Welcome to Think Change. I'm Sara Pantuliano. We're recording this episode from Washington DC in the sidelines of the spring meetings of the World Bank and the IMF. By the time this episode comes out, we will have no doubts in a number of pledges and commitments on how to improve the so-called Bretton Woods institutions. They actually marked their 80th birthday this year. The aim is to make sure that these institutions are fit to face the extraordinary challenges of today. These issues and recommendations can be quite technical and complex, though, so in this episode we want to zoom out.
I want to discuss today why the development finance is reaching those who need the most and how we can harness recent trends and technological advances that can increase financial inclusion. Joining me today, I'm really delighted to have a stellar panel of friends and colleagues who have recently been appointed to help steer ODI's new presence in Washington DC. I'm joined by Liesbet Steer. Liesbet is the freshly minted chair of ODI North America Board. She's also the outgoing president and CEO of the Education Development Center. Also joining me is Sheila Warren, the CEO of the Crypto Council for Innovation and a member of the ODI North America Board, and, last but not least, andy Escovitz, the Executive Director of ODI North America, based in Washington DC. Welcome to you all. Let me start with a question that I'd like all of you to think about. Do you worry that the gaps between wealthy and poor countries and between the rich and the poor will continue to grow, and how can we narrow these gaps?
So this worries me the most.
In fact, this is the reason that I joined ODI, Sara, because I spent 22 years in government, working both at USAID and then at Development Finance Corporation, looking at the intersection of development and finance, and came to this realization that, after a full career working in development, that we're not doing everything that we need to be doing.
If you look at project out over towards the end of the century, we're going to see some of the largest cities in the world are going to all be in Africa, a lot of them in West Africa, and that also coincides with the fact that many of them remain some of the least developed countries in the world.
And that also coincides with the fact that many of them remain some of the least developed countries in the world. And if you think through how long the World Bank and USAID and others have existed for more than 50 years, going at 80 years for the World Bank in the 50 plus years that they've been looking at what's a least developed country only seven countries have emerged from that status, so something's not working. Of course, there have been tremendous successes of countries whether you're looking at Korea or countries in the eastern part of Europe that have done tremendously well from the types of assistance that's been financing, that have been provided. But if you look at a lot of the countries that are particularly in the Pacific Islands in Africa, this isn't working and it's for a whole variety of reasons that we can talk about.
Yes, and it's true that the list of least developed countries remains skewed towards Africa. And, of course, many LDCs suffer from structural vulnerabilities. They're highly exposed to economic and environmental shocks. And then, when you look at the recent shocks that have shaken countries around the world the pandemic, the ongoing conflicts in Gaza, in Ukraine, elsewhere these impacts are felt most keenly in LDCs. Lisbeth, what do you think about this growing inequality?
It gets exacerbated what Andrew is just saying by the fact that we live in a world where there are seismic changes. When you think about climate change, you think about digitalization and AI. That actually makes it much harder for those countries who are currently behind to catch up. Behind to catch up, because it is especially the well-endowed countries that will be able to either withstand the effects of climate change or really take advantage of the new opportunities of the green economy. And the countries we really need to worry about are the low-income countries. The lower-income countries because they do not have the financial resources, but they also are lacking the human capital resources, and we've seen, for example with the pandemic, how there have been huge setbacks in the ability of countries to build their human capital, whether that's through health or through education, which is at the basis of everything and needs to power this transition and economic growth.
Thanks, lisbeth. Sheila Lisbeth mentioned AI and tech as a potential further impact of broadening the divide. How do you see that?
I share that concern. I think that these inequality issues are not just global issues, they are also regional issues and they are also national issues. We're reporting today, coincidentally, in the United States, which has seen expanding income inequality over the past decade, and that trend is only accelerating, think, in parallel with the advent of new technologies, many of which are touted as solutions to some of these problems. And, look, I think that is theoretically possible. I do think that any technology does have the potential to reduce inequality and to actually level the playing field, but that is a very context-dependent question and so far, bluntly and candidly, what I'm seeing from AI at a global level is not making me feel particularly positive about that potential being realized versus, frankly, the almost exact opposite effect being what is more likely to be realized.
