The world’s Public Development Banks (PDBs) recently met for a “Finance in Common Summit”, announcing that they would help reorient investment patterns towards sustainable development. We asked Bhumika Muchhala to tell us more about what role development banks actually play in fuelling today’s multiple crises.
Bhumika Muchhala is an advocate, activist, and educator on international financial architecture, feminist economics and global economic justice. She has 20 years of experience in global justice organizations, including at Third World Network where she was engaged in advocacy and research on UN processes such as the Sustainable Development Goals and Financing for Development, as well as on the policies of the Bretton Woods Institutions. She is currently working on her PhD in political economy of global inequalities and decolonial and feminist theory at The New School in New York and consults with various organizations on advancing economic justice and rights.
Bhumika, what role do Development Banks play in fuelling global crises?
When we are talking about Public Development Banks we are talking about public money. And with public money there needs to be accountability that the needs of the public are being addressed. We need to see that public money is going towards real solutions to our systemic crises, from the climate crisis to poverty, intersectional inequalities, and the erosion of public health, and education services and systems.
However, we are in a world where for the last 40 years the neoliberal economic model has deployed the state to protect and promote the private sector at the expense of the public sector. What has happened is a kind of systematic dismantling of the capacity and integrity of the public sector. While the dismantling has been exacerbated both in developed and developing countries, there has also been an emergence of a very powerful narrative: the public sector “failure”, and the multiple crises that have resulted from weak public services and systems, will be fixed by the private sector through financial leveraging and public-private partnerships. This is the current political narrative in which Public Development Banks operate.
Why is this a problem for the public sector?
Over the last 40 years, a lot of Public Development Banks’ infrastructure projects have had devastating side effects, particularly through human rights violations, dispossession and displacement of indigenous people, and extraction, pollution and harm to the environment and ecosystems. The key problem is that the Public Development Banks have, over the past four decades, prioritized projects that benefit the private sector operating in energy infrastructure, natural resource extraction and the co-optation of public services in health, for example.
We see a huge step towards public-private partnerships and the implicit message, especially present in the messaging of the World Bank in the wake of the COVID-19 crisis, is that the public sector should do all it can to channel private money and to decrease the risks to the private sector. This is especially problematic in relation to the pandemic, because it has become evident that the weakness of the public sector has escalated the crisis and upholding private financial interests have repeatedly demonstrated failures in delivering for the public interest.
From 9 to 12 November, the “first global summit of all Public Development Banks” took place, the so-called “Finance in Common Summit”. It was announced as “joining forces to promote new forms of cooperation to help reorient investment patterns towards sustainable development to help our world recover better—to deliver the finance for the future we want”—big words. What do you think was the motivation behind this summit?
Indeed, big words! What an incredible opportunity this could have been to put forward transformational pledges and to really make concrete commitments. The declaration that was produced as the outcome of the summit had this promising language, suggesting that Public Development Banks would align their financing with sustainable development goals and the Paris Agreement. However, the lack of concrete, binding commitments, with agreed-upon timelines and accountability frameworks, is very disappointing. They should have made a shift, at least to some degree, from the practice of leveraging private financial flows and privatization facilitation and towards commitments to strengthen public systems, especially health systems. The ideal high bar would be that of ensuring universal and quality public services.
On climate change, there were no commitments to address ongoing losses and damages caused by carbon emissions or to outline a timeline to end fossil fuel investments once and for all. And on the key crisis of sovereign debt currently unfolding, the Public Development Banks, who are backed by G20 governments, did not offer a response of any substance on the debt distress that structurally limits the capacity of developing countries to respond to the health and economic impacts of the pandemic. In fact, many low-income countries are spending more on debt repayments than their national health sector budget, even in a pandemic!
The Finance in Common summit
The Finance in Common summit took place from 9 to 12 November. It gathered together 450 global public development banks from around the world, controlling more than 2 trillion dollars of public money per year. This was for the first time that so many development banks came together (virtually) to “reconcile the entire finance community in support of common action for climate and the UN Sustainable Development Goals”. The joint declaration that came out of the summit, however, was more than weak.
