Money, politics and power – reforming the international financial architecture full transcript
Host [00:00] You're listening to Make Change Happen, the podcast from IIED. In this episode, IIED colleagues Laura Kelly and Mohsen Gul talk about reform to the international financial architecture – the framework of institutions, policies, rules and practices that govern the global financial system. This influential global framework includes the World Bank and International Monetary Fund, multilateral development banks, international financial institutions and country groupings such as the G20. With the reform of these structures set to be discussed at key summits over the next year, this episode explores how to make them work for everyone, including the least developed countries.
Mohsen Gul [00:55] It's great to be joined by my colleague Laura today in having this conversation. This reminds me of a quote I read from Frank Gehry that "Architecture should speak of its time and place, but aim for timelessness". Indeed, Gehry was not really thinking about global financial architecture, but the quote is so much relevant to the discussion we're having today. I really feel like our current global financing architecture is like this old house, which was built another time, for another population, but is no more fit for the world of today. So we really need to think of how we can make this house more strong and sturdy.
For instance, the World Bank has this new mission and vision for it, to make a world that is free of poverty, and have added ‘livable planet’ to its mission. But many such institutions beyond their vision and mission face criticism for being slow, overtly bureaucratic and really lacking innovation. So we really need to think on how can we make them fit for the new purpose that is there. What do you think, Laura, how can we make them fit for purpose?
Laura Kelly [02:01] That's a really good question Moh, and I like your opening quote. This is about something that needs to be changed, not necessarily something that needs to be thrown out and start again. There's a lot within the system that could really be reformed to have greater impacts on poverty reduction, to help address the challenges of climate change and nature loss. So really, we've got a great opportunity coming up over the next sort of year or so to have impact on those changes.
So for example, the International Development Association (IDA), which was established in 1960, is the most concessional financing arm of the [World] Bank. So it's designed to address the development challenges of the poorest countries – so the least developed countries, for example – that IIED works a lot with. IDA provides grants and low-interest loans to countries for projects and programmes for promoting economic growth, poverty reduction and to improve living standards.
It hasn't said so much to date about climate and nature. And what we know is that climate and nature are going to be key to sustainable development in these countries. The IDA replenishment is happening this year – it happens every three years – and there are contributions from donor countries, and it uses the World Bank's own internal resources. So this replenishment is a real opportunity to bring the voices and concerns of lower income countries, the LDCs [least developed countries], the Small Island Developing States, and their populations into reforming the system.
Mohsen Gul [03:36] I agree, Laura. But it's not just about these big multinational organisations like the World Bank and all, right? It's also about recognising other key stakeholders in the international financing architecture as well – be it private sector or others – and that they also need to be involved equally in order to deliver on the promise of the resilient future.
So I think, yes, IDA replenishment is one of the tools, but there are so many tools that we need to use. An approach I call around this is ‘everything, everywhere, all at once’ will need to be changed if we are to deliver on the promise that we've set around this.
Laura Kelly [04:16] I think that's right. That's a really good point, Moh, that this isn't just something that sits in that sort of, you know, the big international institutions. It does need to go through everything. But that actually makes it potentially quite daunting.
I wonder if we could listen to one of our colleagues now who gives us some indications of what are the main principles we should be thinking about. So we've got a pre-recorded part from Paul Steele, who's IIED's chief economist. Paul specialises on the links between environment, climate and poverty reduction. He's worked on issues relating to debt and finance for several years. So we asked him briefly to explain what IIED's three priorities for reform of the international architecture should look like. Here's what Paul has to say.
Paul Steele [05:02] With the debate about the international financial architecture, it’s important that three things emerge. Firstly, that it’s not just a technical discussion but focuses on substance, and the importance of not just poverty reduction and inclusion, but also combining this with climate and nature.
Secondly, that it’s not just a debate between capitals in Western countries and the emerging economies, but also that the voices of the least developed countries are fully engaged and participate in the discussions. And finally, that it’s not just a technical discussion about the amount of money – although this is hugely important – but also about the quality of the money. Is the money really getting to the women and men on the ground who are facing the climate and nature emergency?