So these points that both Lisbeth and Sheila made are spot on. So I'm going to give two examples of where technology, or lack of technology, has been a major hindrance. It goes back 30 years, and then one where I see technology actually working and it's happening today. So more than 30 years ago I was living in a small village in Nicaragua, well before there were any access to mobile phones, and there was one land line in the village and we had a construction project and we had 80 people show up every single day at the construction project for three weeks waiting for the materials to arrive from the capital, but the phone was down. We never got the call that they were delayed, so everybody showed up, and this was 30 years ago.
I thought about the difference between living in a country, how we were just stagnant for three weeks, all these people, whereas every place else in the world one phone call would have solved this situation. Now I'm going to contrast that with a company that's using technology in a really interesting way in Africa. It's called Liquid Star and what they're doing is one of the challenges with doing solar mini-grids is that often the people that you're selling the power to can't really afford to pay for all the power, so it's tough to make money. They figured out, living in a remote area in Djibouti, that they could supplement their income by selling their power for both crypto mining and for localized AI learning, so that gives them an additional income stream. So I'm excited to see what technology will do, but I can't agree with you more that the gaps are going to leave people behind.
You're absolutely right Widening inequality is not only an issue between countries, but obviously within countries too. And yes, while technology can provide solutions here, it needs to be designed and implemented with this goal in mind, and all of this requires investment. You've written a lot about how the development finance institutions and the multilateral development banks or VFIs and MDBs, as they're known, are not doing enough to advance investment in the poorest countries. Why do you think it is?
So let's start with and I drive a lot of them crazy, even though they know that what I'm saying is true so, in the first instance, all of these institutions have to remind themselves that they are development institutions whose job is to do development, and they just happen to use financing as a tool. But so many of them have evolved into viewing themselves as banks where they have to earn a return on a portfolio-wide basis, earn a return on a deal-by-deal basis. But that's not the way that they should be structured, because if you look at the entire, everything that's available to advanced development, you look at the entire. You know everything that's available to advanced development. You've got grants, you've got contracts and then you have financing, and sometimes it makes sense to provide some financing.
The voices that we're hearing from people and I couldn't agree with them more is that it's not working for the poorest countries in the world. You know, we heard Mia Motley yesterday saying that you can't expect countries that are struggling to have 15-year lending at variable rates when interest rates are so high. The other point she made was with the millions of dollars that these countries are spending on lawyers and everyone's spending on lawyers to renegotiate deals when they go south, which is happening more and more. Why don't you just reduce the interest rates early on? So for the countries we have to think through how do you get them the type of long-term, inexpensive capital that they need and supplement that with aid assistance.
And then for companies, the same thing. People say why aren't companies going in here? Well, if you're a company, a big company, and you have an opportunity to make a 28% rate of return on an investment in clean energy in the United States or Mexico, are you going to take that same risk and be told that you can't earn more than a 9% rate of return on a deal in Liberia? You're not. You're not going to go there. So we have to give these companies if we really want to mobilize that capital, we have to give them more incentives to go there and not view it as corporate welfare.
I think we have to really think about this also as intentionality. So I think there's this mythology or this fantasy that if we just generate wealth, that's somehow going to affect inequality in some magical, fantastical way. That has really never happened in the history of humanity. And without the actual intention and this speaks to development, it speaks to aid, it speaks to corporate welfare, it speaks to all of these different kinds of mechanisms or processes If there is not the specific and deliberate and measurable intention of creating an outcome that reduces inequality, it's not going to happen. And I think what we've seen over time is an erosion of that specific measurement or metric around that and this idea that we're just supposed to whether it's a trickle down, you know, sort of economic model, or whether it is simply kind of crossing our fingers and hoping for the best. None of those things are going to happen without accountability in the outcome that we're looking to create, happen without accountability in the outcome that we're looking to create.
