Around the Halls: A Year in Review and Look Ahead to 2024
The year 2023 is coming to a close as emerging market and developing economies continue to experience economic headwinds in the form of higher-for-longer interest rates, the ongoing ramifications of the COVID-19 pandemic and Russia’s war in Ukraine and accelerating climate change.
In reflecting on the end of the year and the start of another, researchers from the Boston University Global Development Policy Center highlight where policy movement has been made or stagnated, and what to keep an eye on in 2024.
Below, read key takeaways on the climate finance, China’s overseas lending and development finance, trade, greening the Belt and Road Initiative and more:
One Step Forward, Two Steps Back: 2023 and the Debt and Development Crises
Although spotted with glimmers of hope and signs of progress, the ability of the multilateral system to adequately respond to the unsustainable levels of sovereign debt worsened in 2023.
Recognizing the failure of the Group of 20 (G20) Common Framework for Debt Treatment Beyond the DSSI (Common Framework) to deliver meaningful debt relief in a timely manner for developing countries, the Global Sovereign Debt Roundtable (GSDR) was established by the International Monetary Fund (IMF), the World Bank and India in its capacity as host of the G20 this year. The objective of the GSDR is to address the processes and standards in the Common Framework and beyond so that debt restructurings can be improved. The GSDR appeared to play a role in hastening a prolonged process of debt restructuring for Zambia, bringing the Paris Club and China to an agreement. However, the final deal was ultimately rejected when it became clear that private bondholders refused to provide relief commensurable to those official creditors.
Meanwhile, 14 countries have defaulted on their debt since 2020 and upwards of 60 more stand at a precipice. Indeed, according to the United Nations Conference on Trade and Development, 3.3 billion people are living in a country that spends more on external debt service than on public health or education. As interest rates stay ‘higher for longer’ in advanced economies, the stress on developing countries will only accentuate. Decisive action in 2024 is paramount if the world economy is to recovery in a green and inclusive manner.
In 2024, the GDP Center and partners at the Debt Relief and an Inclusive Recovery Project will continue to advance policy-oriented research to this end.
Progress on Climate Finance in 2023, but More Ambition Needed in 2024
In 2023, governments laid some of the groundwork to substantially increase climate finance over the next few years. Most notably, the World Bank’s evolution process will yield an extra $5 billion a year in financing. Progress on re-channeling Special Drawing Rights through multilateral development banks (MDBs) is also a welcome step forward.
However, adaptation finance remains a significant concern. Despite a commitment to double adaptation finance by 2025 from 2019 levels, adaptation finance has trailed behind mitigation finance. Most worryingly, with intensifying climate impacts, adaptation finance needs have only continued to grow.
2023 also witnessed the first Global Stocktake under the Paris Agreement. Several developing country governments have indicated their willingness to step ambition if international finance is available through conditional targets. If the conditional pledges are to be fully implemented, greenhouse gas emissions in 2030 will fall an extra 3.3 percent. This is a critical opportunity that richer nations and international financial institutions should pursue.
In 2024, governments are expected to agree on a climate finance target (the “new collective quantified goal”) under the Paris Agreement. This goal will succeed the $100 billion announced in 2009. This goal should consider the broader context and prioritize concessional – the cost of capital is expected to stay high, almost 70 countries are at risk of debt distress and intensifying climate impacts. With calls for MDBs to scale up financing at the recent 2023 United Nations Climate Change Conference (COP28), governments should also empower the banks with a capital increase to ensure they can operate at the scale to help shift economies towards resilient, low carbon pathways.
According to statements made at a COP28 side event, the Brazil Group of 20 (G20) presidency is organizing a review of the multilateral climate funds. This will be an important opportunity to revisit the impact of these funds and identify how G20 members can best support these funds for maximum effectiveness.
The Tides of China’s Development Finance are Changing
In 2023, China held the Third Belt and Road Forum (BRF), marking 10 years of the Belt and Road Initiative (BRI) and providing insight into the future of Chinese overseas lending and development finance (OLDF). Within 10 years of the BRI, Chinese OLDF has brought economic benefits and environmental risks for recipient countries. As China has been addressing risks through greening the BRI and taking a “small is beautiful” approach toward projects, Chinese OLDF has declined to low levels globally and regionally, bringing into question the longevity of China’s lending boom.
Globally, China’s development finance institutions, China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM), have collectively extended $498 billion in sovereign loans from 2008-2021. However, from 2020-2021, CDB and CHEXIM supplied just $10.5 billion in combined financing. In Africa, Chinese OLDF dipped below $1 billion in 2022, for the first time in 18 years.
Despite decreasing trends in recent years, China doubled down on its financing goals by committing to extend more OLDF by announcing roughly $100 billion in financing windows from CDB and CHEXIM, a capital injection of $11 billion into the Silk Road Fund and increased aid finance for China’s aid agency. Stronger emphasis was placed on a “small yet smart” approach toward funding projects, in efforts to enhance the beneficial impacts of the BRI. These financial commitments indicate that the future of China’s OLDF is upward, where financing will rebound, diversify and ultimately have more beneficial outcomes for recipient countries.
