“An incorrigible arsonist will now be our fire chief.”
President Donald Trump will select David Malpass, currently the undersecretary of treasury for international affairs, as the US nominee to lead the World Bank, the Washington Post and Politico have reported.
He would replace Jim Yong Kim, who abruptly stepped down in January.
Malpass beat out a number of women considered for the job, including former PepsiCo CEO Indra Nooyi and Goldman Sachs executive Heidi Cruz (whose husband Ted ran against Trump for president). He has already earned the opposition of some development experts for his vociferous criticism of the World Bank and other international institutions.
Justin Sandefur, an economist at the Center for Global Development, an influential think tank working on global poverty and development, put out a statement arguing that other World Bank stakeholders should attempt to block Trump’s pick. While the US has traditionally chosen the World Bank head, formally the position is selected through a vote of bank shareholders, and other countries could indeed band together to reject Malpass.
— Holly Shulman (@HollyShulman) February 5, 2019
W. Gyude Moore, the former minister of public works for Liberia (and thus someone with deep experience in one of the developing countries where the World Bank is most needed), compared nominating him to nominating an arsonist to be a fire chief.
An incorrigible arsonist will now be our fire chief. Man spends his adult life denigrating multilateralism and now has the “pleasure” of running one of it’s pillars. When does it end? https://t.co/fMFWaKgN46
— W. Gyude Moore (@gyude_moore) February 5, 2019
Malpass is, as Sandefur suggests, an infamously bad economic forecaster. As my colleague Matt Yglesias noted upon Malpass’s initial appointment to the Trump administration, Malpass served as chief economist to Bear Stearns in 2007 and 2008 as the firm collapsed due to the subprime crisis.
In August 2007, he wrote a Wall Street Journal op-ed titled, “Don’t Panic About the Credit Market,” in which he argued, “Neither the economy nor job growth has been dependent on housing.” He also wrote that “buyers, and likely the economy as a whole, will probably benefit over time from the wrenching return to more normal market conditions.” Within months of the op-ed’s publication, the US was in a recession. By March 2008, Bear Stearns had to be bailed out by the New York Fed and JPMorgan Chase.
Undeterred, Malpass spent the Obama years calling for the Fed to adopt higher interest rates, and in 2012 even argued that maintaining low rates would lead to a recession. The Fed kept rates low, a recession didn’t ensue, and most economists credit the steady recovery to the Fed’s willingness to maintain rates near zero. If anything, it erred in not trying hard enough to push long-term interest rates down.
Malpass is a vocal critic of the World Bank and other international institutions
Malpass, who also served in the Reagan and H.W. Bush administrations, has repeatedly criticized the World Bank for growing too much and making loans to countries that, in his view, don’t deserve it. Some of his sharpest comments have come since taking his current post at the Treasury Department.
“The World Bank’s biggest borrower is China. Well, China has plenty of resources,” he said at a Council on Foreign Relations forum in November 2017. “And it doesn’t make sense to have money borrowed in the US, using the US government guarantee, going into lending in China for a country that’s got other resources and access to capital markets. … So one of the things we’ve challenged the World Bank to do is graduate countries, that as they are successful, let’s reduce the lending there and allow more lending to countries that need it.”
At that forum, he rejected the idea that the World Bank could offer loans both to China (whose GDP per capita still lags behind developed countries) and to other developing countries, arguing instead that the bank’s budget should be fixed: “What we’re challenging them to do now is to lay out a course into the future where they — where they find their size, a plateau, and then make the best out of that.”
In a November 2018 statement to a Senate subcommittee, he emphasized his view that World Bank staff salaries have to be constrained, which might make it harder to recruit skilled economists and other professionals to the World Bank, especially when the bank has to compete with private financial institutions like Goldman or JPMorgan or Credit Suisse capable of paying economists and finance professionals much higher salaries.
In November 2017, speaking before the House Financial Services committee, he was even harsher, indicting the World Bank and other multinational financial organizations for their policy advice, which is increasingly the main product offered by the World Bank, rather than direct loans.
“They’re often corrupt in their lending practices, and they don’t get the benefit to the actual people in the countries,” he told then-ranking committee member Maxine Waters (D-CA). “They get the benefit to the people who fly in on a first-class airplane ticket to give advice to the government officials in the country, that flow of money is large, but not so much the actual benefit to normal people within poor countries.”
The US doesn’t get to choose the World Bank president, though it has in the past
The tradition of letting an American, chosen by the American president, run the World Bank made some sense in its very early years, when it was principally a tool to provide credit for reconstruction efforts in Western Europe.
Its first loan, to France, was effectively a bridge loan keeping French reconstruction efforts afloat as the country awaited Marshall Plan funds from the US. And America, as the least-destroyed ally in World War II, bought the most shares in the World Bank and provided more capital than anyone else, and therefore had more voting shares in the bank than anyone else. So American domination seemed somewhat natural. This is a bank, banks are businesses, and businesses are run by their shareholders.
But Western Europe recovered with impressive speed, and over time, the bank evolved into a kind of research and consulting service, meant to discover and disseminate best practices to poor countries. The question of who should run it started to look very different from the question of who should run a bank with a number of shareholders. “The largest shareholder” is a decent answer to who should run the latter, but not to who should run the former.
If the World Bank’s job is coordinating policy advice for poor countries, and the rapid gains against poverty in East and South Asia mean that “poor countries” is increasingly a synonym for “sub-Saharan African countries,” then one can make a strong case that sub-Saharan African countries, or developing countries more broadly, should be able to choose their own policy coordinator. That means breaking the tradition of having an American run the bank and allowing an economist or other development professional from the Global South to take over.
A number of possible candidates come to mind, but perhaps the most obvious is Ngozi Okonjo-Iweala. The former foreign affairs and finance minister for Nigeria, a veteran of the World Bank bureaucracy, and an economics PhD from MIT, Okonjo-Iweala would be the first woman, the first African, and the second nonwhite person after Kim to run the bank. She ran for the job in 2012, with the support of South Africa, Nigeria, and other African governments, only to lose to Kim, who had the overwhelming backing of the United States.
Okonjo-Iweala is not the only viable developing world candidate. Raghuram Rajan, the former IMF chief economist and Indian central bank governor who has been vocally calling for non-American leader of the World Bank for over a decade, would be eminently qualified, as would African Development Bank President Akinwumi Adesina. Columbia economics professor José Antonio Ocampo and current interim President Kristalina Georgieva are both from middle-income rather than poor countries (Colombia and Bulgaria, respectively) but would importantly break the American stranglehold nonetheless.
The Trump administration has obviously rejected this approach. But it’s not too late for other shareholders in the World Bank to adopt it. The US holds 15.98 percent of voting power in the International Bank for Reconstruction and Development (the bank’s primary body as far as electing the president is concerned). Japan, France, Germany, and the UK alone have shares worth 18.48 percent.
Malpass is just one nominee put up by one of the shareholder countries; other shareholder countries can name their own and put the matter up to a general vote. If they can cooperate with major developing country shareholders like China, India, and Brazil, as well as any number of smaller African shareholders, they can very plausibly outvote the US and put in a candidate like Rajan or Okonjo-Iweala or even threaten to in a way that forces Malpass to withdraw his candidacy and requires Trump to get behind a consensus candidate.
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Author: Dylan Matthews