Even the odds: Fixing global economic governance

By Joseph E. Stiglitz

NEW DELHI: Following the annual meetings of the International Monetary Fund and the World Bank this month, the Middle East is teetering on the edge of a major conflict, and the rest of the world continues to fracture along new economic and geopolitical lines. Rarely have the shortcomings of world leaders and existing institutional arrangements been so glaringly obvious. The IMF’s governing body could not even agree on a final communique. True, the World Bank, under its new leadership, has committed to addressing climate change, tackling growth challenges, and strengthening its anti-poverty policies. It aims to increase its lending by leveraging existing capital and by raising new funds. For the latter, however, it will need US congressional approval, and that seems unlikely with Republicans controlling the House of Representatives. Importantly, the planned increase in lending capacity falls far short of what the world needs. It is more than just a drop in the bucket, but the bucket remains largely empty.

As with the climate discussions surrounding the United Nations General Assembly in September, there was much talk about scaling up private capital by lowering the risk premium that investors demand for projects in poor countries. Although the social returns to investing in solar power in Sub-Saharan Africa (where there is abundant sunshine and a dearth of energy) are higher than in the cloudy north, the private sector has been reluctant to enter, owing to fears about political and economic instability.

The upshot of all this “de-risking” talk is that the public sector should provide whatever subsidies it takes to “crowd in” the private sector. No wonder big private financial firms are hovering around these international meetings. They are ready to feed at the public trough, hoping for new arrangements that will privatize the gains while socialising the losses – as past “public-private partnerships” have done. But why should we expect the private sector to solve a long-run public-goods problem like climate change?

The private sector is well known to be short-sighted, focusing wholly on proprietary gains, not social benefits. It has been awash with liquidity for 15 years, thanks to central banks pumping huge amounts of money into the economy in response to the 2008 financial crisis (which the private sector caused) and the pandemic. The result is a process whereby central banks lend to commercial banks, which lend to private Western firms, which then lend to foreign governments or infrastructure-investment firms, with transaction costs and government guarantees piling up along the way. It would be much better to use liquidity to strengthen multilateral development banks (MDBs), which have developed special competencies in the relevant areas.

Though MDBs have sometimes been slow to act, that is largely because they have obligations to protect the environment and uphold people’s rights. Given that climate change is a long-run challenge, it is better that climate investments be carried out wisely and at scale.

When it comes to achieving scale, the key is not just to mobilise more money by borrowing from rich countries, with all the well-known problems that entails; it is to enhance emerging markets’ and developing countries’ revenues. Yet existing international arrangements are effectively blocking this urgent imperative.

Consider the OECD’s Base Erosion and Profit Shifting framework. The hope was that BEPS would make rich corporations pay their fair share of taxes in the countries where they operate. The prevailing “transfer price system” gives multinationals enormous leeway to report profits in whatever tax jurisdiction they prefer. But the proposed BEPS reforms – even if fully adopted, which seems unlikely – seem of limited effect and will provide developing countries with limited additional revenues at most.

Worse, the invidious Investor-State Dispute Settlement process – which allows multinationals to sue governments when they make regulatory changes that could harm profits – has further constrained the resources available to emerging markets and developing countries, even as it has hampered their efforts to respond to environmental and health challenges.

Then there is the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) regime, which led to vaccine apartheid and unnecessary deaths, hospitalizations, and illnesses in the developing world during the pandemic (further increasing expenditures and decreasing revenues). And TRIPS is designed to fill rich multinationals’ coffers with royalties on intellectual property from the developing world well into the future. In fact, the entire structure of trade agreements has preserved neocolonial trade patterns, with developing countries stuck producing mostly primary commodities, while developed countries dominate the high-value-added links in the global production chain.

All these flawed arrangements can and should be changed. Doing so would provide developing countries with the resources they need to invest in climate-change mitigation and adaptation, public health, and the rest of the Sustainable Development Goals. Perhaps the single most important improvement to the global financial architecture would be an annual issuance of, say, $300 billion in special drawing rights (SDRs, the IMF’s international reserve asset), which it can “print” at will if advanced economies agree. As matters stand, the bulk of SDR issuances go to rich countries (the IMF’s largest “shareholders”) that don’t need the funds, whereas developing countries could use them to invest in their future or to pay back debt (including to the IMF).

That is why rich countries should recycle their SDRs by turning them into loans or grants for climate investments in developing countries. While this is already being done to a limited extent through the IMF’s Resilience and Sustainability Trust, it could be scaled up massively and redesigned to achieve a bigger bang for the buck. The best part about this approach is that it does not really cost advanced economies anything. Unless one is beholden to some misguided ideology, there is no reason to oppose it. Even if advanced economies reached net-zero emissions tomorrow, we would still be doomed, because emissions in developing countries would continue to rise. Perhaps the only strategy, then, to ensure that developing countries and emerging markets do what they must if we are to avert a climate catastrophe is to start rectifying some of the global injustices of the past, and to generate more income and affordable financing for developing countries.