World Bank under Malpass?

At a time when there is growing clamor, especially from developing countries for both the World Bank and the International Monetary Fund to be headed by persons belonging to the countries of the emerging economies, the US President Donald Trump has used his country's unwritten and informal prerogative of naming the World Bank President. He has nominated David Malpass who has been one of the bitterest critics of multilateralism, especially the working of the World Bank, as the head of this Bretton Woods institution. The Treasury Department undersecretary for international affairs and former senior economic advisor to the Trump campaign has been a fierce critic of the institution. He will replace Jim Yong Kim, who resigned unexpectedly last month.
Malpass, 62, has straddled the top echelons of government and the Wall Street, having worked in the Reagan and George H.W. Bush administrations and as the chief economist for the defunct bank Bear Stearns. He also unsuccessfully sought the 2010 Republican nomination for a Senate seat from New York.
Malpass' public forecasting has at times been way of the mark and said to have been shaped by his political leanings.
In 2007, he wrote on the editorial pages of The Wall Street Journal that the "economy is sturdy and will grow solidly in coming months, and perhaps years." Over the subsequent months, the United States toppled into its worst financial crisis and recession since the Great Depression of the 1930s.
In the same editorial, Malpass dismissed the risks from subprime mortgages by saying, "Housing and debt markets are not that big a part of the U.S. economy, or of job creation." As it was found out immediately the reckless use of subprime mortgages was the catalyst that ignited the 2008 financial crisis.
Malpass would succeed Jim Yong Kim, who announced in January that he was stepping down three years before his term was to expire. The final decision on a successor to Kim will be up to the bank's board.
The World Bank was founded in 1944 with the task of shoring up the economies of nations devastated by World War II. The first recipient of a World Bank loan was France. The bank, whose leader is nominated by the United States and has always been a US citizen, has since shifted its focus from reconstruction to development, extensively in Africa, Asia and Latin America.
Kim's unexpected departure could, in the opinion of knowledgeable circles, set up a contentious fight between the Trump administration and other countries who argue that the United States exerts too much influence over the bank, which is based in Washington.
Since reports emerged from the impending nomination, several economists and global development experts are said to have pointed to past statements Malpass has made critical of the World Bank and multilateral institutions more broadly.
"David Malpass is a Trump loyalist who has committed economic malpractice on a wide range of topics, from dismissing the first signs of the 2008 global financial crisis to flirting with the abolition of the IMF," Justin Sandefur, a senior fellow at the Center for Global Development said in a statement. "His disdain for the World Bank's mission of fighting global poverty rivals John Bolton's respect for the United Nations."
The nomination of Malpass is said to raise legitimate fears about what happens to one of multilateralism's most storied and impactful institutions when it's headed by an avowed critic of multilateralism.
The World Bank has been tackling extreme poverty over the last seven-plus decades by extending loans to low-income countries to fund projects at lower rates than if they were to go seek financing for those projects from international markets. Now, an organization that will be loaning upwards of $10 billion in just this fiscal year to some of the world's most impoverished countries will be led by someone who may seek to undermine it.
The appointment also threatens a long-standing (albeit informal) agreement under which the U.S. appoints the head of the World Bank and Europe appoints the head of the International Monetary Fund (IMF). Criticism of the practice has been growing in recent years in favor of nominating people who actually hail from developing countries to these two posts. It's a call that's likely to grow louder if Malpass is confirmed.
Malpass looks likely to be confirmed by the nation states that fund the Bank. The Europeans are too strongly attached to the informal ability to appoint the IMF head to put up much of a fight. In fact, some may see this as a guarantee of the IMF's leadership for at least one more round - now that the US will "owe" them for backing Malpass.
Former World Bank president Robert Zoellick explaining why emerging markets are so critical to the world's future - and why the next World Bank president needs to pay them particular attention says that the global economy is a far different beast today than it was when the World Bank was first established in 1945.
However, some believe past colourful rhetoric aside, signs suggest Malpass will seek to reform an institution that has become a sprawling bureaucracy, rather than reduce it to ruins. If one looks at congressional testimony Malpass gave last year, it seems he and the Trump administration have three main goals when it came to the administration's dealings with the World Bank and IMF.
The first is to get emerging markets to start relying more on international market-based financing rather than the below-market-rate financing the Bank offers; the second is to make sure that money is lent for projects that are more financially sustainable; and third is to seek more debt transparency from countries receiving the loans. But one should also keep in mind that just before the crash of 2008, Malpass was all praise for the way the global economy was progressing. He was at that time the chief economist of Bear Stearns which could not survive the crash.
If the World Bank's directors approve his nomination, Malpass would be positioned to overhaul an institution that, he has argued, has become too focused on its own expansion and prestige rather than on the interests of poor countries.
"A host of organizations are creating mountains of debt without solving problems," Malpass said in a speech last year.
"Huge organizations like the World Bank and the many multi-lateral development banks have created an environment where their own growth ends up being as important as their clients' growth."
Stewart Patrick, a senior fellow in global governance at the Council on Foreign Relations, said that Malpass appears intent on weakening a World Bank that is already rethinking its role in a world with broader greater access to capital markets but also chronic humanitarian crises.
"It certainly seems like he's the wrong guy if you wanted to strengthen the World Bank," Patrick said. "He has such a record of criticism of the World Bank. And he seems to have bought into the sovereignty mindset of the administration that global institutions are a threat."