Tomorrow’s Global Financial Architecture: A Reform Plan for People and Planet

Throughout 2023 and early 2024, leaders around the world called for global financial architecture reform (GFAR). These calls—articulated in Barbadian Prime Minister Mia Mottley’s Bridgetown Initiative, in the agenda of India’s G20 Presidency, at the Africa Climate Summit and the 2024 African Union Summit—rightly reflect frustrations with a system of outdated multilateralism. This system neither represents the voices of the majority of the world’s population nor responds to today’s major challenges such as economic inequality, climate change, and biodiversity loss.

But while reform proposals are now getting attention, the level of funding being unlocked thus far is nowhere near the reported estimated financing needs to achieve the stated objectives. Significant resources—to the tune of approximately $1 trillion a year by 2025 and $2.4 trillion a year by 2030—are needed for energy transitions and sustainable development in emerging market economies (excluding China).

 

Advocates have proposed seventy-one separate policy proposals.1 In one respect, this is arguably a good thing. The history of neoliberal thought shows that, over decades, a proliferation of actors debating and proposing solutions, when they are based on a similar worldview, moves the Overton window for what is politically viable.

However, this proliferation, combined with a lack of clarity around the objectives of GFAR, risks dissipating the limited political capital available to realize the proposed reforms in the next five years.

In light of these challenges, in 2024, policymakers need to focus on what can deliver the greatest impact.

To aid this process, this piece aims to aid policy makers in understanding a more complete picture of the landscape by

  1. delineating the various motivations behind reforms;
  2. enumerating the policy ideas and proposals being put forward, as well as the various coalitions of governments, NGOs, and multistakeholder groups that are pushing these agendas; and
  3. proposing a comprehensive reform plan comprising political salience, viable policy proposals, country-level plans, and a focus on impact.

Reform Motivations

The motivating factors behind recent calls for reform can be broadly divided into four categories:

Representation. Institutions such as the G20, UN Security Council, International Monetary Fund (IMF), and World Bank make decisions that have significant implications for countries that lack a say in determining the rules. In September and October 2023, respectively, African leaders successfully called for an African Union seat on the G20 and a third sub-Saharan African seat on the IMF’s executive board.

Rules. Debt contracts, credit ratings, economic conditionalities, and tax norms are accused of featuring biases that hinder the ability of some countries to get a fair deal and invest for the future. In October 2023, Nigeria proposed a UN General Assembly resolution to establish a legally binding international tax convention. This proposal—still under debate—is an alternative to the international tax norms set by the Organization for Economic Co-operation and Development—some of which are perceived to harm the tax bases of countries in the Global South.

Risk. Credible estimates on the scale of external financing needed for energy transitions and sustainable development in emerging market economies (except China) are approximately $1 trillion a year by 2025 and $2.4 trillion by 2030. The failure to invest now could result in increased carbon emissions and a lack of resilience to climate shocks if the world exceeds 2 degrees warming above preindustrial levels. In September 2023, African leaders, as part of a declaration following the Africa Climate Summit, campaigned for financing measures—still under consideration—to increase investment in sustainable development.

Reconfiguration. In a world where geopolitical power dynamics are shifting and tensions between the United States and China are rising, countries find themselves with newfound leverage and are keen to use it. In 2023, the South African government reported that over forty countries expressed interest in becoming members of the BRICS political grouping founded by Russia and dominated by China.

These motivations are all rooted in evidence and the realpolitik of shifting power, and they carry significant moral authority. They also frequently overlap—in who is driving them, in the arguments used to make the case for reforms, and in the horse-trading that occurs in multilateral negotiations.

Reform Proposals

The policy proposals related to public finance put forward by governments, multilateral groupings and civil society overlap significantly but can be subdivided into six categories.Proposals related to trade policy, carbon markets, the mobilization of private capital, and the regulation of banking have been excluded for reasons of brevity.

