Author: Jeremy Gaines

The trillion-dollar bank: Making IBRD fit for purpose in the 21st century

The World Bank Evolution Roadmap is being developed at a critical moment in time. Developing countries have been hit by the unprecedented impact of the COVID-19 pandemic and the Ukraine war, with loss of fiscal buffers, increased indebtedness, and erosion of creditworthiness, leading to a decline in growth prospects and leaving them exposed to further crises. Progress on poverty reduction has been arrested and most developing countries are offtrack on most of the sustainable development goals (SDGs). There is also growing recognition of the need to respond more effectively to pressing global challenges including climate, fragility, and pandemics. Developing countries will be the most adversely hit and have much more limited capacity to respond to the impacts of climate change. Excluding China, they could account for more than 50 percent of global greenhouse gas emissions (GHGs) by 2030. They are home to the greatest biodiversity and forest coverage in the world. The lives of all 8.5 billion people living on the planet in 2030 will depend significantly on what happens in developing countries. Sustainable development is today an imperative for all.

Against this backdrop there has been an ongoing and vigorous reflection on an appropriate global response and implications for the multilateral development bank system with a focus on the World Bank. The paper prepared by World Bank Management for the Development Committee sets out this context and makes proposals on a way forward for the World Bank based on discussions in the Board.

The World Bank Board has proposed an enhanced formulation of the World Bank mission: “To end extreme poverty and boost shared prosperity by fostering sustainable, inclusive and resilient development.” The roadmap proposes that the World Bank Group will “continue its support to countries’ efforts to achieve the SDG goals while deepening longstanding support for three global challenges that have become increasingly prominent in the last decade: climate change, pandemics and health security, and fragility and conflict.” It proposes a major push in three directions: (a) scaling up impact for good development outcomes and countries; (b) tackling cross-border challenges; and (c) preventing, preparing and responding to crises.

This is a fundamental and timely shift but the scale and urgency of the response that is now needed must be clearly recognized and acted upon. As the latest IPCC assessment makes clear, the pace of climate change is faster than we had anticipated and delay on climate action will be deeply dangerous. We not only risk irreversible damage to climate and nature but setting back progress hugely on development and poverty reduction.  On the other hand, strong climate action can unlock the growth story of the 21st century, one that is more sustainable, inclusive, and resilient than the harmful and wasteful growth model of the last century. Developing countries are well poised to exploit these new opportunities given that so much of their infrastructure has yet to be built.

We have made the case through a body of analytical work, together with colleagues, that what is now needed is a big and sustained investment push on sustainable development in developing countries—to drive a strong recovery from the present crisis, to restore momentum to the SDGs, and to ensure that we can keep climate and nature goals within reach. These investments should rise to $5.9 trillion by 2030, compared to $2.4 trillion in 2019. About one-half the incremental investments will be needed for climate action, and the remainder for the rest of the SDGs. Most incremental finance will need to come from domestic sources, but at least $1 trillion in annual incremental external financing will be needed.

The World Bank Group, together with the rest of the MDB system, has a central role to play in supporting countries both in the realization of the necessary investments and in mobilizing the required scale and right kinds of finance. Within the World Bank Group, the role of IDA remains vital given the extremely difficult circumstances and the pressing needs of low-income and fragile countries. The role of the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) will also be crucial for harnessing the potential of private sector investment and finance. But it is IBRD that has to play the anchor role in the scaling up effort given the very large prospective needs across developing countries and its outsized ability to lead a major charge on sustainable development.

Given the major and urgent ramp-up that is needed on external financing, the International Bank for Reconstruction and Development (IBRD) should triple its sustainable annual lending to around $100 billion per year, with a total loan exposure of $1 trillion by 2030, as its contribution to the $1 trillion in needed annual financing.

How can this be done?

First, the World Bank needs shareholder support to expand its mission and vision to embrace an ambitious agenda of a big investment push as a crisis response, and for SDG attainment and climate action. Shareholders must assess the scale and pace of any proposed response against the scale and urgency of what needs to be done.

Second, IBRD must be able to meet the needs of all clients—low income, lower middle income, and upper middle income. The relative scale of support for SDGs and climate action will be larger for low-income countries, much of which will continue to come from IDA. But the Bank must act to reverse the diminishing relevance of IBRD in upper middle-income countries, and anticipate future needs of low-income countries.

