The G20 Explores Multilateral Development Bank Reforms

The Multilateral Development Bank (MDB) system has mostly resisted the unravelling of the international order. However, the multiplication of MDBs has considerably reduced their collective effectiveness. This fragmentation is now preventing them from adapting to global challenges and from harnessing private capital for development. In response, the G20 is exploring solutions to fix the system. A set of proposals will be discussed at the upcoming World Bank Spring Meetings in Washington, DC. Most recommendations are incremental fixes and do not entail institutional change. Others could pave the way for significant reforms, with the potential to transform the MDB system.

What next

On April 19, a working group will brief the G20 Finance Ministers and Central Bank Governors and consult with MDBs on possible reforms to global financial governance. Most of the modest, consensual proposals will be welcomed as first steps toward a more sustainable MDB system. Other, more controversial ideas will continue to be discussed until the final recommendations are presented in October 2018. In any case, this process will entrench the G20 as the key decision-making body for MDBs. As such, it will provide the G20 membership with the possibility to revamp the MDB system in the next few years.

Impacts

  • The ongoing debate on a World Bank capital increase will become peripheral to the larger discussion on MDB system reform
  • If implemented, a cross-MDB risk insurance platform would create a one-stop shop for investors and expand opportunities for private reinsurers
  • If implemented, system-wide securitization would create new asset classes and expand opportunities for institutional investors
  • If implemented, the in-country MDB coordination platforms would enhance ownership of projects by host government in middle-income and stable low-income countries

Analysis

Since the creation of the World Bank at the 1944 Bretton Woods conference, the public institutions that provide long-term international financing for development have proliferated.

Given the scale and multifaceted nature of development challenges, the multiplication and functional differentiation of MDBs is not inherently negative. However, concerns have emerged regarding the coherence and governance of the system, and about the efficient use of public resources.

Such concerns predate the New Development Bank and Asian Infrastructure Investment Bank (AIIB). However, the establishment of the two China-led MDBs have intensified the fragmentation of the MDB system and thereby accentuated the critical challenges associated with it.

Fragmentation

The fragmentation of the MDB system has created three critical problems.

The first problem is duplication. Each MDB replicates all attributes of its sister institutions, from the administrative and research departments to country offices. Instead of enabling economies of scale, the MDB system unnecessarily ties up financial and human capital that could be deployed in countries and projects that need it most.

The second issue is free riding. Some MDBs cross-subsidize others by taking more risks and shouldering more costs. For instance, in 2017 the World Bank and the AIIB partnered to finance the rehabilitation of the Nurek hydropower plant in Tajikistan. For the project to be financially sustainable, the World Bank provided two highly-concessional loans and a grant; in turn, this soft package enabled the AIIB to lend on much harder terms.

The third difficulty is unfair competition between MDBs. Borrowing countries can choose the lending product most competitive in terms of pricing, policy conditionality, and financing modalities. If unchecked, the competition can lead to a race to the bottom, to the detriment of creditors and debtors alike.

Aggravating factors

All other things being equal, these problems have constrained the effectiveness of MDBs. In the changing context of development finance, they risk, however, undermining the whole system.

The role of the MDBs is evolving in response to two simultaneous developments:

  • the rise of transboundary challenges, such as climate change, international migration, and pandemics that MDBs have increasingly sought to address;
  • the growing gap between investment needs and available public financing, which MDBs have endeavoured to bridge by mobilizing private capital.

In this process, the negative effects of fragmentation have become more acute, with increased risk of overlapping mandates and undercutting practices.

For instance, the World Bank recently started implementing the “cascade,” a new operational approach to harness private financing for development. When preparing a project, World Bank staffers must consider private solutions first and public options only as a last resort. This modus operandi can only work if other MDBs do not seek to get their own money out the door. In other words, the World Bank’s new approach cannot be effective in the absence of system-wide coordination and cooperation.

In effect, the fragmentation of the MDB system is preventing MDBs, starting with the World Bank, from transforming themselves and fully fulfilling their new missions.

Recent steps

Since 2015, MDBs have enhanced their collaboration on strategies, policies, and operations to mitigate these problems. Meaningful coordination and cooperation have been achieved in infrastructure development, climate change, and private capital mobilization. In these areas, MDBs have agreed on collective commitments and on universal metrics to measure their progress. Two recent examples include the common MDB principles on crowding-in private finance, endorsed by the G20 in Hamburg, and the joint MDB statement on climate finance at the One Planet Summit held in Paris.

However, these efforts remain largely declarative: most lack in enforceability and specificity. Some have also failed to overcome fundamental disagreements among MDBs, including on private capital mobilization.

Envisaged Solutions

In April 2017, the G20 established an Eminent Persons Group (EPG) tasked with recommending practical reforms to improve the functioning of the MDB system. In March 2018, the EPG released a note outlining ideas for discussion. Most of these proposals do not require the creation of new institutions or the major alteration of existing ones.

The EPG argues for the pursuit of cross-MDB collaboration and for a clarification of mandates. It calls for the establishment of in-country platforms through which MDBs and bilateral donors would coordinate their operations.

The EPG also encourages a system-wide pivot toward private sector solutions. To this end, it proposes that the Multilateral Investment Guarantee Agency, an institution of the World Bank Group, be repurposed to service all MDBs. At the same time, the group advocates for a single organization, most likely the World Bank, to enable system-wide securitization of loans.

Furthermore, the EPG recommends that the G20 provide strategic direction and oversight to the MDB system. The decisions made in this forum, which lacks formal authority, would still require the ascent of each MDB to be implemented.

Possible pathways

Most recommendations put forward by the EPG have already garnered consensus. However, the proposals that risk altering the balance of power within the system will be opposed. China and the other shareholders that are under-represented at the World Bank might resist making it the first MDB among equals. Shareholders which do not belong to the G20 will likely challenge its leadership.

Even if all EPG recommendations are endorsed, they would not amount to the necessary revamp of the MDB system. Nonetheless, by entrenching the leadership role of the G20, the EPG could make possible more transformative reforms in the medium term, including a redrawing of all MDB mandates based on their comparative advantages.

This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief

Belt and Road Could Remake the Strategic Map of Asia

The Belt and Road Initiative (BRI) marks an inflexion point in China’s foreign policy. By ‘building capabilities’ and ‘striking some successes’ (yousuo zuowei), the initiative builds on previous Chinese doctrines. However, the BRI also represents an unprecedented challenge to the established regional order. It has the potential to reshape the economic system and alter the balance of power in greater Asia. As such, the BRI paves the way for China’s ascendancy, at the expense of the United States and regional powers.

