Category: Blog

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. Read the other posts in the series, and stay tuned for more.

At the Spring Meetings, calls for the World Bank to become the go-to institution for fighting global challenges will intensify, including from some of us at CGD. This isn’t new: Janet Yellen called for the bank to “evolve” to tackle climate change and other global threats; Gordon Brown called for its immediate transformation into a “Global Public Goods” bank; my colleague Charles Kenny called for a larger and easier-to-access IBRD to tackle global challenges; and a recent piece I co-wrote with Amanda Glassman, Clemence Landers, and Eleni Smitham ends on the following lines:

“There is a clear hunger for the World Bank to be a leader on GPG issues, not only as a financier or vehicle. The bank brings analytical capabilities, capacity building, and intellectual leadership to both country development and global challenges. The global system lacks an effective focal point in the fight against global public bads. Deploying the World Bank effectively, both as a financial and an intellectual leader, can fill that gap.”

Doing so involves tackling a set of serious institutional challenges: mobilizing more capital and financing; learning to live with or work around more and different kinds of risk; streamlining processes and procedures to become not just a viable source of financing for new challenges, but an attractive one. These challenges remain unresolved.

But they are not the only unresolved challenge. The World Bank—and indeed, those of us who have called for changes to the bank—face an intellectual challenge we have not yet met: working out what exactly we mean when we speak of global challenges and global public goods, and what that implies for how we address them. Most crucially, we need to consider their relationship with what remains the core mandate of the bank for now—poverty and economic growth in developing countries. That we have yet to fully resolve this challenge—despite breezy statements that no trade-offs exist at all—suggests how far we are from creating a World Bank that has the tools to discharge its core mandate and an expanded one well—indeed, whether such a bank is possible to create.

There is a common language centred on “global public good” provision that many commentators—myself included—have employed when proposing a revision to the mandate and remit of the World Bank. But public good provision presents a very particular form of economic problem, with very particular solutions, and it is not clear either that the problems typically raised as potential new space for the World Bank to occupy are truly public goods problems, or that the mechanisms that the bank has its disposal are suited to fix public goods problems. Meanwhile, the pursuit of poverty eradication and economic growth—the World Bank’s current mission—is most definitely not a public goods problem.

Classifying something as a public good has a very particular meaning in economics, suggesting it has characteristics that make it very difficult for the private market to provide. Public goods are non-rival, so use by one consumer does not diminish availability for others, but most importantly for market provision, they are non-excludable: that is, once provided, they benefit everyone, whether or not those people have paid for them. This leads to free-riding—where potential beneficiaries do not pay for the good, because they hope to benefit from some other payer’s action, a position which if universal means that the good simply isn’t provided at all. In the textbooks, free-rider problems are solved by coercive mechanisms for payment such as taxation.

Coercive mechanisms aren’t something the World Bank is set up to do, but the organisation can take a different approach: in the real world, public goods are often provided through the provision of goods that are excludable: if national defense is a non-excludable public good (that is, everyone in the country benefits whether or not they pay tax), a new weapons system is not. It is simply a private good that has positive externalities. And if a 1.5 degree world is a public good from which we will all benefit, clean energy is not: it is a private good that benefits a specific country but has positive spillovers for everyone else. In fact, many climate mitigation actions have local effects that are either partly excludable or partly rival. For example, moving to cleaner energy or reducing crop residue burning will have local effects on air quality which, though they may spill over into neighbouring countries, are mine; others who do not pay for it do not benefit, or not in full. In such cases, a contribution to a global public good comes in the form of providing a private good (a cleaner energy plant, or a method of reducing crop residue burning) with a positive externality, also called a merit good.  

So the role of the World Bank will be to substitute these positive merit goods for those demerit goods that have negative externalities, like fossil-fuel burning power plants, or crop burning practices that are over-supplied in the free market. This substitution is closer to what the World Bank has the tools to provide at scale: positive externality merit goods are simply under-consumed in the market and subsidy can be enough to provide them at their optimal level. In other words, to provide the public good, the World Bank can support the provision by client governments of private goods that have positive externalities towards the public good we seek—be that global public health or a lower-warming world. 

The question that remains is then simply about prioritization of its scarce subsidy resources for different positive-externality goods. The World Bank has funds to pursue goods and services that have merit or positive externalities: from public health, to education, to good macroeconomic management (and indeed climate change adaptation, which is a quite different kind of good to climate change mitigation). If the climate mitigation spending that the bank is capable of delivering is that which has local benefits, it begins to fall into this class as well—and its ability to deliver them depends on how much clients with access to different World Bank funds want to utilize them, and, in turn, on the level of subsidy offered. But since the viable path for the World Bank to contribute to both poverty reduction and global public goods is in the provision of private goods with merit characteristics, it must also grapple with the fact that these goods are by definition location-specific. The World Bank’s selling point (not it’s unique selling point, but one of the biggest ones) is that it is a cheap and reliable source of money. To provide location-specific goods at a subsidy, it is, by definition, trading off between alternative purposes and alternative locations. And the places where poverty-reducing goods are most in demand and will have most impact are not the places where goods supporting climate change mitigation will have the biggest impact, for example.  

