By Johanna Neuhoff, Associate Director of Consulting, Oxford Economics
As Ajay Banga assumes the role of president of the World Bank, incorporating global public goods into its financing scheme will help him meet his goal of thinking globally while recognising local needs.
A new leader often heralds a new agenda, and Ajay Banga’s (Ajaypal Singh Banga’s) elevation to the top job at the World Bank beginning June 2 is certain to mean a much-needed fresh direction for the multi-billion-dollar multilateral lender.
With the support of its largest shareholder, the United States, Mr. Banga has made it clear that combatting climate change, pandemics and fragility is central to achieving the Bank’s twin goals of eliminating extreme poverty and promoting shared prosperity.
This transition provides an excellent opportunity for the World Bank to put into practice the commitment set out in its Evolution Roadmap to make what economists call the provision of global public goods (GPGs) a central part of its mission to achieve the United Nations (UN) sustainable development goals (SDGs) and fulfil its mandate as established by its twin goals.
Global benefits outweigh the costs
GPGs benefit all countries and, thus, all people. Countless studies estimating the costs and benefits of GPG provision have shown that investment in GPGs pays off because the benefits are huge at the global level compared to the costs.
To give just one example, our research for the German development agency GIZ published in late June shows how improving pandemic preparedness globally would cost around US$45 billion a year, or just 0.1 percent of global GDP (gross domestic product), which is dwarfed by the estimated annual harm from the COVID-19 pandemic of US$3.5 trillion over six years—some 4 percent of global GDP.
The challenge is that GPGs, by definition, benefit all people globally, irrespective of what entities provide them and bear the corresponding costs. This leads to an unfortunate distribution of costs and benefits among countries, incentivising free-riding and leading to the observed underprovision. Furthermore, governments may not be willing to pay back loans for helping other countries if their own benefits are small.
The World Bank can address unfavourable distributions of costs and benefits
Due to its unique position as a powerful multilateral lender, the World Bank is ideally positioned to be the financier of international regimes for GPGs in developing countries. Its multilateral approach allows for weighing global benefits and costs, mitigating the unfavourable incentive structure at the individual-country level. By taking a strategic shift, it can make GPG provision the centrepiece of a transformed country-based engagement model, enabling the Bank, and its client countries, to prepare better for the future—becoming the “Bank for the World”.
Not all GPGs are equally important to the Bank
GPGs are often interpreted as global challenges, but a more stringent and useful definition is that they are goods that deliver benefits in other countries greater than in the ones providing them but in which there are no markets.
However, some GPGs are less relevant to the World Bank than others. We have identified five tests demonstrating which GPGs the Bank should incorporate into its strategic agenda.
First, there must be political consensus about the global targets of GPG provision, from which measurable national targets can be derived.
Second, the provision of the respective GPGs must contribute to achieving the Bank’s twin goals, as the benefits must also accrue in client countries.
Third, financing gaps for implementing measures to support GPGs must exist in developing countries, thus leveraging the Bank’s role as the lender.
Fourth, several partner organisations should be involved, for which the Bank can act as the convenor and mobiliser of private capital.
Finally, the World Bank can fill institutional gaps in the national provisions of global regimes by capitalising on its technical and financial capacities.
Seven GPGs were analysed in the study: climate-change mitigation; preservation of biodiversity; pandemic prevention; peace and security; free trade; international tax cooperation; and financial stability. Three of them passed the tests described above and are, therefore, relevant for the World Bank: climate-change mitigation, preservation of biodiversity and pandemic prevention.
Steps for the Evolution Roadmap
So, what next steps should Mr. Banga and his colleagues take to incorporate those GPGs into the Evolution Roadmap? The first is to mainstream GPGs into all aspects of the Bank’s work by aligning its safeguards with international minimum standards set out by global regimes. In other words, the Bank must ensure that the projects it finances do not excessively harm the GPGs in question.
The Bank should also include the targets set by international regimes for the selected GPGs in its high-level outcomes, as they inform its country programming and the Country Partnership Frameworks (CPFs) focused on ensuring they meet the twin goals. This will maximise the overlap between a country’s priorities and the GPGs for all projects that are beneficial to the client country.
Because ambitious, transformative projects aimed at delivering GPGs tend to be very costly and therefore unprofitable to the client country without further incentives, the Bank should allocate additional, explicit GPG-specific funding to avoid diverting resources away from efforts toward national-development goals and to “buy GPG effects”. The more additional specific GPG funding is available, the more ambitious the projects it can support as part of its country engagement.
Grant funds should be used to buy cross-border externalities
Of course, it is not only about additional money but also how it is spent. The current GPG fund of the World Bank, established in 2020, allocates grants to IBRD (International Bank for Reconstruction and Development) loans at the flat subsidy rate of 15 percent of the eligible loan amount. Thus, any project that produces positive externalities receives the same grant—irrespective of its GPG impact.
As a result, a housing project in Colombia that arguably produces only negligible GPG externalities receives the same volume of subsidies from the GPG fund as an Indian solar rooftop programme that is expected to abate CO2 (carbon dioxide) emissions valued at US$269.4 million.
There is a need for a rules-based and targeted approach that allocates grant funds strategically to buy cross-border externalities. One possible solution is an auctioning scheme through which interested parties bid on the dollar-per-GPG effect they need to pursue the project. Allocating grants according to the measurable degree of cross-border externalities as opposed to the flat subsidy rate in the current IBRD GPG fund will help the Bank become much more impactful.
Increasing financing for the World Bank
Given the ongoing debate about increasing the funding available to multilateral development banks (MDBs), the good news is that the required financing for the provision of GPGs by the World Bank is much less than the benefits they generate.
For example, the US$3.15-billion development policy loan to Egypt by the Bank’s IBRD arm delivered a cut of 0.05 gigatons in CO2 emissions valued at US$15.8 billion. And US$267 million of credit from Germany and the Bank’s IDA (International Development Association) arm for Côte d’Ivoire resulted in the annual preservation of 10,900 hectares of forest that will deliver benefits to other countries worth US$38.2 million a year.
Ensuring the additional money is better spent will help Mr. Banga make his case to the Bank’s shareholders.
During the run-up to his selection as the World Bank’s president, Mr. Banga told a Center for Global Development (CGD) audience that the Bank must “think globally but recognise national and regional needs”. He could not have summed up the promise of incorporating GPGs into its agenda better.