What Kind of World Bank Do We Need to Build a More Resilient Economy?

There are hot debates over whether development banks should continue to increase resources for tackling climate change or focus on their traditional goal of reducing poverty.

This misses the bigger point.

Countries everywhere are trying to figure out how to grow in an inclusive, resilient, nature-positive and low-emission way. This is simply common sense: countries want to make their economies less vulnerable to a changing climate, protect rather than deplete the natural assets they depend on and take advantage of clean technologies and new markets. This is particularly true for emerging and developing economies that are making critical choices about how they grow, and the technologies, infrastructure and skills in which they invest. The past year has made the stakes clear. Compounding geopolitical conflicts, climate shocks and a Super El Niño are putting pressure on traditional energy and food systems, raising prices and hitting household budgets and national economies hard.

The real question is how the World Bank can help countries build more resilient economies over the next decade. The World Bank and regional development banks should be lead partners in helping countries make this transition. 

Three priorities are particularly important:

First, the World Bank needs to help countries rethink their growth pathways.

Climate needs to be integrated into economic planning. When climate plans led by environment ministries coexist with traditional plans, policies and investments from finance, planning and sector ministries, the latter tend to take precedence. The Bank needs to turn its Country Climate and Development Reports from Bank documents into a toolkit that a broad range of economic and sectoral actors can use to understand climate-related risks and opportunities and make choices about a more sustainable and inclusive development path.

Second, the World Bank needs to help countries make greater use of policy and institutional reform as tools for transition.

Renewables now make economic sense in large part because of policy shifts, from reducing fossil fuel subsidies and creating investable power purchase agreements to reforming permitting processes and energy-buying institutions. Financial structuring was built on these foundations. These changes helped renewables scale and technology costs fall, so concessional financial support is now needed only in the toughest markets.

The same catalytic approach is needed at the macroeconomic level and in harder-to-transition sectors such as agriculture and heavy industry. The aim is to make entire economies and sectors, not just individual projects, investment-ready. The Bank needs to focus on tools that back the difficult policy choices countries want to make to drive their transitions. Development policy operations and payment-by-results will be key. Standardized disaster response mechanisms should be married with support to build systemic resilience. Other tools, such as debt restructuring and International Monetary Fund lending, can help create the political and fiscal space needed to unlock economic and sectoral transitions.

Third, the Bank and other climate and development finance institutions need to work as a system to allocate finance better and back country platforms.

The transition requires more upfront public finance and measures to de-risk private investment, particularly in frontier markets and technologies. Banks need to use their increased capital and stretch their balance sheets further. Donors should continue to use multilateral development banks to leverage concessional funds. But the task is not only to increase the funds available for the transition. It is also to allocate and use them better.

The International Finance Corporation (IFC), as the Bank’s private finance arm, should take more risk, with blended finance being used sparingly, once policy and institutional risks have been dealt with. The most concessional finance should focus on countries least able to finance their own transitions and on investments that cannot be made commercially viable.

An increasing number of developing countries are establishing country-led platforms to translate their climate and development priorities into policy reforms, investment programs and project pipelines. Fragmented technical assistance, readiness and project preparation funds should align behind these priorities, while public and private finance institutions combine capital and instruments and harmonize procedures to accelerate viable investments.  

A New Vision for Development

The World Bank’s challenge is not to choose between climate and development. It is to respond to the drive from an increasing number of developing countries to find a new growth trajectory: one that is sustainable, inclusive and resilient.

The question for Bank shareholders is not simply how much of the Bank’s financing should count as climate spending. It is how to set a new vision for climate and development finance institutions and hold them accountable for supporting the policy, institutional and investment shifts needed to help countries move onto this new growth path.