This essay is part of a series of articles, edited by Stewart Patrick, emerging from the Carnegie Working Group on Reimagining Global Economic Governance.
Strengthening international financial and tax cooperation has been at the center of global debates in 2023 and 2024. In the first of these areas, the main issues have been development financing, including the role of multilateral development banks (MDBs), and the overindebtedness problem faced by many developing countries. The debate on international monetary reforms has been more restricted. In the tax domain, the major issues have been the analysis of the scope of the agreements reached in the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework in 2021 and the need for a stronger role for the United Nations (UN).
The UN, the International Monetary Fund (IMF), the World Bank, and the G20 have played key roles in these debates, proposing policies and providing fora for strengthening global cooperation. Broadly speaking, agreements have been stronger in relation to development financing. In tax cooperation, there is also a broad agreement on the need for stronger international cooperation but significant differences of opinion about what it should cover and what roles the UN and the OECD should play in this cooperation. In the critical issue of overindebtedness, agreements have been limited. And in monetary cooperation, there have been few initiatives.
The world has an urgent need but also important opportunities to transform the existing system of global economic governance to address four glaring needs: providing adequate and more effective development finance, reforming the international monetary system, restructuring sovereign debt, and deepening international tax cooperation. Action in these areas must be coupled with some crucial institutional reforms. The opportunities for discussion are broad, including at the UN Summit of the Future and the G20 summit in September and November 2024 (respectively), and at the fourth UN Conference on Financing for Development, planned for mid-2025 in Spain.
Development Financing
The UN, World Bank Group, and G20 have tended to agree on three key recommendations on development financing:
- MDBs must finance the contribution of developing countries to the provision of global public goods, particularly the prevention of pandemics and the fight against climate change.
- Consequently, MDB lending should include contingency clauses to recognize developing countries’ vulnerabilities to climate change, health emergencies, and the effects of international economic crises. These clauses should allow the temporary suspension of the debt service obligations with these institutions and, if necessary, a reduction in the associated liabilities. Similar clauses would be desirable in private sector lending to developing countries.
- MDBs should collaborate more closely with the private sector, ideally leveraging the latter’s contribution to the provision of global public goods.
In relation to global public goods, MDBs substantially increased their financing to global public health after the outbreak of the COVID-19 pandemic, from $2.6 billion in 2019 to $11.1 billion in 2020. Commitments to climate finance have been larger and have grown over a longer period. In 2022, loan commitments in climate finance by MDBs to low- and middle-income countries reached $60.2 billion, double the financing they provided in the mid-2010s, achieving, earlier than anticipated, the 2025 targets for climate finance set at the 2019 UN Climate Action Summit.
As pointed out, an essential element of these proposals is the need for concessional credits or donations channeled through MDBs. These benefits should be extended to support the contribution of middle-income countries to global public goods and include mechanisms for partially subsidizing private sector credits to leverage their investments in those goods. This will require a significant increase in official development assistance (ODA) beyond its current levels (0.5 percent of GDP for the EU but only 0.22 percent for the United States). In addition to concessional resources, there is further need for longer-term MDB loans, from thirty to fifty years, with extended grace periods and lower interest rates.
A complementary mechanism required is increasing the ratio of MDB lending and the capital of these institutions—that is, leveraging their equity—while maintaining their investment grade. Innovative financial mechanisms, such as guarantees and public-private partnerships, also need to be developed to support private investments.
To fulfill all of these new functions, as well as more traditional ones, the MDBs must be adequately capitalized. Given the magnitude of the needed resources today, it is remarkable that the G20 agreements in this regard were much weaker in 2023 than they were in 2009, when the body called for capitalizing all MDBs. One of the biggest uncertainties today concerns the potential commitment of the United States, the largest shareholder of the World Bank, to capitalize that institution, given the significant resistance in the U.S. Congress, particularly from the Republican Party, to such measures.
International proposals for funding the MDBs differ significantly in their magnitude. The G20’s group of independent experts proposed increasing the annual financing of these institutions to $500 billion by 2030. The UN’s proposals are much more ambitious: they call for a return to the 1960 ratio between MDB financing and the size of the world economy, which would imply increasing available funds to nearly $2 trillion, closer to the estimates of the Sustainable Development Goals financing gap.
Finally, MDBs should strengthen their role as a service network. For the World Bank, this entails collaborating with regional multilateral and national development banks, as well as other public sector financial institutions. This is essential because public development banks finance around 10 to 12 percent of investment worldwide.
International Monetary Reform
Unlike development financing, international monetary reform has not been central to recent global debates. The most important reform initiative is the IMF Executive Board proposal to its Board of Governors for a 50 percent increase in quotas, maintaining member countries’ shares but opening the discussion for quota realignments that should lead to a decision in 2025.
In terms of credit lines, the major reforms continue to be those adopted in 2009–2010: duplication of all existing lines; the creation of contingency facilities, including the flexible credit line and the precautionary and liquidity lines; and better access to regular credit lines for low-income countries, for whom interest payments also were eliminated in 2015. An important addition was the approval in 2012 of the “institutional vision” on capital account management, which set the view that restrictions on capital movements should be adopted to manage volatility and under critical conditions. This agreement remains in place.