What next

The BRI’s strategic implications will gradually materialize as China implements the initiative. In the short term, the Chinese leadership is likely to focus on projects that have high economic benefits and a low strategic value. Such an emphasis will help build regional acceptance for the initiative and encourage the United States to support some BRI projects. However, the Trump administration is likely to oppose endeavours that undermine its interests or those of its allies. They include projects that facilitate China’s military advance in the Indian Ocean and those that strategically empower Russia and Iran.

Impacts

  • Russia will continue to cautiously embrace the BRI, despite the initiative being detrimental to its influence in Central Asia;
  • India and Japan could expand on the ‘Asia-Africa Growth Corridor’ to promote a joint, alternative vision for Asian connectivity;
  • The Asian Infrastructure Investment Bank will steer clear of BRI projects that are dual-use or located in disputed territories.

Analysis

The BRI is a novel strategic framework whose development was posterior to most of the initiatives and projects it underpins. As such, it is essentially a re-structuring exercise that serves two purposes:

  • enhance internal policy coordination across China’s multiple levels and branches of government; and
  • provide an overarching narrative for China’s economic and foreign policy endeavors in greater Asia. The positive BRI ‘brand’ aims to advance China’s soft power while downplaying its hard power build-up.

Hybrid strategy

Nevertheless, the BRI also constitutes a framework for action. It provides China with the instruments to achieve long-standing strategic goals and more recent economic ones.

The BRI is driven by two rationales:

  • economic: sustain China’s economic growth by supporting regional demand for Chinese goods, services, and capital;
  • strategic: achieve regional dominance by gradually improving China’s geoeconomic and geopolitical positions.

These motives are mutually reinforcing: China’s larger economic size strengthens its regional influence. They are also often intertwined at the operational level. For instance, the 50 billion-dollar China-Pakistan Economic Corridor (CPEC) serves dual economic and strategic purposes.

At the same time, China must arbitrate on these competing objectives. Projects whose strategic value makes up for a dearth of economic viability come at the expense of those that can have a more transformative economic impact or that have higher potential returns. Which of these objectives takes priority remains uncertain and is likely to evolve with time and across countries.

Regardless of the ultimate intent of the Chinese leadership, the BRI has far-reaching implications for the balance of power in greater Asia.

Geoeconomic implications

The BRI’s vision is that of new regional economic order with China at the crossroads of trade and investment fluxes. Such a model will enable China to deepen and expand its regional leadership as well as increase its leverage on recipient and transit countries.

The BRI provides for regional economic integration on Chinese terms. The development of hard connectivity infrastructure will create greater interdependence between Asian economies. The closer bilateral economic relationships will be, at least in strategic terms, to the relative advantage of China, the significantly bigger partner.

In addition, the BRI enables China to leverage its economic weight to set regional norms and standards. It can do so via top-down initiatives such as the BRI-related Regional Comprehensive Economic Partnership or in a bottom-up approach via the large number of BRI infrastructure projects designed and built by Chinese companies.

Finally, the BRI consolidates China’s position as one of the main providers of bilateral finance in Asia. China’s ability to set lending rates and conditions provides the possibility of extracting non-financial concessions, especially from recipient countries whose debt has become unsustainable. The lopsided creditor-to-debtor relationship also allows China to control the entire project cycle from conception to execution.

Geopolitical Implications

The BRI will help China maintain stability in the periphery, secure transit routes, and enhance power projection capabilities.

The BRI’s avowed focus on economic development will support the conditions for social stability and political permanence in China’s Western provinces and in recipient countries.

The initiative will also enable China to mitigate its strategic vulnerabilities, first of which is its overreliance on the Strait of Malacca for the transit of critical supplies such as hydrocarbon. The development of overland transport corridors will provide alternative transit routes, including the new Myanmar-China and the planned Pakistan-China oil pipelines.

Furthermore, the BRI will strengthen China’s defensive and offensive military capabilities. The Indian Ocean, where Chinese-built port facilities are effectively consolidating the so-called ‘String of Pearls’ network, is a case in point. CPEC’s Gwadar port might eventually become a Chinese naval base. Similarly, the construction and modernization of highways and railways in China’s neighborhood can facilitate the rapid deployment of Chinese troops.

Overall, the BRI has potential to dramatically improve China’s relative geostrategic position in greater Asia. It can also empower other regional powers such as Russia and Iran, which are the geographic anchors of the New Eurasian Land Bridge and the China-Central Asia & West Asia Economic Corridor, respectively.

Unintended Consequences

In addition to creating potential for Chinese interventionism, the BRI increases the risks for strategic entrapment.

BRI projects that involve Chinese workers or ownership have been the target of terrorist attacks, most recently in Balochistan. Such events, and the need to secure long transit routes and strategic assets might prove triggers for direct Chinese armed intervention.

U.S. Options

The BRI’s multifaceted nature complicates the response of the United States, which has so far been muted. The Trump administration is reluctant to embrace the initiative for fear of strategically empowering China. However, it is wary that frontal opposition would jeopardize regional economic development and thereby be equally detrimental to American interests in the region.

The U.S. response will likely be measured and selective. It could be determined by a cost-benefits analysis of BRI components that would assess whether the gains in terms of economic development offset the relative strategic loss of the United States and its regional allies.

The United States is likely to:

  • participate in, or at least tacitly support, projects that align with its strategic interests or, at the minimum, that do not undermine them;
  • engage with China and recipient countries on the projects with significant mutual economic benefits and whose detrimental effect on U.S. interest can be mitigated;
  • oppose and impede projects that undermine critical U.S. interest.

Such an approach would result in the United States supporting some corridors while mitigating or resisting others (see map).

This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief

G20 Turns Its Focus Onto Africa

In July 2017, the Group of 20 (G20) launched the Compact with Africa (CWA), an initiative that aims to catalyze private investments in infrastructure. The CWA is designed as a tailorable initiative that lets participant countries set their objectives and select implementing measures and instruments. As such, it emphasizes “country ownership,” the core tenet of international development. But the CWA targets the African countries most willing and able to reform their investment frameworks. This shift from a universal to an “avant-garde” approach marks a consequential departure from the conventional practices of multilateral institutions.