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Laura Kelly [06:01] So, yeah, I think Paul had some really good insights there that come out a lot from the work that he's been doing with many of these countries and many of our NGO partners.
How we can try to bring this experience into these international discussions and how we bring the worlds of finance and climate in particular together. In a couple of weeks we'll have the annual meetings of the IMF and the World Bank at the same time as the climate negotiations – the UNFCCC – are talking about climate finance in another setting. We really need to bring these two fields together, don't we, Moh?
Mohsen Gul [06:41] Absolutely, and I really appreciated Paul's comment on the quality of finance in addition to the quantity. For instance, how much of money is going to, at the very local level, to the right communities that really need it? Six per cent of adaptation finance actually ends up going to vulnerable groups like youth, children and women. So there's a lot of money that is still not directed at the right place.
While we're thinking of the qualified goal and quantifying numbers for the world to agree on and pay for, we also need to start thinking how can this equitably reach out to the communities most in need? So we really need to start innovating: not just in terms of where the money is coming from, but also how the money is going to land in an innovative and equitable manner to the communities where it matters.
I am from, for instance, an emerging market myself and I recognise how often in many conversations this risk factor is brought in. And it drives the conversations around debt, why there's so much inertia in moving the money where it matters. But I've recognised there is this big problem of risk perception versus actual risk – and we need to, as Paul said, work on removing these barriers. And for me the biggest barrier is around perception, and that can be removed when, yes, we have money in place to provide, but we also put in enabling environment structures, capacity-building and support systems for the communities – local communities in particular – in the countries where this has to go. And how can structures be put in place to help them show their own agency and take the leadership in managing most of the climate risks that they face.
Laura Kelly [08:33] I totally agree with Moh. I think the focus on aid and concessional finance… many of the developed countries have caused most of the climate challenges that the lower income countries are facing. But private finance clearly has an important role to play. So thinking about some of these investments differently and, as you say, how businesses view the risks of doing business in climate-vulnerable countries.
We've just completed some work in my part of IIED looking at cotton supply chains in southern India. The clothing retailer Primark sources quite a lot of its cotton from women farmers in south India, and they've done quite a lot of work to support those women to improve their productivity, to build their business models. But they've been seeing in the last two to three years real variability in the yields that they're getting. And that does mean that their finance people say: "We need to go and source our cotton somewhere else." But it's a wasted investment.
So they've started to look at what alternatives might be to support the women in different ways. And they asked us to go and do some research, to talk to women about the challenges, what the opportunities were, and something like insurance, for example, being a tool that could be used to support them more. And I think we need to think more innovatively about the different tools. So finance is important, but other things like insurance, debt management, all of these have a role to play in improving the financial architecture and getting, as you say, money to where it matters.
Mohsen Gul [10:08] Absolutely. And IIED has been working in this space, co-designing a global support service to improve debt sustainability for Small Island Developing States – also known as SIDS – in collaboration with SIDS leaders and industry representatives. This has been a significant milestone in efforts to end the vicious debt spiral affecting SIDS.
Ritu Bharadwaj, IIED's principal researcher in the climate governance and finance team, has led IIED's participation in this. We did ask her to explain the thinking behind the initiative and reflect on its potential impact for least developed countries. Let's hear it from Ritu.
Ritu Bharadwaj [10:47] Despite contributing less than 1% of the global greenhouse gas emissions, Small Island Developing States – or SIDS – bear the brunt of climate-related disasters. This relentless exposure to disasters has led to escalating debt levels for these countries, because every time they’re hit by a disaster they have to borrow money to bring their economy back on track and provide relief and rehabilitation support to the community.
SIDS Debt Sustainability Support Service was created in response to these dire circumstances. The support service aims to provide SIDS with a multi-layered approach to debt sustainability, future protection of the economy from recurring disasters, support for resilience investment, legal aid and capacity-building. These tools not only offer immediate relief, but also create the fiscal space needed for long-term investment in climate resilience and sustainable development.
