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Hot Take: March 2023

Written by Oliver Moyles

Image credit:Jessica Rennoldson, David Aragon

In our March 2023 edition, we reflected on the huge demands on the World Bank's president, the public money underpinning soaring oil profits, and the real drivers of rising food bills.

From laggard to leader: Why the next two months could redefine the World Bank

Financing the decarbonisation of the global economy at the scale required to limit warming to 1.5°C depends on strong leadership. Leadership from multilateral development banks (MDBs) like the World Bank. But, to put it simply, they are failing. MDBs have simply not been reactive or responsive enough as global crises compound.

At the World Bank’s biannual meeting this April, discussions will undoubtedly focus on the Bank’s “Evolution Roadmap”: a rethink of the Bank’s operational model and mission commissioned by their largest shareholder, the US. This spot-check has produced a draft paper widely criticised for lacking the ambition required to confront global challenges. The World Bank will need to do far more to reassure shareholders in April.

Criticism of the roadmap builds on a 2018 review commissioned by the G20 on Multilateral Development Banks’ (MDBs) Capital Adequacy Frameworks (CAF). The CAF review – conducted by a panel including ODI’s Frannie Leautier, Hans Peter Lankes, and Chris Humphrey – recommended five operational changes in order to use MDB capital more effectively. Reform will be costly, they noted, but the cost of inaction will be far greater.

These recommendations have widespread support and would be a welcome first step for the World Bank, but there are much deeper issues to address. The Bank’s failure to expand investment in line with the scale of climate change - coupled with their glacial divestment from fossil fuel projects - reflect an institution slow to accept both the reality of the crisis and their role in preventing it. MDBs could be confronting the crisis – working with developing countries on co-producing strong, long-term, climate-smart macroeconomic strategies that scale clean energy and nurture green industries – but to date, their lack of long-term vision and joined up approach is more laggard than leader.

Whether the World Bank tackles these issues head-on will be decided over the next two months. As the only candidate, the US nominee Ajay Banga - who visited ODI in March – is almost certain to be confirmed as the new President. How he sets the tone from day one will define their tenure – not to mention levels of poverty and climate vulnerability for generations to come.

Image credit:PublicDomainImages; Pixabay, Karabo_Spain

The IPCC's final warning lands amidst record oil profits

“Act now or it will be too late”. Once again, the IPPC has told us that the window of opportunity to act on climate change is closing. Its latest report was released just after some of the world’s largest oil and gas giants had their highest-ever profits: $200 billion in 2022. The record-breaking earnings are propped up by generous support from governments, intended to help protect consumers from soaring prices as oil and gas supplies from Russia are cut. But fossil fuel subsidies are nothing new: in 2021, government subsidies for the consumption and production of fossil fuels reached $190 billion.

Fossil fuel subsidies have devastating impacts on both the climate and the wider economy. In addition to prolonging our addiction to fossil fuels, such subsidies aren’t always means-tested or income targeted, meaning they enable profligate consumption amongst wealthier households and businesses – proportionally higher emitters and in the need of least support.

As the global cost of living crisis continues, so too does the development case for redirecting subsidies. But the political and economic landscape makes reform difficult. Colombia, for example, provided $1.6 billion in subsidies to the production and consumption of fossil fuels in 2019. Nigeria spent $1.7 billion on subsidies the same year. In both countries, citizens expect cheap energy, governments continue to generate revenues from fossil fuels, and lobby groups continue to exercise power over decision-makers. The Nigerian government’s previous attempt at reform even triggered widespread protests.

During the Colombian Presidential election campaign last year, President Petro pledged to rethink new oil and gas exploration projects, as well as the production subsidies that accompanied them. But pressure on public finances have stalled his ambition, with only the removal of a statute that permitted companies to deduct royalty payments from their tax bills being rolled out so far. Petro is now balancing the need to reduce the deficit with the need to maintain investor confidence.

So, while subsidies must be phased out in accordance with commitments made at COP26 and reaffirmed at COP27, any reform must be complemented by politically-smart redistribution to maintain public support . In the case of lower-income fossil fuel producers, wealthier countries and multilateral agencies may need to support aspiring reformers to plan, finance and implement a just energy transition. Subsidy reform may free up some of the fiscal resources needed, but would be high-risk for any government unless the public feel that they are getting something else in return. The problem facing decision makers is that the longer we continue to subsidise fossil fuels, the harder it will be to redirect those resources elsewhere and the more costly the energy transition will ultimately be.

Does the Russia-Ukraine war really explain why hunger is on the rise?

When Russia invaded Ukraine, many anticipated rising international prices of fuel, fertiliser, maize, sunflower oil and wheat; a price shock that would hit low-income households across the global south hard, driving them into poverty and hunger. But while concern was rightly held for the most vulnerable, focusing on international shocks may be masking the root cause of food insecurity in the Global South.

The invasion dramatically exacerbated a steady rise in the price of commodities that began in 2020. Internationally, headline figures for March 2022 showed a 69% increase in the global price of wheat, a 71% rise in oil prices, and a 117% increase in the cost of fertiliser compared to the year before. But this price shock did not wholly translate into the Global South.

One study of 16 low- and middle-income countries showed average price increases of between just 0.6% and 6%. Instead, rising food prices and extreme hunger in lower-income countries are often caused by uniquely domestic pressures, like drought, storms, or plant and livestock disease. ODI’s analysis of food prices in Mali and Sudan over the last ten years, for instance, shows that the prices of staple grains had doubled or more, but this was down to domestic factors like poor weather, harvest shortfalls, or conflict.

For such countries, the international response to the global food shocks of the Ukraine war – while an order of magnitude lower than required – also shifted the focus away from addressing the root causes of chronic food shortages. Improving resilience to drought and other shocks, through irrigation, agroforestry, or soil and water conservation, should arguably be the priority in these regions.

It is heartening to see the collective recognition on the need to tackle food insecurity and hunger. But responding to the Ukraine crisis cannot come at the expense of addressing the myriad other crises battering food supplies in low and middle-income countries.