The Early 2020s: Former World Bank President David Malpass on COVID, Inflation, China, and Climate

>> David Malpass: China is very involved in lending its own money, much bigger than any World Bank amounts into their Belt and Road initiative. And a challenge from that is try to stop some of the practices that they do. One is a non-disclosure clauses in the contracts. What this means is that the clauses within the contracts are unfair to the people of the country.

Also the taking of collateral by China as it lends a country. So for example, in Ecuador and Angola, China had contracts which allowed them to take physical control of the oil. That gives them an advantage and also control within the country's framework.

>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century Podcast, an official podcast for the Hoover Institution Economic Policy Working Group where we talk about economics, markets, and public policy.

I'm Jon Hartley, your host. Today, my guest is David Malpass. David served as the 13th president of the World Bank Group. Prior to his appointment at the World Bank, David served as U.S Undersecretary of the Treasury for International Affairs during the Trump administration. Before joining Treasury, David founded and led a macroeconomic research firm based in New York City.

Before that, he served as Chief Economist at Bear Stearns and conducted financial analyses of countries around the world. Earlier in his career, David served various roles at treasury as well during the Reagan and Georgia H.W. Bush administrations. He also served in the U.S. senate, working on the Senate Budget Committee and Joint Economic Committee.

Thank you so much for joining us today, David.

>> David Malpass: Hi, Jon.

>> Jon Hartley: So I want to get to your beginnings. David, where did you grow up and how did you first get interested in economics and finance?

>> David Malpass: I grew up in Northern Michigan. I was born in Petoskey and then raised in East Jordan, an even smaller town.

Economics, I think, came to me more from my interest in the way the world works. And I was a physics major in college. And before that I was interested in geography, in languages, and how things work. And that leads you right into economics. Why do people move money the way they do?

What are the policy tools? And so that was my interest.

>> Jon Hartley: That's fascinating, I wanna talk a little bit about. You've had an amazing career in both the public sector and private sector. And you served in a variety of government roles as Treasury and in Congress before becoming the World Bank president.

>> David Malpass: State Department, that was left out. So that was two or three years of my life. So, yeah, two years.

>> Jon Hartley: And you've also done a lot in the private sector as well. And many people may not realize this, but there's a whole host of suspicious people who served as chief economists at Bear Stearns in addition to yourself, like Carmen Reinhardt, Larry Kudlow, I'm curious, how has your time in the private sector informed your public service?

I think it's rare that you find people that have so much experience in economics in both the private sector and the public sector.

>> David Malpass: Private sector is really important. People, for one, have to compete. And so that was, that was good for my economics. I was regularly ranked near the top in the Institutional Investor poll, so that that was reinforcing of some of the ways I was doing things.

I wanted people often to look at the actual raw data. So a lot of times economists work in terms of rate of change, when what you need to look at is the actual levels of data. So I learned that and more importantly, I learned lots about financial markets.

We forget the crossover between economics and markets, but it's tight. And so as you think about whichever kind of market, whether it's equity markets or bond markets or interest rate markets and futures or currency markets, they are directly crossing over between economics and finance and real world. So I saw that in much detail in those years.

That was 24 years on Wall Street.

>> Jon Hartley: And it's amazing, and what an amazing career. Speaking of someone that's worked in both private sector at Goldman in various policy roles, I think working in private sector really gives you an added perspective. And certainly I think a lot of data increasingly is being generated in the private sector as well.

Even those in the public sector use Bloomberg Terminals. Jay Powell, the Chairman of the Fed, has a Bloomberg Terminal that comes from the private sector. Often we're looking at blue chip forecasts that are being produced by an aggregation of chief economist forecasts in the types of roles that you served in the private sector.

So I think there's a lot of interplay between private sector and public sector that maybe isn't very much appreciated, but you've been huge in both of those places. I want to get more into your tenure at the World Bank. So the World bank is generally focused on extreme poverty, whereas the IMF is more focused on lending to distressed countries, doing conditional lending.

For the listeners out there, can you explain a little bit more about what the World Bank president role entails? I know that part of your role is to guide. The board of about 25 executive directors represent around 180 countries. And voting at the World Bank is determined by capital contributions.

