Around the Halls: A Year in Review and Look Ahead to 2023
As 2022 comes to a close and the world confronts the “polycrisis,” researchers from the Boston University Global Development Policy Center highlight where progress has been made, where policy movement has stagnated and what to keep an eye on for 2023.
Below, read key takeaways on the green energy revolution, sovereign debt, Chinese loans to Africa, the international trade and investment regime and more:
Increasing MDB Firepower is Crucial to Meeting 21st Century Challenges
2023 offers an important window of opportunity to finally reform multilateral development banks (MDBs) so that they are better suited to help countries achieve their development and climate change goals. In October 2022, US Treasury Secretary Janet Yellen asked for an evolution roadmap from World Bank management on how the Bank can be reformed to be more fit for purpose. The mandate for this evolution roadmap is sweeping and includes everything from the mission of the World Bank itself to the details about its financing instruments.
Yellen’s call builds on the findings of the G20 Independent Review of Capital Adequacy Frameworks (CAF) of MDBs. The CAF report found that MDBs could mobilize billions of dollars if they optimized their balance sheets. This report highlights earlier work from the Boston University Global Development Policy Center, which found that the MDBs have a headroom of at least $500 billion. While implementing the CAF recommendations will help to increase the overall firepower of the MDBs, it is also crucial for the MDBs to receive a capital increase so that they can provide the concessional resources that countries need to meet 21st century challenges.
Is China Hitting Pause on the Green Energy Revolution?
While 2021 saw a major commitment from China’s leadership to step up support for green and low-carbon energy in developing countries, China did not deliver on that commitment in 2022. Announcements from Chinese ministries and regulators in March 2022 and June 2022 did represent a major step forward in codifying high-level commitments, but an actual “step up” of support remains to be seen. The China’s Global Power Database update released in October 2022 shows that coal still accounts for the largest share of overseas electric power generating capacity financed by China, while wind and solar combined make up 12 percent of capacity tracked in the database.
It is no surprise that China’s global green energy goals have yet to come to fruition. China itself has faced a confluence of environmental and economic crises, from droughts and heat waves in the summer, to ongoing financial issues associated with the COVID-19 pandemic. Belt and Road Initiative countries have also struggled to increase ambition on climate and clean energy goals, and many countries are facing debt distress that limits their ability to borrow from creditors like China, even for renewable energy. Going forward, to meet its own commitments, China will have to both scale up support for renewable energy and phase out support for fossil fuels, especially coal.
Maternal and Child Health: Developments and Setbacks in 2022
As the COVID-19 pandemic surges into another year, the world will continue to grapple with the strain that the pandemic has imposed on health systems globally, and particularly in low- and middle-income countries (LMICs). It is clear that the ongoing pandemic will only create more barriers to access and exacerbate inequities in health care-seeking, particularly in contexts where health systems are already constrained. As I previously wrote, women and children are especially vulnerable and have already experienced significant reductions to service provision since the start of the pandemic. This in turn has contributed to poor health outcomes for women and their children. A recent study on health facilities in six LMICs found that antenatal care and in-facility delivery, which are closely linked to maternal and child health and mortality, have declined significantly since 2020, although some countries were relatively more successful than others at adopting strategies to maintain continuity of care. Routine vaccination coverage for pregnant women and infants has also declined, with larger disruptions in vaccine accessibility and distribution within LMICs compared to high-income countries. These setbacks, combined with continued restrictions to sexual and reproductive health services, imply that the challenges that women and children will face globally are likely to persist for the foreseeable future unless clear and decisive action (through, for example, the allocation of resources for these priorities, and not simply the proposal of new policies) is taken to mitigate them.
The WTO: An Institution Under Strain
The COVID-19 pandemic has acted as a stress test, revealing the fragility of the World Trade Organization (WTO) in adapting to a world in polycrisis.
At the 12th WTO Ministerial Conference (MC12), member countries had the opportunity to prioritize multilateral trade negotiations, address developing country concerns and finally agree to a comprehensive waiver on the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) for COVID-19 products. Instead, the talks led to a modest waiver – largely a clarification of patent rights for vaccines – and little else. Moreover, other research has shown that high-income countries are willing and able to sidestep WTO rules during a pandemic for their own benefit while unwilling to agree to waive the rules for others. This largely reflects a well-established trend of continually shrinking policy space for developing countries.
In parallel to negotiations at the WTO, European and other countries sought to modernize the Energy Charter Treaty (ECT), a sector-specific investment treaty with substantial financial and legal implications for its membership. However, as recent research showed the potentially large financial costs of investor-state disputes brought by the fossil fuel industry, countries discussed withdrawal from the treaty entirely. As in the trade regime, these financial risks are even more dire for developing countries as they navigate the compounding effects of debt and climate. 2023 will see an official vote on modernizing the ECT, as well as a large-scale review of investment treaties to align them with the Paris Agreement coordinated by the Organization for Economic Co-operation and Development.
It remains to be seen how well these institutions will be able to respond to global development and climate needs, but their future depends on it.
China-Africa Development Finance Engagement in Transition
In August 2022, China announced the cancellation of 23 overdue interest-free loans with maturities up to 2021 for 17 African countries during the follow-up meeting of the 2021 Forum on China-Africa Cooperation. China did not release a list of countries that received these cancellations, but a policy brief from the Boston University Global Development Policy Center estimated that cancellations were only 1 percent of overall Chinese loan commitments to Africa. Although this action was in line with China’s previous debt cancellations practices, it came at a moment where several African countries were in discussions about restructuring and canceling external debt and observing decreasing loans from China to Africa. This decrease in lending is not unique to Africa as loans from the China Development Bank (CDB) and Export-Import Bank of China (CHEXIM) have declined since 2016. However, the COVID-19 pandemic, African countries’ continual external debt and fiscal constraints, China’s domestic economic issues and cautionary lending from CDB and CHEXIM may explain decreasing lending trends in Africa. Whether or not lending rebounds, other forms of finance such as China’s Overseas Development Investment Funds (ODIFs) will most likely increase in Africa.