Additionally, some of the public development banks did not even sign the declaration...
Yes, even though the statement was not binding as such, the World Bank, the Asian Development Bank (ADB), the Asian Infrastructure Investment Bank (AIIB), the New Development Bank (NDB), and the Inter-American Development Bank (IADB) all neglected to join as full signatories. This clearly shows a lack of consensus. What is more important than consensus and a strengthening of multilateralism in a pandemic that relies on collective action to heal and recover? There is so much potential to deliver concrete and measurable goals, especially for the climate, ecological, and public health crises. That is why the Summit was a missed opportunity.
Why was it not possible to reach a consensus?
We are dealing with a multipolar world now. The main problem was trying to bring all the Development Banks, especially the Asian and Islamic banks, in line with an agenda that is governed by European and American Development Banks. In the past, this was more feasible because there was an implicit shared agenda between the Western countries. However, now you have the Asian countries joining the summit, you have Islamic development banks, you have different regions and countries. Yes, there are a lot of new initiatives, like the new Climate Bank Roadmap by the European Investment Bank (EIB), but let’s face it, the rest of the world is left with a very bad taste in their mouth from centuries of colonialism and the profound injustice, exploitation and inequality that it created, and in fact, continues to create.
We have to consider that colonialism is real. Within the development finance arena, colonialism is baked into the institutional leadership, agenda formation and policy narratives. As such, it is an incredibly sophisticated kind of colonialism. The Bretton Woods Institutions of the IMF and World Bank Group are, in some ways, like the “mothership”. The World Bank has always been led by an American and the IMF has always been led by a European.
Similarly, at the executive board level, most of the votes go to the European and American countries, with the US possessing veto power in the IMF. The Finance Ministries of the OECD countries determine the policy priorities. Thus you have the “Maximizing Finance in Development” framework in the World Bank, and an overarching bias toward fiscal austerity in order to prioritize debt sustainability in the IMF.
The adverse and often devastating impacts of placing creditors, investor firms, banks, and other private sector actors at higher priority than people and planet has been witnessed and recorded over the last four decades, if not more. So, why should other development banks from non-Western regions trust the western-led development banks?. Why should they believe that the EU and US-led institutional leadership actually want to cooperate now, and most importantly, to cooperate with equity? My analysis is that it is difficult to find meaningful and impactful political consensus in any of the multilateral fora right now.
Will this declaration have any effect?
Whether it will have an effect in the long run depends very much on the level to which the Public Development Banks are held accountable. We have to ask, where is the accountability structure? European civil society organizations have been strong in pushing for accountability and transparency, and creating public and civil society consultations. However, other regions in the world do not have strong accountability structures in place yet. At the same time, accountability structures can only go so far if the policy agenda in the first place is not rooted in human, economic and social rights and environmental protection.
One key issue is that awareness of multilateral development banks and their governance structures is not accessible to the wider public. In that society overall, especially in the North, does not have an understanding of what MDBs do in the South with their taxpayer money. There is a problematic lack of comprehension of how the policies and projects of these banks negatively affect food security, economic diversification and access to and affordability of public services, just to give three quick examples. This is partly a result of the way many civil society organizations operate in technical policy language and partly due to the natural priority that domestic and national issues take over international issues. However, there is also the reality that in countries like the US, internationalism has been sharply declining, in that people lack not only awareness but also concern or interest in the world beyond their borders. When I look back 20 years to the global justice movement around the Seattle protest against the WTO and the various uprisings that followed against the IMF, World Bank and G7/G8, that was a truly unique and powerful moment in history. Economic imperialism was rendered alive and palpable, in large part through popular education teach-ins and resource materials. The conscience of the public was invoked, and a discourse of economic moralism had a real effect in shaping awareness, interest and action on issues ranging from the displacement of indigenous communities to the erasure of food security when World Bank policies promoted export-led development models. That kind of understanding of Public Development Banks has to be created in order to create an accountability system. Otherwise, it is just a few small policy advocacy organisations and individuals that are trying to hold banks accountable and shift their policy paradigms away from a private sector first stance and toward a people-and-planet first stance.
