The Transatlantic Triangular Trade financed the Industrial Revolution in Europe, which, in turn, produced a global climate catastrophe. This climate tragedy has adversely affected Small Island Developing States, including former plantation economies of the West Indies. The irony is that they face the worse effects of climate change and have done the least to bring it about.
At the close of COP27, President Macron announced a conference in Paris in June 2023. His plan was to assess every possibility of increasing financial solidarity with the South. Prime Minister Mottley of Barbados has been leading since COP26 the “Bridgetown Initiative”. This initiative aims to facilitate access to international financing for states to respond to climate challenges.
While President Macron’s announcement aligns with the Bridgetown Initiative, his June 2023 summit aimed to propose solutions to financial issues that go beyond the climate question and brings together the global climate, debt, and development agendas.
On January 6, 2023, Catherine Colonna, the French minister of Europe and Foreign Affairs, clarified that the summit in Paris would focus on building a new North-South contract. On that day, the Secretary of State for Development, Francophonie and International Partnerships, Chrysoula Zacharopoulou, and the Permanent Representative of France to the OECD, Amélie de Montchalin, attended a webinar managed and planned by the Finance for Development Lab to deliberate the issues that would be the key focal points of the Summit. The four objectives which were publicized, stated that four working groups would work to:
- Restore fiscal space to countries facing short-term difficulties, especially the most indebted countries
- Foster private sector developmentin low-income countries
- Encourage investment in green infrastructurefor the energy transition in emerging and developing countries
- Mobilize innovative financingfor countries vulnerable to climate change
So, what are the hurdles ahead?
Debt Overburdened Economies
Before the pandemic, the poorest countries in the world already had towering levels of debt. The pandemic compounded these troubles. These countries were forced to borrow more money to shore up their economies. In March 2023, the UNDP cautioned that some countries were spending more than one-fifth of state revenues to service external debt.
UNDP Reports highlight those countries with the highest debt – as a percentage of GDP in 2021, which had reached 240 per cent in one case and 182 per cent in another. The top seven in the list had debt – as a percentage of GDP that was 125 per cent and upward.
What is the size of the debt?
The debt of developing countries over the last decade has doubled to $9tn in 2021 according to the most recent World Bank Debt Report.
Who holds the debt?
In 1956, the Paris Club was formed to design ways for heavily indebted countries to avoid the consequences of default. When debtor countries undertake structural reforms to stabilise their macroeconomic situation, Paris Club creditors provide an appropriate debt treatment in the form of debt relief by postponement or, in instances of concessional rescheduling, flow treatment or modifications to debt service obligations, or stock treatment that fixes an agreed date.
However, in recent times, Saudi Arabia, India, and China have emerged as new creditor nations with China overtaking the traditional creditor nations as the world’s biggest lender.
What is the connection between climate and debt? The EU Expert Group on Sustainable Finance points out that it is harder for developing countries to find the 1.8 to 2.6 trillion euros they need annually until 2030 to meet their commitments to climate change. The former UN Secretary General Ban Ki-moon has highlighted that African countries are most exposed to the impacts of climate change and are responsible for just about three per cent of global CO2 emissions.
What will the Debt Road Map look like with overlays of green finance, network readiness, and circularity?
Poor countries find climate finance, including capital for flood defences, green hydrogen, ocean and wind energy projects, and solar solutions have remained intractable problems.
The triad of climate change, SARS-CoV-2, and digitalization calls for a transformation of the international financial system. The outcome will be a New Financial Pact. The present institutions – including the World Bank and the IMF – were set up by the victorious nations towards the end of WWII at the ski resort called Bretton-Woods in New Hampshire, US.
But the world is a different place now. It was never static. It is a place today that demands a shift in focus away from developed economies towards delivering outcomes that benefit all of humanity. It is a place cloaked by AI, the IoT, cybersecurity, economic migration, and the circular economy.
The Paris Session was one station along a route to refocusing heirloom institutions that predated independence for many of the countries attending the Summit.
The Macron Summit was a clarion call to deliver a path to transformation, not reform of the global financial system. The IMF announced that it achieved a target of $100 billion in special drawing rights (SDRs), which is a reserve currency, accessible to climate-vulnerable states. The World Bank announced that developing nations hit by climate disasters would be able to suspend debt repayments.