What next

In the next months, the African Development Bank (AfDB), the IMF, and the World Bank will help participating countries prepare and implement individual Investment Compacts. With strong external support, the Compacts will send the potent signal to private investors that governments have the will and the means to reform their investment frameworks. The impact of CWA will, for the most part, depend on whether the initiative remains at the top of the G20 agenda beyond the current German presidency (high probability) and, especially, on whether the successive governments in participating countries maintain their predecessors’ commitment to the Compacts (lower probability).

Impacts

  • The Compacts will increase foreign investments into participating African countries, especially in the infrastructure sector;
  • In most countries, the influx of private financing for infrastructure is likely to complement – and not substitute – public financing;
  • The Compact for Africa may mark an expansion of the G20’s sphere of responsibility, at the expense of the G7.

Analysis

The CWA aims to catalyze foreign and domestic private investment and promote the efficient use of public funds with a focus on the infrastructure sector.

It consists of country-specific Investment Compacts, or reform plans, to which interested African governments voluntary commit. The Compacts will list packages of actions and, possibly, bankable projects. They are prepared by the participating countries in collaboration with International Financial Institutions (IFIs), G20 donors, and other interested partners.

The Compacts comprise three main areas of reform:

  • The macroeconomic framework covers debt sustainability, domestic revenue mobilization, public investment management, and public utilities;
  • The business framework covers institutions and sector regulations, investor protection, project preparation, and contract standardization;
  • The financing framework covers risk mitigation, domestic debt markets, and innovative instruments for institutional investors.

Eight recipient countries are now participating in the CWA: Côte d’Ivoire, Egypt, Ethiopia, Ghana, Morocco, Rwanda, Senegal and Tunisia. Among the participants, all but Egypt have outlined their priorities for reform in Compact Prospectuses. They were presented to international investors on June 13, 2017, during a pre-summit G20 conference on African development.

The CWA forms the core of a broader “G20 Africa Partnership” that includes existing and new initiatives that support renewable energy, energy efficiency, rural employment, digital educations for girls, improved taxation and food security on the continent.

Rationale

The CWA is the first major G20 initiative focused on development issues in Africa, an area that has traditionally fallen within the remit of the G7. The emergence of this item onto the G20 agenda, where it has featured prominently, is explained by Germany’s own agenda for Africa as well as by the growing clout of emerging G20 donors.

Germany’s own priorities for bilateral and European cooperation with Africa are expressed in the recent Marshall Plan for Africa, itself partly reflected in the forthcoming EU External Investment Plan. The CWA platform will increase the legitimacy and facilitate the implementation of these strategies.

The emerging market economies that are members of the G20 represent a significant and growing share of development finance – just as companies based in these countries represent a large and rising share of foreign investments into Africa. Mobilizing the political support, if not the financial resources, of emerging “non-traditional” donors via the G20 forum was a prerequisite for the CWA to be effective.

Implementation

CWA is part of the “G20 Finance Track,” where a reporting structure will be set up. However, the G20 will provide little more than a high-level political platform to create and sustain the momentum for reform. The AfDB, IMF, and World Bank Group will be the main points of contact during the preparation and implementation of the Compacts, which will be developed on the basis of a catalog of possible measures and instruments outlined in an ad hoc joint report prepared by the three IFIs.

The IFIs will provide financial and technical assistance to the participating governments by way of existing initiatives and instruments as provided by their respective mandates and in the limit of their respective financing envelopes for the countries involved. G20 members can also contribute to the implementation of the Compacts with domestic policy measures, some of which are also presented in the report, and via bilateral channels of cooperation and other platforms such as the “Forum of China Africa Cooperation” and “the Tokyo International Conference on African Development.” For instance, on the sideline of the June 2017 conference, Germany committed €300 million in bilateral funds for business development in Côte d’Ivoire, Ghana, and Tunisia.

Other relevant parties such as the New Partnership for Africa’s Development Agency and the OECD have also been invited to provide support.

The contributions from multilateral and bilateral partners will be coordinated in each participating country by ad hoc Country Teams, which will comprise representatives of government, IFIs, interested G20 countries, and other partners.

Impact

Although the CWA is a high-level platform that rests on existing institutions and financing channels, it will add to a web of more than 100 recent multilateral and bilateral initiatives that also aim to facilitate private investments in Africa. Like other programs, the CWA will represent a minor cost to participating countries by diverting administration and donor resources. In particular, the use of IFI resources to achieve Compacts’ objectives is likely to come at the expense of other IFI operations in these countries. The initiative will also duplicate similar structures and processes. For instance, the Country Team will replicate existing donor cooperation groups, most of which are organized by themes or sectors.

The CWA is however expected to have a small, but overall positive impact, mostly by signaling to private investors that the commitment of participating countries to reform is genuine and durable. Indeed, the CWA’s added value resides in the high level of country ownership. The reform priorities are set by participating governments, who commit to specific objectives, and select a package of actions to attain them. The actionability and publicity of the Compacts will guarantee the commitment of governments to the agreed roadmap. In addition, the unity of the donor community and the visibility of external support will increase the political feasibility of implementing the Compacts.

Most actions under the CWA require implementation over the medium to long term. In the end, the success of the initiative will therefore depend on the sustained commitment of successive governments in participating countries and in G20 members.

 

This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief

 

 

The World Bank Group Pivots to Private Sector Solutions

In April 2017 Jim Kim, the president of the World Bank Group (WBG), announced that the institution would become an “honest broker” focused on catalysing commercial capital for infrastructure development. This paradigm shift provides a new impetus for the redeployment of scarce public funds to leverage private investments, including in the poorest, riskiest countries. If realized, the WBG repositioning would mark a significant step in the current transition in development finance. It has the potential to transform the balance sheets of Multilateral Development Banks (MDBs) and to unlock infrastructure markets in developing countries.

What next

In the next few years, the WBG will aim to mainstream its mission as a “facilitator of capital” in addition to maintaining its historic function as a “provider of capital.” To this end, the WBG will scale up the preparation of bankable projects, deploy new facilities and instruments for private sector participation, and increase support for institutional, policy, and regulatory reforms in developing countries. These efforts will result in an evolution of WBG operations, rather than in the transformation of its model. They will facilitate private investments in frontier economies but nowhere near a level sufficient to bridge their infrastructure gaps.