That's exactly right, Sheila, and that's one of the reasons why we felt Washington DC was a key location for ODI to establish more of a presence. I mean, this is the city where some of the major institutions are based, including, of course, the World Bank and the IMF, but also the Inter-American Development Bank, the US International Development Finance Corporation and, of course, the US Treasury, which exerts tremendous influence on the development finance architecture at large, and so if we can work with institutions like these to build in more of that intentionality that you're talking about, then I think we can have a really significant impact around the world. Lisbeth, in your new role as the chair of ODI's operations in Washington DC and in the wider region, what do you think are the most urgent things that need to be done to help improve these institutions?
Well, there's a lot to be done and, on the question of kind of what we should be worried about, I think what I do not see at the moment is a sense of urgency. We're six years away from the SDG deadline and 15% of SDG targets the sustainable development goals which were agreed in 2015 for the world Only 15% are currently on track, and we see some people worried about the climate impacts. We see some of that, but, broadly speaking, when it comes to human development, that urgency to me is lacking, and what we could do as an organization, as ODI, is really bring that sense of urgency to the table. We can also help think about the solutions and I would say there are two areas where I think ODI can really bring its expertise and its background and its reputation.
On the finance side, because all of this obviously requires money, and we are here this week in Washington DC with the World Bank IMF meetings. It's talking about money and there are two parts of this. One is the volume of money, where we do know that, even if countries increase their domestic resources, as the IMF is recommending, they will not have enough to fund the basic human needs and the human development, so there will be a need for the international community to step up in new ways to bring financing to the table. There's efforts, obviously, to continue to push countries and donors to reach their targets of 0.7 percent, but we know that in the current environment that's going to be very difficult. So we need to start thinking about what are the other options that we have. But we know that in the current environment that's going to be very difficult. So we need to start thinking about what are the other options that we have.
And I agree with Andy on the kind of the debt and the financing side. We would need to start with looking obviously at the debt situation. How could we provide debt relief and restructure debt so it becomes more manageable for countries? At the moment we have four out of 10 people live in countries where interest rate payments are larger than the spending on education or health, so we need to address the fact that countries are paying up too much in terms of interest. Secondly, we need to grow the concessional financing and that's low-cost, long-term debt financing. So on the one hand, you want to relieve debt, but you also want to create more of it.
It could even be at-cost financing. At-cost Because often one of the challenges in working in these countries is that the big multilateral development banks and development finance institutions they don't have people on the ground and they don't do the small loans. To say, it doesn't make sense for us to do due diligence on a $100,000 loan to a small business in Burundi, well then, work through an intermediary, work through a local bank, work through a regional bank, let them do it. But then don't try to get a cut from that. Don't say, well, we're going to lend you the money, but we need to make sure we earn two, three, 4%. Just recognize that you're a development institution. They will do the development work for you and we're going to give you the money and we're going to give you some extra money to provide technical assistance to make sure that it works. But this isn't the mentality of the banks.
Yeah, so that. And then the other area I think related to the volume question, is the private sector, as you were mentioning. There's been so much talk about blended finance, what we call blended finance. We're going to blend official finance with private finance. Well, we've actually not been able to do this very successfully, so I think ODI could bring some real expertise to the table. And then the other side of the equation, the second really important part, is obviously the efficiency and effectiveness, and I joined ODI many years ago and my first job at ODI, when I was first with ODI as a research fellow, was actually to look at aid effectiveness.
