Q: The latest assessment is that the global downturn may not be as bad as initially feared. What is your view on that?
A: Since late 2022, there have been some brighter spots. One is the mildness of the winter in the northern hemisphere that’s helped on energy prices. There’s also been a supply response around the world that’s producing more and helping on the inflation front. India is seeing some of that with the inflation rate coming down. And then importantly, as China lifted the lockdowns or changed its Covid policies, that opens the prospect of faster growth for China as well.
And certainly, India has been taking advantage of these somewhat better global developments. I should mention, however, for many developing countries, that conditions are still harsh. That includes the high price of food and energy and fertiliser, which makes agriculture so challenging for many developing countries. And there are also higher interest rates, which are still penetrating global markets. Developing countries in particular are facing much higher financing costs and interest rates on their debt. That creates its own set of problems and challenges. We’ll be discussing that somewhat in the roundtable on the sidelines of the G20.
Q: How do you see India’s economy?
A: India, of course, had a very challenging time during Covid. So, it’s good to see the country recovering strongly and growth being strong, inflation coming down. But the challenge for India is huge, in terms of achieving fast enough growth, to really raise living standards nationwide. I think the 8% growth goal is achievable, but it will take a stronger private sector in order to get there.
So we think there are meaningful changes that can be made to improve both the private sector and agriculture and those will be important for India to achieve the growth goals, both the goal of $5 trillion and the goal for the 100th anniversary.
Q: India is trying to become part of the whole global value chain. What more do you think it needs to do?
A: I think there needs to be more investment, especially in the private sector. I saw in the new government budget, there will be more investment from the government, but critical in India’s competitiveness in terms of global value chains is the amount of investment in the private sector and, in particular, in smaller businesses. That means both domestic investment and foreign direct investment. I think there’s good potential for India to attract more. One of the issues is the difficulty in commercial loans or financing.
There’s been progress made in the banking sector since my last trip in 2019, but more can be done to increase the level of commercial and industrial credit–the actual credit provided by banks and also by non-banks, in particular to smaller businesses that are becoming medium-sized businesses. Vital for competitiveness is this transition from small to medium, and India is behind on that. One of the blockages is the publicly listed companies–there’s a great many publicly listed companies and it’s very difficult to delist in order to create synergies within various sectors.
So, you end up with a great number of companies that are not competitive, and they don’t have an exit strategy. They’ve gone public too early in their cycle, and now they can’t get financing, and there’s no way back, there’s no way to delist under the current regulatory policies.
Q: The latest data coming out of the US suggests higher interest rates for a longer time. Does that again derail the situation in terms of a stronger dollar and currency outflows from emerging countries? So do you see this disruption continuing for a much longer period of time?
A: The remarkable period was how low the interest rates were for a long time. So I think it makes sense that the world should plan on rates being more normal going into the future. And so that’s what’s being absorbed in asset prices and in global investment planning horizons. You have to plan on interest rates being higher than they were over the last 10 years–that was the unusual period.
That means that there needs to be constructed a business environment that can operate with normal interest rates, which is what we’re moving into now. And that’s a big challenge for the world, and particularly a big challenge for developing countries. We’re in this odd situation now, where a giant percentage of the world’s capital is absorbed by a small number of advanced economies and that makes it hard to see a pathway toward convergence or toward narrowing the gap between countries.
Q: This confluence of factors is making it tough for countries that have high debt or current account deficit or a weakening currency, as you mentioned. What kind of a solution is there for these countries?
A: India has shown on the rupee that it can be relatively stable, and I think that can be reinforced–that a successful economy can enjoy stability in the currency and at the same time have interest rates that actually help the process of holding down inflation and therefore, interest rates. India can build on that. Other countries are facing this giant challenge of external indebtedness, which thankfully is not such a problem for India, and facing the problem of a current account deficit.
The ways that countries can handle that is through urgently moving toward improved competitiveness–that means private sector climate environments that are competitive and that are based on regulations that actually facilitate new investment. We’re working on debt restructuring for those countries that have unsustainable levels of debt, which in the current environment (is) a high percentage of the countries. Poorer countries have gotten to a point where their debt is unsustainable. The debt roundtable that I’ll be co-hosting later this week is focused on how to speed up the process of debt restructuring, and actually get to fair burden-sharing across all of the creditors, and that process needs to be really improved and enhanced.
