Exceptional Uncertainty and the Global Economy: A conversation with David Malpass and Adam Posen

MR. ADAM POSEN:  It is my honor and pleasure to be hosting a conversation with David Malpass, the 13th President of the World Bank Group.  And I will introduce him in slightly more fulsome form in a moment. Just to say that the occasion for this is the release of the World Bank's Global Economic Prospects Report, which is one of their flagship documents published regularly and, at this moment, as President Malpass will outline, is addressing the very big divergences we're seeing between the developing countries and the developed world in terms of their economic recovery from COVID, as well as the damage done, but also, facing a world of, as they put it, unprecedented macroeconomic imbalances, rising income inequality, and exceptional uncertainty.  

I encourage everyone to download and read the report, which is freely available from the World Bank's website, also with links from the Peterson website, and have at it with the data and the projections and the analyses, which represents the work of a lot of good staff at the Bank.

We are fortunate today to have with us David Malpass back to the Peterson Institute, in this case, virtual stage. David, in addition to serving as the World Bank President since April 2019, has previously served recently in the Trump administration as Undersecretary of the Treasury for International Affairs for the U.S. Of course, in that role, he represented the United States in a variety of international settings, including in the G7, G20 Finance Deputies meeting, the IMF/World Bank Spring and Annual Meetings.  Importantly, in 2018, David successfully advocated for a capital increase for the IBRD and the IFC, including domestically in the U.S., as well as globally, and he was also instrumental in advancing the debt transparency initiative previously adopted, I think, to good effect by the World Bank and the IMF.                  

David had a long, successful career in economic analysis in the private sector, in financial markets, but he has long been concerned with issues of development and debt. Earlier in his career, he served as the U.S. Deputy Assistant Secretary of State--Secretary of the Treasury, excuse me--for Developing Nations, and the Deputy Assistant Secretary of State for Latin America when-- in those roles, he focused on a variety of issues but, very importantly, including the Latin American debt crisis and the issues of U.S. involvement in the World Bank and other international financial institutions at that time. 

With that, David brings a practitioner's and committed view to the importance of macroeconomics and debt management to the world and to the developing world, and I'd like to ask him to lead off with what he wants us to take away from the global economic outlook of the World Bank-- Global Economic Prospects, excuse me.

MR. DAVID MALPASS:  Thanks very much, Adam. Well, one thing to take away is thanks, Peterson Institute, for the work that you do, and Adam, for your work.

It is really important, I think, in the world to have voices, because it is a complicated world scenario that we're facing. That was brought out in the GEP that came out last week. The global growth rate is slowing some, but the bigger impact is that the developing countries are falling further behind. One way we can measure that is in the poverty numbers, which are rising. Extreme poverty is rising--that's less than $1.90 a day--but also, poverty in general, or very low income, is rising under the pressures of the world. And then, as we think about it on a per capita basis, it's even more dramatic. One statistic that we think we have is for the poorest countries, the IDA countries, which is about 75 countries, the per capita income is growing just 0.5 percent, even in the recovery, whereas, in the advanced economies, it's a full 5 percent per capita. That may be less on a real basis, but it gives you the sense that the poorer countries are falling further behind, which is the challenge and what we want to talk about.

That's made worse-- added challenges from the macro side, with the inflation rate in advanced economies spreading to developing countries, and it's a big challenge as the supply chains close in or redirect themselves toward the advanced economies. And now, we expect to be facing multiple interest rate hikes from the advanced economies, and those are often amplified in developing countries. And it's already going on. A third of the developing countries have already raised interest rates, and more will come, and that puts particular pressure on new businesses, small businesses, women-owned businesses, and the lifeblood of the global supply chain. That's the reason for the concern that we've been expressing. 

With that, Adam, the GEP -- we do it twice a year. I've spoken on it in previous years. I think we have to recognize the pandemic, the inflation, the interest rate hikes, and also what I'll call misallocation of capital going on in the world right now. And it means that these inequality problems are likely to extend for years to come. 

I didn't mention the importance of the health care systems and the education systems. If we look out five years, 10 years forward, things that are important are nutrition for children, advanced care for people as part of a health care system, and then, education. And our data-- we have data on the education that there's been a substantial backsliding in children's ability to read. That's one statistic that we track in terms of learning poverty, and it's gone up from some 53 percent of 10-year-olds that can't read a basic text. That's gone all the way to 70 percent now with the school closures. And that problem will weigh on the world for years and years to come, and it's vital, really, that we begin to get resources to people in the poorest countries. Thanks.