  1. Increased volume of low-cost public finance through loans and grants. This would occur through reform of multilateral development banks’ (MDB) capital adequacy frameworks and proposed increases in capital, through additional resources for the IMF’s Resilience and Sustainability Trust, and through the unlocking of IMF special drawing rights (SDRs) as collateral to bolster MDB balance sheets. This increased volume could also occur through increased donor contributions to the International Development Association (IDA), the World Bank’s low-income country fund; the funding would come in the form of official development assistance, largely from G7 countries. New funds on loss and damage and climate adaptation, transport, and fossil fuel windfall levies have been proposed to raise additional revenues.
  2. Increased representation in the governance of international institutions. This would occur through reform of the IMF’s quota system, which allocates voting shares to member states.
  3. Improved agility and flexibility of lending. This would occur through faster lending by the World Bank and reform of the IMF’s Resilience and Sustainability Trust to expand access and increase the flexibility of lending, particularly to countries that are highly vulnerable to climate change. 
  4. Improved risk assessments to create opportunities for investments. This would occur through the reform of credit rating agency methodologies, IMF and World Bank debt sustainability assessments, and assessments of concessionality based on climate vulnerability.
  5. Reforms of debt governance. This would occur through changes to IMF policy on how creditors are treated in debt restructurings; the introduction of “pause clauses” following natural and pandemic shocks; and debt swaps to unlock finance for sustainable development through credit enhancements, sustainability-linked key performance indicators, and high-cost debt exchanges for cheaper debt.

These proposals, their champions, and the policy processes through which they could be advanced are further discussed in the article’s annex. A range of coalitions drive the proposals, but while these coalitions frequently include sovereign entities, they do not focus on decisionmaking or policy implementation; instead, they put forward packages of proposals and commit their signatories to advocate for the reforms.

Government Coalition Proposals

Mia Mottley’s Bridgetown Initiative has gained attention as a principal vehicle for financial reforms. It has put forth a package of five policy proposals covering debt reform, liquidity support, and trade and governance. And while the initiative is essentially a campaigning tool, it has gained traction by presenting a propositional agenda, asking for endorsement from influencers and governments, and providing a short version that journalists can easily report.

The Vulnerable Twenty (V20) group (which now includes sixty-eight member countries that represent a total population of 1.7 billion people) laid out a GFAR proposal in April 2023 in its Accra-Marrakesh Agenda. The agenda includes reforms on debt, carbon markets, and climate risk management.

The Sustainable Debt Coalition, spearheaded by Egypt during the UN Climate Change Conference (COP27), brings together borrower and creditor countries to push for innovations in debt management. The innovations include climate resilient debt clauses, debt for climate “swaps,” and credit enhancements to reduce the cost of expensive debt and unlock finance for sustainable development.

The Paris Pact for People and Planet, supported by thirty-five governments from Africa, Asia, Europe, and Latin America, calls for accelerated debt suspension treatments and better coordination among MDBs. It also proposes further work under the G20 and COP presidencies on international taxation, lowering foreign exchange risks, and establishing an international finance facility for forests.

The Nairobi Declaration, which emerged from the September 2023 Africa Climate Summit, articulated the perspective of several African leaders on GFAR. It calls for MDB reform, new SDR issuances, a financial transaction tax, and reformed governance of the Bretton Woods Institutions. This has been followed by the creation of The Alliance for African Multilateral Financial Institutions (AAMFI) also called the Africa Club. 

Finance in Common, a French government-led coalition of public and multilateral development banks, aims to align investment priorities with the principles enshrined in the 2015 Paris Agreement on climate change.

International Institution Proposals

The UN secretary general has called for a Sustainable Development Goal stimulus package of $500 billion a year. The funding would be used to tackle the high cost of debt and rising risks of debt distress, scale up long-term financing for development, and expand contingency financing for countries in need.

Multistakeholder Coalition Proposals

The Sustainability Linked Sovereign Debt Hub convenes think tanks and MDBs to propose innovations in debt policy that will unlock finance for sustainability investments.

The Sharing Strategies platform brings together an informal coalition of civil society groups, international organizations, governments, and philanthropic organizations to shape media debates, support champions who can lend credibility to the proposals, and advocate to key decisionmakers.