Q: On debt restructuring, there are geopolitical concerns, and there are concerns about asset capture in these countries. Is there a possibility of a solution to address these concerns?
A: Absolutely, the goal is to address those concerns. And specifically, we are strongly encouraging transparency of contracts. I was in China in December, and at the press conference, I described specific steps China could take to increase transparency. They have tended to put non-disclosure clauses in their contracts to request collateral from sovereign borrowers in their contracts and these practices make it more difficult to restructure the debt when problems are found.
They use escrow accounts that add to the difficulty of restructuring. So these are steps that China could take that would improve, going forward, the debt processes. Then, in addition, as we look at the existing debt, countries that have excessive debt, there need to be ways to really get to an endpoint where the restructurings can occur, whether in Ghana or in Sri Lanka, or Ethiopia. There’ll be discussions on those.
Q: Some have suggested that debt write-offs are the only option, given the scale of the problem.
A: I think creditors will need to explore many options. One is a reduction in the principal value of the debt, but other avenues are available as well. Reduction in the interest rate of the debt over a long period of time that achieves equivalent Net Present Value reduction. I think also, there can be some combination of these within a given debt-restructuring process.
An interesting proposal that came out last week was the idea of swapping some of the current debt for a very long-maturity debt that will have the principal guaranteed in that debt. I worked at the US treasury department during the formulation of the Brady plan as the official on developing countries. It was hard to put together. So, I hope in our current circumstances, there can be a process that really moves toward an endpoint that’s based on burden sharing, comparable treatment, and comparable Net Present Value reduction using a common discount rate that actually brings debt levels into sustainable territory.
Q: Have the pandemic and geopolitical developments derailed the globalisation process and countries working toward mutual benefit?
A: It’s clear from economics that trade is a vital part of growth and faster progress in raising living standards. So, we should be looking for ways to facilitate that and that includes India. India has been engaged in subsidies for certain products, with industrial policy that points resources towards certain fields. And these I think, end up distorting markets and end up not benefiting the growth rate as much as they should. India has limits on exports in some cases, and that also ends up blocking participation in global markets. So I expect global markets to continue to be a vital, necessary part of global growth. Currently, countries are working out what rules there can be, and what’s a fair system to evaluate those processes. I see great benefits from trade that’s global in nature through supply chains.
Q: How do you see the supply chain shift working on the ground?
A: It coincided with the pandemic, but the problem that is clear now was there had been too much dependency by Europe on Russia for energy and too much dependency by the world on China as a sole provider of things like antibiotics or certain parts of that technology, manufacturing sector. So I think of it as healthy diversification going on around the world, away from excessive dependency that creates benefits also for China in terms of it being competitive in a broader group of markets. Having global markets depend on China wasn’t a favourable way for China to develop either. As the world diversifies, some of that diversification can come to India. Clearly, that can be, I think, a win-win beneficial for everyone.
Q: What does India need to do to attract this investment?
A: It really needs to focus on competitiveness and that means regulatory policies that encourage skills that encourage investment, both domestic investment and foreign direct investment. A regulatory process that encourages small businesses to grow into medium-sized businesses. That they need access to credit and they need access to capital, to capital markets through bond markets and what I mentioned before of being able to delist if they get to a point where they’re more attractive as a private company rather than a public company. So, these are all steps toward competitiveness.
Within skilling obviously, education, and women in the labour force are all vital parts of that for India to be competitive in a global supply chain. I mentioned the stability of the rupee is a beneficial point and that can be reinforced. All of this is more readily available to India than to many developing countries. So, I really think that this is a moment where India can make progress.
Land reform is a key part of it because that becomes the basis for infrastructure, and also for consolidation within the agriculture sector. That’s an action… absolutely vital one. That’s one that the World Bank has to deal with. With India, unlike other countries, it’s harder to incorporate land into projects and that slows down our own efforts within India. And so we know it firsthand.
Q: The ADB yesterday announced a step up in their programme. Are you also looking at stepping up funding for India?
