IMF, World Bank need a reboot, says UNDP chief

The secretary-general recently spoke of the need for a Bretton Woods 2.0 system. Could you explain what that means?

Bretton Woods was the place where the World Bank and International Monetary Fund were founded after the Second World War, The international financial architecture is built around these two institutions. Increasingly there is a sense in our world today that these institutions need a reboot. You can call it Bretton Woods 2.0. We’ve suddenly seen post pandemic economic shocks, the impact of Ukraine on world food prices, energy prices, capital markets, and increasing interest rates causing a debt crisis for developing countries. The Secretary General is signalling to the world that we need to go back to a basic question: is our international financial architecture set up for the big crises that are arising? Clearly the World Bank and the IMF are struggling under the current magnitude and scale of these crises. We need to look at more liquidity, debt rescheduling and restructuring as well as lowering the cost of borrowing so that countries have the means to actually invest. Bretton Woods 2.0 is really about a 21st century view of the international financial architecture.

What are the reforms UN is proposing?

First, the Secretary General would like the world to recommit to rescuing the Sustainable Development Goals (SDGs). Later this year, there will be an SDG Summit in New York and that will be the mid-way point for the 2030 Agenda. We have a very mixed balanced sheet so far. The SDGs are the only unifying agenda the world has right now through these turbulent times and we can’t lose that. Second, the Secretary-General has put a lot of attention on the fact that the international financial architecture is simply not delivering what is required of it. He is calling for addressing short-term debt and liquidity challenges while working on a more structural reconfiguration that allows development finance to be available at far higher levels and at far lower costs. This is not sorcery, its a matter of leveraging the balance sheet of institutions like the World Bank and creating far more capacity to lend at concessional rates. This is because you can borrow from the World Bank at 4-5% but if you’re a developing country, you are punished by capital markets and ratings agencies and are forced to borrow at 10, 12 or 14%, which is totally unaffordable.

The secretary-general recently acknowledged that the G20 common framework to redress the debt crisis in developing countries has not succeeded. What went wrong?

As they say, it takes two to develop a debt crisis: the ones who lend and the ones who borrow. What we saw in recent years was a very low cost of borrowing with very low interest rates and also continuous advice to developing countries to borrow funds in order to invest in infrastructure, clean energy and other aspects of their economic development. This led to a significant amount of borrowing and for the first time in history, the majority of debt was actually held by the private sector. During the pandemic, the inability to pay debts by many countries led to the G20 to put up the Comprehensive framework on the one hand and the debt suspension initiative on the other. However, the private sector did not come to the table. That led some governments to say, “Why should we reschedule our debts simply for developing governments to pay private creditors who are not even at the table?”

Secondly, the debt suspension was stopped after the pandemic. Right now, we are in a position where the debt crisis has become cumulative. The G20 is struggling right now to rapidly address these issues in an effective manner. During India’s G20 presidency, that will be one of the pressure points because if we are not fast enough, we may find the growing number of countries actually reaching the point of default with not just financial and economic consequences but also political instability.

India is trying to position itself as a leader of the global South. How can India with its G20 Presidency help steer the conversation towards tools that will help the developing world?

I think the G20 presidency that India has projected to the world is a very inclusive one. India set parameters for its presidency that signalled to the world that it really wants to convene everyone around the table. We should be careful not to divide the G20 agenda into a North-South binary. Part of what India is trying to do is set out areas of shared interest like climate finance. Another thing is digital development. Digital technology will define the pathways of countries in terms of whether they are part of the digitally powered economy or whether they’re left behind. India has demonstrated some revolutionary breakthroughs and innovations with Aadhar and CoWIN. India sees itself in a unique position as a developing country that can create more opportunities for international cooperation on global frameworks for the digital future.

How concerned are you about geopolitical divisions between the West on the one hand and Russia and China on the other?

As UNDP, we’re extremely concerned. This is because we can measure the costs to development in the countries we work in. The problem of debt we spoke of is a direct consequence of geopolitical conflict and an inability to respond to debt problems early enough. The high interest environment we live in today is punitive to developing countries. With every rise in interest rates, you’re essentially cutting the development budget countries have to invest in education, health and clean energy. The Secretary-General has also made clear that he is very concerned about the growing rift in the international community and its inability to work together on issues like climate change, poverty and creating an inclusive digital economy.