The two banks created by China are the Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank. There are many experts and academics, not only in the global south, who think that the World Bank and the International Monetary Fund (IMF), the two large multilateral financial institutions of the Bretton Woods system, which emerged after the Second World War, need to adapt to the XXI century.
The criticisms have been multiple, from denouncing the excessive influence of the US and Europe in these institutions for having veto power, to the rejection of the structural adjustment plans of the 1990s and 2000s, the conditionality and the enormous bureaucracy. from the lending processes, to the current demand that multilateral development banks, the most important of which is the World Bank (but this also applies to regional ones), finance the fight against climate change and the transition towards green energies. However, the changes so far have been minimal.
But that may change this year. There is a political moment for a major reform to take place. While the previous president of the World Bank, David Malpass, chosen by Donald Trump, was accused of being a climate change denier and therefore resigned, the new one, Ajay Banga, proposed by Biden, seems willing to modernize the institution. At the end of June, in addition, a summit was held in Paris to achieve a new global pact for finance, led by Emmanuel Macron and Mia Mottley, the prime minister of Barbados, one of the countries most threatened by climate change. and global south leader for World Bank reform.
For its part, India, a country with growing weight in international relations and which in 2023 will hold the presidency of the G-20, also considers this issue one of its priorities and has asked a group of experts led by prestigious economists , Larry Summers and N.K. Singh to submit a report on the reforms. This study, which has two parts, one presented in July and the other in October, will serve as a basis for the G-20 summit of heads of state and government in September, whose possible agreement will be reviewed at the Bank’s autumn meetings. World Cup and the IMF and will be finalized in its final details by COP28 at the end of 2023. Expectations are, therefore, high.
However, the obstacles to reaching an agreement will not be easy to overcome. The challenges are multiple and could be summarized as follows: in general terms, the World Bank has to review its mission, its system of operations and its financing. Until now its mission was twofold: reducing poverty and achieving common prosperity in the world. But now a third objective is demanded: financing the fight against climate change. And this brings with it four challenges:
1. Know if it is possible to achieve these three objectives with the same money as before. The south thinks not, although there are some countries that even refuse to include that third objective.
2. Expand concessional loans (that is, with lower financing costs than the market) for more countries and under more circumstances. Here too there is a certain consensus in favor in the global south.
3. Incorporate the private sector in this financing. This is accepted by almost everyone, except the most demanding NGOs.
4. Increase the capital of the World Bank without debating the new distribution in voting percentages. Here again the global south is divided.
It is worth analyzing each of these points in more detail. Does the World Bank need more capital to finance climate change mitigation and adaptation efforts? Many developed countries think not. Or at least they thought so until Mia Mottley’s Bridgetown Initiative, which will be explained below, has begun to gain traction. The argument is that many reforms can be made at the World Bank before more money is put on the table. From 1944, the year of its creation, until 2021, with only 19 billion dollars of invested capital, the Bank has been able to provide 750 billion in loans and 23,000 in aid. This is the magic of being able to leverage (go into debt) based on the credibility of your shareholders (your member states).
In order to adopt an operations system that better manages and increases risk a little more (without losing the AAA rating, and for that we must have greater dialogue with credit agencies), better involve private capital, make greater use of capital callable capital and speed up loan approval times (now at an average of no more and no less than 465 days) greater and faster financing could be achieved. This follows from the independent analysis of the appropriate capital framework for development banks commissioned by the G-20 finance ministers and central bankers and led by Tanzanian Frannie Léautier.
But it seems increasingly evident that further leveraging the bank’s balance sheet and making its operations more agile is not going to be enough. The UN estimates that between now and 2050, 125 trillion dollars are needed to truly turn our economies green. And according to calculations by the World Bank itself, between now and 2030, some $2.4 trillion will be required each year to combat climate change in developing countries alone, and that’s without counting all the spending necessary to achieve all the goals. sustainable development goals (SDG). If we did, perhaps the annual figure needed would be close to $4 trillion.
These numbers are very far from the less than 200 billion dollars that all development banks offered to developing and least developed countries in 2022. Precisely this division between middle and low income countries brings the first discrepancies in the global south. Poor countries fear that much of the financing will now go to developing economies to make them greener. That would be good for India, but bad for much of Africa. On the other hand, many hydrocarbon-exporting developing countries do not welcome the World Bank becoming a green bank, for obvious reasons.
