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After decades when developing world governments focused on attracting private capital to fund investment, official institutions like the IMF and World Bank should now be coming into their own. Combating climate change requires vast spending on mitigation and technological transition, but higher market interest rates are crippling lower-rated governments’ borrowing capacity and driving many into default.
A conference in Paris this week will consider options for extending concessional finance, including proposals from the “Bridgetown Initiative” led by Mia Mottley, prime minister of Barbados. The plans include channelling $100bn in special drawing rights, a reserve asset created by the IMF, to emerging markets, and introducing currency risk guarantees for green investments. But reaching consensus will mean the institutions involved, the IMF and multilateral development banks, particularly the World Bank, overcoming challenges to their relevance and legitimacy.
Much of the global system of finance as it affects developing country governments — from infrastructure lending to resolving sovereign debt crises — has traditionally been directed by the Group of Seven and other rich countries and underpinned by the US dollar, causing frustration among some developing countries. But emerging markets’ attempts at creating alternative frameworks have also encountered trouble.
The New Development Bank, which Beijing set up with fellow “Brics” countries Brazil, Russia, India and South Africa in 2014 and is led by former Brazilian president Dilma Rousseff, has struggled since the invasion of Ukraine because of its association with Russia. Under pressure from rich-country sanctions, it has suspended lending to Moscow and needs dollars to cover its liabilities.
The director-general of its independent evaluation office recently told the FT in an interview that the bank was “struggling to mobilise resources” and examining alternative currencies and instruments. It is also recruiting new member countries. But despite some limited activity in renminbi, a recent claim by Brazil’s president Luiz Inácio Lula da Silva that the bank will challenge the dollar’s dominance is not credible.
Last week another Chinese-led development finance lender, the Asian Infrastructure Investment Bank, which has more than a hundred shareholders including rich-world governments, also suffered a challenge to its legitimacy. Its Canadian director-general for communications resigned and complained that the institution was unduly influenced by the Chinese Communist party, causing the Canadian government to review its membership.
On the issue of sovereign debt, China has caused intense frustration among rich-country creditors by holding up restructuring talks for distressed developing countries. Beijing has tried to insist that if it takes losses on its loans — largely infrastructure-related debt — so should development institutions such as the World Bank. In April, China’s central bank governor appeared to relent and said the country would participate in collective restructuring efforts organised through the larger Group of 20 nations, though it’s unclear what concessions Beijing will make in practice.
A logical outcome would be the big middle-income powers given more say in existing multilateral institutions. But so far it’s not just the rich world’s jealousy of existing prerogatives — the US and Europe in effect appoint the heads of the World Bank and IMF respectively — preventing a shift. China in particular has traditionally eschewed the kind of leading role that might threaten its image as a developing country,
When shareholder governments’ “quota” contributions to the IMF and World Bank — which broadly reflect economic heft and determine voting weights in the executive boards — were last revised, officials involved said China argued privately for an outcome that held its vote share below that of the US and Japan. The quotas are currently being revised again, with the US supporting a shift towards emerging market countries, and this time China should take on more responsibility.
China also clings to its (self-defining) developing country status in the World Trade Organization, which gives it “special and differential treatment” privileges such as phase-in arrangements for liberalisation, despite increasing pressure from the US to drop it. In 2021, the overriding importance of symbolism became clear when Beijing offered to give up the substantive benefits but keep the label.
Avinash Persaud, who advises the Barbadian government on the Bridgetown Initiative, says that the rich countries increasing multilateral institutions’ firepower could help restore their own and the system’s credibility among emerging markets. “We need to say to the G7: you run this system but it’s broken. It’s the best way for you to leverage your money. But if you don’t put a lot more into it, it will be swept away by other things.”
It’s a strong argument. But it’s up against not just the potential reluctance of the rich countries to shell out but mistrust of multilateral institutions among middle-income powers. Meanwhile, geopolitical divisions over Ukraine have unhelpfully made relations between some advanced and developing countries trickier. The reform agenda deserves success, but it has a lot of entrenched suspicion to overcome.
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