How do you judge the current in depth debate in relation to the COVID crisis? What role do Public Development Banks play here?
They should play an incredibly important role. The key issue is that Public Development Banks make loans and loans create debt. The World Bank says these loans are concessional. However, concessional loans still create debt. The truth is that the multilateral institutions, and especially the World Bank Group, are responsible for significant amounts of sovereign debt holdings in developing countries. Obviously, private debt and China are huge creditors as well, but multilateral debt is also a burden on developing nations, especially low-income nations.
The main reason why the World Bank Group and multilateral Development Banks say they can’t offer debt relief is that they would lose their special AAA credit rating from the credit rating agencies, and thus their ability to raise funds from the capital markets. So, we see how everything comes back to high finance. Big finance corporations, firms and markets hold an extraordinary amount of power on not just the operational policy, but also the underlying political narratives that debase the public sector as inefficient, corrupt, low-quality and last choice and the private sector as the very opposite! Meanwhile, the welfare states of the European Union are a brilliant example of exact contradiction: the social protection and human welfare programmes of the EU are a direct result of steadfast and scaled government financing for the public sector, for public institutions, and for public provisions!
So, making some gesture of debt relief would be a key issue in tackling the multiple crises of today?
Yes, but unfortunately there was very little in the report about how the public development banks create debt. They talked about sound development financing but without giving a clear statement on debt relief, theirs were just empty words. Public Development Bank financing has to be non-debt creating and must avoid the pitfalls of blended finance mechanisms and public-private partnerships.
Isn’t the short-term response of debt suspension for some developing countries a step in the right direction?
No, not at all. Debt justice groups including the African Forum and Network on Debt and Development (AFRODAD), the European Network on Debt and Development (EURODAD), the Asian Peoples’ Movement on Debt and Development (APMDD), the Latin American Network on Debt and Development (LATINDADD) and many civil society organizations have called out this response, stating that the debt suspension is not nearly enough. Debt suspension just kicks the can down the road and while it creates a bit of a breathing room in a crisis, the debt has not actually been reduced. Of the 73 countries that are eligible for the Debt Service Suspension Initiative, only 43 have requested the suspension. A key reason for this is that they are concerned that if they participate in the initiative, their credit rating will be downgraded and that would make it more difficult to access capital markets in future.
So, what the debt crisis is pointing out is how important accessing capital markets is for developing countries. For them, being thrown a lifeline depends on their reception on the capital market. However, this is not a god-given structure. This structure comes out of the current capitalist and financialised system, in which not only are the North and the South unequal but the financial sector and human societies are unequal! There is such a deep imbalance that in times of crisis, debt escalates wildly.
Public development banks have so much potential to do something about this imbalance, channelling public money into really tackling and creating solutions to the climate crisis, to poverty and inequality, and strengthening the public sector, public services and public goods.
What do civil society groups demand from public development banks?
In short: civil society demands that considerable financial resources are devoted to building an equitable, inclusive, and sustainable future. But what specifically do they demand?
- Debt cancellation for developing countries and stop using loans as the main financial instruments in response to the multiple crises;
- Stop financing fossil fuels, but scale up public financing to support a just transition to renewable and democratic energy systems and increase the share of finance dedicated to stimulating job creation in sectors that benefit the most vulnerable such as clean energy, urban mobility, and public health;
- Stop financing any harmful projects, but place human rights, racial, and climate justice at the core of their actions and stop making investments in industrial-scale agriculture, industrial meat production, and megadairies, but fund socially responsible and sustainable livestock production;
- Democratization of global economic governance, recognizing the right of every country to be at the decision-making table, and not only those concentrating power or resources.
Before the Finance in Common Summit, 320 civil society organizations launched a joint statement calling on public development banks to build a new global order that is “truly just, equitable, and gives primacy to the rights of people and the well-being of the planet”.