The Role of New Multilateral Development Banks in the Geopolitics of Decarbonisation

Portrait of engineer man or worker, people, with solar panels or solar cells on the roof in farm. Power plant with green field, renewable energy source in Thailand. Eco technology for electric power.
Portrait of engineer man or worker, people, with solar panels or solar cells on the roof in farm. Power plant with green field, renewable energy source in Thailand. Eco technology for electric power.

The Role of New Multilateral Development Banks in the Geopolitics of Decarbonisation provides a synthesis of research and analysis on how the changing landscape of development finance could impact the geopolitics of decarbonisation. Specifically, it considers whether the emergence of new multilateral institutions that are led by developing countries is more likely to lead to stronger international cooperation on climate change and decarbonisation, or to greater rivalry and competition.

The scope has been limited to focus primarily on the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) as two of the most recently established and largest developing country-led multilateral institutions.

The sources reviewed were chosen based on their relevance to the following three issues:

  1. the relative strength of the climate and environmental standards of the AIIB and NDB in comparison with other development institutions;
  2. the extent to which the AIIB and NDB are being used to achieve geopolitical objectives for example in securing preferential trade agreements, infrastructure contracts or access to natural resources; and
  3. China’s role in the development finance landscape as a major shareholder of both institutions.

Overall, the evidence suggests that the multilateral nature of the AIIB and NDB compared with other bilateral development banks or institutions offers an opportunity to use them as models both for international cooperation on decarbonisation and for how to successfully deliver sustainable infrastructure investment in developing countries.

On truly global challenges like climate change, cooperative institutions are more likely to encourage higher standards and have less geopolitical linkages than bilateral lending. The real focus of attention should therefore be on the overall balance of financial flows between bilateral or multilateral institutions.

In addition to the questions posed above, the paper also highlights several emerging geopolitical issues that are not covered as extensively in the literature but that will have implications for development finance and decarbonisation.

Emerging geopolitical issues for development finance and decarbonisation

The first is debt sustainability. Progress on this issue more than any other will likely determine how much capacity developing countries can put towards decarbonisation efforts in the coming years. Second and third round impacts from COVID-19 are already hitting countries from the global economic slowdown, collapse of tourism sectors and credit downgrades.

The role of the International Monetary Fund (IMF) and Multilateral Development Banks (MDBs) will increase under these conditions. There will be geopolitical tensions over who controls bailout and debt relief terms especially for developing countries highly indebted to China, and whether green conditions are attached.

If the AIIB and NDB can be employed to help find common ground on the global debt crisis and ensure a sustainable recovery, this would free up fiscal space for developing countries to devote more resources to decarbonising their economies and sharing best practices and lessons learned with partners.

The second issue relates to standard setting of, and access to, digital technologies. Research shows that digital technologies such as Artificial Intelligence and the Internet of Things have a key role to play in meeting decarbonisation objectives. 

The digital sphere is also increasingly geopolitical. The debate over the use of 5G technology and Huawei is perhaps the most notable example, but China’s “Made in 2025” initiative to upgrade Chinese industry identifies advanced information technology as a priority sector. Additionally, the EU’s Connectivity Strategy for Europe and Asia features digital connectivity as a priority and specifically seeks to leverage financial resources from international financial institutions and multilateral development banks. 

Development Finance Institutions (DFIs) could provide a route for digital technologies into developing countries. Countries building hardware financed by these new institutions will therefore need to make choices about standards. Ultimately, digitalisation can make decarbonisation easier and cooperation more likely.

The AIIB and NDB could facilitate the integration of technological systems and multilateral agreement on standards and practices leading to a scenario characterized by beneficial data-sharing, cross-border electricity interconnection of renewable energy and local smart-grids.

Finally, the role of recipient countries as geopolitical actors either individually or collectively has not been covered extensively in the existing literature but would be an important topic for further research. Developing countries have the means to influence donor country behaviour through participation in international venues and institutions and could coordinate to demand a shift in financial flows, for example towards net zero energy sources or building resilience to climate impacts.

About this paper

The paper has several limitations. First, only sources written in English have been reviewed and therefore important research might have been unintentionally excluded.

Secondly, there are many other development finance institutions that are geopolitical actors, for example national development banks or export-import banks. These are mentioned but are not the focus. Widening the scope to include more in-depth analysis of the role of bilateral institutions would be a useful future exercise.

Finally, for the purposes of this analysis the AIIB and NDB are often lumped together, but in fact they differ from each other with respect to standards and practices.

This publication is a deliverable of MISTRA GEOPOLITICS, which is funded by the MISTRA – The Swedish Foundation For Strategic Environmental Research. The author wishes to thank several colleagues for their contributions, including Nick Mabey, Ronan Palmer, and Lisa Fischer from E3G, as well as Claudia Strambo from the Stockholm Environment Institute (SEI) and André Månberger from Lund University.


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