The IMF and World bank annual meetings will take place in Washington this week. These meetings take place in a context of magnified calls to revise the international financial architecture, almost 80 years after its creation. Persistent weak leadership at the World Bank has made those calls only louder.
Which kind of structural changes could be envisaged?
Some background. As a result of the 1944 Bretton Woods treaty, the World Bank Group emerged to reduce poverty and generate shared prosperity with the developing world, and the International Monetary Fund was established to monitor and ensure a robust international monetary system. Notwithstanding their purposeful design and inedible footprint over the years, both institutions struggle with mandate definitions, design constraints and the outsized role of the dollar. The American economy, defined by GDP, represents now less than 20% of the global output, yet more than 90% of global financial transactions are expressed in dollars.
The World Bank, in particular, is encumbered with a skewed governance structure (five Western countries and China represent 41% of voting power, and the US has the monopoly in designating the CEO); it struggles with scale (the World Bank had no more than $115 billion in disbursements this year, a mere fraction of the present needs); it is misaligned in its purpose (the World Bank has supported fossil fuel expansion in the midst of the climate crisis); and it lacks speed of execution. Change to these four structural levers would be a fundamental start to address the crises facing the 55 most vulnerable countries in the Global South.
Calls to revise the international financial architecture are gaining momentum. The Bridgetown Agenda, launched this summer under the leadership of Barbados PM Mia Mottley, proposes to increase the speed and scale of mitigation and adaptation funds from the IMF, the World Bank and multi-lateral development banks to the most vulnerable countries. This week, Treasury Secretary Janet Yellen offered proposals for the World Bank and regional development banks to expand their purview to address global challenges and move away from country-specific loans. The proposals echo recommendations from the “Boosting MDB’s Investing Capacity” report, issued under the leadership of international finance expert Frannie Leautier, and commissioned by the G20.
These reform propositions coalesce with a much broader groundswell to redraw the original Bretton Woods architecture, which is marred by a tangible inadequacy to tackle the current eight-headed crisis: climate change, health (including mental health) pandemic, bio-diversity loss, financial fault lines, geo-political tension, social inequality and racial injustice, loss of faith in international trade and democratically elected institutions, and food supply and water shortages.
What would comprehensive reform mean?
A comprehensive reform could involve the creation of an expanded and fully interactive trifecta. In addition to the IMF and the World Bank, a new institution could be created, the International Platform for Climate Finance (IPCF), a structure proposed by Steve Waygood, who leads Aviva Investors Responsible Investment Team. The platform would bring central bankers, finance ministers and CEOs together to translate Intergovernmental Panel on Climate Change (IPCC) scientific recommendations into adaptation and mitigation imperatives for the finance and investment industry. The IPCF could also hold the international balance sheet of Nationally Determined Contributions (NDCs) articulated within the Paris 2015 Treaty. The World Bank would have an amended remit to become the institution for facilitating mitigation (focus on reduction and avoidance of crisis pain points at core), in strategic alignment with the Multilateral Development Banks. Global water and stable food supply management would become part of its remit. The IMF would see a mandate change to become the institution for tackling adaptation (focus on relief to address the outcome of the crisis pain points). Part of the remit of the UN International Organization for Migration would be transferred to a new entity under IMF command to speed up the decision and execution capacity to address climate migration.
The IPCF, the IMF and World Bank would each have 4-year CEO appointments, assigned on a rotating basis to the Americas, Europe, Middle-East & Africa, and Asia-Pacific region, each with proportionate voting rights, defined by a new metric comprised of population, modified GDP and net-zero carbon progress status. Each institution would put in place a Climate-related Financial Risk Advisory Committee, akin to that of the US Financial stability board. Each of the three institutions, along with multilateral development banks, would sign a standard ethical code of conduct and a full commitment to decarbonization, halting any further financing of fossil fuel-based activity.
