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The Early 2020s: Former World Bank President David Malpass on COVID, Inflation, China, and Climate · The Capitalism and Freedom in the Twenty-First Century Podcast

0:00
>> David Malpass: China is very involved in lending its own money,
0:03
much bigger than any World Bank amounts into their Belt and Road initiative.
0:09
And a challenge from that is try to stop some of the practices that they do.
0:14
One is a non-disclosure clauses in the contracts.
0:18
What this means is that the clauses within the contracts are unfair to
0:22
the people of the country.
0:24
Also the taking of collateral by China as it lends a country.
0:28
So for example, in Ecuador and Angola,
0:32
China had contracts which allowed them to take physical control of the oil.
0:38
That gives them an advantage and also control within the country's framework.
0:46
[MUSIC]
0:55
>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century Podcast,
0:58
an official podcast for the Hoover Institution Economic Policy Working Group
1:01
where we talk about economics, markets, and public policy.
1:04
I'm Jon Hartley, your host.
1:06
Today, my guest is David Malpass.
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David served as the 13th president of the World Bank Group.
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Prior to his appointment at the World Bank, David served as U.S Undersecretary
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of the Treasury for International Affairs during the Trump administration.
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Before joining Treasury, David founded and
1:23
led a macroeconomic research firm based in New York City.
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Before that, he served as Chief Economist at Bear Stearns and
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conducted financial analyses of countries around the world.
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Earlier in his career, David served various roles at treasury as well during
1:37
the Reagan and Georgia H.W. Bush administrations.
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He also served in the U.S.
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senate, working on the Senate Budget Committee and Joint Economic Committee.
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Thank you so much for joining us today, David.
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>> David Malpass: Hi, Jon.
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>> Jon Hartley: So I want to get to your beginnings.
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David, where did you grow up and how did you first get interested in economics and
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finance?
2:00
>> David Malpass: I grew up in Northern Michigan.
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I was born in Petoskey and then raised in East Jordan, an even smaller town.
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Economics, I think, came to me more from my interest in the way the world works.
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And I was a physics major in college.
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And before that I was interested in geography,
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in languages, and how things work.
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And that leads you right into economics.
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Why do people move money the way they do?
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What are the policy tools?
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And so that was my interest.
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>> Jon Hartley: That's fascinating, I wanna talk a little bit about.
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You've had an amazing career in both the public sector and private sector.
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And you served in a variety of government roles as Treasury and
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in Congress before becoming the World Bank president.
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>> David Malpass: State Department, that was left out.
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So that was two or three years of my life.
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So, yeah, two years.
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>> Jon Hartley: And you've also done a lot in the private sector as well.
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And many people may not realize this, but there's a whole host of suspicious people
3:06
who served as chief economists at Bear Stearns in addition to yourself,
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like Carmen Reinhardt, Larry Kudlow, I'm curious,
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how has your time in the private sector informed your public service?
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I think it's rare that you find people that have so
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much experience in economics in both the private sector and the public sector.
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>> David Malpass: Private sector is really important.
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People, for one, have to compete.
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And so that was, that was good for my economics.
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I was regularly ranked near the top in the Institutional Investor poll,
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so that that was reinforcing of some of the ways I was doing things.
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I wanted people often to look at the actual raw data.
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So a lot of times economists work in terms of rate of change,
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when what you need to look at is the actual levels of data.
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So I learned that and more importantly, I learned lots about financial markets.
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We forget the crossover between economics and
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markets, but it's tight.
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And so as you think about whichever kind of market,
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whether it's equity markets or bond markets or
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interest rate markets and futures or currency markets,
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they are directly crossing over between economics and finance and real world.
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So I saw that in much detail in those years.
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That was 24 years on Wall Street.
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>> Jon Hartley: And it's amazing, and what an amazing career.
4:52
Speaking of someone that's worked in both private sector at Goldman in
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various policy roles,
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I think working in private sector really gives you an added perspective.
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And certainly I think a lot of data increasingly is being generated in
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the private sector as well.
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Even those in the public sector use Bloomberg Terminals.
5:13
Jay Powell, the Chairman of the Fed,
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has a Bloomberg Terminal that comes from the private sector.
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Often we're looking at blue chip forecasts that are being
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produced by an aggregation of chief economist forecasts in
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the types of roles that you served in the private sector.
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So I think there's a lot of interplay between private sector and
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public sector that maybe isn't very much appreciated, but
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you've been huge in both of those places.
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I want to get more into your tenure at the World Bank.
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So the World bank is generally focused on extreme poverty, whereas the IMF
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is more focused on lending to distressed countries, doing conditional lending.
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For the listeners out there, can you explain a little bit more about what
5:59
the World Bank president role entails?
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I know that part of your role is to guide.
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The board of about 25 executive directors represent around 180 countries.
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And voting at the World Bank is determined by capital contributions.
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It's not like UN which is one country, one vote.
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The voting power is based off of the capital contributions or
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how much each country invests in the World Bank.
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And typically, the World Bank, you're voting on projects that come up like
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building a dam or a power plant in a very poor country.
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As president World Bank, how do you oversee this process and
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what does that role entail?
