Frontloading finance can save lives, tackle climate change and generate real impact

By Sony Kapoor, CEO of the Nordic Institute for Finance, Technology and Sustainability (NIFTYS) and Chair of Re-Define

The humanitarian, moral and economic case for development aid has been made eloquently and does not bear repeating. But the stark, ongoing highly inequitable impact of climate change and the COVID-19 pandemic, both of which hurt poor and developing economies the most, has turbocharged the case for more aid and now. However, present levels of aid languish at 0.32% of GDP, or $161.2 billion, less than half the promised amount of 0.7% of GDP. This commitment needs to be at least doubled, but despite the OECD call for a “massive expansion of aid” countries such as the UK are cutting, rather than increasing aid. 

Meanwhile, in the developing world, COVID-19 may push 150 million to 200 million people into extreme poverty, reversing years of hard-earned progress. Even a dynamic economy such as India has seen an increase of 75 million additional poor, with the middle class also being hollowed out. The IMF has highlighted the uneven nature of the recovery between rich economies that have vaccines and large stimulus programmes, and developing countries that are lagging behind on both, now also facing fresh outbreaks of the virus. Climate change is likely to push an additional 130 million people into extreme poverty absent urgent mitigation and resources for adaptation. As Oxfam has highlighted, developed economies have failed to meet their promise to mobilise $100 billion in climate funding with the true value likely at only a third of the reported volume. 

The need to frontload aid to 1) finance vaccination efforts in developing economies 2) rescue the millions who have just fallen into extreme poverty before permanent scarring sets in 3) support ambitious mitigation efforts in developing economies to reduce greenhouse gases and 4) fund adaptation measures, could not be stronger. Every euro spent on these efforts will deliver several euros of return, for both developing countries and the global economy.

The large benefits of frontloading spending on vaccines is what led some donors to launch the International Financing Facility for Immunization (IFFIm) in 2006. IFFIm borrowed $6.4 billion and used it to fund the delivery of vaccines, which otherwise were unlikely to have been developed and administered, and which contributed to saving 13 million lives until 2019. The vaccine bonds issued by IFFIm will be repaid by pledges from 10 countries over a period of 32 years. Remarkably, IFFm was able to borrow at a lower rate than the weighted average borrowing costs of the pledging countries, because so many environmental, social and governance (ESG) conscious investors wanted to save lives.  

Now is the time for the EU, accounting for nearly 50% of all aid, the US under a Biden administration keen to reengage with the world, Japan and the UK to launch an ambitious IFFIm-like facility with the explicit aim of doubling aid volumes until 2030. Other donors, especially the Norway, Canada, Australia and South Korea, would be natural partners. This is also the Decade of Delivery for the Sustainable Development Goals (SDGs) that are badly lagging behind.

Enter FASTER – Frontloading Aid for the SDGs, The Environment and (COVID) Recovery – a plan to nearly double the volume of aid over the next decade to $250 – $300 billion. This will entail the issuance of around $1 trillion in SDG bonds, social bonds and green bonds to be repaid by ring fencing 25% -30% of current aid (as a % of GDP) for 20 years between 2031 and 2050. 

At prevailing record low interest rates and given the dramatic growth of ESG investors, real interest rates on these bonds will be zero or negative with coupons of around 1%. Far from undermining the total volume of aid between now and 2050, borrowing will actually increase it. ESG investors and impact funds who have been buying green and social bonds will lap these up. Unlike many of the outstanding green, social, and sustainability (GSS) bonds, these bonds will provide additional financing for climate action, SDG investments, social and health interventions that would otherwise not have been funded. 

Even if the frontloaded expenditure from FASTER is only modestly successful in saving lives, reducing extreme poverty and tackling climate change, public support for aid among existing donors is likely to increase, raising aid allocations. Combined with the growing variety of donors, this means that aid volume won´t see a dramatic drop-off in 2031, after FASTER expires. 

