Increasing the capital – and optimizing the existing capital – of the world’s MDBs is of the utmost importance. But doing so makes sense only if that financing is used to move the world economy in a direction consistent with the United Nations Sustainable Development Goals (SDGs) and the 2015 Paris climate agreement.
According to researchers at the Brookings Institution, the world needs to invest an additional $3 trillion per year in sustainable infrastructure in order to keep global warming below 2°C relative to pre-industrial levels – the target enshrined in both the SDGs and the Paris agreement. Today, however, infrastructure contributes heavily to global warming, with about 70% of all greenhouse-gas emissions coming from its construction and operation.
That means that the infrastructure we build – or cease to build – can determine whether we will achieve global climate goals. It will also determine whether safe and affordable infrastructure services (for example, water, sanitation, electricity, and health care) can be scaled up to meet other SDGs, such as eliminating poverty.
Here, MDBs can play an essential role, given that the private sector and national governments often shy away from such investment. Private capital markets are inherently biased toward short-termism, and tend not to finance long-term investments in infrastructure. Although global economic growth is accelerating, private-sector financing of infrastructure has been falling, according to the World Bank, from $210 billion in 2010 to $38 billion in 2017.
And while national governments provide more than 75% of financing for infrastructure, they tend to avoid massive expenditures for new projects, particularly sustainable infrastructure. Moreover, many governments have come to prefer public-private partnerships that allow them to keep liabilities off-budget. And, as the IMF recently found, governments often launch infrastructure projects as a way to swing votes in the run-up to elections. Longer-term sustainability concerns (including infrastructure maintenance) thus usually take a back seat to political motives.
In light of these shortcomings, development banks have a unique role to play in harnessing expertise and bringing together stakeholders to finance the right kinds of infrastructure. To that end, in 2015, the World Bank and other MDBs launched a strategy to increase development financing “from billions to trillions,” by using public finance to “crowd in” private investment, especially from large institutional investors like pension and insurance funds.
But, since then, the World Bank has rebranded its approach as “maximizing finance for development” (MFD), while failing to demonstrate how it will actually achieve the SDGs. This strategic uncertainty should serve as a reminder that, while MDBs have a critical role to play, they should not be given carte blanche.
At Boston University’s Global Development Policy Center, we estimate that the MDBs could increase lending by up to $1.9 trillion. That said, a blank check would be disastrous, given that the current financing pattern of the MDBs – and particularly the World Bank Group – is highly carbon-intensive. Moreover, a recent study by the Inter-American Development Bank documents how MDB-financed projects under the current model have fueled social inequity and conflict in different parts of the world.
Taxpayer money for closing global infrastructure gaps should thus be conditioned on the MDBs’ recalibration of their strategies toward the SDGs and the Paris climate agreement. This will require reforms to MDBs’ board- and project-level governance. The goal should be to ensure that developing countries – especially those most vulnerable to climate change – have more say in development banks’ board-level decisions. In addition, poorer and vulnerable communities need to be included in the process from the beginning, so that they can provide full prior consent. Affected communities should be sharing the benefits, not absorbing the costs, of new infrastructure investments.
To address climate change directly, all infrastructure investments should be subject to a “Paris test” to confirm that projects are being carried out in accordance with the goal of keeping global warming well below 2°C, or even below 1.5°C. The World Bank’s pledge to end financial support for upstream oil and gas is a step in the right direction, but it should be expanded and become the norm for all MDBs. Moreover, more impact assessments are needed to ensure that road, rail, and waterway projects do not destroy livelihoods or nearby ecosystems, leading to further greenhouse-gas emissions and a loss of vital biodiversity.
Finally, we will need adequate monitoring and evaluation systems to enforce a new compact for MDBs. Without accountability and clear targets set by the SDGs and the Paris agreement, the MDBs will continue to operate according to their own taxpayer-financed discretion, to the detriment of the climate, the environment, and social equity worldwide.
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