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>> David Malpass: Thanks, and
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you're right that the World Bank is very interested in poverty.
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But remember its roots.
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They were in the reconstruction of countries that are now advanced economies.
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The first loan was to France and one of the early loans was to Luxembourg.
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And so as we think about the World bank, there's these
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five different branches I was president of each one that
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do different things within the global development process.
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In addition to the grants and loans for extreme poverty to the poorest
7:16
75 countries, that's the IDA part of the World Bank, there's IBRD,
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the International Bank for Reconstruction and Development,
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which makes floating rate loans to governments that are creditworthy.
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And so for example, Brazil borrows from the World Bank.
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And so those loans are like the IMF.
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They're trying to get structural reforms within the countries.
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So I don't wanna submerge that.
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As the World Bank has evolved over the years,
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Years it's gone from that role, the reconstruction role,
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toward an increasing portion that's poverty related.
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But then also there's the humanitarian assistance side.
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So when there's an earthquake,
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the World Bank is often the one that does the damage assessment.
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This could be Turkey, let's say, when there was a horrendous earthquake,
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the damage assessment.
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And then the methodologies that could
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bring assistance into that particular region of a country.
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Other parts of the World Bank that I'll just mention very briefly is
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the International Finance Corporation.
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Which makes loans to private sector companies in developing countries that for
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example is operating in Ukraine in the private sector now.
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Then there's MIGA, the Multilateral Investment Guarantee Agency, it is meant
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to provide insurance against certain types of risk, like political risk.
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And then a final part that is not insignificant is ICSID,
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the International Center for the Dispute Settlement.
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And, so that it goes to a part of the World Bank that
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is from the beginning trying to improve the rule of law in countries.
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Recognizing that if you have a better rule of law,
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you're going to get more investment into the countries.
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So ICSID helps investors settle disputes with countries and that with in the theory
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that that is helping increase the amount of investment into those countries.
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So it's a broad based organization that works closely with the IMF and
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other parts of the international system.
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>> Jon Hartley: It's fascinating,
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I worked in my own personal capacity at World Bank and the IMF.
10:01
And both these institutions just this past summer, the so called Bretton
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woods institutions celebrate their 80th anniversary this past summer.
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And John Maynard Keynes, Harry Dexter White were a big part of that.
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Harry Dexter White representing the US later turned
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out to be a secret communist and
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John Maynard Keynes represented the United Kingdom.
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And it turned out that I think that the White plan versus the Keynes plan had
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somewhat more influence in the construction of the World Bank and
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the IMF.
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And I think Keynes actually wanted like a world currency, the bancor.
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And so anyways, I think it's interesting that history and
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how much I guess the World Bank, the IMF changed over the years.
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Your point, the first loans were going out to France in the post World War II
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reconstruction period.
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But part of what the World Bank and the IMF were doing for
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many years was managing the system of fixed exchange rates.
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The so called Bretton Woods system that lasted for
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about really the first 20 years or so about their existence.
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And when Nixon took the US off the gold center when every.
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Most countries were then shifting away from this fixed exchange rate regime that
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the World Bank and IMF were managing.
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And since currencies generally floated and the World Bank and
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IMF has sort of pivoted toward conditional lending and
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a bunch of the other sort of rules that you mentioned.
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I think it's also interesting that the World Bank and
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the IMF recall the Bretton Woods institutions because they were
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created at this conference that was in Bretton Woods in Hampshire.
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You can actually go to this hotel where these meetings were happening.
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You can actually go up there and stay there now and there's a gold room and
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everything.
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There's also a golf course that's nearby as well outside of D.C that World Bank,
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IMF employees can go.
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It's called the Bretton Woods Golf Course and
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I think there's also some sort of a nuclear bunker under there, too.
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But I wanna get into some of the biggest challenges that I think you face and
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really overcame.
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I think in many respects, you're a hugely
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consequential World Bank president.
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And I wanna get into sort of each of these topics that you really
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helped to tackle and I think a really meaningful and effective way.
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I wanna start with China, tell us more about the challenges with
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confronting China and its continued role as an aid recipient country.
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It was kind of well above what the average GDP per capita
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that a World Bank aid recipient would be at.
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One of the sorts of things that you did, both as Undersecretary for
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International Affairs at treasury.
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As well as president of the World Bank, to shift this and
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to shift China away from being an aid recipient country.
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There's a lot of critics out there that say maybe China's in this case was
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borrowing basically at 0% from the World bank.
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And lending it out into a belt and
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road initiative basically like a hedge fund very controversial at the time.
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But I'm curious, what was your role in helping to change that?
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>> David Malpass: Let's step back a little bit and you were talking about the fixed
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exchange rate system of the world that's important and the gold standard.
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So in China's rise in terms of per capita really
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was launched in 1993 when they stabilized their currency.
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And so that brought them more engagement with the world system than
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the Soviet Union had been able to achieve.
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So if we look at the course of China in those years
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of the 90s, it was expanding its role.
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And at the same time, then expanding its shareholdings within the World Bank.
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So where we stand today is it's the third largest shareholder behind the U.S and
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Japan.
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It wants to be a bigger shareholder, so there's constant pressure for
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it to expand its role.