Third, the World Bank needs to put scaling up of investment for transformational change at the center of its country-based model. It must foster scalable approaches through advisory work on the enabling environment (domestic resource mobilization, subsidy reform, public investment management capabilities, debt management, regulatory frameworks) and through a shift from project-by-project activities to results-based programmatic support. In particular, it must seek to support countries with their key transformations including energy, transport, cities, water, digital, agriculture, and nature within an overarching strategy of sustainable, inclusive, and resilient development.

Fourth, the scaling-up imperative warrants stronger partnerships with other stakeholders, in countries as well as regionally and globally. The Bank should encourage and proactively support country-led platforms on priority goals such as the just energy transition partnerships. It must foster and support enhanced partnership at the global and regional levels to both give impetus to country-level action and to strengthen the global development finance system.

Fifth, the Bank should play a leading role in working with the private sector and other stakeholders in constructing a new highway for private finance. This is much more than mobilization ratios. It will entail the co-creation of investment opportunities, tackling impediments in the investment climate, development of investment pipelines, supporting local market development, effective risk mitigation instruments deployed at scale, and blended finance to reduce cost of capital. This will also mean developing and utilizing the strengths of all parts of the World Bank Group including IFC and MIGA as well as of the Global Infrastructure Facility.

Sixth, IBRD will need to strengthen its finances to respond at the suggested scale. The ultimate litmus test of the seriousness of any evolution roadmap will be shareholders’ willingness to provide fresh capital. Of course, more can and should be done to optimize balance sheets, following the recommendations in the G-20 Capital Adequacy Frameworks report. Hybrid capital options also offer potential, but shareholders must be willing to signal to markets and credit rating agencies that they stand fully behind the IBRD. Guarantees on various tail risks can be provided in specific ways but paid-in capital provides the overall umbrella to safeguard the institution.

Concessional finance can provide a powerful catalyst for action in low income and middle-income countries alike. It should expand along with non-concessional lending in order to incentivize investments with global benefits and in solidarity with low-income and vulnerable countries.

Many of the ideas discussed in this working paper are included in the draft Evolution Roadmap issued by the World Bank for discussion during the Spring Meetings. This paper is sharper in identifying an investment push as the core strategy to reach the SDGs and climate goals. It also advocates for a stronger results-based framework, starting from identifying the advisory and financial inputs required to achieve quantifiable targets, at global and individual country levels, and then using financial instruments to support those results. This is how we develop a sense of the scale of the evolution required—an IBRD of $1 trillion by 2030.

We bring into sharper focus the need to make IBRD more relevant in upper middle-income countries if global challenges are to be addressed.

We are also clear that while some things can be done to improve the World Bank’s financial situation in the short term, the decades-long program of investment that is anticipated will require a far stronger source of sustainable financing. Without agreement on initiating a new round of capital increases, the evolution roadmap will have limited impact.

Our analysis and recommendations are summarized as a 10-point action plan for the incoming World Bank president.

A New World Bank Agenda in the Era of Climate Change

As the window closes for dealing with the climate crisis, it is worth remembering that the roots of the crisis lie in decades of rising greenhouse gas (GHG) emissions, justified by rich and poor countries alike and their financiers as the by-product of boosting GDP growth at all costs. Agreements to cut emissions, which should tackle runaway climate change, are fragile as shown by the recent return to fossil fuels, especially coal, when energy shortages threaten GDP growth targets. The solution is a meeting of the minds among countries on switching to a cleaner, low-carbon path. As the largest global financier of economic growth, and with a track record in mobilizing resources, the World Bank under a new leadership, with other multilateral development banks (MDBs), is well-positioned to lead the way.

As world development confronts rising global risks, from pandemics to global warming, the MDBs’ function should be in enabling countries to build resilience. This task calls for an expansion of areas with positive spillovers like health services, and brakes on those signifying negative spillovers like environmental damages. GDP as a measure of progress does not deduct losses caused by economic activities, and can wrongly signal a better business environment even when ecological destruction rises, as in the World Bank’s Doing Business Indicators for China, India, and the US. Measured GDP growth can be propped up by destruction, as with Russia’s GDP following its invasion of Ukraine. It celebrates even carbon-intensive growth, as in the East Asian growth miracle since the 1960s.