During the pandemic, IMF emergency lines were widely used, offering financing with no conditionality for eighty countries, though in limited amounts. In October 2023, the IMF’s board improved the contingency credit facilities. Still, this is an area where much more improvement must be made, as these facilities are essential crisis prevention tools and efficient alternatives to reserve accumulation.
In addition, the IMF’s conditionality for its loans must continue to be reviewed, as it carries the stigma of the institution in global debates. This negative perception persists even though a 2002 agreement determined that the institution should return to the principle of macroeconomic conditionality rather than continue to push for broader structural market reforms, as had been the case since the 1980s. In a different direction, in 2018, the IMF was granted the authority to establish conditionality grounded in governance and anticorruption standards.
To make a better use of the special drawing rights (SDRs)—the global reserve currency issued by the IMF—the fund has created two mechanisms financed with deposits of the unused SDRs of different countries. The first, the Poverty Reduction and Growth Trust Fund, aims to address balance of payments problems of low-income countries. The second, the Resilience and Sustainability Trust Fund, is intended to support prospective balance of payments stability for low-income and vulnerable middle-income countries, including managing risks associated with climate change and pandemics. Nevertheless, the SDRs should be the focus of more ambitious reforms. The emission of SDRs could be much higher: at least $200 billion and even up to $400 billion per year. The most important reform that could be adopted would be to eliminate IMF’s dual accounting, which currently separates SDRs from the fund’s current operations. Such a change would allow unused SDRs to be considered as deposits of countries in the IMF, which the institution could then use to finance its credit programs, or to be deposited in the MDBs to increase development financing—including through funds similar to those that the IMF has created.
Sovereign Debt Restructuring
The recent debt problems that many developing countries face result from the fiscal deficits generated during the COVID-19 pandemic and the global inflationary conditions and consequent high interest rates that the international economy has faced since 2022. The proportion of developing countries with high public sector debt levels has increased to almost 30 percent of low-income nations and about a third of middle-income countries. Even countries that do not face default risks are affected by high interest rates.
During the pandemic, the G20 and the Paris Club of wealthy creditor nations created the Debt Service Suspension Initiative (DSSI) for low-income countries, which helped suspend payments for forty-eight out of seventy-three eligible countries. At the end of 2020, the G20 and the Paris Club also launched a debt restructuring mechanism, the Common Framework for Debt Treatment, for DSSI-eligible countries. However, only four low-income countries have benefited from this latter mechanism and middle-income countries have no access to it.
Ambitious reforms are needed in this area. Foremost, it is essential to establish a permanent institutional mechanism for sovereign debt restructuring. Ideally, it should operate within the UN, but it also could be an IMF mechanism, provided that decisions by the appropriate dispute settlement body are independent of the IMF’s Executive Board and Board of Governors. The restructuring process should follow three stages, each with a fixed deadline: voluntary renegotiation, mediation, and arbitration.
That said, the negotiations of an institutional mechanism would be a long and complex process. An essential complement for the foreseeable future is an ad hoc instrument building on those used in previous crises. One possibility would be to revise the Common Framework for Debt Restructuring to include a clear and shorter time frame, suspension of debt payments during negotiations, and expanded eligibility to middle-income countries.
Alternatively, a new mechanism could be created with the support of the IMF, the World Bank, or regional MDBs. It would provide the framework for renegotiations but also financing from those institutions to support countries during restructuring and to facilitate some debt payments. If a new bond is issued in favor of the creditors participating in the restructuring process, it should have a guarantee, resembling the Brady plan adopted in response to the Latin American debt crisis of the 1980s.
A tricky problem is whether debts owed to the MDBs and the IMF should be included in the envisioned restructuring processes, as was done in the 2005 Multilateral Debt Relief for low-income countries. This may be necessary, as MDBs hold a significant proportion of the debt of highly indebted low-income countries.
In addition, any new debt framework will need to account for the emergence of new official lenders, notably China, as well as of various debt contracts with private creditors that differ from loans and bonds. One essential innovation would be the creation of a global debt registry encompassing all types of private and official liabilities. Such a mechanism is essential to ensure equitable creditor treatment and to enhance transparency of debt restructuring processes.
Finally, to reduce the risk of future debt crises, several analysts have suggested the adoption of debt instruments like state-contingent bonds, offering variable returns linked to the debtor country’s economic conditions or commodity prices.
It is worth noting that, unlike the positive proposals for development financing, very limited innovations have been suggested in this area. Notably, the 2023 G20 Summit in New Delhi showed little progress in addressing the overindebtedness of many developing countries, beyond supporting the existing but relatively ineffective Common Framework. This is unfortunate, given the urgency of the debt crisis and the fundamental constraints that many borrowing countries face.
International Tax Cooperation
There are three main institutional frameworks for international tax cooperation: the UN Committee of Experts on International Cooperation in Tax Matters; the Base Erosion and Profit Shifting negotiations within the OECD and its Inclusive Framework, now encompassing 145 countries; and the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, which now includes 169 countries.