It's not like UN which is one country, one vote. The voting power is based off of the capital contributions or how much each country invests in the World Bank. And typically, the World Bank, you're voting on projects that come up like building a dam or a power plant in a very poor country.

As president World Bank, how do you oversee this process and what does that role entail?

>> David Malpass: Thanks, and you're right that the World Bank is very interested in poverty. But remember its roots. They were in the reconstruction of countries that are now advanced economies. The first loan was to France and one of the early loans was to Luxembourg.

And so as we think about the World bank, there's these five different branches I was president of each one that do different things within the global development process. In addition to the grants and loans for extreme poverty to the poorest 75 countries, that's the IDA part of the World Bank, there's IBRD, the International Bank for Reconstruction and Development, which makes floating rate loans to governments that are creditworthy.

And so for example, Brazil borrows from the World Bank. And so those loans are like the IMF. They're trying to get structural reforms within the countries. So I don't wanna submerge that. As the World Bank has evolved over the years, Years it's gone from that role, the reconstruction role, toward an increasing portion that's poverty related.

But then also there's the humanitarian assistance side. So when there's an earthquake, the World Bank is often the one that does the damage assessment. This could be Turkey, let's say, when there was a horrendous earthquake, the damage assessment. And then the methodologies that could bring assistance into that particular region of a country.

Other parts of the World Bank that I'll just mention very briefly is the International Finance Corporation. Which makes loans to private sector companies in developing countries that for example is operating in Ukraine in the private sector now. Then there's MIGA, the Multilateral Investment Guarantee Agency, it is meant to provide insurance against certain types of risk, like political risk.

And then a final part that is not insignificant is ICSID, the International Center for the Dispute Settlement. And, so that it goes to a part of the World Bank that is from the beginning trying to improve the rule of law in countries. Recognizing that if you have a better rule of law, you're going to get more investment into the countries.

So ICSID helps investors settle disputes with countries and that with in the theory that that is helping increase the amount of investment into those countries. So it's a broad based organization that works closely with the IMF and other parts of the international system.

>> Jon Hartley: It's fascinating, I worked in my own personal capacity at World Bank and the IMF.

And both these institutions just this past summer, the so called Bretton woods institutions celebrate their 80th anniversary this past summer. And John Maynard Keynes, Harry Dexter White were a big part of that. Harry Dexter White representing the US later turned out to be a secret communist and John Maynard Keynes represented the United Kingdom.

And it turned out that I think that the White plan versus the Keynes plan had somewhat more influence in the construction of the World Bank and the IMF. And I think Keynes actually wanted like a world currency, the bancor. And so anyways, I think it's interesting that history and how much I guess the World Bank, the IMF changed over the years.

Your point, the first loans were going out to France in the post World War II reconstruction period. But part of what the World Bank and the IMF were doing for many years was managing the system of fixed exchange rates. The so called Bretton Woods system that lasted for about really the first 20 years or so about their existence.

And when Nixon took the US off the gold center when every. Most countries were then shifting away from this fixed exchange rate regime that the World Bank and IMF were managing. And since currencies generally floated and the World Bank and IMF has sort of pivoted toward conditional lending and a bunch of the other sort of rules that you mentioned.

I think it's also interesting that the World Bank and the IMF recall the Bretton Woods institutions because they were created at this conference that was in Bretton Woods in Hampshire. You can actually go to this hotel where these meetings were happening. You can actually go up there and stay there now and there's a gold room and everything.

There's also a golf course that's nearby as well outside of D.C that World Bank, IMF employees can go. It's called the Bretton Woods Golf Course and I think there's also some sort of a nuclear bunker under there, too. But I wanna get into some of the biggest challenges that I think you face and really overcame.

I think in many respects, you're a hugely consequential World Bank president. And I wanna get into sort of each of these topics that you really helped to tackle and I think a really meaningful and effective way. I wanna start with China, tell us more about the challenges with confronting China and its continued role as an aid recipient country.

It was kind of well above what the average GDP per capita that a World Bank aid recipient would be at. One of the sorts of things that you did, both as Undersecretary for International Affairs at treasury. As well as president of the World Bank, to shift this and to shift China away from being an aid recipient country.

