Category Archive: Analysis

1. Droughts and Dams

   December 17, 2022 4:50 am Comments Off on Droughts and Dams

   Most of Zambia’s grid electricity is generated by hydropower. Over the past decade, recurring droughts—in 2015, 2016, 2019, and now again in 2022—have exposed deep vulnerabilities in the system. These droughts have unleashed unprecedented power outages, with low reservoir levels constraining hydroelectricity generation capacity. 

   The consequences of the droughts rippled across Zambia’s economy: power cuts damaged manufacturing inventories and equipment, created new costs of backup generation, and hurt the reputations of domestic businesses in export markets.1Imaduddin Ahmed, M. Baddeley, D. Coffman, J. Meikle, & G. Sianjase, “The cost of power outages to Zambia’s manufacturing sector.” (<)em(>)International Growth Center(<)/em(>) (June 2019). https://doi.org/F-41408-ZMB-1 Only a third of Zambian households have electricity access to the grid, and even those privileged few experienced power outages up to fifteen hours a day.2Imaduddin Ahmed, P. Parikh, G. Sianjase, D. Coffman, “The impact of power outages on households in Zambia,” (<)em(>)Under Review(<)/em(>) (2022); Zesco.,“Countrywide Load-Shedding Schedule December 2019 Revised,” (2019); ZICTA, & CSO, “2018 National Survey on Access and Usage of Information and Communication Technologies by Households and Individuals – A Demand Side Assessment of Access and Usage of ICTs in Zambia,” (2019). The lessons of these droughts are clear: for Zambia’s system of energy provision to be climate resilient, it would need to diversify away from hydropower generated from its Zambezi river basin.

   Zambia is one of thirty-two developing countries facing the challenge of hydropower dependence3Here, “hydropower dependence” is defined as relying on hydropower for 25 percent or more of electricity grid power generation. amidst increasingly frequent El Niño droughts.4G. Wang, Cai, W., Gan, B., Wu, L., Santoso, A., Lin, X., Chen, Z., & M.J. McPhaden, “Continued increase of extreme El Niño frequency long after 1.5◦C warming stabilization.” (<)em(>)Nature Climate Change(<)/em(>) 7, 8 (2017), 568–572. https://doi.org/10.1038/NCLIMATE3351 The droughts have revealed a perversity: hydropower was initially considered as a key renewable energy source for climate mitigation, but its own availability has been curtailed by already-present climatic changes. Seventeen of these hydropower-dependent and drought-vulnerable countries, including Zambia, received World Bank investments for hydropower from the 1950s to the 1970s to support mineral extraction and industrialization. In Zambia, the uneven distribution of these investments, and the univariate investment appraisal process, created a system of energy provision which has failed to deliver power after its primary river basin experienced droughts. 

   The World Bank played a crucial role in establishing hydropower and power supply infrastructure in Zambia, and across Africa. Since the completion of the nation’s two largest hydropower dams in 1974 and until the recent commissioning of a coal-fired power plant, hydropower had accounted for almost all the nation’s power supply. But before the entrance of multilateral lenders, a lack of established markets, low commercial demand, and little private sector investment precluded the development of the energy sector. The World Bank and other development finance institutions provided investment, and encouraged further private investment by providing debt, issuing guarantees, and offering political leverage to equity investors and private co-lenders. More recently, China has invested heavily into African infrastructure, to the point where Chinese state-owned enterprises are now larger debtors to Zambia’s state-owned bank ZESCO than the World Bank.5D. Moyo, (<)em(>)Winner Take All: China’s Race For Resources and What It Means For Us(<)/em(>). (Penguin, 2013); Zesco Ltd.,“Integrated Report,” (2018). But even though its most significant investments into Zambian power generation took place forty years prior to the power outages of 2015 and 2016, the World Bank still accounts for the greatest share of investment in Zambian power generation assets.

   The World Bank and twentieth-century hydropower

   In 2014, the year before the major power outages began, the Kariba and Kafue hydropower projects accounted for 81 percent of electricity generated by ZESCO.6Energy Regulation Board of Zambia (2015): 4–7. These projects were financed by the World Bank in 1956 and 1974, respectively. 

   Investment in hydropower in Zambia was representative of the World Bank’s institutional bias. During the 1950s, economic infrastructure—transport, telecommunications and electricity— accounted for 87 percent of World Bank lending commitments in Africa. It continued to account for 69 percent of commitments in the 1960s, and 39 percent in the 1970s. During that same period, social infrastructure—education, water supply, sanitation, housing and public health—lacked financial support, accounting for 0 percent, 8 percent, and 16 percent of World Bank commitments in the 1950s, 60s and 70s, respectively.7 Imaduddin Ahmed, (<)em(>)The Political Economy of Hydropower Dependent Nations – A Case Study of Zambia(<)/em(>) (Palgrave Macmillan, 2021). Zambia fit these trends: from 1953 to 1974, economic infrastructure constituted 73 percent of the World Bank’s investments in the nation, and hydropower itself accounted for three-quarters of that amount.8Ahmed, (<)em(>)The Political Economy of Hydropower Dependent Nations;(<)/em(>) IBRD,“Technical Report on the Southern Rhodesian Power Expansion Project,” (1952); IBRD, & IDA,“Appraisal of Kariba North Hydroelectric Project Zambia,”(1970): http://documents.worldbank.org/curated/en/917071468334477402/pdf/multi-page.pdf. Despite this massive investment, universal electrification was not a priority. Investments in Zambia’s energy provision instead served the sanctioned British colony of Rhodesia and copper extraction from Zambia. 

   The prioritization of hydropower reflected broader strategies pursued by the World Bank. There was a belief that hydropower could spur further economic activity, in the way that it had in the case of the Tennessee Valley Authority (TVA) in the USA, and stymie the effects of the Great Depression. 

   Created through congressional charter in 1933, the TVA was a federal hydropower agency that would cover more than half of Tennessee, portions of Alabama, Mississippi, and Kentucky and slivers of Georgia, North Carolina, and Virginia. By 1946, the TVA had nine large dams along a stretch of 600 miles of Tennessee River, and a further eleven on the tributaries. As well as regulating the flow of water, the dams had the capacity to generate 2 to 2.5 million kilowatts of power, ranking the TVA second among US electric systems9J. Huxley, (<)em(>)TVA: Adventure in planning(<)/em(>) (The Architectural Press, 1946). and offering electricity prices were almost 60 percent lower than the national average.10H. Finer,(<)em(>)The T.V.A.: Lessons for International Application(<)/em(>) (Da Capo Press,1972). The TVA also employed thousands in construction and operations, leading to an increase in the region’s aggregate demand for services, retail, and manufacturing industries.11Employing thousands, in construction and operations, the TVA helped create greater aggregate demand which led to greater output and output per capita, and this was particularly pronounced in the TVA’s catchment area. Per capita output increased by 84 percent from 1933–40 in Alabama, Mississippi and Tennessee, compared with 57 percent for the USA, while nominal retail and service receipts increased by 87 percent, creating an increase of 17,000 jobs in the trade sector in the TVA power area from 1930–1940. Value-added by manufacturing increased by 39 percent from 1935-1939 in the TVA public power area (compared with 31 percent across the United States), and manufacturing wages increased by 35 percent (compared with 25 percent across the United States). The textiles, food products and chemicals manufacturing sectors increased employment by 17,000 from 1930 to 1940. In turn, the expansion of these sectors explains the increase in employment of the construction industry by 16,000 for the same period.

   For the World Bank, the TVA represented a model that could be pursued in the developing world: economic infrastructure investments could provoke structural shifts from low-productivity agriculture to higher-productivity manufacturing, increase demand for goods and services, and thereby increase government coffers from heightened tax revenues to fund “social” infrastructure. 

   The US was also the World Bank’s largest shareholder, and exporting a US developmental model carried political benefits.  In 1949, a New Republic article called the TVA the finest “American ‘know-how’ available for export” and the USA’s “best-known, most highly appreciated institution.”12M.L. Cooke, “Down to Earth with Point Four,” (<)em(>)New Republic(<)/em(>), July 11, 1949; D. Ekbladh, “ ‘Mr. TVA:’ Grass-Roots Development , David Lilienthal, and the Rise and Fall of the Tennessee Valley Authority as a Symbol for U.S. Overseas Development, 1933-1973,” (<)em(>)Diplomatic History(<)/em(>) 26, 3 (2002): 335–374. https://doi.org/https://doi.org/10.1111/1467-7709.00315. The historian Arthur Schlesinger called the TVA “a weapon which, if properly employed, might outbid all the social ruthlessness of the Communists.” 13Ekbladh, “Mr. TVA”; A. J. Schlesinger, (<)em(>)The Vital Center: The Politics of Freedom(<)/em(>) (Houghton Mifflin, 1949).14Even a member of the judiciary was recorded making overtly political statements about the Tennessee Valley Authority. “The word “Tennessee” is well known all the way across from the Mediterranean to the Pacific,” said US Supreme Court Justice William Douglas in 1951. “They know about Tennessee because they have heard of the Tennessee Valley Authority […] that fits their needs and will solve many of their basic problems.

   In the initial years of the World Bank’s history, hydropower projects had seen success in Chile, Turkey, Southern Rhodesia, Yugoslavia, and therefore dams were considered sound investments. This, however, created institutional reluctance to explore alternatives. Relying on private funding by selling bonds on the private market, the Bank focused on establishing its creditworthiness in its early years.15Sharma, P. A. (2017). (<)em(>)Robert McNamara’s Other War – The World Bank and International Development(<)/em(>). University of Pennsylvania Press. This resulted in an appraisal methodology in the mid-1950s of assessing need on the basis of demonstrated market demand, rather than on the basis of economic need. Its early appraisals of hydropower “rarely” investigated the “possibility of a thermal alternative.”16E. S. Mason & R.E. Asher, “The World Bank since Bretton Woods.” (<)em(>)The Brookings Institution(<)/em(>) (1973).

   The Kariba North and Kafue hyroelectric projects

   In Zambia, ZESCO compared both the Kariba North project and the Kafue hydroelectric projects against the thermal alternative, a coal-fired power plant at Maamba Collieries, during its evaluations.17IBRD & IDA However, it considered the thermal alternative on only one criterion: lifecycle cost. ZESCO determined Maamba to be more expensive on both a capital and operational expenditures basis. But the evaluations also hugely underestimated the human and financial costs of Kariba, resulting in the bankruptcy of the British construction contractor Mitchell, and a disturbing “expectation” of fatalities in construction.18D. Morrell, (<)em(>)Indictment: Power and Politics in the Construction Industry(<)/em(>) (Faber and Faber Ltd, 1987). “We expect men to be killed on hydroelectric work,” reportedly said a senior partner of the consulting engineering firm of the Kariba North Bank Company. The evaluations omitted the possibility of mass displacement, even though earlier, the Kariba dam’s construction had compulsorily displaced an estimated 57,000 BaTonga people, destroying their cultural and religious sites.19J. Matanzima, “Thayer Scudder’s Four Stage Framework, water resources dispossession and appropriation: the Kariba case,” (<)em(>)International Journal of Water Resources Development(<)/em(>) 00, (2021): 1–24. https://doi.org/10.1080/07900627.2020.1866505

   The reports also lacked comparative study of the loss or damage of habitat. While climate resilience would not have been a relevant consideration in the 1970s, there was an awareness of anthropogenic contributions to climate change. Analysis suggests that the methane emissions from the decomposition of underlying vegetation from the Kariba dam’s reservoir may have had an emissions impact 3.5 to 8 times higher than a coal-fired power plant generating the same amount of energy. 20Analysis emailed by Ocko to author on March 18, 2021 following a review of: I.B. Ocko & S.P. Hamburg, “Climate Impacts of Hydropower: Enormous Differences among Facilities and over Time,” (<)em(>)Environmental Science and Technology(<)/em(>) 53, 23 (2019):14070–14082. https://doi.org/10.1021/acs.est.9b05083; L. Scherer, & S. Pfister, “Hydropower’s biogenic carbon footprint,” (<)em(>)PLoS ONE(<)/em(>) 11, 9 (2016):1–12. https://doi.org/10.1371/journal.pone.0161947

   Where there were resources for hydropower, the World Bank went. With the Kariba hydropower plant, the Bank even pushed through legal and political hurdles: the then chairman of Mitchell Construction recalls that the Bank “twisted” the Zambian government’s arm to make it accept the Kariba north bank power station, for the purpose of assisting the Bank in circumventing investment sanctions on Southern Rhodesia21Morrell, which was referred to in the World Bank’s earlier investment appraisal documents as “the Colony.” In 1965, the UN Security Council had condemned the unilateral declaration of independence made by a “racist [white] minority in Southern Rhodesia” and thus, in 1966, it had called for “all States to do their utmost to break off economic relations with Southern Rhodesia.”22UN Security Council, Resolution 216, (1965) https://documents-dds-ny.un.org/doc/RESOLUTION/GEN/NR0/222/87/PDF/NR022287.pdf?OpenElement; UN Security Council. Resolution 232. (1966) https://www.sipri.org/sites/default/files/2016-03/232.pdf. Mitchell Construction chair David Morrell reflects: 

   Dr. Goebbels was a great advocate of scale in practicing the art of deceit. The higher the deception, the less likely it was to be challenged. Thus it was with Kariba Stage 2 for, stripped of its camouflage, it was quite simply the product of sanctions-breaking on a massive scale. The incredible fact was that the Kariba north bank power station was being built for Rhodesia with international aid provided through the World Bank. The Kariba North Bank Company, though wholly owned by the Zambian government, was simply a façade. It provided a medium through which World Bank funds could be channelled in order to purchase all the imported constructional equipment and permanent installations without the Bank itself suffering direct contamination from Salisbury. The Zambians were told by a British member of the World Bank team that if they project went off smoothly, “There would be no reason to supposed that IBRD (the World Bank) would not assist Kafue Stage 2 (Kaunda’s favored solution to Zambia’s power problem) in due course.”

   Yet the goal of the World Bank’s investment was not to extend power generation to ordinary Zambians. Indeed, by 2018, only a third of the population had access to on-grid energy access.23ZICTA & CSO Insofar as the Kariba hydropower dam was meant to benefit the Zambian economy at all (rather than Rhodesia), appraisal documents inferred that it “urgently” required to satiate demand from Zambia’s copper industry. “In Zambia[,] adequate supplies of power are vital to the economy of the country since the copper industry, which accounts for about 40 percent of the gross domestic product, is a very large user of power.”24IBRD, & IDA, “Appraisal of Kariba North Hydroelectric Project Zambia,” (1970)(<)em(>) (<)/em(>)http://documents.worldbank.org/curated/en/917071468334477402/pdf/multi-page.pdf

   At the time, the Copperbelt accounted for 85 percent of Zambia’s electricity consumption.25IBRD, & IDA From 1966 until the 1990s, ores and metal exports represented over 96 percent of merchandise exports.26World Bank, “Zambia World Development Indicators,” (2020). The industry’s profits would have been retained by the government following its nationalization in 1969, in stark contrast to today when most profits are expatriated to Canadian mining corporations Barrick Gold and First Quantam Minerals, British mining corporation Glencore and Indian mining corporation Vedanta.27Ahmed; S. J. Barton, (<)em(>)Policy signals and market responses:a 50 year history of Zambia’s relationship with foreign capital(<)/em(>) (Palgrave MacMillan, 2015). Following the energy investments, manufacturing value-added contribution to GDP did increase substantially: starting at 4 percent in 1960 and rising to 10 percent in 1970, and going up to 17 percent in 1980 and 32 percent in 1992.28World Bank.

