Category: Feature on Proposals and Analysis page
How Emerging Economies Are Reshaping the International Financial System
It’s been 25 years since the 1997 Asian financial crisis led to the creation of the G20 forum for finance ministers; and 15 years since this became a leader-level meeting following the global financial crisis. During this period, there has been significant shift in the global finance and economic landscape. The ascent of several emerging economies has seen their contributions to the multilateral finance system that supports development rise significantly. Our new report collates those contributions over the last decade for the first time. It charts how China’s annual contributions to the UN and multilateral development banks rose twenty-fold from $0.1bn to $2.2bn. But it also looks collectively at a group of 13 rising economies whose developmental contributions to multilateral finance institutions have risen five-fold to over $6bn over the last decade. These contributions now make up an eighth of the total; and have seen the creation of two new multilateral finance institutions.
In this blog, we draw out key findings from our analysis, including the balance between funding existing and new institutions like the New Development Bank. We consider whether continued growth in the 13 emerging actors could generate enough new funding for development over the next quarter century, and even create an institution as large at the World Bank’s fund for low-income countries (IDA). Despite recent rhetoric around the return to a bipolar world order, this report is evidence that a wide group of countries are already playing major role in the global economic and development system, and will continue to do so in years to come
The transformational effect of economic growth on the multilateral system
In 1990 most people in the world lived in low-income countries; by 2020, this share had fallen dramatically to just seven percent of people. Meanwhile, the share of the global population living in middle-income countries swelled from 30 percent in 1990 to 73 percent in 2020. Such a transformation implies a greater number of countries with the economic output to contribute internationally: widening and deepening participation in the multilateral system.
And this is just what we’ve seen. Over the decade to 2019, we find a group of emerging actors have significantly increased their contributions of development finance to multilateral organisations. These include thirteen major economies outside the group of more established providers within the Development Assistance Committee (DAC), which tend to receive more attention. Ten of these emerging actors are G20 members, including the BRICS—Brazil, Russia, India, China, and South Africa—but others have grown quickly too: Argentina, Chile, Indonesia, Israel, Mexico, Saudi Arabia, Turkey, and the United Arab Emirates. Collectively, we refer to these thirteen emerging actors as the “E13.”
Over the decade, the E13’s annual contributions of development finance to multilateral organisations (both core and funding earmarked for particular purposes) have increased almost five-fold, from $1.3bn in 2010 to $6.3bn in 2019 (up 377 percent). And their unrestricted core contributions have risen even more: increasing from $1.0bn to $5.2bn (up 410 percent).
Of these core contributions, we see that those to UN agencies more than quadrupled over the decade, steadily rising from $0.3bn to $1.2bn (up 330 percent). But by far the most striking development in E13 core contributions has come from the creation and capitalisation of two new multilateral organisations: the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB).
The role of China
Although China has recently stepped back its bilateral finance efforts, its multilateral contributions increased steadily to 2019; and provided a third (34 percent) of the E13 total over the decade. Our colleagues have examined this in detail, including how China has the second highest aggregate voting share after the US in international finance institutions it supports. Still, our analysis also highlights the importance of Russia, Brazil and India who each contributed over $3bn over the period and collectively contributed a further third of the total. While China’s multilateral contributions have been concentrated (59 percent) in new institutions it co-founded (see below), other providers have concentrated funding in traditional institutions: for example, Argentina, Chile and Mexico did not support the new institutions while for Saudi Arabia and UAE they were 17 percent and 21 percent respectively.
Creating new multilateral finance organisations
Over the ten-year period we examine, almost half of the E13’s core multilateral contributions were to the two new institutions (AIIB and NDB). After 2016, funding provided to these institutions made up over two-thirds of their contributions. Indeed, in 2016 the first financial contributions to AIIB and NDB causedE13 multilateral development finance to triple in a single year. The E13 provided an additional $6.0bn of core funds for AIIB and NDB in 2016, without reducing their multilateral contributions through other channels. Though annual contributions reduced to $3.1bn in 2019, AIIB and NDB still accounted for half of the E13’s multilateral development finance in that year, leaving their contributions at the end of the decade far ahead of the beginning.