There's a lot of critics out there that say maybe China's in this case was borrowing basically at 0% from the World bank. And lending it out into a belt and road initiative basically like a hedge fund very controversial at the time. But I'm curious, what was your role in helping to change that?

>> David Malpass: Let's step back a little bit and you were talking about the fixed exchange rate system of the world that's important and the gold standard. So in China's rise in terms of per capita really was launched in 1993 when they stabilized their currency. And so that brought them more engagement with the world system than the Soviet Union had been able to achieve.

So if we look at the course of China in those years of the 90s, it was expanding its role. And at the same time, then expanding its shareholdings within the World Bank. So where we stand today is it's the third largest shareholder behind the U.S and Japan. It wants to be a bigger shareholder, so there's constant pressure for it to expand its role.

With regard to lending to China, it's actually not a very important topic. I know it gets a lot of attention, but it's not very much money and it's very profitable for the World Bank. So the way you described it isn't quite right, they borrow at a floating exchange rate with a spread.

So, because China is creditworthy, it's one of the borrowers that helps pay for World Bank salaries and so on. And in the earlier years, China was a recipient of IDA as a, one of the poorer developing countries. And indeed it was a poor developing country in the 1970s and 80s, remember under Mao, there were famines, it was a horrific set of economic policies.

And so as we bring it forward to today, China is repaying those old loans with interest and it ends up being a net cash flow positive to the bank. I'm not trying to defend the lending, I would like to see it stop. But it's something that China negotiated very strenuously for in the 2017 capital increase, and that was agreed to within the Trump administration for its lending to China to decline.

From a per capita standpoint, there are quite a few countries with Higher per capita than China who are lending from the bank. So it was one of the agreements in 2017 to have all of those countries look for an exit from IBRD lending. But as I said, that type of lending to the higher income developing countries is actually highly profitable for the World Bank.

And we're talking about a billion dollars a year, which is a tiny fraction of China's on lending to other countries. So it's not really a factor in supporting China. China are very eager to have the lending from the World bank for symbolic reasons. It's a connection to the world and also for demonstration reasons.

So even President Xi, in talking with me in person in my role as president or even before I became president, was eager to see some lending by the World Bank. And what we agreed to was to have that lending be primarily for marine plastic. China is one of the major contributors to the marine plastics problem in the world.

Through its rivers, they chop up plastic into little pieces and it's dumped into the rivers. And they were looking for assistance, technical oriented assistance to reduce that in the same way that was done with sewage treatment. So the World bank had been successful in China in helping them treat sewage so that it didn't pollute the rivers.

And so even at the highest levels of the Chinese government, they talk about now being able to swim in the Pearl river. And they're proud of the cleanup that was done and they want to see that go. So I don't want to go on. There are bigger issues and challenges with China and so maybe shall we talk about that a little, John?

>> Jon Hartley: Sure.

>> David Malpass: So other challenges here, China is very involved in lending its own money, much bigger than any World bank amounts into their Belt and Road initiative. And a challenge from that is the way it's done. And I worked both at treasury and then at the World Bank to try to stop some of the practices that they do.

One is a non-disclosure clauses in the contracts. So they say that once they've signed the contract with the country, the country can't discuss it even with the IMF and the World bank, much less in public discussions. What this means is that the clauses within the contracts are unfair to the people of the country.

So we tried to reduce that. Also the taking of collateral by China as it lends to a country. So for example, in Ecuador and Angola, China had contracts which allowed them to take physical control of the oil. And then that gives them an advantage within those countries and also control within the country's framework.

So scaling that back was one of the goals. These are really problematic because China doesn't want to do that and some private sector lenders are doing that. That became an issue in the Chad debt restructuring because Glencore had contracts that were collateralized that were very difficult then to reschedule.

And so Carmen Reinhardt who I brought in as chief economist at the World Bank was very involved in trying to have more transparency and disclosure of the types of lending that was being done. And that includes the swap lines that were done by China's central bank. That is a current issue in Argentina for example, where China makes a loan and then gets priority within that.

So that's one set of issues that I've been frustrated are not moving forward within the world within the world framework. That a related set is the restructuring of debt for countries that have hit the wall. That as interest rate, well, as the world growth didn't pick up in the 2010s.