But the reality is that climate change is being felt all over the world. Natural disasters and extreme weather events are becoming more and more evident, which is why Barbados’ proposal, called the Bridgetown Initiative, after the name of its capital, has gained so much momentum. Its Prime Minister, Mia Mottley, precisely asks that these extreme phenomena be taken into account when granting and repaying loans. If a country suffers a catastrophe, its debt payments should be frozen for a time, for example, so that it can focus on the costs of reconstruction. The restructuring of the debt of the most needy countries is also a demand of the UN.
Mottley calls for the poor countries most affected by climate change to have more access to concessional loans and for development banks to mobilize at least one trillion a year to make these countries more resilient, especially when they suffer a natural disaster, incorporating the private sector to these efforts. Although it must also be said that even here there is not a total consensus in the global south. Many NGOs, for example, think that the incorporation of the private sector will tie the fight against climate change to commercial logic, and that will have negative effects. They remember that financial innovation based on the magic of securitization and leverage brought about the financial crisis of 2008 and denounce that the privatization of environmental management has been disastrous for many regions and indigenous peoples. The bet, from this more radical perspective, must be above all public financing.
But generally, also in the global south, the dominant view is that without the private sector there are not enough resources, technology or knowledge to achieve the energy transition on time. Amar Bhattacharya and Homi Kharas, from the Brookings Center for Sustainable Development, for example, think that we are in a phase of enormous technological advances in the production of renewable electricity, in electric vehicles, in the reduction and capture of fugitive emissions, in the heating, cooling and insulation of buildings and in the agri-food sector, that many of these innovations will be available at very competitive prices for a large part of the world’s population in the next five years. That is why it is absolutely necessary for the World Bank and other development banks to change their model, and instead of financing project by project, put their efforts into helping recipient countries to identify and implement the necessary green investments from a much broader perspective. more systemic.
But in this case too there are criticisms. There are voices in the global south who think that the countries of the north want to evade their historical responsibility and, instead of adequately financing the compensation fund for developing countries (it must be remembered that the 100 billion fund has never been covered which had been promised in Copenhagen in 2009), now they want to pass that responsibility on to the development banks. And as mentioned before, it seems that they want to do it without having to put much more fresh money on the table. Among other things because geopolitics also plays a role here. The US views the capital increase debate with suspicion because it knows that China is waiting with its checkbook and, the moment it opens it, it will ask to overtake Japan (a much smaller economy) as the second largest taxpayer. and with voting power in the World Bank, something that is rejected from Tokyo.
The truth is that the voting percentages, both in the World Bank and the IMF, are zero sum. If the countries of the South, led by China, obtain greater decision-making power, other countries, especially European ones, must have less. And since China has already run into this problem before, it is now leaving it to India to fight the battle for reforms. China appears to be in no hurry to reform the World Bank. So far he has had good experiences with said bank and, while it is true that he would not mind if it focused on making economies greener, it is not a priority for Beijing either because it has its own resources. Of course, if the opportunity offered, I would push to eliminate the veto power of the US and the EU in both the IMF and the World Bank.
Summers and Singh do not have it easy to find a consensus that will lead to the desired reform. They are both aware of their responsibility. They know that, after Covid, some 800 million people live in food insecurity. They are also convinced that there are transnational challenges such as pandemics, climate change and migration that have to be addressed by multilateral development banks. Its objective is threefold. Review the fund’s mission, operations and capital. Calculate the investments necessary to achieve the SDGs, which according to them amount to 3 trillion dollars a year between now and 2030, and improve the cooperation of development banks. They have also promised that they will include the positions of the majority of countries, that they will carry out credible and serious studies and that responsibility for the success of the reform must be a shared achievement. That is to say, that all countries, or at least the vast majority, endorse the final result. Complicated task. In July the G-20 finance ministers only took note, but did not approve, the recommendations of the first part of their report, hopefully they will have more success when they present the second part in October.
Miguel Otero Iglesias is a senior researcher at the Elcano Royal Institute and a professor at the IE School of Politics, Economics and Global Affairs.