   Zambia’s copper mining industry also served the World Bank’s shareholders’ broader interests. Major shareholders required Zambia’s copper, raw or processed, for their own industries— Zambia’s copper output had at one point accounted for 14 percent of global output, just behind the USA and USSR.29Barton.

   Still, benefits reaching the general population were limited.  As observed, two-thirds of Zambians today remain without grid electricity. Nor had investments in Zambia’s power production significantly altered employment away from agriculture. In 1968, 75 percent of Zambia’s population was assessed as being dependent on subsistence agriculture. 30S.F. Park, (<)em(>)Basic Data on the Economy of Zambia(<)/em(>) (1968). Twenty-two years later and following $1.13 billion dollars of investment into Zambia’s power generation, that proportion had fallen by just 3 percent in 1991.

   El Niño droughts and ZESCO

   As early as 2001, the IPCC had named the Zambezi as the “worst” of 11 major African river basins exhibiting potential effects of climate change. It expected rainfall to decrease by 10 to 20 percent, and higher temperatures to increase evaporation by 10 to 25 percent, resulting in a 26 to 40 percent reduction in average annual streamflow.31 IPCC, “Climate Change 2001: Impacts, Adaptation, and Vulnerability,” (2001): figs. 10–1. By 2007, ZESCO’s energy supply was not far exceeding growing demand. 

   Despite these warnings and the impending need for additional but diversified installed power generation capacity, ZESCO did not urgently pursue diversification from hydropower projects. In 2002, Harrison and Whittington sounded the alarm bells around the proposed scheme for a hydropower station at Batoka Gorge, arguing that it was susceptible to climate change impacts through the reduction of river flow. Sixteen years later, in 2018, Zambia’s system of provision continued to make preparations for the scheme, extending from the initial vision of envisioned 1,200MW in 2017 to 2,400MW for an approximate cost of $5 billion.32Energy Regulation Board of Zambia. (2019). (<)em(>)Energy Sector Report 2018(<)/em(>). As late as November 2017, ZESCO planned to commission more than 70 percent of additional installed power capacity from hydropower33Zesco Ltd., “Zesco’s planned additional energy generation,” (2017)., much of it from within the Zambezi River Basin, where water levels are not fed by diversified weather patterns.

   At the same time, a domestically available source of climate-resilient (if not climate-friendly) baseload power was available, and, in fact, posed a threat if not used. In 2014, coal dumps, which were the by-product of mining at the Maamba collieries, were at risk of spontaneous combustion.34African Energy, “Zambia: Maamba plant delayed by transmission hold-up.” (<)em(>)African Energy Newsletter(<)/em(>), May 30, 2014. Coal from Maamba, considered since 1970 an option for power generation, was finally utilized in 2017. 35The plant had been in the Ministry of Energy and Water Development’s Power System Development Master Plan since 2008, with the expectation of delivery by 2014. But ZESCO and the independent power project could not agree on the tariff. ZESCO had not acquired new power-generation assets in over a generation, and they continued to rely on the power-generation of fully amortized assets constructed over forty years ago without charging system-sustainable tariffs to their customers. The Government of Zambia ultimately “imposed” an agreement for the plant to move forward. Even so, the reported timeline of negotiations and financing arrangements suggest that Maamba Collieries could have delivered power to ZESCO’s grid before the 2015 power outages had ZESCO delivered the transmission infrastructure on time to make use of power plant’s output.

   The future of the World Bank in Zambia 

   In contrast to its mid-twentieth century strategy, only five of the World Bank’s twenty-six investment commitments of the past decade—or 1 percent of its total commitments—have been related to electricity. These projects have focused on solar energy and electricity access for low-income households. The Bank’s investment appraisal criteria have also evolved. Its subsidiary, the International Finance Corporation, published in 2012 “Environmental and Social Performance Standards” which include consideration of labor impacts, resource efficiency, community impacts, land resettlement, biodiversity, indigenous people, and cultural heritage. 

   Given these shifts, the World Bank could still play a major role in addressing Zambia’s troubled hydropower assets and power crises. The Bank’s advisory services, for example, could assist ZESCO in addressing its technical and non-technical losses, which may have been as high as almost a fifth of energy generated in 2016.36Ahmed.

   The World Bank could also assist in the exploration of reliable alternatives to hydropower. Natural gas, imported through the Southern African Power Pool from Mozambique and Tanzania, is a mature, relatively low-carbon and climate-resilient generation source to meet Zambia’s growing electricity needs. Established alternatives are domestically-sourced coal-fired power in Zambia, which can be more harmful to the environment, and increased hydropower, which would not be resilient to further drought. The World Bank could advise ZESCO, the Energy Regulation Board, and parliament to establish ZESCO as a credible off-taker to the Mozambican and Tanzanian utilities, such as by having ZESCO charge a cost-recovery tariff to its customers.  

   Just as it supported hydropower investments in the 1950s, the World Bank could mobilize financing to support the African Energy Transition Bank (a partnership of the Afreximbank and the African Petroleum Producers Organization) and African Development Bank plan to develop natural gas in Tanzania and Mozambique. Coupled with this would be financing made available to minimize methane leakages and capture carbon dioxide emissions, so that natural gas can deliver climate-resilient, cheap and relatively low-carbon electricity to southern Africa. The Bank could also help structure contracts between developers, governments, and local communities to ensure that royalties, taxes and profit-sharing are distributed fairly. Finally, the Bank could play a crucial role in helping Tanzania and Mozambique manage the influx of foreign currency for their exported energy, so as not to price their nascent value-adding industries out of global markets. 

   To become a transformative force for international development, the World Bank must take more risk, pursue creative alternatives, and depart from its current unwavering commitment to its triple-A credit rating. In Zambia, the Bank could assist the government in exploring whether Zambia’s old large hydropower assets could credibly—from the perspective of lifecycle emissions—be used to produce green hydrogen. Through concessional loans, the Bank could promote investment into a new green hydrogen industry in Zambia. These moves would give the World Bank a new lease of life, and more importantly, offer Zambia an additional source of power to counter its intensifying predicament. 

   This essay contains excerpts from the author’s latest book, The Political Economy of Hydropower Dependant Nations: A Case Study of Zambia, published by Springer Nature and Palgrave Macmillan.

2. Europe’s “Leap Into the Future”

   December 15, 2022 5:40 pm Comments Off on Europe’s “Leap Into the Future”

   This is the fifth edition of The Polycrisis newsletter, written by Kate Mackenzie and Tim Sahay. Subscribe here to get it in your inbox.

   In 2020, as demand for liquefied natural gas boomed in Asia, the shippable fuel was an afterthought in Europe. But when Russia’s invasion of Ukraine in February 2022 imperiled the continent’s energy supply, Europe panicked and spent the intervening year loading up on gas.

   Now, a balmy autumn and mild winter plus demand restraint have made it likely that the continent gets through the coming months with economic woes but not a full-blown energy crisis. Europe entered December having outbid Asian buyers for LNG cargoes and with gas inventories brimming. Incredibly, manufacturing output—once expected to be the first casualty of the energy shortage—is up. Running industrial production hot and substituting away from gas will help shift the continent onto a more energy-independent trajectory in the long term.

   But it was not long ago that the prospect of rationing and regional blackouts had German officials quaking in their boots. The energy crisis lobbed grenades into the EU’s battles over state aid and its restrictive fiscal rules. Over the past six months, European countries have nationalized utilities, plowed money into green investments, and taxed the windfall profits of energy companies. Policies like price caps, ridiculed by the bien-pensants months earlier, are on the verge of being state policy.

   Many of the moves are temporary—hurriedly developed and justified as emergency response measures—but they set precedents for which tools count as legitimate. Increasingly frequent crises in the material world can open up new political pathways.

   Space for the periphery

   Nowhere are these dynamics clearer than in Europe’s problem child: Greece. Through November of this year, Athens spent 5.7 percent of GDP, or over €10 billion, to protect households and businesses from rising energy prices. That puts it close, as a share of GDP, to Germany’s unrivaled 7.4 percent spent on subsidies.

   Given the fresh wound of the bond crisis—when the EU Commission, European Central Bank, and IMF forced Greece to run a primary surplus for years amid 50 percent youth unemployment—such a cushion for ordinary households facing a cost of living spike is nothing short of extraordinary. The government, which faces an election year in 2023, pledged over the summer to absorb more than 90 percent of the rise in power bills for households, and around that number for farmers and small businesses. In November, it imposed a tax rate of 90 percent on windfall profits of energy companies. If fiscal austerity was the story of the Eurocrisis, the energy crisis has been met with a more socially prudent policy response. While expenditures for energy users do not yet signal a decisive shift towards fiscal expansion—subsidy funds were drawn from Next Generation EU funding—the sheer size of the outlay is significant.

   Nationalizations

   Last summer, facing sweltering heat and mounting anxiety over low gas supply for the coming winter, France announced that it would spend $10 billion to nationalize electric utility Électricité de France (EDF). In a statement by the Finance Ministry (presented by Goldman Sachs and Societe Generale), the French government explained that the move would allow it to “commit to long-term projects that are sometimes incompatible with the shorter-term expectations of private investors, without being exposed to the volatility of equity markets.”

   Whether or not securing the roughly 14 percent of stock in EDF that the government didn’t already own makes a material difference in France’s energy sovereignty, the move is in line with a series of other nationalizations. In Italy, Prime Minister Giorgia Meloni just passed emergency legislation making it easier for the government to take over key energy infrastructure like power plants and pipelines.

   The biggest of these nationalizations is in Germany, where the government now controls the gas company Uniper after a 15 billion euro rescue package proved inadequate. Berlin had to change its domestic laws to allow nationalization and took a 99 percent ownership stake in the too-big-to-fail company that went bankrupt after its failed bet on Nord Stream 2.

   “There might be more of this,” European Investment Bank President Werner Hoyer told Bloomberg, “because in view of the incredibly high energy prices which cannot be passed on to the consumers the states must come in.”

   Rules for thee but not for me

   Germany sees the monster it has unleashed with these extraordinary policies, and is now trying to rein it in. Having pledged a €200 billion energy package for its own citizens, backed in part by new borrowing, the country is now insisting that it will oppose further joint EU debt issuance, or any softening of fiscal rules that would enable other countries to raise debt. That’s over loud calls from other member countries, the European Commission, and even the IMF for more joint debt issuance.

   Strict constitutional rule prevents Berlin from running a budget deficit. This is the so-called Schuldenbremse, or debt brake, which Germans circumvented in 2020 by declaring a state of exception. Now, the German finance ministry is rejecting the French push for a low gas price cap, arguing that without a freely moving price signal Europe will underbid Asian buyers. Joining Germany’s bid to let prices rip is Europe’s biggest gas supplier, Norway, whose treasury is raking in its highest-ever hydrocarbon revenues from the pockets of fellow Europeans.

   Societies boil when the price of essentials like energy and food soar. Fearing blowback, politicians are now spending money into voters’ pockets. But inflation has already exacted a toll on incumbents—Macron’s party was unable to win a legislative majority in parliament, and only a third of French are willing to keep bearing the economic costs of the war. Mario Draghi, key champion of the sanctions escalation, warned that inflation “can wear down the commitment of our countries toward Ukraine.” Indeed, Draghi lost his Italian premiership and was replaced by the far-right Meloni. After a drubbing in Germany’s state elections, the liberal FDP, long uncomfortable with the SPD and Greens interventionism, has vowed to stop “left-wing projects [from] being implemented in this coalition.”

   Will the present state of exception draw to a close? We are entering an era when the EU will be battered by repeated shocks and social upheaval. There are worse things in a democracy than politicians acting to save their skins. Europe’s austerity and free-market wing condoned  enormous fiscal intervention amidst plague and war, but these moves set a precedent for governments to actively take charge in future crises. 

   “Europe will be forged in crisis, and will be the sum of the solutions adopted for those crises,” EU founding father Jean Monnet famously said. The polycrisis is not just one thing. It’s one thing after another. Europeans are already gearing up to compete with the United States’s recent protectionist policy escalation. Facing a potentially wickeder winter in 2024, “sovereign Europe” appears to be firmly on the agenda. As material crises pile on each other, exceptional policy will follow.

3. Money and the Climate Crisis

   December 8, 2022 2:17 pm Comments Off on Money and the Climate Crisis

   The conclusion of COP27 reflected persisting uncertainties around coordinated global action towards decarbonization. Major agreements—including the establishment of a loss and damage fund—were reached, but the burden of mounting debt among global South countries continued to limit climate ambition.

   The second event convened by The Polycrisis begins with COP27 and tackles the larger constraints in the global financial system, the role of private finance and multilateral development banks, the possibilities of debt restructuring, and new avenues to rethink climate finance. The discussion featured Mona Ali, Rishikesh Ram Bhandary, Anna Gelpern, Avinash Persaud, and Brad Setser, and was moderated by Adam Tooze.

   A recording of the event can be viewed here. This transcript has been lightly edited for length and clarity.

   A conversation on climate and the global financial architecture

   adam tooze: It seems to me that there are four key issues for us to discuss. The first is the question of sovereign debt restructuring. Looming over that is the role of private finance in addressing development issues, and climate finance issues in particular. Then there is the role of multinational financial institutions: the World Bank and the IMF. But the obvious place to start is with COP27, and where we’re at now.

   Avinash, from your point of view, where do things stand, particularly with the Bridgetown Initiative? You and Barbados Prime Minister Mia Mottley have developed this clearly formulated program for a route out of the impasse we find ourselves in.

   Avinash persaud: The Bridgetown Initiative is five very specific proposals, which can be achieved within the next twelve to eighteen months and would collectively have quite a meaningful impact on the global system. COP27 in Sharm-el Sheikh really was quite a historic event. We’re all justifiably cynical about international agreements and events—COP is a great place to launch ideas, but a lousy place to get anything agreed—but a lot was achieved. A historic decision was made to set up a loss and damage fund and its transitional committee. 

   What was unusual and almost unprecedented about the Loss and Damage Fund was the degree of absolute unity that the G-77 plus China showed. They were completely unshakable despite their variety. They isolated Europe and the United States—Europe crossed the floor first, making the US deeply uncomfortable. In these events, the typical US strategy is to isolate China, but they instead found themselves completely isolated, so they moved along too. 

