Development finance reform needs to address the greatest challenges of our era

We are in a moment of profound global turbulence. The COVID-19 pandemic has battered health systems and economies, reversed years of progress in battling diseases like tuberculosis and malaria, and, according to the World Bank, triggered the largest setback in the fight against global poverty since World War II. The many harms have been aggravated by sharp rises in food, fuel, and fertilizer prices that are disproportionately hurting smallholder farmers and families in need. Staple food prices in sub-Saharan Africa rose by nearly 24% from 2020 to 2022, and the number of undernourished people worldwide grew by 150 million over roughly the same period.

On top of all this comes the growing impact of climate change. Africa has experienced five of its 30 deadliest-ever weather disasters in just the past 18 months, including withering droughts, deadly floods, and the most energetic and long-lasting cyclone ever recorded. In Asia, devastating floods and brutal heat have wracked Southeast Asia and the Indian subcontinent. Cruelly, the families facing these crises are the least responsible for causing them. According to the World Inequality Lab, the poorer half of the world produced only 12% of greenhouse gas emissions in 2019 but suffered 75% of the relative income losses from climate disasters.

While the challenges are many, they share one common element: low-income countries, and their people, being squeezed on all sides.

These combined shocks have amplified hard economic times for low- and middle- income countries, even as international foreign aid has diminished in real terms. Since 2010, the external debt of the world’s poorest countries has nearly tripled and their debt service payments have more than quadrupled, growing 60 times faster than average fiscal revenues. Sixty percent of low-income countries—double the proportion in 2015—are either at high risk of debt distress or already in distress.

Many countries desperately need more money to develop their human capital and critical basic infrastructure. In 1944, after a decade of war and depression that left countries reeling, the cornerstones of our current international financial system were established at the Bretton Woods Conference in the United States. That effort led to the creation of the World Bank and the International Monetary Fund, which were designed to help countries rebuild from WWII and promote growth in less developed nations.

We now must work to ensure that our international financial systems are robust and dynamic enough to meet the unique challenges of our time.

Already, there is a groundswell for change accompanying the appointment of new World Bank president Ajay Banga. In that spirit, the Bill & Melinda Gates Foundation is releasing a statement of first principles titled “Development Finance, Climate, and World Bank Reform: Funding to Jumpstart the Sustainable Development Goals.” Informed by our decades of experience working with low-income countries, development banks, and a wide range of partners, it spells out the key actions we believe are required to achieve real reform and to ensure enough resources to meet this extraordinary moment.

Principles for development finance reform

We cannot just stand by as poor countries are forced to choose between meeting critical basic needs and adapting to a climate crisis they did not cause.

Here are some of the principles for reform that we believe will help our international financial systems take decisive action.

• Connect climate adaptation to development and be realistic about what development looks like in the current context. Low-income countries that are trying to meet the basic needs of their people are focused first and foremost on generating growth and adapting to avoid the worst impacts of climate change. These countries view climate through the lens of development, and the world should partner with them to prioritize investments that combine climate adaptation and resilient development outcomes in areas that have the highest returns for poor families, such as agriculture, public health, energy, and infrastructure. Smallholder farmers are bearing the brunt of the climate crisis, which is causing more frequent droughts and floods and new outbreaks of crop and livestock pests and diseases. There is an urgent need for continued support from the international finance system, especially the World Bank, to invest in new tools like drought-tolerant seeds and weather information services developed by organizations like the CGIAR, a global network of agricultural research partnerships committed to delivering farmers climate-smart innovations.
• Use more flexible financial instruments. Whether it’s grants, loans with varying degrees of concessionality, remittances, or private funds, all kinds of capital are needed to meet the scale of this challenge. Development finance institutions should work to mix and match these various instruments for maximum effect, scale them up, and tailor them to specific borrowers. The most concessional resources (which are also the scarcest) should be directed to where they will have the greatest development impact in low-income countries and respond to the most pressing needs.
• Facilitate debt restructuring. Letting low-income countries drown in debt isn’t helping anyone. Much of the deterioration in debt positions comes not from poor debt management by these countries but from sharp spikes in global inflation and interest rates. We need to immediately advance the initial round of reforms to the G20 Common Framework for debt treatments to facilitate debt restructuring in these countries, introduce debt standstills upon a country’s request for restructuring, and begin financing a portion of these debts at International Development Association (IDA) rates.
• Embrace generosity. All of this will require more money, period, and the Global North needs to step up. World Bank shareholders should commit to increasing IDA contributions by 50% (which would get them back to their real levels from a decade ago), mobilize US$6 billion in immediate contributions to IDA’s Crisis Response Window, and agree to negotiate a capital increase as part of the reform process to shore up confidence in the multilateral system.

The delegates at Bretton Woods nearly 80 years ago sought to create, in U.S. Treasury Secretary Henry Morgenthau Jr.’s words, “a dynamic world economy in which the people of every nation will be able to realize their potentialities.” That should be our goal too. If we work now to reform our international financing structures as described above, I believe we can restore the trend of amazing progress on health and development that we saw before COVID-19 and get that much closer to a global economy that works for everyone.