Impacts

  • Scaled-up WBG operations in frontier economies will mobilize and catalyse more private investments, including in fragile and conflict-affected states
  • New WBG facilities and instruments will channel more capital from institutional investors to the infrastructure sector in developing economies
  • WBG repositioning may be emulated by regional development banks, thereby changing the landscape of development finance

Analysis

In 2015, the WBG estimated that $550 billion is invested in infrastructure in Emerging Market and Developing Economies (EMDEs) every year. Of this total 80% is financed by the public sector, 10% of which by Official Development Assistance. By contrast, basic infrastructure needs in these countries range from $850 billion to $2 trillion annually for the period 2017-2030, with an additional $1 trillion required to meet the Sustainable Development Goals.

The public sector faces tight fiscal constraints that make it unable to bridge this financing gap. In the meantime, institutional investors such as pension funds, insurance companies, and sovereign wealth funds hold an estimated $70 trillion in assets that on average yield low returns. The long-term, high-yield profile of infrastructure investments in EMDEs seems well-suited to their mandate. However, an unfavourable business environment and a dearth of bankable projects have prevented these investors from allocating significant resources to this sector.

Recent Initiatives

This situation has long been recognized by MDBs. Since 2011 and under the leadership of the G20 they have increased their efforts to address these bottlenecks.

Establishing project preparation facilities has been part of this agenda. For instance, in 2015 the WBG created the Global Infrastructure Facility (GIF), a $100m platform that helps governments prepare and structure complex public-private partnerships in infrastructure. During the 3-year pilot phase, the GIF aims to support 15 to 20 projects to be financed by institutional investors.

The MDBs have also scaled up pooled investment vehicles that channel third-party capital. For instance, the International Finance Corporation (IFC) – the WBG’s private sector arm – recently launched the Managed Co-Lending Portfolio Program that allows institutional investors to passively participate in IFC’s lending operations.

Standardization and Replication

In parallel, the WBG has developed standardized and replicable models for private participation that aim to reduce risks and transaction costs in order to achieve scale. For instance, in 2015 the IFC launched Scaling Solar, a one-stop-shop program for the development of private, grid-connected solar photovoltaic plants. Scaling Solar is based on standardized procurement, contracting, and financing documents in an effort to go beyond the traditional project-by-project approach.

Honest Broker

In the run-up to the 2017 Spring Meetings, WBG President Kim declared that the WBG would take a more systematic approach to leveraging commercial capital in the infrastructure sector. He pledged to turn the WBG into an “honest broker” that sits between commercial capital and potential investments in EMDEs.

If the ambition and the narrative are new, the idea of facilitating capital is not. The WBG, like other MDBs, already:

  • Mobilizes capital, by co-financing projects and providing guarantees and other instruments for risk mitigation; and
  • Catalyses additional capital, mainly by supporting institutional, policy, regulatory reforms to enable private participation.

This function complements the primary role of the WBG as a provider of capital.

However, President Kim’s statement of intent inverts this ontological hierarchy. By doing so, it heralds potentially far-reaching consequences for the operations of the WBG. This paradigm shift has already been translated into a new priority: de-risking markets and projects, with an emphasis on frontier economies, including fragile and conflict-affected countries.

When de-risking projects, the WBG will maintain a focus on additionality. Its intervention will aim to enable additional commercial capital – not to replace or compete with existing private solutions. This condition means that the WBG’s future operations will increase the flows of private investments into EMDEs, with limited market distortion effect.

Modus Operandi

The WBG repositioning will be operationalized by the “cascade,” a new modus operandi for the preparation of projects supported by the WBG. This set of guidelines will be first applied to infrastructure financing, and later extended to finance, education, health, and agribusiness.

When preparing a project, WBG staffers will have to consider private solutions first. If they are not feasible, they will have recourse to public options.

Project preparation will be carried out according to the following procedure:

Source: WBG, author

The WBG repositioning will be enabled by changes at several levels. Their scope and the pace of implementation will determine the impact of the WBG’s strategic shift on its model and on private investments in EMDEs.

Cultural Evolution

The “cascade” approach calls for a change of mindset and incentives for WBG staffers, who will have to think simultaneously like private investors and public reformers. It will also necessitate more collaboration between the WBG’s public and private sector windows, building on the “One World Bank Group” plan launched in 2013.

In addition, the WBG’s strategy to use public funds only as a last resort will require active cooperation with other MDBs and bilateral donors to avoid WBG operations being undercut. International financial institutions often compete to finance projects, especially those that could be financed commercially and that present an equivocal case in term of additionality.

Institutional Reforms

“3.0,” the IFC’s long-term strategy was endorsed in December 2016 and followed by an institutional reorganization. The new direction aims to adjust IFC’s business model to increase its capacity to leverage commercial capital in frontier economies.

Innovative Instruments

The WBG is expanding its suite of tools to de-risk markets and projects. In April 2017, the WBG established a $2.5bn Private Sector Window (PSW) with the International Development Association (IDA) – its concessional arm.

The PSW is composed of four facilities that provide and support project-based guarantees, currency risk-sharing, and blended finance, with a focus on infrastructures in frontier economies. This new window will allow IDA to support the operations of the IFC and the guarantee arm of the WBG by limiting their exposure and carrying part of the risks on its balance sheet. A pipeline of projects is currently under development.

The WBG is also working on other tools, such as indices and bonds, to support the development of infrastructure as an asset class.

Financing Capacity

The WBG repositioning, and the associated focus on frontier economies, will require stronger financial capacity. Extensive efficiency and leveraging measures have recently been implemented across the WBG.

Nonetheless, at the Annual Meetings in October 2017 the WBG will introduce a new package of proposals that is likely to include a strengthening of the equity base of the International Bank for Reconstruction and Development (IBRD) – its non-concessional public sector arm – and the IFC. However, there is very limited appetite among member countries for a general or selective capital increase, especially within the United States government.

 

This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief

China and the AIIB on the Belt and Road: Power Sans Control

As the Asian Infrastructure Investment Bank matures, it emancipates from its Chinese parent. But the multilateral development bank remains a key instrument of China’s foreign and development policy.

