IMF WBG Spring Meetings 2023 by MG Publishing

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2023 SPRING MEETINGS COMMEMORATIVE BOOKAZINE EDITION

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CONTRIBUTING AUTHORS DARON ACEMOGLU JESSICA ANTONISSE KATHERINE BLANCHARD JEFFREY FRANKEL LISA GABLE HEIDI GIBSON SIMON JOHNSON JAMIE JONES PRATIMA JOSHI ANA PALACIO GOURI G PANICKAR IAN RALBY MICHAEL SPENCE KIRAN SOMVANSHI MALCOM TEMPLE ANDRÉS VELASCO Copyright© by Diplomatic CourierTM and Medauras Global Publishing 2023. All rights reserved under International and Pan-American Copyright Conventions. Published in the United States by Medauras Global and Diplomatic Courier. LEGAL NOTICE. No part of this publication may be reproduced in any form—except brief excerpts for the purpose of review—without written consent from the publisher and authors. Every effort has been made to ensure the accuracy of information in this publication; however, the authors, Diplomatic Courier, and Medauras Global make no warranties, express or implied, in regards to the information and disclaim all liability for any loss, damages, errors, or omissions. EDITORIAL. The content represents the views of their authors and do not reflect those of the editors and the publishers. Every effort has been made to ensure the accuracy of information in this publication, however, Medauras Global and the Diplomatic Courier make no warranties, express or implied in regards to the information, and disclaim all liability for any loss, damages, errors, or omissions. PERMISSIONS. This publication cannot be reproduced without the permission of the authors and the publisher. For permissions please email: info@medauras.com with your written request.

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Contents I M F W B G SP R I N G MEETI NG S I AP RI L 2023

06 I The Shakeup the World Bank Needs By: Ana Palacio

10 I Tyranny’s Engaging Youth as Partners: Collaborating for a Shared Future By: Heidi Gibson and Katherine Blanchard

14 I How to Fix the Platform Economy By: Daron Acemoglu and Simon Johnson

18 I Why Banks Need to Go Back to the Basics for Sustainable Growth By: Lisa Gable

22 I Countering Structural Disruptions By: Michael Spence

26 I Promise, Potential Pitfalls of AI in Africa By: Malcom Temple

30 I Addressing Social Inequalities in Cities Through Data By: Pratima Joshi and Gouri G Panickar

34 I The Imperative to See Food as Integral to Maritime Strategy By: Jamie Jones and Ian Ralby

38 I Fifty Years of Floating Currencies By: Jeffrey Frankel

42 I The World Bank Group’s Road Map Should Lead Away from Fossil Fuels By: Jessica Antonisse

46 I Convenient ESG is Not Good ESG By: Kiran Somvanshi

50 I A Subsidy War Without Winners By: Andrés Velasco

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The Shakeup the World Bank Needs By Ana Palacio

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ajor changes are afoot at the World Bank, but few people seem to be paying attention. Beyond devising a new, greener mission, the Bank is undergoing a leadership transition, with important implications for its relationship with the Global South and the institution’s long-term relevance. By the time David Malpass, the World Bank’s president, announced his resignation last month, tensions over the Bank’s stance on climate change had been building for months. Chosen for the job by former President Donald Trump’s administration, Malpass faced considerable pressure when Joe Biden took over, with the U.S. Treasury expressing dissatisfaction with the Bank’s failure to show genuine climate leadership. Criticism of Malpass escalated in September, after he refused to acknowledge the role of human greenhouse-gas emissions in driving climate change. While he subsequently did so, his backpedaling did nothing to diminish accusations that, under his leadership, the World Bank was not doing nearly enough to align its lending with global emissions-reduction goals. A month later, a group of ten major economies–the G7, plus Australia, the Netherlands, and Switzerland submitted a proposal for a “fundamental reform” of the Bank that would lead to greater progress on this f ront. The Bank’s climate action plan remains, according to many Western countries, too short on ambition. Malpass’s resignation was thus probably a relief–not least to the United States. Almost immediately, Treasury Secretary Janet Yellen reiterated America’s commitment to “evolve the World Bank” into an engine of the green transition. Soon after, Biden nominated Ajay Banga–the Indian-born former Mastercard executive who oversaw the firm’s emergence as a global payment platform–to succeed Malpass. Banga was not necessarily an obvious

BEYOND DEVISING A NEW, GREENER MISSION, THE BANK IS UNDERGOING A LEADERSHIP TRANSITION, WITH IMPORTANT IMPLICATIONS FOR ITS RELATIONSHIP WITH THE GLOBAL SOUTH AND THE INSTITUTION’S LONGTERM RELEVANCE. choice. The World Bank’s Board of Executive Directors “strongly encouraged” the nomination of women candidates, of which there were several solid options with extensive development experience, including Gayle Smith, a former USAID administrator, and the agency’s current head, Samantha Power. In the world of multilateral development institutions, Banga is an outsider. But Banga’s selection may prove to be a shrewd move by Biden. Yes, his confirmation would uphold the longstanding tradition of the U.S.–the World Bank’s biggest shareholder and the largest donor to its concessional arm, the International Development Association– handpicking the Bank’s head. This custom, together with the tacit understanding that a European should lead the International Monetary Fund, has rightfully generated discontent in the Global South, with countries there calling for more representative multilateral governance. Banga does represent a nod to India and the Global South more broadly. The question is whether this will translate into more effective leadership on development, including the climate trends that threaten it. The World Bank was originally conceived as a tool for reconstruction. Development IMF WBG SPRING MEETINGS 2023 | 7

later became the Bank’s primary focus, thanks not least to its former president and key architect, Robert McNamara, who sought to promote the Western model of economic development. Despite being a signatory to the Bretton Woods Agreement, the Soviet Union never joined the World Bank, not least because it viewed the Bank as a platform for promoting the West’s free-market philosophy. What would it take to effectively support prosperity in the emerging world today? For starters, contentious debates about the possible expansion of the World Bank’s agenda–including how climate action fits into it–will need to be settled. At the same time, the Bank will have to overcome internal disagreements on debt relief and restructuring for distressed countries. (As it stands, discussions are effectively paralyzed by Chinese demands that the Bank accept loan write-downs.) While such discussions unfold–or stall– the crises fueling them continue to escalate. The World Bank must mobilize adequate resources to help countries confront a perfect storm of climate, energy, food, and debt crises. At a time of rising protectionism and global economic fragmentation, this will be especially difficult. Only a leader with both technical and political savvy can hope to succeed. Ambition and scale will be crucial. A compelling case has been made for a far larger World Bank. But even barring such an institutional transformation, a dramatic increase in lending to clients across the income distribution is badly needed. Though the Bank’s commitments have nearly doubled since 2019–reaching $115 billion–lending has been lagging behind global economic growth since 2017. Reforming lending policy is particularly important for the Bank to regain influence in middle-income countries, which have long looked elsewhere to finance their development needs. But more funding is just the beginning. The World Bank must also do a much 8 | D I PLOM AT I C COU RIE R

better job of listening to developing countries. Barbadian Prime Minister Mia Amor Mottley’s Bridgetown Initiative–which recommends new terms for development financing and calls for increased funding for climate resilience, mitigation, and postdisaster reconstruction–is one proposal worth considering. If the World Bank fails to listen to the ideas and demands of developing countries, the West will lose them–with consequences that extend far beyond the Bank. And rebuilding relationships with alienated allies is both difficult and costly. South Africa’s drift toward the Sino-Russian nexus–and resistance to the West’s hasty efforts to win it back—offers important lessons in this regard. Banga is now on a “global listening tour.” But winning support for his candidacy is only the first step. As president, Banga will have to find ways to meet the demands of a Global South that is eager for change, or else risk undermining the World Bank’s long-term viability and jeopardizing the West’s ability to exercise its convening power. Banga’s outsider status may work in his favor, as he attempts to shake up the institution and bridge its traditional mandate with a twenty-first-century agenda. But the “outsiders” who really need to be brought into World Bank decision-making are the countries that have been kept outside far too long. ***** About the author: Ana Palacio, a former minister of foreign affairs of Spain and former senior vice president and general counsel of the World Bank Group, is a visiting lecturer at Georgetown University. Copyright: Project Syndicate, 2023.

