At COP27, the IMF and the World Bank plan to overhaul the trade deadlock

At COP27, the IMF and the World Bank plan to overhaul the trade deadlock

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 combat the new threat of global warming.

There is growing momentum behind the ideas, which would overhaul the two powerful financial institutions that often channel money from rich, industrialized countries to developing countries. The proposals are quickly circulating among heads of state, finance ministers and even bank and fund managers, all of whom are meeting now. The UN climate summit is 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 disaster. Loans were based on risk, and richer countries charged lower interest rates and offered better terms than poorer countries.

But as climate change continues to bring a cascading series of hurricanes, floods, droughts and fires, poor countries themselves have become victims not only of extreme weather but also of age-old financial institutions. They are desperate for funds to recover from climate disasters, while also starving for money to prepare for the next disaster. They are saddled with debt, but need to invest in moving 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 proposed reforms would provide significantly more money to developing countries to mitigate the effects of climate change, deploy those funds more quickly, offer lower interest rates to struggling countries and stop defaulting on debt after major disasters. Supporters say the changes would also allow institutions to attract trillions of dollars in private capital to help countries prepare for climate disasters and transition to wind, solar and other clean energy.

If the World Bank and IMF review goes ahead, it could represent the largest mobilization of international finance in history to help developing countries cope with and adapt to a warming planet.

The proposals are largely in line with what is known as the Bridgetown Initiative, which was pushed this summer by Prime Minister Mia Mottley of Barbados, a heavily indebted Caribbean nation highly vulnerable to climate disasters. Ms Motley launched her campaign at last year’s climate summit in Glasgow, drawing attention to the plight of poor and small islands.

In July, he gathered economists, fund managers and United Nations Under-Secretary-General Amina Mohammed in the Barbadian capital, Bridgetown, to develop the plan.

At the UN climate summit now underway, Ms Motley’s unlikely idea has gained momentum, even from the heads of giant lenders.

“The world has changed dramatically,” IMF Managing Director Kristalina Georgieva said in an interview on the sidelines of the summit on Wednesday, adding that she strongly supports the Bridgetown Initiative. “When our institutions were created, there were no common global challenges like climate change. Now we must mobilize to address them.”

On Wednesday, World Bank President David Malpass acknowledged calls to reform his institution.

“At COP27 there were recommendations for multilateral development banks to significantly increase our climate finance,” Mr Malpass said in a message to finance ministers around the world. “I warmly welcome these calls. Successful climate action to reduce greenhouse gas emissions will require concerted global pressure, and we are committed to that effort.”

Almost every country is a member of both the World Bank and the IMF, but power is shared 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 make a formal request to the World Bank to develop an “evolution roadmap” 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,” he said.

And Svenja Schulze, Minister of Economic Cooperation and Development of Germany, who is a major shareholder of the bank, said the statement Last month, his government backed the reforms, adding that the bank’s “current model” was “no longer appropriate at this time of global crises”.

John Kerry, President Biden’s special climate envoy, said Wednesday at a Bloomberg News event on the sidelines of COP27 that bank and fund reform could unleash a geyser of capital that could save lives.

“It can be done,” he said, adding that if all goes as planned, it could lead to more than $1 trillion in new funding. “It’s the real stuff.”

French President Emmanuel Macron said Monday he supported Ms. Motley’s plans and joined her in calling for a task force to make recommendations on new climate finance plans before the annual spring meetings of the World Bank and IMF in Washington.

Those institutions, Mr. Macron said, “must come up with concrete proposals to activate these innovative financing mechanisms, to develop access to new liquidity, new preferential financing ideas for developing economies, to offer solutions that take into account vulnerabilities.”

Both institutions were the result of World War II. The Allies convened economists and politicians from 44 countries at Bretton Woods (NH) and developed a plan for an interconnected global financial system designed to help economies recover from the war and bring some stability to the global economy.

Established institutions have functioned largely unchanged since then, with rich countries primarily financing loans to developing countries and holding most of their debt, and thus exerting a great deal of control over their growth and progress.

Now that leaders are calling for fundamental changes in how institutions operate, they are once again turning to the constituent assembly.

“We need to put Bretton Woods back together and completely overhaul and reform the World Bank system and open up access to private capital for developing countries,” former Vice President Al Gore said at a climate summit on Monday. “This is a moment of global epiphany. This is not the time for moral cowardice and reckless indifference to the future of humanity.”

Ms. Motley echoed Mr. Gore in a message to world leaders on Monday.

“Yes, it’s time for us to revisit Bretton Woods,” he said on Monday. “Yes, it is time for us to remember that the countries that are sitting in this room today did not exist when the Bretton Woods institutions were basically formed. And therefore, we have not seen, we have not heard enough.”

Unlike the discussions around climate compensationOn the agenda of this year’s climate summit for the first time but not garnering much financial support, bank and fund reforms are seen as the most immediate and practical way to help the developing world deal with grave threats. caused by increasing floods, fires, heat and drought.

Raj Shah, chairman of the Rockefeller Foundation, attended the Bridgetown meeting in July and said the proposed reforms, if implemented, would be a monumental achievement, on par with earlier commitments to address global crises such as the AIDS epidemic.

“This is urgent, this has to happen now, there is absolutely no excuse, and if we don’t do it, the next generation of young activists will have to hold us accountable for trying to act like World War II has just ended, while actually we “We’re dealing with a completely different world there,” Mr Shah said during a panel discussion at COP27 on Tuesday.

By helping developing countries switch to renewable energy sources such as wind and solar, the reform money from the World Bank and IMF could help prevent average global temperatures from rising more than 2 degrees Celsius above pre-industrial levels.

Scientists have noted that an increase in temperature above 1.5 degrees will significantly increase the likelihood of catastrophic climate impacts. The global average temperature has already risen by 1.1. degrees Celsius compared to pre-industrial levels, and the UN says the planet is currently on track to rise from 2.4 Celsius to 2.6 Celsius by the end of this century.

Among the most transformative changes under discussion is a new approach to risk ratings and the resulting interest rates that developing countries must pay for World Bank loans.

World Trade Organization chief Ngozi Okonjo-Iweala said his experience as Nigeria’s finance minister informed his support for Ms Motley’s agenda.

Like many developing countries, Nigeria borrows on average at much higher interest rates than wealthier countries. Paying off that debt is a huge drain on national budgets, leaving governments without the reserves they need when they face such a crisis. Recently, Nigeria has been affected by widespread flooding.

“It’s a totally overblown risk, I can tell you,” he said. “It is not true that some countries can borrow at 3 percent and others at 14, 15 percent.”

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