And back in the day, we had this great effort of some of the donors to try and come up with some norms about how could we make our international assistance more effective, and we had this declaration in 2005 called the Paris Declaration. No one talks about the Paris Declaration anymore, sadly. I think the reason for that is that the donor landscape has become much more complicated. It's no longer just official donors who need to agree how to operate, but we now need to work with other types of donors, non-traditional donors, with the private sector, and we need to redefine the relationship between donor countries and partner countries and rethinking that entire partnership, no longer a sort of donor to partner country relationship but more a mutually beneficial relationship. And for example, on the human capital side. That's really important because high income countries need skills. Low income countries have an abundance of young people and could provide those skills. So what kind of partnerships can exist between different countries to really solve these big issues?
You're right, and these are all issues where ODI has deep expertise, whether that's on development effectiveness, debt, blended finance, labour mobility, you name it. We plan to build this huge body of research to deepen our relationships in Washington DC. And, of course, the other area is around digitalisation. This is another key area of focus for ODI. Sheila, your work focuses on digital currencies and has a strong emphasis on financial inclusion. We talked about AI. We've talked about tech. Can you share some examples of programs that you have seen have been effective through cryptocurrencies, through AI, in playing a positive role in helping people, in helping lift people out of poverty?
Absolutely, and I'll talk about two different examples within the digital currency space that I think are at this point sufficiently baked as to have proven traction. And one is just the simple case of low value cross-border remittances. Transfer the equivalent of $20, let's say, which is a lot of money across the border is going to cost you in some cases up to 50% of that fee, which is in fees, which is ridiculous. What has happened using a combination of digital currencies and kind of point of sale providers, like a Western money gram type of situation, has been fee reduction from approximately 7% down to 1.5% in many cases, which is a tremendous cost savings. This is again it's been proven over the course of the last decade something that is actually being used in many countries in the world for this particular use case. So that's an example of just literally just focusing on the efficiencies technology can provide and using those to directly reduce fees. It's a very straightforward, linear example and it works.
Another example, I think, is access to capital. We talked about this before, but in a different way access to capital by entrepreneurs. So we know that historically, certain kinds of demographics get more funding, whether that is community crowdfunding, whether it is venture funding, whether it is aid funding, whatever it might look like, that kind of investment tends to accrue to people of a certain educational attainment, racial, gender, et cetera demographics. And what's happened using digital currencies is the ability to raise funds in a different way. You don't have to go through it, and I think about this mostly in terms of Silicon Valley, which is what I'm most familiar with, the idea being you don't have to go through it, and I think about this mostly in terms of Silicon Valley, which is what I'm most familiar with, the idea being you don't have to go through those traditional kinds of structures to obtain funding that could allow you to start a business.
You could actually use more of a crowdfunding model, but create accountability and governance around those funds of the project. So in the past, you'd have investors that come in. They'd sit on your board, they'd give you guidance, they'd help you grow your business. Now you can do that same thing with your community using digital currencies and blockchain technologies. So those are just two examples of different, very known problems that have been proven to be addressed, and again it's about really creating an alternative to a model that has become very exclusionary over time because of regulatory capture, corporate capture all kinds of other network effects right, all those kinds of things that have solidified certain kinds of historical structures in ways where there's just such a high barrier to entry for anybody who's not pre-part of those communities already.
Totally, and we actually hear from a lot of our partners, you know, in low and middle income countries requests, you know, to support the development of their digital roadmaps and getting investment in tech above anything. You know that's what they see is going to be so transformational. The other thing they talk about is actually investment in making sure that they don't get left behind in this green revolution, because this is becoming another divide, and we've seen the US and Europe develop and invest a lot in creating green jobs in their own countries, but we're not seeing the same investment to help low and middle-income countries do the same. Instead, there is almost the creation of a barrier to them to stay engaged with this global green economy. What can rich countries do, lisbeth, to support low and middle-income countries not to be left behind in this green revolution?
Well, this is the million-dollar question for the next generation. The climate community at the moment has not fully recognized the importance of human capital in the green transition. You have a lot of focus on technology. You have a lot of focus on the money that's needed to help with the green transition, but there has not been sufficient attention to how we actually going to build the skills needed to power the jobs that are going to be emerging. If you take the energy transition, for example, worldwide the net increase in green jobs will be 80 million across the world. Some of that will be in rich countries, some of that will be in low-income countries, but unless we really build the workforce and also the skills base to do that, we are not going to succeed. So when we think about the support that developing countries need, it is really about creating the skills base as well as the transition into those jobs and opportunities that will be out there, and that's been a missed piece.
