From Fragmentation to Cooperation: The Strategic Importance of the World Bank Group’s IDA
Marcos Vinicius Chiliatto is executive director of the World Bank Group for Brazil , and also Colombia, Dominican Republic, Ecuador, Haiti, Panama, Philippines, Suriname and Trinidad & Tobago. Previously, he worked at the Inter-American Development Bank (IDB) and the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). He has a PhD in Economics from the State University of Campinas (UNICAMP). Opinions and points of view are personal and the responsibility of the author, and do not necessarily reflect the opinion of the Bank or its Board. This article was written by Chiliatto especially for issue 116 of the WBO weekly newsletter, dated May 10, 2024. To subscribe to the newsletter, enter your email in the field below.
The world is going through a period of structural transformations that affect the global order. The relationship between the largest economic powers has been progressively deteriorating, in a scenario that coincides with the occurrence of serious armed conflicts and the broadening of economic sanctions applied to countries. Meanwhile, the institutions that have underpinned global governance since the post-war era, such as the United Nations, the International Monetary Fund (IMF) and the World Bank, face crucial challenges in remaining relevant. These institutions have undergone significant reforms to adapt to a changing international architecture and, for this reason, they find themselves under severe pressure. While the world is experiencing this process of geopolitical and geoeconomic fragmentation, the new configuration of global governance remains unknown.
Despite this complex general context, the Brazilian leadership of the G20 has made notable efforts. It is important to highlight some of the advances achieved, such as, for example, the fact that Finance Minister Fernando Haddad raised the issue of inequality and brought a proposal to tax the wealth of a super-rich minority to the debate of the 20 most powerful finance ministers in the world. Furthermore, President Luiz Inácio Lula da Silva launched the global alliance against hunger, which focuses on combating food insecurity plaguing millions of families around the world. The Brazilian leadership at the G20 has also developed innovative instruments to expand sustainable financing and protect biodiversity, while promoting an agenda of deep cooperation between international financial institutions.
Even though the geopolitical scenario is challenging, these advances in the G20 are an expression that multilateralism continues to be the best alternative. In parallel to the G20 agenda, the World Bank has just demonstrated that multilateralism can deliver positive results. A platform was recently created that will raise up to US$70 billion in additional resources to finance what we define as global challenges.
The synergy between the agenda led by Brazil at the G20 and the new strategic direction of the World Bank also becomes evident on the topic of global governance. While in the G20 Brazil is pressing for the need to reform the Bretton Woods multilateral structure, so that its institutions begin to reflect the new geoeconomic reality of the twenty-first century, the member countries of the World Bank are preparing a shareholding review discussion in the institution in 2025, which is expected to empower the global south.
This year, the World Bank Group is initiating one of its biggest undertakings: the ambitious replenishment of the International Development Association (IDA), to be agreed in December 2024[1].
The IDA is important because it is the main source of concessional financing institution for the world's poorest countries, offering grants and highly concessional loans.
Financing granted by the IDA is directed to projects aimed at social inclusion, combating poverty and hunger, improving basic infrastructure, promoting access to health and education, strengthening government institutions, and stimulating economic growth. In the year 2023, IDA approved more than US$30 billion in funding for 75 countries, the majority of which are in Africa. In addition to financing, IDA also plays a key role in providing technical assistance and expertise to help countries effectively design and implement their projects.
For the financial future of the IDA, it will be essential to continue developing creative instruments to increase financing volumes. One can think, for example, of the use of special drawing rights (SDRs),[2] either as contributions as hybrid capital, or with the issuance of debt instruments linked to SDRs that would allow raising resources over longer terms. However, these initiatives would not change the main financial nature of IDA, which is to offer mainly grants and highly concessional resources. In this regard, IDA will continue to depend on frequent contributions from high- and middle-income countries.
In addition to the reach of this financing model to the poorest, IDA has a particularly strategic importance for the global south. Although the global north has historically been the largest donor to IDA (and this needs to continue), contributions from emerging countries have grown and may have additional relevance in the current historical moment.
Why should the global south increase its participation in the IDA? First, let's think about the global alliance against hunger, being discussed at the G20. In this alliance, there is a systematization component of known policies to combat hunger, namely, to strengthen south-south cooperation, and there is a resource mobilization component. In this sense, the ambitious reorganization of IDA and its strategy to combat extreme poverty and food insecurity could reinforce the financial pillar of the alliance and be an achievement also for the G20. Second, the effective contributions of the global south to the reorganization of IDA will have a direct impact on discussions on global governance, since the negotiations on the review of voting power that will take place in 2025 at the World Bank consider direct contributions to IDA. Third, while contributions from the global north are an obligation due to a historical debt with Africa, a gesture of solidarity from the global south, which gains relevance in the geopolitical and geoeconomic scenario, is also important. And in the particular case of Latin America, Haiti is a major beneficiary of IDA, and its development depends not only on resolving the monumental security challenge, but also on social inclusion and economic growth.
Given the complexity of the current global geopolitical and geoeconomic scenario, the ongoing structural transformations demand a reconfiguration of global governance institutions. The role played by Brazil in the G20 in addressing crucial issues such as inequality and food security highlights the importance of multilateralism as a way to face common challenges. The relevance of the World Bank Group's IDA stands out not only as a vital instrument for the development of the poorest countries, but also as a symbol for strengthening cooperation between the global south and the north. Emerging countries can not only play a more crucial role in tackling poverty and hunger, but also positively influence the redistribution of voting power in international financial institutions, promoting more equitable and, therefore, effective global governance. Thus, the restoration of IDA not only represents an important step in the fight against poverty, but also an opportunity to redefine power dynamics in the international context.
[1] The World Bank Group is made up of four financial institutions: the International Bank for Reconstruction and Development (IBRD), which focuses on sovereign guaranteed operations in middle-income countries; the aforementioned IDA, dedicated exclusively to the poorest countries; the International Finance Corporation (IFC) for operations with the private sector, without sovereign guarantee; and the Multilateral Investment Guarantee Agency (MIGA), which focuses on promoting guarantee instruments.
[2] Special Drawing Rights (SDRs) are an international asset created by the IMF to complement the official reserves of member countries. They function as an international accounting unit and are allocated to countries according to their quotas in the IMF. SDRs are mainly used in transactions between governments and international institutions, as well as in currency exchange operations between central banks. Their main function is to increase the liquidity and stability of the international monetary system. With the recent expansion of SDRs, there are debates about new ways to use SDRs in multilateral development banks, as a means of providing additional financing to developing countries, something that depends mainly on decisions of the countries holding this reserve asset.
