Will Glasgow fix broken climate finance promises?

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: Current climate mitigation plans will result in a catastrophic 2.7°C world temperature rise. US$1.6–3.8 trillion is needed annually to avoid global warming exceeding 1.5°C.

Creative accounting

Rich countries have long broken their 2009 Copenhagen COP16 pledge to mobilize “US$100 billion per year by 2020 to address the needs of developing countries”. The pandemic has worsened the situation, reducing available finance. Poor countries – many already caught in debt traps – struggle to cope.

While minuscule compared to the finance needed to adequately address climate change, it was considered a good start. The number includes both public and private finance, with sources – public/private, grants/loans, etc. – unspecified.

Such ambiguity has enabled double-counting, poor transparency and creative accounting, noted the UN Independent Expert Group on Climate Finance. Thus, the rich countries’ Organisation for Economic Co-operation and Development (OECD) reported US$80bn in climate finance for developing countries in 2019.

Fudging numbers

But OECD climate finance numbers include non-concessional commercial loans, ‘rolled-over’ loans and private finance. Some donor governments count most development aid, even when not primarily for ‘climate action’.

Also, the dispute over which funds are to be considered ‘new and additional’ has not been resolved since the 1992 adoption of the UN Framework Convention on Climate Change (UNFCCC) at the Rio Earth Summit.

Official development assistance redesignated as climate finance should be categorized as ‘reallocated’, rather than ‘additional’ funding. Consequently, poor countries are losing aid for education, health and other public goods.

India has disputed the OECD claim of US$57bn climate finance in 2013-14, suggesting a paltry US$2.2bn instead! Other developing countries have also challenged such creative accounting and ‘greenwashing’.

Climate finance anarchy

Developing countries expected the promised US$100bn yearly to be largely public grants disbursed via the then new UNFCCC Green Climate Fund. Oxfam estimates public climate financing at only US$19–22.5bn in 2017-18, with little effective coordination of public finance.

Developing countries believed their representatives would help decide disbursement, ensuring equity, efficacy and efficiency. But little is actually managed by developing countries themselves. Instead, climate finance is disbursed via many channels, including rich countries’ aid and export promotion agencies, private banks, equity funds and multilateral institutions’ loans and grants.

Several UN programmes also support climate action, including the UN Environment Programme, UN Development Programme and Global Environment Facility. But all are underfunded, requiring frequent replenishment. Uncertain financing and developing countries’ lack of meaningful involvement in disbursements make planning all the more difficult.

Financialization has meant that climate funding increasingly involves private financial interests. Claims of private climate finance from rich to poor countries are much contested. Even the OECD estimate has not been rising steadily, instead fluctuating directionless from US$16.7bn in 2014 to US$10.1bn in 2016 and US$14.6bn in 2018.

The actual role and impact of private finance are also much disputed. Unsurprisingly, private funding is unlikely to help countries most in need, address policy priorities, or compensate for damages beyond repair. Instead, ‘blended finance’ often uses public finance to ‘de-risk’ private investments.

Putting profits first

The poorest countries desperately need to rebuild resilience and adapt human environments and livelihoods. Adaptation funds are required to better cope with the new circumstances created by global warming. Needed ‘adaptation’ – such as improving drainage, water catchment and infrastructure – is costly, but nonetheless desperately necessary.

But ‘donors’ prefer publicizable ‘easy wins’ from climate mitigation, especially as they increasingly gave loans, rather than grants. Thus, although the Paris COP21 Agreement sought to balance mitigation with adaptation, most climate finance still seeks to cut greenhouse gas (GHG) emissions.

As climate adaptation is rarely lucrative, it is of less interest to private investors. Rather, private finance favours mitigation investments generating higher returns. Thus, only US$20bn was for adaptation in 2019 – less than half the sum for mitigation. Unsurprisingly, the OECD report acknowledges only 3% of private climate finance has been for adaptation.

Chasing profits, most climate finance goes to middle-income countries, not the poorest or most vulnerable. Only US$5.9bn – less than a fifth of total adaptation finance – has gone to the UN’s 46 ‘least developed countries’ (LDCs) during 2014-18! This is “less than 3% of [poorly] estimated LDCs annual adaptation finance needs between 2020-2030”.