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Engaging Youth as Partners: Collaborating for a Shared Future By Heidi Gibson and Katherine Blanchard

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s we come to the halfway point of the 2030 agenda, there is a sudden flurry of governmental, organizational, and corporate metrics and actions being set out to achieve the Sustainable Development Goals (SDGs). Recent progress, such as international agreements to protect biodiversity or the high seas create much-needed moments of hope. And yet, scientif ic f indings such as the latest IPCC report, highlight that our current trajectory is one of existential risk. That climate risk only continues to grow. Clearly, we must do more to create a sustainable future, and the time to take impactful action is dwindling. Thinking and acting for a more sustainable planet requires we evolve in how we see and interact with ourselves, each other, and the world around us. It requires collaboration on an unprecedented level, and will require a revisioning of power, justice, and partnership that includes everyone.

Young People are Eager to Engage Young people don’t currently have much of a voice in how the world achieves the SDGs, but nobody has more at stake. Many young people know this and are demanding inclusion in the process. Youth movements like Fridays for the Future and Turning Green, the rise of activists like Greta Thunberg and Autumn Peltier, and the innovative use of social media to spread messages and build coalitions, all indicate that youth are eager to contribute to priority-setting and decisionmaking as part of this process. From youth climate action strikes to protests for more equitable and representative societies, there is evident energy from this generation, and a clear drive to engage in creating a shared, sustainable future. The role that youth can play in thinking and acting for a more sustainable future is also laid out in the SDGs, specifically the call of SDG 4.7, to “ensure all learners acquire knowledge and skills needed to promote sustainable development.” Youth want change, and the SDGs support this. Yet global leaders

FROM YOUTH CLIMATE ACTION STRIKES TO PROTESTS FOR MORE EQUITABLE AND REPRESENTATIVE SOCIETIES, THERE IS EVIDENT ENERGY FROM THIS GENERATION, AND A CLEAR DRIVE TO ENGAGE IN CREATING A SHARED, SUSTAINABLE FUTURE. have been slow to engage youth as authentic partners. Youth activism is on the rise, international agreements, corporate actions on the environment, sustainability, and governance–there is a confluence of opportunity and energy around those focused on a sustainable future. But partnership and collaborative action between young people, governments, businesses, and more established civil society groups is lacking. Part of this disconnect is due to the lack of institutional support for young people–not only supporting their activist efforts, but support through traditional education channels. Educational institutions lack an overriding focus of helping youth to gain knowledge and tools to envision and take action for sustainable futures. While, concurrently, omitting many of the issues young people care most about from national and local curriculum and standards. We need to transform our ideas about education. There is opportunity for SDG 4.7 to play out by elevating the value of education and the critical role it plays.

Transform Education, Transform Ourselves So, what does transformative education for a sustainable future look like? What knowledge and skills are most crucial for IMF WBG SPRING MEETINGS 2023 | 11

young people? Education with this aim must involve specific content knowledge such as teaching about the role of greenhouse gasses in global warming or the impact of an acidifying ocean. However, content knowledge alone is insufficient. Equally important are the skills, attitudes, lenses, and behaviors needed to move toward creating a more sustainable world. In other words, standards, curricula, and educational approaches should not only focus on the details of the climate crisis, but also the opportunity to develop skills and perspectives to navigate complex systems and issues in pursuit of shared, sustainable futures. And this education is not just for youth, it is for all of us. Leaders can and should model these same skills as they work toward sustainability on the basis of something like the climate crisis, but also the opportunity to develop skills and perspectives to navigate complex systems and issues in pursuit of shared, sustainable futures. And this education is not just for youth, it is for all of us. Leaders can and should model these same skills as they work toward sustainability. Authentic engagement with youth partners means not only encouraging them to learn, but also learning ourselves. For example, we must support youth in realizing their existing agency and ability to take action to address the problems they notice in their communities–and through education, empower them to do so. This also necessitates a shift in the way adults and societies approach education. If we want a true partnership with youth, one of the first steps is to share power in educational spaces–to transition from a model that frames adults as experts and youth as apprentices to a scenario where young people are engaged as co-creators of knowledge and solutions. Similarly, to move toward informed, thoughtful, sustainable approaches to the future, young people need to learn to consider different perspectives and reflect on their own selves and positions. Educators and policymakers must develop 12 | D I PLOM AT I C COU RIE R

STANDARDS, CURRICULA, AND EDUCATIONAL APPROACHES SHOULD NOT ONLY FOCUS ON THE DETAILS OF THE CLIMATE CRISIS, BUT ALSO THE OPPORTUNITY TO DEVELOP SKILLS AND PERSPECTIVES TO NAVIGATE COMPLEX SYSTEMS AND ISSUES IN PURSUIT OF SHARED, SUSTAINABLE FUTURES. similar skills–to take on the perspective of young people and understand the frustration at the slow–sometimes backward–progress on achieving a more sustainable future. Just as we hope youth find sustainable pathways forward by balancing different points of view, so too must decision-makers balance the very real short-term needs and constraints, with a longer-term view focused on the future these young people represent. None of this can be done in isolation. Developing necessary approaches around connection and collaboration will require us all to evolve from ideas privileging individual goals and achievements to focus on relationality and our global collective. We must all rethink how we view ourselves and those around us, including our relationship with the natural world. When we look to the wisdom of groups that have focused on sustainability and planetary health, we find deep interconnection and embeddedness between people and the natural world. Indeed, there is no boundary between the environment and people. People are part of the environment, and the environment is part of people. We find

deep interconnection and embeddedness between people and the natural world. Indeed, there is no boundary between the environment and people. People are part of the environment, and the environment is part of people.

Imagining the Future Finally, a sustainable future is a just future. Ensuring we meet everybody’s needs and address inequities is particularly challenging when moving from the abstract to real action, but sustainability cannot truly exist without equality because injustices destabilize systems. This can be a challenging concept for students, and even more challenging for adults who have spent decades benefiting from centuries-old inequitable and unjust systems. Together we face the formidable challenges of learning how to undo hierarchies and unfair power structures, within our educational institutions, as well as within society writ large. Knowledge, skills, and attitudes in these areas are important precursors to sustainability regardless of the specific topic and are reflected in many frameworks in the sustainability and climate action field. There are many frameworks designed for professionals and higher-education students. For primary and secondary students, the Smithsonian Science Education Center’s Sustainability Mindsets provide a roadmap for the growth and transformation of young people, and can be an opportunity for adults to reflect on their own embodiment of this work as well. The largest collectives of young people come together as cohorts in schools around the world, with secondary schools topping out at 614 million students globally in 2020. But as of 2022, only 53% of national education curricula around the world include references to climate change, and 30% of educators continue to feel ill-equipped to broach the topic with their students. Local, national, and global leaders are not only failing students

by being slow to protect people and the planet but are also failing them by not centering these issues in their approach to education. The majority of education systems are not currently designed to engage students as partners in addressing the most pressing issues of our time. But by embracing Goal 4.7, they can be. They can bridge the gap between global goals, youth urgency for change, and the development of skills and knowledge to help bring that change about. Education systems can be reimagined from a classroom level to a national level in order to integrate standards, professional development, curriculum, pedagogical approaches, and a deep respect for the role of young people. Education spaces can be reimagined as places where young people learn the collaboration and care needed for a sustainable future in partnership with their educators and community. Young people can–and must–become key partners in moving toward a sustainable future. This requires authentic engagement and reflection from the adults and leaders who work with and for them. Partnerships are defined by their mutually beneficial nature, and the responsibility that each partner holds to the collective outcome. Our institutions, our interactions, and our thinking all must change as we join young people in developing fundamental knowledge, skills, and attitudes that can act as a foundation for a shared, transformative future for us all. About the authors: Heidi Gibson is the Acting Manager for the Smithsonian Science for Global Goals series at the Smithsonian Science Education Center. Katherine Pedersen Blanchard is Assistant Division Director of Professional Services at the Smithsonian Science Education Center.

