The political economy of International Finance Corporation lending
Introduction
In 2010, the World Bank's International Finance Corporation (IFC) approved a multi-million credit to facilitate the renovation of a five-star Mövenpick Hotel in Ghana's capital Accra. The project company was a fully owned subsidiary of Kingdom Hotels Investments, a global player with operations in 18 countries, and owned by a Saudi Arabian prince.1 The IFC points out that the project's development impact consists of adding important business infrastructure, creating new jobs, and providing demand for local food and non-food supplies. According to the IFC, the project has been a “great success,” obtaining most revenue per room in all Accra.2
Being part of the World Bank Group, the IFC's official mandate is to “end extreme poverty and promote shared prosperity.”3 The IFC is the private-sector arm of the World Bank Group4 and according to its Articles of Agreement is supposed to assist – “particularly in the less developed areas” – in financing development-oriented private sector projects for which “sufficient private capital is not otherwise available on reasonable terms.“5 Given this mandate, the IFC's provision of financial support for a highly profitable luxury hotel seems puzzling. Despite the ongoing global financial crisis at the start of the project, it is hard to imagine that private capital would not have been available to finance the project, or that other, more obviously development-oriented projects could not have been more worthy of the IFC's support.
In this paper, we examine the allocation of IFC loans from a political economy perspective. Decisions about loans are made by the IFC's Board of Directors (“Board”), where both the home countries of companies implementing its projects (“sponsors”) and the recipient countries of projects (“recipients”) are represented. In a nutshell, we expect IFC lending to be affected by the political interests of the 25 countries that are directly represented by an Executive Director in the Board. We expect these – usually rich – members to use their positions of power to influence the IFC in a way that private companies from their countries receive a disproportionate share of IFC lending.
The IFC has 184 member countries that provide the organization's paid-in capital of US$ 2.56 billion.6 It raises the funds for its lending activities primarily in the international debt markets. Due to its high paid-in capital the IFC has a persistent AAA rating and can borrow at prime conditions. The IFC does not pay dividends to its shareholders and is exempt from corporate taxes. These benefits are to some extent passed on to borrowers, in the form of longer maturing loans or longer grace periods compared to market conditions (Te Velde et al., 2007). The IFC issues a variety of bonds like US dollar benchmark bonds, themed bonds, and local-currency bonds. In addition to bond issuance, the IFC invests its liquid assets to increase its total resources. In 2018, total resources, which consist of paid-in capital, retained earnings net of designations, and total loan-loss reserves, amounted to US$ 24.7 billion.
Over the last decade, the IFC became a major player in development lending. Whereas its commitments were as low as US$ 4 billion in the year 2000, the IFC reached a 2018 portfolio of new commitments amounting to more than US$ 23 billion for a total of 366 private sector projects in 74 recipient countries. Reflecting the rise of public-private cooperation in financing for development more broadly, this upward trend is likely to continue. In 2018, the IFC's shareholders endorsed a US$ 5.5 billion paid-in capital increase that will more than triple the cumulative paid-in capital that the IFC received since its inception. Not least because of this capital increase, the IFC projects that it will more than double its annual commitments and reach US$ 48 billion by 2030 (IFC, 2018).7 The IFC now accounts for about one third of the World Bank Group's total annual commitments of US$ 67 billion and is becoming an increasingly important institution within the Group. Its former President Jim Yong Kim sees the future of the Group as a broker between private lenders and developing countries, which would substantially strengthen the role of the IFC.8 According to Ellmers et al. (2010: 8) “private sector finance may even become the new core business of the Bank.” In light of these developments understanding the drivers of IFC lending is of vital importance.
While the IFC might broadly follow its mandate in aiming to promote pro-poor growth,9 we also expect its lending decisions to be influenced by its member countries’ own interests. These members, in turn, can plausibly be expected to represent the interests of private companies based in their countries. As in most multilateral organizations, some member countries have more influence on the IFC than others. Building on previous literature on the political economy of multilateral organizations, we expect more influential governments to exploit their formal and informal influence on the organization to use it for their own benefit. As we outline in more detail in Section 2, we have two main hypotheses. First, we expect that governments will use their influence individually to secure more IFC loans for their country and for companies from their country. Second, we expect recipient governments and governments from sponsoring countries whose companies obtain the loans to form coalitions and use their joint influence to secure more IFC loans that benefit both of their countries.
Our measure of influence is a country's representation on the IFC's Board of Directors, which is in charge of the IFC's day-to-day business.10 We presume that companies and countries receive more loans from the IFC when their interests are represented on the IFC's Board, i.e., when the government of the recipient country or the government of the company's home country (sponsor) hold one of the 25 seats. In a nutshell, our expectations are that countries with a seat on the IFC Board will a) have a higher likelihood of receiving IFC projects, b) have a higher likelihood that its companies receive an IFC project, c) receive more projects that are implemented by its own companies, as for such projects the benefits to companies and recipient countries accumulate, and d) receive more joint projects with a partner country that also holds a seat on the Board, as sponsor-recipient pairs can cooperate in the Board to jointly influence IFC lending. As we describe in more detail below, we have collected new data for more than 3000 IFC projects over the 1995–2015 period to test these hypotheses.