Cruel ironies

The International Monetary Fund recognizes the “unequal burden of rising temperatures”. It is indeed a “cruel irony” that those far less responsible for global warming bear the brunt of its costs. Meanwhile, providing climate finance via loans is pushing poor countries deeper into debt.

Increasingly frequent extreme weather disasters are often followed by much more borrowing due to poor countries’ limited fiscal space. But loans for low-income countries (LICs) cost much more than for high-income ones. Hence, LICs spend five times more on debt than on coping with climate change and cutting GHG emissions.

Four-fifths of the most damaging disasters since 2000 have been due to tropical storms. The worst disasters have raised government debt in 90% of cases within two years – with no prospect of debt relief.

As many LICs are already heavily indebted, climate disasters have been truly catastrophic – as in Belize, Grenada and Mozambique. Little has trickled down to the worst affected, and other vulnerable, needy and poor communities.

Funding gap

Based on countries’ own long-term goals for mitigation and adaptation, the UNFCCC’s Standing Committee on Finance estimated that developing countries need US$5.8-5.9 trillion in all until 2030. The UN estimates developing countries currently need US$70bn yearly for adaptation, rising to US$140–300bn by 2030.

In July, the ‘V20’ of finance ministers from 48 climate-vulnerable countries urged delivery of the 2009 US$100bn vow to affirm a commitment to improve climate finance. This should include increased funds, more in grants, and with at least half for adaptation – but the UNFCCC chief has noted lack of progress since.

Only strong enforcement of rigorous climate finance criteria can stop rich countries abusing currently ambiguous reporting requirements. Currently fragmented climate financing urgently needs more coherence and strategic prioritization of support to those most distressed and vulnerable.

This month’s UNFCCC COP26 in Glasgow, Scotland, can and must set things right before it is too late. Will the new Cold War drive the North to do the unexpected to win the rest of the world to its side instead of further militarizing tensions?

Relevant IPS readings

Much more climate finance now! 12 Sep 2017.

http://www.ipsnews.net/2017/09/much-climate-finance-now/

Can Private Finance Really Serve Humanity? 14 Jul 2020.

http://www.ipsnews.net/2020/07/can-private-finance-really-serve-humanity/

Blending Finance Not SDG Financing Silver Bullet. 30 Apr 2018. http://www.ipsnews.net/2018/04/blending-finance-not-sdg-financing-silver-bullet/

Big Business Capturing UN SDG Agenda? 11 Dec 2018.

http://www.ipsnews.net/2018/12/big-business-capturing-un-sdg-agenda/

Developing Countries Struggling To Cope With COVID-19. 23 Feb 2021. https://www.ipsnews.net/2021/02/developing-countries-struggling-cope-covid-19/

Covid-19 Compounds Developing Country Debt Burdens. 23 Jul 2020. https://www.ipsnews.net/2020/07/covid-19-compounds-developing-country-debt-burdens/

Bleak prospects for least developed countries

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: “The outlook for LDCs is grim”. The latest United Nations (UN) assessment of prospects for the least developed countries (LDCs) notes recent setbacks without finding any silver lining on the horizon.

Promises unkept

Half a century ago, LDCs were first officially recognised by a UN General Assembly resolution. It built on research, analysis and advocacy by the UN Conference on Trade and Development (UNCTAD).

The landmark 1971 declaration drew attention to LDCs’ unique challenges and pledged support from the international community. The UN has convened four LDC conferences since, with each adopting a 10-year programme of action for national governments and ‘development partners’.

But actual progress has been disappointing, with only seven countries ‘graduating’. The list of LDCs has grown to 46 as more ‘qualify’ to ‘join’. With the fifth conference due in Doha in January 2022, some critical soul-searching is urgently needed for efforts not to disappoint yet again.

The failure of development partners to meet their commitments has been a major long-standing problem. Only 6 of 29 Organization for Economic Cooperation and Development (OECD) partners have kept their promise to give at least 0.15% of their national incomes as aid to LDCs.

As the 1969 UN definition of official development assistance (ODA) has been compromised, the UN report unsurprisingly laments declining aid ‘concessionality’. New OECD aid reporting rules mean its numbers do not reliably measure additional sustainable development finance.

Systemic incoherence

The UN uses three criteria – income, human assets and vulnerability – to classify LDCs. Although nominally part of the UN system, the World Bank and International Monetary Fund do not recognise LDCs.