This was a time when the central banks were all doing QE which they claimed was stimulative. But I wrote a lot about how it was not stimulative, it was actually distortive. It channeled capital to the richer countries and so the poor countries were left with a shortage of capital and that pushed them into debt crisis along with their over borrowing.

Many of the poorer countries found themselves in very difficult circumstances even prior to Covid. One of the early things I did at the World bank in 2019 was to commission a report by the bank on the four waves of debt or that this is the developing country debt crisis that included the Latin debt crisis that I'd worked on.

So as we bring this forward, China has been successful in avoiding the write down of its debt to some of these poorer developing countries. And that leaves a huge negative cash flow for the countries to creditors that are much better off than the countries. So that's a frustration and an important part of the relationship.

And then I was also going to mention the relationship of China with developing countries in terms of the control mechanisms through their contracting for infrastructure and other types of assistance. So these are all key parts of the relationship. They remain problematic. And if we think about, okay, what is the goal here?

I was very clear in the mission at the World Bank to have outcome outcomes for people in developing countries improve. So I wanted to have you could measure that through an increase in the median income for people, the median per capita income of countries. And so as we pursue that then this type of contracting is not useful in moving the world forward.

But what has happened on the international stage is China's approach being tolerated, accepted by the international system. So this creates tension within the relationship between the world and China. And it's been successful for China in pursuing that approach.

>> Jon Hartley: I mean, it's a very big topic, the geostrategic competition, the BRIC countries attempted to start their own multilateral development banks, the BRICS Bank.

>> David Malpass: Can I interrupt before we lose that thought so that people, your viewers, understand this? The multilateral development banks is an expanding concept within international finance. It includes the World bank, but also several other major multilateral development banks, such as the Inter American Development bank, the Asian Development bank and several others.

It's not a finite category and it gets substantial benefit within the world financial system through what's called preferred creditor treatment. And so China is aware of that and has created two institutions, the AIIB, the Asian Infrastructure Investment Bank, and the NDB, the New Development Bank, which is in Shanghai, to take advantage of that and claim preferred creditor treatment status within the capital structure of sovereign lending.

And so I just want to mention that because it's one of the powerful protections that are granted to multilateral development banks, which is now accruing substantially to China's benefit.

>> Jon Hartley: It's a great point. And yeah, I think in recent years there's been so certainly a lot of news about this potential that the US could lose its status having a world reserve currency, so-called de-dollarization.

And certainly politicians from countries like Brazil and China and elsewhere have stated this as a goal. I have an academic paper that tracks all this through post-Ukraine invasion from Russia and through COVID. And it looks like so far the US dollar status is still okay. But certainly I think we'll continue to monitor over time whether or not things change and to what degree any of these other countries are successful in chipping away at the dollar status if you're looking at the share of World Bank or the share of Central Bank that reserves around the world, the US dollar.

So still pretty much up there in that 50 to 70% band. Now I wanna get into growth cuz you mentioned growth a bit. And I think economic growth is such a huge topic, especially with growth in advanced economies slowing down since the global financial crisis. With maybe the one exception of the US, the US continues to be exceptional in terms of its growth.

Over this time, developing countries and during your tenure, certainly developing countries have continued to reduce extreme poverty and have continued to grow quite a bit and converge quite a bit through the 2010s. But the COVID period was pretty different. And I think if you look at some evidence, Covid was actually a pretty bad time for particularly developing countries.

But I think it was made a lot less bad because of the efforts of the IMF and Bank. You were president of the World Bank during COVID, can you explain a little bit more about what the World Bank and IMF response to COVID involved? And what was it like being a President of the World Bank while this once in every 100 year pandemic came along?

>> David Malpass: The World Bank staff was affected the way people in Washington D C and around the world were affected. So there were lockdowns. And so it was certainly a shock to the system. It was worse, as we know, for poorer people around the world for all a variety of reasons.

One, they couldn't go into work and many were working on an hourly basis, meaning if you don't go to work, you don't get, don't get paid. And so that caused the differentiation around the world. There was the slowdown in global growth, which impacts developing countries heavily because they're dependent on markets going outside.

So we can recognize the trauma and the unfairness of the trauma. We looked at that and then wanted to do several things in response. One was the front loading of the assistance that was IDA. So I had negotiated IDA 19, which was the 19th three-year replenishment of the IDA trust fund.

