Published 9 June 2023 in Facts and figures
|Focus 2030 has produced a Special Edition to present the issues at stake at the Summit for a New Global Financing Pact, and the solutions it could bring. In this dossier, you’ll find facts and figures, infographics, expert interviews, citizen mobilization campaigns and survey results relating to the Summit.
The world is more fractured than ever. Climate change, exploding inequality, rising poverty and the over-indebtedness of the world’s most fragile countries are undermining an increasingly divided international community.
In light of this, France is organizing a Summit for a New Global Financing Pact on June 22 and 23, which aims to initiate an overhaul of the global financial architecture and mobilize massive financing to fight climate change and support human development. According to Oxfam, 27 trillion dollars are required by 2030 to meet the needs of low and middle income countries. In comparison, official development assistance, which reached a record level in 2022, has only managed to mobilize 204 billion dollars in 2022, or 5% of the annual needs identified by Oxfam.
1. Allocate 0.7% of industrialized countries’ GNI to official development assistance
2. Reaching $100 billion for the climate
3. Reallocate $100 billion in special drawing rights
4. Restructuring multilateral development banks
5. Mobilize innovative financing
6. Mitigating debt
7. Encouraging private sector contributions
Financial commitments have already been made by industrialized countries, some of which are long-standing: one of the challenges of the summit will be to reaffirm them.
Official Development Assistance (ODA) is financial assistance provided by member countries of the OECD’s Development Assistance Committee (DAC) to improve the economic development and living standards of developing countries - and to finance global public goods such as global health. Since 1970, DAC countries have made a commitment under the United Nations to allocated 0.7% of their gross national income (GNI) to ODA.
However, this commitment has never been met and is still far from being fulfilled: in 2022, while ODA reached an all-time high, it represented only 0.36% of DAC members’ GNI. At a time of unprecedented need, some countries have even recently reduced their contributions to international solidarity.
The fact that this promise has not been kept for the past fifty years means a considerable shortfall estimated at 7091 billion (in constant 2021 dollars). In just 5 years (from 2018 to 2022), an ODA rate of 0.7% would have enabled us to mobilize an additional $1,000 billion for the development of the most fragile countries.
To mobilize more financing for developing countries, it seems crucial that the commitments made by DAC countries be respected, and that aid be targeted to the countries that need it most. The Summit for a New Global Financing Pact should be an opportunity for industrialized countries to renew this commitment and put development back at the heart of international discussions.
Nevertheless, while ODA is the preferred mechanism for financing international development, particularly in support of essential services (health, education, nutrition, gender equality), all observers recognize that the amounts mobilized through this channel are not sufficient to address current emergencies, particularly the financing of the climate transition.
The 100 billion dollars climate pledge was made at the 2009 United Nations Climate Change Conference (COP15) in Copenhagen. There, developed countries pledged to mobilize 100 billion dollars per year starting in 2020 to help developing countries tackle and adapt to climate change. This sum is to be used to finance measures such as the reduction of greenhouse gas emissions, the implementation of adaptation measures or the transfer of less polluting technologies.
Nevertheless, more than 16 billion dollars was missing by the 2020 deadline. Based on available estimates for the following years, 100 billion dollars could be reached by 2023.
In addition, while the 100 billion should support climate change adaptation and mitigation equally, the financing mobilized is primarily aimed at mitigation (48.6 billion for mitigation, 28.6 billion for adaptation and 6 billion targeting both objectives in 2020), limiting the capacity of developing countries to deal with the current consequences of climate change.
Moreover, most of the financing has been distributed in the form of loans and has mainly targeted Asia and middle-income countries. The least developed countries, which have difficulties in taking out loans and which are mostly located in sub-Saharan Africa, are not the priority beneficiaries of climate financing, even though many of them are particularly vulnerable to climate change. The way in which financing is accounted for is also called into question: according to Reuters, the climate dimension of certain projects accounted for as such can be questioned.
Thus, if the 100 billion for the climate is to be reached, it must also be rethought to better target the countries most vulnerable to the consequences of climate change. This is one of the stated objectives of the Summit for a New Global Financing Pact, which should, among other things, help to promote access to climate subsidies for countries unable to obtain loans.
