“Cutting the development budget risks provoking the next conflicts”

There’s a gaping hole in global development financing – which means the poorest countries have nothing left to put towards the UN SDGs. This is partially due to the global financial and debt architecture, which is now set to change with, among other measures, the reform of the World Bank. We spoke to RNE member Heidemarie Wieczorek-Zeul to find out what this reform has in store and where even more needs be done.

Historically, the World Bank’s development financing has consistently been under fire. Currently the Global South is demanding a greater say in financing matters. Where has the problem been up to now?

Heidemarie Wieczorek-Zeul: For a start, we faced the problem that the financing for the goals – and this is something the current Development Minister Svenja Schulze has also addressed – was not enough. That’s why it’s good that at the Spring Meetings of the World Bank and the International Monetary Fund (IMF), which have just taken place, they decided to top up the lending volume by 70 billion US dollars. That will help support the countries that want to invest in global public goods – meaning goods whose benefits and costs extend beyond national borders – but until now haven’t had the chance. Germany has already contributed to the funding by – as Federal Chancellor Olaf Scholz already announced last year – providing 305 million euros in hybrid capital to the World Bank. That was the impetus, so to speak, for others to follow suit. It’s certainly a wise move – but still, at some point the question of further top-ups will raise its head.

The ability of the poorest countries to act has so far been very much restricted by the debt architecture. Why is that?

That’s a complex point. In the federal government we launched an initiative in the early 2000s which provided debt relief for heavily indebted poor countries in return for them using the freedom of action it gave them to invest, for example, in things like public health and education. The problem is – especially after the reversal in interest rates witnessed in the USA and the shock caused by the impact of the Covid pandemic – the level of debt of the poorest countries has risen drastically. Some of the countries have to spend almost 30 percent of their national budgets on financing their debt. And that means there’s nothing left over for the Sustainable Development Goals (SDGs), the issue of decarbonisation or restructuring the economy. When this is your starting point, I don’t think it’s enough to say: well we have the G20 Common Framework for debt treatments. Because when you look at how many countries have been able to benefit from it so far, it’s just not enough.

What could be done to change that?

Actually – and this something we also established in the RNE statements from June 2023 – we need more transparency around the questions: Who is in debt and who are the creditors? Apart from that, I think, we need new impetus among the traditional donors, but also China and the private stakeholders that are involved, to collectively enable debt relief and better debt management. In my opinion, that is absolutely essential today.

The World Bank now wants to reform itself into a “better bank”. Implementation steps were agreed at its Spring Meetings. What were they?

For one thing, the lending volume has just been extended and with it also the bank’s mandate. It’s not just a question of fighting poverty, but also of financing global public goods and, above all, adapting in the face of climate change. We at the RNE have been saying for a while now that the World Bank needs to become a transformation bank. Now they’ve taken a step in that direction, so from here on it’s all about the implementation. Apart from that, the indicators for measuring the impact have been reduced – although two new ones have been added: biodiversity and inequality. I think those are also important steps to stop the poorest countries worrying that any new missions will be charged to them.

Where do you think there might be room for improvement in this reform?

I would say, the most important thing is that it is implemented swiftly. Because I know what kind of processes these are and the devil is in the detail.

And if you now – with these reform steps in mind – reflect on the RNE’s statements from summer 2023, what progress do you see?

In relation to the World Bank, the points we mentioned back then really have come on better than I expected, after many years of hardly any progress at all.

Another point you already mentioned in 2023 is the question of the allocation of special drawing rights. What’s happened there?

So in 2021, 650 billion US dollars’ worth of special drawing rights were made available to help stabilise economic development – at the time it came from the IMF in light of the Covid pandemic. But the fact is that these rights are allocated based on the share of IMF quotas each country holds and not on anything to do with poverty or particular vulnerability. That has led, for example, to a situation where Germany received more than the entire continent of Africa put together. Of course for countries in the Global South that hardly seems reasonable. But now there are some interesting developments on that front – namely the possibility of special drawing rights basically being provided as hybrid capital for the African Development Bank. That makes sense whichever way you look at it, because the African Development Bank is a major player and that would boost the lending volume because its stability and security would, of course, improve. So I hope the IMF agrees to this. But it looks like there’s going to be a new German vote on it and our Finance Minister will not be supporting this initiative.

Germany is jointly responsible for drawing up the UN Pact for the Future. What role will this pact play at the International Conference on Financing for Development in Madrid in summer 2025?

That depends on how the decision-making pans out. So far, some parts of the draft are worded in very general terms, but with regard to the financing of the SDGs, it has sent out promising signals. Actually, the Pact of the Future signals that, in a world shattered by geopolitics, there is the will to reinforce multilateralism. And that’s why I feel it really needs and deserves to be given a lot more attention in Germany.

Is there any hope at all of agreement in the current geopolitical climate?

It’s absolutely possible, as we saw at the spring meeting of the Financing for Development Forum of the UN Economic and Social Council (ECOSOC) in April. Unlike with the two international financial institutions – the World Bank and the IMF – where geopolitics made it practically impossible to come up with a joint statement, at this ECOSOC meeting they even reached a consensus over their joint statement. That shows that the UN level is one that we need to beef up, because it helps boost cohesion and prevents unnecessary fragmentation.

What did they agree to there?

The document points out, for instance, that the funding gap – calculated at somewhere between 2.5 and 4 billion US dollars – has to be filled to deliver on the SDGs and the climate targets. This needs to come from various financing sources. Obviously that also means the private sector, but equally it is abundantly clear that some of it has to be covered by public funds too. That’s the challenge we are facing at the moment.

What approaches might be taken to close this gap?

One of the more interesting approaches – which we at the RNE have also been advocating – is to step up the establishment of their own tax systems in the countries of the Global South. This needs to be done as transparently and digitally as possible, which also helps against corruption. Another approach that tackles debt relief is through so-called debt swaps, whereby the funds owed are repurposed for, say, economic transformation or investment in renewable energy. But it’s also important to make the international financial institutions more inclusive. And there was an interesting proposal under the G20 presidency from the Brazilian finance minister to tax the 3,000 richest people in the world, which would bring in as much as 250 billion US dollars. Our Development Minister Svenja Schulze also supported this and has taken it up. These are all important perspectives with an eye to the conference in Madrid.

Germany was one of the initiators of the World Bank reform. Can the federal government sit back now or should it do more?

As far as the World Bank is concerned, I think the steps are laid out. But the question is, of course, what is the federal government doing at home? How are they behaving? And I’m amazed to notice – to put it diplomatically – that there are attempts to slash the development budget and also make cuts in the humanitarian aid from the Foreign Office. That is the absolute opposite of what we need if we want to form new global alliances and prevent new alliances involving states like Russia or China. Cutting the development budget risks provoking the next conflicts. Because then, not enough can be done to counteract climate change. If the finance minister now argues that there’s nothing more we can do, that would just stunt Germany’s role in the world. And we have learnt that we are not safe in the long run without greater global security – and not just military security: we must also be able to defend ourselves in the fight against climate change, against pandemics, against racism and inequality. This argument for saving is in stark contrast to what Olaf Scholz is envisaging on all his trips and his other endeavours.

How could we create more awareness for this vital topic at the national level?

Of course it’s important that civil society gets involved. But it’s also essential that those with political responsibility appropriately advocate the things they decide at international conferences, at home – with all their consequences.


Recommendations & statements

Finanzierung der Transformation und nachhaltigen Entwicklung

Reform der internationalen Finanzarchitektur - Stellungnahme des Rates für Nachhaltige Entwicklung; Berlin, 21.06.2023