New globalization through investment Joaquim Levy is MD and CFO at the World Bank Group Let me take the opportunity to look back and reflect on the many discussions I have had over this year’s Annual Meetings - and what I have learned from these discussions about how globalization, perhaps in different forms, will remain central to the World Bank’s mission. First, we recognize that globalization is intimately linked to the Sustainable Development Goals (SDGs) and the World Bank Group’s goals of ending extreme poverty by 2030 and boosting shared prosperity—and to the three ways of achieving them. Achieving these goals requires: (i) promoting sustainable and inclusive growth, especially through boosting investment in infrastructure while reducing the carbon footprint of progress; (ii) investing in human capital; and (iii) fostering countries’ resilience to global shocks. We also realize that the benefits of globalization are many and widespread, although not universally experienced. We recognize that there are those in high income countries who, eg. for the lack of adequate training or compensatory public policies that would distribute some of the gains generated by potentially Pareto-improving trade expansion feel that they have been left behind. But we also have to think about those who have been lifted up in the last 15 years and may now face much worse prospects with the decline in commodity prices. Especially when we add the risks of accelerating climate change that will affect particularly the poor, in a world with an increasing number of fragile states and conflicts. And a key takeaway was that we need to make a better case for globalization, recognizing that cross-border investment, particularly in infrastructure—together with trade—can help improve global welfare and share prosperity. A new positive form of globalization would mobilize long term private savings from advanced economies towards emerging and developing economies, supporting an intergenerational compact. It would find new uses for the trillions of dollars in low-return savings existing in many countries. It may take time and effort to build and refine it, but it would show that the benefits of globalization can be extended for many more years, fostering growth in developing nations and reducing the carbon footprint of progress. Fostering climate-smart infrastructure investment addresses the structural gaps underlying the low-growth low-interest rate environment. Interest rates—both in nominal and real terms—have been declining across all major advanced economies over the last 20 years. So this is not a new development (and perhaps was not caused only by the financial crisis). Some people, notably Professor Larry Summers, have argued that we are in a period of secular stagnation, which could explain this development. There might not be enough aggregate demand, mostly due to ageing populations and too low private investment, as technological progress drives down the marginal cost of capital. Investment in climate-smart infrastructure in developing and emerging markets with young demographics is a powerful way to address the current stagnation and income disparities. It would help reduce the imbalance between savings and investments, between private current wealth and the need of future income streams to pensioners, and could be a way to help create a new world much more compatible with the climate commitments taken by countries in Paris last year. And if this is true, mobilizing private savings to productive use would boost consumer confidence, which could help increase demand today even if this infrastructure will become a reality only a few years from now. This is how the promise hailed at the 2015 Addis Ababa UN Conference can be made a reality and benefit rich and poor nations alike. Mobilizing private capital to invest in long-term infrastructure is not an easy task—but it is one that the WBG is taking very seriously. Infrastructure investments, especially in distant geographies, carry significant risks, sometimes well above the risk appetite of investors, in particular ageing savers and those used to invest in fixed income. This is true even for well-structured projects in relatively stable regulatory environments. So it is important to continue to develop suitable risk-mitigation techniques to attract both equity and fixed-income investors. At the World Bank Group, we are addressing this task at three levels: Upstream, at the level of project preparation, identification and operation, we help governments prepare projects and also lower the informational hurdles, producing and distributing information about projects and regulatory environment. For instance, we just published a report on the Benchmarking PPP Procurement comparing regulatory environment and procurement rules in 82 countries, in what could be seen as a Doing Business exercise for infrastructure. We have also created-with the help of donors and in partnership with other Multilateral Banks-the Global Infrastructure Facility (GIF), which has already a relevant pipeline of project preparation. Midstream, we are making the range of guarantees offered by the WGB more understandable and understood. The GIF is also set to offer guarantee products where gaps are identified, as soon as it raises the necessary funds to do so. Downstream, we aim at creating an ecosystem for investors, starting with fostering local capital markets and institutional investors to mobilize domestic resources and align incentives. We are working with the private sector in creating indexes and other instruments that could help adequately position infrastructure investment at the risk-reward space where it would maximize our ability to mobilize resources to reach the trillion of dollars necessary to match demand around the globe. If we can buttress the finding that bonds in the infrastructure space need not be riskier than usual corporate credit, including in emerging markets, regulators might also be prepared to consider more flexible regulatory capital charges, especially for instruments enhanced by guarantees from multilateral institutions. As part of the new ecosystem, IFC—the WBG institution dedicated to financing private sector projects—has launched an investment vehicle that responds to the risk mitigation needs of institutional investors. IFC’s Managed Co-lending Portfolio Program (MCPP) issues senior credit to institutional investors, with the riskier tranches being retained by the World Bank Group’s IFC, with the help of SIDA, the Swedish Development Agency. Guarantees for projects and portfolios are a powerful way to facilitate private mobilization that can be seen as a very effective fiscal policy tool. Guarantees can be effective to support investment that is viable but deemed too risky by the private sector. They also respond to the current dilemma of excess savings relative to the availability of safe assets—pointed out by former Federal Reserve chairman Ben Bernanke. The provision of safe assets through multilateral banks supported by their shareholders has, of course, a fiscal connection. That connection is a positive one to the extent it fosters well-structured investment that observes appropriate governance, social, labour and environment safeguards and generates new income streams by expanding the global production frontier, thus increasing savers’ permanent income and helping developing countries grow. In sum, I believe greater infrastructure investment can help raise potential growth and invigorate the globalization agenda. And especially so if it incorporates new technologies and arrangements that help developing countries leapfrog into low-carbon economies where services will play an increasing role. If we persist in supporting trade and think creatively about clean infrastructure, we will advance in the fight against climate change and meet our goals for ending extreme poverty and boosting shared prosperity by 2030.
... we need to make a better case for globalization, recognizing that cross-border investment, particularly in infrastructure—together with trade—can help improve global welfare and share prosperity