Europeans should bet on modernising the World Bank and IMF

Posted by Admin June 19, 2024 World

By David McNair, Executive Director, ONE Campaign, Council Member, ECFR; Ameer Chughtai, Visiting Fellow, ECFR

The opinions expressed in this article are those of the author and do not represent in any way the editorial position of Euronews.

In this decisive year for climate finance, the moment is now for strengthening the World Bank and IMF’s capacity to provide climate finance to developing countries, David McNair and Ameer Chughtai write.

Established 80 years ago, in July 1944, at a time before many developing countries had gained independence, the Bretton Woods institutions reflect the governance and priorities of a very different era.

Yet, despite their shortcomings, the two institutions remain critical instruments through which European countries can mobilise climate and development finance for low- and middle-income countries — and, in doing so, pursue Europe’s own climate ambitions.

The World Bank (often described simply as The Bank) plays a unique role in the international system. Its central function — to leverage shareholder capital, borrow on international capital markets, and then lend cheaply to developing countries — is effective and exceptional.

Since its creation in 1944, the World Bank’s International Bank for Reconstruction and Development (IBRD) has received $19 billion (€17.7 bn) from shareholders and turned it into over $800bn (€744.9bn) in lending.

While regional development banks (such as the African Development Bank and European Investment Bank) play an important role, none lend to developing countries on the scale of the World Bank.

In the 1990s and 2000s, the primary criticism of the Bank was that it enforced harmful policy conditionalities on borrowing countries.

But the debate has shifted to one in which activists and leaders in the global south want more of what the Bank can offer. Yet, they consider it too small and too slow to meet today’s challenges of climate change and geopolitical fragmentation.

A case of mutually beneficial partnership

This demand was on display at an African Heads of State meeting in April when leaders called for a record scale of replenishment — $120bn, or €111.7bn — for the World Bank’s concessional lending arm, the International Development Association (IDA).

IDA plays a particularly important role in countries with limited access to capital markets. For every dollar a donor commits, IDA leverages $3.5, all while supporting country owned systems and providing flexibility to respond to crises.

This reflects the major climate and development finance needs of developing countries (excluding China), which are estimated to be on the scale of $1 trillion (€931.1bn) a year by 2030.In doing so, Europe and Africa could pursue a mutually beneficial partnership.

Africa has bountiful natural resources in terms of solar, wind and hydro potential as well as forests and critical minerals. These abundancies also extend to the continent’s burgeoning human capital in the form of the world’s youngest population.

Despite these clear benefits, Africa lacks access to affordable capital. Europe, with a rapidly ageing population, lacks many of these resources but has financial capital.

The basis for the partnership is clear.

It’s also about rules-based order

Should we fail to mobilise this finance, Africa’s ballooning population may well follow a development path that is fossil fuel-heavy – locking in more harmful emissions. A path that undermines global, African, and European aspirations on climate change.

However, development impact is just one argument for Europe investing in the World Bank.

Geopolitics is another. The World Bank and IMF remain one of the few functional arenas for multilateral cooperation.

With the UN Security Council in constant paralysis and the World Trade Organisation struggling for relevance, the Bretton Woods institutions continue to work on tackling key development challenges across the globe on a scale unmatched by any other organisation.

For developed countries seeking to uphold the “rules-based order,” a system developing countries view as inherently unsuitable for their needs, the Bretton Woods institutions provide one of the last examples of how the current order can benefit them.

Indeed, given the current geopolitical context, it is difficult to see how such institutions could be created now if they did not already exist.

The tools are there, the moment is now

To maximise these opportunities, European countries should focus on two key policies to maximise financing from the Bretton Woods institutions.

First and foremost, they should support the current IDA (International Development Association) replenishment to meet its fundraising goals. The concessional lending bank provides strong value for money, yet it is in danger of falling short of its fundraising targets this year.

An underpowered IDA would constrain climate financing to low-income countries when needed more than ever. As major donors to IDA, European countries should avert this funding shortfall and support it to the hilt.

Second, European countries should ensure that the much-vaunted rechannelling of 100 billion USD of special drawing rights (SDRs) to developing countries starts to bear fruit.

While the target has been nominally reached, the deployment of capital has been slow. With one last push, the IMF can finally start to utilise SDRs at scale to fund the key challenges.

To do so, they should fund subsidies for the Poverty Reduction and Growth Trust and push for the expansion of eligibility criteria for the Resilience and Sustainability Trust. The European Central Bank should also permit the rechannelling of its SDRs into hybrid capital instruments, tools that can leverage SDRs more powerfully than the two IMF trusts.

Europeans have the tools to drive reform of the Bretton Woods institutions. In this decisive year for climate finance, the moment is now to strengthen the World Bank and IMF’s capacity to provide climate finance to developing countries.

David McNair is Executive Director of ONE Campaign and Council Member of the European Council on Foreign Relations (ECFR), and Ameer Chughtai is Visiting Fellow at ECFR.

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