Growth and Good Development Outcomes: My Discussions With Janet Yellen and Kristalina Georgieva

This past February 4th and 10th, I was pleased to hold discussions on the world economy, growth and debt with former Federal Reserve Chair Janet Yellen at the Bipartisan Policy Center; and with IMF Managing Director Kristalina Georgieva here at the World Bank.

To summarize some of my thoughts on the issues that came up:

SLOW EUROPEAN GROWTH

For Africa, one of the biggest drags on current growth and investment is the slow European growth rate. With Europe’s GDP growth the slowest in seven years, median income there has also stagnated.

The Eurozone has traditionally been a key market for much of Africa’s trade, so it is imperative that European countries begin to undertake structural reforms to boost their growth.

INEQUALITY

While this slow-growth situation is tough for Europe, it is even tougher for those in the developing world.

With Africa’s growth and investment sluggish at best, there is a clear and worsening north-south inequality divide. People are too seldom seeing their countries grow, their livelihoods improve, and their employment opportunities rise.

One main contributor to inequality is the “low for long” central bank policy. Central banks in the US, Japan, Europe, and the UK are buying and holding long-duration assets using short-term borrowing — through their huge and growing central bank liabilities to the banking system.

In addition to benefiting established sovereign bond issuers at the expense of new issuers, the result is a second type of inequality: large, well-established businesses get more, and cheaper, capital than new businesses and poorer countries. New entrants need working capital – short-term credits to help provide the needed growth of inventory, receivables, trade finance and equipment – yet the system is set up to do the opposite, to favor established borrowers, crowding out new borrowers. Policies are working to help big governments and big corporate borrowers, a recipe for inequality and slow growth for small businesses and poorer countries.

DEBT TRANSPARENCY

The World Bank has a major initiative to encourage debt and investment transparency as a way to speed up the growth and investment process and reduce inequality.

Empirical evidence shows that countries that are more transparent about their debt and investment decisions are able to get financing at a lower interest rate. We think they can also increase their investment inflows.

Transparency is crucial both to how people invest, and the sustainability of the debt that they use to make these investments.

The best practical way to determine which debt and investments make sense is full transparency. When governments borrow, people should know:

What is the interest rate? How many years? What are the clauses in the debt contract? What is the purpose of the project and how will people benefit?

These questions — and more — are items that the public deserves to know, so that they can better evaluate debt decisions. Debt transparency will require progress on issues such as non-disclosure of loan contract terms, 27

net present value reductions of excessive debt, disclosure of collateral and debt-equivalent instruments, the implementation of the new IDA- 19 SDFP, negative pledge clause violations, and disclosure of SOE liabilities.

When discussing debt and investment transparency, China’s foreign lending is a very relevant topic given China’s large economy and newness to international standards for official lenders.

We’re working well with China on this and other issues, but there is still substantial work to be done.

PRIVATE SECTOR GROWTH

Important to the concept of sustainable lending is private sector growth, which leads directly to job creation, growth and higher median incomes.

In many cases, an individual’s first job begins with a small business. New employees gain a wage, lifetime skills, and the tools needed to unleash their full economic potential. For developing nations, more people working means more people with the skills needed for a thriving economy.

To empower growth among businesses, small and large alike, we need what economists call contestability – the opportunity for businesses to compete with state-owned and military-run enterprises that often depend on monopoly power.

Monopolies distort pricing and markets, creating barriers to good economic outcomes.

SUSTAINABILITY

It is clear that to empower long-term growth and good outcomes, we must seek sustainability, and not just in financing structures.

Climate change and sustainable development practices are key concerns, and I am glad that the World Bank is leading on these issues.

One way in which we are doing so is by pursuing lower-carbon growth.

The World Bank Group has a $200 billion target for the next five years for investments in climate and the environment. For these important issues, the World Bank Group represents nearly half of all funding by international organizations and is the single largest funder of environment and climate change initiatives worldwide.

DIGITAL FINANCIAL SERVICES

Digital financial services offer a major new opportunity for development. Digital cash empowers even the disadvantaged within an economy to have access to money with low transaction costs.

Kenya’s M-PESA system is finding ways for new entrants to become “bankable”, borrowing against today’s cash flows to buy the products they will sell tomorrow; and building businesses out of that.

To make it work requires a combination of basic services (electricity, telecom); sound regulatory policy; and a degree of trust in the rule of law. It’s hard but the payoff can be huge.

My thanks again to Chair Yellen and Marketplace’s Kai Ryssdal at the first event, and Managing Director Georgieva at the second for their insights