The logic of FASTER dovetails neatly with the reasoning behind the €750 billion EU Recovery Fund, as well as the Biden administration´s stimulus and economic recovery and infrastructure plans. All seek to frontload spending and investments to minimise economic scarring, tackle climate change and catalyse economic growth. If anything, FASTER has the most compelling logic of bigger economic multipliers, greater emissions reductions, saving more lives and biggest impact per Euro. 

What better way for an EU keen to project soft power by prioritising the Green Deal and an EU-Africa partnership than to launch a FASTER facility to tackle climate change, save tens of millions of lives, and catalyse growth in the developing world? And for a Biden administration and Japan – keen to rebuild environmental credentials and address China´s influence – to co-sponsor it, demonstrating intent? The UK, a lead sponsor of IFFm, is perfectly placed to co-ordinate the launch of FASTER ahead of the forthcoming COP26 to also help catalyse ambitious climate commitments. 

Urban migration and COVID-19: Cities on the frontline of an inclusive response and recovery

By Samer Saliba, Head of Practice, Mayors Migration Council

Photo: Manoej Paateel / Shutterstock

The international community is not doing enough to financially support those who are doing the most for migrants, refugees, and internally displaced people during this global pandemic: city governments. While many cities have the mandate to serve people in vulnerable situations, including migrant and displaced residents, they often do not have enough financial resources to meet the increased demand and need of new arrivals. Lost revenue due to the economic impacts of COVID-19 will further curtail cities’ ability to deliver critical services to their residents this year. Some estimates suggest city governments could see revenue losses of up to 25 percent in 2021, precisely when their spending needs to increase to pay for recovery efforts and continuously growing populations. In a recent survey, 33 municipal finance officials in 22 countries across all continents reported already seeing a 10 percent decrease in their overall revenue and around a five percent increase in expenditure. This “scissors effect” of local government revenue and expenditure will be most felt in cities in developing countries. African cities, for example,  could potentially lose up to up to 65 percent of their revenue in 2021.

While the international community is paying more attention to municipal finance in relation to climate change, sustainable development, and urban development in general, the same cannot be said of urban migration and displacement. Few municipal finance mechanisms focus explicitly on financing for urban migration and displacement, despite the fact that the majority of migrants and displaced people reside in cities. Moreover, donors with low risk tolerance often disregard city governments in low to middle-income countries. In response to the unmet needs of cities, my organisation, the Mayors Migration Council (MMC), recently launched the Global Cities Fund on Inclusive Pandemic Response supporting five cities to implement inclusive response and recovery programmes of their own design.

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Transitions in development: the European Green Deal and Latin America

By José Antonio Sanahuja, Director, Fundación Carolina, Spain, Special Advisor for Latin America and the Caribbean to the High Representative of the European Union for Foreign Affairs and Security Policy

The response to COVID-19, the ecological transition and strategic autonomy are the three driving forces of the European Union’s (EU) broad transformative programme. This programme involves deep changes in its own social and economic development model and in its relationship with the world. It is a short-term reaction to a pandemic that has fast become a systemic crisis. But it is also the EU’s long-term response to an international context of globalisation in crisis and challenges to the international order. The future of EU-Latin America relations will be deeply affected by these transformations.  

For the EU, as for Latin America, the pandemic is a catalyst for change. This time the reaction has been quite different in terms of monetary or fiscal measures compared to the self-destructive cycle of austerity adopted in the European debt crisis. Following an immediate response from the European Central Bank, the council adopted a first range of modest financial support measures. But in July 2020 the European Council agreed on an unprecedented package of 1.8 trillion euro, including the new 2021-27 budget and the “Next Generation” recovery programme. The programme involves linking budget, new common taxes and Eurobonds, paving the way to a common treasury. Therefore, this agreement is an important federal step forward, that just six months earlier would have been unbelievable. Beyond its macroeconomic and fiscal impact, these investment instruments will also push the EU towards an ambitious shift in its development model.