   Also at COP, the UK launched a model for a natural disaster clause that countries can put in their sovereign debt agreements. That may not sound exciting, but it will have a huge impact if all debt instruments have natural disaster clauses that allow the suspension of interest on principal payments. If a disaster happens, we get 17 percent of our GDP over two years. That is huge—most multilateral developed banks will offer you 2 percent.

   Finally, the discussion on the multilateral development banks in the COP text is really interesting. There is a focus on global public goods, tripling the expansion of multilateral development bank lending, and widening concessional funding for climate vulnerable countries. And finally, Emmanuel  Macron took note of the proposal Mia Mottley put down, agreeing to launch a global summit in June of next year focusing on a global climate mitigation trust, to drive the private sector into this transition—especially in developing countries where the cost of capital is so prohibitively high that we’re not really seeing much of a private sector transition.

   aT: That is an extraordinarily upbeat view. Establishing the fund is the one thing, charging it with money is another. Who will be on the hook for this funding? 

   aP: Two things were critical for the agreement to take place. The first was that developing countries had to shift their ask a bit. The initial ask was open ended—it was about all past historical responsibilities and all future ones. We shifted that to the specific and defined task of reconstruction after a climatic disaster. Secondly, in terms of who is on the hook, we’ve moved the debate away from the simple idea that developed countries must pay, to the idea that developed countries have the main responsibility to contribute, but there will also be new forms of financing. We’re talking about things like a global cross border carbon tax, things which the developed countries know will involve other countries too. Ultimately, widening the remit on finance contributed to the agreement.

   aT: You can see how a compromise might emerge from that. Mona, you’ve thought a lot about the IMF and World Bank structures. How did the unfolding of COP27 strike you? Are we making as much progress as you would like to see, and where do you see further avenues?

   MA: I’m going to step back and talk about this year, because the geopolitics of 2022 framed the tensions at COP27. About 60 percent of the foreign exchange reserves of nations, and about 40 percent of capital raising—equity and debt—is dollar denominated. After the Russian invasion of Ukraine, we’ve seen dollar appreciation at a twenty-year high. It’s come down to May 2020 levels now, but we’ve seen a destabilization of balance sheets across the globe. I do think that straining of the global macro financial environment is driving some of this realignment right across the G-77, and against Europe and the United States. 

   We’ve seen ninety developing economies undergoing currency devaluation, which means that their dollar-denominated debt and all of the external debt of developing nations is about $11 trillion today, 40 percent being sovereign debt. Much of it is in dollars! We’re seeing a spiraling up of dollar liabilities, an increased cost of dollar debt servicing, and a sell-off of $70 billion earlier this year in emerging market bond funds. Altogether developing economies have lost about $370 billion in foreign exchange reserves this year. This drain in liquidity is occurring amidst a very troubling concatenation of commodity inflation, trade shocks, rising debt burdens, and climate vulnerability.

   We know that the US is the largest contributor, in historical terms, to the cumulative carbon emissions that drive climate change, and that impacts GDP losses in developing countries. We now have developing countries contributing much less to cumulative carbon emissions but facing the brunt of the climate crisis. The excellent work of Stephen Paduano at LSE found that we have close to a trillion—$992 billion—of Special Drawing Rights (SDRs) sitting on the sidelines, underutilized. Andrés Arauz at CEPR has argued that if rich countries donate just a quarter of their SDRs to developing countries, the entirety of IMF debt to poor countries could be extinguished. 

   Climate financing in developing economies, according to the recent Stern Songwe report, requires external funding of about a trillion dollars per year through 2030. 71 percent of climate financing right now is debt-financed. Given the debt and climate shock faced acutely by twenty-nine economies, I do think more debt financing is the wrong model going forward. Here’s a call for the necessity of regularly issued SDRs, and an extra issuance in the case of exogenous shocks. By the way, new financing made possible through regular and extra issuance was all part of the original intent of the 1944 Bretton Woods agreement. I think SDRs can be an important source of debt free liquidity to finance the clean energy transition. And of course, there are different issues with regard to who gets the SDRs, the unequal distribution based on IMF country quotas, and also technical hurdles to donating SDRs or re-channeling them from advanced economies to the global South. These technical reforms need to be sorted out quickly.

   aT: The best use of SDRs is a key element of the Bridgetown Initiative as well, right? 

   aP: Most definitely so. Mitigation is where we need to mobilize $4 to 5 trillion. I think the $1 trillion per year for developing countries is an optimistic number and assumes that there’ll be $1 trillion of domestic finance being mobilized. What’s really holding that back is the cost of capital. A recent study by the IEA found that the cost of capital for a solar photovoltaic project in Europe is 2 percent, the cost of capital for that project in Brazil is 15 percent, while for many African countries it’s nearly 20 percent. You can’t get any renewable energy project done where the cost of capital is 20 percent. So our plan is a global climate mitigation trust seeded with $500 billion of SDRs. 

   Picking up on what Mona’s saying, we’ve got about $500 billion of unused SDRs today, because about half of them are owned by countries that issue their own reserve currencies. If you issue your own reserve currency, you don’t need an SDR. We could begin the Trust with those, and that would allow us to put equity into developing country projects—equity, not debt—and that will leverage something like $2 to 3 trillion of private sector finance. And if that works, we can issue another $500 billion of SDRs—we need that kind of scale to get the transition we need in transport, agriculture, and energy.

   aT: Rishikesh, you’ve also been thinking about the role of climate finance, particularly the significance of the IMF. How did COP27 look from your point of view? 

   Rishikesh ram bhandary: One of the reasons why the Bridgetown Initiative has been so compelling is that COP as a collective has finally realized that unless you reform the global financial architecture, you’re really not going to move the needle on climate and development. You see this really clearly in COP27’s decision text where they’re calling for reforms of multilateral banks, they’re calling for a much greater utilization of tools outside of the formal process. So I think we truly are at an inflection point. Unless there is a wholesale reform, we’re really not going to decarbonize as fast as we need, precisely to guard against the losses and damages that we are already starting to witness. Of course, the creation of the Loss and Damage Fund is extremely important. If you read the entire decision, it also calls on the heads of international financial institutions to think about loss and damage. It’s not just one fund, it’s the larger architecture that is able to respond to the needs of climate vulnerable countries. 

   We also have to remember that the goal of this COP was to raise ambition. In Glasgow, countries were asked to come back with stronger pledges. What I think is particularly compelling is that Egypt, the host country of this COP, stated very clearly in their pledge that they are unable to make a stronger pledge because of the fiscal constraints. They are in so much debt that they are not actually able to enhance their ambition. The link between indebtedness and climate ambition has been made very clear by this COP presidency. 

   Multilateral development banks (MDBs) were also a very big part of the discussion. The G20 capital adequacy framework report was mentioned in quite a few places at COP, and I think very rightly so. There’s a lot of frustration around the role of MDBs, and there’s a great demand on them to really step up. If you look at the joint MDB report on climate finance that was released, the MDBs themselves are saying, “We said we would do $50 billion by 2025. We are at $51 billion this year. So in a sense, we can declare victory because we have already surpassed our targets three years ahead of time, right?” But we clearly know the scale of investment needed is orders of magnitude greater. I think we are now finally realizing that the target-setting approach within the context of COP isn’t working. If you don’t increase the balance sheets in a much more meaningful way, the scale of finance that needs to be mobilized is simply not going to happen. 

   aT: The conversation converges around the adequacy of multilateral banks and financial institutions in our current environment. One comes out of the corporate climate finance discussion, but that converges, for example in the case of Pakistan or the case of Egypt, with longer standing issues of their ability to manage both short term macroeconomic crises and long-run debt sustainability issues. Brad and Anna, how do you assess conversations around sovereign debt restructuring mechanisms and the role of the IMF in COP27? One could think of various instruments and perhaps almost cynical strategies of a country like Egypt where it basically says, “Look, you’ve got to do something about our debt, so that we can do something about climate.” 

   brad seTser: The overarching challenge right now facing low-income countries is that financing writ large has dried up. Over the past ten years, many countries were able to draw on Chinese project financing, which grew at an incredible pace between 2010 and 2020 but has basically come to an end, and borrow at a high cost from the global bond market. With the Fed rate hikes, that source of financing has also dried up. It does strike me that various mechanisms for expanding the lending of the MDBs – through an IMF sustainability and resilience trust as part of that – have to play a role, because the cost of private finance right now is largely prohibitive. Creativity is called for. China showed that you could generate enormous influence and build a lot of infrastructure by mobilizing roughly $500 billion over ten years. Given that the World Bank now has a balance sheet of about $400 billion, some kind of strategy for doubling its effective capacity over the next ten years strikes me as a realistic ambition that we should be aiming for. Setting aside whether that can be financed without increasing the capital of the bank or not, capital is basically cheap, and if it takes more capital, it should be provided. 

   I completely agree with the view that there’s an awful lot of unused SDRs sitting around, and we should be more creative with how we try to mobilize them. But I would also note that SDRs are technically a perpetual liability, and they do carry a non-trivial interest rate now that the US and Euro area are off zero rates. The easiest use of the SDR is not to provide equity capital or as a sort of donation, but rather as a perpetual loan to various institutions, which then can lend at the SDR interest rate. Thinking of it as cheap debt financing strikes me as the easier approach to achieving results quickly. Pure donation means that you would have to absorb the interest rate costs, because it would be treated as a grant. 

   The other observation may not be completely consistent with the views of everyone on this panel. Countries like Pakistan and Egypt haven’t yet concluded that they themselves want debt relief. They have insisted on structuring their IMF programs around payment. Egypt doesn’t want to default on its bonds. Pakistan has celebrated the fact that they are going to be able to pay their bonds thanks to the IMF’s lending, and both have opted to draw on bilateral sources of financing, notably in the Gulf, to augment the IMF lending as part of an approach where they maintain relatively high levels of debt.

   One of the classic problems of the international financial architecture is that countries are very reluctant to restructure their debts, even when those debts are high, and even when those debts constrain their ability to make future investments. That problem clearly has not gone away, and it has been a constraint on the international response.

   At: Anna, why are countries like Pakistan and Egypt unwilling to restructure? On the face of it, this would be a “Get Out of Jail Free” card. You can write down debt, so this would be a first move, but it seems that there are dysfunctionally few incentives to default and restructure. 

   anna gelpern: I think that it’s a bit of a misconception. We’ve treated sovereigns as sort of defective corporates who just can’t behave. If you look at NITSA or review the recent literature, countries actually pay shockingly much more than you would expect them to pay. They also borrow shockingly more than you would expect them to borrow. Looking at sovereignty as a sort of a commitment defect and nothing else is perhaps a bit off. This actually suggests to me that even though corporations are no more eager to restructure than sovereigns, it’s a complicated domestic and international political economy problem. It’s vital to remember that most creditors are also debtors. If you look at the 1980s crisis, it could have been a US and European banking meltdown but it ended up being a Third World debt crisis.

   One of these crises is not like the others. “Drowning in debt” is a metaphor, drowning in water is not a metaphor. It is critical to remember that debt is a social institution, social construct, an accounting concept. The genuine lack of resources—be it for climate adaptation, loss and damage, hunger, war—is not a metaphor. I do think that being creative on the finance side is where our focus should be, but we have to recognize that it’s not just a lot of debt.

   This panel, I think, is right to focus primarily on mobilizing resources for critical needs. There’s a lot of opportunistic merging of debt and climate, and in some circles, debt relief is free money. Nobody wants to talk about what happens the day after you drop the debt, and five years after you drop the debt, because more than half of countries with debt relief are back in debt distress. I think that it’s important to separate out real problems, financial engineering, and institutional challenges. 

   aP: Our framework arrives from the problem that there’s too little finance for the needs. Loss and damage, climate adaptation, and climate mitigation are three very different things requiring very different instruments. Loss and damage is actually the smallest of the three—probably $100 to $200 billion dollars a year, but it requires grants, and grants are very scarce. Still, every storm can’t leave nations with even more debt. We need additional sources of revenues, like tax revenues, to go towards loss and damage. Then there’s private sector optimism around climate adaptation finance. But the private sector won’t be able to fund it, there aren’t enough revenue streams for that. Governments and MDBs must play a role. 

   How do we avoid countries sinking into that debt? Well, in two ways. Firstly, make the money as concessional as possible when it’s about climate resilience, as concessional money is also scarce. You can also limit concessional money to adaptation and not mitigation, because mitigation includes the whole transition of energy, agricultural transport, which may have other revenue streams involving the private sector. But then there are issues in the financial architecture—the high cost of capital in climate vulnerable countries, high risks, and so on. 

   Most finance people have approached high costs of capital in developing countries through selling insurance or risk mitigation, but it’s the fundamental system that creates the risk. When you hold the international reserve currency during a global crisis, your currency goes in a high demand which allows you to have an activist fiscal and monetary policy. When you don’t have an international reserve currency and you’re in crisis, your currency is collapsing, and you’re forced to tighten monetary and fiscal policy. That’s why we need to employ the SDRs which are a proxy of this international reserve currency to help us reduce that cost of capital. 

   at: This three-way division is incredibly compelling. Grants cover loss and damage, but at the same moment, loss and damage is redefined not as historic climate injustice but rather narrowly as the latest inundation of Pakistan, the latest crisis which must be addressed by grants. Then, climate adaptation becomes the zone for scarce concessional public finance because there are no revenue streams. And then we move up the chain to mitigation, which is the economic development project. 

   There are macroeconomic risks in the dollar system globally. There, the Fed is essentially a de-risking agent and we need a variety of de-risking strategies to stabilize those private flows. It’s a tiered stack of grants, concessional finance, and derisking private flows, which is, after all, what we do with the US Treasury market or the European sovereign bond market any day of the week. 

   The question that many folks are asking is: why are we pursuing a gigantic, trillion dollar, publicly de-risked private debt machine to drive this energy transition? As Anna so nicely put it, every lender is also a borrower. There are both sides to the balance sheet. How do we stabilize this structure in a way which isn’t essentially exploitative of public balance sheets for the purposes of derisking private capital?

   aP: We need what I call a third balance sheet. We need a balance sheet that stands outside of governments, and that’s what the global climate mitigation trust is. It hangs there, off the developing and developed country balance sheets. It’s a third balance sheet, to fund projects not governments. My developing country friends tend not to like that because they don’t like the private sector, but if you’re funding projects and not government, you can be a third balance sheet. People have been talking about a third balance sheet for global public goods, and now we really need it.

   ag: I think the Bridgetown Initiative as a framework is really the way that we should think about this more broadly.

   It’s not about, “Oh my God, are we going to end up subsidizing the private sector?” Guess what? We are. They’re good at this. When a chief economist of a major financial institution says “I would love to invest, just so long as you take out the transfer risk, the exchange risk, and the political risk, and I can get a free return.” Are we okay with that? Is this a good use of subsidy capital? One possibility is letting the creditors who are also debtors take a bunch of losses. We’ll recapitalize some and let the others float away into the sunset. I think it’s actually a fairly complicated calculus at any given point. 

