Pandemic, climate shock, inflation: What causes hardship, annoyance and sometimes even financial restrictions for citizens in western industrialized nations is quickly becoming a life-threatening danger for people in the world’s poorest countries. For every percentage point of growth lost in developing countries’ economies, 100 million people are plunged into poverty and another 50 million into extreme poverty. This is what World Bank President Ajay Banga calculated at the joint annual meeting of the International Monetary Fund (IMF) and his own institution in Marrakesh. “The frustration of the global south is understandable. In many ways they are footing the bill for the prosperity of others,” said Banga.
Because that is the case, the head of the World Bank has now placed himself at the head of those who want to put international development policy on a new foundation. Yes, you can say: The World Bank wants to reinvent itself after 80 years and go beyond fighting poverty to become a health, environmental and climate bank. In addition to Banga, the main drivers are US Finance Minister Janet Yellen and Federal Development Minister Svenja Schulze.
It is obvious that the World Bank is at the center of all reform considerations, as the IMF sister bank is by far the largest development financier in the world, with annual loans and grants of more than 100 billion US dollars. The only problem is: So far, it has granted its significantly reduced interest loans almost exclusively to improve food supplies or school education in a specific individual country. However, the last few years in particular have shown that developing countries are increasingly struggling with problems that do not stop at national borders: pandemics, climate-related natural disasters and price increases for essential goods, for example. The 189 member states of the World Bank now want to draw conclusions from this. Or, as Schulze put it in Marrakesh: the time-honored institution is being brought “in line with the times.”
Developing countries need 2.3 trillion euros in aid – per year
“In the 21st century you can only successfully combat poverty if you also protect the natural foundations of life,” said Schulze. In the future, this knowledge will not only be an integral part of the official World Bank mission. Rather, it should also shape day-to-day business and help create the global energy transition, prevent the next pandemic or protect the rainforest. In order to make their contribution to ensuring that as many people in the world as possible have access to so-called “public goods” such as a clean environment, a stable climate, peace and functioning health care, the developing countries alone need, according to estimates by the Federal Government, financial aid amounting to EUR 100,000 every year the equivalent of around 2.3 trillion euros.
With the reform, the World Bank also wants to counter China’s efforts to incorporate the African continent into its own sphere of influence by awarding development aid. The People’s Republic’s loans to Africa have increased fivefold since 2010, while those from the World Bank have only increased two and a half times. However, Beijing is also currently learning what it means to be a creditor to other countries: some countries are now unable to repay their debts. China has therefore recently significantly reduced the granting of loans.
As far as the World Bank is concerned, the loan conditions – such as the level of interest and the terms – should be changed in such a way that it is more worthwhile for recipient states to invest in projects that not only serve their own benefit, but also serve a broader benefit, for example cross-border combating of infectious diseases. Projects should also be funded primarily in which the fight against poverty is combined with climate protection. As an example, Yellen cited agricultural programs that do not rely on high pesticide use, but rather on drought-resistant crops and efficient water use. In addition, the World Bank wants to defer interest and principal payments in the future for countries affected by natural disasters.
The World Bank also wants to take a higher risk when granting loans
Schulze emphasized that the expansion of the list of tasks does not necessarily mean that the World Bank has to make more money available for every project. However, she admitted that the question of financing would soon arise, because the international community is actually miles away from achieving the development goals it has set itself.
To address the problem, the World Bank wants to attract more private capital, but at the same time become more willing to take risks. So far, the bank has acted very conservatively in order not to endanger its creditworthiness. Today she holds 20 cents of equity for every dollar she borrows. In the future it should only be 19 cents. That sounds like a marginal change, but it goes a long way toward helping the bank spend $50 billion more over the next decade.
So-called hybrid financing instruments should also be added. The federal government, which is a pioneer here, wants to acquire a kind of bond from the World Bank and thereby bring 305 million euros in equity-like funds into its coffers. The bank could borrow an additional $2.6 billion. Countries like the USA are also in the starting blocks here. Combined with other measures, World Bank boss Banga wants to increase his institution’s potential credit offering by a further $100 billion.
However, many developing countries also view the reform plans critically. They fear that the World Bank could become a pure “climate bank” – and that they themselves would end up receiving less money for traditional poverty alleviation. Criticism also comes from aid organizations. “The proposals for the long overdue reform of the World Bank fall short. If the bank is to further develop its mandate and combat the climate crisis in addition to poverty and inequality, a simple capital increase is not enough,” said Ute Straub, responsible officer at Bread for the World . “A bigger bank doesn’t necessarily mean a better bank.”