Instead, the Bank only uses income to classify countries, with only low-income countries eligible for concessional loans from both Bank and Fund. Thus, ‘middle-income’ LDCs – so classified due to poor human assets and/or high vulnerability – are left out.

When the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was adopted in 1995, LDCs were given more time to comply: first, until November 2005, extended to July 2013, then July 2021, and most recently, July 2034. But such ad-hoc postponements undermine LDCs’ long-term planning.

Instead of the current ‘case-by-case’ approach, LDCs need more predictability. The grace period should be while a country remains an LDC, say, plus a further 12 years after graduation, as proposed by Chad. The 12-year ‘grace period’ should also apply to other “international support measures”, including all types of special and differential treatment.

Limited market access

LDCs account for only 0.13% of global trade. But despite touting trade liberalisation as necessary for development, OECD countries have not given LDCs much access to their own markets. Allowing more meaningful ‘duty-free, quota-free’ (DFQF) access is thus crucial to LDCs.

Helpful 97% DFQF access for LDCs to developed country markets was agreed to at the 2005 World Trade Organization (WTO) ministerial in Hong Kong. But most LDC exports are concentrated in a few tariff lines, such as agricultural products and textiles, still subject to constant re-negotiation.

Tariff reduction alone is no panacea, as non-tariff measures have posed barriers to LDC exports. Regulatory standards – e.g., ‘sanitary and phyto-sanitary’ requirements – and ‘Rules of Origin’ clauses limit LDC eligibility for preferences. Even when requirements are met, onerous procedures can still frustrate access.

Also, preferential arrangements – like the European Union’s ‘Everything But Arms’ initiative and the US ‘Generalised System of Preferences’ (GSP) – have often been arbitrarily implemented.

Needing frequent Congressional approval makes GSP unpredictable, ever subject to capricious new conditions. Thus, some US lawmakers are demanding that GSP renewal – which expired on 31 December 2020 – should be subject to conditions such as particular human rights, rule of law, labour or environmental regulation priorities.

Trade concessions?

Despite the lofty 2000 Millennium Declaration, OECD countries have conceded little since. After the African walkout at the 1999 Seattle WTO ministerial, the promise of a ‘Development Round’ brought developing countries back to the negotiating table. Launched in Doha after 9/11, “with much rhetoric about… global unity”, there was little enthusiasm among rich countries.

Still pushing developing countries to open their markets more, rich countries demanded they lower tariffs to nearly zero in sectors never previously covered by multilateral trade agreements, including agriculture and services.

Refusing to recognise tariffs as poor countries’ means to protect their farmers and ensure food security, OECD demands ignore their own heavy subsidisation of food agriculture. Also, LDC protection of their modern services – still in ‘infancy’ – is deemed necessary to withstand transnational competition.

OECD countries became more protectionist after the 2008-2009 global financial crisis, later pursuing bilateral, regional and plurilateral ‘free trade’ agreements. In December 2015, the Financial Times gleefully proclaimed “the Doha Round had finally died a merciful death” after long being comatose.

Preferential trade?

Despite DFQF market access, ‘margins of preference’ (MoP) for LDC products have been squeezed by other developing countries’ exports. MoP refer to the difference between preferential rates for LDCs and other rates. These may refer to ‘Most Favoured Nation’ (MFN) rates available to all countries, or preferential rates available to some.

Meanwhile, tariffs have fallen with MFN liberalisation, in some cases to zero. Tariff cuts have deprived LDCs of important revenue. ‘Aid for Trade’ (A4T) – purportedly to promote exports – has never tried to compensate developing countries for lost tariff revenue.

Moreover, A4T conditionalities make them less developmental. A4T is often used for trade policy capacity building – typically focused on encouraging LDCs to open their markets more, as desired by rich countries – rather than enhancing LDCs’ productive capacities and capabilities.

Even if market barriers are reduced, most LDCs still lack the infrastructure and support services to export much more. OECD countries demand LDC trade liberalisation even before they have developed sufficient productive capacities. Hence, even ‘graduate’ LDCs fail to become internationally competitive.

International solidarity critical

While LDCs’ lot remains dismal, new challenges have emerged. For many LDCs, global warming poses an existential threat. The pandemic has also worsened their lot. Inadequate international fiscal support and the high costs of containing the pandemic meant 2020 saw LDCs’ worst growth since the 1980s’ lost decade.