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With regard to lending to China, it's actually not a very important topic.
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I know it gets a lot of attention,
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but it's not very much money and it's very profitable for the World Bank.
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So the way you described it isn't quite right,
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they borrow at a floating exchange rate with a spread.
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So, because China is creditworthy,
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it's one of the borrowers that helps pay for
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World Bank salaries and so on.
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And in the earlier years, China was a recipient of IDA as a,
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one of the poorer developing countries.
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And indeed it was a poor developing country in the 1970s and 80s,
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remember under Mao, there were famines, it was a horrific set of economic policies.
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And so as we bring it forward to today,
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China is repaying those old loans with interest and
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it ends up being a net cash flow positive to the bank.
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I'm not trying to defend the lending, I would like to see it stop.
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But it's something that China negotiated very strenuously for
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in the 2017 capital increase, and
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that was agreed to within the Trump administration for
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its lending to China to decline.
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From a per capita standpoint, there are quite a few countries with
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Higher per capita than China who are lending from the bank.
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So it was one of the agreements in 2017 to have all
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of those countries look for an exit from IBRD lending.
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But as I said, that type of lending to the higher income
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developing countries is actually highly profitable for the World Bank.
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And we're talking about a billion dollars a year,
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which is a tiny fraction of China's on lending to other countries.
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So it's not really a factor in supporting China.
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China are very eager to have the lending from the World bank for symbolic reasons.
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It's a connection to the world and also for demonstration reasons.
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So even President Xi, in talking with me in person
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in my role as president or even before I became president,
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was eager to see some lending by the World Bank.
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And what we agreed to was to have that lending be primarily for marine plastic.
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China is one of the major contributors to the marine plastics problem in the world.
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Through its rivers, they chop up plastic into little pieces and
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it's dumped into the rivers.
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And they were looking for assistance,
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technical oriented assistance to reduce that in
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the same way that was done with sewage treatment.
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So the World bank had been successful in China in helping
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them treat sewage so that it didn't pollute the rivers.
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And so even at the highest levels of the Chinese government,
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they talk about now being able to swim in the Pearl river.
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And they're proud of the cleanup that was done and they want to see that go.
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So I don't want to go on.
18:11
There are bigger issues and challenges with China and so
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maybe shall we talk about that a little, John?
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>> Jon Hartley: Sure.
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>> David Malpass: So other challenges here,
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China is very involved in lending its own money,
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much bigger than any World bank amounts into their Belt and Road initiative.
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And a challenge from that is the way it's done.
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And I worked both at treasury and
18:37
then at the World Bank to try to stop some of the practices that they do.
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One is a non-disclosure clauses in the contracts.
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So they say that once they've signed the contract with the country,
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the country can't discuss it even with the IMF and
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the World bank, much less in public discussions.
18:59
What this means is that the clauses within the contracts
19:03
are unfair to the people of the country.
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So we tried to reduce that.
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Also the taking of collateral by China as it lends to a country.
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So for example, in Ecuador and Angola, China had contracts
19:17
which allowed them to take physical control of the oil.
19:23
And then that gives them an advantage within those countries and
19:30
also control within the country's framework.
19:36
So scaling that back was one of the goals.
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These are really problematic because China doesn't want to do that and
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some private sector lenders are doing that.
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That became an issue in the Chad debt restructuring because Glencore had
19:52
contracts that were collateralized that were very difficult then to reschedule.
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And so Carmen Reinhardt who I brought in as chief economist at
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the World Bank was very involved in trying to have more transparency and
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disclosure of the types of lending that was being done.
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And that includes the swap lines that were done by China's central bank.
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That is a current issue in Argentina for example,
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where China makes a loan and then gets priority within that.
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So that's one set of issues that I've been frustrated
20:32
are not moving forward within the world within the world framework.
20:39
That a related set is the restructuring of debt for countries that have hit the wall.
20:45
That as interest rate, well, as the world
20:50
growth didn't pick up in the 2010s.
20:54
This was a time when the central banks were all doing QE which they claimed was
20:59
stimulative.
21:00
But I wrote a lot about how it was not stimulative, it was actually distortive.
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It channeled capital to the richer countries and so
21:11
the poor countries were left with a shortage of capital and
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that pushed them into debt crisis along with their over borrowing.
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Many of the poorer countries found themselves in very
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difficult circumstances even prior to Covid.
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One of the early things I did at the World bank in 2019 was to commission
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a report by the bank on the four waves of debt or that this is the developing
21:39
country debt crisis that included the Latin debt crisis that I'd worked on.
21:44
So as we bring this forward, China has been
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successful in avoiding the write down of its debt
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to some of these poorer developing countries.
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And that leaves a huge negative cash flow for
22:03
the countries to creditors that are much better off than the countries.
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So that's a frustration and an important part of the relationship.
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And then I was also going to mention the relationship
22:22
of China with developing countries in terms of
22:27
the control mechanisms through their contracting for
22:32
infrastructure and other types of assistance.
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So these are all key parts of the relationship.
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They remain problematic.
22:46
And if we think about, okay, what is the goal here?