MR. POSEN:  Thank you, David. There's so much to talk about, and I really appreciate you framing some of the issues in terms of capital reallocation, not just net flows, and we'll return to that.

I first just want to tell our audience since this is going out livestream around the world, obviously, those of you who are registered participants may put questions to President Malpass in the Q&A function on Zoom, and I will be bringing those--as many as I can--to his attention later in the program.

But I want to go back to where you ended, which is the devastating effects on what you're referring rightly to as the IDA countries, the 75 or so countries that are truly poor. The World Bank is dedicated to eliminating poverty. Where do we go from here? I mean, how much is debt restructuring or debt forgiveness a part of the way to get out of this mess? How much is it if the rich countries were to deliver on vaccinations? What is the priority for addressing those lasting costs of the COVID pandemic in the emerging world?

MR. MALPASS: Each of those is important. On vaccinations, what the World Bank has done is tried to have-- we have programs in some nearly 70 countries where they can actually have contracts to get vaccines and to deploy the vaccines. 

We think a country-based model is very important in actually delivering goods and services to people, so we work a lot with the governments of countries to try to have a noncorrupt environment that allows procurement, for example, with clear contracts. That was one of the big problems with vaccines, because countries were not entering into actual contracts, and then there wasn't the preparation that was needed to deploy those. We are expanding every day the contracts with countries and also encouraging the health ministers and the finance ministers of the under-vaccinated countries to seek contracts. And we can finance; we have practically unlimited financing available if they will enter into contracts for vaccines and for the deployment, importantly, which we can help them with, and for the therapeutics, as well.

With regard to the debt payments, these are staggering. In about March of 2020, I called for a moratorium. As the pandemic struck, it made sense for the poorest countries to be given a hiatus in their payments. Working with the IMF, the G20 declared the Debt Service Suspension Initiative, the DSSI. Unfortunately, it didn't extend far enough through the G20 process to get to the private sector or to some of the official credits that were out. And so, it had limited impact in terms of the savings on debt service. And now we are faced with it-- it expired at the end of 2021. So, the countries not only will have to resume those payments, but then pay interest on the unpaid-- on the amounts that they deferred. It's really a compounding of the amount of debt on the developing countries and especially on the poorest. 

The G20 also initiated what's called the Common Framework. It sets out to provide, to help countries achieve sustainability through debt relief. But unfortunately, it stalled. Only three countries applied and there hasn't been much progress on those. 

We are making some progress on Chad, where the World Bank has a big concessional program. The World Bank operates in these poorest countries often through grants or zero-interest-rate loans. We have a sizable program, and have had, in Chad, and that will continue, but the amount of the debt payments going to creditors is large compared to the amount of money that can be put in. There is an IMF program now and an intention to try to get the large, private sector creditors who are oil-related to provide relief.  Chad is seeing difficulty in producing or keeping up its volumes of oil production because of the challenges there. That gives you a sense of where the debt stands.

One statistic that we looked at is, for the IDA countries--this is the poorest countries in the world--they are expected to pay, in 2022 alone, $35 billion to creditors largely in much better off countries. And so, that compares-- we just went through the IDA replenishment cycle. The entirety of the three-year commitments by the whole world for these countries was $24 billion. That's over a three-year period; meaning, roughly $8 billion per year from all of the advanced countries, the countries around the world put money into IDA. That's roughly $8 billion per year. But in 2022 alone, the creditors will take up $35 billion from the same set of countries. That puts into perspective the negative flow that's going on the debt side.

And then, final point, Adam, is the policies themselves, meaning it's okay to complain about the world inequality and then in addition, some countries are really taking steps to increase their level of vaccination, to be more transparent in the debt that they take on, and to make the regulatory changes that are more encouraging to the private sector. The World Bank is deeply committed to enabling the private sectors in countries or to helping countries create an environment that enables private sector investment. We have to keep focused on that. The long-term solution, even for the poorest countries, is to have an environment where their own citizens want to invest and outsiders want to invest in business in these countries. 

And we work on that every day. Frankly, the going is challenging. There's often laws that have been on the books for a long time that need to be changed, and there's business practices that don't attract private businesses. We work with governments daily to try to improve those.

