Making global benefits pay : the World Bank reform to support global public goods

Global public goods (GPGs) are goods that are produced locally but have global effects. GPGs are essential for securing global development. The climate and biodiversity crises, pandemics, as well as fragility, conflict and violence are threatening livelihoods and well-being around the world, and addressing them would have enormous positive economic and social effects. However, the cross-border externalities involved are not being fully taken into account by countries, and hence these GPGs are still underprovided compared with what would be globally optimal. One year ago, the World Bank launched the Framework for Financial Incentives (FFI) to strengthen the support of GPGs in its operations. This novel instrument encourages countries to implement investment projects and policies that have positive spillovers to other countries by offering targeted financial incentives. As a core element of the World Bank’s Evolution reform, the FFI reflects the recognition that relatively modest investments in client countries can generate substantial global benefits – for other developing and emerging economies as well as for the Bank’s shareholder countries. Its challenges lie in incorporating the non-financial aspects of GPGs and the multi-faceted motivations to provide them in bankable operations. This policy brief discusses the relevance of GPGs for development and presents the World Bank’s approach to supporting their provision in client countries through the FFI. The key takeaways are: • GPGs are not all those that are commonly shared or agreed upon as goals but are defined by the specific problem structure that the involved cross-border externalities entail. • Investment in GPGs can generate substantial benefits – not only for developing and emerging economies, but also for high-income countries that make up the World Bank’s largest shareholders. Consequently, both out of enlightened self-interest and as a cost-effective way to advance global sustainable development at a time when international development budgets are undergoing significant reductions, shareholder countries should increase their contributions to the FFI. This applies in particular to those provided to the Livable Planet Fund, which provides the essential grant financing for countries’ GPG-related projects. • To retain and strengthen confidence among stakeholders, the FFI must deploy its resources efficiently. This implies offering grants only when projects’ overall domestic benefits are insufficient to motivate countries to provide GPGs on their own, and extending loans instead when client countries have sufficient self-interest to ensure repayment. The assessment of costs and benefits is complex, but it should improve with experience and become increasingly standardised. To signal its effectiveness, the FFI should pursue full transparency in its allocation decisions and undertake systematic impact assessments.