And so it was meant to last for three years, which started from, it would have been, I think 2020 through 2022. And so what we were able to do was accelerate the flow of grants and loans from that into countries for both humanitarian assistance and also for COVID, for direct assistance for COVID.

Another thing that we did was set up a fast track approval process through the board of the World bank that allowed a menu of options for countries. So if they needed, it was on the idea that many countries needed similar things in terms of, of medical equipment and medical supplies.

And so that didn't have to go through the board, each one as an individual case. So that drastically accelerated the process. And by the end we had managed to put forward $10 billion of assistance that was specifically for medical related items that were Covid related. And that was on top of the acceleration of other kinds of lending.

And so that was successful. One of the things that made this possible was fortunately for the World Bank, the IT function, the information technology function was pretty up to date. And so people were able to work with their laptops from home and still get the throughput. So we saw our financial commitments go up each year and they peaked in 2023.

They fell down in fiscal 24 which ended on June 30th because of some of this front loading that was going on of the lending process. So I think that's a successful change of direction by the bank during, during COVID I wanted to mention one other thing that what I did was lead a group of four institutions.

And I'm having to dig into my memory here, but it was myself, Kristalina at the IMF, NGOCIA at the WTO, and Tedros at the WHO. We met regularly to analyze the situation with regard to transportation of vaccines, for example. And so that was a good coordinating meeting. I have to say, though, that it was frustrating, and that shows up in the minutes of those meetings.

One of the things I wanted to do at the World bank was to have a disclosure of what was discussed in some of these high level, so called high level meetings. And so this is one where we would put out a document to say what we discussed. And you can see through those Documents, but my frustration at the inability of the advanced countries to give up or to give access to vaccines.

So, this was a widely discussed topic in 2021 in the media. Why aren't vaccines flowing to poorer people around the world? And it was indeed frustrating. There were barriers set up by the advanced economies. So, we tried to break through those. I think those are the things I was gonna mention on that.

>> Jon Hartley: Yeah, it's amazing to think of that time, was only a few years ago, and I remember certainly, the US getting a vaccine out in basically just less than a year. There was this advanced market commitment concept of Operation Warp Speed. That was being helmed by the Trump White House at that time.

And then you had organizations like, COVAX, and others were trying to distribute the vaccine throughout the world, working in tandem with organizations like the World Bank. I remember there was all this competition for vaccines across various countries. And I remember, Canada had bought a number of vaccines that didn't quite work out from China, and it was quite a mad dash and quite a scramble.

And thankfully, we've gotten through it, and thankfully, countries are, some countries are still recovering.

>> David Malpass: Huge individual events. One was the Chinese vaccine didn't work, so you had a failure of vaccination there. One was the COVAX that you mentioned, which also didn't work. It was supposed to, and World Bank did not join, and I explained why it wouldn't work.

That it was a European concept of buying up vaccines from people, and then having them distribute them to countries. And the problem was, when you try to distribute from a central plan, and they were intent on doing it equitably, it basically meant no one got very much from that operation.

I think it really didn't work. So, what we did in sharp contrast from the World Bank, was talk to the countries, see which kind of vaccines they wanted and then see if we could finance it, so that they could get delivery on the schedules that they wanted. So, it was a substantially different approach.

Another type of, I'll mention two more events that occurred, was India. Initially, didn't suffer very much from COVID, and so, they are a major potential manufacturer of vaccines. And so, COVAX had contracted with India to take receipt of vaccines, but the contract was pretty clear, that if India needed them they wouldn't be shipped.

So, there was a contracting error from COVAX, because India decided that it needed the vaccines for its own population. Which had begun suffering intensely from outbreak of COVID among elderly, who needed to be treated with the vaccine. So, there was a force majeure or I don't know the legal terms of what was in the contract.

So, that was a setback for other developing countries. And then another similar was the options that the US held onto. This is in 2021, US wouldn't give up its options, and so others couldn't take advantage. And then Europe had the same, they had vaccines in warehouses that they wouldn't allow to be shipped.

And so, they expired value. And that was at a time when elderly, and people at risk in poorer countries actually needed the vaccine.

>> Jon Hartley: It's a shame.