MR. POSEN: It's a huge agenda, and I just want to go back a moment on the debt restructuring, the, I won't say "failures," but incompleteness of the DSSI and the Common Framework. The kinds of numbers you raise, David, about the $35 billion coming out and the $8 billion a year going in in the IDA countries, are not unprecedented, but in this particular context of the COVID crisis--and, as you say, large amounts of private capital will be available and large amounts of debt issuance by the rich countries--this mismatch seems all the worse.

Can you say a bit more about, then, the process? In the sense of, for the private creditors, who should be at the table? How can the Bank or the Fund or, in general, member governments get the private sector better allocating capital? But also public sector. We talk about Paris Club. Is the issue that some of the most important official sector lenders are not part of the Paris Club, or is the Paris Club itself having misfunctions that you'd like to see change?

MR. MALPASS:  Each of those is a challenge. One, to give you the context, there's been a very big shift in the composition of the debt over the last 10 years. Ten years ago, the Paris Club-- I have a slide which I'll show you, though you won't be able to read it very well. It kind of looks like this. The bar on the left-hand side is-- in 2010, the amount of debt--official, bilateral, and private sector debt for the DSSI-eligible countries, which is very close to the same as IDA countries--and then in 2020. What's happened is there's lots more debt, but the amount of debt owed to the Paris Club, which is the official creditors that used to be the majority of the debt of these poorer countries, that's shifted. Now, there's much more owed to China. And China is not in the Paris Club, nor is India, nor Saudi Arabia. So three of the big creditors are not part of the Paris Club. As you look to do a restructuring, they are brought in separately, which is a challenge. 

There's even a challenge under the Common Framework of debt reconciliation. If you say, how much debt does Chad have, to external debt. That took, seems like, over a year for people to find a table to sit around and compare notes. Within the debt sector in advanced economies, there's a bankruptcy process where, when a debtor hits the wall, they can sit under a bankruptcy process and compare how much debt each of them is owed and then come up with a restructuring proposal. There's no corresponding availability of process for sovereign debt, and I don't think there could be, but what we need is better facilitation for restructuring processes for countries. 

And the reason for that: many more countries are in a situation where their debt is unsustainable. They took on the debt pre-COVID, and oftentimes too much debt with non-transparent terms. And now, in the post-COVID environment, there's just not going to be enough money for them to pay the debt service, and they get into very difficult restructurings because the contracts are under nondisclosure agreements, which is problematic. We are facing that in many countries, where the contracts themselves are not available to the various institutions to help the country try to reschedule the debt. Under the Common Framework, the debtor, and under the Paris Club process, debtors don't sit at the table themselves. Here, they've got outsiders deciding what to do in terms of a restructuring process where some of the key contracts-- the biggest contracts-- the terms are not public. 

In the most recent Chad comment from the creditors committee, which came out on January 7th, it talked about good-faith efforts by the private sector creditors to try to reschedule the debt. That's not encouraging. A key goal for developing countries is to have light at the end of the tunnel so they can invite new investment from their own citizens and outsiders to invest in their country. And investment is way too low, and part of that is because investors realize that a lot of their funds are going to have to go for debt service payments to previous contracts that are maybe not disclosed.

Another issue that's challenging within the debt environment is ESCROW accounts. The countries have sometimes given collateral or ESCROW arrangements, which means that it makes the restructuring of the debt much harder than it was in previous cycles. The World Bank has issued several reports, now, one in 2019, pre-pandemic, which said four waves of debt have already occurred and we're worried about another one.  We followed up in 2020 and 2021 with more reports on debt transparency and the steps that could be taken and the World Bank keeps a massive database called the DRS, the debt reporting system.  We put out an annual report called the IDS, which is one of the base sources of information on debt, and we've been expanding the definitions of debt to what are called debt-like instruments. 

I'll give you one example, and that's central bank swaps. The countries have been taking on debt through swaps that were not recorded as debt because they were swaps. But the effect of them is very similar to debt. That's now being picked up in the debt reporting system, the DRS, and made public on our databases. 

I know that was a long answer, Adam, but it's critical that we have more transparency and that we work toward restructuring processes. For countries that have unsustainable debt levels, it simply is not enough to address the short-term liquidity needs of the country.  You have to address the medium-term debt sustainability if you are to attract new investment.  