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I was very clear in the mission at the World Bank to have outcome outcomes for
22:56
people in developing countries improve.
23:00
So I wanted to have you could measure that through an increase in the median
23:05
income for people, the median per capita income of countries.
23:11
And so as we pursue that then this type of contracting
23:16
is not useful in moving the world forward.
23:20
But what has happened on the international stage is China's
23:26
approach being tolerated, accepted by the international system.
23:32
So this creates tension within the relationship between the world and China.
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And it's been successful for China in pursuing that approach.
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>> Jon Hartley: I mean, it's a very big topic, the geostrategic competition,
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the BRIC countries attempted to start their own
23:56
multilateral development banks, the BRICS Bank.
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>> David Malpass: Can I interrupt before we lose that thought so that people,
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your viewers, understand this?
24:07
The multilateral development banks is an expanding concept
24:12
within international finance.
24:15
It includes the World bank, but also several other major multilateral
24:19
development banks, such as the Inter American Development bank,
24:23
the Asian Development bank and several others.
24:26
It's not a finite category and it gets substantial benefit within the world
24:31
financial system through what's called preferred creditor treatment.
24:37
And so China is aware of that and has created two institutions,
24:42
the AIIB, the Asian Infrastructure Investment Bank, and
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the NDB, the New Development Bank, which is in Shanghai,
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to take advantage of that and claim preferred creditor treatment
24:56
status within the capital structure of sovereign lending.
25:01
And so I just want to mention that because it's one of the powerful
25:06
protections that are granted to multilateral development banks,
25:11
which is now accruing substantially to China's benefit.
25:16
>> Jon Hartley: It's a great point.
25:17
And yeah, I think in recent years there's been so
25:20
certainly a lot of news about this potential that the US could lose its
25:25
status having a world reserve currency, so-called de-dollarization.
25:30
And certainly politicians from countries like Brazil and
25:35
China and elsewhere have stated this as a goal.
25:38
I have an academic paper that tracks all this through
25:43
post-Ukraine invasion from Russia and through COVID.
25:49
And it looks like so far the US dollar status is still okay.
25:53
But certainly I think we'll continue to monitor over time whether or
25:58
not things change and
26:00
to what degree any of these other countries are successful in chipping away
26:05
at the dollar status if you're looking at the share of World Bank or
26:10
the share of Central Bank that reserves around the world, the US dollar.
26:16
So still pretty much up there in that 50 to 70% band.
26:21
Now I wanna get into growth cuz you mentioned growth a bit.
26:24
And I think economic growth is such a huge topic, especially with
26:29
growth in advanced economies slowing down since the global financial crisis.
26:37
With maybe the one exception of the US,
26:39
the US continues to be exceptional in terms of its growth.
26:42
Over this time, developing countries and during your tenure,
26:46
certainly developing countries have continued to reduce extreme poverty and
26:52
have continued to grow quite a bit and converge quite a bit through the 2010s.
26:58
But the COVID period was pretty different.
27:00
And I think if you look at some evidence,
27:03
Covid was actually a pretty bad time for particularly developing countries.
27:09
But I think it was made a lot less bad because of the efforts of the IMF
27:13
and Bank.
27:13
You were president of the World Bank during COVID, can you explain a little
27:19
bit more about what the World Bank and IMF response to COVID involved?
27:24
And what was it like being a President of
27:29
the World Bank while this once in every
27:34
100 year pandemic came along?
27:39
>> David Malpass: The World Bank staff was affected the way people in Washington D C
27:40
and around the world were affected.
27:41
So there were lockdowns.
27:42
And so it was certainly a shock to the system.
27:47
It was worse, as we know, for
27:49
poorer people around the world for all a variety of reasons.
27:55
One, they couldn't go into work and many were working on an hourly basis,
27:59
meaning if you don't go to work, you don't get, don't get paid.
28:03
And so that caused the differentiation around the world.
28:07
There was the slowdown in global growth, which impacts developing countries
28:11
heavily because they're dependent on markets going outside.
28:15
So we can recognize the trauma and the unfairness of the trauma.
28:23
We looked at that and then wanted to do several things in response.
28:30
One was the front loading of the assistance that was IDA.
28:34
So I had negotiated IDA 19,
28:37
which was the 19th three-year replenishment of the IDA trust fund.
28:43
And so it was meant to last for three years, which started from,
28:48
it would have been, I think 2020 through 2022.
28:53
And so what we were able to do was accelerate the flow of grants and
28:58
loans from that into countries for both humanitarian assistance and
29:03
also for COVID, for direct assistance for COVID.
29:08
Another thing that we did was set up a fast track approval process
29:13
through the board of the World bank that allowed a menu of options for countries.
29:21
So if they needed, it was on the idea that
29:24
many countries needed similar things in terms of,
29:29
of medical equipment and medical supplies.
29:34
And so that didn't have to go through the board, each one as an individual case.
29:41
So that drastically accelerated the process.
29:43
And by the end we had managed to put forward $10 billion of assistance
29:49
that was specifically for medical related items that were Covid related.
29:56
And that was on top of the acceleration of other kinds of lending.
30:03
And so that was successful.