>> David Malpass: Yikes. Yeah, moving on, but that's deep history. The overlay, and I should mention it, is the many other challenges that were spilling off of the global slowness in the 2010s, and then the hammer blow from COVID.

So, it meant that what we talked about at the World Bank, and I wrote and spoke a lot about the reversal in development that was going on. And I think is still problematic, you mentioned in your remarks, the idea of there being convergence, that convergence slowed and then stopped and then reversed.

That means, the idea that developing countries should grow faster than advanced economies in order to narrow the gap in per capita, and to broaden the depth of development around the world. Unfortunately, that hasn't been the case now for some years. And so, I worked extensively on trying to analyze what was wrong, and how you could reaccelerate growth within the developing world.

That takes us to the currency issues, to the market issues, and to the rule of law kinds of issues that are, I think, very important to development.

>> Jon Hartley: Yeah, no, it's fascinating. I know in the economic literature, there's a long period of divergence, up till the late 90s.

Lant Pritchett wrote this famous article called Divergence, Big Time. And that was right when this period of about 25 years of convergence started. And in the late 2010s there were quite a few economists, Michael Kramer, Arvind Subramanian, among others, who were writing about this new era of converging to convergence.

And that was right before COVID started. And since, it seems from the data that I've looked at and regressions I've run, you're absolutely right. We're sort of back seemingly in this period of divergence, since COVID. I wanna talk a little bit about climate. Clearly it's an important topic, and by the time you left office, you increased the World Bank's climate lending to around 35%.

Would you explain what that means and what the approach to climate was during your time as president of the World Bank?

>> David Malpass: Sure. Climate we can divide into mitigation and adaptation. So, for adaptation, this is the idea that countries are facing changes in their climate that affects agriculture, it affects flooding, and that there are changes that they can make that will save lives.

And that's been going on, of course, for decades by moving people off floodplains, for example. And so, there is within the World Bank's climate commitments, 50% of the climate spending is supposed to go to adaptation. And the World Bank was one of the few organizations successful in doing that.

It takes a lot of planning for a project that will. Improve the preparation of people for changes that are going on in their climate and in their weather. And so as the bank expanded, of that 35% then, 17.5% is going toward in general poorer countries and taking care of people and pretty directly saving lives through this adaptation-type financing.

An example of that is in Vietnam where the Mekong Delta is subject to floods and where there can be changes made to protect some of that. And so that is also a source of attraction for countries that are donating to IDA of the World Bank, because for some of the countries, particularly in Europe and Japan, they're comfortable donating more for the overlay that's climate-related.

With regard to the mitigation side, this is where some of the challenges come in. The World Bank was under immense pressure from the COP process, the United Nations' push for more spending on climate to put ever more amounts of money into climate. The challenge here is there's a limited amount of resources.

The World Bank's annual commitments have some throughput capacity constraints. So as you move more toward climate, that means less toward other uses such as education, health, child nutrition. And so there needed to be some kind of balancing of that. What we did was called the Climate Change Action Plan, which made the point that climate and development have to be done together, that you can't simply overlay climate costs because that would sacrifice development.

So that was an integrated approach to thinking about what countries needed. For example, in South Africa, we had a big push to try to have them salvage the electricity grid which was suffering from lack of capacity as solar panels came on and were inserted into the grid. Solar panels are intermittent, meaning they come on and off during the day and the night, or if the weather changes.

And so that challenges the grids. So around the world, countries are having a big challenge trying to get enough new investment into their grid that they can absorb the intermittent sources that are being brought on stream. And so that's the some of the types of lending challenges. One of the things that we wanted to do was try to put a measure of cost benefit into the evaluation of different projects.

One of the problems is there's the temptation to simply measure climate spending in terms of how many dollars go into it. And there was massive pressure to have the World Bank make commitments that it wouldn't have been able to meet, meaning high dollar value commitments when there were not projects available for that.

And then also have it ignore the question of whether it's actually a useful loan to make to the country. So I think that as we think about where we stand today, one of the challenges in the climate area is people are very interested in responding to problems within the world, but then doing it in a way that has actual benefits rather than just the spending of money or of subsidies.

