World Bank gets help from sovereign wealth funds to invest in developing nations

By Howard Schneider
Washington Post Foreign Service
Sunday, April 18, 2010

As the World Bank tries to rebuild after a global economic crisis that arguably boosted its reputation but left it strapped financially, the agency will get support from a new quarter: sovereign wealth funds.

Under a program announced last week, state-owned investment vehicles from South Korea, Azerbaijan, Netherlands and Saudi Arabia have agreed to invest $600 million in a bank-sponsored equity fund for less-developed countries.

The investment is not large on a global scale. But it opens a new pool of capital that World Bank President Robert B. Zoellick said could prove to be important in creating a new "architecture" for the post-crisis global economy.

Sovereign wealth funds are established by countries with trade surpluses from manufacturing or petroleum exports and used to invest in projects, typically ones in developed countries or emerging markets. The crisis, Zoellick said, showed investors that there are no havens and helped them become open to the idea of teaming with the World Bank on investments in Africa, the Caribbean and Latin America.

"Five or 10 years from now, people will look and say, 'That was really big,' " Zoellick said of the new program. "Under any circumstance, the World Bank is still a small player in international finance. We need to leverage ourselves not only in financial terms but in policy terms that will draw private capital."

"Leverage" is a concept Zoellick thinks about a lot these days. In the new fund, he is leveraging the World Bank's expertise in evaluating projects and generating a return in hopes that countries with large currency reserves -- China's stands at $2.5 trillion -- invest more in less-well-off parts of the world.

Zoellick is also trying to leverage his long U.S. diplomatic career into the bank's first general capital increase in more than 20 years, an issue that will be debated this week at meetings of the institution's governing board.

The former U.S. trade representative and deputy secretary of state has asked countries for $3.5 billion in new contributions, money that would, through borrowing and other methods, give the bank access to about $40 billion it can lend. The alternative, Zoellick said, is to curb new loans and programs at a time when economists are warning that a nascent recovery needs help to keep going.

The amount of money the bank lent and committed during the crisis was historic -- roughly $105 billion since July 2008, between double and triple the norm. The lending arguably turned the bank temporarily from an anti-poverty agency into a prop for global demand and spending: Loans and lines of credit were targeted to keep trade flowing through linchpin countries such as India, and a $3 billion fund was established to keep emerging-market banks from collapsing.

"We came into the crisis well capitalized, so we were able to lean forward," Zoellick said in an interview at World Bank headquarters on Pennsylvania Avenue. "If we don't get a capital increase by even later this year, we will have to slow the lending that we do. If something happens in international markets -- and markets are still fraught with risk -- we would no longer be in a position to step up and help countries that are in trouble."

About $1 billion will come from developing countries such as China that Zoellick is courting to play a bigger role. The rest would come from traditional mainstays in the developed world -- the United States is being asked to pay $115 million annually during the next five years. That may raise questions at a time when some of those industrialized countries are being asked to surrender voting shares on the bank's board so more can be turned over to developing countries. A plan under discussion would give developing nations 47 percent of the bank's voting shares, up from 44 percent.

It is a small shift, but one that's in line with Zoellick's view that the world economy is becoming more "multipolar."

It is a perspective that has pushed Zoellick in unexpected directions. During a speech last week at the Woodrow Wilson International Center for Scholars, he included a defense of derivatives -- financial instruments that in their more complex form contributed to the recent crisis and are now a target for new regulation. Zoellick noted, however, that they can help protect countries from swings in commodity prices or currency exchange rates.

Zoellick said he was concerned that the financial system reforms being debated in places such as Washington, Brussels and London could slow economies that the world may need to depend on for future growth.

The crisis "hastened a process that was underway and still has not been fully recognized in what I call the 'G-7 world.' " Zoellick said, referring to the advanced industrial nations that coordinate global economic policy. "It is important to go beyond the notion of development as north-south charity. It is now mutual interest. . . . What are the sources of growth? One source will be developing countries."

© 2010 The Washington Post Company