30:06
One of the things that made this possible was fortunately for the World Bank,
30:12
the IT function, the information technology function was pretty up to date.
30:19
And so people were able to work with their laptops from home and
30:23
still get the throughput.
30:25
So we saw our financial commitments go up each year and they peaked in 2023.
30:32
They fell down in fiscal 24 which ended on June
30:38
30th because of some of this front loading
30:43
that was going on of the lending process.
30:47
So I think that's a successful change of direction by the bank during,
30:54
during COVID I wanted to mention one other thing that
30:58
what I did was lead a group of four institutions.
31:03
And I'm having to dig into my memory here, but it was myself,
31:08
Kristalina at the IMF, NGOCIA at the WTO, and Tedros at the WHO.
31:13
We met regularly to analyze the situation
31:20
with regard to transportation
31:25
of vaccines, for example.
31:29
And so that was a good coordinating meeting.
31:33
I have to say, though, that it was frustrating, and
31:36
that shows up in the minutes of those meetings.
31:39
One of the things I wanted to do at the World bank was to have a disclosure of
31:45
what was discussed in some of these high level, so called high level meetings.
31:51
And so this is one where we would put out a document to say what we discussed.
31:58
And you can see through those Documents, but
32:02
my frustration at the inability of the advanced
32:07
countries to give up or to give access to vaccines.
32:13
So, this was a widely discussed topic in 2021 in the media.
32:21
Why aren't vaccines flowing to poorer people around the world?
32:27
And it was indeed frustrating.
32:30
There were barriers set up by the advanced economies.
32:33
So, we tried to break through those.
32:36
I think those are the things I was gonna mention on that.
32:40
>> Jon Hartley: Yeah, it's amazing to think of that time,
32:44
was only a few years ago, and I remember certainly,
32:49
the US getting a vaccine out in basically just less than a year.
32:56
There was this advanced market commitment concept of Operation Warp Speed.
33:01
That was being helmed by the Trump White House at that time.
33:06
And then you had organizations like, COVAX, and
33:10
others were trying to distribute the vaccine throughout the world,
33:14
working in tandem with organizations like the World Bank.
33:18
I remember there was all this competition for vaccines across various countries.
33:24
And I remember, Canada had bought a number of vaccines that didn't quite
33:29
work out from China, and it was quite a mad dash and quite a scramble.
33:34
And thankfully, we've gotten through it, and thankfully,
33:39
countries are, some countries are still recovering.
33:43
>> David Malpass: Huge individual events.
33:47
One was the Chinese vaccine didn't work, so you had a failure of vaccination there.
33:53
One was the COVAX that you mentioned, which also didn't work.
33:57
It was supposed to, and World Bank did not join, and
34:01
I explained why it wouldn't work.
34:04
That it was a European concept of buying up vaccines from people,
34:08
and then having them distribute them to countries.
34:11
And the problem was, when you try to distribute from a central plan,
34:19
and they were intent on doing it equitably,
34:23
it basically meant no one got very much from that operation.
34:30
I think it really didn't work.
34:32
So, what we did in sharp contrast from the World Bank, was talk to the countries,
34:37
see which kind of vaccines they wanted and then see if we could finance it, so
34:42
that they could get delivery on the schedules that they wanted.
34:46
So, it was a substantially different approach.
34:49
Another type of, I'll mention two more events that occurred, was India.
34:56
Initially, didn't suffer very much from COVID, and so,
35:02
they are a major potential manufacturer of vaccines.
35:06
And so, COVAX had contracted with India to take receipt of vaccines, but the contract
35:13
was pretty clear, that if India needed them they wouldn't be shipped.
35:18
So, there was a contracting error from COVAX,
35:23
because India decided that it needed the vaccines for its own population.
35:31
Which had begun suffering intensely from outbreak of COVID among elderly,
35:38
who needed to be treated with the vaccine.
35:42
So, there was a force majeure or
35:46
I don't know the legal terms of what was in the contract.
35:52
So, that was a setback for other developing countries.
35:57
And then another similar was the options that the US held onto.
36:05
This is in 2021, US wouldn't give up its options, and so
36:09
others couldn't take advantage.
36:12
And then Europe had the same,
36:14
they had vaccines in warehouses that they wouldn't allow to be shipped.
36:19
And so, they expired value.
36:22
And that was at a time when elderly, and
36:25
people at risk in poorer countries actually needed the vaccine.
36:32
>> Jon Hartley: It's a shame. >> David Malpass: Yikes.
36:33
Yeah, moving on, but that's deep history.
36:36
The overlay, and I should mention it, is the many other
36:41
challenges that were spilling off of the global slowness in
36:47
the 2010s, and then the hammer blow from COVID.
36:52
So, it meant that what we talked about at the World Bank,
36:58
and I wrote and spoke a lot about the reversal in development that was going on.
37:05
And I think is still problematic, you mentioned in your remarks,
37:11
the idea of there being convergence,
37:14
that convergence slowed and then stopped and then reversed.
37:19
That means, the idea that developing countries should grow
37:24
faster than advanced economies in order to narrow the gap in per capita,
37:30
and to broaden the depth of development around the world.