Eighteen months after starting operations, the Asian Infrastructure Investment Bank (AIIB) is still in infancy. But the newest multilateral development bank has already declared independence from its Chinese parent. Last week, at the AIIB’s second Annual Meetings, President Jin Liqun drove a wedge between his institution and China’s flagship foreign policy and development initiative. “There has been some confusion,” he said, about the relationship between AIIB and the Belt and Road Initiative (BRI – formerly known as ‘One Belt, One Road’). “We operate by our standards, by our governance. The Belt and Road is a marvelous program … but we have our standards”.

On the face of it, this statement is surprising. Both proposed by China in 2013, the AIIB and the BRI have in common not only a progenitor and a birthyear. They also share a same purpose: to improve infrastructure connectivity in Asia. In fact, the raison d’être of the AIIB is to implement the BRI’s hard infrastructure agenda.

By design, the BRI overwhelmingly relies on bilateral channels for its implementation. A large share of the financing for infrastructure projects indeed transits via China’s so-called ‘policy banks’ and ad hoc funds. Last month, at the first BRI summit, President Xi Jinping announced an additional $70 billion for the BRI infrastructure component to be delivered via such institutions, namely the China Development Bank, the EXIM Bank, and the Silk Road Fund. Although significant, China’s commitments pales in comparison to BRI’s total cost, estimated in the trillion of dollars. Well-aware of this shortfall and of the financial risks involved, the Chinese leadership has made mobilizing external resources a priority from the outset. The establishment of the AIIB, which leverages capital from its member countries to finance infrastructure projects, intervened in this context.

Four years later, the reality of the AIIB as a Chinese-made vehicle built to work in tandem with China’s bilateral institutions to implement China’s foreign policy and development initiative is in question. From a Chinese object, the AIIB has evolved to acquire a life of its own as a multilateral institution. This emancipation of the AIIB has consequences for its operations, and potentially for its mandate.

Into Bretton Woods

The choices on staffing, policies, and strategies that the AIIB made to date reveal an institution created much less in China’s image than in that of the traditional multilateral development banks.

Of course, the divergence of the AIIB from the Chinese model can be explained by its very nature. As a multilateral bank that borrows on international markets to finance its operations, the AIIB must abide by the standards and norms established by its Bretton Woods peers. However, another, unforeseen factor contributed to shaping the AIIB into an institution that is conceivably much different than the one China originally envisioned.

With 80 member countries so far, the AIIB’s attraction is as undisputed as it was unexpected. Paradoxically, this international success has come at a cost for China, which has been compelled to forge compromises on the AIIB’s governance and operational policies. For instance, the AIIB’s environmental and social framework and its new energy strategy bear the mark of the AIIB’s European members. They mirror the standards and rules adopted by the World Bank and the Asian Development Bank.  As more countries join in, China might also feel pressed to reduce its voting share, in effect relinquishing its veto power.

Power Sans Control

Even as China’s control over the AIIB is eroding, the multilateral development bank remains instrumental in the success of BRI – giving the Xi administration no reason to resist this evolution.

To be sure, the current balance of power within the AIIB still enables China to harness the financial firepower of the bank, whose formal mandate aligns with the BRI goals. Since it started operations, the AIIB has approved 16 projects for $2.5bn, most of which fall under the BRI umbrella. At capacity, the AIIB will have a portfolio exceeding $100 billion (and scalable to $250 billion), mostly focused on Asian infrastructures.

Furthermore, the multilateral setting enhances the inclusiveness and legitimacy of the AIIB, thereby allowing China to leverage the resources of participants that otherwise object to the BRI. India is a case in point. The country has long voiced its opposition to the BRI, citing the strategic implications of infrastructure development in the China-Pakistan Economic Corridor and in Pakistan-controlled Kashmir. At the same time, as a founding member and the host of the AIIB’s 2018 Annual Meetings, India has been an eager player in a collective institution that contributes to the BRI but steer clear of its most controversial activities. By statute, the AIIB cannot finance operations in disputed areas without the consent of all parties.

In this perspective, China’s dominance of the AIIB is at best expendable and at worst detrimental to the country’s foreign policy and development objectives under the BRI. At present, China can fully exploit the emerging division of labor between the AIIB and its bilateral institutions. Under this informal modus vivendi, multilateral capital would be applied to the infrastructure projects that present a sufficient case in terms of financial or economic viability, in line with the AIIB’s financial constraints. Chinese bilateral resources would be directed to the residual projects that find their core rationale in strategic objectives, such as dual-use infrastructures.

Out of Asia?

There remains however a distinct possibility that the AIIB will gradually spiral out of China’s orbit. Of the 23 countries that have joined the AIIB in 2017, 12 hail from outside the greater Asia region. As more non-regional, borrowing member countries join the AIIB, the multilateral development bank may shift the current focus on regional infrastructures to a more universal mandate, at the expense of the BRI. In such scenario, the AIIB and BRI would no longer align but merely intersect, leaving China to shoulder alone the burden of the Belt and Road.

Cooperation under the Belt and Road Initiative Will Increase

On May 14-15, China convened the first summit of the Belt and Road Initiative (BRI) – formerly known as One Belt, One Road. With this major diplomatic event, President Xi Jinping aimed to both showcase and buttress international support for his central foreign policy initiative, the success of which will hinge on the participation of other countries, regional organizations, and international financial institutions. Their contribution – or lack thereof – will affect the nature of BRI and determine the impact of the Chinese initiative on Asia’s infrastructure connectivity, economic system, and geopolitical order.

What next

BRI will remain a Chinese object, tied to China’s evolving economic and geopolitical ambitions. China will continue to provide the undisputed leadership and the bulk of the financing. But Xi Jinping will seek more followers, if not partners, to implement the initiative on which much of his domestic power depends. China will leverage their resources in projects, sectors, and regions where their positive-sum involvement will help China achieve its long-term goals under the BRI. In turn, China may make concessions on some contested issues, such as project standards and public debt sustainability.

Impacts

The cooperation between China and multilateral development banks may increase the number of BRI infrastructure projects with competitive procurement;

  • Plans for BRI’s corridors may be altered to accommodate competing visions for Asia’s connectivity, such as Russia’s;
  • BRI’s geographic boundaries may be expanded to include Latin America and the rest of Africa;
  • At its Annual Meetings in June, the Asian Infrastructure Investment Bank may more formally align its mandate with BRI’s.

 Analysis

The first Belt and Road Forum for International Cooperation was attended by 110 delegations, 29 national leaders, and the heads of the United Nations, the International Monetary Fund, and the World Bank. Their presence demonstrated the international support for President Xi Jinping’s main foreign policy initiative.