Figure 1. E13 core and earmarked contributions of development finance to multilateral organisations (nominal USD billions)
Source: Authors’ analysis
Emerging actors fund a sixth of the UN system
As well as higher absolute contributions (Figure 1), the E13’s role in the multilateral system has also grown in relative terms (Figure 2). As a share of the level of finance provided by the 29 high-income countries in the OECD DAC, the E13’s core multilateral contributions rose from 5 percent in 2010 to 12 percent in 2019—more than doubling their relative significance. This was largely due to the effect of AIIB and NDB (clearly seen by the 2016 peak), but we also see that E13 core contributions to the UN system steadily and quickly rose as a share of the DAC level across the decade: from 5 percent in 2010 to 17 percent in 2019.
Figure 2. E13 core contributions of development finance to multilateral organisations as a share of contributions from DAC countries
Source: Authors’ analysis
A look to 2050—what role might the emerging economies play?
As the economies of the E13 continue to grow, what might this mean for their multilateral contributions in the future? Figure 3 shows how the share of economic output provided as development finance to multilateral organisations (either core or earmarked) tends to increase with higher levels of income per capita. Though the relationship is steeper for the DAC than the E13, even the E13’s current trajectory implies a significant increase in future multilateral development finance from this group.
Figure 3. Relation between Income per capita and contributions of development finance to multilateral organisations, 2010-19
Source: Authors’ analysis
As an illustrative scenario: we calculate that if the E13’s recent growth performance is extrapolated (roughly 4.3 percent growth per year in per head terms over the 2010s), and if the group continues to follow its current path relating income per capita to the share of GNI provided, then by 2050 the group could collectively provide 0.032 percent of its combined GNI as core contributions of development finance to multilaterals (this is still well-under half of the current figure for DAC providers). The E13 might then contribute some $64.5bn per year—up from 0.019 percent in 2019 ($5.2bn). To provide a sense of scale, the additional contributions would be enough to fund an additional organisation on the scale of the World Bank’s International Development Association (the IDA19 replenishment was equivalent to $27.3bn per year, which inflated to 2050 could be $50bn). This scenario is highly simplified—and we are working on other more careful potential scenarios in the coming months.
Just the beginning of the multipolar era
Whilst the war instigated by Russia, and rising competitions with China, could suggest a return to a Cold-War-esque bipolar world, the spread of economic growth and prosperity mean the economic and financial influence is much-wider spread.
The “emerging” economies we examine here are significantly stepping up their contribution to development and their choices on whether and how to support international financial institutions will have a significant bearing on development and prosperity.
The World Bank Should Ramp Up Finance for Climate, But Not at the Cost of Development
The World Bank Group Evolution Roadmap makes three financing asks of donors and shareholders: capital for IBRD, continued support for IDA, and grants to support climate projects. I think donors and shareholders should support a capital increase and strengthen commitments to IDA. But they should not provide more grants to support climate activities at least until (i) IBRD lending to support mitigation has been reformed and expanded and (ii) major cost-effectiveness and equity concerns of existing grant mechanisms are addressed.
The World Bank already acts as a trustee for twelve climate-related financial intermediary funds, which together have raised over $48 billion, mostly spent on grants for mitigation and in particular clean energy (see forthcoming work by my colleagues Clemence Landers, Nancy Lee, and Sam Matthews).
More than four fifths of this finance is used in middle-income countries, a proportion unlikely to change, given the mitigation focus. Zack Gehan and I have been developing scenarios for future economic growth and electricity consumption that suggest low-income economies will still be responsible for less than five percent of electricity consumption in 2050 even if they considerably outperform growth expectations. And mitigation subsidies in low-income countries have to be larger for the same reduction in emissions, because the cost of capital is higher.
Climate funds are not cost-effective tools of greenhouse gas reduction. Most funds do not publish any data on emissions avoided per dollar of subsidy, but available data suggests funded projects vary by more than 100-fold in terms of cost effectiveness. The Bank Group’s use of subsidies in general has led to minimal leverage (often 1:1 or less) and proven extremely difficult to scale. Even if they were be used more effectively, grants are the wrong instrument for mitigation. Given the aim is to shift countries along the abatement cost curve toward activities that have marginally unfavorable in local economic returns but positive global externalities, large volumes of marginally below market finance (i.e., IBRD lending) is a more appropriate tool than smaller volumes of grant finance.
Despite this, worldwide, official development assistance (ODA) is already being diverted to support the targeted $100 billion in (supposedly) new and additional climate finance, nearly all of it to subsidize mitigation projects. There is every reason to think this dynamic would be repeated by donors with regard to additional ODA provided through the World Bank Group.