This innovative support service, created for SIDS, has the potential to serve as a kernel for a broader facility that could be scaled up to benefit LDCs as well. The support service could be adapted to provide these countries with the tools they need to manage their debts more sustainably, freeing up resources for crucial investment in their future.
However, for the support service to be fully effective we need to reform the international finance architecture. The current system does not adequately provide support to the vulnerable nations like SIDS and LDCs. For LDCs and SIDS and other vulnerable nation[s], this reform is crucial for their survival and for building resilience against future shocks.
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Laura Kelly [12:24] Ritu raises many important points in her comments there. It's really interesting to see that many of the lowest-income, poorest countries pay interest rates on their loans that are much higher than, say, we do in in the global North. And that feels not just unjust, but actually it feels like it's a drain on their development.
Some of the work that we've also done at IIED looks at many of the low-income countries who have unsustainable debt burdens, you know, as Ritu was pointing out there. And we've shown that for some of the poorest countries, the LDCs, they are repaying much more in loans than they're actually getting in concessional finance to deal with development, climate, nature, let alone being able to sort of continue investments in health and education.
We have got a system that really needs some fundamental changes. I mean, Moh, from some of your experience, what do you think are some of the things that we really need to be focusing in on?
Mohsen Gul [13:26] Absolutely, Laura, I think you've raised a really good point, and I also agree with Ritu around debt repayment. I'll give you an example: the average interest cost on external borrowing in developing countries is three times higher than that of developed countries. And many of the LDCs and SIDS on average are dedicating 14-15% of their domestic revenue or GDP to just interest payments. That's a lot of their money going to just repay the system.
We need to think of longer repayment periods; we need to think of lower interest rates; we need to think of simpler risk-return methodologies that will allow for long-term, lower-interest financing to be provided. We also need to think of how can, for example, current financing tools like IDA improve their funding criteria or significantly scale up financing for climate resilience? I think we're not seeing a lot of money going to sectors like agriculture, water and others.
So it's so important that we diversify the sources of financial support, and we make these terms equitable and easier for countries to get onto this journey. And it would be a shame if we do not make more noise about how, in this new replenishment cycle of IDA, some of these factors need to be considered, and climate not seen as an after-thought but really embedded in decision-making from the get-go.
Laura Kelly [14:57] Yeah, those are really important points. And as we've said, you know, we work quite a lot with the least developed countries and the Small Island Developing States. And we're now actually lucky enough to hear from one of their officials. So Isatou Camara is the director of finance at Gambia's Ministry of Finance and Economic Affairs, and here's what she has to say on these issues.
Isatou F Camara [15:21] I am Isatou F Camara, director of climate finance at The Gambia’s Ministry of Finance and Economic Affairs. I lead climate finance negotiations on behalf of the least developed countries under the United Nations Framework Convention on Climate Change.
Least developed countries face significant challenges in financing their climate and development needs, with the current supply of climate finance falling drastically short of the required amounts. Least developed countries have only received US$21.2 billion of the total climate finance provided and mobilised, despite the fact that their needs – as outlined in their nationally determined contributions – amount to $1 trillion by 2030.
Developed countries who bear the responsibility for providing climate finance must meet their commitments: commitments that are already insufficient given the scale of the climate crisis. This financial support is crucial for the implementation of adaptation and mitigation actions, as well as addressing loss and damage in vulnerable regions. The shortage of climate finance is not because of a shortage of money supply, but rather a financial architecture that fails to adequately serve the most vulnerable or address the urgency of the climate crisis. The current system prevents funds from reaching where they are most needed.
Given the gravity of the climate emergency, swift and coordinated action is required to reform the international financial system. The financial institutions must focus on reducing the cost of capital, addressing debt instability and improving speed and access of funding to LDCs. These reforms are critical for creating the physical space needed for climate investments, driving real transformative action on the ground and fostering the transition to resilient, low-carbon economic growth.
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Laura Kelly [17:57] It's really great to hear that insight from Isatou. I do think she's really highlighted this issue of how we bring the quality of finance, and what's really needed at the local level, into the discussions.
