Photo credit: DiasporaEngager (www.DiasporaEngager.com).

Imagine you are a country in the Global South. You suffer from a heavy debt burden. You’ve been trying for decades to catch up to the richer countries, but unsuccessfully, in large part because of that debt hanging around your neck like a giant millstone. And you are spending more and more of your precious resources dealing with the effects of climate change, from rising waters to superstorms, a crisis that you played little part in creating in the first place.

You face a terrestrial version of the three-body problem.

These three “bodies”—debt, development, climate change—impact your country in difficult-to-predict ways. More importantly, just like in Liu Cixin’s novel and the Netflix series of the same name, those interactions have led to one disaster after another.

The Global North offers its own solution to this three-body problem. The international community has decided that all countries must cut their carbon emissions. Primarily for its own energy transition away from fossil fuels, the Global North has also negotiated with countries that possess significant deposits of “critical raw materials” to prioritize the delivery of those minerals to Global North battery factories and solar panel manufacturing sites.

Meanwhile, the Global North has offered very little in the way of debt relief, though it has come up with new “instruments” like “debt-for-climate” swaps to achieve the goal of lower carbon emissions. Although potentially useful, these instruments don’t really reduce a lot of emissions (because the countries involved are not huge emitters) or a lot of debt (since the money involved so far is quite modest).

So, according to this particular solution to the three-body problem, you as a Global South country won’t see a lot of relief. Meanwhile, if you rely heavily on fossil fuels and fossil-fuel infrastructure, it’s becoming increasingly difficult to use those resources to jump the development gap while adhering to voluntary pledges to achieve carbon neutrality by 2050 or thereabouts.

Perhaps you have some of the minerals—lithium, nickel, cobalt—that are so coveted for the “clean energy” transition in the North. You can make some money there, but only as an extractor of raw materials. The Global North has been using free trade agreements and intellectual property right protections to limit technology transfer and restrict your ability to rise higher in the value chain by processing those ores or making your own lithium batteries and electric vehicles.

You’re stuck. You can’t break into the new “clean energy” economy, except at the bottom floor, and you are constrained in your use of old-fashioned fossil fuels. Meanwhile, you’re drowning: figuratively in debt and literally in the rising waters of climate change.

In Liu Cixin’s universe, people dehydrate themselves to survive successive planetary crises. That’s not an option in our world.

But you, as a country in the Global South, have other alternatives.

Working within the System

It’s time, UN Secretary General Antonio Gutteres announced last week, for “the godfathers of the climate crisis” to put their money toward solving the problem they largely created by paying a “windfall tax” on their profits. Going after oil, gas, and coal companies makes a lot of sense. Addressing the climate crisis will require trillions of dollars. Oil and gas companies collectively make hundreds of billions of dollars, so it’s a no-brainer to follow bank robber Willy Sutton’s advice and go “where the money is.”

However sensible it might be, this approach is not transformative. A windfall profit tax will redistribute some of the money made by these companies, but it won’t reduce their production of toxic substances. Indeed, it might even prompt these companies to pump out more oil and gas in order to maintain high profit margins. Also, it seems counter-productive to associate your monetary solution to the problem of rising carbon emissions with the success of the very businesses committed to increasing those emissions. A windfall profit tax won’t drive these companies out of business or even shift over to a different kind of business. However, coupled with stricter regulations of the industry—such as severely limiting the carbon emissions of their facilities and their products or restricting where and how they conduct their operations—such a tax could have a favorable effect.

The challenge facing the international community today isn’t the result of a couple bad actors like oil companies or even a couple bad policies. It is a systemic crisis that derives from a particular type of manufacturing and agriculture, an addiction to extraction, and patterns of overconsumption in the Global North. It’s hard to imagine such a system reforming itself, any more than a car can fix its engine as it barrels down the road.

