Tuesday 03 Oct 2023
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This article first appeared in Forum, The Edge Malaysia Weekly on July 18, 2022 - July 24, 2022

Long a means for powerful nations to influence developing countries, development finance has gained renewed significance in the new Cold War. Unlike during the US-Soviet Cold War, the rivalry now is between mixed market capitalist systems.

Development aid rivalry

After reneging repeatedly on development aid and climate finance promises, the Group of Seven (G7) big rich nations dutifully lined up behind US President Joe Biden’s Partnership for Global Infrastructure and Investment (PGII) at their 2022 Summit at Schloss Elmau, in the Bavarian Alps of Germany.

With a US$200 billion (RM885 billion) US commitment, the G7 promised to mobilise US$600 billion in public and private funds for infrastructure investments in developing countries to compete with China’s multitrillion dollar Belt and Road Initiative (BRI).

The White House denounces BRI, claiming the PGII offers “values driven, high-quality, and sustainable infrastructure”. Hence, G7 funding is more likely to have strings attached, for examle, taking sides in the new Cold War.

A Chinese foreign ministry spokesman emphasised “China continues to welcome all initiatives to promote global infrastructure development”, but insisted China is “opposed to pushing forward geopolitical calculations under the pretext of infrastructure construction or smearing the Belt and Road Initiative”.

US national security priority

At the 2021 G7 Summit, Biden had unveiled a similar Build Back Better World (B3W) initiative, insisting it would define the G7 alternative to China’s BRI. Based on his domestic Build Back Better (BBB) programme, B3W was soon “dead in the water” when the Senate rejected BBB.

The White House’s claim that with the B3W, the “United States is rallying the world’s democracies to deliver for our people, meet the world’s biggest challenges, and demonstrate our shared values” has also been dropped from PGII.

With few B3W details forthcoming, the European Union (EU) launched its own Global Gateway for developing countries in December 2021, promising €300 billion in infrastructure investments by 2027.

At the EU-African Union Summit in February 2022, the EU announced €150 billion financing for the Africa-Europe Investment Package, half the Global Gateway budget.

EU leaders have touted their Global Gateway, suggesting G7 initiatives should be not only complementary, but also mutually reinforcing. But the EU’s African priority is not necessarily shared by other G7 members.

EU funding of €135 billion will be from the European Fund for Sustainable Development. The UK Clean Green Initiative, from the 2021 Glasgow Climate Summit, and Japan’s US$65 billion for regional connectivity may also not be additional.

Acknowledging scepticism about how much is new money, German Chancellor Olaf Scholz urged G7 members to present their pledges consistently to allay doubts about double-counting and the low grants share vis a vis loans.

When the PGII was announced to replace the B3W, it “created significant confusion”. Making clear its purpose, the White House unequivocally asserted PGII will “advance US national security”.

Far-fetched, risky, conditional

The G7 also urges using public money to leverage private sector funds. But such initiatives have previously failed to mobilise significant private funding — hardly inspiring hope of meeting the trillion-dollar financing gap.

The Economist has found blended finance — mixing public, charitable and private money — “starry-eyed” and “struggling to take off”. Even the International Monetary Fund (IMF) and World Bank warn public-private partnerships (PPPs) incur contingent fiscal risks.

Worse, PPPs distort national priorities, favour private investors and worsen debt crises. They have also not improved equity of access, reduced poverty or enhanced sustainability.

Developing country debt crises typically involve commercial loans or private sector money. For example, the 1980s’ Latin American debt crises were triggered by US Federal Reserve interest rate hikes to kill inflation.

Private sector loans usually involve higher interest rates and shorter repayment periods than loans from governments and multilateral development banks. Unsurprisingly, they lack equitable restructuring or refinancing mechanisms.

Ignoring yet another UN resolution, powerful nations disregard developing countries’ appeals for fair and orderly multilateral sovereign debt restructuring arrangements. Similarly, the West refuses to fix unfair trade, tax and other rules disadvantaging poorer countries.

Trust deficit

Over half a century ago, rich nations promised 0.7% of their gross national income (GNI) as development aid. But total overseas development assistance (ODA) from rich Organisation for Economic Development and Co-operation (OECD) members has barely exceeded half the promised amount.

Worse, the share has actually declined from 0.54% in 1961, with only five nations consistently meeting their 0.7% commitment in many years. Oxfam estimated 50 years of unkept promises meant a US$5.7 trillion aid shortfall by 2020!

At the 2005 Gleneagles Summit, G7 leaders pledged to double their aid by 2010, earmarking US$50 billion yearly for Africa. But actual delivery has been woefully short, with no transparent reporting or accountability.

Most development aid is neither transparent nor predictable. After some earlier progress in untying, aid is increasingly being “tied” again — requiring recipients to implement donor projects or to buy from donor country suppliers — compromising effectiveness.

The US ranked lowest among the G7, giving only 0.18% in 2021. To make things worse, US aid effectiveness is worst among the world’s 27 wealthiest nations. Clearly, apart from aid volume shortfalls, quality is also an issue.

The Syrian refugee crisis and Covid-19 pandemic have provided some recent pretexts to cut aid. Some powerful countries have turned to “creative accounting”, for example, counting refugee settlement and “peace-keeping” military operations costs as ODA.

Unsurprisingly, the UN deputy secretary-general is “deeply troubled over recent decisions and proposals to markedly cut” ODA to service Ukraine war impacts on refugees.

Controversies over what climate finance is “new and additional” to ODA have not been resolved since the 1992 adoption of the UN Framework Convention on Climate Change at the Rio Earth Summit.

G7 countries also fell far short of rich countries’ 2009 pledge to annually give US$100 billion in climate finance until 2020 to help developing countries adapt to and mitigate global warming.

The OECD’s reported US$79.6 billion in climate finance in 2019 was the highest ever. But OECD estimates are much disputed — for example, for double counting and including non-concessional commercial loans, “rolled-over” loans and private finance.

Cooperation, not conflict

Although China is new to development finance, it is now among the world’s biggest development financiers. Following broken promises and duplicity, even betrayal, China’s significance has increased as OECD donor funding declined relatively.

China is now a bigger player in international development finance than the world’s six major multilateral financial institutions together. Many developing countries have few options but to engage with, if not rely on, China.

Undoubtedly, there are justifiable concerns over China’s development finance and practices. These have included adverse environmental impacts, poor transparency and a high share of commercial loans — even if at concessional rates.

In 2019, IMF managing director Christine Lagarde suggested the new BRI phase would “benefit from increased transparency, open procurement with competitive bidding, and better risk assessment in project selection”.

Lagarde approved of China’s new debt sustainability framework and green investment principles to evaluate BRI projects. She expected “BRI 2.0 … will be guided by a spirit of collaboration, transparency, and a commitment to sustainability that will serve all of its members well, both today and tomorrow”.

The new Cold War may well spur more healthy and peaceful rivalry, inadvertently improving development aid and prospects for developing countries.

Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions from 2008 to 2015 in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was United Nations assistant secretary-general for economic development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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