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How to Fix the Platform Economy By Daron Acemoglu and Simon Johnson

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eta (Facebook), Alphabet (Google), Microsoft, Twitter, and a few other tech companies have come to dominate what we see and hear on the internet, shaping hundreds of millions of people’s perceptions of the world. In pursuit of advertising revenue, their algorithms are programmed to show us content that will hold our attention–including extremist videos, disinformation, and material designed to stimulate envy, insecurity, and anger. With the rapid development of “large language models” such as ChatGPT and Bard, Big Tech’s hold on impressionable minds will only strengthen, with potentially scary consequences. But other outcomes are possible. Companies could deploy the latest wave of artificial intelligence much more responsibly, and two current court cases serve as warnings to those pursuing socially destructive business models. But we also need public-policy interventions to break up the largest tech companies and to tax digital advertising. These policy levers can help change Big Tech’s pernicious business model, thereby preventing the platforms from inflicting so much emotional harm on their users– especially vulnerable young people. The legal cases include Gonzales v. Google, which is currently before the U.S. Supreme Court. At issue is the tech industry’s insistence that Section 230 of the 1996 Communications Decency Act exempts platform companies from any liability for third-party content that they host. If platforms are acting more like news outlets than mere online repositories when they recommend videos, tweets, or posts, they should be held to the same standard as established media, which, under existing defamation laws, are not allowed to publish what they know to be untrue. Hence, in a $1.6 billion lawsuit filed against Fox News, Dominion Voting Systems has uncovered ample evidence that Fox’s top on-air hosts and executives

IF A DAILY NEWSPAPER PUBLISHES A COMMENTARY BY A TERRORIST, SOME READERS WILL PROBABLY STOP SUBSCRIBING. BUT SINCE MOST INDIVIDUALS DO NOT WANT TO WALK AWAY FROM THEIR EXISTING ONLINE SOCIAL NETWORKS, WE NEED GOVERNMENT REGULATION TO RE-EMPOWER CONSUMERS. were well aware (and told each other) that former President Donald Trump’s claims of election fraud were entirely false. Dominion thus has a strong claim to damages if it can show that Fox knowingly spread falsehoods about Dominion’s voting machines in the 2020 election. Shouldn’t online platforms whose algorithms disseminated the same lies be held to the same standard? Addressing such questions has become even more urgent now that programs like ChatGPT are poised to reshape the internet. These sophisticated algorithmic recommenders could potentially be trained not to promote extreme content or deliberate lies, and not to encourage extreme emotions. If an algorithm is exploitative or manipulative toward children (or anyone else, for that matter), the responsibility for such harm should lie with the humans in charge. After all, AIs at this level are not operating autonomously of human decisionmaking. To claim otherwise is to grant their creators legal immunity. IMF WBG SPRING MEETINGS 2023 | 15

Tech companies should no longer be able to excuse their own inattention or negligence by arguing that “there’s too much data” for them to monitor. That wealth of data is the source of their profits, and the sheer abundance of content on their platforms is what makes their AIs so potent. While they should enjoy a reasonable degree of protection against liability for what someone else posts on their site, this should apply only to passive content that the platforms do not in any way recommend to other users. Active content that is algorithmically pushed out to millions of people to generate revenue is a different matter. Indeed, it is just like traditional publishing, only much more powerful. If a daily newspaper publishes a commentary by a terrorist, some readers will probably stop subscribing. But since most individuals do not want to walk away from their existing online social networks, we need government regulation to reempower consumers. First, the largest platform companies should be broken up to create more intense competition between recommendation algorithms and their trainers. But for this to work in the public’s interest, platforms also must be required to allow a user’s social network to be transferred to a different platform. The same “interoperability” rationale allows you to keep your cell-phone number when you change carriers. Social-media and digital-content consumers should be able to vote with their feet when they don’t like what a platform is promoting. Second, and even more importantly, we need to force an adjustment in the prevailing Big Tech business model, which is based on harvesting vast amounts of user data and monetizing it through digital-advertising sales. This business model explains why disinformation, outrage, and insecurity are so prevalent online. Emotional manipulation maximizes 16 | D I PLOM AT I C COURIE R

user engagement, enabling more intrusive data collection and higher profits. A tax on digital advertising is one of the only practical ways to change this extraordinarily destructive business model. It would reduce platforms’ temptation to maximize user engagement through emotional manipulation; and, if coupled with limits on data collection, it would provide incentives to develop alternative approaches, such as subscriptionbased models. Another advantage of a digital-advertising tax is that it could be set even higher for content promoted to people under 21. Selling cigarettes or alcohol to minors is a serious criminal offense. While it is not feasible to forbid young people from seeing content that damages their mental health, a high rate of taxation on advertising revenues derived from promoting such material is entirely appropriate. The proceeds could be devoted to strengthening mental-health programs, not least those for teen suicide prevention. If there is any doubt about which content is hurting young people, we can just ask the AI recommendation algorithm. ***** About the authors: Daron Acemoglu, Professor of Economics at MIT, is co-author (with James A. Robinson) of Why Nations Fail: The Origins of Power, Prosperity and Poverty and The Narrow Corridor: States, Societies, and the Fate of Liberty. Simon Johnson, a former chief economist at the International Monetary Fund, is a professor at MIT’s Sloan School of Management and a co-chair of the COVID-19 Policy Alliance. Copyright: Project Syndicate, 2023.

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Why Banks Need to Go Back to the Basics for Sustainable Growth By Lisa Gable

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he erosion of public trust in institutions has accelerated since the outbreak of COVID-19. The recent bank failures have exacerbated market uncertainty and fueled anxiety among consumers. According to financial experts, the collapse of Silicon Valley Bank (SVB) was foreseeable and could have been prevented, leaving ordinary people questioning what went wrong. SVB is currently under investigation for not having a Chief Risk Officer from April 2022 to January 2023. It seems that the bank’s executives may not have been attentive to adapting their internal risk environments or staffing to adequately assess risk. If confirmed, this could be considered a breach of their duty of care. Opinion editorials and politicians are vigorously debating the root cause of the problem. Is it due to insufficient oversight or regulation, mismanagement by executives, or a combination of these factors? Some pundits have raised concerns that SVB board members and executives devoted too many bank resources (time and financial) to causes not directly related to the bank’s mission. We are still learning more about the collapse and politicians continue to debate what more resilient regulations could look like, but there is something useful to take away from these pundit critiques. After all, history has shown that organizations that branch out too far from their core mission risk becoming sidetracked and diverting precious attention and resources from their primary goals. Despite the wide range of activities they undertake, banks are primarily entrusted with the crucial responsibility of accepting deposits, pooling them, and then lending them out to those who require financing, as emphasized by the International Monetary Fund (IMF). The paramount objective is to ensure that these funds are accessible to people when they need them. In the end,

HISTORY HAS SHOWN THAT ORGANIZATIONS THAT BRANCH OUT TOO FAR FROM THEIR CORE MISSION RISK BECOMING SIDETRACKED AND DIVERTING PRECIOUS ATTENTION AND RESOURCES FROM THEIR PRIMARY GOALS. visionary ideas must be reconciled with economic realities.

Unintended Consequences Investors and startup CEOs have underscored the grave repercussions of the bank’s collapse. SVB’s collapse not only jeopardized the survival of conventional tech startups, but also failed to safeguard the assets of companies that had prioritized diversity, equity, and inclusion (DEI) and climate-related products and services. These are the very things that the bank’s leaders had given the highest level of attention to. Executives at RA Capital wrote a letter on March 12 to Treasury Secretary Janet Yellen and Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg, urging the federal government to act quickly and provide clear direction. They emphasize that any missteps could have long-lasting consequences, potentially impeding U.S. competitiveness and innovation, and jeopardizing climate change and energy investment goals. But, perhaps the most poignant call to action came from Tiffany Dufu, the wellrespected Black female Founder and CEO of The Cru, who posted a LinkedIn plea for financial help for her company, an IMF WBG SPRING MEETINGS 2023 | 19

SVB customer. Dufu urged her network to support startup founders, particularly Black woman founders who receive less than 1% of venture capital funding. She wrote: “If you know a startup founder, reach out to them to offer support. If it’s a Black woman founder, put her on speed dial. It’s hard enough to execute and fund a vision you believe will change the world.”