An important advance in recent years was the 2021 OECD agreement on Inclusive Framework negotiations, comprising two elements. Pillar One determined that a fraction of the global profits of multinational corporations (MNCs) would be apportioned to the countries where their customers are located, based on the countries’ share of worldwide sales of those firms, even if they sell remotely. However, this provision only applies to very large and profitable firms—those with annual global turnover exceeding €20 billion and profit margins of at least 10 percent of revenue—and only to 25 percent of their “residual” profit, defined as that exceeding a 10 percent profit margin. In turn, Pillar Two established a minimum effective corporate tax rate of 15 percent for signatory countries.
This agreement had two problems. First, most benefits from these reforms will flow to high-income countries, where the headquarters of the main MNCs are located. Second, signatories are required to remove unilateral measures like digital services taxes, a condition that is unsatisfactory for many developing economies, as it would limit their ability to tax digital MNCs in the future.
Given the marginal benefits for the developing world, African countries proposed negotiating a UN tax convention. Based on this proposal, the UN General Assembly approved in late 2023 the establishment of an intergovernmental committee to draft the terms of reference for a UN Framework Convention aimed at an effective and inclusive international tax cooperation system. Negotiations on the contents of the Convention have started in 2024.
The future UN Convention must build upon but go beyond the reallocation of taxing rights provided by the OECD agreement. The agreement could include the following elements:
- A new, effective mechanism to tax all MNCs, including those in digital markets, in the countries where they operate, based on a well-developed principle of significant economic presence.
- A stronger effective minimum tax rate. This could be 25 percent, the average nominal rate in developed countries.
- Clear criteria for taxing activities associated with natural resource exploitation.
- Agreement to tax annually the equivalent to 2 percent of the wealth of the world’s super-rich, as well as common standards for the very rich of all countries. This could be accompanied by the adoption of common principles and minimum standards for taxing income and wealth.
- Stronger anti-avoidance instruments and country-by-country reports of taxes paid by multinationals that would be made publicly available.
- The creation of a global asset registry that identifies the final beneficial ownership of all assets.
This reform could also include transforming the UN Committee of Experts on International Cooperation in Tax Matters into a permanent intergovernmental body (a proposal defeated in 2004 and 2015), along with greater international tax cooperation, which should include cooperation between the UN and the OECD.
Critical Institutional Issues
Finally, the reform of the international financial and tax system should address four key challenges.
The first is to enhance developing countries’ voice and participation in the Bretton Woods institutions. This shift requires updating current capital shares based on the relative size of economies. Additionally, a broader use of double majority decisionmaking should be considered, as should be the elimination of the veto power for decisions requiring 85 percent of votes, as this rule essentially benefits only one country: the United States. The 50 percent increase in IMF quotas should be made effective, and the different institutions of the World Bank Group—and, indeed, all MDBs—should also be adequately capitalized. In parallel, the basic votes in the IMF and the World Bank, which are equal for all member countries, should be increased, bringing them to the level they had when these organizations were created at Bretton Woods (which would mean 11 percent vs. the current 5.5 percent, in the case of the IMF). Lastly, the IMF and World Bank should ensure a transparent and equitable system for electing the heads of both institutions, upholding the principle of equal treatment for qualified candidates regardless of national origin.
The second key institutional issue involves creating a representative committee at the top of the system of international economic cooperation to overcome the “elite multilateralism” constituted by the G7 and the G20. This would require creating a Global Economic Coordination Council, which would coordinate the activities of the UN system, including the IMF and the World Bank, as well as the World Trade Organization, which would be integrated into the UN system. The new body ideally would adopt a representation regime based on constituencies and weighted voting, mirroring the structure of the Bretton Woods institutions, operating as a council at the level of heads of government that could convene ministerial meetings.
The third reform, which has been mentioned in previous sections, is to create new global institutions in two areas: a permanent institutional mechanism for sovereign debt restructuring, and a transformation of the UN Committee of Experts on International Cooperation in Tax Matters into an intergovernmental organ.
The fourth essential reform is to develop a multilevel architecture in which global, regional, and even subregional entities can cooperate. Such a scheme would create not only synergies in global cooperation but also healthy competition in financing. Such an architecture already exists in the case of MDBs. However, it should be extended to the international monetary system, where this network is half-empty—it includes the European Stability Mechanism, the Chiang Mai Initiative of the Association of Southeast Asian Nations and three East Asian countries, and the Latin American Reserve Fund—and to international tax cooperation, where is almost nonexistent.
José Antonio Ocampo is a professor at the School of International and Public Affairs, a member of the Committee on Global Thought, and of the Initiative for Policy Dialogue (IPD) at Columbia University. He has occupied numerous positions at the United Nations and his native Colombia, including UN undersecretary general for economic and social affairs, executive secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC), and minister of finance and public credit on two occasions, minister of agriculture and rural development, director of the National Planning Office of Colombia, and member of the Board of Directors of Banco de la República (Colombia’s central bank).
