Opening the Windows: Using Multilateral Development Banks for Disaster-Poverty Hotspots

Global public goods are by definition undersupplied. The best example is our failure to deal with climate change in a timely and decisive manner. Global summits, commissions and proposals to deal with climate change have been endless – and so far useless. A recently published fascinating ODI study, “The geography of climate change, disasters and climate extremes in 2030”, led by Andrew Shepherd,  has warned that climate change and exposure to ´natural´ disasters threaten to derail efforts to eradicate poverty over the next decade. In our age of the Anthropocene, catastrophic ´natural´ disasters such as earthquakes and tsunamis are increasingly joined by man-made disasters resulting from climate change: droughts, heat waves, polar vortex, tropical and polar cyclones, and floods.

Disasters, just like poverty, have a distinct geography. Where both overlap, we can locate disaster-poverty hotspots. A Multi-hazard Index shows the combined hazard exposure for drought, flood, high temperature, tropical cyclone and earthquake by 2030. A Poverty Vulnerability Index measures the proportion of people in severe (<0.75$_PPP/day), extreme (<1.25$) and ´moderate´ (<4$) poverty. The ODI Study investigated the overlay between high poverty vulnerability and hazard incidence in 2030 and aggregated the numbers of people likely to be poor in 2030 in the top hazard-prone countries. There is considerable overlap between the countries with the highest and high vulnerability to poverty in 2030 as revealed in the Poverty Vulnerability Index (PVI), and the countries with the highest exposure to hazards, as measured by the Multi-hazard Index (MHI).  Disaster-related impoverishment also appears to have a distinct within-country geography, being largely rural rather than urban. Impoverishment trends can easily cancel out escape routes from poverty in some countries.

Disaster Hazards and Poverty Vulnerability Often Overlap

Source: ODI (2013), The geography of climate change, disasters and climate extremes in 2030

The ODI study estimates that up to 325 million extremely poor people could be living in the 49 most hazard-prone countries in 2030, the majority in South Asia and Sub-Saharan Africa. Most at risk of disaster-induced poverty: Bangladesh, Democratic Republic of the Congo, Ethiopia, Kenya, Madagascar, Nepal, Nigeria, Pakistan, South Sudan, Sudan and Uganda. Another 10 countries have high proportions of people in poverty, high multi-hazard exposure and inadequate capacity to minimize the impacts: Benin, Central African Republic, Chad, Gambia, Guinea Bissau, Haiti, Liberia, Mali, North Korea and Zimbabwe. Afghanistan, Cameroon, Myanmar, Niger, Papua New Guinea, Somalia and Yemen also endure high exposure to hazard and moderate poverty. India – the country where the highest number of the world´s poor people are projected to live also by 2030 - needs to be treated as a cluster of separate sub-national entities. Some states cause considerable concern, including Assam, Madhya Pradesh, Odisha, Uttar Pradesh and West Bengal.

These scenarios are not compatible with the goal to eradicate extreme poverty by 2030. The ODI study provides evidence “that if the international community is serious about eradicating poverty by 2030, it must put disaster risk management at the heart of poverty eradication efforts. Without this, the target of ending poverty may not be within reach”. Consequently, regardless whether or not the more optimistic end-of-poverty scenarios so popular these days will materialize (discussed here), there is thus convincing evidence that the soft-finance windows of multilateral institutions target projects to deal with natural disasters and poverty simultaneously.

 In the absence of first-best solutions, such as an effective UN climate change convention, multilateral institutions and development agencies can provide second-best solutions by compensating for the lack of global agreements for sharing the burden to provide for global public goods. True, there is opposition to entrust the regional development banks (and development agencies) with global public goods, for the fear that such an assignment might further tilt the incentives of our political leaders toward ignoring climate change and other global public ills. But the multilateral development banks are appreciated for their ability to provide effective financial and technical services. These capable global institutions that can provide long-term finance to meet critical physical and social infrastructure needs regionally and globally and they can serve as critical knowledge hubs. “…it would be folly to let the currently still considerable institutional and financial strengths of the MDBs wither away”[1].

