Generating Green Growth: Green Transformation in the Global South and Roles of Development Finance

Three years since the onset of the COVID-19 pandemic, multiple extreme weather disasters have pushed millions of people to the brink of hunger and poverty. Progress in achieving the United Nations 2030 Sustainable Development Goals (SDGs) has been rolled back in many countries due to multiple overlapping crises, or poly-crises: the health crisis, the global climate crisis and humanitarian crises caused by war.

As countries in the global economy are highly heterogeneous in terms of their contributions to the cumulative carbon dioxide (CO₂) stock and the unequal distribution of harm and damage due to global warming, emerging markets and developing economies (EMDEs) are seeking and prioritizing balance between growth, poverty reduction and sustainability through green transformation by taking advantage of existing developmental finance flows.  

How can EMDEs utilize developmental finance to undergo structural green transitions?

A new working paper by Yan Wang and Yinyin Xu explores the best methods for EMDEs to augment renewable or green natural capital (GNK) to transform into green economies. Their analysis finds that GNK is a neglected area of investment by multilateral and bilateral development financiers. Investing in forests, land, fisheries and protected areas and augmenting their values could reduce CO₂ emissions and improve people’s income and welfare. 

Main findings: 

• The three types of development finance examined (bilateral development banks, multilateral development banks and foreign direct investment (FDI)) have significant positive impact on GDP per capita.
  • Bilateral lending and FDI inflows, on average, have a good performance in terms of reducing emissions.
  • On the other hand, bilateral lending and FDI inflows are shown to have a negative and significant relationship with GNK per capita, indicating a certain degree of over-exploitation of green natural capital such as through deforestation, overgrazing, overfishing and, in some cases, desertification.
• Economies use GNK as an input initially, so the GNK declines as the economy grows in early stages. Only when the economy is developed to a certain extent do governments start to invest in GNK, which rises thereafter. 
  • GNK investment also validates the biological carbon sequestration effect, or, the natural ability of ecosystems to store carbon, demonstrated by the negative and significant relationship between green natural capital and CO₂ emissions, showing that an increase in a country’s GNK would potentially lead to a reduction of CO₂ emissions.
• Chinese development finance in the energy sector is associated with lower CO₂ emissions but is detrimental to GNK formation. As one of the largest inputs of development finance flows, the authors say more work needs to be done to safeguard Chinese investment against unintended environmental impacts to ensure sustainable development.

The authors found that development financiers have not provided adequate financing for GNK accumulation. They recommend that EMDEs’ GNK investment focus on long term ‘patient capital,’ which can be provided by multilateral and bilateral development banks, as well as host countries’ fiscal resources and national development banks.

Additionally, Wang and Xu argue that patient capital contains two major advantages: that this type of capital is labor-intensive, which will consequently create employment, promote rural development and reduce poverty and; that EMDEs can invest in these areas without incurring large amounts of debt and that these areas can a subsequently become priorities for boosting sustainable development. Patient capital investments tend to have a clear socio-economic and environmental goal to achieve, making them a good match for life-cycle environmental management frameworks based on a common understanding among bilateral and multilateral creditors.