Climate Windows in Multilateral Aid

Jim Yong Kim, the World Bank President (“Oh doctor, doctor…”) had “The Phrase that Pays” at the recent IMF-World Bank Spring Meetings 2014: “We know we cannot end extreme poverty by 2030 without tackling climate change”. Dr Kim´s statement, to be sure, begs the question why the World Bank (and others, such as the Gates Foundation or the OECD) is so cocksure about ending poverty by 2030? As a matter of prerequisite and logic, ending poverty would imply that ´we can tackle climate change´ over the next fifteen years. This is highly unlikely. Still, should and can concessionary finance by the multilateral development banks be used to tackle climate-change and disaster-risk management and adaption? Not all would agree, and not just for the risk of mission creep on the part of the multilateral development banks (Reisen, 2010)[1].

 

Inge Kaul, who was one of the first to mainstream the critical importance of enhanced provision of global public goods (GPGs) for reducing poverty (Kaul, et al. 1999)[2], says no. She has recently criticized tapping ODA funds for provisioning of GPGs such as climate-proofing development, an issue for which advanced countries have prime responsibility (Kaul, 2014)[3]. It is thus inappropriate to take climate financing out of ODA – there is need to top up ODA with climate finance. A little table that juxtaposes the major differences between GPG provisioning and ODA summarizes Kaul´s position.

 

Table 1: Some Differences between Provisioning GPGs and Development Cooperation

Source: Inge Kaul (2014)

 

 

The OECD Creditor Reporting System does not allow exploring the sectoral breakdown of multilateral ODA. An earlier study (Reisen et al., 2004)[4] that had explored bilateral ODA for how much was being allocated to regional and global public goods had indeed found evidence of “aid diversion” from traditional poverty targets. For the five-year average of the period 1997-2001, the OECD Development Centre study had shown that 30% of bilateral ODA could be classified as global or regional public goods, each contributing 15% to total ODA flows. The offset coefficient between GPG-related ODA and traditional aid was calculated at 25%, which confirmed partner concerns that GPG-devoted ODA was not entirely additional but partly reduced funds for poverty reduction. Another concern – that GPG-oriented ODA would crowd out aid to the poorest countries – was not confirmed, however.

 

These results would confirm tensions between deleting the under-provision of international public goods (where a maximum effect per ODA dollar is reached by earmarking) and recipient countries’ “ownership” (where free transfers maximize the utility of the ODA dollar for the poor). They would also support the quest for separating traditional ODA and spending on the provision of international public goods, to both maximize “ownership” of ODA partner countries and the provision of international public goods.

 

The argument of “aid dispersion” has been refuted, however.  

• First, by those who stress the inseparability of poverty reduction and GPG provisioning and stress the co-benefits of GPG-related ODA[5].  One example advanced is supporting fragile states to establish sound public institutions, which in turn will contribute to poverty reduction and simultaneously deprive international terrorism of a breeding ground. Mitigation of and adaptation to climate change as well as disaster prevention and management are increasingly viewed as a prerequisite to sustaining past successes in global poverty reduction. As part of the post-2015 development goals, a United Nations Secretary General’s High Level Panel recently recommended that building disaster resilience be made a target under the new headline goal on ending poverty.
• Second, by those who look for existing institutions that can be trusted to deliver in a world devote of first-best solutions. Global summits, commissions and proposals to deal with climate change have been endless – and so far ineffective. 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. 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.
   
   An important side effect of mainstreaming climate change into development cooperation would be the need for multilateral donors to integrate vulnerability to environmental and global risks into their allocation criteria of concessional flows. By implication, the weight of performance-based allocation and the reliance on policy and governance assessment (through the CPIA) would need to shrink. Donors have been reluctant to change so far, despite criticism and long debate: performance-based assessment gives high weight to policy and governance assessment (through CPIA) and ignores the vulnerability or distance of poor countries from development goals such as the MDGs. Inclusion of policy-independent, structural indicators into the allocation mechanism would make multilateral concessional finance more transparent, stable, predictable and less procyclical.
   
  Assessing vulnerability which is independent of present policy is needed both to identify the most vulnerable poor countries and to design criteria for the allocation of international resources. Two kinds of vulnerability and the corresponding indices can be considered:

• Structural economic vulnerability (as measured by the UN Economic Vulnerability Index, EVI), the UN index thought to replace the non-transparent performance index CPIA. EVI is a composite consisting of 50% ´exposure´ (size, location, agricultural share) and 50% shock intensity (both natural and trade)[6].
• Physical Vulnerability to Climate Change Index (PVCCI), an indicator developed by Patrick Guillaumont (2013)[7] at the Fondation pour les Études et Recherches sur le Développement International (FERDI). PVCCI consists of 50% ´risks related to progressive shocks´ (flooding due to sea level rise; increasing aridity) and 50& ´risks related to the intensification of recurrent shocks´ (rainfall; temperature)[8].
   
  EVI would be used for the allocation of development assistance, PVCCI for the allocation of adaptation resources. As scope and time horizons differ, a separate climate window ruled by PVCCI should be pursued. Poverty related allocation of concessional finance should gradually move away from performance-based allocation, especially to the extent that the focus is on fragile least developed countries.
   
  The devastation brought to the Philippines by typhoon Haiyan in November 2013 has been understood as a wake-up call for multilaterals to deal with extreme weather events that could have their roots in climate change. The Asian Development Bank recently estimated that developing countries need massive investments to transition to a low carbon, climate resilient development path: Incremental investments are estimated to be between $140 billion to $175 billion per year for mitigation in all developing countries, and $40 billion per year for adaptation in developing countries in Asia and the Pacific[9]. Concessional resources can only contribute a tiny part to these investments. Innovative approaches involving a mix of financial instruments are needed. This includes concessional loans, equity investment, subordinated or mezzanine loans, credit enhancement of bond issues, and first loss facilities and guarantees. Dr. Kim´s statement then was indeed “The Phrase that Pays”: provision for dealing with climate change should be added to traditional ODA, not (even partially) replace it.
   

---

[1] Helmut Reisen (2010), “The multilateral donor non-system: towards accountability and efficient role assignment”, Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 4(5), pages 1-22.

[2] Inge Kaul (1999), Global Public Goods: International Cooperation in the 21st Century, UNDP: New York City.

[3] Inge Kaul (2014), “'The Donors’ Dilemma' - Time to Think in Terms of Global Public Policy”, Global Policy, 11^th February.

[4] Helmut Reisen, Marcelo Soto, Thomas Weithöner (2004), "Financing Global and Regional Public Goods Through ODA: Analysis and Evidence from the OECD Creditor Reporting System," OECD Development Centre Working Papers 232, OECD Publishing.

[5] See Moira Feil, Mario Stumm &  Jürgen Zattler (2013), ), ´Pay Attention to Co-Benefits´, D+C, September. 

[6] A detailed presentation of EVI can be found in Patrick Guillaumont (2011), The concept of structural economic vulnerability and its relevance for the identification of the Least Developed Countries and other purposes

(Nature, measurement, and evolution), UN-DESA, CDP Background Paper No. 12, ST/ESA/2011/CDP/12 ,September.

[7] Patrick Guillaumont (2013), “Measuring Structural Vulnerability to Allocate Development Assistance and Adaptation Resources”, FERDI Working Paper No. 68, Ferdi: Clermont-Ferrand, March.

[8] For detail, see P. Guillaumont and C. Simonet (2011), “Designing an Index of Structural Vulnerability to Climate Change”, FERDI Working Paper I.08, March.

[9] ADB (2013), Financing Adaptation and Mitigation in Asia and the Pacific, 18. Nov 2013