Mia Amor Mottley and Rajiv J. Shah
As the world’s finance ministers travel to Washington for the annual spring meetings of the World Bank and the International Monetary Fund (IMF) next week, humanity’s future hangs in the balance. Climate change threatens to make the world either inhospitable or unhabitable for billions of people. The global economy is creating more poverty, hunger, and despair. And an unjust war in Ukraine is producing disastrous consequences for vulnerable people just after a pandemic that did the same.
Every country is facing this mix of compounding crises, yet every country has not been affected in the same way. Nor does every country have the same means to withstand these challenges, let alone overcome them. Rich-countries, after stoking their economies with trillions in fiscal and monetary support in recent years, have recently raised interest rates to address inflation, so far without suffering the deep recessions that many feared. In contrast, lower-income countries that could not respond to the pandemic with stimulus packages and quantitative easing are now swamped by debt and projected to grow much slower than expected or needed for sustained development. Unsurprisingly, hundreds of millions of people in those countries are falling behind: poverty and hunger have increased while measures of health care, education, and gender equity have dramatically declined.
Unfortunately, despite many warnings and pleas, the World Bank, the IMF, and other international financial institutions—and their wealthy shareholders—have not yet done enough to overcome this inequity. Some of their struggles are understandable. Many of these organizations were established in 1944 to help rebuild countries after World War II; they were not designed to counteract multiple global crises at the same time. But too many of their present-day struggles stem from policy choices. Wealthier countries have neglected to honor previous commitments, including pledges to spend at least 0.7 percent of their GDPs on foreign aid and to mobilize $100 billion a year for climate action in developing countries. And the World Bank and IMF have struggled to tailor their instruments to support countries in this moment of profound need.
As a result, these institutions—which have done so much good in the past and still represent hope to so many—are no longer able to meet their missions. The result is a fundamental breakdown of the nearly 80-year-old covenant between wealthier countries, which have pledged to support institutions such as the World Bank and the IMF and to help lift up the most vulnerable and build a more prosperous and stable world for everyone, and poorer ones, which have used this support to invest in development initiatives that promote inclusive growth and bolster their people.
Next week’s meetings are the first of several sessions this year in which countries will have a chance to restore that covenant. Billions of people around the world understandably doubt whether anything can be done. And the meeting’s agendas so far offer little reason for optimism; they barely scratch the surface of what is possible and necessary. Despite a long list of reforms offered by a broad range of individuals and institutions from across the world, a remarkably limited number of proposals is currently up for approval next week.
The World Bank, the IMF, and their shareholders and leaders face a choice: they can build solidarity around common challenges, or they can further sap the trust that has underpinned multilateralism for decades and that will be essential to making the twenty-first century more prosperous, fair, and peaceful. The question next week is whether they truly believe that we are all in this together.
HELP ON THE WAY?
The development finance system was established in response to the world wars of the twentieth century. To make the postwar world prosperous and stable enough to avoid another global calamity, dozens of countries came together in 1944 in the shadows of the White Mountains, near Bretton Woods, New Hampshire, to create the World Bank, the IMF, and other institutions and agreements to help countries build or rebuild, withstand economic shocks, and trade freely.
For decades, the system helped support the growth that enabled Europe’s recovery and Asia’s rise and helped billions climb out of poverty. Yet in recent years, the system has struggled. The problem has not been insufficient dedication on the part of the institutions, which are staffed by people who work tirelessly, often in difficult and dangerous settings. Instead, the difficulties have been due in part to the nature and scope of the current crises, which have affected every country simultaneously and which have in many cases unwound previous progress. The institutions have also been held back by their own layers and layers of obsolete rules and procedures. Despite good intentions and good work, they are falling short.
Take, for example, their performance during the COVID-19 pandemic. At the height of the pandemic, the IMF, the World Bank, and others took heroic actions to ward off economic collapse, but they proved insufficient. With limited external support, low-income countries were able to mount only limited responses to the crisis, mobilizing just two percent of GDP, on average, to stimulate their economies, whereas richer counterparts were mobilizing 24 percent of their GDPs, on average. That discrepancy is one reason why after growing by six percent a year from 2000 to 2010, developing countries are expected to grow by an average of only four percent per year through 2030.
Even that low level of growth is in no way assured, given high levels of debt. For example, according to the World Bank’s analysis, the public and private debt held by countries eligible for its development assistance tripled over the last decade. And the climate crisis will make those balance sheets even worse. Recent analyses reveal that developing countries will require $1 trillion to $2 trillion in finance per year, much of it in the form of investments in climate resilience and resources to make up for loss and damage caused by extreme weather. They are currently receiving only a tiny fraction of that amount.