That means that an expanded mandate requires that we trade off between subsidizing action on poverty and growth on the one hand, and climate mitigation and similar global challenges on the other; we will also need to trade off between the goods we subsidise to fight different global challenges. The only way to avoid these trade-offs is to have a World Bank that is fully funded to fight both poverty and global challenges. None of the proposals on the table will get us there. They will only make the trade-off slightly less painful, if they are even adopted.

So my ask of the World Bank—and indeed all participants at the Spring Meetings—is simple. Before we retool and reorient, think carefully. Think about the underlying problems it wants to solve; think about what its scope for action really is; think about what clients want; and think about the trade-offs that a reorientation will force. And wherever we land on these trade-offs, the only way towards an expanded mission that doesn’t fail the poor is far, far more money.

This blog has benefited from excellent comments by Stefan Dercon, Mark Plant, and Amanda Glassman.

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. Read the other posts in the series, and stay tuned for more.

The International Development Association (IDA) has emerged as the largest financing arm of the World Bank Group in the last few years, and demand for IDA finance is poised to remain high as poor countries face a daunting global outlook. But these headwinds also make IDA’s financial future less certain. As the world debates multilateral development bank (MDB) reform and the proposed World Bank “Evolution Roadmap,” IDA has not featured as prominently as the future of the International Bank for Reconstruction and Development (IBRD)—even as many developing countries express concern that the Bank’s evolution not come at the cost of the Bank’s development mission. The Spring Meetings are an opportunity for a reset.

IDA has exceeded IBRD’s financing volumes since 2020, when it increased its commitments by close to $20 billion in response to the global COVID pandemic, and they have remained high, with IDA committing $42 billion in 2022, outstripping both IBRD ($33 billion) and the International Finance Corporation ($17 billion). To sustain these levels, donors moved to replenish IDA’s funds a year ahead of schedule. Since then, IDA’s annual financing commitments have continued to grow as the low-income countries its serves have been barreled by a series of exogenous shocks—from global supply chain crises to interest rate normalization by advanced economies—that occurred against the backdrop of deteriorating debt dynamics. Today IDA remains a first port of call for countries hit by crises and an essential component of many poor countries’ external financing mix.

But these factors have combined to put pressure on IDA’s medium-term outlook and its ability to sustain these high financing levels. If IDA maintains a 2023 financing envelope on par with 2022 levels, the fund will have committed almost two thirds of its available financing in the first half of its replenishment cycle, with a year left to go before it receives a fresh batch of funds. To address this likely shortfall IDA has launched a fundraising exercise around its Crisis Response Window (CRW)—an IDA set-aside that disburses budget support for countries needing emergency financing linked to an exogenous shock—but many key donors appear tapped out.

A fundamental question for IDA is whether there are balance sheet efficiency type measures (à la the G20 review of MDB capital adequacy frameworks) that could be relevant to IDA. In the past, I arguedthat IDA should take a more ambitious approach to its own large equity base and borrow more from the market to increase its financing to poor countries. Whether this argument remains relevant in a high-interest environment is less clear.

Over the past several cycles, IDA has become less dependent on donors. It has managed to nearly double in size while donor contributions have essentially flatlined for almost a decade. This is because IDA has a hefty amount of reflows from loans that it can recycle for new projects, and because the institution has started going to capital markets to borrow against its loan portfolio. Last cycle, IDA raised around $23.5 billion in financing from donors for a total replenishment envelope of $93 billion.

But the burning question: can this continue? To date, most of the investigation into MDB financial efficiency, including the capital adequacy framework (CAF) report, has centered on the hard loan windows. A similar independent study focused on IDA is critically important. Part of the complexity that donors need to grapple with is how interest rates will affect IDA’s ability to borrow from the market. In a benign interest rate environment, IDA was able to issue at historically low cost and pass along those low costs to its borrowers. At the peak of COVID, when interest rates were at historic lows, our back-of-the-envelope calculations showed it cost less than 20 cents on the dollar to buy down an IDA market bond to concessional terms. Contrast that to today, where that number is closer to 40 cents, by our estimates. That clearly changes a lot of the equation around market borrowing, including whether it is affordable and compatible with IDA’s current financing needs. To add to the headwinds, deteriorating debt dynamics will have a depressant effect on reflows over the medium to long term. In addition, the specter of reverse graduations—where countries like Sri Lanka that had graduated out of IDA financing may once again qualify as they suffer economic distress—will increase the claims on IDA resources.

During the Spring Meetings, much of the focus will be on IBRD, which has occupied center stage in the roadmap conversation. But discussion around new sources of grants for middle-income countries have many low-income countries rightly nervous. I hope that during the Spring Meetings key IDA donors reaffirm in no uncertain terms their strong political commitment to IDA—whether that comes out in the DC statement, G20 communique, or elsewhere. IDA countries should be reassured that they too are part of the Bank’s evolution process and can plan on steady IDA infusions over the medium term. An early statement of political support could help ease tensions, setting up the evolution process as a win for all, rather than a series of difficult tradeoffs.