The UN report acknowledges even the meagre progress “painstakingly achieved on several dimensions of development, notably on the fronts of poverty, hunger, education and health” has been reversed. Besides emerging challenges, the LDCs conference must also address the roots of their condition.

LDCs’ development trajectories and options are shaped by the global environment. Besides foreign trade, concessional international financing is key to LDC progress. The latest UN LDCs report proposes new “international support measures”, but recent trends suggest they are unlikely to materialise.

Related IPS commentaries

Allow Least Developed Countries to Develop. 31 August 2021. https://www.ipsnews.net/2021/08/allow-least-developed-countries-develop/

End Vaccine Apartheid. 7 September 2021. http://www.ipsnews.net/2021/09/end-vaccine-apartheid/

Paltry International Support for Spending Needs Sets South Further Back. 8 June 2021. https://www.ipsnews.net/2021/06/paltry-international-support-spending-needs-sets-south-back/

Can the SDGs be financed? 29 March 2017.

http://www.ipsnews.net/2017/03/can-the-sdgs-be-financed/

International Tax Cooperation Crucial for Development. 7 October 2015.

http://www.ipsnews.net/2015/10/opinion-international-tax-cooperation-crucial-for-development/

Inflation bogey blocking recovery

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: The bogey of inflation has been revived. Dubious pre-pandemic economic progress, fiscal constraints and vaccine apartheid were bad enough. Now, ostensibly anti-inflationary measures also threaten recovery and sustainable development.

The International Monetary Fund (IMF) has revised downwards its latest global growth forecast. Its latest World Economic Outlook (WEO) warns of a “dangerous divergence” between richer and poorer countries. This has been exacerbated by, but has also worsened national fiscal disparities and the ‘great vaccine divide’.

Inflation bogey revived

Meanwhile, there is growing talk of ‘stagflation’ – of rising inflation with slow growth and high unemployment, as in the 1970s. Meanwhile, The Economist warns of harmful “wage-price spirals” aggravating vicious circles of rising inflation and wage demands.

But over 70%, or 152 of 209 economists polled believe rising inflation worldwide is due to temporary supply chain disruptions. Heads of major central banks – such as the US Federal Reserve, Bank of England and European Central Bank – concur.

Although the IMF agrees, it also urges policymakers to “be on the lookout and be prepared to act, especially if…prolonged supply disruptions, rising commodity and housing prices, permanent and unfunded fiscal commitments, a de-anchoring of expectations, combined with mismeasurement of output gaps [materialise]”.

The IMF’s October 2021 Fiscal Monitor urges governments to take all steps necessary to regain capital markets’ and lenders’ confidence, including by reducing budget deficits. But it also warns against ‘self-defeating’, premature phasing-out of needed recovery measures. Thus, the ‘two-handed’ IMF economists offer contradictory policy guidance.

Wrong diagnosis

But inflation is unlikely to persist. First, labour market deregulation since the 1980s has long eroded workers’ bargaining power. Hence, workers are now more worried about job security, badly eroded in recent decades.

Second, ‘decent’ job creation remains weak in most rich countries after decades of ‘off-shoring’ and labour-saving innovation. Unsurprisingly then, labour shares of national income have been falling since the mid-1970s.

While jobs typically trail recovery, the current lag is “more severe” than before, notes the IMF. Across the world, labour force participation and employment remain well below pre-pandemic levels, particularly for youth.

The WEO notes private investment fell in 2021’s second quarter, with several new uncertainties responsible. Slower investment and growth also mean less tax revenue and higher debt-GDP ratios. Cutting spending will only make things worse.

Correct diagnosis should be the basis for choice of medication. Contrary to monetarist faith, inflation is not only due to excess money supply. But if supplies are blocked – e.g., due to disasters, conflicts, curfews or transport restrictions – demand easily becomes ‘excessive’.

Inflation is often also due to big suppliers abusing their market power, with powerful firms raising prices with higher ‘mark-ups’. Privatization and deregulation over the last four decades have strengthened these monopolies or oligopolies.

Blunt instrument

The WEO seems more concerned with inflation than employment as financial markets demand monetary tightening, interest rate hikes and fiscal austerity. Bloomberg has urged emerging economies to “brace for rate hikes”, with Mexico, Brazil, Peru, Russia and others obliging, as The Economist anticipated.