Low-income countries will suffer the most from the effects of climate change, a problem they have played almost no part in creating. Development (and thus development finance) is a powerful force for adaptation. Redirecting effective development finance from low-income countries to subsidize ineffective mitigation activities in richer countries is a triple loss for mitigation, adaptation, and development.
Instead, donors and shareholders should support the IBRD to do more on mitigation through policy lending operations. Combined with using the financial value of callable capital to borrow more from the current base, an IBRD capital increase which leverages lending capacity 10:1 or more could significantly expand finance for mitigation. These resources can be made more attractive to borrowers if packaged as large-scale, low transactions-cost climate policy lending rather than project finance. Additional ODA funding to subsidize mitigation in middle-income countries should only follow increased support for IDA, reform, and expansion of IBRD climate mitigation lending, and the development of cost-effective grant models for climate funds.
The World Bank Window for Host Communities and Refugees: Opportunities for Learning and Expansion in Africa and Beyond
This blog is one in a series by experts across the Center for Global Development ahead of the 2022 US-Africa Leaders Summit. These posts aim to re-examine US-Africa policy and put forward recommendations to deliver on a more resilient, deeper, and mutually beneficial partnership between the United States and the nations of Africa.
The US-Africa Leaders Summit in Washington, DC presents an important opportunity to discuss the public good provided by African countries in hosting 7 million refugees. The US is the largest bilateral and multilateral donor to refugee responses around the world. However, with a record number of people displaced, more must be done to advance development-led approaches that recognize the reality of protracted displacement, harness the productive potential of refugees to support themselves and local economies, and respond to the shared challenges of hosts and refugees.
One critical tool that African and US officials should focus on and jointly advocate for is the World Bank’s Window for Host Communities and Refugees (WHR). Designed as an innovative financing mechanism, the WHR provides funding incentives for low-income countries to include refugees in poverty reduction efforts and other development programs and has a review framework to monitor and promote improvements in refugee policy. To date, 77 percent of the WHR has been committed to African countries, which host 72 percent of refugees who live in low-income, eligible countries.
As the largest shareholder of the World Bank (and with its recent replenishment pledge, the largest contributor to the bank’s concessional window), the US has a strong interest in ensuring the WHR provides the support host countries need to deliver positive development outcomes for host communities and refugee populations alike. And, in an era of squeezed aid budgets, multilateral development banks (MDBs) like the World Bank offer donors leverage: for every US$1 from the United States, the World Bank can provide an additional $4 to low-income countries.
Building on its strong partnerships with country governments, focus on poverty reduction, and multi-year funding, the World Bank can more effectively support medium-term approaches such as including refugees in health and education systems (versus parallel systems) and job creation programs. For a number of African leaders, the $2.4 billion WHR is a major source of funding that is linked to their country’s development plans, in contrast to the vast majority of humanitarian aid that directly targets refugee subsistence.
Background on the World Bank’s Window for Host Communities and Refugees
The International Development Association (IDA) is the World Bank’s main tool for supporting low-income countries with concessional financing, offering low- to no-interest rate loans and grants across a variety of sectors. In 2016, the World Bank launched the $2 billion Regional Sub-Window for Refugees and Host Communities (RSW) as part of the IDA’s 18th Replenishment. The RSW lasted for three years, until June 2020, when it was redesigned as the $2.2 billion Window for Host Communities and Refugees (WHR) as part of IDA19. (IDA19 covered two, rather than three, years due to the COVID-19 pandemic and therefore only allocated $1.3 billion of the total.) The WHR continues under IDA20 with $2.4 billion in funding.
The WHR and its predecessor the RSW were created in recognition of the fact that low-income countries that host refugees often struggle to meet their development goals for their own citizens. Humanitarian and development assistance must reach both host communities and refugee populations to move beyond care and maintenance aid approaches and improve social cohesion. The WHR provides additional financing beyond the country’s typical IDA allocation, and for most countries, does so on even more favorable terms. WHR funding supports refugee-hosting countries to mitigate shocks and create social and economic development opportunities for refugees and hosts; facilitate the social and economic inclusion of refugees in host countries and/or as returnees; and strengthen country preparedness for additional refugee flows.