37:35
Unfortunately, that hasn't been the case now for some years.
37:41
And so, I worked extensively on trying to analyze what was wrong,
37:46
and how you could reaccelerate growth within the developing world.
37:52
That takes us to the currency issues, to the market issues, and to the rule of
37:57
law kinds of issues that are, I think, very important to development.
38:01
>> Jon Hartley: Yeah, no, it's fascinating.
38:03
I know in the economic literature,
38:05
there's a long period of divergence, up till the late 90s.
38:10
Lant Pritchett wrote this famous article called Divergence, Big Time.
38:14
And that was right when this period of about 25 years of convergence started.
38:20
And in the late 2010s there were quite a few economists,
38:24
Michael Kramer, Arvind Subramanian, among others,
38:27
who were writing about this new era of converging to convergence.
38:32
And that was right before COVID started.
38:35
And since, it seems from the data that I've looked at and regressions I've run,
38:38
you're absolutely right.
38:40
We're sort of back seemingly in this period of divergence, since COVID.
38:46
I wanna talk a little bit about climate.
38:47
Clearly it's an important topic, and by the time you left office,
38:52
you increased the World Bank's climate lending to around 35%.
38:56
Would you explain what that means and
38:58
what the approach to climate was during your time as president of the World Bank?
39:05
>> David Malpass: Sure.
39:06
Climate we can divide into mitigation and adaptation.
39:11
So, for adaptation, this is the idea that countries are facing
39:17
changes in their climate that affects agriculture, it affects flooding, and
39:24
that there are changes that they can make that will save lives.
39:30
And that's been going on, of course, for
39:33
decades by moving people off floodplains, for example.
39:37
And so, there is within the World Bank's climate commitments,
39:43
50% of the climate spending is supposed to go to adaptation.
39:49
And the World Bank was one of the few organizations successful in doing that.
39:53
It takes a lot of planning for a project that will.
39:59
Improve the preparation of people for changes that
40:04
are going on in their climate and in their weather.
40:09
And so as the bank expanded, of that 35% then,
40:15
17.5% is going toward in general poorer countries and
40:22
taking care of people and pretty directly saving lives
40:29
through this adaptation-type financing.
40:34
An example of that is in Vietnam where the Mekong Delta is subject to floods and
40:41
where there can be changes made to protect some of that.
40:47
And so that is also a source of attraction for
40:51
countries that are donating to IDA of the World Bank, because for
40:56
some of the countries, particularly in Europe and Japan,
41:01
they're comfortable donating more for the overlay that's climate-related.
41:09
With regard to the mitigation side, this is where some of the challenges come in.
41:16
The World Bank was under immense pressure from the COP process,
41:24
the United Nations' push for more spending
41:29
on climate to put ever more amounts of money into climate.
41:36
The challenge here is there's a limited amount of resources.
41:39
The World Bank's annual commitments have
41:44
some throughput capacity constraints.
41:49
So as you move more toward climate,
41:52
that means less toward other uses such as education, health, child nutrition.
41:58
And so there needed to be some kind of balancing of that.
42:03
What we did was called the Climate Change Action Plan,
42:07
which made the point that climate and development have to be done together, that
42:13
you can't simply overlay climate costs because that would sacrifice development.
42:19
So that was an integrated approach to thinking about what countries needed.
42:25
For example, in South Africa, we had a big push
42:30
to try to have them salvage the electricity grid
42:36
which was suffering from lack of capacity as solar
42:41
panels came on and were inserted into the grid.
42:46
Solar panels are intermittent, meaning they come on and off during the day and
42:51
the night, or if the weather changes.
42:54
And so that challenges the grids.
42:56
So around the world, countries are having a big challenge trying
43:02
to get enough new investment into their grid that they can absorb
43:08
the intermittent sources that are being brought on stream.
43:13
And so that's the some of the types of lending challenges.
43:19
One of the things that we wanted to do was try to put
43:24
a measure of cost benefit into the evaluation of different projects.
43:31
One of the problems is there's the temptation to simply measure
43:36
climate spending in terms of how many dollars go into it.
43:40
And there was massive pressure to have the World Bank make commitments
43:45
that it wouldn't have been able to meet, meaning high dollar value
43:50
commitments when there were not projects available for that.
43:54
And then also have it ignore the question of whether it's actually
43:59
a useful loan to make to the country.
44:02
So I think that as we think about where we stand today,
44:07
one of the challenges in the climate area is people are very
44:12
interested in responding to problems within the world,
44:17
but then doing it in a way that has actual benefits rather
44:22
than just the spending of money or of subsidies.
44:26
And I think that remains one of the big problems.
44:32
It's not useful within development to push renewable
44:38
energy sources or users of renewable energy,
44:43
like electric vehicles, if it's going to on net
44:49
add to greenhouse gas emissions in the world.
44:54
So there has to be some kind of evaluation of the cost benefit of that activity.
45:01
I think that remains one of the big challenges.
45:03
And I'm concerned, as more and
45:06
more of the development spending is diverted into climate,
45:11
it actually undercuts this goal of having better outcomes for
45:17
the people of developing countries.