And I think that remains one of the big problems. It's not useful within development to push renewable energy sources or users of renewable energy, like electric vehicles, if it's going to on net add to greenhouse gas emissions in the world. So there has to be some kind of evaluation of the cost benefit of that activity.

I think that remains one of the big challenges. And I'm concerned, as more and more of the development spending is diverted into climate, it actually undercuts this goal of having better outcomes for the people of developing countries.

>> Jon Hartley: I know there's a lot of critics who you have challenged or criticized the World bank or IMF in the very recent years, along with other governments, of being too focused on climate, in topics like inequality as well, to the detriment of fighting extreme poverty, which is, I think, extremely important thing that we can't forget.

I wanna talk a little bit about inflation.

>> David Malpass: So on that, then I think a way that the world can operate on that is to actually evaluate the projects. I talked about this and people simply didn't wanna talk about it. I would say, okay, good, let's do things that are useful on climate.

Do you have an idea of a project? And that's where the conversation often stopped. There wanted to be a blind commitment to spend money without thinking of whether it was a useful project. So I think that gives a grounding for where we could go from now.

>> Jon Hartley: Absolutely.

>> David Malpass: Go ahead, sorry.

>> Jon Hartley: Good point. I was just saying, people are wondering a lot about inflation now in terms of sort of the topics of late that are, I think, top of mind. It's been a big topic certainly for both developing economies and advanced economies with the global post-pandemic inflationary surge.

What are your thoughts on the causes of it and the subsequent response from central banks?

>> David Malpass: Yeah, it's a huge problem. If we think about our goal, how do we have better living standards for people, then you can talk in terms of, economists do, in terms of real income.

So that means your income in nominal terms less the inflation rate. This, of course, has plagued developing countries for forever. As their currencies weaken, then workers usually lose ground against the prices. So vendors tend to raise the price of their goods immediately when there's a devaluation. But workers have to then catch up after the fact.

So that's the cycle that we're in with the world now, where workers lag behind in terms of their nominal wages, and so their dollar or their peso or their euro goes less far for their daily needs. Economists keep arguing about what are the causes of inflation. I would welcome a look Back where the central banks actually look at the role that they played.

And it's very important to bring in the two other factors, the supply chain which was substantially disrupted by COVID, but then also the government spending that was instituted massively during COVID and it persisted after COVID. So some portion of the cost push inflation is directly related to the giant amounts of money that were being committed by governments.

So people just raised their prices for the things that were being sold to the government and for competitive goods that competed with those. So you get a bidding war instigated by government spending. So that needs to be looked at. And I think that leads to a whole host of issues for central banks to think about in terms of their own role in how to achieve price stability, which is one of the prime objectives of the US Federal Reserve.

And it is the prime objective for the European Central Bank price stability. How do you do that in a floating exchange rate environment with interest rates that fluctuate over such a broad range of activity? I think the answer is you recognize as a central bank that some part of what you're doing affects the supply side of the economy.

It's not just demand that's being influenced by the interest rate decisions of the central banks, it's also the supply and be cognizant of that. So that as we try to achieve price stability going forward, we recognize that more production will help with price stability. This is particularly apparent, of course, in the energy sector where energy prices feed into so many goods and services and you could achieve lower inflation by having more production of energy.

That's the opposite of what's happening in many countries around the world.

>> Jon Hartley: And I think interesting to see just how, in my opinion, so central banks were to respond to the post-pandemic inflation. A lot of these sort of group think ideas of inflation is transitory and I'll come back down with bank intervention or without some complaints raising rates.

I think it's a bit of a black spot on the Federal Reserve of late. I think it was pretty clear that inflation was pretty broad-based across the price basket by October, 2021. And it wasn't just a used car price spike story at that point, which kinda started in May of 2021.

>> David Malpass: They were late in their hikes. But I think there needs to be even before that going back into the zero interest rate environment. Zirp, remember, we had a whole word and a concept and endless conferences on how wonderful it is that zero interest rates were going to stay for a long time.

And that led then into some of the theories of modern monetary theory and some of the theories of during COVID of the idea that all governments should spend as much as possible, which ends up a two edged sword. And so I think there needs to be some rethinking of those tools.

I've been critical of QE of quantitative easing or of bond buying by central banks. I think it should be recognized as a tool to stabilize markets when they fail, but not as a stimulative tool because of the distortion that comes from that bond buying. But that still hasn't been accepted within the international community.