Our fixed-effects regressions show that representation of a government on the IFC's Board of Directors significantly and substantially increases the likelihood that IFC projects go to its country and to companies based in its country. The probability to receive an IFC loan increases by about one fifth for countries that get a seat on the IFC Board and is not significantly higher in the years directly before or after. This suggests that the observed effects of membership are unlikely to be due to general trends that affect a country's likelihood of receiving a loan and of becoming a member of the Board. We find the effect of holding a seat on the Board to become stronger in cases where a project is implemented by a company from the recipient country and when both recipient and sponsor countries hold a seat on the IFC Board. While seats on the Board are not allocated randomly, we consider it unlikely that two countries' joint representation on the Board is driven by unobserved variables that also affect the probability that these two countries collaborate in an IFC project.11
The paper extends the literature in three dimensions. First and foremost, we show how governments pursue the interests of private companies from their countries in international fora by influencing how international financial institutions allocate their loans. This has received little attention in the literature on international institutions but becomes increasingly important as these institutions expand their cooperation with the private sector to leverage private financing for achieving development goals.12 Second, we look at the joint influence of country coalitions. The previous literature has mostly focused on how individual countries can sway decision-making in international organizations. The particular way in which the IFC operates, however, allows us to test whether countries also collaborate with one another in order to jointly increase their access to multilateral resources. Third, we are the first to investigate the importance of shareholder influence for IFC lending. While there is a substantial literature on shareholder influence on other international organizations,13 the IFC has not yet been considered – perhaps because it only recently became an important global actor in development cooperation.
More generally, our paper speaks to the recent policy debate on leveraging private funding for development. The rise of the IFC reflects the surge of private financing in development cooperation more broadly. It is an increasingly popular perspective in the global development landscape to consider a key role for public resources in leveraging private sector investments; e.g., by using them for guarantees to reduce investor risk and for risk-sharing via pooling mechanisms like blended loans, syndicated loans and securitization (OECD, 2014). Both the Sustainable Development Goals (SDGs) and the Addis Ababa Action Agenda (AAAA) emphasize this perspective. According to the AAAA, “[a]n important use of international public finance, including ODA, is to catalyse additional resource mobilization from other sources, public and private. […] It can […] be used to unlock additional finance through blended or pooled financing and risk mitigation, notably for infrastructure and other investments that support private sector development” (UN, 2015: 27).
To the extent that the allocation of such funding is shaped by special interests rather than need or expected rates of return, an allocation of private funds that benefits some countries and companies disproportionally might be less effective in promoting development than commonly thought. After all, there is evidence to suggest that political considerations in allocating official aid make the aid less effective in raising growth (Dreher et al., 2018a). The commercial incentives of the political coalitions involved in IFC lending might thus work contrary to the IFC's goal of promoting economic development and poverty reduction.
The next section introduces our hypotheses and provides descriptive evidence. Section 3 explains our empirical strategy and section 4 provides the main results. The final section 5 discusses implications and concludes.
Section snippets
Data on IFC lending
To investigate the allocation of IFC loans we compile a new dataset on IFC lending. For each IFC loan we code its size, the year in which it was approved, the country in which the investment took place (“recipient country”), and the home country of the company that received the loan to implement the project (“sponsor country”). While data on year of loan approval, loan size, and recipient country can be extracted (web scraped) from the World Bank's individual project websites, the sponsor
Empirical models
We employ various sets of empirical models to test our hypotheses. We start with a model at the recipient-year level, proceed with regressions at the sponsor-year level and conclude with regressions at the sponsor-recipient-year level.
Evidence on the recipient level
Table 1 reports the results at the recipient-year level. Initially, we estimate regressions without country fixed effects to look at general determinants of country i receiving an IFC project in year t. We add variables indicating a recipient country's level of economic development, its growth rate, its health level, its education level, its private sector development, whether the country was under an IMF program, and the amount of financing it receives via foreign direct investment, bilateral
Conclusions
In this paper, we argued that private firms receive preferential access to IFC loans when their governments can politically influence the allocation of IFC loans. Governments can exert such influence individually and in coalitions with other governments.
Our results based on data for more than 3000 IFC projects over the 1995–2015 period show that countries and companies more frequently receive IFC projects when their government holds a seat on the IFC's Board of Directors. Given that the
Acknowledgements
We thank Lennart Kaplan, Erasmus Kersting, Christopher Kilby, Nicola Limodio, Randall Stone, Konstantin Wacker, participants of presentations at Heidelberg University (2016, 2017), the International Political Economy Society conference (Durham 2016), the ZEW Public Finance Conference (Mannheim 2017), the Annual International Conference of the Research Group on Development Economics (Göttingen 2017), the 10th Beyond Basic Questions Workshop (Gargnano 2017), the Transformations in Global Economic
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