Institutionalization

China capitalized on this support to anchor the BRI in an embryonic set of dedicated structures. At the summit, Xi Jinping announced the establishment of an advisory council and of a liaison office for the summit’s follow-up activities, along with new cooperative mechanisms such as the Facilitating Center for Building the Belt and Road.

Since the launch of the initiative in 2013, China has used BRI as a narrative to guide and justify various domestic and foreign activities. Similarly, Chinese provinces and countries along the Belt and Road have used the BRI brand to obtain the backing of the Chinese government for various infrastructure projects.

The new institutions presumably represent a first step from the idea to the reality of BRI as a transformative initiative. They have the potential to empower it with the capacity to be additional – ie. to enable activities that would not have otherwise taken place.

The nascent framework will remain under the authority of China, which is also due to host the next BRI summit in 2019.

Made in China

Overall, the summit reiterated the China-centric model of BRI, which remains a physical and relationship network with China as its sole node. For instance, bilateral agreements represented most of the 76 items in the list of deliverables prepared by the Chinese delegation. Similarly, only China committed new financial resources for BRI, the bulk of which is to be delivered via bilateral channels.

They include:

  • RMB 100 billion ($14.5 billion) for the Silk Road Fund, the $40bn China-owned investment fund established in 2014;
  • RMB 250 billion ($36.2 billion) for China Development Bank, for the creation of multi-currency lending schemes for infrastructures and industries and multi-currency credit lines for foreign financial institutions;
  • RMB 130 billion ($18.8 billion) for China Export-Import Bank.

In a bilateral setting China can leverage its full weight to achieve its economic and strategic goals under the BRI. In particular, tied bilateral financing allows China to maintain control over project preparation and implementation, thereby favouring Chinese companies or undertaking projects, such as dual-use ones, that do not provide sufficient commercial returns.

However, a China-centric model is not sustainable if BRI is to be successful, as China does not have the capacity to implement it alone. First, Chinese resources are significant but limited. For instance, foreign exchange reserves have dropped to $3 trillion, from a peak of about $4 trillion in 2013. Second, the risks involved in the construction and operation of infrastructure projects in unstable regions are considerable. Facing possible sovereign defaults in other high-risk countries, China will want to limit its exposure. These challenges explain, in part, why according to a recent study by the American Enterprise Institute, China’s combined investments in all BRI countries since 2014 is smaller and growing more slowly than Chinese investments in the United States alone over the same period.

China is therefore facing a dilemma: maintain the current model, at the risk of the failure of the initiative; or, in a process similar to the establishment of the Asian Infrastructure Investment Bank, multilateralize BRI to leverage the resources of partners at the expense of China’s control.

China’s declarations at the BRI summit reflect this balancing act.

Internationalization

The recent name change to BRI epitomized China’s recent efforts to shift BRI’s narrative from that of a Chinese policy to a more inclusive Chinese-led international initiative.

China used the summit to push for an internationalization of BRI. Xi Jinping reiterated his proposition that the cooperation and coordination take place within the framework of existing regional organizations such as the Shanghai Cooperation Organization.

The summit also marked an effort to enrol new partners, from non-BRI countries to the private sector, to implement the initiative. The joint communique mentioned the importance of non-discriminatory procurement procedures and that of private participation in infrastructures.

Furthermore, China signed a memorandum of understanding with six traditional and non-traditional multilateral development banks. They pledged to collaborate on matters of common interest under the BRI, including via a new forum for financial cooperation. In parallel, the World Bank is establishing the Global Infrastructure Connectivity Alliance, a platform mandated by the G20 under Chinese presidency, whose mission will include mapping the BRI and sharing information on associated bankable projects.

China and the IMF will also set up a joint capacity development centre focused on the BRI countries. The involvement of international financial institutions will help improve the policy and regulatory environment and provide additional financing, thereby facilitating the implementation of BRI.

China’s effort to internationalize BRI is not open-ended, nor is it necessarily a step toward multilateralism.

New aspirations

China has also used the summit to expand the geographic and thematic realms of BRI. In the process, the BRI might grow to supersede, instead of merely complementing, existing mechanisms.

The summit further blurred the geographic boundaries of BRI. It opened the possibility of expanding BRI to the rest of Africa and to Latin America.

The summit also demonstrated the continued effort by China and bilateral partners to expand the use of the renminbi for trade settlements and for other cross-border financial transactions, at the expense of the dollar. The internationalization of the renminbi has the support of several BRI countries, including that of Russia following the imposition of international sanctions in 2014.

China reiterated the need for the development of hard infrastructure which had formed the core of the BRI. But at the summit it placed a greater emphasis on the soft infrastructure – customs clearance systems, quarantine processes, market access, trade barriers, and foreign investment procedures. This shift may signal a renewed effort by China to set the regional economic norms and standards, in part filling the vacuum created by the withdrawal of the United States from the Trans-Pacific Partnership.

 

This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief

The U.S. Development Policy Is at a Crossroads

The U.S. administration presented a budget request for FY2018 that contains measures that will have an impact U.S. development policy over the next four years. The recommended funding cuts in foreign assistance and the proposed elimination of agencies mark a break from the bi-partisan approach of the last decades and might signal a major shift in policy. A momentous change in the financing, institutions, and priorities of U.S. development assistance would have consequences for the development sector, U.S. foreign policy, and prosperity around the world.

What next

 The President’s “America First” budget reflects a bargaining position that will be examined and moderated by Congress later in the appropriation cycle. But it will pave the way for an evolution of the U.S. development policy according to two scenarios: in a “marginal reform” scenario, the bi-partisan approach will largely prevail and development agencies and programs will undergo limited adjustments in terms of budget, instruments and priorities; in a “major upheaval” scenario they will face large budget cuts, some might be phased-out and the rest repurposed.

Impacts

 The elimination of U.S. funding for bilateral and multilateral climate change programs will jeopardize the implementation of the 2015 Paris agreement;

  • Reduced U.S. assistance to low-income countries that the U.S. administration deems “non-strategic” might reverse development gains;
  • The removal of U.S. development agencies for exports and foreign investments would limit business opportunities for U.S. companies;
  • The use of development assistance for short-term foreign policy objectives and reversal from untied aid would weaken international cooperation on development;
  • S. opposition to the reforms of International Financial Institutions would accelerate the fragmentation of the Bretton Woods order.