Back to the Basics Warren Buffett’s first and foremost rule is “never lose money” which is particularly applicable when it comes to handling other people’s money. In times of crisis, it is essential to maintain an unwavering focus on Job #1—the core function that your institution must perform to survive and thrive. When things are headed south, it is crucial to go back to the fundamentals. Take a moment to reflect on your organization’s purpose. Revisit your charter and mission statement to evaluate if it aligns with your reason for existing, or if it has drifted towards vague and challenging-to-measure aspirations. Instead of fixating on ambitious but uncertain goals, have you prioritized immediate solutions to best serve your customers? To assess the focus and effectiveness of your organization’s leadership, evaluate how executives and board members allocate their time and what they publicly communicate. Are leaders striving for unattainable objectives to the detriment of realistic targets? Or are they actively taking steps to mitigate risks and gauging the success of these actions to ensure that innovative ideas are sustainable? As representatives of multilateral financial institutions convene, discussions should place the greatest importance on promoting financial stability and creating opportunity for customers, rather than focusing on lofty aspirations. In challenging times, banks and their boards 20 | D I PLOM AT I C CO URIE R

should refocus on the fundamentals and remind themselves of the original purpose of their institutions. The most efficient approach to attain societal objectives is by guaranteeing economic security. ***** About the author: Lisa Gable, Chairperson World in 2050, CEO, former US Ambassador, UN Delegate, and author of Wall Street Journal Bestseller Turnaround – How to Change Course When Things Are Going South.

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Countering Structural Disruptions By Michael Spence

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rade and technology development policies almost always have distributional consequences. There may be a few exceptions for which the implementation of a policy produces either gains or no loss for nearly everyone, what economists would call a Pareto improvement. But these instances are relatively rare. You could argue that for early-stage developing countries, the export-driven growth model that draws surplus labor into the modernizing manufacturing and urban sectors comes close to meeting this standard. But even there, the gains are not spread evenly, and income inequality normally increases.

IN THE “ATOMS LAYER,” WHERE PHYSICAL ECONOMIC ACTIVITY TAKES PLACE, PRODUCTIVITY GROWTH IS MIXED – HIGHER IN STRUCTURED ENVIRONMENTS LIKE MANUFACTURING AND LOGISTICS, AND LOWER ELSEWHERE.

Distributional impacts are the norm, within countries and across national boundaries. Successful developing countries experience structural change as part of the growth process. The longterm benefits of exposure to global markets and investment are very large, driving both growth and significant structural adjustments in terms of jobs, skills, and human capital. But some sectors are inevitably adversely affected.

All of this is vital to ensure that the policies that underpin the growth model retain popular support; otherwise, political opposition will likely disrupt or even abort the growth strategy.

To ensure that new economic opportunities and pressures do not overwhelm the ability of developing countries – particularly the labor force – to adapt, policymakers should manage the pace and sequencing of the opening process in trade, investment, and the capital account. For example, if net employment creation – jobs created minus jobs lost – turns negative, opening may be happening too fast. Efforts to calibrate the pace of opening should be complemented by some redistribution toward adversely affected people or sectors, but not at the expense of investment. Most important, to support the creation of an inclusive pattern of structural adjustment, government must invest heavily in highquality, affordable (either low-cost or f ree) education for young people and training for older workers.

These challenges are not limited to developing economies. Trade, investment, and technology have significant effects on economic structure, relative prices, and income and wealth distribution pretty much everywhere. One recent paper argues that trade with China not only has direct negative effects on employment and wages in the US manufacturing sector, but also produces negative upstream effects on suppliers of intermediate products. To be sure, the paper’s authors conclude that, for the United States, trade with China yields net benefits, because the positive downstream effect – a wide range of industries gaining access to cheaper intermediate products – is larger than the combined direct and upstream negative effects. Nevertheless, US-China trade still has important distributional implications because the negative effects are more concentrated by sector and geography, whereas the positive effects are spread widely. This has arguably had a significant impact on American attitudes toward trade with China – and thus on US trade policy generally. IMF WBG SPRING MEETINGS 2023 | 23

Of course, the debate about trade with China is particularly heated in the US, owing not least to allegations that China has violated World Trade Organization rules. But this is a red herring. There are surely many cases of developing countries’ failure to comply strictly with WTO rules. But the structural and distributional effects of trade do not depend on a country’s compliance with WTO rules, but rather on its stage of development, the scale of trade, and its comparative advantages. The severity of the so-called China shock in the US reflected its speed and scale. Policymakers’ mistake was to devote relatively little attention to modulating the speed of the transition or supporting those affected by the structural adjustment. But slowing the pace of structural change is easier said than done, particularly when it comes to the green transition – another key driver of structural change today. Decades of inaction mean that rapid reductions in greenhouse-gas emissions are now urgently needed. But this is already creating major dislocations, with serious distributional implications. As these effects grow, so will resistance to the necessary initiatives. A third driver of structural transformation today is technology. As David Autor and others have documented, even before the latest breakthroughs in artificial intelligence, digital technology was removing routine (codifiable), mainly middle-income jobs from the economy, leading to job and income polarization. This phenomenon can be observed in all advanced economies. Compounding the challenge in the US, productivity growth has moved onto a dual track. As Belinda Azenui and I recently noted, breakthroughs in machine learning have enabled productivity to grow rapidly in what technologists call the “bits layer” of the economy – where information is processed, stored, accessed, 24 | D IPLOM AT I C CO URIE R

and used, where transactions occur, and where decisions are made. But in the “atoms layer,” where physical economic activity takes place, productivity growth is mixed – higher in structured environments like manufacturing and logistics, and lower elsewhere, including large employment sectors like hospitality. If these trends – and policymakers’ inaction – persist, the gap in productivity and incomes will continue to widen. In a 2022 article entitled “The Turing Trap,” Erik Brynjolfsson suggested that the AI research agenda is overly focused on human-like artificial intelligence, motivated by the famous Turing Test: can a person interacting with a machine determine whether it is one? Clearly, that benchmark has produced astonishing advances. But Brynjolfsson argues that it needs to be complemented with a more aggressive and well-funded machineaugmentation agenda. The goal of developing semi-autonomous vehicles must be accompanied by a push to boost the productivity of a broad range of service-sector jobs. About the author: Michael Spence, a Nobel laureate in economics, is Emeritus Professor at Stanford University and Senior Fellow at the Hoover Institution. Copyright: Project Syndicate, 2023.

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Promise, Potential Pitfalls of AI in Africa By Malcom Temple 26 | D IPLOM AT I C COU RIE R

I M F W B G SP R I N G MEETI NG S I AP RI L 2023

ecent advances in artificial intelligence (AI) such as the release of generative AI and ChatGPT have set business leaders across the globe scrambling to harness its benefits including in Africa. Research institutions have boasted the boost AI could give to the continent’s GDP–with some estimating an increase of up to 50% (or $1.5 trillion) by the end of the decade. But with some economists warning that the AI revolution threatens to widen wealth inequality, what does the adoption of AI mean for poverty eradication efforts in a region already beset by an immense gap between rich and poor? AI is already making inroads in Africa. So far, more than 2,400 companies on the continent have adopted the new technologies. The majority of them (66%) are in just four countries: South Africa, Kenya, Egypt, and Nigeria. A recent State of AI in Africa Report found that these companies span several industries including health, hospitality, insurance and finance but about 34% are mediumsized enterprises with less than 100 employees and 41% are startups with less than 10 employees. Clearly, AI adoption is still nascent on the continent. Certain characteristics nonetheless make the region particularly ripe for technological disruption: Africa is the youngest and fastest growing continent with a highly entrepreneurial and tech-savvy population. Mobile money became ubiquitous in Kenya before the rest of the world and Africans were among the first to widely adopt mobile phone access to the internet. Yet, Africa also has the highest rate of wealth inequality. On average across African states the top 10% of each population possess 54% of national wealth while the bottom 50% hold less than 10%. What’s more, strong economic growth over the past few decades in Africa has not led to proportional poverty alleviation, given the link between high inequality and low upward mobility.

