Financing global public goods

Climate change is threatening the World Bank's mission of poverty eradication and may reverse development gains made thus far

Shifting the focus to global public goods

The 1944 Bretton Woods Conference established the World Bank to rebuild post-war Europe and to respond to the market failure in capital flows to developing countries. Since then, the World Bank has expanded to a group of five institutions approving $46 billion for 275 projects in developing countries in FY16,[1] financing country-level public goods in sectors such as health, education and sanitation.

Particularly over the past decade, however, it has become clear that climate change threatens the Bank’s objective of poverty eradication and even poses the risk of reversing development gains that have been made thus far. Poor countries are most vulnerable to climate change and the extreme weather events that accompany it, via crop failures and food price shocks, natural disasters, and infectious diseases that become more prevalent with changes in weather patterns. Without rapid action, experts claim that climate change could result in an additional 100 million people living in extreme poverty by 2030.[2]

Climate change is a manifestation of the global tragedy of the commons and gives rise to the issue of free-riding, which makes it difficult to decide who bears the costs of reduced emissions. This tension is particularly acute between developed and developing countries, particularly those whose emissions have been historically lower than the cumulative emissions of wealthy nations. The rapid industrialization and population growth taking place in developing economies however, underscores the importance of climate-resistant and emissions-reducing infrastructure, and for those lower-income countries whose national budgets are insufficient for such investments, the World Bank is the most well-placed to support the financing of public goods that have clear global benefits.

This shift from financing country-specific projects to global public goods is particularly critical in a time when capital flows to the developing world are only increasing in volume, and when lower income countries such as Ghana and Rwanda are able to access foreign capital on their own, alleviating the capital market failure that was the original motivation to establish the World Bank.

Steps being taken to shift the focus

In response to the Paris Climate Talks of December 2015, the World Bank Group established the Climate Change Action Plan (CCAP) in April 2016, to support its borrower countries deliver on their Intended Nationally Determined Contributions (INDCs), primarily focused on increasing renewable energy sources and existing energy efficiency. The African Climate Business Plan was also set up to address the specific needs of the continent, and the International Finance Corporation (IFC) released the Climate Implementation Plan[3] to mobilize private sector capital towards the most impactful environmentally-friendly investments.

Additionally, in May 2016, the World Bank Group launched the Pandemic Emergency Financing Facility (PEF),[4] a global financing mechanism designed to quickly disburse funds during deadly pandemics. The PEF was a response to increasing evidence of the link between climate change and infectious diseases.[5] The most recent Ebola outbreak, and other zoonotic diseases such as HIV, SARS, and the H1N1 flu, have been closely associated to erratic weather patterns from climate change, whereby heavy rainfalls that follow extreme dry seasons produce excess fruit, which attract animals (e.g. bats in the case of Ebola) and increase the opportunities for the disease to jump between species, and ultimately to humans who come in contact with the infected animal.[6]

Additional steps required

While CCAP and related initiatives are all steps in the right direction, if the World Bank’s primary focus will be to finance global public goods, it will need to ensure that current country-level programs for national public goods such as health and education systems, are handed over and sustained through the regional development institutions, such as the Asian Development Bank (ADB) and African Development Bank (AfDB). The newly established BRICS’ New Development Bank (NDB) and Asian Infrastructure Investment Bank (AIIB) are indicative of the demand for more regionally-focused organizations, and by having a clear delineation of responsibility between the World Bank and such regional institutions, the World Bank can slowly transition into an organization that focuses exclusively on projects that are climate-resistant and emissions-reducing with clear global benefits. Such projects can include financing R&D for new agricultural technologies and more affordable renewable energy sources, or developing seawalls to protect from water-related natural disasters. In the absence of a supranational authority that can collect national taxes and finance global public goods whose non-excludability will always result in free-riding and thus severe levels of underfunding, the World Bank has a potentially significant role to play in addressing this global market failure.

In doing so, the World Bank will need to ensure that these projects are selected by local governments and are in line with the recipient country’s national development priorities, to ensure long-term sustainability of the investments and to remove any risk of perception that Western agendas are driving local government needs. (798 words)

[1] World Bank FY16 Annual Report

[2] Shock Waves: Managing the Impacts of Climate Change on Poverty (2016)

[3] IFC Climate Implementation Plan (April 2016)

[4] World Bank Press Release (May 2016)

[5] Pandemics and Climate Change Present Opportunity for Insurers (June 2016)

[6] How Climate Change Exacerbates the Spread of Disease, Including Ebola (Sep 2018)


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Student comments on Financing global public goods

  1. NY777, I haven’t read much about the World Bank since studying developing markets as an undergrad, so I was happy to see the World Bank is taking active steps towards helping developing nations deal with climate change. Prior to your article, I was unaware of the extent to which climate change is impacting those in developing nations.

    While I agree the World Bank could do more to help combat climate change, I am not sure that pushing non-climate related responsibilities to the regional development institutions and switching to a model solely focused on climate change would be beneficial in the long run. The regional development institutions are vital to the nations they serve, but I believe the size and global backing of the World Bank provides a greater level of organizational stability, helps attract a high concentration of intellectual capital, and ensures all regions receive attention regardless of the strength of their regional development institution. Taking away some of the World Bank’s responsibilities (and reducing its scale) may negatively impact these positive attributes, so I would keep the World Bank’s model as is and look to increase the number of climate-focused initiatives.

    Thanks for the article!

  2. NY777, thanks for the fascinating post! Based on your analysis showing that individual developing countries are increasingly receiving funding directly for country-specific projects, and that regional development banks are making regional scale investments, I completely agree that the World Bank is uniquely positioned to invest in programs that will have global impact. And given that climate change is a pressing issue which, to date, has been difficult to tackle due to the issues you mention above regarding externalities, it also completely makes sense as a priority for the World Bank. I also appreciate your comment about the need to select projects to fund based on input from a wide range of countries as a way to generate buy-in and a sense of empowerment. It definitely seems to me that there would be plenty of such issues that affect all countries, such as the couple that you mentioned. Do you envision, though, that some of these technology developers would be private companies? And would they likely be companies based int he US or other developed countries? How would World Bank recipient nations think about this?

    Thanks for the great ideas!

  3. NY777, very interesting and well-written post! While I totally agree that a supranational organization like the World Bank has unique ability to transcend regional and country-specific squabbles in order to fund projects that would benefit the whole world, I do think that it will be difficult for the World Bank to ultimately separate itself from driving the agenda of its largest contributor nations (i.e. the US & Japan). I also worry that separate funding from the World Bank won’t help to overcome the major disputes that developing nations (who are bearing the brunt on two fronts: being hit the hardest by the impacts of climate change that was primarily caused by carbon emissions by the developed world, while also potentially being forced to bear the cost of growing an economy with less carbon-intensive forms of energy) have with developed ones who are trying to reign in global carbon emissions more quickly. There’s a question of fairness on who should be bearing the financial cost of climate change abatement initiatives, and while the World Bank’s plans could certainly help get projects off the ground, ultimately the financed loans will need to be repaid, by someone…

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