Fixing Global Economic Governance
Following the annual meetings of the International Monetary Fund and the World Bank this month, the Middle East is teetering on the edge of a major conflict, and the rest of the world continues to fracture along new economic and geopolitical lines. Rarely have the shortcomings of world leaders and existing institutional arrangements been so glaringly obvious. The IMF’s governing body could not even agree on a final communiqué.
True, the World Bank, under its new leadership, has committed to addressing climate change, tackling growth challenges, and strengthening its antipoverty policies. It aims to increase its lending by leveraging existing capital and by raising new funds. For the latter, however, it will need US congressional approval, and that seems unlikely with
Republicans controlling the House of Representatives. Importantly, the planned increase in lending capacity falls far short of what the world needs. It is more than just a drop in the bucket, but the bucket remains largely empty.
As with the climate discussions surrounding the United Nations General Assembly in September, there was much talk about scaling up private capital by lowering the risk premium that investors demand for projects in poor countries. Although the social returns to investing in solar power in Sub-Saharan Africa (where there is abundant sunshine and a dearth of energy) are higher than in the cloudy north, the private sector has been reluctant to enter, owing to fears about political and economic instability.
The upshot of all this “derisking” talk is that the public sector should provide whatever subsidies it takes to “crowd in” the private sector. No wonder big private financial firms are hovering around these international meetings. They are ready to feed at the public trough, hoping for new arrangements that will privatize the gains while socializing the losses – as past “public-private partnerships” have done.
But why should we expect the private sector to solve a longrun public-goods problem like climate change? The private sector is well known to be short-sighted, focusing wholly on proprietary gains, not social benefits. It has been awash with liquidity for 15 years, thanks to central banks pumping huge amounts of money into the economy in response to the 2008 financial crisis (which the private sector caused) and the COVID-19 pandemic. The result is a roundabout process whereby central banks lend to commercial banks, which lend to private Western firms, which then lend to foreign governments or infrastructure-investment firms, with transaction costs and government guarantees piling up along the way.
It would be much better to use liquidity to strengthen multilateral development banks (MDBs), which have developed special competencies in the relevant areas. Though MDBs have sometimes been slow to act, that is largely because they have obligations to protect the environment and uphold people’s rights. Given that climate change is a long-run challenge, it is better that climate investments be carried out wisely and at scale.