This data is why the IMF has worried about a “great divergence” and the World Bank has predicted a “lost decade.” Beyond the data and projections, a more profound judgment is clear: when humanity is facing some of the gravest crises in history, an inadequate response has left countries and people feeling increasingly alone. Farmers in Sudan face longer and more intense droughts and floods. Workers at salt pans in India toil in relentlessly rising temperatures. And billions of others across Africa, Asia, and Latin America watch helplessly as livestock die off, food prices soar, and currencies spiral.
A NEW HOPE
In the last few years, however, a new consensus has developed around the belief that one of the best hopes for scaling the investments and innovations required to meet today’s crises is to revitalize and augment the development finance system. A broad, diverse group of current and former government officials, activists in vulnerable communities, aid groups, humanitarian and philanthropy organizations, and scholars have developed specific proposals and reforms.
Last summer, the two of us—together with UN Deputy Secretary General Amina Mohammed and the Open Society Foundations—brought together private, public, and philanthropic leaders in Barbados, to discuss revitalizing the system. Together, we launched the Bridgetown Initiative, which seeks to advance and garner support around specific ideas. At the same time, the G-20, the V-20 (a group of 20 countries that are particularly vulnerable to climate change), and the African Development Bank, among others, are actively advancing some of these proposals. French President Emmanuel Macron is also bringing world leaders to meet in Paris in June for a unique opportunity to discuss this agenda.
The new consensus centers on a few core principles. First, countries need new ways to relieve unsustainable debt levels and invest for the future, instead of simply servicing obligations from the past. One step in this direction would be fixing the G-20 Common Framework for Debt Treatments, which is the mechanism for restructuring and reducing debt burdens, in part, by including firm deadlines on the restructurings (several of which have lingered for years unresolved). The G-20’s Debt Service Suspension Initiative, which briefly paused principal and interest payments on official bilateral debts during the pandemic, could be extended and enhanced to cover a broader range of debts, including private sector ones. Taken together, these sorts of changes can give states drowning in debt a lifeline and encourage the sorts of investments needed for the twenty-first century.
Without action this year, the promise at the core of the global economic order may be broken for good.
The IMF should also extend the time horizon of its debt sustainability analysis by decades, which would allow countries to borrow more today by assuming longer timelines to manage current and future obligations. The fund should also affirm that not all debt is the same by adopting new metrics that would treat debt incurred from investment in climate resilience as fiscally prudent and therefore encourage the sorts of adaptation and mitigation investments that benefit everyone.
At the same time, countries could do more to help prevent liquidity crunches from becoming debt crises by channeling unused IMF Special Drawing Rights, which can effectively augment member countries’ official reserves, to countries at risk and in need of liquidity today. The fund could also raise access limits to its rapid financing facilities and temporarily suspend interest rate surcharges for heavy borrowers when there are clear signs of international financial stress, as there are today. The IMF moved urgently to assist Ukraine in its darkest hour, as it should have. Other countries deserve the same urgent response, given the terrible human costs they are facing.
A second principle is that countries need access to additional loans at below-market rates. Thanks to the work of a G-20-appointed independent commission, it is clear that multilateral development banks, such as the World Bank, could use their balance sheets much more aggressively to unlock several hundreds of billions in new lending. These banks should increase the amount of capital—including capital that can be lent at lower rates—available for developing economies and offer lending instruments with extended maturities of even up to 50 years. They should also focus more on attracting and leveraging private capital investment in vulnerable and struggling countries.
Finally, the public, private, and philanthropic sectors must work together to expand access to public goods. Technological breakthroughs will continue to benefit humanity. But the free market on its own will too often deliver those advances to the wealthiest first and to the most vulnerable much later—if ever. One way to address this problem is through public-private platforms such as Gavi, which delivers vaccines all over the world by pooling contributions from governments, philanthropies, and institutions to purchase and distribute immunizations at scale. The Global Energy Alliance for People and Planet is taking this approach to more equitably distribute renewable energy technologies. Similar initiatives could help scale advances in agriculture and other high-priority sectors.
KEEP THE FAITH
The covenant between wealthier countries and lower-income ones has always been rooted in a shared interest in living together in a more stable, healthy, and prosperous world. A reimagined development finance system would support that goal, including by giving low-income and middle-income countries the resources they need to address poverty and climate change. Some observers have worried that reforms would risk prioritizing climate adaptation and mitigation at the expense of poverty eradication, which is the overwhelming focus of the poorest countries. But this is not an either-or proposition. With the right reforms, the system can combat both problems at the same time—and benefit everyone by making the world more prosperous, stable, and better able to meet the climate challenge.
Others argue that the prospects for reform are slim, given the world’s focus on Ukraine, growing tensions between great powers, and the long-standing reluctance of some institutional leaders to change. Yet everyone should recognize that, without a more significant multilateral effort, the twenty-first century will be less prosperous and more dangerous for everyone. What happens next week will signal the world’s willingness—or lack thereof—to address today’s crises with a focus on long-term gains rather than short-term payback. Without action this year, the promise at the core of the global economic order may be broken for good. But with the right agenda, the system can be restored and revitalized.
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