When economies are ranked by GDP growth, policy emphasis is on the volume of physical capital like roads and bridges, and rightly, its productivity. The World Bank and other MDBs have been instrumental in recognizing the essential part of human capital (education and health) in growth. But natural capital, like clean air and forests, continues to be ignored: its disinvestment must be reversed. A measure capturing the contribution of all three forms of capital—physical, human, and natural—is the United Nations Development Programme’s (UNDP) recent planetary pressures-adjusted Human Development Index (HDI). It adds a per person ecological impact to HDI, resulting in eye-catching changes in country rankings. Norway falls 34 positions from second place among 191 countries and Australia 87 positions from fifth in the same grouping.

To lead climate mitigation, however, the World Bank and the MDBs need to clear the haziness in climate attribution. The blame for climate change must be assigned squarely to the perpetrators of the use of fossil fuels, the principal emitters of GHGs. Equally, it is vital to communicate this link to the public, especially when climate disasters strike, and people’s attention is focused on them. The public increasingly identifies climate change as the top global risk. But it does not flag it among the highest priorities for investments because the causal link between emissions and disasters is indirect—unlike the direct connection between a virus and disease.

The economics of spillover harm should signal the merits of decarbonizing economies. All projects should pass a social cost-benefit test inclusive of climate impacts. They should be accompanied by legal covenants on climate mitigation and adaptation. Development programs must avoid the use of fossil fuels, in addition to removing their subsidies. Economic analysis also motivates carbon pricing via either a carbon tax at the source of the pollution, as in South Korea and Singapore, or carbon trading, as in the European Union and China. The World Bank and IMF should call on countries to adopt carbon pricing.

Finally, high-income countries ought to provide vast climate financing to low-income countries, following the minimal progress achieved on this at COP 27. The MDBs need to double the financing for resilience building, while strengthening the evaluation of results. It pays to strike an unprecedented climate alliance—among the World Bank, IMF, Asian Development Bank, African Development Bank, Inter-American Development Bank, European Investment Bank, the New Development Bank, and UNDP, as well as bilateral agencies. Countries are more receptive to making investments in climate adaptation as they can directly reap its benefits, but less so for mitigation whose gains accrue to others too. The MDBs can help launch fit-for-purpose financial products and leverage cost effective financing from the private sector.

Poverty reduction has long been the organizing principle of the World Bank and some of the other MDBs, which has served the countries and the global economy well. The game-ending blind spot has been environmental harm, which is derailing growth, the very foundation of poverty reduction. So, it is imperative that global financiers press for a transformative change in the way growth is generated. If it can move swiftly and smartly on climate action under its new leadership, the World Bank, together with its partners, would earn its place as a just-in-time, global problem solver.

Vinod Thomas is the author of the new book Risk and Resilience in the Era of Climate Change, Palgrave Macmillan, April 4, 2023, and former senior vice president for independent evaluation at the World Bank.

The Spring Meetings Should Launch a Climate-Dedicated IBRD Capital Increase

This blog is one in a series by experts across the Center for Global Development ahead of the IMF/World Bank Spring Meetings. Each post in the series will put forward a tangible policy “win” for the World Bank or the broader MDB system that the author would like to see emerge from the Spring Meetings. Stay tuned for the rest of the series in the coming days.

The World Bank shouldn’t become a dedicated climate bank: that’s not what its client countries want, and the global development agenda (the D in IBRD and IDA) is still urgent. But, with additional finance, the Bank could play an important part in the global response to the climate challenge. That should be the focus of this year’s Spring Meetings discussions.

Across the 43 World Bank client countries surveyed in 2020-21, less than 6 percent of respondents listed climate as one of their country’s top development priorities. As a priority for Bank engagement, the issue ranked particularly low in IDA countries. This makes sense given what we know about climate change and its impacts. First, even in thirty years’ time, current low-income countries are likely to be consuming just two percent of the world’s electricity supply. They are just not a major part of the mitigation story, and pushing them to prioritize mitigation is an assault on rights, utility, and equity. Second, development is a powerful tool of adaptation, urgently required because it is poor countries that will bear the brunt of climate change. We’re probably still thirty years at least from the World Bank’s Dream of a World Free of Poverty at the far-too-low poverty line of $2.15 a day: development remains an urgent priority.