45:20
>> Jon Hartley: I know there's a lot of critics who you have challenged or
45:24
criticized the World bank or IMF in the very recent years,
45:28
along with other governments, of being too focused on climate,
45:33
in topics like inequality as well, to the detriment of fighting extreme poverty,
45:39
which is, I think, extremely important thing that we can't forget.
45:44
I wanna talk a little bit about inflation.
45:47
>> David Malpass: So on that, then I think a way that the world can operate on that
45:51
is to actually evaluate the projects.
45:54
I talked about this and people simply didn't wanna talk about it.
45:58
I would say, okay, good, let's do things that are useful on climate.
46:02
Do you have an idea of a project?
46:05
And that's where the conversation often stopped.
46:08
There wanted to be a blind commitment to spend money without thinking of whether it
46:13
was a useful project.
46:14
So I think that gives a grounding for where we could go from now.
46:19
>> Jon Hartley: Absolutely.
46:20
>> David Malpass: Go ahead, sorry.
46:21
>> Jon Hartley: Good point.
46:23
I was just saying, people are wondering a lot about inflation now in
46:28
terms of sort of the topics of late that are, I think, top of mind.
46:32
It's been a big topic certainly for both developing economies and
46:38
advanced economies with the global post-pandemic inflationary surge.
46:45
What are your thoughts on the causes of it and
46:48
the subsequent response from central banks?
46:51
>> David Malpass: Yeah, it's a huge problem.
46:53
If we think about our goal, how do we have better living standards for people,
46:59
then you can talk in terms of, economists do, in terms of real income.
47:03
So that means your income in nominal terms less the inflation rate.
47:09
This, of course, has plagued developing countries for forever.
47:15
As their currencies weaken, then workers usually lose ground against the prices.
47:21
So vendors tend to raise the price of
47:24
their goods immediately when there's a devaluation.
47:28
But workers have to then catch up after the fact.
47:31
So that's the cycle that we're in with the world now,
47:38
where workers lag behind in terms of their nominal wages,
47:44
and so their dollar or their peso or
47:48
their euro goes less far for their daily needs.
47:53
Economists keep arguing about what are the causes of inflation.
47:58
I would welcome a look Back where the central
48:01
banks actually look at the role that they played.
48:04
And it's very important to bring in the two other factors,
48:10
the supply chain which was substantially disrupted by COVID,
48:16
but then also the government spending that was instituted
48:22
massively during COVID and it persisted after COVID.
48:27
So some portion of the cost push inflation is directly related to
48:32
the giant amounts of money that were being committed by governments.
48:37
So people just raised their prices for the things that were being sold to
48:42
the government and for competitive goods that competed with those.
48:47
So you get a bidding war instigated by government spending.
48:52
So that needs to be looked at.
48:55
And I think that leads to a whole host of issues for central banks
49:00
to think about in terms of their own role in how to achieve price stability,
49:06
which is one of the prime objectives of the US Federal Reserve.
49:11
And it is the prime objective for the European Central Bank price stability.
49:17
How do you do that in a floating exchange rate environment
49:22
with interest rates that fluctuate over such a broad range of activity?
49:29
I think the answer is you recognize as a central bank that some part
49:34
of what you're doing affects the supply side of the economy.
49:39
It's not just demand that's being influenced by the interest rate decisions
49:44
of the central banks, it's also the supply and be cognizant of that.
49:49
So that as we try to achieve price stability going forward,
49:54
we recognize that more production will help with price stability.
50:00
This is particularly apparent, of course,
50:03
in the energy sector where energy prices feed into so many goods and services and
50:08
you could achieve lower inflation by having more production of energy.
50:13
That's the opposite of what's happening in many countries around the world.
50:18
>> Jon Hartley: And I think interesting to see just how, in my opinion, so
50:23
central banks were to respond to the post-pandemic inflation.
50:28
A lot of these sort of group think ideas of inflation is transitory and
50:32
I'll come back down with bank intervention or without some complaints raising rates.
50:37
I think it's a bit of a black spot on the Federal Reserve of late.
50:42
I think it was pretty clear that inflation was pretty broad-based across
50:47
the price basket by October, 2021.
50:49
And it wasn't just a used car price spike story at that point,
50:54
which kinda started in May of 2021.
50:58
>> David Malpass: They were late in their hikes.
50:59
But I think there needs to be even before that going back
51:04
into the zero interest rate environment.
51:07
Zirp, remember, we had a whole word and a concept and endless conferences on
51:13
how wonderful it is that zero interest rates were going to stay for a long time.
51:20
And that led then into some of the theories of modern monetary theory and
51:26
some of the theories of during COVID of the idea that all governments
51:32
should spend as much as possible, which ends up a two edged sword.
51:37
And so I think there needs to be some rethinking of those tools.
51:45
I've been critical of QE of quantitative easing or
51:51
of bond buying by central banks.
51:54
I think it should be recognized as a tool to stabilize markets
52:00
when they fail, but not as a stimulative tool because of
52:05
the distortion that comes from that bond buying.
52:09
But that still hasn't been accepted within the international community.
52:16
And we're at risk of having central banks out into the future continue
52:22
to think that they're helping the world by buying their own government's bonds.