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We need a new multilateralism to bring about a better post-pandemic world

By Benigno Lopez, Vice President for Sectors and Knowledge, IDB

When discussing life after the pandemic, many express a longing to return to a pre-Coronavirus world. But instead of dreaming of the status quo, I hope Latin America and the Caribbean (LAC) advances towards a better and “new normal”, born under the pressures of COVID-19, and far more equitable and collaborative than before. Critically, multilaterals will need to work together more than ever to help make this happen.

Bringing about a better, post-pandemic future will not be easy. LAC has been hit hard by the crisis. According to recent estimates, the region saw a 7.4 percent contraction of GDP in 2020, with 34 million people losing their jobs and at least 40 million falling into poverty. To further complicate matters, the region grappled with pressing challenges even before the emergence of COVID-19. Economic growth and productivity have been lagging for some time. And our region is the most unequal in the world: the richest tenth of the population captures 22 times more income than the bottom tenth, while the richest 1 percent captures 21 percent of the income in the entire economy — double the average in the industrialised world.

As the pandemic spread, so have concerns over inequality. References to inequality on social networks have multiplied by 10 since March 2020, according to our own digital tracking tools.

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Reforming industrial subsidies usage through the WTO: process proposals

By Professor Peter Draper, Executive Director and Dr Naoise McDonagh, Lecturer, Institute for International Trade, The University of Adelaide

The distorting effects of state-owned enterprises (SOEs) and industrial subsidies on global market competition has become a topic of increasing importance for many World Trade Organization (WTO) members in recent years. There is growing pressure from key actors for WTO reform. The U.S., EU and Japan have jointly outlined a reform agenda for the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM)1 , focusing on market distorting effects of state capitalism. China has offered a different reform agenda that seeks greater recognition of the role of subsidies in pursuing legitimate social and development goals, as outlined in a recent WTO communication. Subsidy usage is therefore a key development issue.

A lack of reform may lead to growing use of subsidies by developed and advanced developing countries with deep pockets in ways that ultimately widen the economic gap between countries. This is because many developing economies will not have the capacity to leverage subsidies to build their industrial bases.

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L’Afrique pense par elle-même son développement

Par Firmin Edouard Matoko, Sous-directeur général, Priorité Afrique et Relations extérieures

Ce blog fait partie d’une série qui invite acteurs et penseurs à renouveler le discours actuel sur l’Afrique et son développement.

Les africains ont aujourd’hui plusieurs certitudes quant au futur de leur continent: celui-ci regorge de richesses naturelles (« un scandale de la nature » disent certains) ; il est culturellement riche et abonde de ressources humaines talentueuses. Enfin, après des décennies d’enfermement idéologique et d’injustice épistémique, l’Afrique est désormais capable de penser par elle-même et d’écrire son avenir[1].

La réalité d’une Afrique riche en ressources naturelles mais non encore totalement exploitées a été le fil conducteur des stratégies de développement post-indépendances d’inspiration classique ou libérale. Deux économistes africains, l’égyptien Samir Amin et le zimbabwéen Thandika Mkandawire se distinguent très vite par leurs analyses sur les conditions inégales de développement des pays africains et en se situant dans un schéma de rupture anticolonial. Dans un sens, on peut situer à travers les thèses de ces deux précurseurs le point de départ d’une pensée africaine du développement. D’ailleurs, la création en 1973 du CODESRIA dont les deux éminents économistes suscités furent secrétaires exécutifs avait pour objectif de « développer des capacités et des outils scientifiques susceptibles de promouvoir la cohésion, le bien-être et le progrès des sociétés africaines. Ceci passait évidemment par l’émergence d’une communauté panafricaine de chercheurs actifs, la protection de leur liberté intellectuelle et de leur autonomie dans l’accomplissement de leur mission et l’élimination des barrières linguistiques, disciplinaires, régionales, de genre et entre les générations ».

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Beyond vested interests: Reforming international co-operation post COVID-19

By Imme Scholz, Deputy Director of the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) and Deputy Chair of the German Council for Sustainable Development[i]

This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.