Meanwhile, more than four fifths of climate finance is used in middle-income countries, which is appropriate given they are a bigger part of the mitigation challenge. There’s a considerable role for the World Bank to provide that finance at scale. What’s not appropriate is that the $48 billion in subsidies funneled through the World Bank to date has so inefficiently used, with returns in terms of greenhouse gas emissions averted per dollar that vary by more than a hundredfold. And there is no simple, agreed approach to improve the efficiency of grant financing for mitigation. Not least, it’s a fantasy that we can use a few billion in subsidies to directly unlock trillions in private capital, and anyway, most of the investment needed to support mitigation and adaptation is public, not private (83 percent of infrastructure investment in developing countries is public, for example). What makes the problem worse is that, at the moment, we are poaching development finance from poor countries to finance climate mitigation in richer countries.

But the World Bank doesn’t have to waste subsidies on inefficient mitigation. It can make IBRD loans for mitigation spending more attractive without them. Countries would be much more willing to borrow from the IBRD for climate spending if its lending wasn’t so bureaucratic. There’s an irony that more climate borrowing will be deterred by social and environmental safeguards on investment projects that add a total of nearly a year to World Bank project approval compared to policy lending—that’s to say nothing of considerably slower disbursement and the complexities of following World Bank procurement rules. The average project subject to environmental review takes about seven years to close, compared to fifteen months for policy lending.

All of this is why I want to see the World Bank’s governors agree to pursue a climate-dedicated capital increase at this year’s Spring Meetings, an idea Scott Morris and I wrote about two years ago. IBRD interest rates remain considerably below what most middle-income countries can borrow from private financiers. If they could obtain (comparatively) hassle-free policy loans from the Bank in support of their Nationally Determined Contributions to global greenhouse gas emissions reduction it would help middle-income countries meet investment costs, it would bring donors closer to meeting their $100 billion financing commitments, and it would preserve concessional finance for the countries that need it most to develop and adapt.

JETPs and the Role of Multilateral Development Banks in Shaping and Driving the Just Energy Transition

FEATURED

  • Alice Carr, Executive Director, Public Policy, Glasgow Financial Alliance for Net Zero
  • Deputy Minister Rachmat Kaimuddin, Coordinating Ministry of Maritime Affairs and Investment, Indonesia
  • Alexia Latortue, Assistant Secretary for International Trade and Development
  • Jennifer Sara, Global Director for Climate Change, World Bank
  • Woochong Um, Managing Director General, Asian Development Bank (ADB)
  • Juergen Zattler, Director-General for International Development Policy, 2030 Agenda and Climate, German Federal Ministry for Economic Cooperation and Development (BMZ)

MODERATOR

  • Annika Seiler, Policy Fellow, Center for Global Development
This event will be hosted in-person at CGD’s DC office: 2055 L St NW, 5th floor, Washington, DC 20036

The Just Energy Transition Partnerships (JETPs) of the International Partners Group (IPG) for South Africa, Indonesia, and Viet Nam are spearheading the novel approach to climate action to support developing countries’ transition out of a deep coal dependency, rooted in the realities of their respective energy systems in a way that is just and inclusive, contributes to economic diversification, drives innovation and decent job growth, and is aligned with their respective Sustainable Development Goals (SDGs). But there are concerns how these partnerships can address effectively challenges in terms of partner countries’ readiness, availability of sufficient concessional resources, and private capital mobilization. 

On the sidelines of the Spring Meetings of the World Bank and IMF, CGD will host a panel discussion on critical success factors for a just energy transition and how MDBs can support the JETP process. Featuring policymakers and leaders from JETP countries, the IPG, multilateral development banks (MDBs), and the Glasgow Financial Alliance for Net Zero (GFANZ), the panel will conclude with recommendations for improvements of JETPs, the reform agenda of MDBs, and important complementary policy and regulatory reforms in partner countries.

For a full list of CGD Spring Meetings events, click here.