And we're at risk of having central banks out into the future continue to think that they're helping the world by buying their own government's bonds. This is a slippery slope and one I think we should try to reconsider right now.

>> Jon Hartley: Certainly, the Fed's framework reviews going on.

I think the Fed's flexible average inflation targeting, I think is rightly taken some heat in recent years in the sense that it's not quite clear enough over what period we're averaging inflation over and how flexible it is. I just wanna pivot a little bit from central banks here to really just broadly the future and I'm curious, just a final question here.

What do you see in the future as being the most important for the developing world, as well as advanced economies? Is it economic growth and trying to revive it? Is it demographics and decline in population growth? Is it AI? Personally, I'm very excited to see that the World Bank doing business report is being relaunched at the World Bank in the coming days.

They've got a meaning for the World Bank Business Ready index. I think it's gonna be a bit different. But I think regulation matters a lot and I think, it's something that that index measures. But I think the regulation has been one sort of culprit in why I think growth in advanced economies is slowed since the global financial crisis or the Great Recession in the late 2000s.

But obviously, there's a lot of stories going on, emerging economies being held back since COVID, the return of divergence. All these topics I feel like are very big and timely. What are the things that you're thinking about when you think about growth and developing economies in international economics in the years to come?

>> David Malpass: These are huge important topics. The world's not very balanced right now. The capital is flowing to parts of the world that are over capitalized and not going to parts that have growing populations or that are undercapitalized. So that's this differential in infrastructure, for example, in the world.

But it's readily apparent in small business growth being weak, really worldwide. And so I'm critical of big governments, which is one of the trends, not just in the advanced economies, but also in the developing countries themselves, which crowds out smaller businesses. And so I think if we can think of the growth challenge in that way, it will help.

And we should recognize the importance of all of this into real people in real conditions. We're talking about healthcare, we're talking about child nutrition. The stunting rates in the world are higher in the developing world. Higher, not lower, this is horrible. Children not getting enough calories to grow, or not enough nutrition, I should say, not just calories to grow to their normal stature.

So it's urgent that we think of better models. And that takes me straight into this issue that we're at a very difficult period right now, where the United States government, the world's biggest borrower, Has short duration and, therefore, is directly crowding out small businesses. This is a combination of treasury having issued short term even as debt was growing rapidly.

That puts more burden on the short end of the curve. But then also the central bank, by buying bonds with overnight funding, the central banks borrow from banks, takes it away from small businesses and puts it into government bonds. So that's a very harmful trade and one that's lost huge amounts of money in the US but also in Japan and in Europe.

In the US the Fed's already had $200 billion of losses on that concept and it's going to grow substantially into the future. So this drags growth in developing countries. Now, not to let them off the hook, they're doing a lot of things to undercut their own growth through by putting their own spending through subsidies, for example, that are non economic, by having big projects rather than allowing the funding to be allocated through markets to small businesses.

And so you see quite a few developing countries under intense pressure, some of which is of their own making, but some of it is coming from the global financial system. Think of the practical problem for small businesses and for some of the develop. Well, for really most of the developing countries, they borrow in floating rate debt.

So if you're a small business, you're trying to grow and hire more workers, you go to the bank and ask for funding for your inventory expansion because you have more customers and they need to have more inventory to support the customer base. And the bank says, that'll be LIBOR or SOFR plus four or plus six.

And that means you can't afford your growth and so you stop hiring. And so that's going on in many parts of the world. It's a big problem. It means global growth is slow right now and there's not really a path to improve it.

>> Jon Hartley: Absolutely, I know there's a malaria vaccine, a highly effective malaria vaccine is being rolled out in Africa as well.

There's about 500,000 people a year that died in Africa from malaria. So I mean, that's I think one sort of miraculous piece of hope as well. David, a real honor to have you on and hear about your amazing career and ideas. I want to thank you so much for joining us today.

>> David Malpass: Thanks, John. Nice to talk with you.

>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century Podcast, an official podcast of the Hoover Institution Economic Policy Working Group where we talk about economics, markets, and public policy. I'm Jon Hartley, your host. Thanks so much for joining us.