The annual IMF and World Bank meetings will take place in Washington this week. These meetings take place in the context of intense calls for a review of the international financial architecture, nearly 80 years after its establishment. The World Bank’s continued weak leadership has raised the voice of those calls.
What kind of structural changes can be imagined?
some background. As a result of the Bretton Woods Treaty of 1944, the World Bank Group emerged to reduce poverty and achieve shared prosperity with the developing world, and the International Monetary Fund was created to monitor and ensure a strong international monetary system. Despite their purposeful design and inedible footprint over the years, both institutions struggle with mandate definitions, design limitations, and the outsized role of the dollar. The US economy, defined by GDP, now accounts for less than 20% of global output, yet more than 90% of global financial transactions are expressed in dollars.
The World Bank, in particular, is saddled with a skewed management structure (five Western countries and China account for 41% of the voting power, and the United States has a monopoly on appointing the CEO); It struggles with scale (the World Bank had no more than $115 billion in payments this year, just a fraction of current needs); they are incompatible in their purpose (the World Bank has supported the expansion of fossil fuels in the midst of the climate crisis); It lacks speed of execution. A change to these four structural levers will be an essential start in addressing the crises facing the 55 most vulnerable countries in the Global South.
Calls for a review of the international financial architecture are gaining momentum. The Bridgetown Agenda, launched this summer under the leadership of Barbados Prime Minister Mia Motley, proposes increasing the speed and scale of mitigation and adaptation funds from the IMF, World Bank and multilateral development banks to the most vulnerable countries. This week, Treasury Secretary Janet Yellen presented proposals for the World Bank and regional development banks to expand their remit to address global challenges and move away from country-specific loans. The proposals reflect the recommendations in the report “Strengthening the Investment Capacity of the Asian Development Bank,” issued under the leadership of international financial expert Franny Letier, and mandated by the G-20.
These reform proposals combine with a widespread wave to redraw the original Bretton Woods architecture, which has been marred by appreciable shortcomings in addressing the current eight-headed crisis: climate change, a health pandemic (including mental health), biodiversity loss, and financing. Fault lines, geopolitical tension, social inequality and racial injustice, loss of confidence in international trade and democratically elected institutions, food supply and water shortages.
What does comprehensive reform mean?
An overhaul could include creating an expanded, fully interactive trilogy. In addition to the International Monetary Fund and the World Bank, a new institution could be created, the International Platform for Climate Finance (IPCF), a structure proposed by Steve Weygood, who leads the responsible investment team at Aviva for investors. The platform will bring central bank governors, finance ministers and CEOs together to translate the scientific recommendations of the Intergovernmental Panel on Climate Change (IPCC) into the imperatives of adaptation and mitigation for the finance and investment sector. The IPCF could also maintain the international balance sheet for Nationally Determined Contributions (NDCs) set out in the 2015 Paris Treaty. The World Bank would have revised powers to become the Facility Institution mitigation (Focus on reducing and avoiding critical pain points at their core), in strategic alignment with the multilateral development banks. Managing global water and stable food supplies will become part of her remit. The IMF will see a change in the mandate to become the processing institution Adaptation (Focus on relief to address the outcome of the pain points crisis). Part of the powers of the United Nations International Organization for Migration will be transferred to a new entity under the leadership of the International Monetary Fund to accelerate decision and operational capacity to tackle climate migration.
The IPCF, the International Monetary Fund and the World Bank will each have 4-year CEO appointments, appointed on a rotational basis in the Americas, Europe, Middle East, Africa and Asia-Pacific regions, each with proportional voting rights, defined by new law. The measure consists of population, adjusted GDP, and net zero carbon progression status. Each institution will establish an advisory committee on climate-related financial risks, similar to that of the US Financial Stability Board. Each of the three institutions, along with the multilateral development banks, will sign a standard ethical code of conduct and fully commit to decarbonization, and halt any additional funding for fossil fuel-based activity.