A: The World Bank programme is large in India–it involves IBRD, but also IFC and MIGA. That has been very productive in mobilising a big programme, for example in the rooftop solar, that the World Bank doesn’t put in all of the money. It enables a big private sector participation. So I’m pleased with the size of the programmes. I think we can focus the World Bank programme more on the private sector and also the energy transition as well as the agriculture reforms that are needed.
India could make progress in terms of engaging the agriculture community within a reform process that aims to increase the efficiency of agriculture, but also the crop yields and do it in a way that is reflective of water scarcity and the electricity demands that are coming from the agriculture sector. So, there are reforms that can improve the output. These are all part of this 8% growth goal. To really get to 8% is a huge challenge but a worthy one for India. Private sector, agriculture, state owned enterprise and the rapid movement–I mean, it’s hard, it’s very hard for countries to make the changes that will really enable faster growth.
We are doing $5.5 billion per year when we put together IBRD and IFC. That’s a very large programme by World Bank standards and in the same range as the ADB programme.
Q: In the entire South Asia region, apart from India, most of the countries are in a difficult economic situation. Do you think the World Bank and IMF can drive changes in these countries in terms of economic reforms?
A: Pakistan is an important part of the global community and certainly would benefit from economic reforms that allowed it to grow faster. That would be good for everyone and, I would dare say, including India. There are very real challenges in Pakistan’s economy and also in their debt levels. That’s certainly a fruitful area for the IMF and World Bank to try to improve this system.
In other areas, the debt burdens are notable in Nepal and Bhutan, and the Maldives and Sri Lanka. There is this general challenge of how do you get growth and investment in developing countries where the advanced economies are absorbing such a high percentage of global capital. There’s no magic solution to this. Each country has its own challenges to deal with. Sri Lanka has huge agricultural potential, but it has to be reactivated with debt reform and with credit reform and market reforms as well.
Q: Are countries doing enough on climate change?
A: The world should do more. The greenhouse gas emissions are rising and actually, the estimates have gone up, not down. That’s, in part, related to the changes going on in Europe, and the challenges from the Ukraine war, but it’s also the world’s need for more energy and more electricity, which is putting huge demands on the system. So clearly, more needs to be done, more in terms of projects and more financing. The World Bank has doubled under my presidency the amount of climate financing. We are the biggest financier by far of international financial institutions.
We do more than 50% of the total for those institutions and it’s not enough. We’re looking for ways to dramatically expand our financing for both mitigation and importantly, adaptation. You know, we do 75% of the financing of adaptation. That’s a big challenge for our programmes, whether that’s in Vietnam, which has a big adaptation problem. Flooding in Bangladesh and then countries around the developing world, we’re spending a lot of time and resources on the adaptation challenge.
Q: What is your view on the carbon tax–is it a non-tariff barrier?
A: The world is in an exploration phase to try to find ways to make progress on mitigation efforts. So we have to be careful that it is not protectionist in nature or not in its intent. I think Europe doesn’t intend it to be protectionist. So it will be up to Europe to find ways to implement it in a way that really does focus on the goal of greenhouse gas emission reduction.
The World Bank has proposed a trust fund that would tackle the problem directly, and put more global resources into global public goods. You have to have deeply concessional resources added to long-term projects in order to create the transition.
Q: There is a lot of positive noise around India these days. Do you share that optimism?
A: India is notable in the developing world in having been able to make progress coming out of Covid and despite the current challenges of high prices for prices. But I also think India is coming from a lower base of GDP per capita. I hope India feels positive about the future but also sets a high goal for itself. I know that’s been done through the 8% target and also with Amrit Kaal that goal that’s embedded now in the budget and in the prospects for India. I think it’s a worthy goal and is achievable but will take a lot of work on competitiveness.
Q: What prompted you to step down?
A: As I have said, very clearly, you know, it was a very busy four years. So, I’m looking forward to new challenges. The timing is good for me, personally and for the bank because we’re at a point where we’ve accomplished a lot of the things that I wanted to accomplish. And we’re ready now for the next phase as well. So, the bank is in a very strong position from the standpoint of its personnel and its finances. So that’s an opportunity for us to have a very smooth transition.
Q: Is it time for a non-American to head the bank?
A: That’s a matter for shareholders. I think the bank has been a strong institution. So, I hope the world recognises that, and I feel that I’m proud of the accomplishments that I had at the bank and the bank made during my presidency.