MR. POSEN: Thank you, David. This is obviously at the core of the World Bank's mission and decisions.  And so, I appreciate the depth of your answer.

Just a reminder to our audience, if you're a registered guest, which anyone could have done ahead of time, you're able to post questions in the Q&A function, and I'll be coming to some of those questions shortly.

Before we turn to some of the more macro aspects of the prospects that your team at the Bank and you have put out, let me just go back to one thing you said and one thing you didn't say.  So, one thing you said was you mentioned the contracts-based approach at country level that the World Bank has pursued for getting vaccines not just purchased but into the hands and distributed. That's obviously somewhat in contrast to the COVAX approach of donations and other means of getting it out there.

As we're finding and as we were warned to expect, COVID, as we have it, is both a recurring pandemic, or endemic, in part because we're not vaccinating enough people fast enough; but also, it may not be the last--and certainly is not the last pandemic we're going to have.  So, going forward, we know there was the G20 working group with Ngozi, Carmen, Larry Summers talking about preparation for future pandemics. You have this experience at the Bank of contracts--I don't want to say "versus"--but as compared to the COVAX approach of donations. What do you want to see going forward in terms of pandemic financing, pandemic preparedness, vaccine distribution, and so on?

MR. MALPASS: Thanks. It's vital that more countries prepare for crises. I think we can do that country by country, and also with some global support for their efforts.  That's a core part of the World Bank mission. One way to do that is to expand that and expect more country by country.  We work with the health ministers and then connect those health ministers with finance ministers in order to try to bridge gaps in the funding that the countries are providing. Oftentimes, the countries are facing tight budgets.  Health preparedness gets too little in terms of funding. That can be worked on through country programs.

With regard to our contracts, we also work with a group in Africa called AVAT, which had contracts. In other words, the critical missing step in 2021 was the availability of vaccines that could be entered into contracts. We were able to finance a large number of African countries working with AVAT and we sought the same kinds of opportunities with COVAX throughout. We have worked closely with COVAX.

But to your point, one of the challenges was to match the countries or what the countries were willing to use as vaccines--remember, early on, some countries wanted AstraZeneca; some wanted Johnson & Johnson.  And only a few had capabilities to deploy Moderna and Pfizer because of the cold chain. There needed to be, and we put in place, systems to assess the capacity of countries for the various types of vaccines, and then to match that with delivery schedules. That's been our focus and we worked with both AVAT and with COVAX to try do that as well. 

And there were some successes in that, country by country, but there were also a lot of frustrations because some countries were receiving vaccines that their people did not want to take because the communications efforts had not been done to persuade people that that particular vaccine that was arriving at their airport was usable. There were a lot of vaccines that were returned to the senders with due dates, the eligibility dates not met.  Just frustration all around, and I think as we look to go forward, I think there has to be a priority put on what the countries are able to use and want to use. The people of the country have preferences and they have the ability to use different types of vaccines and therapeutics. I think we have to have a system of distribution and engagement with the countries that's sensitive to that, which takes-- the World Bank has people on the ground in almost all of the countries that are working daily with the health ministers, the finance ministers, in order to assess those needs and the hesitancy and then break through it and encourage use of vaccines and therapeutics in countering COVID.  

MR. POSEN:  Okay--I--

MR. MALPASS:  Thanks.

MR. POSEN:  No, no.  There's so much to cover and I want to get to the group questions.

MR. MALPASS:  That's [audio distortion]--

MR. POSEN:  The one thing which is mentioned, of course, in the GEP is not--you have not mentioned so far is aspects of climate change and climate change finance for emerging markets and developing countries.  And your report does go in-depth into issues of commodity exporters and boom-bust cycles of commodity prices. And so, I was wondering if you could say a bit more about how countries that are dependent on commodity exports, in particular but in general, can rebalance in a world where, God willing, we are moving away from fossil fuel usage, and the Bank's role in that. 

MR. MALPASS:  Yeah, climate change occupies World Bank every day. 35 percent of our funding goes to climate finance. You can imagine the pressure that puts then on health finance and education, nutrition, and all the other programs of the Bank. 

What we did in 2021 was the Climate Change Action Plan, which was specific, detailed, and made commitments of the Bank, which are huge within the global context. In Glasgow, there was the search for $100 billion of financing for climate finance. The World Bank alone is a quarter of that. The whole rest of the world, the other three quarters. The World Bank alone is providing more than the entire G7 for this climate finance. And it was a challenge in Glasgow to have people recognize the need to have actual projects that will reduce greenhouse gas emissions and will add to the adaptation of countries.