Analysis

 In 2015, the U.S. provided $31bn in Official Development Assistance (ODA), which represents about 0.17% of GNI (for a United Nations target of 0.7%) and 0.8% of the federal budget. About 65% of U.S. ODA is untied, meaning that there is no condition that the funds be used to procure goods or services from the U.S.

More than 85% of U.S. ODA is provided bilaterally, via more than 20 agencies and bureaus. The rest consists of contributions to multilateral funds managed by development banks and UN organizations.

Graphic: U.S. Development Spending (Gross Disbursements, billion dollars); Source OECD

President’s Budget Request

On March 16, 2017, the White House initiated the budget process by presenting its blueprint for the fiscal year starting on October 1st. The document introduces some headline numbers for development spending and reveals some of the administration’s development priorities. But it does not provide a definitive outline of the forthcoming U.S. development policy.

The administration requested $25.6bn in base funding for the Department of State and the U.S. Agency for International Development (USAID), a 28.7% reduction from the previous year. It requested an additional $12bn (-37.4%) as part of the Overseas Contingency Operations, an extraordinary fund for emergency activities, mostly in Syria, Iraq, and Afghanistan.

The blueprint calls for the elimination of funding for the U.S. bilateral and multilateral climate change programs. It reduces funding for the UN and affiliated agencies and sets a 25% cap for U.S. contribution to total UN peacekeeping costs. It reduces funding for Multilateral Development Banks (MDBs) by $650m over three years compared to commitments by the previous administration.

The blueprint pledges to meet current bilateral and multilateral commitments for vaccination, HIV/AIDS, and malaria programs. It allows for “significant” funding for humanitarian assistance, including food aid, disaster, and refugee program funding.

The budget proposes to eliminate independent agencies, including the African Development Foundation, the U.S. Trade and Development Agency (USTDA), and the Overseas Private Investment Corporation (OPIC).

Other Developments

In January 2017, President Trump signed an Executive Order that, for the first time, named the USAID administrator as a regular member of the National Security Council’s deputies committee. With another, he reinstated and expanded the Mexico City Policy (the so-called “global gag rule”) that restricts organizations that condone abortion from receiving any U.S. health funding.

In March 2017, the administration also requested a review of all agencies and programs for the purpose of reorganizing the executive branch.

U.S. Congress

The consent of the Republican-controlled Congress will be necessary for the budgetary and institutional measures put forward by the administration to become effective. The authorization bills will establish, continue, or modify agencies and programs; the appropriation bills will provide funding for those that are authorized.

Congress is not likely to agree on the proposed cuts in development spending, as several prominent Republicans have already declared their firm opposition.

Policy Pathways

The government can act on three main levers to reorient the U.S. development policy: funding levels, aid allocation, and channels of delivery.

Development spending for FY2018 is likely to be reduced, though not by the extent proposed by the administration. The cuts will not be spread equally across agencies, programs and sectors.

The administration has proposed that U.S. foreign assistance be re-focused on international organizations that “advance U.S. foreign policy interests” and on countries of “greatest strategic importance”. Any significant shift in spending allocation would require approval from Congress, which segments the budget into country and program accounts. It would not take effect immediately, in part because some funds are disbursed as part of multiyear strategies that would be costly to terminate prematurely. The existing federal budget process would also not be suited to a development policy based on “deals,” whereby the amount of aid a recipient receive depends on its support for U.S. international policies.

The administration is likely to propose a reorganization of U.S. development institutions later this year. The President’s budget suggests that such a reform would not be driven by budgetary concerns only. OPIC, whose elimination is proposed, returns about $280m annually to the Treasury.

The administration’s current approach to development reflects the positions of some conservative lawmakers, for whom OPIC, USTDA, and Export-Import Bank distort markets. However, the elimination of the agencies that help American companies export and invest overseas would run counter to the administration’s trade policy.

On the contrary, the administration might seek to offset some of the impact of budget cuts by accelerating the shift from aid to development finance, whereby scarce public funds would be used to leverage commercial capital for development purposes. This strategy would elevate the agencies that support private sector investments such as OPIC and USTDA, while maintaining those that reward good governance and economic freedom, such as the Millennium Challenge Corporation (MCC). It would phase out the other grant-based agencies, such as USAID, or re-focus them on emergency response and humanitarian issues. This approach could be accompanied by measures to support U.S. companies, including a more systematic use of tied aid.

All development finance programs could also be consolidated in a new entity dedicated to the private sector. Alternatively, agencies and programs could also be merged in a single entity at the cabinet-level on the model of the UK’s Department for International Development.

Presidential initiatives

Congress has codified presidential initiatives such as Feed the Future and Power Africa, which leverage private investment with aid-based instruments across U.S. agencies. But their existence remains dependent on the U.S. agencies that implement them and on the White House staff that coordinate the overall approach.

Multilateral Organizations

In FY2016, the U.S. contributed $2.3bn to MDBs and $1.1bn to the UN system, with an additional $2.5bn for peacekeeping operations. A significant reduction in U.S. voluntary funding for multilateral organizations would be mostly borne:

  • by the climate funds, such as the Green Climate Fund ($3bn previously committed, with $250m disbursed),
  • by the UN specialized agencies that grant membership to the Palestinian Authority; and
  • to a lesser extent, by MDBs’ concessional arms such as the International Development Association (IDA) ($3.9bn previously committed over three years).

The administration might oppose future capital increases in MDBs and the International Monetary Fund and hinder reforms that would increase the influence of emerging countries. It might also exercise its voting power in these organizations to pursue foreign policy objectives, beyond the prohibitions already mandated by Congress.

 

This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief

The Impact of AIIB and NDB on Infrastructure Financing 

The advent of the Asian Infrastructure Investment Bank (AIIB) and of the New Development Bank (NDB) (or “BRICS Bank”) changed the landscape of international development. The new institutions have the potential to finance a significant share of infrastructure projects in Emerging Market and Developing Economies (EMDEs). They also have the potential to hasten the power transition from the United States and the West to China and the Rest. Their first year of operations offers insights on the extent to which they will be able to realize this potential.