The world is now in the eighth month of the COVID-19 pandemic. When this was written, the highest daily infection rates were recorded in India, the US and Brazil, while the highest death rates (per 100,000 inhabitants) were registered in Europe and the Americas. Africa so far has not turned into a hotspot of the disease – good news that is attributed to effective public health workers and Africa’s young population. The COVID-19 pandemic has laid bare weaknesses and blind spots in societies, economies and policies worldwide. Notably that public services the world over take too long to understand their new responsibilities under changed circumstances and as a result act too slowly, at the expense of the most vulnerable. For example, infection and death rates are high in OECD countries despite good health care systems. And insufficient digital infrastructure and access in public administrations, schools and households, exacerbated by social inequalities, affect access to education in Germany or in Latin American countries alike.

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COVID-19: A game changer for the Global South and international co-operation?

By Debapriya Bhattacharya, Chair, Southern Voice and Distinguished Fellow, Centre for Policy Dialogue (CPD), and Sarah Sabin Khan, Senior Research Associate, CPD

This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.

In a short but seemingly never-ending time span, the COVID-19 crisis has propelled governments into the dilemma of balancing the response to immediate health, economic and social fallouts, with long-term recovery. Some remain vigorously engaged in saving lives. Others are seesawing between loosening restrictions and enforcing new ones to prevent a second wave. Countries from the Global South are among the worst affected by the pandemic. This is due to both their weak pre-crisis conditions as well as their disadvantaged position in global governance. There is a broad consensus that things will not and cannot go back to the way they were before. A “new normal” will emerge in terms of how governments, producers, businesses, consumers and other economic agents conduct themselves. This will be also true for global governance structures and the conventionally dialectical relationship between the North and the South.  

In this context, pessimistic views and optimistic outlooks on the post-COVID world confront one another. 

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COVID-19 and the human development crisis: what have we learnt?

By Pedro Conceição, Director of the Human Development Report Office and lead author of the Human Development Report and Mario Pezzini, Director of the OECD Development Centre and special adviser to the OECD Secretary-General on development

This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.

To say COVID-19 is unprecedented is no cliché. Its simultaneous impact on multiple development areas – education, health and the economy – sets it apart. As does its geographic reach: the pandemic, and its spillover, have touched every country.

Of course, the world has seen many crises over the past 30 years, including health crises from HIV/AIDS to Ebola, and economic crises such as the Global Financial Crisis of 2007-09. Each has hit human development, devastating the lives of millions. But overall the world has still made development gains year on year. What distinguishes COVID-19 is the triple hit to health, income and education, fundamental building blocks of human development. And as a result the global human development index is on course to decline this year for the first time since the concept was introduced in 1990 – something that can still be avoided or at least mitigated with strong policy responses.

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The G20 and the failure of policy coordination during COVID-19

By Paola Subacchi, Professor of International Economics at Queen Mary University of London’s Global Policy Institute, is the author, most recently of The Cost of Free Money (Yale University Press, 2020)

This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.

covid-19-coordination-g20When a crisis strikes, it is a time to be bold and do whatever it takes to avoid the worst. The response to the COVID-19 pandemic so far has been surprisingly bold at the national level, but at the international level, it has been disappointing to say the least. The G20 – the “premier forum for international economic co-operation” – has played no significant role in this crisis, or at least not one comparable to the role it played during the global financial crisis. Unlike in 2008, when it led the multilateral policy response, the G20 has attempted neither to coordinate the fiscal response nor to ensure that robust and broad multilateral financial safety nets are in place. It is arguable whether the nature of the current crisis requires the same deployment of financial resources as when the banking and financial systems in many countries seized up. However, the IMF and the World Bank have beefed up their resources to an unprecedented $1 trillion of loans and non-conditional credit lines to help developing countries. The G20, in turn, has agreed on temporary debt relief for low-income countries, but limited the suspension to one year. So far just $5.3 billion in bilateral debt repayments have been suspended, against an expected $11.5 billion – clearly this initiative has fallen short in ambition and scope. Continue reading