While the United States has narrowly avoided the first-ever deliberate default on the its financial obligations, 26 other countries teeter on the precipice of default or have already defaulted. But unlike the politically motivated, manufactured emergency that faced the U.S. and global economy, these primarily Global South states are on the brink of default primarily due to external pressures, international systems, and geopolitical dynamics. Burdensome loans from international financial institutions (IFIs), private creditors, and governments—with debt to China of particular note for many African countries—make it impossible to prepare for and recover from crises such as climate change and the COVID-19 pandemic. The burden of debt repayment also limits governments’ ability to invest domestically in their development and their people. For example, in 2020, 64 countries spent more on debt servicing than they did on their health budgets. Moreover, the cascading impacts of this constant cycle of debt, crisis, and underinvestment are detrimental to democratic resilience and accountability.
The upcoming Summit for a New Global Financial Pact, hosted by French President Emmanuel Macron in June 2023, is slated to focus on several of the reforms needed to address the ongoing interlinked debt and climate crises. Catalyzed by the “Bridgetown Agenda”—a proposal from Barbadian Prime Minister Mia Mottley to reform development finance—the summit is designed to build alignment between the Global North and the Global South on how the international financial system can be redesigned to meet this moment of converging crises. However, important details of the summit remain unclear, including who will attend from the U.S. government. And the question of whether the rhetoric about solidarity, cooperation, and urgency can be matched with meaningful commitment to action still looms.
Although the Biden-Harris administration has been understandably distracted by the domestic political impasse on the debt ceiling, Washington must not ignore the needs of its allies in the Global South. Rather, it should demand a bolder vision for IFI reform by pushing multilateral development banks (MDBs) to unleash better financing, proposing innovative solutions to alleviate sovereign debt burdens, and increasing fiscal capacity for Global South states through liquidity injections. And unfortunately, time is of the essence to address these pressing issues. Not only is unleashing more resources for these countries in line with the administration’s pledges to tackle climate change, but it is also key to its pledge to elevate global “democratic renewal” as a central component of its foreign policy agenda. IFI reform is a crucial—though often overlooked—means of delivering on both of these objectives.
The role of the Bretton Woods institutions
Formed in the aftermath of World War II, the Bretton Woods institutions—the International Monetary Fund (IMF) and the World Bank Group—were built to aid reconstruction efforts and forge a new era of global economic cooperation. Within this system, the IMF was designed to be the “lender of last resort” to countries experiencing economic crises, while the World Bank was designed to provide poorer countries with financing and technical support to aid development. The World Bank is now one among several MDBs which use loans and grants to assist low- and middle-income countries (LMICs) in pursuing sustainable development priorities. As the largest shareholder, the United States plays a pivotal role in decision-making at both the IMF and World Bank.
Financing from IFIs—which include the Bretton Woods institutions and MDBs—has undoubtedly had positive effects in many circumstances, including, for example, preventing millions of HIV cases through reduced drug costs, as well as decreasing extreme poverty rates in sub-Saharan African countries through cash transfer programs. However, as recently recognized in the 2023 “G7 Hiroshima Leaders’ Communiqué,” these institutions and their financing efforts have not risen to the challenges of today.
Where climate, development, and democracy meet
The cost for climate adaptation needs will average $250 billion each year by 2030 globally. Given that the countries most vulnerable to climate change are often also among the most resource constrained, they have few options but to go into more debt to deal with natural disasters and other impacts of the climate emergency. In effect, countries must increase their sovereign debt to face the impacts of a crisis they did little to cause.
In effect, countries must increase their sovereign debt to face the impacts of a crisis they did little to cause.
In 2022, when Pakistan faced devastating flooding that submerged one-third of its land and displaced 8 million people, the country was already saddled with $250 billion in existing sovereign debt. Democratic institutions were also under strain, with the parliament having ousted Prime Minister Imran Khan a few months prior. The floods have continued to displace communities and disrupt economic livelihoods, leading to further government destabilization. In turn, political instability and corruption have slowed the humanitarian response and undermined climate resilience and flood preparedness. This left the government with no choice but to borrow more to recover from the $30.1 billion in damages. Meanwhile, political instability has escalated.
This vicious cycle of crippling debt, disaster, and more burdensome repayments prevent LMICs from investing in climate resilience, strengthening democratic institutions, and delivering public services that can reduce economic and social inequalities. Emerging economies—including many fragile and nascent democracies—are in desperate need of more resources and fiscal space to meet their populations’ development needs and protect against climate-driven disasters.
