A long introduction
Prior to last month’s Spring Meetings of the World Bank and the IMF, World Bank shareholders asked management to prepare an “evolution road map” for the future. For a generation of economists, the bank’s mission has been to eliminate extreme poverty and promote shared prosperity. The “evolution” shareholders seek is the addition of a new mission: to support borrowers’ investments in global public goods (GPGs)—or better, global public “bads”—particularly climate mitigation, but also pandemic prevention, antimalarial resistance, species loss, climate migrants and refugees, and other problems of the global commons.
The climate mitigation work is an urgent development mission. The world has probably already lost the battle to limit warming to 1.5 degrees Celsius by 2050. Even now, millions of people in developing countries are suffering and dying due to natural disasters and sea level rise made worse by past and current global emissions to which they have made negligible contributions. The urgent need to reduce emissions more and faster is about climate justice in the most fundamental sense.
Middle-income countries, however, are unwilling to borrow at the World Bank’s usual rates to address this global bad, since doing so would mean taking on the full costs of greener and cleaner at home, while sharing the benefits with the rest of the world. Consider Brazil and Indonesia, where programs to fight deforestation are a challenge politically and financially. They could and would do more to reduce their rates of deforestation if they had access to World Bank financing at somewhat lower than normal interest rates, to take into account the benefits of their programs to the rest of the world.
But management’s evolution road map paper said nothing about how a new climate-and-other GPG mission for the bank should be resourced and structured. Why? Because the global politics are difficult. Rich countries would like to see more World Bank finance dedicated to climate mitigation in middle-income countries such as Brazil, India, Indonesia, Peru, and South Africa. But the low-income countries fear that any rich-country contributions to support World Bank work on climate mitigation and other GPGs would come out of what could be contributions to the bank’s traditional mission of growth and poverty reduction. They argue they need more grants and highly concessional loans to help them cope with the economic losses climate change is visiting upon them and from which they are disproportionately suffering. They also require relief from debt due to the COVID pandemic and the high prices of food, fertilizer, and fuel resulting from the war in Ukraine.
One way to resolve the tension is to have “more than enough” new money on the table to work on both fronts. For low-income countries, IDA grants and concessional loans for post-COVID debt relief, climate resilience and adaptation, and standard growth and poverty reduction programs; and for middle-income countries, IBRD and IFC loans for public and private investments in power and forest management and pandemic preparedness, with the cost of the GPG components below the standard World Bank interest rates.
But from where might “more than enough” or even some of what is enough new money come? A straightforward major increase in the capital of the bank would require that the Biden administration go to the US Congress, something US Treasury Secretary Janet Yellen has already ruled out, at least for now (a capital increase cannot happen without the US as it is the single largest shareholder). The US or other high-income countries could “reallocate” some of their IMF Special Drawing Rights to the World Bank and other multilateral development banks to allow increased lending to developing countries. But beyond a small amount already designated to the IMF for low-income countries, reallocation is stalled due to a technical complication for EU members, and in the US for lack of the necessary agreement from Congress.
More promising, since in the short run it requires no new resources outright, is that World Bank shareholders agree to “sweat” the existing World Bank capital, that is for the bank to increase its own ratio of borrowing from the markets relative to the bank’s existing capital, in a manner that would preserve the bank’s AAA credit rating (see this G20 report). Doing so would allow a healthy increase in lending volumes for middle-income countries—and encourage any new contributions from the rich world to the World Bank to be used to increase lending and grants to the low-income countries.
But the (excellent) G20 report is controversial. It will take time (and discussions with the rating agencies) before it bears fruit, and once it does, middle-income countries will have many other legitimate, traditional calls for the additional lending it should permit—for education, health, infrastructure, and structural adjustment—beyond climate mitigation and other global public goods.
Getting to the point: A new GPG window with its own governance
A 2016 CGD report on the future of multilateral banking included wording proposing “the creation of a new financing window or fund with a separate governance structure” (my italics) to deal with climate and other global public goods. In 2021, my colleagues Charles Kenny and Scott Morris followed up by proposing the creation of a dedicated window at the World Bank for climate mitigation investments in middle-income countries, but made no reference to a governance set-up distinct from that of the World Bank’s other funds.
Consider a new window for climate mitigation and other GPGs, with the capital to finance loans at somewhat lower interest than IBRD rates (with the lower rate meaning the borrower is not financing any difference in costs between attaining local and global benefits) and with its own governance, in which initial shareholding and voting power would reflect contributions of capital, and with capital contributions over time affecting voting shares. That approach to governance would replicate in this century the successful Bretton Woods arrangement when the IBRD/World Bank was first created to foster growth and development in the last century.
Opening a new window at the World Bank dedicated to a new mission and with its own governance is not in itself new. The IFC, IDA, and MIGA were all founded after Bretton Woods (in 1956, 1960, and 1988, respectively) to address contemporary challenges. Each of these windows or funds has its own articles of agreement, with countries’ voting power being a function of their shares of capital in each fund; and in the case of IDA, voting shares being updated with each replenishment.
A new, differentiated window has advantages. It would make clear the readiness of the rich countries to contribute to programs that benefit all countries rich and poor, while still holding them to increases in their contributions to the soft windows at the World Bank and the other multilaterals in the next rounds of recapitalization and replenishment. Rich countries’ capital contributions to the new fund would make transparent their progress toward reaching the $100 billion a year commitment made in 2009 toward financing developing countries’ climate programs (some of which should go to adaptation and so to other funds) by 2020, which so far has not been met. Its original country shareholders could invite the Gates Foundation, the Bezos Fund, The Nature Conservancy, and other philanthropies to contribute capital. In addition, as in the case of the Asian Development Bank’s “big climate bet,” the original shareholders of the World Bank’s new window could provide not only for traditional loans to borrowers but for shareholder guarantees of borrowers’ repayments, taking risk off the window’s balance sheet and increasing its potential leverage. Finally, to overcome any reluctance of middle-income countries to borrow for clean power and “invisible” pandemic preparedness, loans from the new window could be structured, as Charles Kenny suggests, as fast-disbursing “policy” loans conditional on progress, rather than as traditional project loans.
Might China get the ball rolling?
A new window would also provide an opportunity for China, which with just 6 percent of IBRD shares (compared to the US’s 16 percent) is underrepresented in the IBRD window, to increase its stake and its leadership in the World Bank system as a whole. That too has a precedent; China’s contribution to the recent recapitalization of IDB Invest, the private sector window at the Inter-American Development Bank, made it the second-largest nonregional member of that fund.
It can only be a good thing to minimize through our international institutions the tensions between China and the United States (and Europe); China has recently agreed to end its insistence on the World Bank taking a haircut in any debt deal, something that as a senior lender the World Bank cannot do. Its doing so is a clear statement of its willingness to act multilaterally in supporting debt relief for the many low-income countries in debt distress.
Other contributors of capital to a separate fund could include the US, of course. Germany (a long-time proponent of climate action), France (where President Macron is eager to see progress on climate), Japan, and Korea; they could join and contribute additional paid-in capital at any time—buying additional shares and votes, now or in agreed future rounds of new capital contributions.
Creating a window for global public goods would strengthen the World Bank‘s traditional missions of poverty reduction and shared prosperity as well, given the threat that global public bads pose to those goals.
Sorting out the politics and the financing of a new GPG mission at the World Bank would complement and enhance its traditional 20th century development mission. I hope Ajay Banga, the World Bank’s new president, finds a way to ensure the bank has the capital to contribute to the vital 21st century task of saving the global commons.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
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