Global Public Investment and the Evolution of Bretton Woods
Towards a modern financial architecture
Simon Reid-Henry & Jonathan Glennie[1]
June 2023
In 2023 the international development sector is thinking big about how to increase concessional finance for global objectives. Driving this reform agenda is an interlinked set of poly-crises confronting the world: financial, developmental, geopolitical, environmental. Enhancing the capacity of the World Bank, the International Monetary Fund and the Regional Development Banks to respond to these crises is a major focus of the reform proposals put forward as we approach the Summit for a new Global Financial Pact in Paris.
But eighty years after Bretton Woods and fifty years after the launch of the (failed) New International Economic Order, we need a bolder reform agenda and a new mandate for how to use international public finance in pursuit of global common needs. Recapitalising the Bretton Woods institutions is welcome but is not enough and, on its own, risks entrenching historic power inequalities. Reformed Capital Adequacy Frameworks are needed to allow the MDBs to loan more to where it is needed most, but loans are insufficient to respond to the scale of challenge we face and will not address critical governance challenges that low-and middle-income countries have long raised. Debt swaps have a role to play in raising capital for nations struggling to make repayments, but they continue the ad hoc crisis response approach that has led to this grave situation in the first place.
Bhattacharya, Songwe and Stern recommended in 2022, in a seminal analysis, that the Global South (excluding China) needs to find $2.4 trillion annually for climate finance by 2030, about half of which must be found externally.[2] This implies a total shift in our vision and expectation for global finance. Furthermore, as important as quantity is, we cannot just seek more money, while maintaining an old-fashioned, ineffective architecture. This summit in Paris is not just a place to eek out crisis responses – it should be the starting gun in the search for a better and more structured approach to international public finance.
Evolution, not just reform
Our system of international public finance needs to evolve in order to meet the needs of all countries in the 21st century and to address the growing challenge of truly global problems like climate change. One new approach gaining support is Global Public Investment (GPI).[3] This approach calls for a common system of global investments that are predictable (rather than ad hoc) and representative (stakeholder- rather than shareholder-driven). Above all it calls for a new line of international public finance that can address shared global public goods needs and global commons challenges.
Developing this new system does not mean starting from scratch. Rather it means building the GPI principles of “all contribute, all benefit, and all decide” into the current global financial architecture along with the creation of dedicated budget lines for items that currently go underprovided (because no country acting along can supply them: the difficulty in securing common financing for COVID-19 vaccines is a case in point).
GPI is more than a mechanism, in other words; it is a mandate for a new system of additional international public finance. Just as the current system of international aid (ODA) was developed in the past at the confluence of national self-interest and a genuine desire to improve global welfare, so GPI arises today at the confluence of a genuine desire to address global problems and the national self-interest of securing benefits for domestic citizens (such as climate or global health security).
GPI would complement ODA then, but its governance would be very different. ODA raises legitimacy challenges because it divides the world into “donors” and “recipients” and overlooks the majority of middle-income countries in between. When it comes to things like addressing pandemic vulnerabilities this makes no sense at all. GPI by contrast recognizes that all countries have a stake and a role to play in meeting certain common needs and that they should therefore share decision-making and financial responsibility for those needs.
Global Public Investment could be the Rosetta Stone in a new global deal for multilateralism. It would complement many of the other reforms that are presently being discussed, and include them as part of a longer-term solution for more sustainable and reliable public financing. A GPI arrangement would apply to financing for:
· National investments specifically linked to regional/global strategies of sustainable development and that generate global externalities (GPI co-financing).
· Thematic investments (e.g. investments in the global commons, such as climate) linked to sustainable development needs that generate a public return (GPI transfer financing).
Steps forward
Moving in the direction of a system of Global Public Investment would require a pay-in arrangement with an appropriate decision-making process governing an internationally prioritised programme of investments. This could be accommodated, for example, by committing to a number of institutional changes to the World Bank/MDB system and linking pay out to existing organisations, or it might require new institutions.