Special drawing rights (SDRs) are international reserve assets created by the IMF to supplement the foreign exchange reserves of its member countries. A historic allocation of SDRs, equivalent to 650 billion dollars, was made by the IMF in August 2021 to help countries cope with the consequences of the Covid-19 pandemic. However, as SDRs are allocated to IMF member countries according to their quota, defined according to their weight in the world economy, the 59 poorest countries in the world received only 4% of this allocation (around 26 billion dollars) compared to 68% for the G20 countries (442 billion).
Faced with this imbalance, the G20 countries committed in 2021 to redistribute the equivalent of $100 billion in SDRs to the most fragile economies, particularly the most indebted. Almost two years later, only $76 billion has been officially pledged.
The Summit also aims to encourage holders of special drawing rights to reallocate them via multilateral development banks (such as the African Development Bank). Until now, only IMF facilities have been available for this purpose, but they have been criticized for the conditions attached. Numerous institutional and other bottlenecks make this operation tricky, and equivalent forms of support are currently under discussion. However, some, such as the Center for Global Development, question the reality of these transfers and their operational nature.
|Bridgetown Initiative: reforming the development financing architecture to support vulnerable countries
Launched in September 2022 by Mia Amor Mottley, Prime Minister of Barbados, the Bridgetown Initiative is an action plan aimed at restoring fiscal space to developing countries hard hit by the direct and indirect consequences of the Covid-19 pandemic and the war in Ukraine, by climate change and by a debt crisis aggravated by all these factors. This initiative, which inspired the Summit for a New Global Financing Pact, is based on three key steps:
There are already mechanisms in place to release funds to developing countries. However, these mechanisms are not as effective as they could be. One of the goals of the Summit for a New Global Financing Pact will be to make progress in reforming these institutions.
Multilateral Development Banks (MDBs) are international financial institutions that were created to provide financing and advice for economic and social development in developing countries. They include institutions such as the World Bank (established in 1944 under the Bretton Woods Agreement), the European Investment Bank, the African Development Bank, the Asian Development Bank, etc.
The international context has changed considerably since these institutions were created, and the needs of developing countries to respond to multiple crises (climate issues, debt, etc.) have also changed. Considering this, development finance institutions are regularly criticized for their inability to adapt their strategies to these challenges.
The reasons for this criticism are manifold. On the one hand, MDB loans depend on the countries’ ability to repay. The more the recipient country’s ability to repay is questioned, the higher the interest rates: this prevents countries that need it most from accessing financing. Furthermore, only a small portion of MDB funds is disbursed as grants, which is insufficient to meet the needs of the poorest countries.
The international financial institutions, and in particular the two institutions of the Bretton Woods system, the International Monetary Fund (IMF) and the World Bank Group, are therefore disapproved of for their inability to meet the financial needs of developing countries, especially low-income ones. The appointment processes for their leaders reinforce this legitimacy deficit: traditionally, the head of the IMF is appointed by the European governors, and the head of the World Bank Group is appointed by the US government. Thus, since 1946, 100% of those elected to head the World Bank Group have been American nationals, and 100% of those elected to head the IMF have been European. Developing countries are therefore not involved in the choice of the heads of these institutions.
Moreover, the majority of voting powers are held by the countries with the largest quotas, i.e. the industrialized and emerging countries. 12 countries alone hold more than half the voting powers of the IMF and the International Bank for Reconstruction and Development (IBRD), the World Bank Group’s main loan-issuing organization.
An independent study commissioned by the G20 has estimated that the lending capacity of MDBs could be greatly increased. According to the study, between $500 billion and $1 trillion in additional funds could be lent without jeopardizing their reputation with rating agencies and without increasing their capital. These additional funds could notably finance the fight against climate change, which is currently not a sector in which MDBs are heavily invested.
Moreover, as far as the World Bank is concerned, it is also a question of ensuring that it supports the dual objective of climate and development and that its members provide it with greater support, particularly with regards to the International development association (IDA), which is an instrument targeted at low-income countries.
