As major shareholders in MDBs, the United States and its allies can play a significant role in realigning the banks' mandate with its original mission of maximizing economic growth.
Multilateral development banks (MDBs) have drifted from their original mission of maximizing economic growth. Instead, they prioritize climate-first lending that restricts hydrocarbon investments. This approach fails to address the reality that emerging market and developing economies (EMDEs) will drive half of global energy demand by 2050, with hydrocarbon demand expected to grow significantly in these regions.
These restrictive policies are creating a vacuum that China is filling through its Belt and Road Initiative and development financing. While MDBs allocated only $14.5 billion to oil and gas projects in 2023, China invested $107 billion in energy projects through its development finance institutions. This reliance of EMDEs on high-risk Chinese financing with opaque terms exposes recipients to debt-trap diplomacy.
To provide a low-risk alternative to financing from China and to return to their original mandate, MDBs should adopt a flexible all-of-the-above energy investment strategy that includes both renewables and hydrocarbon development. MDBs should prioritize economic viability and scalability, strategic alignment with international norms, and a synchronization between renewables and base load power.
In addition to reinstituting a more pragmatic financing strategy, coordinating investment strategies and leveraging existing institutional mechanisms such as sovereign wealth funds would aid MDBs in achieving their original mission of maximizing economic growth. This realignment would not only maintain MDBs relevance in EMDEs, it would counter China's influence and ultimately support the sustainable development of affordable power for billions.
Image: Workers are pictured during the construction of the Nestor Kirchner gas pipeline, which first stage was inaugurated on Sunday to transport natural gas from the Vaca Muerta formation in western Argentina to the province of Santa Fe, passing through the province of Buenos Aires, in Macachin, La Pampa, Argentina April 26, 2023. REUTERS/Martin Cossarini