Again, we want to look at projects that will actually have impact and make a difference, and then bring together global funding for those through private foundations, through carbon offsets. That's a major effort to have an impact where the World Bank can play an important role in the middle of bringing in that global community funding to global public goods. Within the GEP, it takes account of that but recognizing that quite a few of the countries produce oil and natural gas and those are in huge demand right now. The World Bank doesn't fund coal, doesn't fund upstream fossil fuel investments. What we are doing is creating action plans for countries, with countries, so that they can reduce their greenhouse gas emissions, and that means identifying the major sources of emissions and then working away from that. One of the starting points is to help the countries stop subsidizing the use of fossil fuels. That's a mainstream effort within our country programs. And then, also finding development avenues for the countries that aren't dependent on greenhouse gas emissions.

A big step--I know--is coal. Helping countries transition in a holistic way away from a dependence on coal-fired power plants.  For the world, we've set out as a major challenge, huge amounts of funding that need to go into that transition.

MR. POSEN:  And just once more, for the record, the monies going to that, they do not become part of the debt--unsustainable debt burden.  This is on a separate account or is this part of--is this grants?  Is this lending?  I mean, I know this is obvious to you but, please, spell it out.

MR. MALPASS:  Well, one thing about the multilateral development banks is they are on the basis of--and the World Bank, especially--of grants, and then of zero percent interest rate loans for the poorest countries.

Even for the middle-income countries, these are very low--these are very deeply concessional interest rate loans. And because of the way that it's working, we put net flows into those countries, meaning it's a positive contribution from the World Bank. 

The challenge on the debt side that we were discussing before is that a lot of those loans are at high interest rates. One of the challenges is the creditors are making a big return from the poorest countries, and that's the situation that we are trying to put pressure on the private sector creditors, also some major official bilateral creditors, to provide debt relief in the form of reduced stock of debt and reduced payment.  And so, I'm making that distinction.  As the World Bank makes loans to countries for climate finance, those are going to be concessional interest rate loans that are very long term.  It's a difference in substance in the type of debt that's being put out.

MR. POSEN:  Okay.  And so, let me now take you back and then go to the audience, but I'm going to take you back one last piece, which is obviously the GEP as a prospects exercise as you said, twice yearly, is partly about the conjuncture, the shorter-term flows. And so, there's a lot of attention, including from Chinese President Xi, I think, in his last public speech, about the potential impact of Federal Reserve and other advanced economies central bank tightening on the developing world. 

You've--obviously tracking that issue and have opinions on that, but you've also spoken about issues of capital misallocation as opposed to just surges in and out. Coming at it from that perspective, how do you view the issue of, say, Fed aggressive tightening and how we should be thinking about that?

MR. MALPASS:  Well, obviously, a complicated question; a lot of very, very engaged people thinking about it.

One observation I have is the advanced countries having had interest rates at or near zero has to be viewed historically as an anomaly.  In order to have a growing world where capital is allocated through markets, there really needs to be a positive interest rate; that's the core of how markets work, and we haven't had that.  That leads to then an allocation based on something other than markets.  A lot of it’s in terms of regulatory policy but also risk aversion by the investors. That gets you into a situation where a huge amount of the capital is being allocated to already capital-intensive parts of the world, the advanced economies building more and more on top of already heavily built infrastructure and real estate, for example. And that is the problem that I've tried to identify. There needs to be a broader allocation of capital worldwide in order to achieve the goal that everybody has, which is that developing countries actually develop.  That has to be a core part of the global system in order to address the refugee flow, the malnutrition that's going on, and so on. There has to be more money and growth flowing into the developing countries and we've had the opposite case.

I was struck this morning by the Microsoft investment, $75 billion, in a video gaming company at a time when, to put it in perspective, the entire IDA20 commitment that we were just able to achieve in December was $24 billion spread over three years. That's $8 billion per year to 75 of the poorest countries. $8 billion, compared to a $75-billion, single-shot investment in a gaming company.  And you have to wonder-- wait a minute, is this the best allocation of capital? This goes to the bond market. Huge amounts of flows are going to the bond market, and basically that's a very small portion of the world that has access to bond financing.

