World Bank, Earth4All and other reports show the links between the debt crisis and the climate crisis. Low-income countries in particular are severely affected. Sabine Gaber describes the challenges facing the international financial system.

by Sabine Gaber (Vice President Club of Rome – Austrian Chapter), 30.3.2024

According to the World Bank’s definition, a person is considered extremely poor if they have less than 2.15 dollars a day at their disposal. Around 750 million people worldwide, or more than 9% of the global population, live in extreme poverty. And almost half of the world’s population lives on less than 5.50 dollars a day.

According to the United Nations’ multidimensional poverty index, which measures the extent to which a household suffers from deprivation in the areas of education, health and standard of living, 1.3 billion people are affected by poverty.

RENEWED RISE IN POVERTY

After the success of escaping extreme poverty for around 1 billion people over three decades, global extreme poverty has only slowly decreased since 2015 and the COVID pandemic has finally worsened the trend, with 90 million people slipping back into extreme poverty since 2020. This was the largest increase since global poverty has been measured.

The Russian war of aggression and the resulting geopolitical upheavals in terms of global trade have increased the cost of living, which disproportionately affects poor countries, and there is still a high debt burden for many countries in the global South, partly due to higher interest rates caused by inflation.

DEBT AND THE CLIMATE CRISIS ARE LINKED

At COP28, many countries of the Global South demonstrated that the debt crisis is preventing them from tackling the twin challenges of climate change and poverty. They have difficulties in obtaining additional affordable financing for climate-relevant investments, for measures to combat biodiversity loss and for the implementation of environmental and social action plans. The creditworthiness of these countries according to international rating agencies is already poor from an economic point of view and there is also an increased risk of stranded assets due to natural disasters as a result of climate change, which further downgrades the creditworthiness of these countries.

The global economic debt crisis of many countries is therefore closely intertwined with the climate and ecological crisis.

The achievement of the 17 Global Sustainable Development Goals and the implementation of the Paris Climate Agreement are becoming increasingly out of reach. According to the SDG progress report, the global sustainability goal SDG 1: End poverty in all its forms everywhere will not be achieved by 2023; over half a billion people are expected to be living in extreme poverty by 2030.

In view of the considerable financing gaps for the implementation of the 2030 Agenda for Sustainable Development and the multiple crises of our time, enormous investments are still being made in carbon-intensive industries, while insufficient funding is available for the socio-ecological, climate-related transformation. There is a lack of incentive systems that serve to protect the climate, ecology and resources through conservation, reuse and recycling, undesirable activities are not / not sufficiently / not fairly taxed, environmentally harmful subsidies are not abolished.

THE INTERNATIONAL FINANCIAL SYSTEM IS FACING A VARIETY OF CHALLENGES

  • Many countries are seeking debt relief in order to obtain new, low-interest loans to overcome the multitude of crises. Otherwise, political instability, social tensions, wars and growing emigration threaten in many countries. The debt crisis therefore needs to be tackled urgently; debt relief, debt restructuring and debt sustainability are being discussed.
  • It is necessary to link debt relief with ecological, social and climate-related transformation processes. The establishment of a global debt body would be necessary to ensure a sustainable system of debt relief for middle and low-income countries by high-income countries.
  • According to World Bank estimates, the total expenditure for developing countries to cope with climate change, pandemics and conflicts for the period 2023 – 2030 will be at least around USD 2.4 trillion per year (WB, IMF 2023). The development financing system must be reformed in order to be able to raise this (these) sum(s).
  • There is an urgent need for reform of multilateral development banks, international financial institutions such as the World Bank, which is striving to expand its mandate beyond poverty reduction to include the provision of global public goods, particularly in the area of climate change. However, it lacks adequate financial resources and requires large capital increases from its shareholders in view of the enormous financing requirements of the global sustainability goals.
  • Multilateral development banks should also ensure that the low-interest (concessional funds) are not diverted from the central development goals – poverty reduction. They need to increase their risk-bearing capacity and risk access and expand their lending, and perhaps IMF Special Drawing Rights (SDRs) can be channeled through the development banks as another way to expand the financing capacity of multilateral development banks. SDRs are reserve assets first established by the IMF in 1969.
  • The entire international financial architecture must be adapted to global sustainability requirements – and not the other way around. A paradigm shift is needed – in addition to reforms, there needs to be the political will for a globally harmonized financial architecture with the recognition that a sustainable financial sector cannot only focus on financial risks and returns, but must take into account the integration of ecological, climate-related and social risks, and this must be done in a globally harmonized manner in order to achieve the goals globally. Incentive systems and sanctions (appropriate carbon pricing, environmental taxes) must be given greater consideration and new business models must redefine/rethink increased costs and affordability and appropriate financial viability.
  • Tax revenues are an important source of development finance and reforms are important (building efficient tax administration systems, transparency to avoid cross-border tax evasion and avoidance, international tax cooperation should be improved, greater coherence of international tax rules – Africa loses 50-80 billion dollars annually through illicit financial flows).
  • Efforts should be made to increase public development and climate financing (more ODA should flow to the poorest countries, donors should provide their ODA in addition to climate financing and not as a substitute for it). Donors should report climate and development finance separately.
  • Better involvement of the private sector by mobilizing private equity for investments. Private sector mobilization has become increasingly important and this too must serve global sustainability goals. However, private capital flows such as foreign direct investment in low- and middle-income countries have fallen sharply during the coronavirus pandemic and capital has also been withdrawn again due to rising inflation and higher interest rates. Building up local savings and local capital markets to finance investments is therefore very important in order to reduce dependence on the international financial market.

All low-income countries are striving for prosperity and sustainable development. The need for economic growth that boosts the incomes of the poorest could not be greater than it is now, according to a World Bank report. Extreme poverty is concentrated in conflict zones, rural areas and south of the Sahara desert. Sixty percent of the poorest people are concentrated in the sub-Saharan zone. According to the World Bank, countries would have to achieve per capita economic growth of 9 percent by 2030 in order to end extreme poverty

THE POVERTY TURNAROUND IN EARTH4ALL

The report to the Club of Rome, “Earth4All”, also deals with overcoming poverty in low-income countries (GDP < USD 10,000 per person) as part of the poverty turnaround and supports enabling rapid, fair and environmentally sustainable economic growth with a GDP increase of at least 5 percent until GDP per person is more than USD 15,000 per year – according to this, economic growth should be supported in the poorest countries so that these countries can overcome the dual challenge of poverty and climate change.

Rapid economic growth that is both fair and environmentally sustainable is desirable, but a new economic model is needed that not only seeks to increase growth but also rapidly reduces poverty in a fair and environmentally sustainable way.

The current global trade agreements must be restructured, a transformation of world trade must also aim to review CO2 emissions in international trade agreements, the outsourcing of CO2 emissions to low-income producing countries must be prevented, emissions must be accounted for where the products are consumed. Further measures to protect low-income countries should be supported, in particular the promotion of green technology exchange, for example by waiving intellectual property rights for patented technologies.

In a politically and economically interconnected world, where all countries share the challenges of the planetary emergency, the causes of poverty must be analyzed and those levers identified that, if changed, can bring about a major and rapid transformation of the current system towards a new model that can withstand the current and future crises.

We must follow the pathways that will deliver the greatest humanitarian, social, environmental and economic benefits for all. No one can shirk this responsibility – poverty concerns us all!