Shifting Fortunes at IFC

October 4, 2012

A significant change occurred earlier this week in the international development arena, the effects of which remain to be seen. On October 1, 2012, Dr. Jin-Yong Cai, a Chinese national, officially took over as the executive vice president and CEO of the International Finance Corporation (IFC). IFC is the development finance institution (DFI) of the World Bank Group, which makes it responsible for supporting private-sector investment across the developing world. IFC is also involved in creating new ideas and initiatives in private-sector health care in Africa and youth employment challenges and investment opportunities in the Arab World. Cai’s appointment at IFC is part of a move within the World Bank and International Monetary Fund (IMF) toward emerging market countries. With the exception of Moeen Qureshi, a Pakistani who led IFC from 1977 to 1980, all previous heads have been European or American. This is a subtle but significant shift at IFC and in the broader balance of power within the Bretton Woods institutions.

Cai will face many challenges when he assumes his duties this October. The most important challenge facing him is IFC’s limited ability to work in conflict and post-conflict zones. There have been considerable efforts over the last five years to strengthen the instruments and processes necessary to make a difference in these areas, but far more needs to be done. IFC remains largely culturally and institutionally unequipped to work in these areas. It may require entirely separate vehicles and personnel to staff these opportunities. It will be interesting to watch Cai, a Chinese national, manage a multilateral institution whose major shareholders in the United States and Europe expect IFC and the World Bank Group to support stability in ways that act as a force multiplier for, broadly speaking, American and Western interests.

A second interrelated challenge will be to manage the constant balance between investing in projects that will generate a full market return versus those that are perceived to have a stronger overall development impact with less of a market return. IFC will face this challenge increasingly in frontier markets or conflict/post-conflict contexts. Although IFC has seen good return on investments in countries such as Romania, it begs the question: is this where IFC’s capital can do the most good? Although a country such as Romania may suffer from a lack of investment capital when compared to some of its European neighbors, the need would seem to be greater in countries that lack any capital or access to the sovereign debt market. Cai would go a long way as the new head of IFC if he could get the organization to accept more risk and slightly lower return on investments, but potentially higher development impact.

The third challenge will be to bring a private-sector perspective to the broader World Bank. With many years of private-sector experience in investment banking, Cai will likely be seen as an evangelist for private-sector approaches within the World Bank, which remains largely oriented toward the public sector. As a Ph.D. economist who began his career as a World Bank Young Professional, he will serve as a credible messenger between IFC and the World Bank Group as a whole. One signal over time will be if he is named a managing director of the World Bank (similar to the way Peter Woicke wore both hats in the past) in addition to his role as CEO of IFC, a possible sign of his ability to influence the Bank Group more broadly.

The final challenge facing Cai is the $500 million per year that IFC transfers to the International Development Association (IDA), the branch of the World Bank that provides no-interest loans to the world’s poorest countries. As the new leader of IFC, Cai has the opportunity to make the case to both World Bank leadership and major contributors that IFC’s profits could be used in much more productive ways that support private-sector-led development. This might include: increased investments and technical assistance in conflict or post-conflict zones and providing further financial support to the in-house consulting known as “advisory services” that often supports IFC investments; increasing “early equity” or “first-loss” investment capital; utilizing the money for additional capital, also known as a backdoor capital increase; or the creation of new soft grant and investment funding vehicles for special projects or initiatives.

In the coming years, DFIs like IFC will be more relevant due to coming foreign aid budget cuts, a reduction in lending from major banks, and the increased capital constraints of the international regulatory framework for banks known as Basel III. Development finance, in particular, may increasingly represent the future of foreign assistance. Since the early 2000s, the amount that DFIs have under management has grown from several billion dollars to over $40 billion. This is important, as the emerging powers that are taking on greater leadership in international development are positively disposed to the central truth of private-sector-led development. However, many of these middle-income countries have shown a reluctance to contribute at high levels for the maintenance of international institutions such as IFC. The new emerging-country leadership of Cai may incentivize other emerging and middle-income countries that see the value in private-sector investment to support IFC beyond the current ad hoc set of arrangements that characterize their support to date. It remains to be seen if the BRICS—Brazil, Russia, India, China, and South Africa—will be willing to play a more central role in the work of IFC by transitioning from reluctant donors to fully engaged contributors.

Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Conor M. Savoy is assistant director of the CSIS Project on U.S. Leadership in Development.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2012 by the Center for Strategic and International Studies. All rights reserved.