We've talked about the World Bank and the IMF, we've talked about climate negotiations, but there's also the G20, which was established in the aftermath of the financial crisis back in 2008 but now has taken on a much broader role in these discussions around international finance. And it does bring together the traditional donors: countries like China and India, now South Africa and African countries are joining. So it is the kind of place where the political will really should exist to try to make some of these changes – that Isatou is saying are necessary – happen.
I mean, Moh, what's your take on these different pieces of the architecture and how they come together rather than just working in silos?
Mohsen Gul [18:57] Laura, for me, there are so many networks and groups that are sprouting every day in real time around this space, but still most of them are dominated by the interest of large economies while the unique challenges that LDCs and SIDS face are often sidelined. So we need to open up these spaces: they need to do them in a way that they recognise and acknowledge the range of issues that many of our colleagues in LDCs and SIDS are facing on [a] day-to-day basis.
Unless we are able to strengthen the enabling environment for the change from the very global to local or local to global level, we're not going to have a resilient financing system which will be inclusive and equitable for all. So for me it's really important that we think of scales and levels of action here.
For example, when we speak about private-sector organisations, how often are we thinking about local private actors in this financing system as well? We're just thinking about those big IFIs, but we're not really thinking of those intermediaries of financial actors that are very much on the ground and getting their hands dirty with the real-world action that is required to support the system. So we need to think on both levels: geographically, but also temporally of how we can have some quick wins in the short term but also have that long-term vision of growth.
Laura Kelly [20:24] Yeah, I think that's a really important point. It’s linking the local to the global, the shorter to the longer term. You know, we’re hearing about the SIDS and we're about to come into hurricane season, though with climate change that's a longer season. You know, these countries are about to go through this cycle again, so it really is important that we start to see concrete progress in these processes.
As I said, in a couple of weeks there'll be the annual meetings of the IMF and the World Bank. The G20 will meet later in the year and then next year the UN system has got its Financing for Development summit. These conversations can't happen in silos; they really have to come together and they have to bring those local perspectives into the discussion and listen to what governments like The Gambia are saying about the challenges that they're facing for their populations.
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Laura Kelly [21:20] So I think we're sort of coming towards the end of our session, Moh. Can I ask you, what do you think is the one change that it would be really important to make the financial architecture work for everyone?
Mohsen Gul [21:32] I really think we need to build the trust in the system and trust from both sides. LDCs and SIDS need to be given more incentives and more opportunities, or more spaces, for them to say what is right and what needs to be done. And then on the other hand, all these big financial giants need to make efforts to make sure that they can regain the trust of LDCs and SIDs in the process.
And, to me, that is the power imbalance that exists at the moment, and we need to rebalance that power dynamic so that everyone feels that it's their interests that are taken care of. And then only we'll be able to move away from the inertia we feel at the moment, from private finance mobilisation and all, and people will be more comfortable in having these conversations.
There's so many times I'm in rooms where, as private sector is mentioned they get fidgety and uncomfortable. Rightly so, if there is so much traditional mistrust that has been historically there. So we need to put in mechanisms and support systems in place that will allow us to be more innovative in this space, and do it in a way that is participatory, inclusive and equitable.
Laura Kelly [22:46] Yeah, I think that's right. And we also need to think, yes, the private sector has an important role to play – but the terms on which the loans are made, the investments are made, really have to ensure that they're going to meet local priorities. Otherwise we just end up building more unsustainable debt burdens.
So it's been great to have this conversation today. We hope you've enjoyed listening to us.
As we've said, there's a lot coming up in the next six months in the international architecture and IIED will be engaging at the G20, at the annual meetings in Financing For Development next year, and at the COP in Azerbaijan as well. And we look forward to engaging with you around those issues.
If you're interested in our work, please get in touch.
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Host [23:36] If you’d like to send us your thoughts and feedback on the discussion, email us at [email protected]. That’s, [email protected]. You can find more information about this podcast and our guests at iied.org/podcast, where you can also listen to previous episodes and browse the rest of our website for more information about IIED and our work. And to learn more about IIED’s research around the issues covered in today’s episode, visit iied.org/mobilising-money-where-it-matters.