BEYOND DEVISING A NEW, GREENER MISSION, THE BANK IS UNDERGOING A LEADERSHIP TRANSITION, WITH IMPORTANT IMPLICATIONS FOR ITS RELATIONSHIP WITH THE GLOBAL SOUTH AND THE INSTITUTION’S LONGTERM RELEVANCE. Some economists warn that AI could exacerbate this trend. In the near term, it is expected that AI will hurt middle-level, white-collar workers rather than those working lower-level jobs. Moreover, as western companies harness automation and other tech advancements like 3D printing, fewer will offshore manufacturing to countries with lower labor costs, instead opting to move operations closer to home. This means that office and manufacturing workers in the Global South could face downward mobility as they are pushed into lowerpaying jobs. In Africa, where nearly 83% of employment remains informal, automation-induced job displacement will likely threaten the continent’s burgeoning middle class while thwarting prospects of upward economic mobility for those living below the poverty level. Thus, the extent to which Africa can reap the many benefits of AI while mitigating the risks hinges on the ability of African states and international partners to implement AI policies that complement poverty reduction strategies. Here are a few: Laying the foundation: As decision makers seek to strengthen data collection IMF WBG SPRING MEETINGS 2023 | 27

and sharing, special attention must be placed on equity and inclusion to ensure data used to train algorithms is representative of the population. To do so, data must include diverse languages and dialects. Individuals f rom all segments of society including diverse ethnic groups must also be involved in the development process. Developing home-grown AI systems: While imported AI systems from the West or East can be a supportive supplement for digital transformation in the immediate-term, African states must develop their own AI models tailored to their unique needs and goals. For example, AI models used to address health or agricultural challenges in Africa will need to be trained on different diseases and soil than in other regions. Workforce development: AI will undoubtedly produce novel ways of working as well as new jobs to deliver unforeseen products and services. To meet the needs of this new digital economy, Af rican education ministries must equip youth with technical and entrepreneurial skills for the jobs that don’t exist yet. Workforce development must also be extended beyond wealthier urban centers to ensure that poorer rural communities have an equal opportunity to thrive. Leveraging AI for Social Challenges: AI has the potential to not only improve productivity in Africa but also help address those issues most critical to ending poverty such as public health, climate change, education, and financial inclusion. African governments and international partners must enable growth of companies using AI to tackle social challenges while creating incentives for companies to share AI-generated insights for the public good. How AI will transform the world is still yet to be seen as is the way the technology itself will evolve over time. But what is certain is that Africa is at a pivotal 28 | D IPLOM AT I C COU RIE R

moment in time. With the right approach, the world’s fourth industrial revolution can be the most inclusive for Africa and remedy some of the continent’s most protracted challenges. ***** About the author: Malcolm Temple is a senior consultant at APCO Worldwide and is based in New York.

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Addressing Social Inequalities in Cities Through Data By Pratima Joshi and Gouri G Panickar

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I M F W B G SP R I N G MEETI NG S I AP RI L 2023

he development of slum communities is mostly overlooked and not prioritized by the rest of the urban population. With the growing gap between the “haves” and “have nots” of society, the interventions by governments and social sector organizations tend to be ineffective in erasing the existing social inequalities. Dilapidated houses, unhygienic conditions, and lack of access to basic services are just a few of the concerns of the urban poor. Attaining a higher standard of living and being heard are far-fetched dreams for these communities. The urban poor remain oppressed due to their lack of knowledge and awareness and inability to voice their concerns. The adverse effects of social inequalities are passed down to generations, trapping them in a vicious circle of poverty. Addressing these social inequalities is of utmost importance for the growth of sustainable cities. How are the existing policy interventions falling behind in achieving this? Are they sensitive to the needs of these underserved communities?

Adopting a Data-Driven Approach In the era of rapid technological advancements and data-centric approaches, it is essential to leverage them for the betterment of the urban poor. Creating and maintaining granularlevel data on slums will pave the way to building sustainable cities in this world. Unfortunately, not enough emphasis is given to spatial data on the slum communities, due to which most interventions are based on assumptions. This makes it difficult to gauge the required size of interventions and their level of impact. Data helps to design realistic, sustainable interventions that are also sensitive to the needs of the urban poor. Prior to designing interventions, it is crucial to study the socio-economic conditions and background of the

DATA SHOULD BE THE FOUNDATION FOR ALL INTERVENTIONS AND MUST BE CO-CREATED WITH THE COMMUNITY. THIS ENSURES THAT THE RELEVANT ASPECTS OF THEIR LIVES, NECESSITIES, AND LIVED EXPERIENCES ARE CAPTURED. slum communities. In most cases, the municipal corporations, as well as the slum community themselves, lack accurate data. As a result of this data gap, policymakers fail to accurately evaluate the condition of the urban poor, leading to their exclusion from development interventions. The aspirations of creating sustainable cities can be achieved through the institutionalization of data. Data should be the foundation for all interventions and must be co-created with the community. This ensures that the relevant aspects of their lives, necessities, and lived experiences are captured. Co-creation of data will also be an eye-opener for the slum communities about the effects of social inequalities on their lives and, in turn, nudge them to act on it. Since its inception, Shelter Associates has been leveraging and successfully demonstrating the impact of data-driven interventions on the slums in the cities of Maharashtra, India. Involving community volunteers in the data collection process has proved effective in understanding the needs of the community. These community volunteers are capacitated for door-to-door data collection using the latest technology. The survey data is then laid down to create granular spatial data of the slums. IMF WBG SPRING MEETINGS 2023 | 31

It is time to move away from the traditional form of data—spreadsheets and drawings— and move on to laying down data spatially. Allocation of resources, ensuring maximum coverage of interventions, and accurate identification of gaps in amenities such as water, electricity, solid waste management and defecation practices are how spatial data can be leveraged. Spatial data is appealing and inferable to a larger audience, reducing the blindness towards the have-nots of society.

The Way Forward Maintaining and tracking slum data provides clarity to the municipal corporations as well as the slum communities on the prevailing issues. Data should be gathered sensitively such that it resonates(captures) with the desires and aspirations of the communities. It ensures that interventions cater to the well-being of people. The clarity and transparency brought about by data instill confidence in the ULBs and urban poor. Stakeholders can then collaborate on developing solutions while remaining committed to the cause. Constant engagement among stakeholders and the smooth implementation of interventions will provide reassurance about the effectiveness of the interventions as well as the stakeholders’ relationship. Massive financial investments by the ULBs are required to create, maintain and update data. Individuals ought to be informed about the power of data and the extent to which it can be leveraged. The availability of granular data will eliminate the unnecessary expenditures borne by institutions and improve resource allocation. As highlighted by the Sustainable Development Goal (SDG) 17.18, the availability of reliable, high-quality and timely data is significant for enhancing the capacity building of local and national governments. Moving forward, data should be readily available to the public free of cost, enabling a wider group of 32 | D I PLOM AT I C COU RIE R

users who will be able to integrate this data as per their requirements. ***** About the authors: Pratima Joshi is the founder and executive director of Shelter Associates, an NGO based in Pune, Maharashtra, India. An Ashoka fellow, she is recognized by BBC and Forbes as a leading “Slum architect of India.” Gouri G Panickar comes with an economic background, specializing in development studies. She is currently working at Shelter Associates and is involved in fundraising and research.

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The Imperative to See Food as Integral to Maritime Strategy Jamie Jones and Ian Ralby

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I M F W B G SP R I N G MEETI NG S I AP RI L 2023

oughly 80% of the world’s grain supply travels by sea. When Russia invaded Ukraine, approximately 30% of that maritime supply was taken offline. No country on earth has been spared from the war’s economic fallout, but the price of food in particular has spiked to intolerable levels. Even more than a year into this crisis, however, few leaders have made the connection between their local economic hardship, overfull silos in Odesa, and the empty bulk carriers that should be sailing the seas with grain in their holds. The problem is that food security is rarely considered a maritime issue. Except for fisheries (which account for 20% of global dietary protein), food security is not usually incorporated into maritime strategy, much less prioritized as a maritime security concern. Yet, it strikes at the core of every country’s national security, as food is fundamental to human survival. By overlooking this security challenge, maritime nations—particularly developing nations—risk compounding their growing vulnerability to climate change, natural disasters, pandemics, supply chain disruptions, and illegal, unregulated, unreported fishing (IUUF). Failing to address food insecurity in maritime strategy can leave a state vulnerable to violent conflict, discredit the nation’s leaders, bleed money from coffers, and create instability, if not suffering, in the lives of the people.