If existing sources of financing are not sufficient to meet the needs of developing countries, new funds could be mobilized by other means: new taxes, introduction of new actors, debt relief, etc.
Innovative financing are alternative financial mechanisms that aim to mobilize funds to complement traditional financing and enhance the impact of development projects or the fight against climate change, poverty, inequality, etc.
A number of innovative financing schemes are already implemented at the national level, particularly in the form of taxes. In France, for example, a tax on financial transactions was introduced in 2012, which raised nearly €1.8 billion in 2020, 30% of which went to the Solidarity Fund for Development (FSD). Implementing such mechanisms at the international level could mobilize very significant amounts for development and the fight against climate change. The main types of innovative financing envisaged by the Summit for a New Global Financing Pact are listed below:
For the most part, this innovative financing is based on a "polluter pays" principle: the biggest contributors to global warming (fossil fuel extraction, maritime and air transport) are also those who will finance the fight against its consequences. Thus, it is envisaged that the implementation of such taxes could allow the future loss and damage fund to be replenished, a fund intended to help the most vulnerable countries cover the costs associated with present and future loss and damage caused by extreme climatic events.
Many developing countries are facing a growing debt burden that limits their ability to finance social policies and allocate funds to fight climate change. To address this issue, various short-term solutions are being considered to help these countries deal with their debt and finance their development and could be discussed at the summit:
Debt management and restructuring are governed by a mechanism called the Common Framework. The objective of reforming the Common Framework would be to make debt relief and restructuring requests faster, more transparent, and more efficient, while ensuring the participation of all donors (including China) in the process. The Paris Club, an informal coalition of public creditors dedicated to finding coordinated, sustainable solutions to the payment problems of indebted countries, has been particularly effective to date, but its scope is increasingly limited. The proportion of debt owed by low-income countries to creditor governments outside the Paris Club (such as China, India, Saudi Arabia, the United Arab Emirates and others) has risen sharply, from 18% in 2010 to 49% in 2021. It is therefore necessary to integrate all donors, including emerging countries and private funds, to find solutions to the debt of developing countries.
Private sector involvement for development in low-income countries is the focus of Working Group 2 for the preparation of the Summit for a New Global Financing Pact. The objective is to allow more financial investments from the private sector in developing countries, particularly towards projects that have a positive social and environmental impact to contribute to the creation of jobs, the development of infrastructures, the improvement of living conditions of local populations, the fight against climate change, etc.
Several solutions are being considered to encourage these investments. One of them is the implementation of a specific financial regulation by developed countries to encourage green investments in emerging and developing countries: developed countries could make commitments along these line in during the summit.
One of the most important ways to accelerate the energy transition in developing countries is through the implementation of Just Energy Transition Partnerships (JETPs). These partnerships, usually concluded between several countries or groups of countries, could be extended to the private sector, and particularly to the private financial sector in collaboration with multilateral development banks. These public-private partnerships could increase the flow of finance to emerging and developing economies. This option is advocated by the Glasgow Financial Alliance for Net Zero, which argues, for example, that at least an additional 10 billion dollars could be mobilized through private sector contributions under the JETP with Indonesia.
Other instruments to promote private investment in low-income and emerging market countries have been proposed, such as mechanisms to provide guarantees against exchange rate risks or to review the criteria for debt sustainability analyses to update risk perspectives.
In short, it is possible to mobilize hundreds - or even thousands - of billions to meet the challenges we face today, but to do so requires ambitious political will. The summit for a new global financial pact represents an opportunity for all concerned to agree on common solutions and a concrete roadmap, at the most opportune moment. The nature of the decisions to be taken at the end of the Summit remains uncertain: whether to create a coalition of actions in favor of certain measures, bringing together governments of goodwill, or to adopt principles that should govern future reforms, remains an open question. NGOs, for their part, are calling for firm, concrete, transparent and ambitious commitments, backed up by an accountability framework. Find out more about civil society campaigns.
Clearly, this summit will be an opportunity to agree on key directions or milestones to guide future decision-making, especially at upcoming events such as the G20, the UN General Assembly, the September 2023 SDG Summit, the IMF and World Bank Annual Meetings and COP28.