Stops and Starts in Global Economic Governance Reform in 2023
After several years characterized by a pandemic, multiple wars and mounting climate impacts that jolted the global order, 2023 was the year when calls for international financial architecture reform went mainstream. The World Bank entered evolution mode, the United Nations (UN) Secretary General called for “a new Bretton Woods moment,” and the Bridgetown Initiative that Barbados launched with a focus on developing countries’ financing needs gathered so much momentum that France—a Group of 7 (G7) member—hosted a major summit to support it.
Calls for reforming the international financial architecture have often not been matched by action, but in several areas this year, policies really changed, including multilateral development banks (MDBs), trade and Global South representation in global governance. Other global economic governance issues, like debt, are not featured in this write-up, because actors in positions of power allowed 2023 to pass without making much-needed policy reforms.
With a huge need to finance climate action, MDBs come to the fore
Last year’s report from the Independent High-Level Expert Group on Climate Finance identified the scale of developing countries’ external climate finance needs: $1 trillion per year by 2030. In this context, MDBs emerged as an attractive solution. As they have top credit ratings and can leverage funds on capital markets, small amounts of donor funding can generate a large scale of financing for client countries. A key motivation of the World Bank’s evolution process—which began in earnest this year—is to direct that financing model towards global challenges like climate change and pandemic prevention, not just to its traditional mission of fighting poverty.
In 2023, the World Bank and Asian Development Bank stretched their balance sheets, allowing them to lend tens of billions of dollars each year. Reports by the G20 Independent Expert Group on Strengthening MDBs laid out a roadmap for additional reforms, including capital increases for the MDBs. Although capital increases could generate far more lending, it runs up against advanced economies’ extreme reluctance to invest resources in multilateral institutions. Proposals like private capital mobilization and voluntary carbon markets have climbed up government agendas as potential alternatives to a capital increase. The good news to donor governments: they minimize public spending. The bad news: there isn’t a whole lot of evidence that they work.
MDBs’ relevance to climate finance has also escalated in other dimensions, including the decision that the World Bank will serve as a temporary host of the loss and damage fund and the increasing momentum for re-channeling Special Drawing Rights (SDRs) to MDBs. Although the future of the MDBs remains up for debate, their centrality to climate finance discussions is here to stay.
Trade is definitely relevant to climate—but is the WTO?
In 2023, trade gained prominence as a key area of climate policymaking—and a highly contentious one. In October, the European Union’s Carbon Border Adjustment Mechanism entered its transitional phase, with a stated aim of ensuring that the EU’s climate policymaking does not disadvantage European industries against competitors in jurisdictions with looser regulations. However, to many developing countries whose industries could suffer, the policy looks like protectionism in disguise that ignores principles of equity. Governments continued to race for access to critical mineral supply chains, with the EU and Japan’s efforts to qualify for US electric vehicle subsidies adding to the perception that powerful countries get to bend rules that are enforced on the weak. Investor-state dispute settlement represents another intersection between trade and climate, with its threat to climate action fueling pushback, including European countries’ decision to move towards an exit from the Energy Charter Treaty.
But amid the action on trade and climate, the World Trade Organization (WTO) has often been out of sight. The WTO’s Appellate Body remains unable to function, and although reform discussions are ongoing, there is little consensus around a new model of dispute settlement. More generally, the old era of major trade agreements does not appear to be coming back: the Indo-Pacific Economic Framework’s trade pillar had to be shelved at the last moment while the future of the EU-Mercosur deal is in doubt. The WTO Ministerial Conference in February 2024 could change the direction of multilateral trade cooperation. For now though, it seems deep trade agreements restraining governments are out, power-based unilateral action is in and a healthy balance of policy space and multilateral coordination remains on the back burner.
The legitimacy of global decision-making comes under fire
This year, Global South governments frequently said that they were not only interested in what decisions were made on the global stage, but also in how they were made. The what and the how are, of course, linked, and global economic governance systems that are weighted towards advanced economies often fail to meet the needs of Global South countries.
Global South countries racked up some governance wins in 2023. The African Union became a permanent member of the Group of 20 (G20) and an additional chair on the IMF Executive Board was created for sub-Saharan African countries. A coalition of like-minded countries has started to provide one model for North-South cooperation, with countries like Barbados, Kenya, Colombia and France joining forces on a number of initiatives to reform the international financial architecture. A Southern coalition—the Brazil, Russia, India, China and South Africa (BRICS) bloc—added six new members. The decision to establish a UN tax convention provides another model, pushing back against exclusive clubs like the Organisation for Economic Cooperation and Development—previously the forum for corporate taxation negotiations—in favor of the truly multilateral forum of the United Nations.
However, perhaps the most meaningful governance decision of 2023—the International Monetary Fund’s (IMF) 16th General Review of Quotas—will end without governance reforms. Quotas determine the weight of countries’ votes at the IMF, the amount they can borrow, the distribution of SDRs and the IMF’s overall resources. Although the review does not officially conclude until December 15th, it will almost certainly lead to a 50 percent increase in IMF quotas distributed in proportion to countries’ existing share of quotas. In short, despite promises going back as far as 2012 to increase developing countries’ representation in the IMF, advanced economies will preserve a dramatically larger share of quotas than their share of global population, and a significantly larger share of quotas than their share of global GDP. The 16th General Review will call on the IMF’s Executive Board to make progress towards quota realignment by 2025.
Looking ahead to 2024
Next year will be jam-packed with consequential moments for global economic governance: the WTO’s Ministerial Conference; a Brazilian G20 presidency; the 29th UN Climate Change Conference (COP29) and a decision on a climate finance goal to follow the $100 billion; continued reform of the World Bank and IMF; a critical juncture for the G20 Common Framework on Debt; and elections anticipated in the US, United Kingdom, India, the European Parliament and more.
If 2023 was the year when calls for reforming the international financial architecture went mainstream, here’s hoping that 2024 will be the year when leaders start to act on those calls with the speed and ambition needed to meet the needs of the moment.
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