How then to open the windows of multilateral concessional finance? What are the feasible, cost efficient and least disruptive operational options? A good list of alternatives has been discussed for IDA at the Center for Global Development by The Future of IDA Working Group led byTodd Moss[2]; the list is modified, commented and extended below:

• Turning MDBs into global/regional public goods facilities. The facility would either replace or operate alongside traditional CF disbursement, to tackle global problems of particular relevance to poor countries—even if the expenditure has to take place outside of those countries. Such an approach would take advantage of existing replenishment mechanisms and leverage the MDBs´ role as a manager of international funds. It may also be a way to engage new donors. But I see two major objections to a departure from country-based CF embedded in the CDG proposal:

1. Chronic poverty will persist as long as the rise of within-country inequality is not stopped or even reversed, a point forcefully stressed by Edward and Sumner (2013)[3]. The main action to achieve greater equality is at the national level, either through the tax system or through social transfers.
2. Funding for GPG-related benefits tends to be viewed with skepticism by partner governments as they worry that correspondingly less money will be made available for conventional poverty reduction.
3. Challenge to define a performance-based allocation mechanism. In any case, to the extent that the remaining CF-eligible countries are mostly fragile and (post)conflict, a performance-based allocation mechanism such as used for IDA with the Country Policy and Institutional Assessment (CPIA) becomes ineffective.
    

• Greening MDB projects. By using concessional finance to encourage low-carbon economic output, MDBs could continue carrying out their poverty alleviation mission but commit to doing it zero-carbon by specifically subsidizing energy efficiency and a sustainable-energy sector. MDBs could thus contribute to the green-growth agenda while maintaining poverty mandate and country-allocation systems[4]. Major objection:

1. Places the geography of ´greening growth´ in poor countries while climate change and other disasters were caused by early developers in advanced countries. This objection can be attenuated by putting the emphasis on disaster mitigation, however.
2.  Need for larger envelopes to compensate for additional cost of green projects as it  is more expensive to build a climate-friendly wind park than a conventional, fossil-fuel power plant of the same capacity, for example. Feil, Stumm and Zattler (2013) suggest that multilateral CF soft windows could cooperate with the Global Environment Facility (GEF, of which multilateral CF windows all are ´executive agencies´), to advance and integrate cost-benefit methodology of GPGs and for additional funding.
    

• Explicit subsovereign lending allocation. MDBs could provide direct funding in grants or credits to local governments or even nongovernmental organizations in regions with per capita incomes below country-level eligibility thresholds, even if the country’s average income level is above the threshold[5]. To extent CF from national to subnational levels would help cope with disaster-related impoverishment that appears to have distinct within-country geography, being largely rural rather than urban. In particular India needs to be treated as a cluster of separate sub-national entities as the ODI study (op.cit: “The geography of climate change, disasters and climate extremes in 2030”) identified some states causing considerable concern, including Assam, Madhya Pradesh, Odisha, Uttar Pradesh and West Bengal. Objection: none. (At least I can´t think of any…).
   
  Whatever option MDB shareholders will choose when trying to open the windows of soft finance to increasingly deal with disaster-poverty hotspots in the future, expect a noticeable impact on loan-grant combinations in multilateral concessional finance. Future CF should be disbursed increasingly as grants, for essentially two reasons: first, creditworthy countries will graduate so that the role of soft loans will decline; second, the addition of natural disaster mitigation as a prime motivation for multilateral CF will only be accepted by partner governments when the grant element is raised, to reflect the advanced countries´ prime responsibility for climate change and its consequences. . This composition effect should require more, not less, funds – in contrast to most projections.

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[1] Johannes Linn (2013), “Realizing the Potential of the Multilateral Development Banks”, Brookings, September.

[2] Todd Moss (2012), “ Soft Lending without Poor Countries: Recommendations for a New IDA”, Center for Global Development, October.

[3] Peter Edward and Andy Sumner (2013), “The Future of Global Poverty in a Multi-Speed World: New Estimates of Scale and Location, 2010–2030”, CGD Working Paper 327, June.

[4] A similar strategy has been recently suggested by Moira Feil, Mario Stumm &  Jürgen Zattler (2013), ), ´Pay Attention to Co-Benefits´, D+C, September.

[5] This is already happening in practice (e.g., India does back-to-back lending from IDA to federal government to states).