MR. POSEN:  Absolutely. So, that's a great bridge for me to bring in some of the questions from our audience, because a number of them--Federico Sukeda [phonetic], an anonymous attendee, Patrick Flynn [phonetic], a number of our audience are asking questions about how to get the private capital off the sidelines.

So, for example, Rami Osmond [phonetic] asks about, "What is your point of view on the inclusion of the developing countries and LDCs in global value chains to get--to help alleviate some of the unique quality issues?"

Patrick Flynn talks about--asks about the ambition to promote and establish smart business practices in developing countries to attract private capital.  Is their own capital sitting on the sidelines?  Is there a possibility of a race between developing countries to get ahead on that front?  And again, just to pull together just a few of the very good questions, from Federico Sukeda, I mean, how do you see the role of commercial financing in helping IDA countries develop?  Should these countries give up--not be planning on using commercial financing, or is there something to get them into commercial financing, if not bonds, per se. 

So, that whole nexus of issues, if you could expand, David, on your and the Bank's vision for that aspect.

MR. MALPASS:  I know there has been the hope of market access for the poorest countries, and I think some of them will achieve that.  But in the current environment, I think it’s difficult to have market access before--until you have a system that attracts small business financing, commercial financing.  And that means the availability of floating rate financing for businesses around the world.

Notable over this last decade is the very low amount of small business financing that's occurred even in the advanced economies.  This was a major challenge facing Europe in 2012, 2013, and 2014, where the European Central Bank tried to put in various mechanisms to subsidize the finance into small businesses, and with only mixed success.  For really this last decade, there's been the odd situation of the central banks holding very long-duration portfolios financed by bank reserves.  This challenges the concept of commercial financing and I think some of the echoes from that are in the developing world. 

What we tried to do in the pandemic from the World Bank side is really beef up our trade finance and our short-term commercial finance for existing businesses.  IFC had a book of business and could go back to those businesses and said: do you need floating-rate financing?  There was a big uptake of that, which helped.  But frankly, we're small compared to the needs of the developing world.

I wanted to mention, Adam, digitalization is very important.  It's something that can help even the poorest countries leapfrog.  The farmers in the poorest countries have, in many cases, access to cell phones that can show them planting cycles, which is really helpful information.  I think one of the high priorities for the World Bank over the next year and two and three years is to push, to help digitalization and the breakdown of the monopolies.  There's been a monopoly on undersea cable access in West Africa.  That's beginning to break down and that creates really important opportunities for inclusion in the value chains so, people in the developing countries can get included in global value chains, but they need digitalization and access to short-term finance which, right now, is in really short supply.

MR. POSEN:  No, thank you.  I mean, at Peterson Institute, one of the ways we contributed in the past is working on the importance of trade finance, and our board member--one of your predecessors--Bob Zoellick, pushed very hard on that during the previous financial crisis, to good effect.  So, I'm delighted to hear you emphasizing that. 

Let me turn--there were a bunch of questions on China as an official lender.  So, again, from our audience, Leric Hale [phonetic] asks, how does undisclosed, nontransparent debt related to China's BRI initiative reinforce other indebtedness in emerging markets?

We also have Barry Wood asking, of that debt, the $35 billion in payments out from the IDA countries you were talking about, how much of that is owed to China?  And of the amount that you think is actually going to be repaid, how much do we expect China to receive in repayments from that?

And then, I believe there's one more in this vein on this topic.  So, Shabtai Gold asked, is China interested in helping other G20 countries force some kind of private sector deal? 

So, I realize that there are political sensitivities in your role talking about China, but there's a great deal of interest.  Our colleague, Anna Gelpern, led a multiauthor study on issues of transparency in lending from China.  So, if you could say a few words about China's role in all this.

MR. MALPASS:  And we should.  I think the world should talk about it. China has been pretty forthcoming in being willing to talk about it.  We've seen President Xi make statements on it.  I had two conversations with Premier Li Keqiang in December, or toward the end of 2021.

I think it is okay for people to talk about this.  My impression: China would like to see developing countries--other developing countries, it's considered still a developing country itself in some of the definitions.  But I should note from the World Bank's perspective, they're a net payer into the World Bank and they were a big participant as a donor into IDA20, the just-completed IDA20.  We welcome that.  We have a big relationship with China. 