Challenges for the World Bank
This week, the governors of the World Bank will be asked to perform their fiduciary duty, particularly regarding the agency's relationship with their CEO. The Board of Directors has the primary responsibility to ensure that the CEO acts consistently and for the benefit of the Directors (providers of capital) and private citizens who contribute through financial contributions. Given the urgency of the eight-headed crisis, the hardship faced by the people of the most vulnerable countries, and the call for an overhaul of the World Bank's mandate to alleviate poverty and share prosperity, the Board faces a twofold challenge: What can the World Bank do to meet the challenges of the twenty-first century and does it have A harmonized executive leadership standard to guide and implement this transformation?
Regarding the level of leadership, the Board of Directors can present to CEO Malpass the following questions, which are grouped into three categories:
• Wise and ethical leadership
o The World Bank recently released the “Sovereign Climate and Nature Report: A Proposal (for a Disclosure of Risks and Opportunities Framework”) for sovereign states. As the largest multilateral institution, what does the institution’s framework look like? Is it inspired by the corporate voluntary framework, the TCFD (Task Force financial disclosures related to climate risks)?
o Multilateral development banks, such as the Asian Infrastructure Investment Bank, the European Bank for Reconstruction and Development and the European Investment Bank, have allocated 50 percent of their financing for climate. Why is the World Bank the largest multilateral institution with only 35%?
o At COP26 2021, a joint statement with the MDBs has been relaxed under your instructions, except for specific deadlines and numerical targets. What was your motive?
o World Bank Group commitments increased to $115 billion in FY 2022. How much has been provided in maturities over ten years and what is the split between mitigation and adaptation?
• Strategy Execution
o The World Bank refused to sign the statement endorsed by 34 countries and 5 financial institutions, including the European Investment Bank, which committed to “end unabated new direct public support for the international fossil fuel energy sector by the end of 2022, except in limited and clearly defined circumstances.” Correspond to 1.5°C
o The Bank's current reporting processes on climate finance make the levels claimed by the Bank for climate finance not independently verifiable. Oxfam asserts that the bank's claims could be delayed by up to $7 billion, or 40%, based on publicly available information. Can these allegations be confirmed or corrected?
o Given the global water crisis, why are commitments to managing water and waste trending down from $2.6 billion in 2018 to $1.8 billion in 2022?
• Exposure to fossil fuels
o The World Bank has committed nearly $15 billion to fossil fuel-based projects since the 2015 Paris Treaty. How much progress, broken down by project, have you led since your appointment on April 5, 2019?
Rulers can then look at employee morale. Is the current leadership sufficiently responsible for its decisions and able to inspire highly qualified professionals during the next structural transition? Finally, given the series of false errors and slips of the tongue by CEO Malpass, each taking up valuable management time and representing wasted distractions from its core competence, is the current leadership equipped to guide the organization through the challenges it must address?
Part of sound governance might also include developing a list of potential candidates who could replace CEO Malpass and meet the criteria for attractiveness and the strategic implementation leadership profile mandated by the Board of Directors. The following candidates can be identified, all representing the American Hemisphere:
• Christiana Figueresa dual Costa Rican and American citizen, model climate change diplomat, negotiator and chief architect of the 2015 Paris climate treaty.
• Mia MotleyPrime Minister of Barbados, is a strong advocate for a deep reform of the international finance architecture, which will represent credible leadership for the World Bank's core clients, citizens of 55 vulnerable countries.
• Al GoreFormer Vice President of the United States, American entrepreneur and environmentalist, 2007 Nobel Laureate, has political influence and a career track record through the Climate Fund Generation Investment Management, which he co-founded, and as a partner in Kleiner Perkins for its climate technology solutions
• Mark Carneya Canadian banker and economist, has the international aura and charisma as a former Governor of the Bank of Canada and England, as well as Chairman of the Financial Stability Board
Nearly 80 years after the signing of the Bretton Woods Treaty in 1944, it is the duty of this generation to demonstrate ingenuity, boldness, vision and operational acumen to achieve the foundations of the new international financial architecture. The review of the World Bank's leadership this week will be a useful harbinger of what an initial, credible change in the broader international financial architecture may represent in terms of relevance, attractiveness, and effectiveness. Most importantly, it may inspire the next generation, both in the North and the South, to collaborate, in the spirit of the original Bretton Woods Agreement, in designing solutions to problems they did not create.