The improbable greening of global banking
Austerity, restructuring, and privatization are out. Climate change and income inequality are in. The World Bank and the IMF have discovered poor people. What's up with that?
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There are not many movies in which the hero is a banker. I suspect this is no accident. The most famous of them, of course, is “It’s a Wonderful Life” in which the good banker George Baily is locked in mortal combat with himself and the bad banker, Mr. Potter, for the soul of the small fictional town of Bedford Falls in upstate New York.
The film, which was a huge box office flop when it opened in 1946, has become a Christmas staple, not simply because it is out of copyright and costs the networks nothing to broadcast, but because Jimmy Stewart’s performance as the tormented Bailey so charmingly touches on the virtues we Americans all like to think we possess—honesty, decency, compassion, love of family, courage, equality, community, the environment and so on—that we overlook the fact that the film also reflects in not very subtle ways Hollywood’s post-war flirtation with socialism It also has no black, or other people of color, in it.
But, I digress, as the semi-great Budd Schulberg used to write. Nobody is likely to mistake the World Bank or the IMF for fuzzy-headed do-gooders. For decades they have served mainly as bankruptcy trustees and lenders of last resort for the world’s financial basket cases.
Both institutions have been criticized for imposing restructuring plans on poor countries that damaged their public sectors and for pushing aggressive privatization and other stringent measures while ignoring societal concerns. In situations where there was a clear trade-off between getting the economy going and addressing destructive environmental practices, Mr. Potter bested George Bailey most of the time.
The simple reality is that the WB and IMF are global in name only. They are dominated by the U.S. and a few major allies who have worked to impose strict monetarist policies that often run counter to the interests of much of the world’s (poor) population.
I can’t prove this, but I suspect the past policies (austerity, privatization, financial liberalization) of the IMF, the World Bank, and other global institutions that exist to make sure wealthy countries and global companies get their money back or, at least, mitigate their losses is a major driving force of the wave of populism, protectionism, and distaste for globalism that we’ve seen in recent years. Brexit and Donald Trump didn’t come out of anywhere.
Happily, maybe, that seems to be changing a bit. Consider this tidbit from the IMF’s latest annual report:
Without further action to reduce greenhouse gas emissions, the planet is on course to reach temperatures not seen in millions of years, with potentially catastrophic implications. The analysis in this chapter suggests that an initial green investment push combined with steadily rising carbon prices would deliver the needed emission reductions at reasonable transitional global output effects, putting the global economy on a stronger and more sustainable footing over the medium term.
Did you hear that? The report is suggesting that there doesn’t have to be tradeoffs between environmental and economic priorities. We can have both. That is about as optimistic as economists get.
The IMF report posits that an initial green investment push combined with steadily rising carbon prices would deliver the needed emission reductions at reasonable transitional global output effects, putting the global economy on a stronger and more sustainable footing over the medium term. A green investment push upfront would, it says, “strengthen the macroeconomy in the short term and help lower the costs of adjusting to higher carbon prices.”
Carbon pricing is critical to mitigation because higher carbon prices incentivize energy efficiency besides reallocating resources from high- to low-carbon activities. The transitional costs of carbon pricing consistent with net zero emissions by mid-century appear manageable and could be reduced further as new technological innovations develop in response to carbon pricing and green research and development subsidies. Governments can protect those most affected by mitigation by providing targeted cash transfers financed by carbon revenues
In other words, we can meet the Paris targets and grow economies if we act aggressively now:
Changes in climate policies, new technologies, and growing physical risks will prompt reassessment of the value of virtually every financial asset. Firms that align their business models with the transition to a net-zero world will reap handsome rewards. Those that fail to adapt will cease to exist. The longer meaningful adjustment is delayed, the greater the disruption will be.
Much of the credit for the IMF’s turn toward more compassionate banking is no doubt the work of new Managing Director Kristalina Georgieva, who took over the helm of the IMF in October 2019. Georgieva, a native Bulgarian who has previously been CEO of the World Bank and held major economic and environmental positions in the global establishment (she has a Ph.D in environmental science) immediately signaled that she wanted to take the IMF in a different direction:
“In a world that’s eager for higher growth, this is an opportunity to accelerate investment in low-carbon technologies and speed up the transition to a low-carbon world The (IMF) mandate is not changing, not becoming something else, but incorporating growth, employment, and financial stability. There is no question that climate change matters to growth, employment, and financial stability.”
“These things are not necessarily against each other. You can have growth and it can be clean, green, sustainable, and equitable.”
If the IMF’s epiphany was predictable, the World Bank’s transformation has been nothing short of a real miracle. World Bank president David Malpass, a right-wing banker, Donald Trump appointee and longtime skeptic of multilateral institutions, a man whose past anti-globalism stance was so fierce that some aides quit and others warned against his appointment—that David Malpass—has become a surprisingly passionate advocate for policies to reduce global warming, rein in economic inequality and use multilateral institutions to fight the worst of the pandemic's economics impacts.
The WB has made $83 billion dollars in climate-related investments over the last five years and in December, Malpass raised its target and now expects 35% of its financing to have "climate co-benefits, on average, over the next five years." That's up from 28% in 2019 and an 18% target under Malpass his predecessor, Jim Yong Kim. The Bank also has been a strong supporter of implementing and backing the Paris Climate Accord, spurned by Trump as one of his first official acts.
Malpass recently opened his speech at the Climate Ambition Summer 2020 with these stunning words:
Climate change, poverty and inequality, are defining issues of our age. Increasingly, they work hand-in-hand.
The global poor often suffer the most from climate events – including flooding, droughts and food insecurity. There’s a deep unfairness to this – the poor generally emit less in greenhouse gases, and yet are impacted the most by climate change.
He closed with this remarkable thought:
“It’s very clear – we cannot succeed in helping countries reduce poverty without rising to the challenges of climate change."
No one has yet come up with a plausible explanation for Malpass’s metamorphosis from political hack to climate change’s most unlikely champion but I have a theory. One evening, he was standing on a bridge staring at the water below and an angel named Clarence walked up and said “You don’t want to do that. You can save the planet.”
Dig Deeper
World Economic Outlook, October 2020: A Long and Difficult Ascent
Tackling climate crisis is what we should be doing, says new IMF boss
Building back better: A net-zero emissions recovery
Remarks by World Bank Group President David Malpass at the Climate Ambition Summit 2020
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