When we talk about the green transition and to go back to the earlier point about what kind of deal could be done between countries, I was talking to someone in the German government recently who said we're really lacking skills for our e-car industry in Germany we are missing those skills. Meanwhile in Africa there are a lot of people who could be trained as engineers. So Germany is working with Jordan, for example, to see can they help each other, help train engineers in Jordan and then perhaps some of these engineers can come and help the German economy. But it has to be part of a compact between countries that's not an extraction, but as an agreement we can help each other and so that kind of deal for the green economy I think we could really make progress on and ODI could play an amazing role.
I'm sure we can. What would be your call to action to the financial institutions here to really make progress on financial inclusion, really make?
progress on financial inclusion. On financial inclusion, get on with it really. I think the president of the World Bank is talking about from vision to impact. I think really making things happen on the ground is first and foremost, and so, yes, I would say, get on with it.
And you have a call to action almost every day to these institutions. What would be your top one?
So I agree A lot of what needs to happen. It's not that complicated. There are very specific things that need to happen. So it's having people on the ground, it's having people spend time in the countries. My biggest concern is the jobs that we're going to create. And when you look at how we're going to create those jobs, particularly in countries in Africa that are some of the least developed countries, it's going to happen based on regional investments. So as you build up regional infrastructure because some of the economies like Nigeria are huge but then other neighboring countries are much smaller they need to benefit from that regional economy.
When we talk about country platforms and at ODI we focus a lot on the country climate platforms they're always talked about bilaterally. So South Africa can go ahead and decarbonize and the whole plan is always focused on what South Africa is going to do to retire its coal and to grow its renewable energy. But what if you included Botswana and Namibia in that equation? That you help grow those economies as well and take some of the stress off of South Africa to do that? So it's focusing on the real jobs. In the US and in Europe we're doing a great job using industrial policy to create new jobs, but that's not necessarily going to benefit the poorest countries in the world In a lot of cases. As we're calling it, odi the green squeeze in some ways it will potentially hurt some of the poorest countries in the world and we have to be very careful of that.
Totally, and the green squeeze is definitely something. ODI is focusing a lot of resources and energy on Sheila. What's your call to action?
I would just echo my colleagues. I think that we know what needs to be done. There is no magic bullet. No one is coming to save us. There is no lightning strike that's going to make this easy. It is work that is a slog, but there are some very low-hanging fruit kinds of things that need to be done. It's a matter of just getting on with it. I think Lisbeth put it so well. It really is just what's the holdup? Again, it's not going to improve without people who are in the positions of the kinds of folks that we engage with at ODI on a regular basis, making it a priority and moving forward despite political headwinds and despite media detractors and all the things that are going to attach to those who really start taking these bold steps.
I couldn't agree more. We often know exactly what needs to be done to improve development outcomes, but the challenges are often political in nature. I know policymakers are having to balance competing priorities and make difficult decisions, and we've touched on just some of the issues today, ranging from just transition to the challenges and opportunities presented by new technology, which is all underpinned by the need for new and more creative approaches to financing. That's the big political priority. Given the challenges we're facing, you're quite right to say that the time for action is now, and our hope is that, by deepening ODI's presence here in Washington DC, we can work more closely with the policymakers here to help equip them with the evidence so that they can move from talk into action. Well, that's all we have time for today.
I'd like to say thank you to my brilliant guests for joining me on this episode of Think Change. Sheila, Liesbet, Andy, thank you very much. It's been a pleasure to hear your views. If you enjoyed the episode, please do like, subscribe, rate the episode. It does help us a lot. We hope you'll join us again next time.