   Most importantly, there’s a mismatch between existing international institutions and domestic institutions in many of the countries that are providing capital. What is public and what is private? Does that even matter? We have international institutions that are configured around these mid-to-late twentieth-century concepts. That creates enormous incentives to arbitrage and get the subsidy while nobody’s looking. I think we have to be vigilant and imaginative here.

   bs: In a complicated world, it’s hard to know what is public and private—the obvious example is the China Development Bank. It is one of the biggest global financial institutions, and it thinks of itself as a private lender, but the rest of the world thinks of it as a public lender. It is clearly a policy bank, but sometimes it’s a state commercial bank.

   When you merge public and private, it’s helpful to decide if the public sector should put in equity or debt. The basic model of a policy bank is when the public sector puts in some equity and then you raise debt, which is a safe bond, so you’re tapping into the private demand for safety, and you’re increasing the supply of safe assets in the system by having a public equity buffer. It gets complicated if that equity buffer is not big enough, and there are questions about how much you should lever that equity buffer up. There’s another model, which a lot of private investors like, where the private investor—looking for super returns—puts up equity, and the public sector puts up debt. This can work, but that debt financing does carry some risk. It is still a way of mobilizing by providing cheap debt for more projects. I do think it is important to delineate what role the public sector is taking, whether that role is loss-absorbing capital, or cheap funding. 

   at: Just Energy Transition Partnership (JETP) is a phrase du jour, which came out of COP26 with the combined Europe and US initiative centered on South Africa and Eskom, and is now being pursued in Indonesia and Vietnam. This takes us to a different dimension, which is the construction of partnerships where the public-private line is blurred transnationally. Is the JETP framework aligned with Bridgetown? 

   ap: I think that one of our objectives is to make them aligned, but there’s an underlying conceit to the JETP: “If only the developing countries get their act together, the private sector will come. If only you had a proper investment plan, the private sector will come.” 

   We were always a bit skeptical, but the process of developing the plan was a good, collaborative one. Still, now they’re finding that the 1 percent of grants they’ve put up is not making any difference —the private sector is not queuing up. In order to build a coalition, they also need to come to the global climate mitigation trust and put in public sector funding. 

   at: JETP becomes a sort of preparatory exercise which then feeds into these large funding mechanisms.

   ap: The politics of it is that the rich countries are desperate to make JETP work, because they’ve hung this conceit around it. So we come in and rescue them, and then convince them to put money into the larger streams of funding and equity. 

   at: The other thing I like about the Bridgetown agenda is that it’s genuinely political. It’s easy to smirk at that, but it’s precisely what is needed. We do need to bail each other out, at least politically, and sometimes force people into a corner like G-77 and China did with the Europeans and the Americans.

   RRb: JETP carries a pretty big assumption, that the domestic politics have already fallen in line, and JETP will lead. More generally speaking, I think JETP seems to be an interesting band-aid, when the international financial architecture doesn’t work the way it needs to. What does this mean in terms of a broader based legitimacy and support from developing countries that really want fundamental reform? JETP is an extremely important step, but we really need a larger reform.

   At: We’ve discussed these cycles of debt, cancellation, and a repeat of the same. Where do we stand on debt restructuring?

   ma: Let’s get political with the global mitigation trust, but let’s also politicize the IMF and the World Bank. Let’s really look behind the veil and think about how we’re seeing a hoarding of capital. There’s $700 billion unused at the IMF, and the World Bank is hanging on to their AAA rating. How about letting that go a notch that they can lend more. How about removing the surcharges that countries have to pay, not when they’re late in payments, but when they need large, timely liquidity? 

   Avinash, I wanted to ask you: how can we harness the existing structures for climate objectives, and rethink what I consider extractive opaque practices at the IMF and the World Bank? 

   ap: Back in 2016, before her election in 2018, Mia Motley asked me to help look at our debt. I spent two years trying my best to do every possible thing to avoid a debt restructuring, because that would signify the admission of failure for a country. Barbados had never restructured its debt ever before. I presented my plan of a very delicate, acrobatic form of getting around debt restructuring to my friend Brian Wynter of the Bank of Jamaica. He looked at me and said, “My experience was we didn’t restructure enough. If you’re going to go, go big.” I presented the idea to Mia, thinking she would dismiss it because it’s so un-Barbadian, but she gave the go-ahead. We had one of the largest debt restructurings as a percentage of GDP, and that put us on the right footing. You can’t do it often. We used the Greek legislation and reversed collective action clauses in retroactively. You need that for disaster clauses to make sure that liquidity crises don’t become solvency crises, but you also need to make it easier for them to default.

   ag: I agree that new debt financing is not where we should be going. But we cannot stop cleaning the slate and hoping the next day will be brighter. Frankly, the biggest risk for the World Bank and the IMF is irrelevance. If they can’t set the terms of Zambia and Chad, what can they do? I actually don’t think the World Bank would lose anything in their credit ratings—if anything, ratings agencies think they’re being too conservative. 

   I think that the only big problem is that we do not account for domestic politics, and for politics more broadly. These projects can be inflicted on a polity that may not want them, and may want to do something entirely different. The problem in some ways is that you have big debt relief but that comes with a big cost to agency—and with perhaps underwhelming results. I think aid should focus on cultivating agency in the right places. Don’t just vociferate about the IMF. Talk to Argentina! They know how to play the IMF. Sri Lanka needs to figure out what it wants to do, and how it wants to use the IMF and the World Bank. Like Avinash says, these guys are desperate to be useful. Just give them a deliverable, and they’ll hug you. We need to be more muscular about agency.

   ap: When we arrived after two years of coming up with our plan—a shared plan, with both capital and labor involved—they looked at us and they said, “We think you’re doing too much.” But our plan was completely bought in by the public, because we recognized what the public could deal with. Because it was a shared plan, Barbados will probably be able to do more than if it were a top-down plan imposed on labor. Most countries go to the IMF when they have no time, in the midst of an emergency. I learned that actually having the time to develop your plan makes a huge difference. 

4. Realignments

   December 3, 2022 6:48 am Comments Off on Realignments

   Luiz Inácio Lula da Silva may have won last month’s presidential elections, but the strength of Bolsonarismo has been confirmed. In both houses of the National Congress, Bolsonarismo and its allies made gains, overcoming the traditional right wing. In the Federal Senate, Bolsonaro’s Liberal Party (PL) won fourteen of the twenty-seven seats up for election, giving it the largest number over all. In the Lower House, despite the fact that the left has regained some ground, the PL nevertheless elected ninety-nine deputies—a larger share than any other party. The rural, evangelical, and security caucuses doubled in size. The alignment of the parliamentary forces may be more pragmatic than ideological, but as Souza and Caram put it, the Congress elected in 2022 is still “the most conservative since 1964.”1Souza, N.;Caram, B. (2022): “Congresso eleito é o mais conservador desde 1964, afirma Diap”. (<)em(>)O Estado de S. Paulo(<)/em(>). (<)a href='https://bityli.com/dQFqucrZO%20Accessed%207%20November%202022'(>)https://bityli.com/dQFqucrZO Accessed 7 November 2022(<)/a(>).

   Bolsonaro also had a strong showing at the state level. Thirteen of the twenty-seven elected governors gave their support to Bolsonaro; only ten supported Lula. In the state of Sao Paulo, former Bolsonaro minister Tarcisio de Freitas won over 2.5 million more votes than the Workers’ Party (PT) candidate Fernando Haddad. With de Freitas’s victory, Bolsonarismo will politically dominate in Brazil’s richest state. Elsewhere, those who broke with Bolsonaro in 2022—Janaina Paschoal (lawyer responsible for the impeachment request against former President Dilma Rousseff), former Education Minister Abraham Weintraub, and conservative activist Joice Hasselmann—were severely punished.

   The vote for Bolsonaro himself is significant: about 51 million votes in the first round and 58.2 million in the second round. In every single state, support for Bolsonaro grew more than for Lula. Nonetheless, Lula’s victory across the Northeast (winning between 60 and 70 percent of the vote in each of those states) remained decisive, along with the fact that he managed to reduce the damage in Bolsonaro’s stronghold of the South and Southeast.

   What explains Bolsonaro’s electoral popularity? His terrible record in government is well known. During his single term as president, poverty and inequality spiked, public services like education and health suffered, and environmental destruction skyrocketed. The projected annual economic growth for the Brazilian economy between 2020 and 2022 is just 1.1 percent; the global average is 1.8 percent.2Costa, S.;Weiss, P. M. (2022): “Vier Strategien, auf die Bolsonaro setzt”. (<)em(>)Frankfurter Allgemeine Zeitung(<)/em(>). (<)a href='https://bityli.com/cdSkolXuP%20Accessed%207%20November%202022'(>)https://bityli.com/cdSkolXuP Accessed 7 November 2022(<)/a(>).The government’s notorious mismanagement of the pandemic produced the tragedy of 700,000 deaths. Corruption scandals—in areas like vaccine purchases and education—were widely publicized.

   Hypotheses about the supposed conservatism or irrationality of Brazilian society are superficial and inadequate. Costa and Weiss, by contrast, identify four main sources of Bolsonaro’s power: the permanent mobilization of his radical base; the expropriation of nature, public spaces, and workers’ bodies; the discursive construction of popular identity; and the formation of a system of fear, in part by arming sections of the population. Such an analysis is convincing but focusing on how Brazilian financialization has impacted the voting patterns of both the middle and lower classes offers a richer picture.

   The status quo

   For all his social conservatism, Bolsonaro’s term in government has been defined by the standard neoliberal orthodoxies. The turn to deregulation, privatization, labor flexibilization, and fiscal austerity began during the first post-dicatorship government of Fernando Collor de Mello, which was elected in 1989. After Collor’s impeachment in 1992, Fernando Henrique Cardoso carried the flame. His tenure as president (1994-2002) was characterized by intense privatization, the contraction of public investment, and fiscal austerity. Manufacturing was all but crushed and the labor share of national income steadily declined. The result has been the reprimarization of Brazilian economy, which has diminished technological progress.

   When Lula first ran for president in 1989, he was the preferred candidate of middle-class voters. They continued to support him in his unsuccessful presidential bids in 1994 and 1998, as Fernando Henrique Cardoso oversaw vast expropriations of public assets and social guarantees. Ultimately, this was converted into votes for Lula in 2002, when he was elected in no small part thanks to mass middle-class support.3Lavinas, L.;Gonçalves, G. L. (2019): “Brazil 2018: The Middle Classes Shift Right”. Global Dialogue, 9(1), 38-40. (<)a href='https://bityli.com/apIKKFtjD'(>)https://bityli.com/apIKKFtjD(<)/a(>)

   When the PT was elected in 2002, it did little to intervene in the neoliberal status quo that had been in place since 1990. Thanks to the commodities boom of that decade, the government was able to introduce some progressive measures such as the a relative valuation of minimum wage, but at  the same time, the government relied on expanding individual credit as a means of access to social services. With the expansion of consumer credit, both the middle and lower classes became dependent on the financial system. In the context of deregulated markets, which Lula had done little to bring under control, debt soared. The working class, which saw expanded access to consumption, remained loyal to Lula, but the middle class had seen its fortunes fall and frustration with the PT set in.  Devoid of collective identity, they embraced the market as the ultimate solution to their woes, seeking to liberalize financial flows (to gain more access to credit and so expand their assets) and to increase foreign direct investment (for skilled jobs and easier access to luxury goods).4Saad-Filho, A. (2014): “Brazil: Development strategies and social change from import-substitution to the “Events of June.” (<)em(>)Studies in Political Economy(<)/em(>), 94, 3–29. (<)a href='https://doi.org/10.1080/19187033.2014.11674952'(>)https://doi.org/10.1080/19187033.2014.11674952(<)/a(>) With such demands, the middle class became natural supporters of the openly pro-market policies.

   Amid this class realignment came the global crisis of 2008. The impact of the collapse of commodity prices in Brazil was devastating. By the time that Dilma Rousseff came to power in 2011, economic growth had stalled, with GDP plummeting from 7.6 percent in 2010 to 0.1 percent in 2014. Social spending decreased still further. In 2013, for example, the spending on tax and social-security waivers was estimated at BRL 218 billion, while public health and education, together, received BRL 163 billion.5Lavinas, L. (2015). “Em nome da austeridade”. (<)em(>)O Estado de São Paulo(<)/em(>). (<)a href='https://bityli.com/lBVKXC'(>)https://bityli.com/lBVKXC(<)/a(>). Accessed 9 May 2022. This set the stage for a middle-class backlash that ultimately exploded in June 2013. Sparked by demands for improved public transport, the protests quickly became a battleground for different ideological strands in Brazilian politics. Thanks to strategic interventions by the mainstream media, which had an interest in turning the tide against the PT, and police repression against leftist movement, the protests gradually turned to the right, becoming a posteriori a popular base against Rousseff.6Gonçalves, G. L. (2022): “Neoliberal Malaise, 2013 ‘June Journeys’ and the Criminalization of the Protests in Brazil: a Re-reading Through Louis Althusser. (<)em(>)Int J Polit Cult Soc(<)/em(>). Online First. (<)a href='https://doi.org/10.1007/s10767-022-09425-y'(>)https://doi.org/10.1007/s10767-022-09425-y(<)/a(>)

   This became the backdrop to Michel Temer’s parliamentary coup  in 2016. Temer capitalized on the protests and used them to favor the interests of financial investors; this included attacking labor rights and imposing a social spending cap for twenty years. With Bolsonaro’s election in 2018, thanks to massive support from the middle classes, privatizations increased further. He has dished out more austerity, including a major pension reform raising the retirement age for women and the number of qualifying contribution years, as well as an aggressive reduction in public spending in education, science, health, and environmental protection. The Brazilian economy, despite fourteen years of PT rule, has been given over to the markets.

   Bolsonarismo shaken

   The Covid-19 crisis dealt a blow to Bolsonarismo. With 700,000 fatalities, Brazil has the worst record in the region. The nation’s overstretched public health system was exposed as hospital beds ran out, medicines were in short supply, and vaccines were delayed. Despite his neoliberal orthodoxies, under the pressure of the pandemic, Bolsonaro was forced to massively increase public spending, creating an Emergency Aid Program that covered 67 million beneficiaries. Cash transfers and sick-leave schemes kept low-income households afloat. These emergency measures quickly came into conflict with his advocacy for fiscal discipline, and so the administration reintroduced austerity in 2021 by creating a subceiling within the social spending cap. Minister of Economy Paulo Guedes advocated to further squeeze public servants’ salaries. In the second half of 2021, GDP shrank. The government saw resignations from ministers Luiz Henrique Mandetta (former Health Minister) and Sérgio Moro (former Justice Minister). The Supreme Court, too, made public statements against Bolsonarist denialism, as did some branches of the business sector.