Why this Matters Like the invasion of Ukraine, the maritime impact of COVID-19, and disruptive maritime incidents like the explosion in the Port of Beirut or the drama of the EVER GIVEN being stuck in the Suez Canal, illustrate how fragile our maritime supply chains for food and critical resources really are. Unfortunately, however, with urbanization and globalization, most of the world has failed to recognize that we have created an inextricable link between food and maritime shipping. As a result

EXCEPT FOR FISHERIES (WHICH ACCOUNT FOR 20% OF GLOBAL DIETARY PROTEIN), FOOD SECURITY IS NOT USUALLY INCORPORATED INTO MARITIME STRATEGY, MUCH LESS PRIORITIZED AS A MARITIME SECURITY CONCERN. of this blind spot, most states have not developed resiliency in maritime logistics to ensure continuity of food supply. We must correct this mistake; food security should be a core consideration of maritime strategy. In general, failing to address food security can be disastrous. The so-called “Cod Wars” started in the 1950s and resulted in British fishing vessels clashing with the Icelandic Coast Guard, nearly leading to armed conflict. In 2008, food price spikes led to surges of sometimes violent unrest in at least 48 different countries. Governments were overthrown in Haiti and Madagascar. Many scholars and commentators argue that the 2011 Arab Spring protests were also accelerated, if not initiated by food insecurity. More recently, Kenya and Uganda have amassed troops at their borders, actually considering war over a half-acre rock in Lake Victoria with fishing rights worth $100 million. Throughout history, states and individuals alike have turned to violence and crime when their food supply was threatened. In the maritime domain, food insecurity has been blamed for the prominence of piracy, not just historically, but in recent years across different geographies. Perhaps even more tragic than the onset of systematic crime is that illicit activity such as piracy may exacerbate the underlying IMF WBG SPRING MEETINGS 2023 | 35

FAILING TO ADDRESS FOOD SECURITY CAN BE DISASTROUS. THE SOCALLED “COD WARS” STARTED IN THE 1950S AND RESULTED IN BRITISH FISHING VESSELS CLASHING WITH THE ICELANDIC COAST GUARD, NEARLY LEADING TO ARMED CONFLICT. problem by interfering with shipping, thereby disrupting humanitarian food supplies. Just in the last few years, this has occurred in Somalia and Yemen, among other places. This vicious cycle can, in turn, further limit access to food and drive prices up even higher, compounding suffering, violence, and insecurity.

The Vulnerability of Maritime States Many maritime states—particularly developing states and island nations— are especially vulnerable to food insecurity. They often have limited domestic production capacity and rely heavily on shipping for their food supplies. Too often, however, the discourse around food in such states, turns to fishing. IUU fishing, which has gained an increasing amount of global attention, is estimated to cost an annual economic loss of $36.4 billion. But in some major fish producing states— like Somalia which has battled famine for decades—fish is not actually part of the diet. So reducing the maritime consideration of food security to being about countering IUU fishing fails to even recognize the reality of the challenge. Seafood is not the only food at sea and in many cases is not even the majority 36 | D I PLOM AT I C COU RIE R

of what is moving internationally. Coastal, island and archipelagic states are also prone to being hit by natural disasters, which often cause both shortand long-term harm to food security. Many island nations rely on subsistence farming that is especially vulnerable to climatic events. After Tropical Cyclone Pam battered Vanuatu in 2015, the United Nations warned of the potential for longterm food insecurity. While the World Bank and others provided financial relief to mitigate these effects, relying on help from others has always been a risky proposition. These risks only stand to grow, as climate-related disasters are expected to increase in frequency and scale, with fewer resources and less time available for recovery. Vanuatu’s recent experience of two earthquakes and back-to-back cyclones highlights this concern. Similarly, when Hurricane Maria hit Puerto Rico in 2017, the storm destroyed crops and livestock, damaged irrigation systems and farm buildings, and caused significant soil erosion. Food production was severely diminished, leading to shortages and higher prices for basic staples like rice and beans. But the effects are not only local. When one state’s production is diminished, it draws more heavily on food that may have originally been intended for elsewhere. And furthermore, when a state that normally contributes to the global agricultural market is forced to instead draw on that market, the sufficiency of worldwide supplies become a concern. More effective strategy would help. Maritime strategy sets the vision and roadmap for how the maritime space functions and provides the answer to the question of why something is being done in the maritime domain. Every state on earth should have “ensuring ample food supplies for the entire population” as one of its leading strategic objectives. When questioned, for example, as to why grain bulkers get priority over other ships, the state can answer: “in order to achieve our objective of ensuring ample food for our

I M F W B G SP R I N G MEETI NG S I AP RI L 2023

people.” When there is enough food in the world to feed everyone but insufficient logistics to reach them, that is a failure of strategy—especially maritime strategy— and the policy required to implement it.

Enough with the Temporary Measures While short-term solutions to ease immediate suffering should not be dismissed, food security is not a short-term issue. Because of the myriad ways in which states might find themselves grappling with food security, they must think longterm, and think strategically about it. Coastal, island and archipelagic states in particular must shift their thinking about food security. Humanitarian assistance and temporary measures when things go wrong are not always available and, even when they are, outside help is usually inadequate. As noted in Food Security and Sociopolitical Instability, policy interventions aimed at temporarily augmenting food supply are ineffective in the long-term. Releasing strategic food reserves or implementing export bans or import subsidies merely kick the can down the road. Moreover, such interventions can be a distraction, shifting attention away from the structural sources of insecurity and diverting resources from longer-term initiatives such as investing in research and development. States can develop maritime strategies that make the flow of food a national priority and explore every measure possible to limit the likelihood of food insecurity. Dry and cold storage, regionalized storage, bilateral and multilateral assistance agreements, relationships with shippers, and cooperative resilience measures with neighboring states are all examples of ways in which states can take a proactive approach to food security. Maritime strategy is not a wish list, nor a list of threats or emergency protocols. Chasing threats (symptoms) such as piracy

MARITIME STRATEGY SETS THE VISION AND ROADMAP FOR HOW THE MARITIME SPACE FUNCTIONS AND PROVIDES THE ANSWER TO THE QUESTION OF WHY SOMETHING IS BEING DONE IN THE MARITIME DOMAIN. or IUU fishing, rather than addressing causes and implementing sound policy, is also a flawed strategic approach, even though it may be operationally necessary. A holistic conception of the maritime domain as it relates to food security should serve as a building block for a maritime strategy. Sound maritime security strategy should include a plan to protect and responsibly extract resources; ensure the nation is neither “sea blind” nor “wealth blind;” prioritize research and development related to food supplies; mandate public awareness of food resilience; and address contingency plans for when disasters, wars, or other supply chain disruptions occur. At the end of the day, a nation’s security is only as good as its strategy to protect itself. And everybody needs to eat. ***** About the authors: Jamie Jones is a legal institutional capacity building attorney focusing on maritime security in the Pacific Island Nations. Ian Ralby is CEO of I.R. Consilium, a family firm with global expertise in maritime and resource security, and is a Senior Fellow at the Center for Maritime Strategy.

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Fifty Years of Floating Currencies By Jeffrey Frankel

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ifty years ago this month, in March 1973, the Bretton Woods arrangement of fixed exchange rates was abandoned, and the world’s major currencies— including the U.S. dollar, pound, yen, and Deutsche Mark—were allowed to float. At the time, the system’s demise was generally considered a policy failure. But the shift from fixed to flexible exchange rates was probably inevitable. The international monetary system that was designed at Bretton Woods, New Hampshire, in 1944, helped lay the economic foundation for the postwar international order. Over the next three decades, known in France as the “glorious 30” (les trente glorieuses), the system delivered rapid economic growth and unprecedented prosperity. And yet the Bretton Woods regime operated as planned only for roughly one year. Though it was born in 1944, the Bretton Woods system did not become fully functional until 1958, after Western European countries had grown strong enough to make their currencies convertible into dollars. Already by 1959, the United States’ official foreign liabilities equaled its monetary gold stock, and exceeded it by 1964. Yale economist Robert Triffin realized the tension inherent in the US dollar’s role as the world’s only de facto reserve currency. Growing international demand for dollars, he predicted, would force the U.S. to run constant balance-of-payments deficits until investors inevitably lost confidence in the greenback, causing the system to break down. This insight later came to be known as “Triffin’s dilemma.” As it turned out, the increase in dollar liabilities accelerated after 1965, owing to the inflationary U.S. fiscal and monetary expansion of the Vietnam War era. The system became increasingly strained until, in 1971, US President Richard Nixon suspended other governments’ ability to convert their dollar holdings into gold. Two years later, the world’s major

