Larry Summers offered a stark assessment of October’s Annual Meetings of the World Bank Group and International Monetary Fund. In the face of overlapping global economic crises, Summers, the former U.S. Treasury Secretary, said that meeting was, “not going to be remembered for anything except being a missed opportunity.”
Summers was referring to the damage being wrought by a global pandemic, climate change, Russia’s invasion of Ukraine, worldwide inflation and rising food and energy costs in the low- and middle-income countries that represent nearly 85% of the world’s population – and the failure of the World Bank and IMF annual meetings to rise to the occasion.
Summers, who is a member of the ONE Campaign board, served in the Clinton and Obama administrations, as I did. We were sometimes on the same page and sometimes not. Whether you agree or disagree with Larry Summers, two things are true: He has an astounding brain and very strong opinions.
No doubt, Summers will have similarly strong views when he turns his brain power to the G20 Leaders’ Summit in Bali this week, when the world has a second chance to do something about the challenges on the table: Converging crises are slamming the world’s poorest and even middle-income countries. Sixty countries are at risk of debt crises. Our research shows that one in five people on the planet live in the 25 countries that are at the highest risk of debt distress.
Most of these countries don’t have sufficient fiscal and monetary tools to adopt stimulus packages like the U.S. and Europe did during the pandemic. In the poorest countries, revenue is falling and costs are increasing. The multilateral development banks – the World Bank and 14 regional banks that together lent or granted $167 billion to low- and middle-income countries in 2019 – are not able to deliver the capital or the creativity needed to stem the tide.
This reality led the G20 to constitute a panel of experts to consider what the multilateral development banks, or MDBs, could do if they change the way they do business. Their Independent Review of Capital Adequacy Frameworks report is up for consideration at the summit. The question is whether the G20 will adopt its recommendations – or continue to kick some hard decisions down the road.
The five CAF recommendations include that the MDBs should adapt their approach to defining risk tolerance; give more credit to callable capital; utilize financial innovations; improve credit rating assessments of their financial strength; and provide greater access to MDB data and analysis. The punchline: Taken together, these reforms could unlock somewhere between $400 billion and $1 trillion in urgently needed capital.
The signals from the annual meeting in October were mixed. Some major shareholders leaned in but without endorsing all five recommendations. Finance ministers did charge World Bank management to engage its board in a dialogue on a shared vision for the institution and to review the panel’s recommendations and develop a roadmap for assessing them.
If the G20 – whose members represent 60% of the world’s population – wants to steer a truly global economy, it will act on the CAF report in a manner that reflects its interests as well as those of the other 40%. It should take on board the slate of CAF recommendations rather than going a la carte in favor of those that are the easiest lift. It needs to act with speed – calling for more data or recommendations a year from now will only invite more economic decline.
The G20 also needs to consider the views of not just the MDB’s major shareholders but also their “clients” – the countries that are depending on the G20 to go big and go bold.
Mia Mottley, the prime minister of Barbados and a woman who combines a formidable command of the facts with personal experience in managing an economy buffeted by crises, leads the Bridgetown Initiative, which among other proposals calls on lenders to use low-interest, long term debt instruments to finance the energy transition. She put it this way: “The global financial architecture was never designed for us – it was designed when we were still colonies. We were not seen, we were not heard, we were not felt.”
The urgency of acting on the CAF report is not simply a matter of global economics, it is also a matter of global politics. As Summers also said of the annual meetings, “the developing world is going to tune us out. Maybe they’ll tune China in, maybe they won’t. But either way it’s hard to believe that we’re going to be creating the world we want to create.”
Developing countries are watching as shocks not of their making upend their economies. Evidence of a growing disconnect between those in desperate need of increased MDB capital and those who control the MDBs was in stark evidence at the U.N. General Assembly in September. Some of my colleagues have argued that the North is eager to secure the support of Southern member countries for its strategic interests in Ukraine – but without asking how it might support their strategic interests, which are at this point focused squarely on economic survival.
There is a danger that the G20’s verdict on the CAF recommendations will be directionally correct but too tentative to yield either change or increased capital in time to prevent a catastrophe. One of the arguments driving the go-slow approach to the CAF reforms, particularly with respect to balance sheet optimization, is that the World Bank could lose its AAA credit ratings.
To be sure, the CAF proposals constitute a risky shift. But there is a dangerous irony in assessing risk based exclusively on the health of the World Bank or other MDBs. Surely, they need to maintain fiscal health. But the real risk here is that 60 or more countries could fall off the economic map; that hundreds of millions could be plunged into extreme poverty; and that economic divergence will accelerate, leaving us with not a single, global economy, but with two, neither of which can flourish without the other.