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Fixing Global Economic Governance

- By Joseph E. Stiglitz

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.

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