With David Malpass's departure, the Biden Administration has a crucial opportunity to turn the World Bank into a more effective tool for climate action and eradicating poverty. The next World Bank leader should have a proven record of advocating for increased funding for all developing countries and a strong dedication to urgently implementing the bold recommendations of the Bridgetown Initiative to make the Bank better suited for tackling the challenges of the 21st century.
393293 01: A view of the World Bank building October 5, 2000 in Washington, DC. The World Bank bank ... [+]
Amid multiple crises, countries worldwide face a critical challenge: inadequate liquidity to provide essential services and invest in vital areas such as infrastructure, job creation, and climate adaptation and mitigation. Finance ministers in the Global South are calling for favorable terms on capital to address this issue. The world faces a real risk of political instability due to the unprecedented level of economic divergence, which is compounded by the impact of climate change. Simultaneously, extreme wealth and poverty are rising for the first time in 25 years, threatening global progress.
According to the UN, the "great finance divide" means that least developed countries were forced to pay up to 8 times more than developed countries for borrowing, even before the recent rise in interest rates. Now, rising investor risk aversion has caused borrowing costs to exceed what is justified by macroeconomic fundamentals in many countries, contributing to high risk of debt distress for 37 of the world's poorest countries and one in four middle-income countries. Even those countries with investment-grade ratings paid between 6 and 7 percentage points above US treasury yields in 2022, regardless of their repayment history. The UN also suggests that many countries in debt crises could have been solvent with continuous access to financing at the low rates available to rich countries.
Too many national leaders are currently facing the dual challenge of high debt costs and increasing payments while having limited access to funds for necessary short- and long-term investments; this includes the massive infrastructure needs for the energy transition. The Bridgetown Initiative, spearheaded in 2022 by Prime Minister Mia Mottley of Barbados and philanthropic leaders like the Rockefeller Foundation’s Raj Shah, offers solutions to manage debt burdens while increasing affordable long-term financing for development. At its core, the Bridgetown Initiative aims to promote financial fairness for developing countries, regardless of their economic status. It includes recommendations to improve institutions like the World Bank so they can better serve poor and climate-vulnerable countries.
While the World Bank cannot alone fully solve the "great finance divide," it can still play a crucial role in helping countries overcome their liquidity issues if it is led effectively. The Bridgetown Initiative presents a blueprint for the World Bank, along with other multi-development banks (MDBs), to leverage its current resources and expand its balance sheet to generate hundreds of billions of new dollars. Currently, for example, some MDBs only count a small portion of their available capital when assessing their financial strength, even though credit rating agencies consider more of it. The G20 Capital Adequacy Framework (CAF) Review has suggested some ways for leveraging MDBs’ capital more efficiently. Studies have estimated that revising these policies could increase lending by up to $500 billion, without harming credit ratings and not coming at the expense of existing programs designed to help low-income countries.
Such additional funds could provide the poorest countries with greater access to concessionary financing on affordable and fair terms and rates below market rates. Middle-income countries, meanwhile, would also gain greater access to loans on the same basis and market rates as developed countries, which is often all they are asking for: fairness. This is especially relevant since 70% of the world's poorest countries are located in middle-income countries. Governments ultimately require access to funds for climate mitigation and adaptation, as well as for crucial investments in areas such as energy, transport, education, healthcare, and agriculture.
Of course, the World Bank's shareholders, which consist of the wealthiest governments, should also provide more capital - including through the use of re-channeled so-called Special Drawing Rights - to give the Bank greater financial firepower to confront the pressing issues of our time: climate change, food security, economic transformation, resilience against future pandemics and the energy transition needed for the next seven years to 2030. However, the Bank would have a stronger case for more additional investment if it demonstrates efficient use of its current resources. This is where a decisive leader who has already shown commitment to the Bridgetown Initiative can have a significant impact.
The World Bank was created as part of a multilateral system to drive growth, trade, and crisis response. But today, it requires leadership that can equip it to meet the challenges of the 21st century - a world more divided than ever before, with urgent crises ranging from climate change to systemic inequality. To address these challenges, multilateral reform led by a visionary leader who endorses the Bridgetown Initiative is essential. With the rare opportunity to select a new leader capable of thinking and revamping the World Bank, President Biden can lead the way in confronting the poly-crises of our time and ensuring a better future for all.
