China needs venture capital, not the World Bank - China Dialogue

China needs venture capital, not the World Bank

The World Bank subsidises fossil-fuel projects in the developing world, even while its lenders want poor countries to go green. Carl Pope says it’s time the rich world provided a different model of financial support.

“You cannot seize an opportunity if you don’t know about it.” That was the point former US president Bill Clinton made repeatedly in his interactions with World Bank president Robert Zoellick at the Clinton Global Initiative (CGI) in September.

Clinton asked Zoellick what the bank’s role was in enabling poor countries to develop and expand access to electricity and energy services by providing them with options other than fossil fuels, and Zoellick simply wouldn’t answer the question. Clinton clearly understood that without a new development paradigm, China and India, Africa and Latin America will simply not be able to commit to avoiding worldwide climate catastrophe. But Zoellick appeared unprepared to engage on this issue. Over and over, the point was raised that we cannot solve global warming without addressing underlying problems: how to make forest preservation economically beneficial; how to deal with illegal logging and the global trade rules that encourage it; and how to give developing countries access to technology and clean energy options.  

The Clinton Global Initiative this year was infused with the need for ecological, systematic thinking and acting. Earlier that same morning, Al Gore made an urgent appeal calling on the world to negotiate a new global warming treaty in 2009, not 2012, and to put it into effect immediately. He argued that, done right, such a global response could also give us the tools and resources to tackle poverty and conflict. And Jane Goodall, in closing out the sessions on global warming, quoted an Inuit leader from Greenland as saying to her: "In the North, we know what you are doing in the South, because we feel the consequences before you do. In the North, the ice is melting. What will it take to melt the ice in the human heart?”

But what is the role of the World Bank in such a situation?  Zoellick is under heavy pressure, from both the right and the left, to shift the bank’s focus away from rapidly developing but still poor countries like China and India, on the grounds that they have access to capital in the private markets and are actually themselves becoming aid donors to poorer countries. Zoellick is reported to be resisting these pressures, because he fears that if the bank is no longer lending in the world’s most dynamic economies, it will become less central and relevant – and he will have an even harder time raising new tranches of capital.

By this logic, he should have welcomed Clinton’s query. And shortly after the CGI he defended continued World Bank lending in India and China by saying that the bank could make different kinds of loans than commercial lending institutions, and by doing so, encourage development patterns that are more sustainable or inclusive of the poor. However, there is a deeper dilemma which may explain not only why Zoellick didn’t take Clinton up, but also why there is no real evidence that the World Bank will become a major financial driver of a sustainable energy future for either desperately poor nations in Africa, or rapidly growing economies like China. A bank, as an institution, has a business model which depends on spending as little as possible in seeking out, making, and getting repaid on loans. As long as a loan is repaid, a bank’s incentive is entirely to make the loan as cheaply as possible. The World Bank, of course, doesn’t have shareholders, so its bottom line is slightly different. But like a commercial bank it does measure its success by size – and World Bank staff have always been under heavy pressure to make large volumes of loans, as long as they would be repaid. The easy way to make big, repayable loans in developing world is to fund projects like coal mines and power plants; things that have been done hundreds of times before, which generate highly liquid revenue streams and can easily absorb billions of dollars.

As a result, the World Bank provides heavy subsidies for fossil-fuel projects, even while the bank’s lenders – the US, Europe and Japan – lament the unwillingess of poor countries to commit to a low-carbon growth strategy after Kyoto. China responds: “yes, we know we need to do something, but we have to be able to afford it – and we can’t.” By making fossil fuel projects cheaper and easier, the World Bank is actually reinforces China’s and India’s dependence on twentieth-century energy sources, the very sources the world needs to get off this century. It is perverse, but it makes sense given the World Bank’s basic model. A similar dilemma drove the bank’s approach to lending to African agriculture. When big, easy to make, infrastructure loans didn’t do the job, the bank simply walked away from African farmers – a decision for which it has recently lambasted itself.  

What is really needed to enable China (and countries like India, Brazil and Mexico) to leap-frog the carbon-based first-world energy model directly into an economy powered by sustainable energy technologies, is not merchant banking – the World Bank’s basic model – but venture capital. Venture capital’s business model is very different. With venture capital, the assumption is that the value-added is not cheap access to credit, but combined access to credit and a sophisticated support structure. It is assumed that many projects will fail: the "repayment" rate is low. Venture capital looks for risky, but high-return, investments. They then invest a lot of time and energy in helping those investments not only succeed, but also take off. And take off is what the renewable energy sectors in India and China need to do.

Maybe Zoellick should move the World Bank to venture capital’s home in Palo Alto.  It’s time for a different model.

Carl Pope is the executive director of the Sierra Club

Homepage photo by Tracy O