The interest rate is a blunt tool. Inflation is reduced by raising interest rates, cutting growth and increasing unemployment – “tough medicine” indeed. Hawks emphasize how inflation erodes the poor’s purchasing power, but deny their prescriptions do worse.

One must also wonder how interest rate hikes are supposed to address actual problems. For example, in September 2021, global food prices shot up nearly 33% year-on-year, due to extreme weather and pandemic restrictions. Higher rates also certainly could not help when a severe drought hit hydroelectric power generation in Brazil.

Higher interest rates squeeze both private and government spending. Thus, rate hikes will likely trigger a vicious circle of further rate increases and general austerity, slowing recovery and raising debt-GDP ratios.

Raising interest rates in rich countries will also see more capital flight from developing countries and exchange rate depreciations. Already handicapped by vaccine inequity and constrained fiscal space, worsened by modest debt relief and pandemic support from rich countries, raising interest rates will set them further back.

Debt misconstrued

Rising debt levels have understandably been an on-going concern. In 2019, the World Bank warned that post-2008 global financial crisis (GFC) indebtedness was dangerous, noting all previous debt waves had ended in crises.

With the pandemic, fears have been “looming” again of “catastrophic” debt crises in developing countries. As if governments had much choice, the Wall Street Journal warned, “Governments world-wide gorge on record debt, testing new limits”.

The IMF’s October Fiscal Monitor acknowledges, “there is no magic number for the debt target. Macroeconomic theory does not prescribe a specific debt target; nor is there a clear threshold above which debt might become particularly harmful to economic growth”. This confirms earlier IMF and World Bank findings suggesting exaggeration of debt constraints.

Rather, the focus should be on “the likely growth effects of the level, composition and efficiency of public spending and taxation”. Instead of fixating on overall debt levels, its composition – domestic vs external, public vs publicly guaranteed – deserves more attention.

In fact, debt-financed infrastructure, education, skill development and retraining programmes all enhance growth. IMF research found such infrastructure investment had large growth effects without even raising the debt-GDP ratio.

Deep-seated challenges

The predictable recommendation is ‘belt-tightening’ – via ‘austerity’ and ‘higher interest rates’ – bringing even more economic contraction. Typical structural reform prescriptions – e.g., more labour market liberalization, deregulation, privatization and tax cuts – only make things worse, while regressive tax cuts rarely generate promised growth.

Financialization in recent decades has encouraged more speculation, share buybacks, real property, mergers and acquisitions. Consequently, the real economy has suffered, with inflation rising as productivity growth falters.

But inflation was kept in check by cheap imports and cheaper labour, even as profit margins and executive salaries rose. But neoliberals have not hesitated to claim credit for taming inflation during the Great Moderation via fiscal austerity, debt ceilings and inflation targeting.

Despite fiscal austerity, debt has risen, especially since the GFC. Slower growth has also meant less revenue, further reducing fiscal space. Public investment cuts – particularly for services, infrastructure, research and development – have also hurt productivity growth.

Build forward, not backwards

Every economic crisis is different in its own way. The COVID-19 recession involves both supply and demand shocks. Output has fallen due to lockdowns and value chain disruptions. Demand has also declined with lower incomes, less spending, more jobs lost and greater uncertainty.

When provided, relief measures have sustained some demand. Pandemic restrictions have accelerated digitalization, but other changes are also needed. Reforms must build on COVID-19 transformations for a better future , e.g., by promoting job-intensive green investments, worker reskilling and retraining.

The COVID recession thus offers an unexpected opportunity to ‘build forward better’ to address deep-seated problems to build a better world. This must necessarily involve shedding biased and dysfunctional arrangements, managing markets, guiding private investments, workforce retraining and investing in education, health and social protection.

Related IPS commentaries

Fight Pandemic, Not Windmills of the Mind. 28 July 2020. https://www.ipsnews.net/2020/07/fight-pandemic-not-windmills-mind/

Central Banks Must Address Pandemic Challenges. 3 August 2021. http://www.ipsnews.net/2021/08/central-banks-must-address-pandemic-challenges/

Boldly Finance Recovery to Build Forward Better. 22 June 2021. https://www.ipsnews.net/2021/06/boldly-finance-recovery-build-forward-better/

Pandemic Relief Policies Need More Resources, Better Design. 1 June 2021. http://www.ipsnews.net/2021/06/pandemic-relief-policies-need-resources-better-design/