Will transforming the global financial architecture deliver for people living in poverty?
Everyone is talking about MDB reforms. DI’s Fionna Smyth asks: what kind of evolution do we need to solve current crises equitably, inclusively and accountably?
Reform of the multilateral development banks (MDBs) is the new development ‘cat nip’. Everyone is talking about it, and everyone wants it.
The World Bank and International Monetary Fund (IMF) were established in the aftermath of the Second World War to ensure that concessional finance and loans were available at reasonable rates to low- and middle-income countries. They are structured to reflect a twentieth-century world order and were designed to respond to twentieth century ‘development’ challenges. In the face of the reversal of development gains post-pandemic and the existential challenge of the climate crisis, World Bank shareholders asked World Bank staff to review the institution’s mandate to eradicate extreme poverty and accelerate economic growth. How will it measure shared prosperity? Is its dual mandate enough to deal with global challenges such as the climate crisis?
This proposed package of reforms is being presented as the World Bank Evolution Roadmap. With concessional aid dwindling this is a once-in-a-generation opportunity to examine the entire model, as well as rethink how development banks are financed and how eradication of poverty is prioritised.
There has long been dissatisfaction from low- and middle-income countries, as well as from many within the development community, with the governance and efficacy of the existing global financial architecture. These institutions continue to be dominated by countries in the Global North and have failed to deliver sufficient finance to meet either development and climate targets. Despite the 2030 Agenda being trumpeted as the means of eradicating poverty and inequality by 2030, there is a growing realisation that this is practically impossible, and the funding gap to deliver the SDGs is estimated to be in the trillions.
The call is growing across a broad range of stakeholders for MDB reforms that can both achieve the unprecedented scale of finance needed to meet the SDGs by 2030 and deliver an entirely new financial architecture.
This is the backdrop for the World Bank/IMF Spring Meetings 2023 taking place this week: the theme for the programme of events appropriately set as ‘Reshaping Development for a New Era’. Will they really be Reshaping Development for a New Era, or will they be tinkering around the edges and reinforcing the status quo?
I will be attending the Spring Meetings to better understand these key debates and to ensure that data and evidence are central to developing the solutions. There are three key areas I want to put on the table where Development Initiatives (DI) can be a valuable partner in providing analysis and insight:
1. Can a scale up of loans really deliver for the poorest countries, and if not, can they free up other financing for those places?
MDB reform has the potential to unlock hundreds of billions of dollars of additional development finance that could transform countries’ ability to invest in sustainable growth and build resilience against climate change. We know that this additional financing will nearly all be in the form of loans. Based on historic allocations, these are far more likely to benefit middle-income countries: new research from DI shows only 16% of MDB disbursements went to low-income countries (LICs) in 2021.
We also know that many LICs are already at high risk of or already in debt distress, and this figure is as high as 60% in the least developed countries. Not only does this make many of them unsuitable for increased lending, but also a lot of their current debt is held by private creditors and so additional lending may well be spent on repaying private investors instead of on development projects. While that could possibly help LICs by lowering the cost of debt servicing and prevent them from being locked out of capital markets in the future, it’s ultimately likely to push them further into debt. It also means that the additional finance available for them to invest in the SDGs could be far lower than the headline figures suggest. How do we ensure that the political choice is made to put poverty top of the agenda?
2. The reversal of development experienced because of the pandemic means there’s more need than ever. Shouldn’t the WB bank double down on its poverty mandate?
DI’s analysis shows there is a current move away from a focus on poverty: the share of bilateral aid to LICs has fallen from 31% to 24% over the last decade (and the share of this aid provided as grants has also fallen). In recent years, the focus of bilateral providers has increasingly shifted towards provision of global public goods (GPGs), such as climate mitigation, which are often projects that, it could be argued, are better served by the multilateral system. We can’t be sure that increased financing for middle-income countries (MICs) via MDB reform will lead to the reallocation of other funding sources towards countries with the greatest poverty. This would require a political choice to reinstate poverty reduction as the main driver of aid allocations. While a dramatic scale up of MDB finance could open the space to make this choice, it would nevertheless require pressure on aid providers, backed by solid evidence and analysis of development finance of the type that DI provides.
MDBs have a political choice too. Any additional finance raised is likely to primarily benefit MICs (directly at least), it can still benefit the most marginalised people in those countries and support inclusive growth. Investments should be made with respect to national priorities, local communities should have a voice, and mega-projects such as large-scale energy generation should not be at the expense of individuals’ rights. While the Bridgetown Initiative has brought welcome momentum to calls for changes in global climate and development finance architecture, its focus on MICs means questions remain as to whether the impacts will be felt by LICs.
3. How can MDB reform tie into wider transformation that we are seeing towards a more equitable global financing architecture?
There is deep frustration among development finance stakeholders, particularly from lower- and middle-income countries, around inequitable global governance structures that divide the world into aid ‘recipients’ and ‘donors’, with the latter too often imposing conditionality. Other actors such as China offer alternatives. A recognition that we need radical change is driving welcome demand for finance that is governed equitably and benefits those who need it the most. DI has been exploring alternative models and is part of a coalition of organisations supporting Global Public Investment (GPI), which proposes a radical shift in development cooperation. It presents a universal view, moving beyond a ‘developed—developing’ dichotomy to a means-adjusted ‘all contribute, all benefit, all decide’ model for funding GPGs.
This concept isn’t totally new, some regional funds follow such principles, but GPI takes them to a new scale. It represents shifts in:
- ambition, from poverty to inequality and sustainability
- function, from last-resort response to permanent investments in adaptation and preparation
- accountability, from the status quo to new decision-making structures
- narrative, from ‘foreign aid’ to circular cooperation
- and effort by all, from ‘north—south’ transfer to universal effort.
MDBs cannot afford to be on the periphery or left behind in engaging with such emerging approaches to global financing as GPI, which represent a radical departure from the business as usual.
Evolution or revolution?
This week, World Bank Directors will discuss the Evolution Roadmap, and present a proposal for reform of the Bank at the Annual Meetings in October. Will they grasp the nettle and ensure that low-income countries will benefit as well as middle-income countries?
A rising tide raises all boats, and reforms that deliver for people living in poverty will deliver greater global prosperity and security. MDB reform is an essential part of a bigger puzzle: to ensure that those who desperately need aid can access it now, while recognising that the power imbalances in the current financial architecture need to shift to guarantee inclusive, equitable growth. DI will be monitoring the impact of decisions made at this year’s Spring Meetings. Transparency and accountability will be our biggest allies in ensuring the ultimate success of these reforms.
- 1According to the IMF, details also discussed in UNCTAD’s 2022 report.
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