What next

In the next few years, the AIIB and the NDB will have a small but growing ‘quantitative’ impact on infrastructure financing in EMDEs as they expand their portfolios of energy, transportation, and urban development projects, mostly in cooperation with other Multilateral Development Banks (MDBs). In the longer term, the AIIB is likely to have a bigger ‘qualitative’ impact, financing larger, riskier projects and investing in entire infrastructure networks. However, the AIIB and the NDB will reach financing capacity very gradually and most likely not before the second part of the next decade.

Impacts

  • The AIIB and the NDB will support the BRICS’ economic and foreign policy initiatives, such as ‘One Belt, One Road (OBOR)’;
  • The AIIB will help China diversify and increase the value of its international assets, including those of the Silk Road Fund;
  • The AIIB will open business opportunities for all infrastructure firms and the NDB will for BRICS-based companies;
  • Long-term investors will be able to access a wider range of bonds; some may be rated below AAA but will be higher yield;
  • The AIIB and the NDB will help achieve the 2030 Agenda for Sustainable Development and support global economic growth.

 Analysis

After one year of operation, the AIIB and the NDB remain in transition. Their membership, staffing, and operational priorities are developing.

The AIIB is in effect acting as a trust fund of traditional MDBs; the NDB as a credit cooperative for the BRICS. But the AIIB is on track to become an avatar of traditional MDBs, albeit one focused on infrastructure. The NDB is attempting an ambitious strategic shift towards the African continent.

 Composition and Governance

 

Financing capacity

Both the AIIB and the NDB have authorised capital of 100 billion dollars. All the AIIB capital is to be subscribed, with 20 billion dollars to be paid-in. Only 50% of the NDB capital is to be subscribed initially, with 10 billion dollars to be paid-in.

The outstanding operations of the MDBs financed on their own resources are capped at 100% of the (unimpaired) subscribed capital and reserves. The AIIB may decide to increase this limit to 250% of this total (China has a veto power). The equity operations of the AIIB are capped at the total (unimpaired) paid-in capital and reserves.

At full capacity, the infrastructure portfolios of the AIIB and the NDB can therefore exceed 100 billion dollars and 50 billion dollars respectively. The AIIB can increase this to more than 250 billion and the NDB to more than 100 billion.

A significant share of these operations will be financed by new money. China’s financial commitment to the AIIB does not come at the expense of its bilateral programs for infrastructure development.

These volumes of financing remain small compared to total needs. In 2015, the WBG estimated that financing requirements for basic infrastructure in EMDEs were 819 billion dollars per year until 2020 — 304 billion dollars in South Asia and 87 billion in East Asia Pacific (excluding China). Nonetheless, the AIIB and the NDB have the potential to provide a large share of MDB financing for infrastructure development.

Graphic: Financing Base and Total Lending Portfolio; Source: MDBs; All figures are in US$bn; *After OCR-ADF merger; ** As provided in Articles of Agreement

Ripple effect

Some of the impact of the new MDBs on infrastructure financing will be indirect. For instance, in 2016 Japan pledged to provide 200 billion dollars over five years via the ‘Expanded Partnership for Quality Infrastructure’, partly in response to the establishment of the AIIB.

Gradual deployment

The AIIB has committed 1.73 billion dollars for nine operations (nine more are under preparation); the NDB has committed 1.5 billion for seven operations (and intends to lend a further 2.5 billion this year). The pace of portfolio expansion will depend on three main factors:

  • Subscription payments, with the last installments due by 2020 (AIIB) and 2022 (NDB);
  • Recruitment process, with both institutions remaining understaffed (100 employees each; compared to more than 10,000 for the World Bank);
  • Capacity to generate projects, in particular with the provision of technical assistance, including via China’s 50 million dollar ‘Project Preparation fund’ for AIIB’s low-income members.

The AIIB and the NDB have relied on the support of other MDBs for project preparation. To date, 75% of the projects approved by the AIIB (and 100% of projects in the pipeline) are co-financed.

Operational scope and priorities

The geographic reach and sector coverage of the AIIB and the NDB are currently narrow but their scope is potentially very large.

Countries

The AIIB and the NDB can finance operations in all member countries regardless of their income levels. They can also invest in non-member countries (China at the AIIB and in most cases two founding members at the NDB can block such a decision).

But the MDBs’ 2016 documents, statements, and operations denote a focus on the sub-regions in which the main shareholders have the strongest interests. For the AIIB, they include countries along the OBOR axis. For the NDB, they include sub-Saharan Africa, where a first regional centre is being established.

Sectors

The AIIB’s and NDB’s Articles of Agreement provide for the financing of operations in ‘hard’ infrastructures as well as ‘productive sectors’ and ‘sustainable development’.

Their operational scope is currently more restricted, with an initial concentration on the energy sector. In 2016, energy operations represented 63% of the AIIB’s lending commitments and more than 55% of its project pipeline. The two other focus areas are transportation (25% commitments) and cities (12% commitments).

Energy strategy

The AIIB is preparing an energy strategy. The current draft builds on the international agenda. In particular, it mirrors the restrictions that the World Bank placed on operations in support of nuclear energy and, to some extent, of oil- and coal-fired plants.

The AIIB’s energy priorities are:

  • Rehabilitation and upgrade of existing generation stock and of power and gas networks;
  • ‘Low-risk’ greenfield power transmission and distribution projects;
  • Hydropower generation and non-conventional renewable energy (NCRE);
  • Gas-fired generation and related infrastructure.

The strategy provides for a significant share of operations, mostly demand-side energy efficiency and NCRE projects, to be co-financed with other MDBs.

Financing channels, policies and instruments

The AIIB’s financing practices compare with those of other MDBs. The NDB’s reflect the bilateral practices of the BRICS.

The AIIB’s and the NDB’s preferred instruments are loans, guarantees, and equity.

Standards

Both rely on the policies of member countries for the management of environmental and social (E&S) risks. Although less stringent than other MDBs, this approach converges with the World Bank’s new E&S framework.

Their procurement policies diverge though. The NDB’s restrict the procurement of goods and services to member countries only. The AIIB’s places no geographical restriction — and as such is more open than other MDBs’.

Partnerships

The AIIB and the NDB have engaged in collaboration with traditional MDBs for staff exchange and project co-financing, including the World Bank and the Asian Development Bank.

The NDB is also developing co-financing frameworks with the BRICS’ national development banks and financial intermediaries such as Industrial Credit and Investment Corporation of India, China Construction Bank Corporation, and Standard Bank of South Africa.

 

This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief