October 5, 2022
Lawrence H. Summers, a Post Opinions contributing columnist, is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010. Masood Ahmed is president of the Center for Global Development; he has previously served as a senior official at the World Bank and the International Monetary Fund.
When they gather in Washington next week for the International Monetary Fund and World Bank Group annual meetings, the world’s finance ministers face what has been labeled a polycrisis: Challenges ranging from increased interest rates, climate change and an epically strong dollar, to food-supply shortages, high inflation and a still-prevalent pandemic all combine to threaten not just the global economy but also the livelihoods of hundreds of millions.
It is likely that in the next year the United States will go into recession, Europe will be battered by high energy costs and China will suffer its lowest growth in decades. A major slowdown in the global economy is almost inevitable.
What is at stake — what will greatly depend on decisions that finance ministers make next week — is whether developing countries suffer a lost decade of economic opportunity, as happened to many countries in the 1980s, or whether they are enabled to maintain momentum, as occurred after the 2009 financial crisis.
While much will depend on national policy choices, the external environment will be enormously important for most countries. Global cooperation through the IMF and the World Bank matters a great deal. The challenge for these institutions will be not to just discuss new funds and funding mechanisms but to actually deliver the greatly increased support the moment demands.
Action in three areas is essential:
Ease immediate financing pressures: Beyond Ukraine’s need for sustained support, the war has led to higher food, energy and fertilizer prices, all of which are straining the budgets of the most vulnerable low- and middle-income economies. There will be further challenges as interest rates rise, exports to the industrial world fall and diminishing global liquidity makes it harder to attract capital. To avoid cascading downturns, rapid and substantial new finance will be required.
The IMF has provided some financing. As its covid response demonstrated, however, it can do much more — if the fund’s major shareholders provide clear and united direction. Appropriately, the IMF has temporarily raised by 50 percent the ceiling on the financing it provides to countries through its emergency window; it now needs to show similar initiative for its regular programs. Many countries that need IMF financing do not seek it because of the stigma involved. This problem can be addressed by developing a new contingent financing facility that provides funding to countries hurt by external developments without insisting on traditional IMF conditionality.
The World Bank announced that it will scale up new funding commitments to $170 billion through June 2023 to help borrowing countries address these shocks. However, as the bank’s response to the pandemic demonstrated, commitments are not the same as money received: Between 2019 and 2022, the bank increased commitments by over $36 billion but disbursement grew half as quickly. At next week’s meetings, shareholders should extract a pledge that these new commitments will be disbursed quickly.
Deal with unsustainable debt: The issue of debt needs to be tackled, too. Sixty percent of low-income countries and one-third of emerging markets are already at high risk of debt distress. To start, the large creditor countries of the Group of 20 should suspend debt service for the neediest countries, which would provide about $15 billion of cash-flow relief next year.
Even so, many countries will still need to restructure their debt. Unfortunately, the machinery for resolving sovereign debt problems is dysfunctional and unlikely to be rethought anytime soon. But the IMF could help fill the gap by playing a more active role in sovereign debt resolution, working with major creditors to make the process more predictable and productive.
To be sure, there are serious problems of coordination among official as well as between public and private creditors. China’s reluctance to engage in coordinated debt relief and restructurings has been a particular problem given the scale of Chinese holdings. But that is not a reason for others to stand back — it is a reason to move faster so as to set an example.
Don’t forget climate change and pandemics: While the meetings will properly focus on the immediate crisis, it would be reckless to ignore longer-term challenges. An important step would be for shareholders to agree that the World Bank should, over time, substantially reorient its focus onto global rather than just national challenges.
Reducing the risk of pandemics, combating climate change and preserving biodiversity will require a new generation of investment that a reinvented World Bank would be uniquely positioned to catalyze. Sustainability must become as central to the bank’s work as reconstruction and development.
An expanded role for the World Bank would also mean far more lending and advising. The fastest way to get this started would be to implement the recommendations of a recent independent expert group convened by the G-20, which found that the World Bank and other development banks could use existing capital more efficiently while preserving their core financial strength. In parallel, shareholders should start discussions around a “green capital” increase to support an expanded focus on global public goods, and also to drive the bank’s renewal as a partner with the private sector on sustainable investment. Taken together, these changes could drive more than a trillion dollars in new public investment over the next decade and encourage even larger increases in private investment.
Trust in international cooperation has been severely damaged, first by real and perceived shortcomings in the help given to developing countries during the pandemic and now by sky-high food and energy prices and the threat of recession spreading out from the industrial world. The global economy is in dire need of repair. Next week is the time to start.