In the run-up to the annual Spring Meetings of the World Bank and the IMF in the second week of April, there was much talk that the two organisations were on the cusp of change. Multiple crises are demanding attention from the international community. But these institutions, once central players in the management of the international economic order, seem to have little to offer as effective managers in the current conjuncture. Hence the need for change.
Two factors account for their loss of significance or even descent into irrelevance. The first is that these dominant multilateral bodies once accounted for a significant share of the cross-border flows of finance from the capitalist North to the Global South but are now minor players in the global movement of capital. The share of yield-seeking or even predatory private capital in total flows has increased enormously as the distribution of the surpluses generated globally concentrate in the hands of these private players rather than in the hands of governments, including those in high-income countries.
The second is that even the surpluses that remain in the hands of public players are no more concentrated with G7 governments but are spread across governments of countries outside the North, varying from the oil exporters to the now dominant or newly emerging global-manufacturing hubs, especially an increasingly combative China. The Bretton Woods twins, established at a time when the international order looked very different, have a structure of governance and decision-making (dominated by the G7, especially the US) that does not correspond to the current distribution of global economic (even if not military) power.
These dissonant features have developed at a time when the need for multilateral action is urgent, given multiple global challenges. External debt crises overwhelm a large number of low- and middle-income countries that accumulated excess debt during the years when high-income-country governments and central banks injected cheap liquidity into the international system and the COVID pandemic and the spike in food and fuel prices pushed poorer countries into soaking up that liquidity. The result is debt stress and widespread default. With a fragmented creditor community unable to offer viable paths to resolution, adjustment in countries overwhelmed by debt is forcing austerity on populations least able to bear more burdens. The long struggle to meet the minimal standard of living targets incorporated in the Sustainable Development Goals by year 2030 seems doomed to fail. This is leading to civil strife and the emergence and strengthening of fundamentalist and authoritarian forces that disrupt much-needed social cohesion.
Meanwhile, hopes of restraining global warming to a maximum of 1.5-2 °C are waning, and climate catastrophe is emerging as a real danger. A grossly uneven distribution of the available carbon “budget” and an unwillingness on the part of the leading cumulative emitters to make a fair contribution to financing the costs of mitigation and adaptation and of addressing past and future loss and damage make resolution here, too, difficult to ensure. An international community that seems paralysed by a broken multilateralism is unable to respond adequately and in time.
The concerns of the Bretton Woods twins reflect this broken multilateralism. They are finding it difficult to sustain the assertion that they have been at the forefront of the effort to address global challenges for more than 50 years. The World Bank and the IMF can hardly claim that they have the wherewithal to address the crises currently confronting the international system. Rather, there is much evidence to show that the nature of their past interventions makes them part of the problem, not sources for solutions. Whatever other causes they serve, it has been clear for some time now that they are increasingly irrelevant as institutions that can address today’s global challenges and crises.
Confronted by the realisation that they are not up to the tasks set by a history of which they are part, the Bretton Woods twins are facing calls for change from their “handlers”—the G7—and from within the organisations themselves to make them capable of addressing old and new crises or global challenges, of which climate change and the pandemic are stark illustrations.
In response, the World Bank Group (WBG), as the principal “development” funder of the twins, has decided to put out a road map for change. It turns out, however, that this effort at regaining relevance is geared to finding new ways for them to serve as agents of the dominant global interests of our time, especially private international finance.
Not surprisingly, the WBG’s evolution road map has modest ambitions. In the name of enhancing vision, it seeks to broaden its current “twin goals” of “ending extreme poverty and boosting shared prosperity” by 2030 by including in its stated agenda sustainability and resilience and the creation of global public goods to address challenges such as climate change and pandemic preparedness, prevention, and response.
However, after noting that even the twin goals “are increasingly out of reach”, the World Bank partly absolves itself of any responsibility for that failure. In its view, it has in the past “adapted to change”, responding “with speed, scale and impact to individual crises” and to global challenges. The assessment seems to be that the problem is external. Challenges have multiplied and acquired a new intensity, requiring another effort to adapt an organisation that sees itself as positioned “for global leadership on long-term development and crisis response”. In the process it chooses to ignore much cited evidence of not just its own failure but of its complicity in driving failure.