   Bolsonaro’s efforts to recover couldn’t reverse the damage. He attempted to make new alliances with the traditional clientelist right, intensively mobilized his base, and called for mass protests on Independence Day. Most desperately, his government implemented a package of social benefits and subsidies worth BRL 41.25 billion, but to little avail. In the wealthier and higher-educated Southeast, the PT gained 7.7 million votes on its 2018 result. In São Paulo State, Lula gained significant ground and though Bolsonaro was still victorious there, Lula hemorrhaged 1.1 million votes.7Sampaio, L. (2022): “Puxado por SP, Sudeste foi decisivo para vitória de Lula sobre Bolsonaro; veja desempenho por estado e região”. InfoMoney. (<)a href='https://bityli.com/WvbZgSGn'(>)https://bityli.com/WvbZgSGn(<)/a(>) Accessed 7 November 2022. In the southereastern state of Minas Gerais, Bolsonaro was defeated. The middle-class votes that Bolsonaro depended on in 2018 were more divided in 2022.

   The Lula presidency

   If the pandemic was responsible for weakening Bolsonaro’s support among the middle classes, his relatively strong showing at the polls in October shows that it did not wreck irreparable damage. The middle class in Brazil remains wedded to the neoliberal model that has been the bedrock of Bolsonaro’s term in power. As for the working class, it remains to be seen how increased household debt will influence their political preferences. Election results indicate that the Northeast vote for the PT was slightly down compared to 2018.8Folha de S. Paulo (2022): “Diferença da votação entre Nordeste e outras regiões volta a cair após recorde em 2018”. (<)a href='https://bityli.com/nSejbFxD'(>)https://bityli.com/nSejbFxD(<)/a(>)  Accessed 7 November 2022. If working-class debt continues to expand as a means to maintain current levels of consumption, including access to social services, Lula will face major challenges ahead.

5. Development Bank Self-Sabotage

   December 2, 2022 5:26 pm Comments Off on Development Bank Self-Sabotage

   This is the fourth edition of The Polycrisis newsletter, written by Kate Mackenzie and Tim Sahay. Subscribe here to get it in your inbox.

   When the World Bank and IMF make radical noises, the US is typically the voice of restraint. So it came as a surprise to casual observers when, at October’s Annual Meetings, Treasury Secretary Janet Yellen urged the Bank and other multilateral institutions to overhaul their lending practices and get more money out the door more quickly.

   Yellen set the ambitious timeline of December for delivering a roadmap for increased lending. Some speculated that she was assigning a task at which David Malpass—the World Bank head who infamously fumbled questions on whether he believes in human-caused climate change—is likely to fail. 

   This new posture has given life to reforms on which multilateral financial institutions have long dragged their feet. (Just this past summer, the World Bank even attempted to suppress a key report commissioned by the G20 urging greater lending.) And charismatic leadership and nimble advocacy from the Mottley administration in Barbados has made technical questions about lowering the cost of capital politically urgent. 

   Multilateral Development Banks are subject to a snarl of constraints. Many of these are political checks designed by shareholder nations—the US Congress, for example, can take some blame for the state of the World Bank. But a near-dogmatic inertia and conservatism also severely constrict their scope. The lenders take on the constraints applied to commercial banks, which have little relevance to a publicly-backed intermediary driven by development goals and other policy mandates. They willingly ignore callable capital, the colossal solvency guarantee provided by shareholder governments. “[T]hey cannot simply apply commercial bank capital adequacy standards such as the Basel III guidelines,” protests an ODI report—but that is what happens.  

   Banks and their shareholders lash themselves to the goal of maintaining AAA status from credit ratings agencies. The G20-commissioned report that the World Bank tried to block found that each of the Big Three ratings agencies has a different methodology for rating MDBs. With one agency, a hypothetical bank could triple its lending and retain its AAA credit rating, but only increase by 34% with a second agency while keeping in that bracket, and only by 11% with a third. 

   The institutions that are supposed to be vehicles for development and climate protection in the poorest countries are being evaluated as if they were firms seeking an ESG rating: opaquely and inconsistently. Some assessments suggest that MDBs could collectively free up as much as a trillion dollars in lending—without taking a hit to their credit ratings. 

   Scrutiny of the MDBs’ creditworthiness might also turn to their loan books. What does the particular mission of MDBs mean for their own credit risk? Incredibly, this is something that MDBs can explore in some detail as they have their own database produced by a consortium of policy lenders and development finance institutions. The Global Emerging Markets Risk Database, known as Gems, pools MDB credit default data in a centralized, granular database. Created in 2009 by the European Investment Bank (EIB) and the International Finance Corporation (IFC), it potentially gives credit ratings agencies and shareholders transaction-level information about the performance of loans. 

   In its report earlier this year, the G20 recommended strengthening Gems by turning it into a stand-alone entity with legal status and secured budget. But even in its existing form, it has the capacity to reduce cost of capital, which is currently heavily constraining energy and infrastructure investments. It might even help to achieve the goal of “mobilizing private finance,” or at least identify which projects are more suitable to commercial finance. 

   Instead, the MDBs make little use of the potential to look into their lending, eschewing the benefits of their special characteristics along with taking on the constraints of commercial banks, which serve a very different function and operate quite differently. 

   Of course, MDBs are wary of reputational damage from pushing out money too quickly. But where climate is concerned, speed is justice. With the recent passage of multiple industrial policy bills to reshore manufacturing, the US has recognized that ambitious investment requires taking on risk; so far, that attitude is missing from multilateral institutions.

   Even as the World Bank comes up with its work plan to free up more lending, we shouldn’t be too enamored of technical solutions to political problems. It will ultimately be necessary to go further, by overcoming the domestic politics that motivate intransigent shareholders.

6. The Wall Street Consensus at COP27

   November 19, 2022 9:36 am Comments Off on The Wall Street Consensus at COP27

   At COP26, US Special Envoy for Climate John Kerry sanguinely declared the need to “derisk the investment, and create the capacity to have bankable deals. That’s doable for water, it’s doable for electricity, it’s doable for transportation.” Derisking is financial speak for the public sector—be it through official development aid, multilateral resources or national fiscal resources—accepting to take some risks from private financiers in order to persuade them to invest, public efforts variously described as “mobilizing private finance”or “blended finance.”  In response, the UN Special Envoy for Climate and head of the Glasgow Financial Alliance for Net Zero (GFANZ) Mark Carney announced GFANZ’s intentions to work in partnership with governments and multilateral development institutions to mobilize its $130 trillion for green purposes.

   At this year’s COP27 in Egypt, Carney was less triumphant. On the contrary, he defensively explained why the GFANZ financiers had dropped the partnership with UN Race to Zero, intended to police their green pledges and reduce pervasive greenwashing. No longer flanked by top financiers like BlackRock’s Larry Fink (who reportedly stayed away to avoid further incensing the US Republican party), and amid several reports denouncing the systematic failure of the GFANZ-Global North mobilization drive, Carney cut a lonely figure. 

   Indeed, Global North countries have consistently underdelivered on long-standing commitments to mobilize $100 billion climate finance annually, the bare minimum estimate of green financing needs for Global South countries. For 2020, the OECD estimated a $16 billion gap in public and private finance mobilized, far more optimistic than Oxfam’s estimates at one-third of that (around $24 billion).  

   Based on these numbers, and the event’s proceedings, it is tempting to conclude that the Wall Street Consensus—the global political agreement and ideological rationalization that decarbonization must be finance-led, with the state derisking private investments into green assets—has lost momentum from its heyday at COP26. 
   

   There is, however, a more compelling account of recent developments: the “roll-back” stage of the Wall Street Consensus, when carbon financiers organized strategically to roll-back the state’s newfound willingness to regulate dirty credit, has given way into a to “roll-out” stage, in which the state and supranational organizations scale up monetary, fiscal, and regulatory derisking architectures for green asset classes. 

   Roll-back WSC

   The WSC provides the ideological software for claims that global finance should be the anchoring point for green transitions. Take the CNBC COP26 panel on mobilising private finance, with Larry Fink (CEO BlackRock), Jose Vinals (CEO Standard Chartered), Alison Rose (CEO NatWest), Andy Briggs (CEO Phoenix), Greg Case (CEO AON) and David Schwimmer (CEO London Stock Exchange). Panelists agreed that decarbonization was fundamentally a challenge of crowding private credit into green activities, by blending public and private finance. Asked who should decide where finance flows, the chorus led by Fink responded in unison: financiers, especially in the US, are taking the lead, but multilateral spaces like COP26 were critical for regulators to catch up and establish derisking partnerships. 

   These cheery notions of public sector catch-up and derisking partnerships served to mask concerns about a more muscular regulatory approach, one that could discipline carbon financiers by penalizing high-carbon lending. In Europe, 2020 and 2021 saw significant regulatory investment in the design of public taxonomies to categorized green (and, by exclusion, dirty) activities. 

   Perhaps more worrying for the Larry Finks of this world, regulators made significant concessions to climate activists through developing criteria for double materiality, carbon bias in monetary policy, and dirty penalties. BlackRock, most notably but hardly the only carbon financier, had lobbied aggressively on each of these decarbonization battlefronts. As we know from Finance Watch, it strongly opposed double materiality in Europe’s Sustainable Finance taxonomy, seeking to persuade regulators that dirty credit had no material relevance for climate regulation. BlackRock lost that battle, and risked losing a more significant one. Central banks suddenly threatened to drop a crucial obstacle to disciplining carbon financiers—the holy grail of market neutrality. 

   The principle of market neutrality reassures central banks that their unconventional purchases of corporate bonds have no distributive consequences as long as purchases reflect existing market shares: if, say, the corporate bond market traded Shell and Total bonds equally, the ECB would be market neutral if it purchased half Shell, half Total. But market neutrality masks a carbon bias, since the ECB subsidizes fossil companies by purchasing their bonds. Without being bound by the market neutrality principle, central banks could decarbonize monetary policy and curtail private finance’s contribution to the climate crisis, thereby minimizing financial stability spillovers, by explicitly targeting dirty credit assets. The mandatory decarbonization of private finance was politically and institutionally possible.

   Financiers, then, convened at COP26 with the goal of rolling back mandatory decarbonization, altering the grammar of climate finance and extinguishing concepts like carbon bias or dirty penalties from regulators’ vocabularies. Their appeal to partnerships had an added strategic benefit, seeking to defang calls from countries in the Global South for mandatory involvement of private investors in debt restructurings. 

   At COP26, there were signs that their strategy was working. The Network for Greening the Financial System—the 100-plus central banks designing climate rules together—made disclosure of climate risks and stress test scenarios the centerpieces of its press release. Neither the host Bank of England nor the ECB fought to put their own efforts towards mandatory decarbonization on the table, instead agreeing on a return to the 2019 voluntary decarbonization approach. In part, this was a compromise with the US Federal Reserve, whose lack of appetite for decarbonization changed little from the Trump to Biden Administrations. It later turned out that the Bank of England’s governor, Andrew Bailey, had plans to join the roll-back coalition. Inflationary pressures in early 2022 provided the perfect opportunity. The Bank announced it would sell all corporate bonds to shrink its balance sheet, abandoning efforts to discipline carbon financiers. 
   

   The Russian invasion of Ukraine unleashed a new appetite for fossil fuels and further weakened public resolve to curtail dirty financing. Under pressure to deliver on inflation targets, central banks could have chosen to deploy “Ecological Tightening” (ET) instead of Quantitative Tightening—selectively increasing the cost of borrowing for dirty firms while coordinating with governments to fix dysfunctional European energy markets that pegged prices to the most expensive fossil wholesale supplier. But the limits of the inflation targeting regime that institutionalizes monetary dominance became painfully clear, leading instead to zugzwang central banking—where each possible course of action that does not seek to dismantle the dysfunctional macrofinancial architecture leads to a worse outcome, including decarbonization. Even the ECB, the last standing champion of mandatory greening, missed the ET opportunity. Its concrete decarbonization plans, announced in late 2022, fell significantly short of a Paris benchmark due to the benign treatment of carbon finance. Climate stress tests and “supervisory expectations” for transition plans notwithstanding: roll-back WSC was always about reversing mandatory decarbonization. 

   Roll-out WSC

   Global inflationary pressures have since reinforced the political appeal of derisking. Derisking provides a compelling status-quo political message: in the new age of geopolitical tensions, energy competition, higher interest rates, and massive global debt pressures, decarbonization is possible without massive public investment. All it takes is tinkering with risk/return profiles to make projects investable, that is, transferring some risks from private to public balance sheets. In a green hydrogen project, for example, the state can absorb risks from private investors in various ways: fiscal derisking (including equity stake for the state; protection against currency, demand, or political risk; price guarantee for surplus renewable energy), monetary derisking (of green bonds issued by project, preferential loans or exchange rates) and regulatory derisking (preferential regulatory treatment for green hydrogen producers, green hydrogen input requirements for hard-to-abate sectors, removal of subsidies for state-owned incumbents). Civil society organizations concerned with worsening human right outcomes, since investable projects (or green assets) in water, electricity and transportation, housing, education, healthcare or energy have to generate cash flows that pay investors, can easily be dismissed on macroeconomic grounds: with shrinking fiscal space, critiques of derisking are just “perfect is the enemy of good” wishful thinking. 

   The overarching policy question at COP27 has thus become “how do we scale up derisking to make decarbonization investable for BlackRock?” Three distinct examples are worth exploring: the Network for Greening the Financial System (NGFS), the Liquidity and Stability Facility (LSF) for Africa, and green hydrogen and Just Transition Partnerships.

   The NGFS, now under the presidency of Singapore, outlined four key initiatives at COP27: climate scenarios, better climate data, capacity building for climate analysis in central banks and blended finance. The first three are firmly anchored in the logic of voluntary decarbonization, the fourth explicitly about derisking. 

   The Blended Finance Initiative aims to “improve risk-reward ratios for marginally bankable transition projects to attract private capital,” through “catalytic and concessional funding from the public sector and philanthropic sources to crowd in multiples of private capital,” by “absorbing a portion of project risks.” Central banks can play a role as “convenors, facilitators and influencers.” 

   Influencer central banks, we learn from the Blended Finance Initiative, will directly engage in derisking exercises to create “innovative financing instruments” and “attract a broader range of private investors” into new asset classes, working in conjunction with MDBs. Indeed, the Singapore Pavilion, where the NGFS was institutionally located, dedicated Day Two of Finance at COP27 entirely to examining obstacles to scaling up derisking. 