The Marrakesh Framework: An African Agenda for Global Financial Architecture Reform, led by the African Centre for Economic Transformation, is a five-point plan that includes crafting solutions to the debt crisis, providing more grant and concessional money to Africa, channeling SDRs to African financial institutions, increasing African representation on the governing bodies of the IMF and World Bank, and establishing a green growth agenda.

Leading think tanks, including the Carnegie Endowment for International Peace, Bretton Woods Committee, Center for Global Development, Atlantic Council, and Global Solutions Initiative have launched study groups and initiatives on global governance and multilateral reform.

These coalitions are augmented and supported by civil society organizations that develop ideas and coordinate advocacy and engage with activist groups such as Fridays for Future and Extinction Rebellion.

A Reform Plan for People and Planet

The number of reform proposals and the progress to date reflect a strong appetite for change. But with such high ambitions, a limited political window of opportunity, and a fragmented multilateral system, the proliferation of proposals risks dissipating energy rather than building momentum.

The proponents of these initiatives should instead formulate a plan that (1) presents a vision for the impact that could be achieved, (2) lays out the policy mechanisms for mobilizing revenues at scale, and (3) outlines a specific road map for implementation and accountability.

Vision and Impact

The vision should lay out opportunities for transitioning energy systems in a way that increases prosperity and stability globally. It should capture the benefits to developing and emerging economies and to the electorate of advanced economies where the major decisionmaking power currently lies.

Public polling across a range of countries shows widespread support for the idea that governments should spend 2 percent of GDP on “People and Planet”: investments that protect the environment and contribute to human development. Over a third support the proposal in G7 countries and as much as 70 percent support it in African countries.As shown in Figure 1, support for giving the World Bank more money to respond to global crises sits between 38 percent and 58 percent in G7 countries and between 44 percent and 80 percent in selected G21 countries.

Philanthropic organizations should invest further in message testing, the development of insights on how to garner the support of key constituencies, and the development of creative tools that champions can use to target these messages to the most influential audiences.

Revenue Mobilization

A robust set of policymaking tools is essential to unlock the necessary resources in the face of current political constraints.

The most pressing need is unlocking finance at scale through reforming the MDB system: reforms that have limited budgetary requirements but could unlock up to $500 billion annually in additional lending. This could be achieved, for example, by shoring up banks with “callable capital”—a guarantee that governments will step in if a bank gets into difficulty. The capital’s inclusion in risk management frameworks would allow MDBs to better leverage existing balance sheets.

Implementation, Impact, and Accountability

Ensuring impact and building the confidence of policymakers will require a clear sense of how the resources will be deployed and the impact they will have. The G20 could initiate specific country action plans for People and Planet that detail the sectors, projects, and plans worthy of concessional public finance, the domestic policy reforms required, and the projected impacts. These plans could leverage the Just Energy Transition Partnerships and the G20 Compact with Africa that aim to lay out this detail and inspire the confidence of donors and investors.

The plans could then be aligned with private investment, donor activities, and the deployment of domestic fiscal resources.

Without this level of focus, reformers risk missing a genuine opportunity to achieve significant shifts that could unlock transformational investments—investments that not only build prosperity but also help decarbonize the global economy.

However, the ideas and resources required to construct and implement this plan are already in place. With the right level of focus, those already engaged in global financial architecture reform can drive this agenda forward and create significant momentum toward reforms. 


































