Written by David Gelles and Max Bearak
The World Bank and the International Monetary Fund were created 80 years ago to rebuild countries devastated by World War II and to stabilize the global economy. But an expanding group of world leaders now says the two powerful institutions need a 21st-century overhaul to handle a new destructive force: global warming.
There is growing momentum behind a set of ideas that would fundamentally overhaul the two powerful financial institutions, which frequently loan or grant money from rich, industrialized nations to developing countries. The proposals are rapidly gaining traction among heads of state, finance ministers and even leaders of the bank and the fund, who are all meeting at the United Nations climate summit known as COP27.
The current global financial system was designed to try to alleviate poverty through loans or grants to help nations develop or recover from calamity. Loans were based on risk, and wealthier nations were charged lower interest rates and offered better terms than poor countries.
But as climate change continues to deliver a cascading series of hurricanes, floods, drought and fires, poor nations have found themselves victims of not only extreme weather but of the financial institutions designed for a different age. They are desperate for funds to recover from climate disasters while also starved for money to prepare for the next calamity. They are saddled with debt, yet need to invest in a transition away from fossil fuels so they can lower the emissions that are heating the planet and causing so much damage in the first place.
If implemented, the reforms being considered would make significantly more money available to developing nations to mitigate the effects of climate change, deploy those funds faster, offer struggling countries lower interest rates and allow them to pause debt payments after major disasters. Supporters say the changes would also enable the institutions to attract trillions of dollars in private capital to help nations prepare for climate disasters and transition to wind, solar and other clean energy.
Should the overhaul to the World Bank and IMF occur, it could represent the biggest mobilization of international finance in history to help developing countries cope with and adapt to a warming planet.
The proposals are broadly in line with what is known as the Bridgetown Initiative, put forward this summer by Mia Mottley, the prime minister of Barbados, a heavily indebted Caribbean nation that is highly vulnerable to climate disasters. Mottley began her campaign at last year’s climate summit in Glasgow, Scotland, by calling attention to the plight of poor and small island nations.
In July, she gathered economists, foundation executives and Amina Mohammed, the deputy secretary-general of the United Nations, in the Barbadian capital, Bridgetown, to develop the plan.
At the U.N. climate summit underway now, what seemed like an improbable idea from Mottley has gathered momentum, even from the giant lending institutions’ leaders themselves.
“The world has changed dramatically,” Kristalina Georgieva, the managing director of the IMF, said in an interview on the sidelines of the summit Wednesday, adding that she was broadly supportive of the Bridgetown Initiative. “When our institutions were set, there was no common global challenges like climate change. Now we have to mobilize to address them.”
On Wednesday, David Malpass, the president of the World Bank, embraced calls to reform his institution.
“At COP27, there have been recommendations for multilateral development banks to significantly increase our climate finance,” Malpass, said in an address to finance ministers from around the globe. “I warmly welcome these calls. Successful climate action to reduce greenhouse gas emissions will take a concerted global push, and we are committed to this effort.”
Nearly every country is a member of both the World Bank and IMF, but power is distributed through a quota system that gives the United States a dominating position in decision making and leadership.
Treasury Secretary Janet Yellen said last month that she would make a formal request to the World Bank that it come up with an “evolution road map” by the end of the year.
“Given the scale of the challenges, the development banks must continue to explore financial innovations to responsibly stretch their existing balance sheets,” she said.
And Svenja Schulze, the economic cooperation and development minister of Germany, which is a major bank shareholder, said in a statement last month that her government supported reforms, adding that the bank’s “current model” was “no longer appropriate in this time of global crises.”
John Kerry, President Joe Biden’s special climate envoy, said at a Bloomberg News event on the sidelines of COP27 on Wednesday that reforming the bank and the fund could release a geyser of capital that could save lives.
“That can be done,” he said, adding that if everything goes as planned, it could result in more than $1 trillion in new funding. “That’s real stuff.”
President Emmanuel Macron of France said Monday that he supported Mottley’s plans and joined her in calling for the formation of a task force that would make recommendations for new climate financing programs before the annual spring meetings of the World Bank and IMF in Washington.
Those institutions, Macron said, “need to come up with concrete proposals to activate these innovative financing mechanisms, to develop access to new liquidity, new concessional financing ideas for emerging economies, to propose solutions taking into account vulnerability.”
The two institutions were products of World War II. The Allies convened economists and policymakers from 44 countries in Bretton Woods, New Hampshire, and hashed out a plan for an interconnected global financial system designed to help economies rebuild from the war and bring a measure of stability to the global economy.
The institutions that were created have operated largely unchanged since, with wealthy nations essentially financing loans to developing nations and holding much of their debt — and thus exercising a large degree of control over their growth and progress.
Now, as leaders call for fundamental changes to the way the institutions operate, they are invoking the founding conference once more.
“We need to reconvene Bretton Woods and completely revamp and reform the World Bank system and make access to private capital available for developing countries,” former Vice President Al Gore said at the climate summit Monday. “This is a moment for a global epiphany. It is not time for moral cowardice and reckless indifference to the future of humanity.”
Mottley, in an address to world leaders Monday, echoed Gore.
“Yes, it is time for us to revisit Bretton Woods,” she said Monday. “Yes, it is time for us to remember that those countries who sit in this room today did not exist at the time that the Bretton Woods institutions were formed for the most part. And therefore, we have not seen, we have not been heard sufficiently.”
Unlike discussions about climate reparations, which are on the climate summit’s agenda this year for the first time but not gathering a large amount of financial backing, reform of the bank and the fund is being seen as the most immediate and practical way to help the developing world face the severe threats posed by increasing floods, fires, heat and drought.
Raj Shah, the president of the Rockefeller Foundation, participated in the Bridgetown meeting in July and said that if the proposed reforms came to pass, it would be a monumental achievement, on par with past commitments to tackle global crises like the AIDS pandemic.
“This is urgent. This should happen now. There is absolutely no excuse, and if we don’t do it, the next generation of youth activists should hold us accountable for trying to behave like World War II just ended, when in fact we’re facing an entirely different world out there,” Shah said at a panel discussion at COP27 on Tuesday.
If used to help developing nations transition to renewable energy sources like wind and solar, the money unleashed by reforming the World Bank and IMF could help keep average global temperatures from rising above 2 degrees Celsius, compared with preindustrial levels, he said.
Scientists have said that temperature rise above 1.5 degrees Celsius would significantly increase the likelihood of catastrophic climate effects. The average global temperature has already risen by 1.1. degrees Celsius, compared with preindustrial levels, and the United Nations says the planet is on track for a temperature rise of 2.4 Celsius to 2.6 Celsius by the end of this century.
Among the most transformative changes being discussed is a new approach to the risk ratings and resulting interest rates developing countries must pay on loans from the World Bank.
Ngozi Okonjo-Iweala, the head of the World Trade Organization, said her experience as Nigeria’s finance minister informed her support for Mottley’s agenda.
Like many developing nations, Nigeria borrows at far higher interest rates on average than wealthier countries. Paying that debt is a huge drain on national budgets, leaving governments without needed reserves when they face a crisis like the kind of widespread flooding Nigeria recently suffered.
“It is totally exaggerated risk, I can tell you,” she said. “It’s not right that some countries can borrow at 3% and others at 14, 15.”