The IMF Misses an Opportunity to Reform Quotas
Much more rides on the International Monetary Fund’s (IMF) 16th General Review of Quotas than its nondescript title suggests. Quotas determine the IMF’s overall lending capacity, the weight of countries’ votes in the IMF, the amount they can borrow and the distribution of Special Drawing Rights allocations. Reviews of the IMF’s quota system typically take place every five years.
The 16th General Review should have been the moment to align quotas with the needs of today’s world. The IMF has not agreed to change the distribution of quotas since 2010 and the last quota review failed to come to an agreement. Emerging market and developing countries have a far smaller share of quotas – and thus voice – than their share of the global population, lagging also significantly behind their share of global gross domestic product (GDP).
Although the 16th General Review ends with a 50 percent increase in overall quotas, the increase will be distributed in proportion to countries’ existing shares. IMF members with disproportionately large quota shares—chiefly European countries and the US—may be pleased to preserve their power at the IMF in the short term, but in the longer term, this lack of realignment raises significant questions about the IMF’s legitimacy and ability to preserve global financial stability.
Looking ahead, the IMF has committed to propose a new formula to distribute quotas by June 2025—let’s hope IMF members don’t let another opportunity go to waste.
Upstream and Downstream: Next Steps for a Green BRI
In 2023, China took two major steps toward making its overseas development finance and investment more sustainable and inclusive, both upstream and downstream. Upstream, China’s newly announced Green Investment and Finance Partnership (GIFP) paves the way for Chinese investors and lenders to support partner countries in project development. For projects in the mining and chemicals industries, a new form of downstream support also emerged: the China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters (CCCMC) grievance mechanism.
China’s GIFP – announced during the Third Belt and Road Forum – brings together major Chinese lenders to create a project pipeline development facility, through which China and partner countries will plan projects that live up to the principles embedded in the “Green BRI” framework. This step will allow Chinese development finance institutions (DFIs) to incorporate one of the common “best practices” of multilateral and national DFIs around the world.
The CCCMC’s new grievance mechanism is a mediation process available to individuals, organizations or firms who believe that any actor in the mining or chemicals value chain have fallen short of compliance with international environmental and social standards. While it has no enforcement mechanism to compel Chinese investors to participate, it offers a path for dispute resolution before serious harm can arise.
Both new policies open possibilities for a greener BRI. The coming year will determine whether Chinese firms and lenders take advantage of these opportunities for a more sustainable, inclusive future.
An Institutional Legitimacy Crisis at the WTO amid Health and Climate Crises
In 2023, with the majority of the world outside of the acute phase of the COVID- 19 crisis, international institutions have sought to prepare for future health crises. The World Health Organization is pursuing various initiatives at both multilateral and regional levels in pursuance of its global health mandate. Concomitantly, the member states of the World Trade Organization (WTO) have continued to negotiate an extended Waiver of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (originally adopted for vaccines in June 2022) for diagnostics and therapeutics. The United States has spent the past year building evidence to determine whether it should support such an extension– a decision that is already a year past its due date. November 14th marked the 22nd anniversary of the Doha Declaration on TRIPS and Public Health and it remains more “confused and lonely” than “happy and free”.
Beyond public health, the WTO has faced an increasing crisis of legitimacy as it attempts to respond to the climate crisis. The intersection of trade, investment and climate is undeniable – recognized in the WTO’s Public Forum program, at the 2023 United Nations Climate Change Conference (COP28) and at the Organisation for Economic Cooperation and Development Forum on Green Finance and Investment. Each institution has explored how trade and investment can support the global project of mitigating and adapting to climate change.
However, progress at these institutions moves at a snail’s pace, and unless they find ways to build consensus to constructively meet this challenge, they will fail the legitimacy test and exacerbate the climate crisis.
Protecting and Investing in Green Natural Capital for a Sustainable Future
At the 2023 United Nations Climate Change Conference (COP28), policymakers and experts from around the world gathered to assess progressing on achieving the goals set out under the Paris Agreement and to discuss ways to promote sustainable, low-carbon economies.
A recent working paper co-authored with Yinyin Xu explored the nexus between renewable natural capital, carbon dioxide (CO2) emissions and economic development, with a focus on the role of development finance in promoting green transformation in developing countries. Green transformation is defined as a process of building-on and upgrading existing green natural capital (GNK), such as land, forest, fisheries and protected areas.
By surveying a panel of 96 developing countries from 1995-2018, we found that CO2 emissions varied as countries achieved varying levels of economic development, with a sharp increase around the second income threshold before a decrease. We also found that building on and upgrading existing GNK could enhance the natural ability of ecosystems to store carbon. Additionally, foreign direct investment (FDI) and bilateral official lending were found to reduce CO2 emissions but also reduce GNK. In particular, Chinese energy finance is associated with lower CO2 emissions but has a negative impact on GNK. China’s significant investment in hydropower and some renewables may account for the lower emissions, despite its large coal portfolio.
In 2024, public and private finance should look to invest and augment the value of GNK, as it could reduce CO2 emissions and support the green transformation of economies around the world.
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