Mario Draghi: Challenges now facing the world economy
Statement by Mr Mario Draghi, Governor of the Bank of Italy, on behalf of Albania, Greece,
Italy, Malta, Portugal, San Marino and Timor Leste at the Seventy-Eighth Meeting of the
Development Committee (Joint Ministerial Committee of the Boards of Governors of the
Bank and the Fund on the Transfer of Real Resources to Developing Countries), Washington
DC, 12 October 2008.
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Energy and food prices and financial turmoil
Today, the economies of both developed and developing nations are faced with high energy
and food prices and financial distress, which are severely testing their resilience. Steady
leadership, high-quality analysis, and bold answers are needed to overcome the many new
challenges that now confront the development process.
The World Bank has acted quickly to respond to the emergency situation created in several
developing countries as a result of rising food prices, demonstrating that it is indeed able to
respond effectively and in a timely manner to rapidly evolving circumstances. However, more
must be done. It is now important to strike the appropriate balance between alleviating
shortterm needs and longer term development goals and achieve an effective division of tasks in
the international donor community.
The recent financial turmoil puts an extra premium on the role of both Bretton Woods
institutions as providers of financial and advisory services, and as facilitators of international
dialogue. As financial authorities worldwide contemplate how to reshape existing regulatory
frameworks to prevent and contain financial instability, the Bank must retain its role as a
source of assistance in the allocation of limited financial resources to infrastructure and to
social safety nets to promote equitable growth.
Development and climate change: two complementary economic challenges
We welcome the new Strategic Framework on Development and Climate Change for the
World Bank Group (WBG). The launch of this strategy is a positive step toward facilitating a
more prominent role for the Bank in fighting climate change.
Climate change epitomizes the intricacy of development challenges in an increasingly
interdependent world. Adaptation and mitigation of its effects entail not only substantial
financial costs, but also inter-temporal and spatial tradeoffs in welfare distribution. Though
the battle against climate change is often mistakenly viewed as being opposed to economic
growth, it is, in fact, an economic and development issue in several respects.
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First, climate change will increasingly affect the availability and the relative prices of
productive factors, such as land, food, and energy.
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Second, the impact on economic activity of unmitigated climate change and its
budgetary implications are potentially significant for advanced, emerging, and
developing countries alike.
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Finally, environmental protection offers an opportunity for growth, not an obstacle to
development. This principle should underpin economic policies in advanced and
developing countries, as well as development assistance, whether bilateral or
multilateral.
The role of the World Bank in fighting climate change
As an international organization, the World Bank is well-positioned to face the challenges of
combating the effects of climate change as they relate to "global public goods." As a financial
institution, it is well suited to address the intergenerational problems that climate change
poses. Finally, as a multisectoral development agency, the Bank can make use of its
expertise in many policy areas and engage clients in fruitful dialogue, providing an extensive
menu of customized policy options.
We particularly welcome the emphasis placed by the Strategic Framework on market-based
instruments and energy efficiency. In particular, well-functioning and more integrated carbon
markets are not only cost-effective environmental tools, they also have the potential to foster
a more cooperative stance by developing countries by providing new incentives for them to
join mitigation efforts and support innovative technologies.
Both Italy and the European Union are leaders in pioneering market-based instruments to
address climate change. The European Trading System, while still in its early stages and
with ample scope for improvement, is the world's first trading scheme in operation. Its
success has provided a benchmark for the introduction of similar schemes worldwide. The
Bank can contribute positively to the promotion of more liquid and integrated carbon markets
and help clients reap the gains that will result from an increased demand for environmental
protection.
As regards energy efficiency, we believe that policy dialogue has the potential to generate
benefits for both industrialized and developing countries. The Bank traditionally has a
comparative advantage in the area of energy sector reform as it can help clients pursue
sustainable energy policies, establish sound regulatory systems that may mobilize additional
private sector resources, and ease the financial challenges posed by climate change.
Enhancing voice and participation of developing and transition countries
We welcome the proposed sequential approach to enhancing "Voice" within the World Bank
Group. The proposal of a single package that envisages different milestones will accelerate
the Voice reform process, a process that will add to the Bank's legitimacy and credibility by
increasing the representation of its poorest members. We also believe that the World Bank
Group will benefit from early adoption of those measures that already meet with broad
consensus among its membership.
With capital realignment being the most complex issue, we support the proposal to the Board
to launch a more comprehensive shareholding structure review, setting the deadline at the
2011 Spring Meetings. We believe that the members' relative shareholdings in IBRD should
be based on the principle of relative weight in the world economy. In this vein, we also favor
maintaining a link between the Bank's shareholding and the outcome of negotiations on IMF
quotas. Considering the specific mandate of the Bank, we think that contributions to IDA and
Trust Funds cumulated over time should also be included in the criteria for realignment.
Additionally, the underlying principle for introducing further criteria should be the preservation
of the Bank's financial soundness.
The definition of broader shareholding realignment should also provide stable guidance for
future review of shareholder representation. A realignment plan addressing all these issues
cannot be arrived at hastily; on the contrary, it must be the result of a thorough and
comprehensive process.
Finally, fairness and widespread acceptability of the capital realignment plan, as well as the
need for a virtuous corporate governance incentive structure, will require that the
shareholdings of the most severely underrepresented members be adjusted consistently,
irrespective of their classification as developed or developing countries.
Conclusion
Unprecedented challenges now face the world economy and require a renewed effort on the
part of the Bank in the pursuit of its traditional development mission. These challenges also
call for a sharper focus by the Bank, within its poverty reduction mandate, on the provision of
global public goods.
• The current financial turmoil has only added to the distress caused by oil and
commodities price increases. At a time when the demand for IBRD loans is likely to
increase, it is important that the Bank remain focused on the provision of
infrastructure - both social and physical - that can shelter the poorest of this world
from the dramatic impact of present and future shocks. In view of this daunting task,
IBRD resources are extremely limited, requiring that careful consideration be given
to avoid spreading these resources too thinly over too many objectives. A few select
priorities should instead emerge from an active policy dialogue with borrowing
countries.
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Emerging global challenges require that the Bank recognize and clarify its role as a
major actor in the protection of global public goods. This calls for a clearly framed
and articulated operational strategy that includes detailed assessments of the
budget and of the implications for the Bank's balance sheet of entering these new
areas of business.
Confronting these unprecedented challenges requires an institution that enjoys strong
governance and the full support of its membership. The Voice reform effort aims to ensure
that both of these conditions are met.
In this endeavor, the Bank, as a truly global institution, needs to reach out to all its members
countries - borrowers and donors alike - ensuring equitable representation and a strong
capital base. To achieve this goal, the Bank's governance structure must be aligned with its
characterization as a global multilateral financial institution, reassuring capital markets that its
commitments are backed by high-grade callable resources and that its products address
development needs otherwise unmet.
Today, important steps are being taken to meet these conditions, and we trust President
Zoellick to successfully steer the institution in the direction that the WBG's global
membership has indicated and endorsed at this meeting.