Researchers have now shown that inequality drives climate change through increased emissions, and the links between economic crises, rising inequality, and threats to democracy are well-established. Put simply, it is far easier to nurture and protect democracy without perpetual economic crises when the economic dividends of democracy are clear and when economic outcomes do not seem wildly unfair. When populations view the benefits of globalization as having passed them by and their governments as being unable to foster stability and deliver basic services, they begin to lose faith in democratic institutions. This disillusionment can fuel the rise of autocrats who stoke divisions by taking advantage of collective grievances.
The international financial institutions have often been passive onlookers to these trends, but in some cases, their policies and practices have actively contributed to them. For example, the World Bank continues to invest in new fossil fuel infrastructure––$14.8 billion from 2015 to 2022––and encourage ineffective and inequality-inflating privatization measures in a number of countries. The IMF’s loan conditions have stymied economic redistribution and in some cases inadvertently provided cover and support for repressive regimes, as was the case in Egypt.
Moreover, countries in the Global South hold decidedly less power in the IFIs. At the IMF, for example, Americans have a per capita voting representation 64 times greater than that of Ethiopians. Frustration at these types of exclusionary practices within global governance has contributed to many Global South countries declining to join U.N. resolutions, such as the one condemning Russia’s illegal invasion of Ukraine. Although Western leaders may criticize them for failing to uphold a “rules-based international order,” at best, that order has often failed them.
A bold vision for IFI reform
To bolster healthy democracies that can withstand the impacts of a changing climate, global financial infrastructure must change. The United States and other G7 nations must advocate for a transformative vision for IFI reform that pursues a core objective: enabling countries in the Global South—especially those most affected by climate change—to access and utilize a better quality and quantity of resources on the most equitable and least onerous terms possible. At the Paris summit, high-income countries should push for the following concrete vehicles to attain this goal:
- Changes that enable the MDBs to unleash better financing. Last year, an independent panel of experts produced the “CAF Review,” a report that offered pathways to maximize the lending capacity of MDBs in the face of short-term crises and longer-term development needs. In response, the World Bank Group produced an evolution road map and additional proposals, but these are far too timid. The United States, alongside the G7, should push for a bolder and more holistic approach, including a reduction of the equity-to-loan ratio to 17 percent, which experts assess could catalyze at least $8 billion per year to Global South countries to address climate change and other development challenges. Moreover, any reforms and future financing should be entirely consistent with the 1.5° Celsius warming limit of the Paris Agreement, as well as accountability and transparency standards.
- Debt reforms to alleviate financial strain on the Global South. Between 2022 and 2028, V20 countries—a coalition of 58 climate-vulnerable countries—will owe roughly $435 billion to lenders, and the need for spending on climate adaptation, mitigation, and loss and damage will only increase. At the Paris summit, the United States and the G7 broadly should advocate for debt relief that provides flexibility for Global South countries to invest in developmental, social, and health care needs––and thereby increase their democratic dividends. These debt reforms must overcome the current stalemate and finger-pointing surrounding the G20’s Common Framework and deliver something concrete for countries such as Zambia, which has been waiting two years for debt resolution. To complement broader debt relief and restructuring initiatives, new mechanisms such as natural disaster and pandemic clauses for debt suspension, as well as debt-for-climate/nature swaps, should be deployed and scaled up at the MDBs, IMF, and other forums.
- A renewed issuance of special drawing rights (SDRs) to increase fiscal capacity. The United States must also join Bridgetown supporters, V20 members, and leading African experts in pushing for the issuance of a new tranche of SDRs—an IMF reserve asset that bolsters countries’ liquidity. A new allocation would provide an estimated $21 billion to low-income countries and $212 billion to other developing countries. The United States alone has veto power over a new issuance, holding 16.5 percent of the total votes. This action does not require additional congressional approval and has no U.S. budgetary implications. New options for allocating or reallocating SDRs are also on the table and must be decisively implemented.
The Summit for a New Global Financial Pact in Paris and the reform measures that are on the table could be a critical step in delivering the meaningful solidarity for which Global South countries are calling. As Americans grapple with a narrowly averted debt default, much of the Global South is contending with ongoing sovereign debt burdens that undermine climate resilience, economic growth, and risk the erosion of democracy.
By pushing to make global economic governance more equitable, inclusive, and transparent, the United States can show it is not only hearing but also responding concretely to demands from countries in the Global South. Proactive reform will not happen overnight, and the short- and long-term changes that must take place require consistent support beyond the summit in Paris. U.S. policymakers must consider their own harrowing experience with a politically manufactured financial emergency and prioritize bold and innovative IFI reforms to prevent debt defaults internationally. The United States must be ready to show up at this year’s key development decision-making moments armed with real commitment, creativity, and resolve to do more than tinker around the edges of the status quo.