SHARM EL SHEIKH, Egypt — The World Bank and International Monetary Fund were established 80 years ago to rebuild countries devastated by World War II and stabilize the global economy. But a growing group of world leaders now say the two powerful institutions need a 21st century overhaul to deal with a destructive new force: global warming.
There is growing momentum behind a set of ideas that would fundamentally overhaul the two powerful financial institutions, which frequently lend or grant money from wealthy, industrialized countries to developing countries. The proposals are rapidly gaining traction among heads of state, finance ministers and even bank and fund leaders, who are all now meeting at the UN climate summit known as COP27.
The current global financial system was designed to attempt to alleviate poverty through loans or grants to help nations develop or recover from calamity. Loans were risk-based, and rich countries were charged lower interest rates and offered better terms than poor countries.
But as climate change continues to bring a cascade of hurricanes, floods, droughts and fires, poor nations have found themselves victims not only of extreme weather, but also of financial institutions designed for an age. different. They desperately need funds to recover from climate disasters while also starving for cash to prepare for the next calamity. They are debt-ridden, but need to invest in a transition away from fossil fuels so they can reduce the emissions that are warming the planet and causing so much damage in the first place.
If implemented, the reforms envisioned would make much more money available to developing countries to mitigate the effects of climate change, deploy those funds more quickly, offer struggling countries lower interest rates and allow them to suspend debt payments after major disasters. Proponents say the changes would also allow 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.
If the overhaul of the World Bank and IMF happens, it could represent the largest mobilization of international finance in history to help developing countries cope with and adapt to global warming.
The proposals are broadly in line with what’s known as the Bridgetown Initiative, put forward this summer by Mia Mottley, the prime minister of Barbados, a heavily indebted Caribbean nation highly vulnerable to climate disasters. Ms Mottley began her campaign at last year’s climate summit in Glasgow by drawing attention to the plight of the poor and small island nations.
In July, she brought together economists, foundation leaders and Amina Mohammed, the UN deputy secretary-general, in the Barbadian capital, Bridgetown, to craft the plan.
At the ongoing United Nations climate summit, what seemed like an unlikely idea by Ms Mottley gained momentum, even from the heads of the giant credit institutions themselves.
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“The world has changed dramatically,” IMF managing director Kristalina Georgieva said in an interview on the sidelines of Wednesday’s summit, adding that she broadly supports the Bridgetown initiative. “When our institutions were set up, there were no common global challenges like climate change. Now we must mobilize to face it.
On Wednesday, David Malpass, the president of the World Bank, responded favorably to calls to reform his institution.
“At COP27, it was recommended that multilateral development banks dramatically increase our climate finance,” Malpass said in an address to finance ministers around the world. “I warmly welcome these calls. Successful climate action to reduce greenhouse gas emissions will require concerted global leadership, and we are committed to this effort.
Almost all countries are members of both the World Bank and the IMF, but power is distributed through a quota system that gives the United States a dominant position in decision-making and leadership.
US Treasury Secretary Janet Yellen said last month that she would formally ask the World Bank to come up with a “roadmap for change” by the end of the year.
“Given the scale of the challenges, development banks must continue to explore financial innovations to responsibly stretch their existing balance sheets,” she said.
And Svenja Schulze, Germany’s minister for economic cooperation and development, who is one of the bank’s major shareholders, said in a statement last month that her government supported reforms, adding that the “current model” of the bank was “no longer appropriate in this time of global crisis”. crisis “.
John Kerry, President Biden’s special climate envoy, told a Bloomberg News event on the sidelines of COP27 on Wednesday that reforming the bank and fund could unleash a geyser of capital that could save lives.
“It can be done,” he said, adding that if all goes according to plan, it could result in more than $1 trillion in new funding. “It’s true.”
French President Emmanuel Macron said on Monday he supported Ms Mottley’s plans and joined her in calling for the formation of a task force that would make recommendations for new climate finance programs ahead of annual meetings Spring Meetings of the World Bank and the IMF in Washington.
These institutions, said Mr. Macron, “must make concrete proposals to activate these innovative financing mechanisms, develop access to new liquidity, new ideas of concessional financing for emerging economies, propose solutions taking into account the vulnerability”.
Both institutions were products of World War II. The Allies brought together economists and policymakers from 44 countries in Bretton Woods, NH, and developed a plan for an interconnected global financial system designed to help economies rebuild after war and bring some stability to the global economy. .
The institutions that were created have operated largely unchanged ever since, with wealthy countries essentially funding loans to developing countries and holding much of their debt – and thus exercising broad control over their growth and progress.
Now, as leaders call for fundamental changes in how institutions work, they are once again invoking the founding conference.
“We need to reconvene Bretton Woods and completely revamp and reform the World Bank system and make access to private capital available to developing countries,” former Vice President Al Gore said Monday at the climate summit. . “Now is the time for a global epiphany. This is not the time for moral cowardice and reckless indifference to the future of humanity.
Ms Mottley, in an address to world leaders on Monday, echoed Mr Gore.
“Yes, it’s time for us to revisit Bretton Woods,” she said Monday. “Yes, it is time for us to remember that the countries that sit in this room today did not exist when the Bretton Woods institutions were formed for the most part. And so, we have no not seen, we have not been heard enough.
Unlike discussions of climate reparations, which are on the agenda of the climate summit this year for the first time but which do not garner a large number of financial support, the reform of the bank and the fund is seen as the most immediate and practical way to help developing countries deal with the serious threats posed by increasing floods, fires, heat and drought.
Raj Shah, the chairman of the Rockefeller Foundation, attended the Bridgetown meeting in July and said that if the proposed reforms were adopted, it would be a monumental achievement, on par with past commitments to deal with global crises like the AIDS pandemic.
“It’s urgent, it should happen now, there’s absolutely no excuse, and if we don’t, the next generation of young activists should hold us accountable for trying to behave like World War II. world had just ended, when in fact we are facing an entirely different world there,” Shah said during a roundtable at COP27 on Tuesday.
If used to help developing countries switch to renewable energy sources like wind and solar, the money freed up by World Bank and IMF reform could help prevent average global temperatures to exceed 2 degrees Celsius, compared to pre-industrial levels, he said.
Scientists have said that a temperature increase above 1.5 degrees Celsius will dramatically increase the likelihood of catastrophic climate impacts. The global average temperature has already increased by 1.1. degrees Celsius, compared to pre-industrial levels, and the United Nations says the planet is currently on track for a temperature increase of between 2.4 Celsius and 2.6 Celsius by the end of this century.
Among the most transformative changes being discussed is a new approach to risk ratings and the resulting interest rates that developing countries must pay on World Bank loans.
Ngozi Okonjo-Iweala, head of the World Trade Organization, said his experience as Nigeria’s finance minister informed his support for Ms Mottley’s agenda.
Like many developing countries, Nigeria borrows at much higher interest rates on average than wealthier countries. Paying off this debt is a huge drain on national budgets, leaving governments without necessary reserves when faced with a crisis like the kind of widespread flooding Nigeria has recently suffered.
“It’s a totally exaggerated risk, I can tell you that,” she said. “It’s not fair that some countries can borrow at 3% and others at 14, 15.”