Now having said that, many of their past contracts had nondisclosure clauses.  That's one challenge.  Starting in 2014, they made most of their contracts have NDAs in them.  That means that the debt--not only is the debt not transparent, but the connection with the investment that is being made is often--it's hard to separate the pricing of the debt from the pricing of the investment.  And that gets to the question of are you getting a good quality investment for the debt that's being taken on, and then what are the surprise terms for the debt as you uncover it.

Uganda has been in the news, and the contract that the airport was not a fully public contract.  It plays out over a period of time that then limits the options under various restructuring agreements.

I wanted to mention that--with regard to how the G20 operates, then, it's one part of this debt question, but I think we have to also bring in the private sector markets, as well.  London and New York continue to be the center for bonds, and I think there's quite a bit of progress that could be made on collective action clauses.  There's been the proposal for aggregated collective action clauses, which I think would then empower.

Let me give you some data.  I mentioned the $35 billion of the debt service from IDA countries. Of that, China is 37 percent; so, $13.1 billion of that which-- by and large, throughout the crisis-- China has taken full payments through its various creditors.  That's China ExIm Bank, China Development Bank, and some of the other creditors. 

Adding up to the 35, I mentioned 13.1 to China, 13.4 of private sector debt.  A lot of that is bond payments that are coming due on the interest on the bonds, and then, the official bilateral debt not counting China is 8.6.  That shows you that the Paris Club portion of the debt that's coming due even for the IDA countries is small.  And so, that poses a challenge for the world.  The London Club that used to operate that collected private sector payments--or private sector creditors--hasn't been functioning very much.  It's not giving guidance. 

One example of that, under the DSSI, the G20 said it expected private sector creditors to participate.  In reality, there was none by the private sector.  So, there's not much of a cohesion of the private sector creditors.  China took note of that and some of its institutions were not fully participating in the DSSI, as well. 

I think that gives you a set of the challenges.  I proposed and have been outspoken on the need for more

Transparency, and also for the money centers-- the financial centers of the world-- to look at statutory changes that would help with the restructuring process.  One key takeaway for people is that the creditors have many, many more tools, much more powerful, than the debtors in this environment.  By and large, the creditors are taking full payments for--under contracts that may not be public and may not have been very wise for the countries to enter into.  And yet, the full payments are being made even at a time when the countries need health and education expenditures and climate expenditures.

MR. POSEN:  Great, thank you.  Following up on--I appreciate your spelling out for--I mean, a lot of our audience are expert but a lot are not on the issues of Paris versus London Club and who's in the world and which really matters.

Another follow-up question, in the China regard but on a broader point, Simon Lester [phonetic] asks, "You've argued in the past, Mr. Malpass, that, quote, the World Bank can do a better job meeting its commitments to poorer countries.  Can you talk a little bit about your efforts to shift World Bank lending priorities towards these poorer countries and away from middle-income countries such as China?"

And just to follow up on that on my own, as I mentioned at the start you served in U.S. Treasury twice.  You've been engaged in public life domestically in the U.S. on these issues for a long time.  Obviously, China being treated as a developing country or called a developing country has been a hot-button issue in U.S. domestic politics, particularly in relation to the WTO, but also the World Bank.  So, if you could say a little bit, sort of with your Washington audience in mind, how do you think the World Bank should handle this and how much room do you think the Washington types have to give the World Bank for dealing with this?

MR. MALPASS:  Yeah, thanks.  So, the World Bank doesn't have a definition of someone as a developing country.  So, we continue to lend some to China through IBRD.  That was agreed to in the capital increase of 2018.  It's a scaling-down of the lending to China through IBRD. 

And as I mentioned, China is making past payments.  They're actually a net contributor to the Bank, even though they're getting some limited lending from the World Bank under the capital increase that was negotiated really by the world shareholders.  And there's been a major shift in the type of lending to China, to have it be very focused on global public goods.  For example, we're making loans in marine plastics; also, in carbon--reduction of coal-fired power plants.  Tthose are the types of loans that probably the world wants and China has welcomed.

And they have a very specific reason for wanting the loans.  They say in the past the World Bank helped them create pilot concepts that they themselves then expanded around China and had success in things like solid waste disposal and sewage treatment into the river systems, just to give one example.  So, with that, I'm comfortable with where we stand on that.