STARTING IN 2003, FEARS OF “UNFAIR” CURRENCY MANIPULATION BEGAN TO SPREAD. FOR THE PAST TWO DECADES, U.S. POLITICIANS HAVE BEEN CONCERNED THAT CHINA, FOR EXAMPLE, WAS UNDERVALUING ITS CURRENCY BY SELLING RENMINBI AND BUYING DOLLARS. currencies became untethered for good. The new floating system demonstrated its worth later in 1973, when currency depreciations helped oil-importing countries like Japan withstand the shock of the Arab oil embargo. The shift toward exchange-rate flexibility continued after 1973. Initially, most smaller currencies remained pegged to the dollar, but over the following decades, more and more emerging and developing economies moved away from exchange-rate targets and toward increased flexibility. Every exchange-rate regime involves a trade-off between stability and flexibility. On one hand, fixed rates facilitate trade and investment by minimizing exchangerate risk and transaction costs, provide a nominal anchor for monetary policy, and offer protection against currency wars and speculative bubbles. On the other hand, floating exchange rates enable central banks to set monetary policies independently of other countries. They also allow governments to adjust to trade shocks, retain seigniorage, act as a lender of last resort to their domestic financial institutions, and avoid the speculative attacks that sometimes afflict countries IMF WBG SPRING MEETINGS 2023 | 39

with pegged exchange rates. There are many intermediate options between the two extremes of firm fixing and free floating, including target zones, currency baskets, crawling pegs, escape clauses, and systematic managed floats. Over the past 50 years, many countries have decided that the benefits of floating exchange rates outweigh the advantages of fixed rates. True, in the 1980s, the trend toward flexibility was temporarily reversed when some countries, particularly in Latin America, returned to exchangerate targets as a means of taming high inflation. But the trend resumed after 1994, when Mexico was forced to adopt a more flexible exchange rate, followed by Thailand, South Korea, Indonesia, Russia, Brazil, Argentina, Turkey, and others. While most major currencies float relatively freely, periods of extreme exchange-rate swings have sometimes led to consequential government intervention. A prime example is the 1985 Plaza Accord, whereby France, West Germany, Japan, the United Kingdom, and the US cooperatively intervened in the foreignexchange market to bring the soaring dollar back to earth. But interventions became less common after 1995. Starting in 2003, fears of “unfair” currency manipulation began to spread. For the past two decades, U.S. politicians have been concerned that China, for example, was undervaluing its currency by selling renminbi and buying dollars. In 2010 and 2011, Brazilian officials accused the U.S. and Japan of deliberately manipulating their currencies and coined the phrase “currency war” as a colorful way of describing competitive depreciation. But, among developed countries, the last major foreign-exchange intervention to lower a currency’s value was a joint G7 effort to help Japan cope with the effects of the Tōhoku earthquake and tsunami in 2011. In February 2013, the G7 finance ministers and central bank governors vowed to refrain from competitive

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devaluations, a little-known agreement which has held. Even China stopped resisting the appreciation of its currency back in 2014. Lately, fears of a currency war have been replaced by anxiety over “reverse currency wars.” With many countries more concerned about fighting inflation than reining in trade deficits, governments are competing to raise interest rates, thereby appreciating their currencies rather than seeking to keep them undervalued. Some countries are unhappy that the dollar has strengthened by roughly 14% since March 2021. There are some who remain nostalgic for the postwar monetary system or even yearn for the pre-World War I gold standard. But the sinking of Bretton Woods in 1973 was not the currency equivalent of the Titanic disaster. Rather, as the last half-century has shown, it marked the emergence of a new, better system, which has managed to remain afloat despite frequently rough economic seas. ***** About the author: Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University. Copyright: Project Syndicate, 2023.

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The World Bank Group’s Road Map Should Lead Away from Fossil Fuels By Jessica Antonisse

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I M F W B G SP R I N G MEETI NG S I AP RI L 2023

he latest IPCC report showed again how dire our situation is when it comes to our climate and planet. The science is not new–the report pulls together what the Intergovernmental Panel on Climate Change (IPCC) has already set out in a cluster of other reports. This will almost certainly be the last of the assessment reports while the world still has a chance to keep global temperature rise under 1.5 degrees. As the UN Secretary General Antonio Guterres said: “The climate time-bomb is ticking”.

A New World Bank Roadmap? In April the World Bank Group (WBG) will come together for its Spring Meetings. Recent developments show the WBG is catching up, realizing climate science can no longer be ignored and that the group has a big role to play. The international organizations are in a transitional phase, poised to select a new head and working to reset their priorities to achieve the mission to end extreme poverty and promote shared prosperity in a sustainable way. A new document came out last December on the basis of which the World Bank Group kicked off their discussion on a roadmap to evolving their work. It rightly stated that “the fight against poverty is affected by a series of structural trends that will make good development outcomes much harder to achieve”. It is therefore notable however the WBG’s new roadmap does not include a mention of Paris alignment to keep global warming below 1.5 degrees or a mention of fossil fuels specifically. The World Bank Group has invested $14.8 billion supporting fossil fuel projects and policies since the Paris Agreement. The WBG continued to use more public money to finance fossil fuel projects than any other Multilateral Development Bank (MDB), including $930 million in 2022 alone. Reports that suggest this is changing have surfaced, with revelations of new internal communication, guidelines, and training for staff to make the World Bank Group’s

IF THE WORLD BANK GROUP TAKES FIGHTING CLIMATE CHANGE AND EXTREME POVERTY SERIOUSLY, THE WBG NEEDS TO STOP INVESTING IN FOSSIL FUEL PROJECTS. THE BANK SHOULD FOCUS ON ADAPTATION AND INVESTMENT IN A JUST TRANSITION. policy more aligned with the fight against climate change. Revising these priorities and guidelines could potentially be transformational–but to be truly transformational these must clearly emphasize the importance of Paris agreement alignment and should include a complete stop to funding fossil (coal, oil, and gas) projects. The new IPCC report showed we need to cut emissions by 60% by 2035–there is no time for half measures. Critics of the shift to climate friendly investment argue that this distracts from the WBG’s mission of poverty reduction. Such criticisms create a false dichotomy between development and climate. People living in poverty are hit harder by climate change, and an additional 132 million people could be pushed into extreme poverty by 2030 if we stay on the current trajectory. Addressing climate change by transitioning to renewable energy will prevent worsening effects as well as provide a vehicle for sustainable development. By lending money to develop new fossil fuel projects the World Bank Group is investing in soon to be stranded assets in the name of development. But fossil fuel projects have more negative effects than just increased CO2 emissions– IMF WBG SPRING MEETINGS 2023 | 43

they are responsible for air and water pollution and perpetuate environmental injustice, because the burdens of climate change and pollution fall more heavily on low-income communities. Furthermore, there is no evidence that investing in fossil fuels improves the situation of people living in low-income countries. Workers in these industries often do not receive fair treatment, instead being subjected to unsafe working conditions and unfair wages. When it comes to energy access, the International Renewable Energy Agency (IRENA) stated that the cheapest way to provide energy access is via off-grid or distributed renewables. Investing in renewable energy also creates more jobs than investing in fossil fuel projects, and a larger percentage of those jobs go to women. Public f inance serves a role in de-risking a sector, in directing capital to the right cause. By investing in new gas projects for example, we are investing in soon to be stranded assets that will not help elevate people out of poverty. You create a market that was not there, and you divert funds f rom renewable energy projects. The IPCC report also confirmed that it is not too late. We have all the solutions necessary already available to us. It is a matter of political will and bold action. We need the World Bank Group to move fast and take the lead. If the World Bank Group takes fighting climate change and extreme poverty seriously, the WBG needs to stop investing in fossil fuel projects. Instead, the Bank should focus on adaptation and investment in a just transition. Locally-led adaptation projects ensure communities adapt to the climate change already wrecking their surroundings. A just transition to clean energy is needed to elevate people out of poverty and create opportunities for everyone. ***** About the author: Jessica Antonisse works on climate and development policy and advocacy in Brussels.

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Convenient ESG is Not Good ESG By Kiran Somvanshi

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I M F W B G SP R I N G MEETI NG S I AP RI L 2023

arge corporations and small businesses—not just governments and individuals—play a role in shaping a country’s outcomes related to governance, poverty eradication, and sustainable development—the key themes for this year’s International Monetary Fund/ World Bank Group spring meetings. This role can be often gauged from the ESG compliance they undertake. And how do we know that? Through their ESG disclosures. However, not all companies have similar levels of transparency and systems in place for disclosures. Many such companies have struggled to get their ESG disclosures in place in the absence of a uniform definition of ESG. The ESG-themed regulations and investment ideologies, though embroiled in political controversies, are fast shaping the corporate narrative related to these key themes. These regulations rest on compliance with three broad norms of Environmental, Social and Governance. But the execution of the concept in real business life is largely playing out on an “each to its own” basis. This is because; ESG regulations, in most countries, are often not uniform and are disclosuredriven. Companies are supposed to disclose what they are doing, in formats laid down by regulatory bodies. Since the ESG concept is still nascent, regulators are also moving slowly toward making detailed disclosures mandatory for all businesses and have prioritized seeking it from large corporations. However, what these large corporations say and do about giving back to society is typically met with scepticism due to concerns related to “greenwashing” and lip service. Talking about the latest in governance and sustainability is different from undertaking effective actions to foster it. And companies are still establishing structures to measure inputs for disclosures such as emissions, gender pay gap, and supply chain as being ESG-compliant.

