Is it time to modernize the global financial system?

Nothing could be further from the convening of global political, financial and business leaders at Davos 2024, this year’s World Economic Forum Annual Meeting in Davos, Switzerland, than the daily reality facing people displaced by conflict in places such as Sudan or Myanmar. But that contrast is a disturbing feature of globalization today – a growing gap between the experience of communities destabilized by the triple threat of conflict, climate change and economic shocks and the growing prosperity and stability of the rest of the world.

With 2024 upon us, the world cannot afford a rerun of 2023’s growing sense of crisis and its inability to manage it, whether seen in the return of great power rivalries or the breakdown of protection of civilians in places such as Gaza and Ukraine.

The public and private financial leaders coming together at Davos with the resources to break this cycle of crisis are critical. Still, most have yet to show much appetite for ditching the risk-averse, business-as-usual approaches they have become comfortable with. So it was surprising and encouraging to hear new World Bank President Ajay Banga call for “deep cultural change” at the bank to fulfill pledges to countries affected by poverty and the climate crisis, which today are primarily fragile and conflict-affected states.

Banga’s remarks at the Annual Meetings of the World Bank Group and International Monetary Fund (IMF) in Marrakech last year marked a shift in the bank’s approach to climate action as part of a new vision to end poverty “on a livable planet.”

This new forward-looking approach suggests that world leaders recognize the urgent need to pursue new and more impactful strategies to support communities bearing the unparalleled humanitarian impact of conflict, extreme poverty, repeated exogenous shocks and the unchecked impacts of climate change. But the true test of these ambitions will be whether the positive words from Banga turn into action in 2024.

Modernizing the global financial system to reflect the increasing concentration of poverty and climate impacts in conflict-affected communities couldn’t be more urgent. For the first time in two decades, extreme poverty is on the rise, with countries impacted by conflict and fragility expected to be home to two-thirds of those living in extreme poverty by 2030. Conflict, combined with recurring climate catastrophe and the lingering economic fallout from the COVID-19 pandemic, has stretched government budgets beyond their limits, resulting in an unprecedented 60% of low-income countries facing severe debt distress.

The current landscape is bleak: 8 of the 10 countries that have made the least progress toward UN Sustainable Development Goals are conflict-affected, least developed countries. This is the new geography of extreme poverty and one where the World Bank must direct its attention.

While extreme poverty and the climate crisis have intensified, the institutions and financing tools to tackle the consequences have not kept pace. Aid from wealthy nations to least developed countries declined in real terms in 2022. Of particular concern are funding levels to those that are also conflict-affected, where humanitarian response plans are grossly underfunded, at the level of just over 25% on average.

Geopolitical tensions and domestic political concerns have diverted aid away from these countries and prevented the necessary progress in our fight against climate change and poverty. These intertwined crises require urgent action and appropriate finance tailored to these communities.

Currently, the World Bank’s business and financing model is designed to work with governments. But support for least developed countries that are conflict-affected is often delayed or suspended due to a high risk threshold and an unworkable reliance on governments whose capacity to deliver essential services or absorb climate finance is hamstrung by instability. Consequently, communities impacted by conflict, extreme poverty and climate disasters – the people at the heart of the bank’s mission – are left behind by the current system.

World Bank and IMF leaders and shareholders must follow the advice of their experts to modernize these international financial institutions.

Firstly, this means improving the assessments of climate vulnerabilities and their intersection with poverty and conflict at national and local community levels. An improved conflict-sensitive risk mapping system, using data and technology to anticipate climate shocks and inform responses, can help direct financing to where it is needed most urgently to achieve the World Bank’s updated vision and mission.

Second, the World Bank’s ambition to expand partnerships beyond national governments could improve the speed, scale and delivery of World Bank-financed projects to support communities beyond the national government’s reach or access. For example, the World Bank has partnered with NGOs to deliver vital health and nutrition programmes in Afghanistan and Somalia.

In South Sudan, not only did a World Bank and NGO partnership maintain continuity of health service delivery during heightened insecurity but they also tripled the target number served. In 2024, realizing this ambition relies on easing entrenched World Bank bureaucracy and prioritizing people over process to deliver programmes with the UN, NGOs and wider civil society alongside governments.

Thirdly, achieving the updated mission requires a vital boost in capital for the arm of the World Bank serving these communities. The International Development Association is the most important source of finance for vital services and climate action for conflict-affected and climate-vulnerable countries. An expert group commissioned by the G20 recommends tripling funds from the International Development Association by 2030. The year 2024 allows World Bank shareholders to set the bar high with the next round of the fund’s replenishment, which just launched in December.

Unsurprisingly, many in the Global South are losing faith in their Global North partners and the international financial institutions they champion – institutions specifically designed to spur development and address global challenges. The recognition from World Bank and IMF leaders of the need to modernize financing and operations to address this new geography of extreme poverty is encouraging. But they need to move much faster and commit to proposed reforms in 2024 to ensure the divide between fragile and stable countries does not further deepen.

We must not waste the opportunity to make the global financial system work for the most vulnerable communities. Acting now is the best way to prevent a much bigger bill in years to come and will help to deliver a more sustainable, stable and safer future for all.