Now, your opening point was: is the World Bank shifting away from middle-income countries toward the poorest?  That's not the right phrasing.  We've been expanding in recent years toward IDA as a principal form--IDA is getting bigger relative to IBRD.  What that means is there's a natural shift toward the World Bank supporting the low-income countries.  We continue to be engaged in middle-income countries. By the way, China, I think is classified as an upper middle-income country.  The World Bank continues to want to be engaged in middle-income countries where there's demand and where there's benefit to the country.

With global interest rates as low as they are, quite a few middle-income countries have said we can borrow from markets and don't need to from IBRD, and that's okay with the World Bank as well.  So, there's a little bit of a demand pull, or supply push.  We look for ways that we can help countries.  My feeling is there's an okay balance going on between IBRD and IDA and the annual-- one of the unique things is IDA is replenished every three years in consultation with donors and with the recipients of the grants and the zero interest rate loans, and that's powerful.  That's somewhat unique in the world where there's this dialogue between the two, and then there's an agreement on a large amount for the replenishment.  So, I think it's tested every three years.  It's a good, healthy process going on.

Final point, Adam. The challenge, then, is how do we get good outcomes for the countries?  That's what I came into the World Bank to try to do.  That's been an age-old problem for development assistance.  How do you really help people in the poorest countries, or in developing countries in general?  And that challenge is still before us.  We have a hard time identifying and working with governments to actually put in the changes.  And IFC has trouble finding business environments, private sector investments. 

We've expanded--I mean, I should brag a little.  During the pandemic, we had the fastest growth and the highest lending volumes ever for the World Bank.  We expanded 60 percent in the 15 months through June, which is the biggest expansion of the World Bank.  But still, we have quite a few countries where we have trouble making fast-disbursing loans because the policy environment is simply not attractive to making new investments.  And in those cases, we slow it down.  We're reluctant to put in a lot of money upfront to a country that's not really doing all it can to help itself.

MR. POSEN:  Okay, wow.  So, we've covered a lot of ground.  I'm going to circle back with maybe the last question from the audience, something more short-term, related to the GEP. 

Nicole Bastian [phonetic] asks, "How do you see the rise in food prices for developing and emerging markets?  What can governments do and what are you projecting this year?"  And obviously, that relates to the general question of how inflation in the U.S. and other large, rich economies, how that transmits across the rest of the world.  So, how do you see that?

MR. MALPASS:  Yeah, challenging.  So, food prices are up in the U.S.  They're up the same amount or more in developing countries.  The inflation rates are up and they are raising interest rates in order to try to keep their currency stable. 

One problem is the markets tend to go toward the--or fall away from the weaker player.  So, that means currencies come under pressure and capital outflow is coming from the developing countries.  When food is more expensive, that means children are eating less who already have malnutrition, a giant problem.  We've accelerated the IDA cycle from three years to this first time in history it was a two-year cycleThat allows us to add more money through that particular program.  We invite other bilateral aid agencies to increase their aid dramatically during this challenging time.  We work on seeds. Actual things that can help farmers and agriculture produce crops locally, that's an important part of surviving this challenging time. 

And I come back, Adam: I think the global macro policies need to have a stronger focus on this inequality problem.  The capital is concentrating to the smaller and smaller groups, and both the fiscal policy and the monetary policies are doing what helps the people at the upper end, rather than things that would increase the median incomes for people around the world, and especially for developing countries. 

I mean, think about it:  Do you really want a situation where the major central banks are borrowing money from banks in order to buy bonds?  That concentrates wealth, and we see it in the data everywhere in the world.

MR. POSEN:  Okay.  A lot of challenges, a lot of sad news, but obviously a lot of work to be done.

MR. MALPASS:  Can I say, on a positive side: technology is amazing, and the availability of digitalization to the poorest countries is huge.  I mentioned the breakdown of the monopolies in West Africa and I hope in other places will be really powerful because it allows people to actually get access to information which is going to be, I think, the long-term solution, whether for pandemics or for farmers.  It's global in scope and really powerful.

MR. POSEN:  Okay.  Well, thank you again to David Malpass, the 13th President of the World Bank, and to the whole World Bank Group for helping us get the word out about the state of the world, particularly the developing world, based on the Global Economic Prospects Report of the World Bank.

And speaking from the Peterson Institute and our global audience, we appreciate this chance to ask you questions and converse with you, David.

MR. MALPASS:  Thank you, Adam and Peterson Institute.