Author: Lara Cornaro
Financing Climate Change Adaptation and Mitigation in Developing Countries
The provision of international financial assistance to help developing countries undertake measures for climate change mitigation and adaptation is a fundamental element in the UN Framework Convention on Climate Change (UNFCCC) under which the negotiations on climate change are being conducted. This paper attempts to quantify the scale and possible composition of international financial assistance that might be required to help developing countries fulfil the commitments undertaken in COP26.
The paper is in four parts. Section I provides a brief historical review of how the commitment to provide financial assistance evolved since the start of the negotiations in 1992. Section II reviews estimates emerging from different studies of the additional investment that developing countries will have to make to meet the challenge of containing global warming to 1.5°C above preindustrial levels. Section III provides an assessment of the potential scale of international financial assistance that might be needed to make this investment possible. Section IV examines the role of multilateral development (MDBs) banks in raising the amount of financial flows to the required level.
The Sovereignty of Developing Countries: The Challenge of Foreign Aid
Foreign aid has a well-established and significant role in international relations. The role of foreign aid in the repertoire of international development programs is extensively documented, with its goal being the promotion of human and economic development. Foreign aid can be defined as “all forms of assistance that a country derives from other governments or multilateral agencies and financial institutions to fill noticeable gaps, especially in production, savings, and investments; it takes diverse forms such as grants, loans, foreign direct investment (FDI), joint ventures, and technical assistance” (Omotola and Saliu, 2009, p. 88). Foreign aid offers numerous benefits, including a long-term positive influence on economic growth (Karras, 2006), and its function in reducing poverty has been acknowledged (Mahembe and Odhiambo, 2018). There is also evidence that aid improves human development and infant mortality prevention outcomes (Gomanee et al, 2005, p.299), making it a popular tool (Figure 1). However, given that foreign aid is “anything but simple” (Ridell, 2008, p.1), it is associated with several drawbacks. For instance, the provision of aid can facilitate opportunities for corruption and bureaucratic misconduct, which can threaten good governance (Booth, 2012). If this happens, foreign aid can play a hostile role that diverges from its purported purpose, especially considering that evidence indicates aid can have the consequence of increased inequality vis-à-vis income distribution (Herzer and Nunnekamp, 2012). Furthermore, poor quality institutions (Kabir, 2020) can reduce further the effectiveness of foreign aid—a consequence made especially stark given that many developing countries are characterized by institutional deterioration. This forms an important backdrop to claims that corruption has increased due to foreign aid, which can be fungible by nature because of its possible utilization by recipient states for a variety of unintended purposes (Mahembe and Odhiambo, 2018).
Quantitative Tightening and Capital Flows to Emerging Markets
In its May 15th meeting, the Federal Open Market Committee of the U.S. Federal Reserve (Fed) lifted its benchmark policy rate by 0.75% to 1.50%–1.75%, the biggest increase since 1994. The central bank also signaled an additional increase of 0.75% ahead. FOMC members also raised the median projection for the Fed funds rate to a range between 3.25% and 3.50% next year.
In addition to hikes in basic interest rates, liquidity conditions in the US economy will also be affected by the shrinking of the Fed’s balance sheet starting this month. The “quantitative easing” (QE) that resumed strongly in March 2020, in response to the financial shock at the beginning of the pandemic, will now give way to a “quantitative tightening”.
How complementary – or substitute – will be those movements in interest rates and balance sheet downsizing? What are their likely consequences on capital flows to emerging markets?
Climate Refugees: A Major Challenge of International Community and Africa
From socio-economic crises to the scourges of war, through natural disasters and environmental degradation, the world’s history is marked by events leading to mass migration, exacerbating the phenomenon of climate refugees. Today, environmental phenomena prompt many inhabitants to choose exile in search of more stable horizons. It is essential to note that no legal text, either global or regional, considers the case of climate refugees. Given the lack of a specific legal regime for climate refugees, global and regional organizations have no de-facto mandate to assist these individuals, increasing their vulnerability and further complicating the evolution of international law. Experts stress the need to define a legal status for climate refugees to create a protection mechanism for people displaced by climate-related disasters. In this regard, the African continent provides a promising perspective.