OP-ED | African Lending Needs a Better World Bank, By Hannah Ryder

Hannah Ryder argues colonial history explains why the Bretton Woods institutions (BWIs) have never played the role that African countries need them to play in their development, hence why the BWIs are due for a revamp from their colonial roots.

U.S. Treasury Secretary Janet Yellen has said that the world’s foremost financial institutions—the International Monetary Fund and World Bank (also known as the Bretton Woods Institutions, or BWIs) —need to “evolve” to be truly efficient, and especially to help deal with climate action. But these nearly 80-year-old institutions have much deeper problems.

They were set up to ensure economic growth and stability when the predominant global economic model was still one of colonial exploitation. Reform needs to be a deep and thorough process for the BWIs to work in the modern era.

When the BWIs were set up, the United Kingdom and France, two of the largest shareholders today (albeit smaller shareholders than they were in 1944) ruled more than 60 colonies between them. That colonial wealth was a substantial part of their initial shareholding and what came to be known as “quotas” in the International Monetary Fund (IMF).

These colonies therefore became central not just to the war effort, but to the economic recovery from World War II that took place as the BWIs took shape. There were just four African founding members of the 44 states that set up the institutions, and only two, Ethiopia and Liberia, were independent nations. The other two—Egypt and South Africa—were still highly influenced by British rule as members of the Commonwealth.

Yet, at 80 years old, although larger than ever today in staffing and capital terms, the constitutions of the institutions—from their shareholding quotas to their operational models—have hardly changed. India, South Africa, Egypt, and Ethiopia all have smaller quota shares today than they did as founding members.

Quota shares are important because they determine how much a country is allowed to contribute to the IMF as well as to use the IMF’s “back up currency” known as Special Drawing Rights as automatic stabilizer mechanisms without agreement by other members. Quotas also determine voting power on the IMF’s board, which in turn impacts decisions to provide loans to other countries for emergencies.

Colonial history explains why the BWIs have never played the role that African countries need them to play in development. Take Kenya, which joined the IMF in 1964 soon after gaining independence, and today faces significant debt servicing costs from, inter alia, using Eurobonds as well as bilateral creditors to finance everything from salaries to large infrastructure. Kenya has chosen this mixed route partly as a result of meeting significant constraints in achieving approval of projects and financing from the BWIs.

Some analysts, such as well-known Kenyan economist David Ndii, have called Nairobi’s spending reckless. But it is, in fact, at significantly lower levels of magnitude than the spending that’s needed in the country.

Just to build the basic infrastructure to meet the United Nations’ Sustainable Development Goals—for example, to ensure that every Kenyan has access to safe drinking water, a little electricity, and the internet—Development Reimagined (the firm that I lead) has calculated that Kenya needs to be spending between $14 billion and $21 billion per year, from both domestic and external sources of finance.

This itself would take up a massive portion—around 15%—of Kenya’s GDP. Yet, Kenya regularly spends years of effort to get, for instance, a $390 million loan from the World Bank to expand broadband access. Over the years since independence, Kenya has had to push (and sometimes pay for) feasibility study after feasibility study to get an upgrade to what remains its only major railway, finally obtaining two loans worth $3.2 billion from China’s Exim bank in 2014. A loan of more than $3 billion might seem like a lot for an African country, but it is a drop in the ocean in terms of need.

The vast majority of African nations are in the same boat as Kenya. According to our research, in order to meet basic infrastructure needs for every citizen, as per the sustainable development goals, Ethiopia should ideally be spending between $23 billion and $35 billion a year on infrastructure, equivalent to 17 percent to 25 percent of its GDP. Zambia should ideally be spending $7 billion to $11 billion annually, equivalent to 26 percent to 38 percent of its GDP. I could go on.

The financial needs of most African countries—whether large or small, in peace or in conflict—will, for years to come, far exceed the capacity of their economies to invest what’s needed just to meet their citizens’ basic needs.

But the BWIs will never explain this dilemma, because it exposes how inadequate they are institutionally. Loans from the World Bank and IMF are presented as ground-breaking and massive. But the reality is they are all significantly smaller than what African countries need, smaller than what other countries receive, and often too costly as well.

Hannah Ryder is the CEO of Development Reimagined cum Senior Associate at the Center for Strategic International Studies Africa Program. This op-ed was originally published in Foreign Policy; the views expressed in it are those of the author and do not necessarily reflect African Newspage’s editorial policy.