Still, a proposal like the fossil-fuel windfall profit tax can at least generate some funds to ameliorate the situation. As does another proposal that has gathered the support of a number of Global South countries, which Prime Minister Mia Mottley of Barbados put at the heart of her Bridgetown Initiative. This proposal involves the distribution of Special Drawing Rights (SDRs) that the IMF uses as a kind of currency. The last SDR distribution in 2021 injected $650 billion into the global economy. Of the 105 participating countries, 104 were low- and middle-income. These countries could use this alternative currency to address the COVID pandemic, pay down their debts, invest in renewable energy, or frankly anything they want since there were no conditions and no loans to repay.

The IMF, in issuing loans and imposing austerity conditions, has more often been part of the problem rather than part of the solution. But an SDR issuance designed to help indebted countries reallocate funds to addressing climate change could indeed be a welcome policy.

The IMF might reply that it has already designed something specifically for that purpose: the Resilience and Sustainability Trust. But the RST is basically just another way of lending money to needy countries—and adding to their already considerable debt burden. Yes, the conditions are a little better, and the pool of money is pretty large ($25 billion in usable funds). It’s supposed to play a “catalytic” role in priming the pump of private climate financing, but this hasn’t really happened and who says that private banks and equity firms should be the leading actors addressing the climate crisis?

Another option is the Loss and Damage Fund, which Global South countries struggled mightily to get approved at the 2023 Conference of Parties (COP) in Dubai to provide resources to the most vulnerable countries so that they can address the impacts of climate change. The money won’t come in the form of loans but grants, which won’t add to the debt burden of the poorer countries. That sounds good. But the amount of money that’s been raised so far is a mere $700 million. Compare that to the need. Pakistan alone needs $16 billion to repair damage from the floods of 2022.

Worse, the new fund is being housed at the World Bank (perhaps temporarily, perhaps permanently). Talk about putting the fox in charge of the hen house. The World Bank promises that it is no longer a carnivorous, chicken-eating institution—but it helped create the problem in the first place, so the verdict is still out on that one. You remember what the scorpion says to the frog after it stings it to death while being ferried across the river: “Sorry, I couldn’t resist. It’s my character.” They both die, making it an unfortunately apt analogy to the interdependence of the Global North and Global South in an age of climate crisis.

The countries that pledged back in 2009 to mobilize $100 billion annually in climate financing by 2020 finally reached their goal in 2022 by raising nearly $116 billion. Of course, even the richest countries themselves now estimate that the target figure should be closer to $2.4 trillion a year. And (surprise, surprise), two-thirds of the money comes in the form of loans.

Some of that money is passing through the Green Climate Fund, which has reached nearly $13 billion in assets (so, a lot more than the Loss and Damage Fund). It can give out grants but it also dispenses loans. And it has a Private Sector Facility that’s supposed to “catalyze private climate finance,” which sounds suspiciously like turning the desperation of the Global South into a profit-making opportunity.

So, despite all these new instruments (or perhaps because of them), the debt of the Global South remains astronomical. According to Development Finance International, “citizens of the Global South now face the worst debt crisis since global records began.” In Africa, for instance, more than half of all government revenues go to servicing the debt. Meanwhile, the countries of the Global South have to spend more and more to deal with the impacts of climate change. How can countries expect to catch up to the rich North under those circumstances?

Transform the System

Remember: you’re a country in the Global South. Let’s say you’re Indonesia, which means that you’re the sixteenth largest economy in the world and the tenth largest emitter of greenhouse gasses, thanks to your over-reliance on coal-fired power plants (254 of them, to be exact).

You also face some pretty serious effects of climate change—not in some hypothetical future but right now. More than half your population lives on the coasts and experiences now-routine flooding, and your capital city of Jakarta is sinking inexorably below the water line (which is why you’re spending $45 billion to build a new capital in the forests of Borneo).

You desperately need money to wean yourself off fossil fuels, especially coal, of which you’re the world’s leading exporter.

Fortunately, you also have some other valuable resources to sell. Indonesia is far and away the world’s largest producer of nickel, which turns out to be a valuable component in the making of lithium-ion batteries for electric cars (among other things).

You also have a lot of debt: over half a trillion dollars of it. And nearly 50 percent of your government revenue goes to servicing this debt.