Challenges for the World Bank
This week, the World Bank governors will be called on to fulfill their fiduciary duty, especially regarding the agency relationship with their CEO. It is the primary responsibility of the Board of Governors to ensure that a CEO acts in alignment and in the best interest of the principals (the capital purveyors) and the private citizens who are contributing through fiscal contributions. In view of the urgency of the eight-headed crisis, the hardship endured by the population of the most vulnerable countries, and the call to amend the remit of the World Bank to alleviate poverty and to share prosperity, the Board has a dual challenge: what would a World Bank fit for the 21st century challenges offer and does it have aligned executive leadership caliber to steer and implement that transition?
Regarding the leadership caliber, the Board of Governors could submit to CEO Malpass the following questions, which have been sorted into three categories:
• Visionary and Moral Leadership
o The World Bank released recently ‘Sovereign Climate and Nature Reporting: Proposal (for a Risks and Opportunities Disclosure Framework” for sovereign nations. As the largest multilateral institution, what does the institution’s own framework look like? Is it inspired by the voluntary framework for corporations, TCFD (Task Force on Climate Risk related Financial Disclosures) framework?
o Peer multilateral development banks (MDBs) such as the Asian Infrastructure Investment Bank, European Bank for Reconstruction and Development, and the European Investment Bank have set 50 percent of their funding to benefit climate. Why is the World Bank, as the largest multilateral institution at only 35%?
o At COP26 in 2021, a joint statement with Multilateral development Banks was watered down under your instructions, excluding specific deadlines and numerical objectives. What was your motivation?
o World Bank Group commitments rose to $115 billion in fiscal year 2022. How much has been advanced in maturities over ten years and what was the breakdown between mitigation and adaptation?
• Strategy Execution
o The World Bank refused to sign onto a statement, endorsed by 34 countries and 5 financial institutions, including the European Investment Bank, that committed to “end new direct public support for the international unabated fossil fuel energy sector by the end of 2022, except in limited and clearly defined circumstances that are consistent with a 1.5 degrees Celsius
o The Bank’s current climate finance reporting processes are such that the Bank’s claimed levels of climate finance cannot be independently verified. Oxfam asserts that the Bank’s claims could be off by as much as $7bn, or 40%, based on publicly available information. Can these claims be confirmed or rectified?
o Given the global water crisis, why are the commitments to water and waste management on a downward trend from $2.6bn in 2018 to $1.8 bn in 2022?
• Fossil fuel specific exposure
o The World Bank has committed almost $15 billion to fossil fuel-based projects since the Paris 2015 Treaty. How much, broken down by project, has been advanced under your leadership since your appointment on April 5, 2019?
Governors could next look at staff morale. Is current leadership sufficiently accountable for its decisions and capable of inspiring highly qualified professionals through the next structural transition? Lastly, in view of the string of faux pas and slips of the tongue by CEO Malpass, each consuming precious management time and representing wasteful distractions from its core remit, is current leadership equipped to steer the institution through the challenges it must address?
Part of proper governance would also involve making a list of potential candidates who could replace CEO Malpass and meet the gravitas standards and strategic execution leadership profile imposed by the board? The following candidates, all representing the American hemisphere, could be identified:
• Christiana Figueres, dual Costa Rican and American citizen, exemplary climate change diplomat, negotiator and chief architect of the Paris 2015 climate treaty.
• Mia Mottley, PM of Barbados, staunch activist for deep international finance architecture reform, who would represent credible leadership for the core customers of the World Bank, the citizens of the 55 vulnerable countries.
• Al Gore, former U.S.Vice-President, American businessman and environmentalist, 2007 Nobel Prize recipient, who has the political clout and professional track record through climate fund Generation Investment Management, which he co-founded, and as partner of Kleiner Perkins for its climate technology solutions
• Mark Carney, Canadian banker and economist, who has the international aura and gravitas as former Governor of the Bank of Canada and of England, as well as chair of the Financial Stability Board
Almost 80 years after the signing of the 1944 Bretton Woods treaty, it is the duty of this generation to show ingenuity, audacity, vision, and execution acumen to achieve the foundations for the new international financial architecture. The review at the World Bank leadership this week would be an informative harbinger of what initial, credible change to the broader international financial architecture might represent in terms of relevance, gravitas and effectiveness. Most importantly it might inspire the next generation, in both the Global North and South, to cooperate, in the spirit of the original Bretton Woods accord, in designing solutions for problems they didn’t create.