As China’s Belt and Road Initiative (BRI) recalibrates and the new Global Development Initiative (GDI) emerges, they could inform future China-Africa economic relations. The Chinese Foreign Minister’s visit to Africa in January may indicate the direction China wants to take its development initiatives within African countries in 2023.
New Global Biodiversity Commitments May Shape Climate Finance
The year 2022 has ended with a historic global agreement on biodiversity conservation, which will have significant effects on development finance institutions (DFIs) around the world as they focus on financing green energy transitions in 2023 and beyond.
In the early hours of December 19, world leaders signed the Kunming-Montreal Global Biodiversity Framework (GBF), marking the end of the Conference of the Parties (COP15) to the UN Convention on Biological Diversity (CBD). The GBF establishes ambitious goals and targets, including protecting at least 30 percent of land and aquatic areas for conservation in a way that respects Indigenous and other traditional territories and sustainable traditional uses of biodiversity such as small-scale hunting and fishing. In addition, it targets placing all areas under participatory integrated biodiversity conservation, planning, or management.
These goals are ambitious but non-binding. If world leaders incorporate them into policy, it will have a significant effect on the world’s approach to climate finance. Global DFIs like the World Bank currently face global pressure to ramp up their climate finance, and these goals will make nature-based solutions and ecological services a core part of these efforts. Furthermore, these goals will set guidelines for DFIs to ensure that they protect the ecosystems that currently provide critical services to traditional communities and to global biodiversity while they build out a new generation of global renewable energy facilities.
Public Assets vs. Debt in a Polycrisis
In 2022, the global economy faced polycrisis: increasing climate change, Russia’s war in Ukraine and capital flight from emerging markets and developing countries, leading to declines in their foreign exchange reserves, local currency depreciation and difficulties to repay dollar denominated loans.
How can policymakers withstand a polycrisis? It is crucial to focus on building public assets and utilizing these assets to sustain development or to survive. In the past, wealth has not gotten nearly enough attention from economists and policymakers. For starters, as voices from the Global South have increasingly lamented, evaluations of debt sustainability – such as the joint International Monetary Fund-World Bank Debt Sustainability Analysis Framework – have tended to focus narrowly on liabilities, without taking adequate account of the asset side of the public-sector balance sheet.
As part of a recent Group of 20 (G20) report, Justin Lin and I pointed out that in view of large infrastructure financing gaps, countries must prioritize infrastructure, consistent with their nationally determined contributions (NDCs) to tackle country-specific infrastructure bottlenecks. Yinyin Xu and I found that some 78 percent of Chinese-financed projects completed in 54 African countries addressed one of five key bottlenecks. These completed projects now constitute public assets that generate jobs, incomes and government revenues. However, research by the Boston University Global Development Policy Center has revealed concerns over the social and environmental effects of some of these projects.
Not all debt is bad for development. Without debt, some large infrastructure projects could not be financed and capital cannot be efficiently allocated. In 2023, there is a hope that China will take a coordinating role in promoting a new platform for debt restructuring, so that innovative approaches may become more transparent and standardized across financing for development.
Raising Ambition in Debt Restructuring Mechanisms
Sovereign debt has ballooned in developing countries. Between 2008-2021, the external public debt of developing countries increased by 155 percent, from $1.4 trillion to $3.5 trillion. About 60 percent of low-income countries and nearly 30 percent of emerging market economies are at or in risk of debt distress and running out of fiscal space. In the next five years, the Vulnerable Group of 20 (V20), a consortium of 58 climate vulnerable countries, will be responsible for almost $435.8 billion in debt payments.
In 2022, the Group of 20 (G20) fell short of providing an effective debt restructuring tool. The Common Framework for Debt Treatment must be reformed in 2023, specifying a clear debt relief framework and timeline as well as incorporating other creditors and middle-income countries. Coordination with bondholders, multilateral development bank shareholders and Chinese lenders is also recommended for a successful initiative.
Finally, a polycrisis calls for ambition and comprehensive solutions. A proposal from Debt Relief for a Green and Inclusive Recovery outlines a global debt restructuring architecture linking climate and development. This innovative financial scheme may help to tackle the debt crisis and allows developing countries the ability to finance a just transition to low-carbon, resilient and inclusive growth.
The IMF’s Quota Review: Towards a Better Resourced and More Accountable IMF
By Lara Merling
The International Monetary Fund (IMF) is in the process of mainstreaming climate issues through its operations, though the countries that are most vulnerable to the impacts of climate change, yet least responsible for causing it, will have very little formal say in this process. Despite being home to almost 17 percent of the world’s population, members of the V20 only control about 5 percent of the votes at the IMF. This is because of the link between IMF quota shares – meant to reflect a country’s relative position in the global economy – and voting power. The ongoing 16th review of quotas, set to conclude at the end of 2023, is an opportunity for reform.
In addition to voting power, quotas determine the financial contributions from member countries as well as access and cost of loans. However, the overall size of quotas and contributions made by members has failed to keep up with growing financing needs. The IMF seeks to fill this gap through other financing arrangements but has maintained quota shares for determining access limits and which countries have to pay extra fees (known as surcharges) on their loans.
Meaningful reform of quotas would address both power imbalances and the need for additional resources. The United States, which alone holds veto power over decisions, and other advanced economies must agree on reallocating power if meaningful quota reform is to materialize. This would be a key opportunity to act on their stated commitment to an accountable multilateral system that can meet the needs of all countries.
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