Ordinarily, you’d be caught in a familiar downward spiral. You extract nickel and sell it. You make some foreign currency, but you spend half of it on servicing your debt. And meanwhile, Jakarta continues to sink beneath the waves.

But you, as Indonesia, decided to do something different. First, you banned exports of raw nickel, so that you wouldn’t be caught at the bottom of the supply chain as a mere provider of unprocessed ore. Then you brought in Chinese capital to upgrade your capacity to process the nickel for batteries so that you could capture more of the value of the ore. This “resource nationalism” is designed ultimately to produce the batteries themselves in Indonesia.

South Korea pursued a similar strategy to create a steel industry and then become a major shipbuilder, which helped the country jump from roughly the level of Ghana in 1960 to one of the top economies of the world.

Except that this time around, the rich countries are not willing to open their doors to Indonesia. The European Union filed suit at the World Trade Organization against Indonesia’s export ban and won in 2022. Meanwhile, Indonesia’s efforts to create a nickel cartel comparable to what the oil producers started with OPEC have also run aground. And the price of nickel, with the increase in global production, has fallen more than 40 percent over the last year.

Add to that the negative environmental impacts of nickel mining and the community opposition to nickel mines around Indonesia and this “resource nationalism” does not provide an obvious solution to the three-body problem. But that hasn’t prevented other countries with other concentrations of critical minerals—Argentina and lithium, Chile and copper—from dreaming of similarly flipping the script on the Global North. Even though Indonesia hasn’t quite figured out the most feasible formula, its impulse is right: to get more value out of its precious commodities, much as Botswana has done with diamonds.

Global South governments have come up with various ways of subverting the neocolonial aspirations of the richer countries. They have established south-south economic cooperation (including the famous BRICS). They have proposed organizing a kind of debtors’ cartel to form a united front to extract better terms from creditors. They have demanded looser rules for intellectual property rights, as enshrined in free trade treaties, so that they can adapt technologies prevalent (and profitable) in the Global North to help grow their own industries.

More radical proposals come from the community level. The successful referendum on keeping the oil under the ground of the Yasuni national park in Ecuador points to a more direct confrontation with the fossil fuel order. Movements that reject the hyperindustrial, consumerist model of the Global North, which has also become pervasive throughout the Global South, hold up more local traditions of “good living” or buen vivir. Such post-growth alternatives also challenge the inexhaustible demand for energy in the Global North that underpins both the old extractivist model connected to fossil fuels and the new extractivism generated by the “clean energy” transition.

Another source of funds that exists outside the Bretton Woods institutions is what workers (many temporarily located in the Global North) send back to their families (in the Global South) in the form of remittances: $860 billion in 2023. Compare that to what the IMF lent in 2023, a mere $5.7 billion. That figure for annual remittances is almost identical to what the World Bank has loaned in total since 1945: $857.7 billion.

Is it possible to “green” remittances, for instance by setting up a Green Reconstruction Fund that waives the usual transfer fees if workers deposit their money into the bank and earn interest as long as families withdraw the money to use on projects that reduce carbon emissions and promote sustainability? This would be a debt-free way to make an energy transition from the bottom up.

Toward a Solution to the Three Body Problem

Debt cancelation used to be a central plank of the anti-globalization movement. Then, the spread of neoliberal economics to every corner of the globe muted that particular message.

The experience of West Germany after World War II is instructive. In the London Agreement of 1953, the United States, UK, and France effectively canceled more than half of Germany’s external debt and established generous terms for the repayment of the remaining amount. This was done while the Marshall Plan was providing West Germany with considerable resources for its post-war reconstruction. The rationale for this ambitious plan was to ensure that West Germany would be a solid, economically successful bulwark against the Soviet Union and communism.

The main lesson for today is that debt cancelation is an essential component of a global energy transition, and it must also be accompanied by significant funds for reconstruction. What would be the overarching rationale for the cancelation? To ensure that the Global South will be a solid, economically successful bulwark against climate change. This is the ultimate solution to the three-body problem, one that guarantees a truly just energy transition, enables the Global South to catch up to the Global North, and, in the end, saves the planet.

Source of original article: Foreign Policy In Focus (fpif.org).
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