   Second, the COP27 announcements put the Liquidity and Sustainability Facility (LSF) at top of a list of initiatives to reduce the cost of green borrowing for African countries, alongside multilateral guarantees and other market-building measures. Developed by the United Nations’ Economic Commission for Africa in partnership with the investment manager PIMCO, the LSF is a vehicle for derisking African sovereign debt, through a repo facility that provides concessional repo financing to private investors in African sovereign Eurobonds. The repo instrument, it is worth recalling, has been at the centre of recent financial scandals, be it the run on pension funds in the UK, or the implosion of crypto markets triggered by the collapse of FTX, because of its leverage-building capacity.

   The LSF constructs a fiction of liquidity for sovereigns, ignoring the well-know questions of cyclicality hardwired into the repo instrument, perverse incentives for African countries to prioritize foreign currency debt like Eurobonds, and institutional conflicts between the commercial managers of the LSF and national central banks. At COP27, the LSF announced its USD 100 million inaugural transaction, financed by Afreximbank, with a basket including Egypt, Kenya and Angola Eurobonds. The original LSF ambitions to raise $50–100 billion via senior lending from OECD central banks or the SDR allocation were not met. And so an Africa-based institution is diverting trade finance for African companies into subsidies benefitting foreign investors into African Eurobonds. The cui bono from derisking couldnt get a starker answer.

   Finally, the announcements emphasized derisking-based energy transitions through “transition partnerships” and green hydrogen projects. The International Partner Group (US, EU, UK, France, Germany, Norway) announced specific plans for two Just Energy Transition Partnerships, for South Africa and Indonesia, with future plans for Vietnam, Senegal and India. The $20 billion derisking Indonesia Partnership promises $10 billion mobilized by IPG members, and $10 billion from GFANZ, to support a JETP Investment and Policy Plan for the energy sector. While Indonesia may be strategically using its critical resources—nickel, tin, aluminium—to renationalize value chains and promote technological upgrading of national industrial champions, it is also playing a derisking game with international investors. That this game might turn out expensive for the Indonesian state and its citizen—who is loading risks from private investors—is never mentioned in the upbeat press releases. Yet, as the Institution of Economic Justice points out, the derisking at the core of the $8.5 billion South African Partnership effectively commits South African fiscal resources to make private renewable projects investable at the expense of fuel subsidies for poor households. 

   The South African partnership is a stark reminder of the pressure for Global South countries to join the global rush for green hydrogen.  Europe has put green hydrogen at the core of its RePowerEU plan to delink from Russian fossil fuels. By 2050, it expects almost a quarter of global energy demand to be met by green hydrogen. RePowerEU aims for half of Europe’s demand for green hydrogen, estimated at 20 million tons annually by 2030, to be produced locally, the other half imported. At COP27, the EU signed several green hydrogen import partnerships, including with Namibia, Egypt, and South Africa. Derisking is explicitly at core of these arrangements, with the EU committing to mobilize private capital for megaprojects in the Global South. Such partnerships reduce the scope for African and other countries to strategically control green hydrogen chains, and threaten to  trap them into the same patterns of unequal ecological exchange that have characterized carbon capitalism, this time as exporters of green commodities, generators of financial yield, and consumers—but not producers of clean tech. 

   Even the better reported battles over numbers at COP27—for instance on loss and damage—hide the derisking devil in the details and language of “mobilization.” How will these funds be spent? How much of the public grants or loans from the Global North will be deployed for derisking private investments in the Global South? Ultimately, derisking is a tool against the very things that would make the green transition just: adequately funded public services, affordable access to renewable energy, decent housing, and thriving green manufacturing sectors in middle and low income countries. It may well be that derisking partnerships can be reimagined to give the state space for disciplining rather than simply subsidizing private finance, but so far, there is little effort in that direction. 

7. Collective Action and Climate Finance

   November 18, 2022 5:17 pm Comments Off on Collective Action and Climate Finance

   This is the third edition of The Polycrisis newsletter, written by Kate Mackenzie and Tim Sahay. Subscribe here to get it in your inbox.

   At UN climate summits, the items that appear on the agenda are usually those that advocates have fought hard to include. This year’s COP27 meeting in Egypt is no exception. Years of effort have culminated in getting loss and damage—finance for unavoidable climate harms—on the agenda and in the central discussions.

   One agenda fight that has animated meetings this year came in the form of a push by the EU and France to add an item from the Paris Agreement that was not on the agenda, Article 2.1c: “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

   A letter from the French and EU delegations to the UNFCCC argues that including 2.1c is “an essential means to achieve the mitigation and adaptation goals in article” and could defuse issues, including the relationship between 2.1c itself and Article 9 of the Paris Agreement, which sets out a framework for mobilizing the still-undelivered $100 billion per year promised from developed to developing countries.

   To the Europeans, 2.1c represents a potential way to address finance writ large. Harmonized, climate-aware financial rules around the world could, the logic goes, shift the colossus of global capital markets to make a cleaner, more resilient world.

   The indeterminate language of “aligning financial flows” has been tested as an avenue for driving change in the Global North, and been found wanting. Financial climate standards and regulations have been deployed, or at least attempted, in numerous countries. Progress tends to be incremental at best, and where industry or state interests are directly challenged, financial regulation tends to be weakened or unwound (cf, for example, the EU allowing natural gas investments to be included in a sustainable finance taxonomy).

   There are genuine fights over finance taking place, and the “flows” language of 2.1c—together with much of the literature on global climate investment needs—elides the most important element. In the Global North, the blocking role of finance is more a function of limited political willingness to intervene in energy systems, export industries, and industrial policy. This is what holds back the energy transition—not a lack of financial rules.

   In the Global South, finance is indeed an issue—of access, and of terms and cost. What most developing countries need to decarbonize or develop cleanly is, simply, access to good finance and fiscal space in the face of a worsening climate, which tends to evade the investing decisions of private interests. 

   No prisoners?

   The language of “alignment” exemplifies an approach to climate politics that has probably already peaked, based on the premise that no country really wants to decarbonize, and that diplomacy can change that. The global climate policy architecture is structured around a belief that the biggest impediment to climate action is the collective action problem. 

   But it’s domestic economic and political interests that determine when and how countries cut emissions—not free riders and prisoners’ dilemmas. During periods of US intransigence, Akins and Milenderberg argue, the EU, Germany, Mexico, and New Zealand all pursued climate policy. Similarly, Colgan, Green, and Hale posit that, at both domestic and international level, owners of climate-vulnerable assets and owners of high-emitting assets are in an existential contest, from US utilities fighting homeowners’ selling rooftop solar back into the grid, to Saudi Arabia’s undermining of UN science panel work on the 1.5C warming limit. Material commercial and state interests and political veto players play the determinative role. 

   The outlook for multilateralism is bleak. But interest blocs shift, and they are doing so as the energy complex evolves. Renewables, storage, and electrification are becoming cheaper, meaning cutting emissions is as well—and incumbent interests are less immune to change. “Given the economic implications of the ongoing energy transformation, the framing of climate policy as economically detrimental to those pursuing it is a poor description of strategic incentives.” Mercure et al write.

   The analysis suggests a different way to view 2.1c and the entire range of discussions at COP27, and perhaps an explanation of what it is that international fora do. (Disparaging climate summits is easy after almost three decades of them have failed to arrest greenhouse gas emissions.)

   Changes are made possible by another, often underestimated feature of the COP forum: a two-week long opportunity to flex soft power, and for charismatic and persuasive leaders to build coalitions beyond the scope of what is formally required in the Paris Agreement.

   Deals

   An announcement last year at COP26 of a $8.5bn “deal” for South Africa to close and replace its domestic coal power supply was followed this year by a $20 billion “deal” for Indonesia to something similar. (Indonesia had insisted on a lower cost of capital than the market was offering.) The fact that this second arrangement was also developed outside of UNFCCC processes and announced at the G20 meeting could be considered a win for climate diplomacy reaching outside of its UNFCCC wheelhouse. The connection became stronger still in the G20 leaders’ communique referencing the narrowing window for limiting warming to 1.5C.

   One of the smaller but more significant events at COP27 was the launch of a model term sheet for incorporating resilience clauses into sovereign bonds. This feature has already been included in bonds issued by Grenada and Barbados, but a working group including IMF, MDB, and private sector officials produced a template published by the international markets body, ICMA. This would be a gradual way to make sovereign debt more accommodating to climate-vulnerable countries, by allowing those struck by disasters to suspend debt repayments. Avinash Persaud, Barbados climate envoy, said the clause would immediately release 18% of GDP if a crisis hit his country. Like collective action clauses that were introduced into sovereign bonds to protect from “holdout” behavior, the proposed climate resilience clause will take some time to become widespread; they can’t be retrospectively added to issued bonds. An HSBC official, Alexi Chan, confirmed during a COP panel: the effectiveness of the model clause in helping vulnerable countries will depend on whether his bank and its peers actually implement it.

   Another test case for both public and private finance is Sri Lanka’s new “climate prosperity plan,” a combination of national industrial strategy and prospectus created under the V20 alliance of climate vulnerable countries. The draft plan envisages flagship projects such as an offshore wind “megaproject,” and an overhaul of transportation to include electric vehicles, light rail and bike paths, and a $100 million subsea power cable to India’s electricity grid as a source of export earnings. Sri Lanka’s government developed the proposal while racing to secure debt restructuring and an IMF package after it defaulted earlier this year. It has been hit hard by a combination of rising commodity import prices, an exchange rate hurt by Fed rate rises, and plummeting tourism revenues thanks to COVID. One of the biggest single items in its plan speaks volumes of the real problems in climate finance: $2 billion for forex hedging.

   Systemic financial reforms, which would help all countries, can be spurred on by COP, even if it’s only through amplification. The repeated references throughout COP27 to bold proposals like the Bridgetown agenda—which includes IMF and MDB reforms and a new, $500bn facility for the Global South—bode well, as do the G20 communique’s exhortations on climate change in the midst of a war. The UNFCCC meetings do appear able to provide signaling and impetus for outside processes. Within the negotiations, however, the creation of a Loss and Damage fund was the focus of fraught negotiations in the final days and hours of COP27. Material financial transfers to the poorest and most climate vulnerable countries, whose voices get little support elsewhere, is something it should be able to deliver. 

8. The Sacrifice Zone

   November 12, 2022 6:44 am Comments Off on The Sacrifice Zone

   In September 2022, 62 percent of Chilean voters rejected the country’s proposed new constitution.1Electoral resources for the 2022 plebiscite are available at the Servicio Electoral de Chile (SERVEL), (<)a href='http://www.servel.cl' target='_blank' rel='noreferrer noopener'(>)www.servel.cl(<)/a(>)  The defeat took many by surprise—the demands to rewrite the existing charter had been loud and seemingly unanimous. For followers of Chile’s extractive industries, however, the results were less surprising. In fact, they reflected deep and long standing tensions at the heart of the country’s green energy transition.

   At the crux of these tensions is the mining industry. Chile is the largest producer of copper in the world, and the mining industry as a whole employed 289,284 people between July and September 2022. Although mine workers only account for 3.2 percent of the national workforce, jobs are highly concentrated in a few regions.2Statistical information about Chile’s labor market is available at the Instituto Nacional de Estådística (INE) (<)a href='https://stat.ine.cl/Index.aspx'(>)https://stat.ine.cl/Index.aspx(<)/a(>) Toxic, polluted, and exploitative, it has nevertheless provided employment and growth for surrounding communities.3Mauricio Folchi, “La Insustentabilidad Del Boom Minero Chileno: Política y Medio Ambiente, 1983-2003,” (<)em(>)Ecología Política(<)/em(>), no. 26 (2003): 23–49.

   Chile’s miners know that non-renewable resources are unsustainable in the long run, but they also fear that plant closure and industry conversion will leave them worse off. While the constitutional draft offered an impressive set of labor and environmental rights, it neglected to present them with a secure economic future. Among other lessons, the rejection of the constitution reveals the complexities of transitioning away from a neoliberal economy which has left many clinging to jobs that, while dangerous and environmentally harmful, offer financial stability for otherwise forgotten workers. The results of the plebiscite cannot be entirely understood without returning to the history of the mining industry, which is characterized by violence, dispossession, and loss.

   The constitutional debate

   Chile’s current constitutional charter was written during the Pinochet Dictatorship (1973–1990) and approved in a fraudulent referendum in 1980. It is known for its obstacles to reform and for its neoliberal framework, especially regarding social rights. By reducing the role of the state in the economy and society, the constitution encouraged the privatization of social security funds, education, and health care services. Many also consider it illegitimate—a legacy from a government known best for its massive violation of human rights. Indeed, the constitution carries the signature of a regime that, according to official human rights reports, killed or disappeared nearly 3,000 people and imprisoned about 38,000 for political reasons. 

   Though a 2005 reform eliminated some of the most authoritarian clauses, like the appointed senators for life that allowed General Augusto Pinochet and other members of the Military Junta to have a seat in Congress, controversies over the document continued.

   When massive social protests, known as the Estallido Social, took Chile by storm in October 2019, political parties called for a constitutional referendum. Addressing the illegitimacy of the country’s primary legal framework offered an avenue through which  to respond to the social, economic, and political grievances of the largest protests since the return to democracy. 

   In October 2020, more than 78 percent of voters supported rewriting the constitution and electing a constitutional convention. The convention elected in May 2021 included an equal number of men and women, representatives of indigenous nations, and a large number of politically independent representatives. Following a year of deliberations, their final draft was presented to the country on July 4, 2022. 

   The new constitution offered comprehensive social, labor, environmental, and human rights, decentralized power, and established gender parity—addressing many of the demands Chileans had voiced for years. Its labor rights promises included the right to decent work, fair salary, unionization, strike, and collective bargaining. It promised a comprehensive public social security system that could have also covered those performing unpaid domestic and care work. Environmentally, it  was hailed as an “ecological constitution” that “says nature has its own rights, meaning that it can legally be protected.” 

   But in September 2022, nearly two-thirds of voters rejected the proposal. There had been some indication of opposition throughout the process: controversies had tainted the work of the convention, the return of compulsory voting brought five million new people (a 40 percent increase) to the polls, and it had been accused of carrying unrealistic ambitions. In some cases, it was also a vote of protest against President Boric, who assumed power in March 2022, and in favor of concrete measures to overcome the economic recession and high inflation rate. 

   From the perspective of the country’s workers, a crucial factor was that despite its impressive set of rights, the constitution did not offer concrete solutions to meet people’s everyday needs. The overwhelming opposition of workers in Chile’s extractive industries perhaps most clearly embodies these contradictions. In Calama, the country’s mining capital, 70.64 percent of residents rejected the draft—despite living in a region where pollution has had long-term consequences on people’s health. Workers in this region recognized a grounding of good principles, but saw few tangible changes proposed. Though the draft constitution offered to bury Pinochet’s neoliberal legacy, it is also true —as Javier Auyero has argued for the case of Argentina—that people had learned how to maneuver within the existing political-economic and bureaucratic system.4Javier Auyero, (<)em(>)Patients of the State: The Politics of Waiting in Argentina(<)/em(>)  (Durham: Duke University Press, 2012). In a time of economic crisis, many chose certainty over vague radical change. 