Annex. Summary Assessment of Key GFAR Proposals
Proposal Official Champions Progress and Prospects for Success
1. Increased volume of low-cost public lending
Reform MDB Capital Adequacy Frameworks to unlock hundreds of billions in low-cost lending G20 Independent Expert Group; African leaders’ Nairobi Declaration; Bridgetown Initiative; United States; France; Germany In motion, but its full potential is yet to be realized and could be derailed by the U.S. presidential election
Reform the African Development Bank’s Hybrid Capital Instrument to unlock SDRs as collateral for MDB lending African Development Bank, African leaders (Nairobi Declaration) Faces technical hurdles and can only be unlocked if five donors commit SDRs together
Issue new IMF SDRs African leaders (Nairobi Declaration) Limited political appetite among key shareholders of the World Bank in the short term; only possible once every five years and requires U.S. congressional approval if over $650 billion
Create a “green bank” that offers African countries a greater say in governance than under the Bretton Woods Institutions Kenyan President William Ruto No immediate pathway for the creation of the bank with major capital holders
Increase the flexibility of IMF trust funds (Poverty Reduction and Growth Trust and Resilience and Sustainability Trust) Principally led by think tanks and civil society organizations No official processes in motion to reform these funds
2. Increased volume of concessional public finance
Operationalize the “Loss and Damage” facility for vulnerable countries, with new funding sources Denmark, Scotland, G77, African leaders (Nairobi Declaration) Facility was agreed in principle at the COP27, and includes funding commitments in the hundreds of millions
Triple contributions for the IDA (the World Bank’s low-income country fund) through better use of its balance sheet and through capital increases by 2030 G20 Independent Expert Group No donor governments have endorsed the steps required to increase contributions to the IDA at the time of writing
Implement a financial transaction tax (FTT) with revenues channeled toward climate positive investments African leaders (Nairobi Declaration); European Parliament European Union is debating a proposal for an FTT; the Paris Summit for a new financing pact proposed a working group to address the issue
Institute a fossil fuel windfall levy to fund the Loss and Damage facility Independent proposal from former UK prime minister Gordon Brown No government has endorsed the proposal yet
Reduce the costs of remittances to Africa from an average 9 percent to the UN goal of 3 percent Enshrined in the UN’s Sustainable Development Goals Framework Limited progress toward achieving the goal
3. Increased representation in the governance of international institutions
Add an African Union seat at the G20 United States, United Kingdom, France, Germany, China, India Approved in September 2023
Add a third sub-Saharan African seat on the IMF Executive Board United States, European Union, African countries Approved in October 2023
Establish an intergovernmental body at the UN to promote cooperation in addressing tax evasion and aggressive tax avoidance G77, African Group of States Negotiations are ongoing following a 2022 UN resolution
4. Improved agility and impact of funding mechanisms
Streamline and reduce conditionality to facilitate quicker disbursement of funds at the World Bank World Bank Evolution Roadmap In motion, pending approval of the World Bank’s Development Committee
Reform multilateral climate funds to ensure accessibility for vulnerable countries and sub-sovereign entities Civil society organizations Unknown
5. Improved risk assessment and management
Introduce a new concessionality framework at the IMF and World Bank to take account of climate vulnerability Civil society organizations Framework is included in the World Bank’s Evolution Roadmap
Introduce a global resilience reserve fund to pool risks for countries most affected by climate change Civil society organizations Unknown
Reform credit rating agencies to increase the transparency of ratings and better reflect the reality of risks to creditors African leaders (Nairobi Declaration) Remains at the conceptual stage at the time of writing
6. Reforms of debt governance
Reform the G20’s Common Framework to include middle-income countries, include a timeline for resolutions, and compel all creditors to take part in debt negotiations Civil society organizations G20 leaders and finance ministers have urged greater ambition but have failed to implement changes
Implement debt for climate swaps and credit enhancements to unlock future low-cost finance. Sustainable Debt Coalition A number of governments have piloted this approach (notably Barbados, Belize, Gabon, and Seychelles)
Support the establishment of a sovereign debtors’ club to increase borrowers’ bargaining power with creditors Civil society organizations Likely to be addressed within the agenda of the Africa Union’s ‘Africa Club.’
Reform the IMF-World Bank Debt sustainability approach to address debtors’ needs, reflect the quality of debt; take into account the capital needs of countries to achieve the Sustainable Development Goals and deliver on climate action Civil society organizations Remains at the conceptual stage at time of writing
Introduce debt “pause clauses” following natural disasters African leaders (Nairobi Declaration) World Bank announced the inclusion of these clauses in future debt agreements in September 2023

Notes

1 Authors calculations building on analysis from the African Climate Foundation and additional scoping.

This draws on work by Dileimy Orozco at the think tank Third Generation Environmentalism (E3G.org) and on work by Faten Aggad, who was previously at the Africa Climate Foundation.

Based on forthcoming polling from Blacksands, a public communications company headquartered in the United Kingdom.


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