One way to implement the shift to GPI would be via the following institutional lifts:
1. Develop new national budget lines, alongside ODA, for global investments in areas where it is possible to demonstrate a return on those investments over time, and for which additional, non-ODA financing is needed. Some core traditional donors, such as Norway, are already beginning to see the potential benefits of an additional global investments line, and to explore what this means in practice.[4]
2. Once enough countries are committed to GPI, it would make sense to update the World Bank’s mandate to enable support functions for a specific, definable, and presently unfulfilled GPI portfolio (for global needs and challenges): potentially creating a new “agency” to oversee this (as per IBRD, IDA, IFC, MIGA, ICSID): the Global Public Investment Agency (GPIA). Whether or not this was deemed necessary, the function of the World Bank could be to further oversee the coordination and costing of programmes, which would ultimately be managed at the regional level in close cooperation with the regional development banks (MDBs). Project assessment, monitoring, and other elements would be overseen at the lowest practical scale. Alternatively, if the World Bank is not an appropriate lead agency, new institutions may be needed.
3. A priority-setting arrangement and monitoring functions would also be required to ensure efficient and appropriate use of the common funds. The governance of this body would build on existing experiences in multilateral funds, making use, for example, of civil society seats, and ensuring equity, representation, and accountability throughout the system. This body would either be incorporated within the World Bank system or separate to it.
Adopting a GPI approach would profoundly enhance how the WB/MDB system operates today without necessarily requiring a Bretton Woods-style reboot. Indeed, GPI makes a virtue of the turn to regionalism by foregrounding regional decision-making. GPI would make the governance of the WB/MDB system radically more representative, enabling grant-based and market-shaping financing that could, in turn, leverage much greater and coordinated public and private finance. It would further reorient the WB/MDB system towards the member-owned and cooperative intentions of some of its founders and could initiate a race to the top in terms of lending practices.
Reimagining the Bretton Woods Institutions
An effective system of Global Public Investment would therefore enable governments to:
· Provide a universally acceptable common framework for emergent global needs (such as for pandemic preparedness): overcoming the limitations of ODA, freeing up stretched ODA budgets to do what they do best, and stepping in where private finance has proven it is reluctant to lead.
· Create a global common challenges budget line that could raise substantial new (additional) funding for cross-border challenges and market-shaping investments for public returns.
· Establish a new governance standard in international public finance, answering years of calls for reform and leading to “better” decisions over how to spend public money internationally.
· Enable the support function of more generous lending by greener, more impactful banks and by the private sector itself, that can better impact the challenges of tomorrow.
· Better include middle- and lower-income countries in the Global Financial Architecture (GFA)
As discussions continue about financing our global challenges, we don’t just need new mechanisms but a new system. Alongside the current system of Official Development Assistance (ODA) the world needs a new framework for global public investments based upon universal budget lines for global common needs. This would start small and voluntary but build over time, potentially receiving and disbursing globally the proceeds not just from national budgets but from various global taxes, such as a global transaction tax[5], recoupling the financial economy and real economy, and providing countries with even greater capacity to invest in the global infrastructure of the future.[6]
Simon Reid-Henry is an author, academic and policy analyst specialising in international and political affairs. His current work examines the fault lines of democracy at home and abroad and the political dynamics of international public finance. Among other things, he works as a Research Professor at PRIO in Oslo, leading an international team examining the politics of duties in modern political society. Simon is one of the original thinkers behind a new paradigm for international public finance that can better secure global public goods and protect the global commons. He is currently Co-chair of the Global Public Investment Network.
To find out more about the Global Public Investment Network visit ww.globalpublicinvestment.net or contact Wanjiru Kanyiha at wanjiru@globalpublicinvestment.net
[1] Simon Reid-Henry is the director of Public Interest. Jonathan Glennie is a co-founder of Global Nation. Both organisations are members of the Global Public Investment Network (GPIN) www.globalpublicinvestment.net. This paper represents the views of the authors and does not constitute a GPIN position.
[2] LSE (2022). Finance for climate action: scaling up investment for climate and development, 8 of November. Link: https://www.lse.ac.uk/granthaminstitute/publication/finance-for-climate-action-scaling-up-investment-for-climate-and-development/
[3] See for example: Reid-Henry S. (2020) “Global Public Investment: A Preliminary Sketch”, Revue d’économie du
développement (2020) 27 (2): 169-201 and Glennie J. (2021) The future of aid: Global Public Investment.
[4] See for example the recent report of the parliamentary-established Expert Group on Financing the SDGs: https://www.regjeringen.no/en/dokumenter/investing-in-a-common-future/id2977341/. The Norwegian government was represented on the Expert Working Group on Global Public Investment which published its final report in August 2022: https://globalpublicinvestment.net/resource/building-a-better-system-making-gpi-a-reality/
[5] A 0.1% tax on global transactions (2019) would yield between US$237-418bn per year.
[6] WIFO (2019). A Global Financial Transaction Tax, Working Papers, No. 582, May.