   A history of failed closures

   Like refineries and plants, mines and their associated plants inevitably shut down because of increasing costs, depletion, accidents, or environmental issues. Throughout Chile’s history, failed shutdowns and company restructurings have left communities strangled. Each shutdown has left behind a trail of poverty, unemployment, and toxic waste. As a result, communities feel abandoned by the very governments that lined their pockets with the sacrifices of miners’ and their families. 

   During the first half of the twentieth century, the long nitrate crisis expelled thousands of workers and their families, creating a landscape of ghost towns throughout the Atacama Desert. When chemical fertilizers displaced nitrate, employers reduced production and laid off the workforce. Unable to find work in the area, most workers and their families were forced to migrate. Later, the economic crisis of the 1980s closed down large factories, many of which never reopened—or when they did, their labor conditions were far worse than before. Alejandra Brito Peña has argued that these closures were particularly traumatic because they took place under a violent military dictatorship. In the 1980s, the social costs of the closures were almost always passed to local communities; the government offered little or no support for avoiding economic decline. Locals remember the shutdowns as a form of harsh dispossession, and these memories continue to color their political decisions.5Alejandra Brito-Peña, “Memoria Colectiva y Construcción de Territorio: Auge y Despojo de Una Cultura Industrial. Los Casos de La Fábrica Textil Bellavista-Tomé y La Carbonífera Schwager En Coronel (1970-2007),” (<)em(>)Izquierdas(<)/em(>), no. 42 (October 2018): 1–29, https://doi.org/10.4067/S0718-50492018000500001.

   Coal mining communities have paid particularly dearly for the economic transition of the 1990s. When the Empresa Nacional del Carbón (National Coal Company, or ENACAR) announced the end of mining in the southern coastal city of Lota in 1997, it was far from a surprise. Lota symbolized a long history of miners’ labor struggles. For generations, miners there had extracted coal from below the ocean floor, a dangerous job that claimed thousands of lives. But by the 1960s, low productivity, low ore quality, and high costs rendered the company insolvent. This worsened with declining investment and modernization during the 1970–1980s. With the return of democracy in 1990, ENACAR was deemed too expensive and inefficient to survive. 

   In preparation for closure, ENACAR designed a transition program which included early retirement, incentives for the re-hiring of coal miners by local companies, and workforce retraining programs. But in practice, these commitments could not generate good and stable jobs. Chile’s neoliberal prosperity was based on precarious employment and the privatization of social rights, leaving workers and their families without a safety net to protect them from unemployment, old age, sickness, or disability. Twenty-five years later, Lota is one of the poorest communities in the region. Its history demonstrates that shutting down a mine or industrial complex without a solid commitment to creating good-quality jobs only traps communities into cycles of poverty.6Juan Carlos Rodríguez Torrent and Patricio Medina Hernández, “Reconversión, Daño y Abandono En La Ciudad de Lota,” (<)em(>)Atenea (Concepción)(<)/em(>), no. 504 (2011): 147–76, https://doi.org/10.4067/S0718-04622011000200009. 

   The sacrifice zone

   The memory of these experiences is compounded by developments in Chile’s mining industry in the months before the constitutional vote. In June 2022 CODELCO, Chile’s state-owned mining company and one of the largest copper producers in the world, announced the closure of a smelter in Ventanas, an industrial complex located on the central coast of Chile. While the closure was justified on environmental grounds, citing the plant’s high sulfur dioxide (SO₂) emissions, it was also guided by rising and unsustainable maintenance costs.  

   The Ventanas industrial complex dates back to the early 1960s, when President Jorge Alessandri inaugurated a copper smelter, refinery, and thermoelectric plant. Built to support the needs of small and medium-size mines, they were considered the country’s most outstanding achievements. The complex expanded in the following decades, attracting both public and private capital. In 2005, due to financial problems, ENAMI sold the smelter and refinery to CODELCO. 

   Today, there are sixteen plants in a stretch of three miles around the bay, including an oil refinery and three thermoelectric stations. But though the complex once symbolized industrial modernity and state capitalism, today, it is known for environmental degradation and labor conflicts. 

   Though the plants have always been polluters, activists began to mobilize against their environmental impacts after the return to democracy in the early 1990s. Their attention—and, consequently, that of the public—has focused on the SO₂ emissions of the smelter and the coal-fired thermoelectric plants, which caused high rates of cancers and other diseases among the local population. Thirty years of environmental laws, inspections, legal conflicts, and resolutions have ensued.

   In 1993, ENAMI approved a decontamination plan to reduce SO₂ emissions, limit the amount of arsenic, and commit to submitting monthly reports. The resolution failed: environmental authorities declared the area a “saturated zone” the following year, signaling that pollution had exceeded all acceptable levels.7Ministerio Secretaría General de la Presidencia, “(<)a href='https://www.bcn.cl/leychile/navegar?idNorma=30667&idVersion=1994-03-09' target='_blank' rel='noreferrer noopener'(>)Ley 19300: Ley Sobre Bases Generales Del Medio Ambiente(<)/a(>),” March 1, 1994. These problems continued. In 2011, the emissions caused a severe case of poisoning in a nearby elementary school, La Greda. Children began fainting in class, with some experiencing long-term health problems. Greenpeace called it the “Chilean Chernobyl.” 

   The disastrous episode transformed Chile’s language for environmental disasters and their impact on low-income communities. According to Luis Espinoza Almonacid, after La Greda, environmental activists and NGOs started describing Quinteros Bay as a “sacrifice zone,” a term originally coined in the United States in the 1970s to describe areas that are low-income and disposable.8Luis Espinoza Almonacid, “Para una lectura a las zonas de sacrificio desde las zonas del no-ser,” in (<)em(>)Cuestionamientos al modelo extractivista neoliberal desde el Sur: Capitalismo, territorios y resistencias(<)/em(>), by Cristian Alister et al. (Santiago: Ariadna Ediciones, 2022), 133–54. Meanwhile, the smelter and refinery workers who died of cancers and other complications became known as “green men” because of the impact of chemicals on their bodies. By now, people simply live what Manuel Tironi and Israel Rodríguez-Giralt call “toxic lives”: “a chronic, silent and creeping conditioning that is inseparable from life’s ordinariness.”9Manuel Tironi and Israel Rodríguez-Giralt, “Healing, Knowing, Enduring: Care and Politics in Damaged Worlds,” (<)em(>)The Sociological Review(<)/em(>) 65, no. 2_suppl (July 2017): 89–109, https://doi.org/10.1177/0081176917712874.

   After the announcement of the plans to close the smelter, CODELCO workers staged a wildcat strike. They defended the industry and their jobs, arguing that CODELCO should invest in making the plants sustainable. Clinging to the economic nationalism that has influenced their union history, they also supported the role of the public company, arguing that the closure would diminish the state’s role in the mining sector. The strike lasted forty-eight hours and while it did not mobilize all company workers, it sent a strong message to the nation and sparked fears about the economic costs of shutting down the country’s most important industry.

   Few Chileans outside of the COLDECO workforce supported the strike, and the media quickly labeled it a selfish walkout to protect high-paid jobs without consideration for the health of community members. In ongoing negotiations between the company and labor unions leading up to the referendum, the government has reassured workers that they would not be abandoned. But in a country with a history of job precarity, weak labor protections, and rising informality, the workers know that they should be skeptical of these promises.

   Extractive communities at the crossroads

   In Calama, Lota, and Ventanas, as in other mining communities, workers voted against the constitution. While the new labor and environmental protections might have benefitted them, they were skeptical. In the context of neoliberal precarity, mining offers better, although dangerous, income than other work. As Marco Gandarillas writes in the case of Bolivia, workers are placed in the impossible position of either defending their jobs or protecting their communities from environmental damage.10Marco Gandarillas Gonzáles, “(<)a href='https://publicaciones.hegoa.ehu.eus/uploads/pdfs/230/Empresas_transncionales_en_America_Latina.pdf?1488539784' target='_blank' rel='noreferrer noopener'(>)Extractivismo y Derechos Laborales: Dilemas Del Caso Boliviano,(<)/a(>)” in (<)em(>)Empresas Transnacionales En América Latina. Análisis y Propuestas Del Movimiento Social y Sindical.(<)/em(>), ed. Juan Hernández Zubizarreta et al. (Universidad del País Vasco; Hegoa; Observatorio de Multinacionales en América Latina, 2013), 218–32. In this case of Chile, these concerns build on a history of sudden and traumatic closures which have periodically left communities devastated in their wake. 

   There is no question that a transition to a low-carbon economy is urgently needed to confront climate change, and that transition will require closing and restructuring many industries. If this transition is to be truly just and democratic, however, it must account for the historical memories and experiences of easily forgotten workers, who have been repeatedly burdened by radical economic shifts. For Chile’s extractive workers, job creation ought to be at the center of the agenda.11(<)a href='https://www.labor4sustainability.org/post/a-just-transition/'(>)https://www.labor4sustainability.org/post/a-just-transition/(<)/a(>)

9. A New Non-Alignment

   November 9, 2022 12:16 am Comments Off on A New Non-Alignment

   This essay first appeared in GREEN, a journal from Groupe d’études géopolitiques.

   In March of this year, as Russia’s war in Ukraine intensified, China’s Foreign Minister Wang Yi made a trip to New Delhi to speak with his Indian counterpart S. Jaishankar. “If China and India spoke with one voice, the whole world would listen,” Wang argued. “If China and India joined hands, the whole world would pay attention.” The geopolitical scales soon started to tilt India’s way. 

   By April, European Commission President Ursula von der Leyen had made her first trip to Delhi, where she laid the groundwork for several weeks of frenetic EU-India dealmaking for a sweeping agenda ranging from defense to green manufacturing.

   The following month, in a whirlwind three-day tour of Germany, Denmark and France, Prime Minister Narendra Modi won concessions that Indian policymakers have coveted for well over two decades, ranging green-energy investments, tech transfers, and weapons deals, putting flesh on the bones of a moribund EU-India strategic partnership.

   In Berlin, Chancellor Olaf Scholz announced a €10 billion green partnership to help India achieve its 2030 climate targets and high-tech transfers. The next day in Copenhagen, Nordic countries signed wind and solar deals, alongside green shipping and green cities investments. In Paris, Macron signed deals to invest in India’s green hydrogen hubs as well as increase sales of French military aircraft and ships; for its part, Électricité de France confirmed a long-pending deal to build six EPR-1650 nuclear power reactors in Jaitapur. This followed India’s momentous $42 billion investment deal with Japan for electric vehicles (EVs), green hydrogen/ammonia, and heavy industry transition.

   The timing of these rapid concessions is no accident. The divorce of China, Russia, and the West is providing Modi with a golden opportunity to negotiate a new geopolitical order. As the world splits into new Cold War blocs—which look strikingly similar to the old Cold War blocs—the old Indian grand strategy of non-alignment is reemerging. And this time, the rise of China assures that the new counter-hegemonic bloc will enjoy considerably greater resources than the former communist powers ever did.

   That emboldened confederation stretches beyond the subcontinent. India’s last thirty years of catchup growth were achieved in an era of US global primacy. Along with other developing nations who have interests independent of the US, today, a much richer India has the leverage to challenge the coercive underbelly of American hegemony. Brazil and Indonesia, too, are taking advantage of their new pull. Neither the United States nor Europe should underestimate postcolonial elites in their renewed efforts to chart an independent course.

   Friction with the West is assured. But diplomats in the developing world are prepared to pay to avoid a costly and risky confrontation with the Sino-Russian axis. Developing countries’ answer to the West’s question, “Do you want to contain China with us?” is probably “Yes.” But the answer to the question, “Do you want to contain China and Russia with us?” is probably “No.”

   

   Since 9/11, the US Department of the Treasury, National Security Agency, and Department of Commerce have developed a Panopticon over the key networks of globalization. The Treasury’s Office of Foreign Asset Control and the SWIFT payments system surveilled financial channels; Edward Snowden’s Silicon Valley surveillance internet provided a view into the flow of information; and the export control list of technologies gave it a map of supply chains. Key choke points were located and operated in the advanced industrialized states of the G7. Meanwhile, the US became more willing to weaponize the dollar system against troublemakers. The signal to developing countries was clear: if threatened, the US will exert its control over the technologies underpinning economic growth and military superiority.

   The G7’s command of key technology remains the source of its hard power, as demonstrated by the design of its economic-warfare sanctions against Russia following its latest invasion of Ukraine. Sanctioning Russia’s central bank assets and cutting off access to the SWIFT system signaled financial war. Then, a technological iron curtain fell, blocking high-tech exports to Russia’s economy as well as critical airplane parts, while the G7 sought to block the supply of silicon chips (a key component of military hardware) from Korea and Taiwan. In October, the US escalated its containment of China by export control restrictions on chips.

   Countries like China, India, Indonesia, Brazil, South Africa, Mexico, Saudi Arabia, and the United Arab Emirates have refused to sacrifice their national interests to punish Russia. Most importantly, they believe their bargaining power in the new Cold War will result in sweeter trade, technology, and weapons deals from the West. These eight countries alone will account for three-fourths of the world’s population and 60 percent of its economy by 2030. They have aspirations for regional dominance and believe non-alignment better serves their interests.

   Little wonder, then, that these countries are adopting a stance of non-alignment to secure the same key technologies—fighter jets, green technology, chips, submarines, nuclear, advanced pharmaceuticals, 5G mobile networks—that could power their catch-up growth. The map of countries that remained neutral on Russia sanctions is no bleeding-heart protest for global justice, but a hard-nosed security play. Before signing up to the West’s new financial-technological-military regime, these countries intend to extract maximum concessions. They are also betting that the West will tolerate their foot-dragging on Russian sanctions, and refrain from imposing secondary sanctions (sanctions for breaking sanctions) on them. Threats to exit, as any bargainer knows, confer power.

   What exactly do the countries flirting with a new non-alignment want?

   1. Core technologies to power future growth;

   2. Advanced military hardware for enhanced security;

   3. The upper hand in trade negotiations with Europe, the US, and the new Russia-China bloc;

   4. Essential commodities like food, energy, metals and fertilizers from the new Russian-Chinese bloc;

   5. Better terms to restructure their debt to Western and Chinese creditors during a punishing global dollar debt crisis that threatens their sovereignty.

   

   Reliance, the Indian conglomerate owned by billionaire and Modi-backer Mukesh Ambani, encapsulates developing countries’ relationship with the G7. Ambani’s Jamnagar refinery makes billions importing Russian crude oil and exporting diesel and gasoline to the West. Despite its flouting of Western sanctions, it continues to receive green technology transfers from the West. It has invested more than $60 billion of its own cash and $10 billion in partnerships and acquisitions of electrolyzers to manufacture hydrogen (from a Danish firm), photovoltaic wafers (from a German firm), solar panels (from a Norwegian firm), grid-scale batteries (from a US firm), and iron-phosphate batteries (from a Dutch firm).