- The dominant multilateral bodies that once accounted for a significant share of the cross-border flows of finance from the capitalist North to the Global South but are now minor players in the global movement of capital.
- The surpluses that remain in the hands of public players are no more concentrated with G7 governments but are spread across governments of countries outside the North.
- The Bretton Woods twins have a structure of governance and decision-making (dominated by the G7, especially the US) that does not correspond to the current distribution of global economic (even if not military) power.
- Hopes of restraining global warming to a maximum of 1.5-2 °C are waning, and climate catastrophe is emerging as a real danger.
The “review” is not one of past performance, to learn from mistakes, but of “how to strengthen the focus” of its mission. This ignores decades of massive increases in inequality, persistent social deprivation, failure to deliver on basic human rights, and the erosion of state capacity due to an insistence on private leadership in a public-private partnership, with the recommendation that public funds be increasingly devoted to incentivising and mobilising private investment for profit even in areas such as the provision of essential services and catering to basic needs.
To facilitate this strengthening of focus, the road map points to two new directions that the bank should take. The first is that it sees the need to become more “inclusive” in its approach by paying more attention to middle-income countries (MICs) that also face challenges to their sustainable development. The second is that even though global extreme poverty reduction must remain a goal to be achieved since close to 700 million people still live in extreme poverty the bank sees the need to step up the global anti-poverty effort by including those who fall short of a higher poverty line, that is those in MICs who are not so poor as the “extremely” poor.
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These promises to expand the universe of poor countries and poor people that the World Bank would serve is of course welcome. But the road map leaves unaddressed the issue of whether this extension will be in addition to an enlarged engagement with low-income countries (LICs) and the extremely poor. That question needs addressing because of the reasoning behind tweaking the World Bank’s principle to “serve all clients”. The road map explains: “While the 2018 capital increase for IBRD [International Bank for Reconstruction and Development] and IFC [International Finance Corporation] interpreted ‘serving all clients’ as reorienting lending towards lower income countries, the need to make progress on global challenges would require a rebalancing of this strategy to identify opportunities to better respond to MIC clients.”
That leads to a new version of “trickle-down” development since “WBG involvement with MICs offers the opportunity to learn from these countries’ experiences and apply these lessons to LICs”. However, this could involve pushing non-concessional lending into poor countries or depriving them of low-cost credit and grants from the International Development Association. In addition, it could lead to the adoption of a one-size-fits-all approach with policy recommendations to the poorer countries that are not based on an understanding of their often-exceptional circumstances. Certainly, attention to challenges faced by MICs is welcome, but that should not be at the cost of already inadequate attention to LICs and to the poorest populations in MICs.
In sum, the road map’s contours seem to imply a shift in focus away from the very poor—for whom grants and concessional finance are the only flows that can work—to the median players for whom it is believed yield-seeking capital flows can make a difference. It notes that the “evolution of the WBG Mission will require increasing financial and analytical support to MICs” because it is there that the WBG can help “create a robust business enabling environment, and unleash private sector growth” and because the “private sector is a larger economic actor in MICs than in LICs”.
In keeping with this, even as the road map flags the need to address new challenges such as climate change and pandemic preparedness, it emphasises that the private sector must “play an essential role in addressing climate mitigation and the energy transition, including as project implementers, financiers, and innovators”. This sidesteps the evidence that efforts to outsource responsibility to the private sector have not worked in the past. The private sector has been reticent about voluntarily entering areas where financial returns are low even when social benefits are high. Furthermore, efforts to draw it into such activities through public-private partnerships have, in most cases, brought profits to the private sector while leaving risks with governments.
The case seems to be that “given the scale of the financing needs, official multilateral financing must catalyse other financial flows”. However, since many projects linked to challenges such as climate change are unlikely to yield satisfactory monetary returns, private investors are likely to continue to stay away. But, in the World Bank’s perception: “The WBG’s role can be amplified through efforts in areas such as private capital facilitation, (both private capital mobilization (PCM), through co-financing and de-risking, and private capital enabling (PCE), through reforms and public investments), domestic resource mobilization (DRM) and improving the efficiency of public spending.”
C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.