“My grandchild’s time is running out.” Amid a tumult, Ajay Banga, President of the World Bank Group, recalls Teddy Roosevelt’s ‘man in the arena’: “These armchair critics who would rather blow it up … they’re not being helpful. The world needs a World Bank … The question is how to make it run better.”
Tapped as a reformer by the Biden administration, Banga hopes to usher in an era of increased climate mitigation and adaptation investment at a World Bank facing a polycrisis of high costs of living, climate vulnerability, and indebtedness among its loan recipients post-Covid as well as intense competition from rival Chinese-led development institutions. He takes office amid pressure to support the Bridgetown Initiative, an ambitious plan proposed by the government of Barbados last year to reduce lending risks for climate-vulnerable countries. Legitimate criticism over the Initiative’s massive scale has obscured several genuinely farsighted proposals dropped during recent negotiations. The restorative model of climate finance they advance offers Bank shareholders a chance at real change.
The Initiative can be best understood as a fluid policy platform being continuously renegotiated between low and middle-income countries (LMICs) and Global North decisionmakers. At least three versions have been circulated: ‘Bridgetown 1.0,’ created in 2022; ‘Bridgetown 1.9,’ a scaled-down set of proposals serving as a consultative document; and ‘Bridgetown 2.0,’ which shares the basic commitments of Bridgetown 1.9 but lacks its implementation details. This lack of specificity could be read as either the cost of UN and International Monetary Fund (IMF) support or a stopgap measure while Bridgetown 1.9 is renegotiated. Whatever version of Bridgetown prevails will have to overcome objections from the World Bank over the scale of the Initiative’s expansionary agenda and its heavy focus on private investment.
Banga’s reluctance to adopt an expansive lending plan may be explained by simple risk aversion. Even the scaled-down Bridgetown 2.0 simultaneously calls for more generous lending terms for LMICs—50-year as opposed to 10-year loans, low interest rates, and pandemic/disaster payment suspensions—and a massive increase in the overall scale of World Bank lending, amounting to $500 billion in official sector development lending and the use of Bank/IMF tools to help stimulate $1.5 trillion in direct private sector investment, at a time when the capacity of many debtor nations to fully pay off their loans is in doubt. The $1.5 trillion direct investment scheme, which bypasses national governments by channeling private funding to projects directly, has ruffled feathers at the traditionally public-private-partnership-oriented Bank, but it seeks to open up additional space for lending outside of already overdrawn public sectors; LMIC governments already spend a record average of 14.3 percent of national revenues servicing existing debts. A critical observer might characterize it as merely a means to spread the debt burden across LMICs’ public and private sectors simultaneously, indirectly raising their debt ceilings while increasing the chances of a cascading series of bankruptcies later on.
Around 90 percent of Bank holdings are in callable capital—funds only available in the event of a crisis—and the Bank’s greatest asset is its AAA credit rating, which allows it to borrow at low interest rates. Banga worries that if countries default on their debts, he would be forced to call up capital, shaking investor confidence. This would prevent the Bank from offering favorable terms to anyone and make future low-return projects unviable. Banga seeks to circumvent Bridgetown with a series of more moderate reforms to create modest increases in lending and manage risks for private investment in key middle-income countries.
Recent debates over a G20 report suggesting that the World Bank could expand lending significantly without jeopardizing its AAA credit rating indicate that the issues of sustainable expansion and risk mitigation remain deeply disputed. In principle, there is solid economic logic behind protecting the Bank’s ability to fund future generations at low interest rates. However, these necessary debates over scale rage against a backdrop of deep human suffering. We should not allow them to obscure the fact that essential parts of the Initiative’s original platform have been discarded to make it more palatable to Global North statesmen.
The original Bridgetown 1.0 called for an international tax on greenhouse gas emissions and apportionment from the Organisation for Economic Co-operation and Development’s (OECD) new global corporate tax to fund a Losses and Damages fund for climate-vulnerable countries. Bridgetown 1.0 also called for the emergency issuance of up to $650 billion of new foreign exchange guarantees through the International Monetary Fund (IMF) to a new Global Climate Mitigation Trust (GCMT) to “accelerate private investment in the low carbon transition, wherever it is most effective.” For context, these foreign exchange guarantees (also known as Special Drawing Rights, or SDRs) have been issued only four times in IMF history, and traditionally are allocated to nations in proportion to the sizes of their respective economies, meaning that high-income countries received most of the benefits. By excluding wealthy countries from its proposed SDR issuance in favor of a new Global Climate Mitigation Trust, Bridgetown 1.0 favors the financially sustainable development of climate-vulnerable countries over the short-term interests of established economies.
The GCMT would invest in select private climate mitigation projects in exchange for shares in the projects they funded, accelerating public investment in developing economies without further indebting LMIC countries. The GCMT’s foreign exchange guarantees would also mitigate the currency exchange risks that often plague investments in developing countries, thereby reducing the premiums projects in developing nations will have to pay when taking out loans for climate mitigation.
Political opposition from Global North interests appears to have killed not just the international tax on greenhouse gas emissions but also the GCMT. In Bridgetown 1.9, it was scaled down into a smaller trust to “provide cheap long-term currency hedges” to reduce foreign exchange risks, offered tentatively as a pilot program with the hope that it would later be expanded; in Bridgetown 2.0 the proposal was eliminated entirely.
Both the GCMT and the losses and damages fund would have worked to reduce the tremendous disparity in the cost of capital between LMICs and wealthy nations by reducing currency, natural disaster, and other “macro risks,” which Bridgetown Initiative architect Avinash Persaud argued contribute significantly to risk premia. The struggle between economic rationality and economic justice embodied by Banga and Bridgetown is partly a false dichotomy. These ambitious emergency measures were deeply economically rational, but they also recognized the injustices committed against climate vulnerable nations and would have forced both primary contributors and the international community as a whole to make restitution by altering conditions to facilitate greater climate investment in developing countries. They may have been written out of the picture for now due to the opposition of entrenched economic interests, but they may not remain outside of the Overton window forever.
In the long run, efforts at global multilateralism in the face of a rising China can only be served by revitalizing the falling international legitimacy of the Bretton Woods institutions, and the Bank in particular, needs to create conditions for lower-interest loans in LMICs over the coming decades to mitigate default risks among its heavily indebted clients. Ajay Banga’s World Bank Group and the international community as a whole should reconsider their opposition to Bridgetown 1.0’s restorative reforms, which offer the chance for proactive leadership in the cause of truly just climate investing.