   India’s management of these foreign partnerships will depend on Dubai. UAE President Mohammad bin Zayed has positioned the Gulf Kingdom as a Club Med for oligarchs and merchant banks to skirt Western sanctions. Gulf petrostates are set to gain an additional $1.3 trillion in petro (dollar) exports over the next four years. Dubai lets non-aligned countries bypass sanctions, using commodities payments settled in yuan, rupees, and rubles to bypass dollars. Biden’s Persian Gulf policy is adapting, with talk of security guarantees for the UAE and a new partnership with the US for a $100 billion clean energy financing deal for developing countries. Gulf sovereign wealth funds are meanwhile investing in the energy transition across Eurasia. It’s the old Indian-Arab-European sugar, spice, cotton trade route back with a bang.

   

   Under President Joko Widodo, Indonesia, too, is making its move by taking control of its abundant supply of nickel and copper—essential for the energy transition—and incentivizing investment in processing facilities. If the dream of becoming an electrostate is new, the tools are old. Indonesia is copying the developmentalist state successes of the East Asian Tigers as well as the 1970s nationalization drives of the OPEC countries. To howls of outrage by the European Commission at the World Trade Organization, Jokowi banned exports of nickel, forced international companies to refine and process it domestically, and sought technology transfer to state-owned enterprises.

   Indonesia has the largest nickel reserves in the world, with a majority controlled by its state-owned mining company, MIND ID. After Jokowi banned nickel exports, Chinese companies agreed to set up joint ventures in Indonesia along with transfer of critical high pressure acid leach (HPAL) technology that is required to make battery-grade nickel. While Germany’s Volkswagen, Brazil’s Vale, and the U.S.’s Ford and Tesla initially sought to secure unprocessed nickel from the country, Indonesia insisted on grabbing more of the value chain by creating an EV-producing national champion, Indonesia Battery Corporation, which has struck partnerships with China’s CATL and South Korea’s LG to obtain critical HPAL technology for battery-grade nickel.

   Jokowi’s next targets for the “ban-exports-and-nationalize” treatment are tin (Indonesia is the world’s second largest producer and the metal is used as solder to make electrical connections), aluminium (Indonesia is world’s fifth largest producer and the metal is used in electricity and cars) and copper (used in, well, everything electric).

   Such policy independence nonetheless remains limited in the face of American sanctions. After the US threatened any client for Russian weapons with economic warfare, Indonesia canceled its planned purchase of Russia’s Sukhoi-35 fighter jets, despite Russian offers of a dollar bypass palm-oil-for-fighter-jets scheme. Instead, Indonesia undertook a major escalation in defense spending to buy thirty-six US F-15s and forty-two Rafales from France, along with two of France’s Scorpene submarines  (the latter an emollient after France lost out on its sale of diesel subs to Australia) at a total cost of $22 billion. When Russia shipped two S-400 air defense missile systems to India in 2021, it prompted a furious backlash from the US and threats to sanction India for the deal. Calls for constructive, non-coercive sanctions, remain unheeded.

   

   

   Perhaps most surprisingly, given his regime’s proximity with the US, outgoing Brazilian President Jair Bolsonaro chose neutrality in the war. The material stakes make this choice seem obvious—Brazil’s soy, corn, sugar, and meat exports are heavily dependent on Russian fertilizers, and so Bolsonaro has had an enormous stake in preserving relations. Moreover, Brazil’s trade surplus with China is bigger than all its exports to the US  But the ideological current runs deeper.

   Under Luiz Inácio Lula da Silva, Brazil deepened relations not only with the BRICS and other Pink Tide governments, but also with the US. In 2011, the foreign minister boasted that Brazil had more embassies in Africa than Britain did. That willingness to make friends in both the Pacific and North Atlantic has given it greater room to maneuver, as when it broke HIV/AIDS drug patents in favor of Indian generics.

   Bolsonaro’s free-market faction broke with that multilateralist tendency, siding against India, South Africa, and China when that bloc demanded Covid-19 vaccines free of intellectual property (IP) limitations at the World Trade Organization. It also joined the G7 on agricultural free trade policy, and sat out IP fights. Yet the Brazilian right’s best efforts to quash protectionism were not enough to overcome the country’s long aversion to G7 coordinated schemes; Brazil still chose neutrality on Russian sanctions. Elites in Brasília would rather keep their options open and their commitments light.

   Green industrial growth compels some hard choices. Looking ahead, Brazil will need to prioritize either domestic industrialists or external allies as it weighs whether to develop flex-fuel cars fed by homegrown sugarcane ethanol or batteries sourced from China, Indonesia, and the nearby lithium triangle. In his victory speech, flanked by trade unionists and landless peasants, Lula pledged to pursue strategic non-alignment: “We will not accept a new Cold War between the United States and China. We will have relations with everyone.” Brazil may defer choosing between North and South, but the choice between an inward-looking Brazil or an outward-facing one looks inevitable.

   There was a special irony to Brazil’s right-wing capture. Under Bolsonaro, the country was perhaps the most cooperative with the G7-led order of any BRICS country. But Lula represents the developing world’s best shot at leading a global non-alignment movement. Whereas the old non-aligned movement was anchored by moral imperatives—decolonization, anti-racism, nuclear disarmament—this fledgling version lacks a positive social and ethical program. Instead, it stems from the cold commercial and security logic of development. It will be up to that former unionist metalworker to forge a new coalition based on shared values.

   

   Developing countries will use this decade’s violently shifting geoeconomic conditions to build on old growth models, including industrial policy and developmental-state capitalism. Expect states like India and Indonesia to keep imposing conditions on their increasingly coveted cooperation and access to growing consumer markets on hard infrastructure deals.

   If this is the general trend, there will be enormous variations in strategy. Brazil’s program of development through social policy, including the signature Bolsa Familia cash grants, may be fully realized with Lula’s return to power. Indonesia and India—who hold outgoing and incoming presidency of the G20—meanwhile, have favored policies centered on the buildout of electricity, roads, and ports, which can disregard human rights and bias deals toward powerful incumbents. In the extreme version, consider the Gujarat model that has formed the basis of Modi’s aggressive electoral campaigns.

   The new non-aligned countries play the G7 powers off each other. Most exposed to this shifting terrain of economic and security relationships are Germany, Korea, and Japan whose industrial firms fear loss of their export markets. Thus far Germany is distancing itself from the decouplers in Washington. In his recent visit to China, Chancellor Scholz, flanked by CEOs of BASF and Volkswagen, said “New centers of power are emerging in a multipolar world, and we aim to establish and expand partnerships with all of them.”

   Even as non-aligned countries negotiate within the new sanctions regime and find ways to use it to their advantage, we should not lose sight of the devastating toll of G7 sanctions, a blunt instrument that has torn up supply chains and created inflationary pressures. When emerging market elites can parley these conditions to their advantage, it is impressive. But even the most creative trade deals struck under terms set by the G7 are insufficient buffers against food and energy price volatility, unleashed by deregulated commodity markets run out of London and Chicago. Climate chaos on every continent, meanwhile, compounds these tensions, devastating the already threadbare lives of many. All the more reason, then, for the G7 to take a leaf out of the BRICS’ playbook and coordinate investment in long-term sustainable infrastructure.

10. Domestic Politics & Planetary Change

    November 3, 2022 3:12 pm Comments Off on Domestic Politics & Planetary Change

    This is the second edition of The Polycrisis newsletter, written by Kate Mackenzie and Tim Sahay. Subscribe here to get it in your inbox.

    The economic fallout of the pandemic hit Latin America harder than almost anywhere else in the world, kicking 12 million people out of the middle class in a single year. In a string of recent elections—Chile, Bolivia, Colombia, Ecuador—voters have punished incumbent politicians, and the winner has been Latin America’s left. The question facing the continent is whether the new Pink Tide can become a green one.  

    In his victory speech on Sunday, flanked by trade unionists and landless peasants, Brazilian President-elect Luiz Inácio Lula da Silva pledged to pursue strategic non-alignment. “We will not accept a new Cold War between the United States and China. We will have relations with everyone.” China is already Brazil’s largest trading partner and Brazil chose not to join the G7 sanctions on Russia, citing its agricultural sector’s dependence on Russian fertilizers. South-South cooperation may be a big theme of his presidency; Lula’s speech mentioned South American and Caribbean alliances, BRICS, and collaboration with African countries.

    We will resume the monitoring and surveillance of the Amazon, and combat any and all illegal activities, whether they be mining, logging, or improper cattle ranching. – Lula, victory speech.

    When Lula was last in power, soy and beef moratoriums reduced Brazil’s deforestation of the Amazon by 80% between 2004 and 2012, even as Brazilian agricultural production boomed. Norway paid over a billion dollars to Brazil for avoided deforestation. Brazilian law enforcement agencies used Indian and Chinese satellites to monitor deforestation from space, while police and prosecutors enforced it on the ground. 

    Bolsonaro’s parliamentary coalition of rural agribusiness interests—the so-called beef, bible, and bullets coalition—blew up that deal. Without Lula-era enforcement of environmental laws, criminal gangs and agribusiness companies pushed the soy and beef frontier further into the Amazon rainforest, driving a massive spike in deforestation. The most egregious culprit was the meatpacking company JBS, which runs the world’s largest slaughterhouses and processes a quarter of the planet’s beef, and whose emissions from deforestation are larger than all of Italy’s.

    A Lula government that enforces the decades-old Forest Code could see Amazon deforestation dramatically reduced, and some restoration in parts of the south and south-east.

    

    Regions that are worse off in the right-hand map above include the Cerrado grasslands in eastern Brazil, which are less carbon-rich than the Amazon but nevertheless serve as major stores of carbon dioxide. Lula and Dilma Rousseff’s earlier governments also protected the country’s northern Amazon regions, turning a blind eye to forest clearing in other regions. 

    Just as Russia’s invasion of Ukraine spurred more fossil fuel extraction, the Trump administration’s tariff war against China accelerated the pace of clearing land for soybean crops in Brazil, as China stopped buying US soy. Soybeans are Brazil’s biggest export earner. Beef, meanwhile, drives most Brazilian land clearing, and here, pressure from outside Brazil matters less than national politics, since 80% of the beef produced is consumed domestically.

    Who will be Lula’s Manchin?

    Brazil has long seen itself as the southern hemisphere twin of the United States. In the last few decades, Brazilian agriculture has expanded furiously, plowing the Cerrado with a capital intensity rivaling the earlier plundering of the American prairies. That demolition produced vast soy and corn latifundia that has put Brazil in direct competition with the Midwestern corn belts and the soy towns along the Mississippi. As in the US, Brazilian farmland expansion has gone hand in hand with state support, including a web of rail, roads, and waterways to maximize agricultural extraction for internal and export markets.

    That physical infrastructure is kept running by agribusiness bosses and their cronies in parliament, who will stick around through Lula’s next term. We’ve just seen this show play out in the United States. Biden’s climate bills were critically weakened in negotiations with Senator Joe Manchin, representing the voice of oil and gas companies grown fat on a fracking boom. Likewise, Lula will have to make bruising compromises with the JBS-commandeered rural bloc of politicians seeking subsidies for agro-industry. The Workers’ Party (PT) may control the presidency, but Bolsonarists hold the largest bloc in Congress with 99 seats and 14 of 27 states governorships, while the center-right parties form the largest Senate bloc. That legislative impasse means Lula will have to pick battles from his ambitious agenda of social housing, greening agro-industry, and transitioning Petrobras, the national oil company. 

    The new Lula government will have to contend with homelessness, unemployment, and more than a quarter of the population living with hunger. But backed by housing movements, Lula aims to expand social housing and public-transit-oriented green urban development. Any success would serve as a model for other middle income democracies.

    Crude oil is also a significant source of Brazil’s export income, not far behind soybeans. In a late-March interview with Time, Lula dismissed talk of ending national oil extraction. But a Lula government will exert more control over Petrobras, seeking more domestic refining capacity and a vision like that of European oil majors who are declaring themselves “integrated energy companies” that make renewable electricity.

    COP27

    Brazil’s election result and Lula’s attendance will boost the mood at the UN annual climate conference, which begins its 27th meeting on Sunday in Egypt. But the pull of Brazil’s big agriculture and oil underlines how difficult the meeting will be. 

    Standard agenda items relating to money won’t be easily smoothed over by rallying around familiar long-term targets and sectoral pledges. The global debt/currency crisis has prompted tougher questions around the broader financial architecture. Participants from the global South may no longer be content to quarrel over commitments within the confines of climate finance. Many developing countries are experiencing a dire mix of debt distress, high commodity import prices, climate-driven disasters, and scarce access to hard currency. 

    Our first newsletter explored some of the proposals to fix the widening north-south disparity in financial architecture using mechanisms, such as sovereign debt reform and IMF Special Drawing Rights. These matters are now, at last, reaching beyond the world of the Bretton Woods institutions and into UN climate diplomacy. 

    A thread linking the two together is “Loss and Damage,” a kind of sovereign compensation for climate-driven harms. L&D, which is distinct from climate “adaptation” because it denotes harms that can’t be managed or avoided, finally attained a place in the formal COP agenda last year, but with little promise of funds. 

    Loss and Damage will be harder to downplay now as Pakistan faces an historic crisis. Monsoon rains flooded over a third of the country’s land mass, in the wake of severe heatwaves and on top of a Covid-19 exacerbated debt crisis. Sherry Rehman, climate change minister, has told international and domestic media that wealthier countries with greater responsibility for planet-heating emissions need to pay up. “The bargain between the global North and global South is not working and it needs to be fixed for the global South to survive the oncoming train of climate change,” she told Dawn, adding that official climate finance takes two to three years to access. 

    The IMF will loan Pakistan $1.17bn of a $6bn facility agreed in 2019. But the total cost of the flooding is estimated at $15 to $30 billion. While the loan may help with immediate crisis-fighting efforts in Pakistan, it could also be just enough aid to create the appearance of acting on L&D pre-COP.

    The moral case for loss and damage compensation is plain: By and large, the greatest temperature increases and most punishing storms will hit poor countries clustered near the equator that have contributed little to climate change. Yet proposals for rich countries to pay up have so far proved a political cul-de-sac.

    The US in particular is wary of anything that might look like reparations or might identify vast liabilities. “You tell me the government in the world that has trillions of dollars, ’cause that’s what it costs,” John Kerry said last month. 

    Domestic politics constrains the US, which is only slowly edging towards enabling the World Bank to lend more, even while Fed rate rises heap more pain onto low-income countries.

    To the Conference of the Parties, global South countries are bringing demands for loss and damage, the Bridgetown Agenda, and a possible debt strike by the climate-vulnerable. Can Lula build global South solidarity? How will the Biden administration approach Brazil’s moves? Instead of fearing autonomy from new Pink Tide governments, Biden should take the easy win of supporting Lula to achieve shared goals of planetary stability.