FOR A MINING COMPANY, IT IS CONVENIENT TO TALK ABOUT PLANTING A MILLION TREES INSTEAD OF CHOOSING TO NOT MINE IN ENVIRONMENTALLY SENSITIVE AREAS OR IN THE PROXIMITY OF FORESTS. This is also the case with assessment of the impact of the ESG work. There is hardly any penalty yet on non-disclosure although wrong or misleading disclosure has attracted penal provisions in some cases. In April 2022, the US Securities and Exchange Commission charged Vale SA, one of the world’s largest iron ore producers, with making false and misleading claims about the safety of its dams through its ESG disclosures. Incidentally, most companies have taken up ESG issues that are easy to execute and make for good optics, relegating more serious and relevant issues to long-term planning. For instance, for a mining company, it is convenient to talk about planting a million trees instead of choosing to not mine in environmentally sensitive areas or in the proximity of forests. Similarly, for consumer goods companies, it is easier to roll out hiring targets for women on the shop floor instead of hiring women as CEOs or as directors on the boards. For a company selling snacks and processed foods, it is easier to talk about spreading awareness among parents to reduce the stress on their kids, but the company won’t look at making fundamental changes in its product portfolio to make it healthier for the kids. It is simpler for companies to consider hiring transgender or differently abled individuals in their workforce rather than making products and services that are generally more inclusive. IMF WBG SPRING MEETINGS 2023 | 47

Since ESG compliance is still relatively new, companies seek to capitalize on low-hanging fruit. Their stakeholders, such as employees, customers, bankers, and regulators as well, seem to be considerate with what companies are disclosing as their actual achievement as against the targets to be achieved. Most companies end up undertaking convenient ESG compliance rather than changing the outcomes on the ground. Interestingly this convenient ESG compliance is proving enough to help companies improve their rankings in the ESG indices, which in turn are used as a benchmark by ESG-conscious funds to invest in companies. In effect, a small and easy change brought about by a company is helping it win over the funds. There remains little incentive for companies to aim for the more difficultto-achieve goals. Besides, there is no uniformly recognised mechanism to verify whether what has been disclosed to be done has indeed been done and whether what has been done is indeed what was required to be done. This reinforces the criticism meted out against ESG investing as being ambiguous in terms of its measurement and impact. There needs to be a uniform understanding of what ESG stands for and what it doesn’t. There is a need for a disclosure structure to be put in place that doesn’t simply emphasize disclosure but also implementation in both letter and spirit. ***** About the author: Kiran Somvanshi is a journalist researcher at the Economic Times in India. All views are Somvanshi’s own.

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A Subsidy War Without Winners By Andrés Velasco

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I M F W B G SP R I N G MEETI NG S I AP RI L 2023

fter the “currency wars” of the previous decade and the “trade wars” unleashed by former U.S. President Donald Trump, a new kind of conflict is emerging between two of the world’s leading powers. Or at least that was the talk during the World Economic Forum in Davos, where pundits and policymakers fretted over so-called “subsidy wars.” The first shot was fired with the United States’ passage of the Inflation Reduction Act (IRA), which includes $369 billion in subsidies and tax benefits for American companies using green technologies. In response, European Commission President Ursula von der Leyen promised to loosen the European Union’s rules on state aid, enabling member states to pump cash into green industries. “To keep European industry attractive, there is a need to be competitive with offers and incentives that are currently available outside” the EU, she said, at pains to defend the bloc’s protectionist turn. To be fair, those concerned about the costs of a European-American subsidy war are mainly academics. Businesspeople dislike subsidies only when they are not receiving them. “It is a game-changer,” I heard a tycoon say about the IRA. He added that his company recently decided to launch four mammoth green investments in the U.S. and would consider doing the same across the Atlantic if the EU put enough money on the table. With the recent U.S. and European moves, the green subsidy debate is heating up. Proponents of these policies describe them as an indispensable response to the existential threat of climate change, while skeptics claim that the massive deployment of resources will inevitably lead to rent-seeking and inefficiency. The issue is not whether governments should subsidize environmentally friendly industries. It is widely acknowledged that because the social returns on green investments exceed the returns that

STARTING IN 2003, FEARS OF “UNFAIR” CURRENCY MANIPULATION BEGAN TO SPREAD. FOR THE PAST TWO DECADES, U.S. POLITICIANS HAVE BEEN CONCERNED THAT CHINA, FOR EXAMPLE, WAS UNDERVALUING ITS CURRENCY BY SELLING RENMINBI AND BUYING DOLLARS. accrue to private firms, governments must provide financial incentives to prevent under-investment. Instead, the issue is whether governments should offer those incentives only to domestic companies. In Davos, von der Leyen called on President Joe Biden’s administration to grant European companies operating in the U.S. access to the same subsidies as domestic firms. But in the unlikely event that Biden agreed, that would still put the rest of the world at a disadvantage. If an electric car assembled in Michigan by an American company yields the same emission savings as a similar car assembled in Seoul by a South Korean company, why subsidize one and not the other? There are at least three reasons why a subsidy war could be economically harmful. The first is retaliation. While green subsidies could encourage more investment, they could also entrench inefficient incumbents. If the U.S. and the EU cooperatively decided on the level of subsidies, they would choose what is “right” for both. But that is not the outcome in a subsidy war. One side’s IMF WBG SPRING MEETINGS 2023 | 51

attempt to attract green investment triggers a reaction by the other side. The subsequent escalation of subsidies and counter-subsidies can cause costs to outweigh benefits. The second problem is that what is good for Europe and the U.S. is not necessarily good for the world. If the goal is to reduce global greenhouse-gas emissions, the planet might be better off if dollar and euro subsidies were used to buy cheaper Chinese solar panels. That way, the same expenditure would accomplish more emission reductions and lower temperatures for all of humanity. The third risk is that a subsidy war might lead to a waste of fiscal resources. If longterm real interest rates in the U.S. and the EU remain below their growth rates, as many eminent economists believe, then this is a non-issue, because governments can spend and borrow without having to raise taxes in the future. But if the era of low interest rates is over, then the huge fiscal cost of green subsidies should be a concern. How big are these economic risks? No one can be sure, but there are reasons to take dire warnings with a grain of salt. For example, recent estimates suggest that Trump’s trade war with China had a much smaller effect on the U.S. economy than many had predicted, resulting in welfare losses of roughly 0.1% of GDP. And that war was fought with tariffs, which discourage trade, while subsidies encourage beneficial emissions reductions. In addition, eligibility for the subsidies depends on complex “domestic content” requirements that can be tweaked if they become too onerous. Moreover, the economic impact of a U.S.-EU subsidy war on the rest of the world will most likely be limited. Yes, firms outside the U.S. and the EU might be harmed. But if green subsidies accelerate the clean-energy transition and help contain global warming, the whole world will reap the benefits.

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The same goes for fiscal risks. Yes, both the U.S. and the EU could eventually encounter problems if real interest rates continue to rise and stay high. But if and when that day comes, there are many other wasteful expenditures that governments could and should reduce before cutting green subsidies. The more immediate risk is political. The U.S. subsidies violate the World Trade Organization’s rules prohibiting discrimination against products or firms based on their country of origin. The EU must not follow in Biden’s footsteps. At a time of heightened geopolitical tensions, the world’s leading democracies should aim to strengthen the global rules-based system, not undermine it. Most importantly, a subsidy war would sour political and diplomatic relations between the U.S. and Europe at the worst possible time, when liberal democracies face Russian aggression in Ukraine, Chinese expansionism, and illiberal regimes in Central and Eastern Europe, Asia, and Latin America. If we are to mitigate the worst effects of climate change, American and European policymakers must work together, instead of being consumed by petty squabbles over green subsidies. ***** About the author: Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. Copyright: Project Syndicate, 2023.

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