The country eligibility criteria include hosting at least 25,000 refugees (or refugees make up at least 0.1 percent of the population), having a minimally adequate framework for refugee protection, and an action plan for longer-term development solutions that benefit refugees and host communities. Once a country becomes eligible, individual projects are reviewed and cleared for WHR funding by World Bank management before submission to the board for approval. Projects are expected to include efforts to improve the policy and institutional environment for refugees.
In the most recent IDA replenishment—IDA20—the World Bank committed to achieving significant policy improvement and implementation in at least 60 percent of beneficiary countries eligible for the WHR and also added new language on the importance of policy dialogue. For example, among priority activities, it highlights “support legal solutions and/or policy reforms with regard to refugees, e.g., freedom of movement, formal labor force participation, identification documents, and residency permits.”
In order to track progress, the World Bank developed the Refugee Policy Review Framework (RPRF). The framework outlines four dimensions—host communities, regulatory environment and governance, economic opportunities, and access to services—and a methodology. The first review was released in 2021 and provided detailed narratives on all dimensions for the 14 eligible countries at the time of writing. The review finds a “significant impetus for reforms,” especially at the early stages of IDA18, but noted that progress slowed amid the COVID-19 pandemic and varies significantly across contexts. For IDA20, the RPRF will be used to determine if the WHR meets its 60 percent target for significant policy improvement.
WHR funding for Africa
To date, 15 of the 17 countries that have benefitted from the WHR are in Africa: Burkina Faso, Burundi, Cameroon, Chad, Democratic Republic of Congo, Djibouti, Ethiopia, Kenya, Liberia, Mauritania, Niger, Republic of Congo, Rwanda, South Sudan, and Uganda. In addition, Bangladesh and Pakistan have received support.
Funding is notionally allocated to countries based on the number of refugees hosted, and the amounts that are eventually committed also depend on country demand, specific project due diligence approval, and other factors. Uganda, which hosts the most refugees in Africa, has received the most, including the maximum of $500 million in IDA19.
WHR funds have been used on a variety of projects on the continent. RSW funding in Chad incentivized and supported the country’s first-ever national refugee policy that reflects the rights of refugees as laid out in the 1951 Refugee Convention. The World Bank recently approved budget support to Liberia, including resources from the WHR, based on policy reforms which include an increase in refugees’ access to public services. South Sudan has used WHR funds to improve the socioeconomic conditions of refugees and host communities by providing critical services like basic health care, COVID-19 vaccines, clean water, and education for youth.
Recommendations to increase the WHR’s impact
US and African leaders should discuss successes of the WHR to date and commit to support ideas to increase its impact. Areas for discussion should include:
- Expanding the size of the WHR and assessing the levels of concessionality. An additional four countries joined the pool of eligible countries between IDA19 and IDA20, but funding for the window increased only modestly. The World Bank and its partners should assess opportunities to increase the size of the WHR both during the mid-term IDA assessment (when funds can be reallocated based on obligations and need) and in the next round of fundraising for IDA. As part of discussions on reforming and expanding MDBs to provide global public goods, IDA contributors including the US should consider the levels of concessionality offered through the WHR. It will be important to balance levels that incentivize country demand, appropriate recognition of the public good component (with many benefits accruing to others in the region and the world), and the need to preserve the leverage of donor dollars.
- Aligning US and other bilateral funding with WHR investments: At the summit, the US could commit to co-financing WHR projects through USAID and/or State. Aligning and crowding in bilateral funding would increase the program reach and policy impact of WHR projects. As the leading donor in refugee response, the US should also work with other bilateral donors to encourage co-financing.
- Executing on the increased focus on policy reforms, especially those that facilitate refugee economic contributions. The core promise of the WHR is that it provides an infusion of resources toward realizing the development potential of hosts and refugees. For example, the upfront costs of including refugees in education and health systems is both more efficient than creating parallel systems and yields longer-term and sustainable benefits as refugees contribute to local economies. However, these benefits only accrue if refugees are offered meaningful de jure and de facto opportunities to make these contributions. Recognizing the political sensitivity of refugee work in many contexts, the WHR has made significant progress, but more attention is required. For African countries, it is critical to make de facto reforms and track implementation progress at the local level, because funders need to see results that development carrots can actually work. US policymakers must make their support for these reforms clear at the summit and beyond, through continued diplomatic engagement on the rights of refugees across bilateral and multilateral fora.
