Treasury staff insight

The World Bank: Ending extreme poverty and boosting shared prosperity ...

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The World Bank’s goals are to end extreme poverty and boost shared prosperity. To do this it provides developing countries with financial support (concessional and non-concessional loans, grants and guarantees) and technical expertise (such as governance and fiscal management, sectoral reforms and systems, and infrastructure). This support contributes to the global objectives set out in the United Nations 2030 Sustainable Development Goals (SDGs).

The SDGs are ambitious, but the international community has shown it can get results. For example, the extreme poverty rate (those living below $1.90 per day) reduced by over two-thirds in the past 25 years (see “Piecing Together the Poverty Puzzle”, World Bank, 2018). China’s growth was a large contributor to this, but many other countries also made gains. These gains were underpinned by factors such as political reforms, greater trade in goods and services, innovation, pharmaceutical breakthroughs, international aid, and support from multilateral institutions such as the World Bank.

Many hundreds of millions, however, are still living in extreme poverty. Figure 1 shows that extreme poverty is becoming increasingly concentrated in sub-Saharan Africa, and especially in fragile and conflict-affected areas. 

Figure 1 - Number of Poor by Region, 1990-2030

Source: PovcalNet (online analysis tool), World Bank, Washington, DC, World Development Indicators; World Economic Outlook; Global Economic Prospects; Economist Intelligence Unit.

... requires further capital for each of the World Bank’s organisations

For the World Bank to support further progress in achieving the SDGs, it needs new capital for grants and loans for its three largest organisations (there are five separate organisations in the World Bank Group):

  • The International Development Association (IDA): which provides grants and concessional loans to the poorest countries (GNI per capita less than US$1,145) and to a number of small island states that are above this GNI threshold (the ‘Small Islands Economies Exception’).
  • The International Bank of Reconstruction and Development (IBRD): which provides low-cost loans to “middle income” developing countries (GNI per capita between US$1,145 and US$6,795).
  • The International Finance Corporation (IFC): which invests in the private sector of developing countries, to help create and build a well-functioning private sector while also earning a financial return.

As IDA supports the poorest countries through grants and concessional loans, its capital requires frequent replenishing by donor countries. The most recent replenishment will deliver a record US$75 billion for investing in these poorest countries, with this financing to be committed over three-years (mid-2017 to mid-2020).

Capital increases are supported by financial and policy commitments ...

For IBRD and IFC, however, capital increases are relatively rare as both organisations can sustain a higher level of financing from their lending than can IDA. Increasing IBRD and IFC support for the SDGs therefore required a two-pronged approach:

  • The first prong involved better use of existing resources through improving balance sheet management, greater control over budgets, and improving business processes. However, these actions would not be sufficient to provide the significant level of resources needed to help achieve the SDGs by 2030. Without a capital increase, future lending levels would need to decline.
  • The second-prong involved developing a one-off capital increase proposal for member countries to consider. In April 2018, financial commitments and policy commitments for a capital increase of $7.5 billion for the IBRD and $5.5 billion for the IFC were presented to member countries.

An important feature of the financial commitments was sharing the financial burden for strengthening the balance sheet between borrowers (through increases in loan charges for IBRD), member countries (through capital contributions), and the World Bank itself (through tighter balance sheet management and budget restraint commitments). The policy commitments include actions such as greater support to addressing climate change and gender disparity, a bigger share of lending to poorer countries, and a focus on crisis management and fragile and conflict states.

... and have either been supported or are still being voted on

The capital increase proposal was made in the context of a lukewarm attitude from some countries towards multilateralism and global coordination.

In the event, however, the World Bank’s capital increase proposals have enjoyed broad support.

At the time of writing, member countries approved the $7.5 billion capital increase for IBRD. Having agreed that IBRD may increase its capital, each member country now needs to decide whether to subscribe to the new IBRD shares that will be offered to them.

Voting is still ongoing for the $5.5 billion increase for IFC. Similar to IBRD, if the capital increase is approved then each member country will then need to decide whether to subscribe to the new IFC shares offered to them.

New Zealand sees a continued important role for the World Bank ...

New Zealand supported increasing the capital of both the IBRD and IFC, and it also contributed to the most recent IDA replenishment (for the period 2017/18 to 2019/20).  While New Zealand is yet to make a decision on whether it will subscribe to the IBRD shares offered to it or the IFC shares that may be offered to it, the Government considers it important to support the World Bank as the issues it is helping address (e.g. extreme poverty, climate change, refugees) are global challenges requiring global action. The Prime Minister said at the UN General Assembly in September 2018:

“... given the challenges we face today, and how truly global they are in their nature and impact, the need for collective action and multilateralism has never been clearer.”  

New Zealand’s support for the capital increase also reflects the importance of the World Bank’s involvement in the Asia Pacific region, of which the Pacific is of particular importance to New Zealand as reflected in the Government’s Pacific Reset policy.

While the Asia region has seen the greatest reduction in extreme poverty since 1990, the Pacific Island nations remain particularly vulnerable to climatic events and have specific development challenges due to their small size and large distances between islands and to markets. The World Bank’s support to the Pacific includes technical assistance and favourable access to financial resources, which may be up to $850 million in new grants and concessional lending over the three years to mid-2020.

... with the World Bank focused on implementation in support of the Sustainable Development Goals

While the 2030 target for achieving the SDGs is still 11 years away, this is a short time frame given the scale of the ambition. But past experience with the Millennium Development Goals, which were the predecessor to the SDGs and finished in 2015, shows what can be achieved by the international community. With the capital increase voting largely concluded, the focus for IBRD and IFC is now on delivering the financial and policy commitments supporting the capital increases and achievement of the SDGs. This focus on delivery also applies to IDA, although it will also be going through negotiations over the next year for the next replenishment period (mid-2020 to mid-2023). 


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