52:29
This is a slippery slope and one I think we should try to reconsider right now.
52:36
>> Jon Hartley: Certainly, the Fed's framework reviews going on.
52:40
I think the Fed's flexible average inflation targeting, I think is rightly
52:45
taken some heat in recent years in the sense that it's not quite clear enough
52:50
over what period we're averaging inflation over and how flexible it is.
52:55
I just wanna pivot a little bit from central banks here to really just broadly
53:00
the future and I'm curious, just a final question here.
53:04
What do you see in the future as being the most important for
53:07
the developing world, as well as advanced economies?
53:11
Is it economic growth and trying to revive it?
53:16
Is it demographics and decline in population growth?
53:20
Is it AI?
53:22
Personally, I'm very excited to see that the World Bank doing business
53:27
report is being relaunched at the World Bank in the coming days.
53:31
They've got a meaning for the World Bank Business Ready index.
53:35
I think it's gonna be a bit different.
53:36
But I think regulation matters a lot and I think,
53:39
it's something that that index measures.
53:41
But I think the regulation has been one sort of culprit in why I think
53:46
growth in advanced economies is slowed since the global financial crisis or
53:52
the Great Recession in the late 2000s.
53:55
But obviously, there's a lot of stories going on,
53:59
emerging economies being held back since COVID, the return of divergence.
54:04
All these topics I feel like are very big and timely.
54:08
What are the things that you're thinking about when you think about growth and
54:14
developing economies in international economics in the years to come?
54:20
>> David Malpass: These are huge important topics.
54:23
The world's not very balanced right now.
54:25
The capital is flowing to parts of the world that are over capitalized and
54:30
not going to parts that have growing populations or that are undercapitalized.
54:35
So that's this differential in infrastructure, for example, in the world.
54:40
But it's readily apparent in small business
54:45
growth being weak, really worldwide.
54:49
And so I'm critical of big governments, which is one of the trends,
54:54
not just in the advanced economies, but also in the developing
54:59
countries themselves, which crowds out smaller businesses.
55:04
And so I think if we can think of the growth
55:08
challenge in that way, it will help.
55:12
And we should recognize the importance of all of this into real
55:16
people in real conditions.
55:19
We're talking about healthcare, we're talking about child nutrition.
55:23
The stunting rates in the world are higher in the developing world.
55:27
Higher, not lower, this is horrible.
55:30
Children not getting enough calories to grow, or not enough nutrition,
55:36
I should say, not just calories to grow to their normal stature.
55:41
So it's urgent that we think of better models.
55:47
And that takes me straight into this issue that we're at a very
55:52
difficult period right now, where the United States government,
55:57
the world's biggest borrower, Has short duration and,
56:02
therefore, is directly crowding out small businesses.
56:07
This is a combination of treasury having issued short term
56:11
even as debt was growing rapidly.
56:15
That puts more burden on the short end of the curve.
56:18
But then also the central bank, by buying bonds with overnight funding,
56:23
the central banks borrow from banks,
56:26
takes it away from small businesses and puts it into government bonds.
56:31
So that's a very harmful trade and one that's lost huge
56:36
amounts of money in the US but also in Japan and in Europe.
56:41
In the US the Fed's already had $200 billion of losses on that concept and
56:47
it's going to grow substantially into the future.
56:52
So this drags growth in developing countries.
56:56
Now, not to let them off the hook, they're doing a lot of things to undercut
57:02
their own growth through by putting their own spending through subsidies,
57:07
for example, that are non economic, by having big projects rather than
57:12
allowing the funding to be allocated through markets to small businesses.
57:18
And so you see quite a few developing countries under intense pressure,
57:23
some of which is of their own making, but
57:26
some of it is coming from the global financial system.
57:30
Think of the practical problem for small businesses and for some of the develop.
57:35
Well, for really most of the developing countries,
57:38
they borrow in floating rate debt.
57:41
So if you're a small business, you're trying to grow and hire more workers,
57:46
you go to the bank and ask for funding for your inventory expansion because you have
57:51
more customers and they need to have more inventory to support the customer base.
57:56
And the bank says, that'll be LIBOR or
58:02
SOFR plus four or plus six.
58:06
And that means you can't afford your growth and so you stop hiring.
58:11
And so that's going on in many parts of the world.
58:14
It's a big problem.
58:15
It means global growth is slow right now and
58:19
there's not really a path to improve it.
58:23
>> Jon Hartley: Absolutely, I know there's a malaria vaccine,
58:26
a highly effective malaria vaccine is being rolled out in Africa as well.
58:29
There's about 500,000 people a year that died in Africa from malaria.
58:32
So I mean, that's I think one sort of miraculous piece of hope as well.
58:37
David, a real honor to have you on and hear about your amazing career and ideas.
58:40
I want to thank you so much for joining us today.
58:43
>> David Malpass: Thanks, John.
58:44
Nice to talk with you.
58:46
>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century Podcast,
58:48
an official podcast of the Hoover Institution Economic Policy Working Group
58:52
where we talk about economics, markets, and public policy.
58:55
I'm Jon Hartley, your host.
58:56
Thanks so much for joining us.
58:57
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