- Considering independent de jure and de facto policy assessments in addition to the RPRF, and linking policy assessment to financing allocations. The WHR should increase transparency and coordination around discussions of each country’s Refugee Policy Review Framework, and how the RPRF is connected to negotiations around specific programs funded by the WHR. In addition the World Bank should consider linking policy and implementation to concessional finance allocations, so that countries with the most inclusive practices receive more per refugee hosted..
- Promoting WHR-like tools and approaches at other MDBs and donors. The World Bank has led on the agenda of recognizing refugee hosting as a global public good, supporting development outcomes to complement humanitarian relief, and creating financial instruments to respond. The World Bank also hosts a trust fund, the Global Concessional Financing Facility, that includes other MDBs and supports middle-income countries hosting refugees. However, the contributions are ad hoc and insufficient to meet current needs. The Inter-American Development Bank has a dedicated migration program with strong leadership, but also requires additional and predictable funding. Other MDBs—including big players in Africa like the African Development Bank and the Islamic Development Bank—should learn lessons from the WHR and develop robust, development-focused instruments to provide greater support to refugee-hosting countries in their regions. The United States is a leading shareholder in almost all MDBs, and concerted US leadership to elevate such instruments could yield dividends for both displaced persons and the communities that host them. For these tools to meet their potential, they require predictable funding at levels that can meaningfully shape a country’s approach.
- Elevating in-country coordination and consultations, including refugee and host community leaders, on the RPRF and WHR programs. Currently, the World Bank and UNHCR are systematically engaged in WHR discussions with country governments, but inclusion of other key stakeholders occurs on an ad hoc basis. The US should ensure engagement of relevant embassy staff in country dialogues to support joint prioritization and co-financing, and as mentioned above, encourage the participation of other bilateral donors. African leaders can support greater coordination across affected ministries, recognizing that support for host communities and refugees crosses sectors. Finally, all parties should work to deepen the engagement of refugees and host community members in policy and program discussions. For example, country-level coordination platforms could host regular consultations with refugee and host organizations, ensuring that convenings are substantive and tailored to facilitate participation.
Conclusion
In October, Secretary Yellen called for reforming and expanding the MDBs to address global public goods in addition to country development priorities. For African leaders of refugee-hosting countries and US officials, the WHR, as a unique tool to provide significant development financing for a global challenge, should be a high priority for discussion.
The authors thank Cassie Zimmer, Jocilyn Estes, Erin Collinson, Clemence Landers, and Sarah Miller for their input.
Stay tuned for more analysis on the summit in the coming days, and sign up for our US development policy newsletter to get updates in your inbox.
MDB Policy-Based Guarantees: Has Their Time Come?
Multilateral development bank policy-based guarantees (PBGs) have long been an instrument in search of demand. First introduced in 1999 at the International Bank for Reconstruction and Development to help governments access market borrowing at attractive rates, their track-record has been uneven, and their uptake limited. The multilateral development bank (MDB) business model tends to favor direct lending over non-lending products. And MDBs have experienced high-profile bumpy patches with PBGs—including a 2015 PBG for Ghana which sparked significant controversy around whether it generated an actual financial benefit for the country – that may have deterred countries from using the instrument. Moreover, the benign global interest rate environment that has prevailed since the Global Financial Crisis has generally helped governments access external commercial financing at historically low rates, making PBGs less directly relevant.
But PBGs have also had their successes, especially during times of stressed market conditions. PBGs have proven useful in insulating issuers from external market turmoil and helped governments secure better terms – reducing funding costs by an average of 330 basis points compared to what governments would have achieved had they pursued unenhanced issuances. They have helped new issuers establish market access and grow their investor base. They have helped countries reprofile expensive commercial debt on more favorable terms. They have helped governments secure private sector participation in restructuring exercises. And some governments are starting to use PBGs to raise funds for environmental, social, and governance (ESG) programs and projects, raising the possibility of a new generation of ESG PBGs.
PBGs have also proven more catalytic than direct lending, with $1 PBG mobilizing on average $1.8 in commercial finance.
PBGs could become freshly relevant as the world grapples with multiple crises, increased capital market volatility, heightened risk aversion, and tightening monetary conditions. Indeed, many of their strengths are well-tailored to the challenges governments in emerging and frontier markets will increasingly face in the coming years. Going forward, PBGs could be particularly useful debt management tools to help governments maintain market access on more favorable terms and reprofile or restructure debt while mobilizing more private finance for ESG programs.
Read the full note here.