This piece is part of the Climate Crossroads series. Read the rest of the series here.

Financing green energy around the world comes with strings attached. (Mathias Dalheimer)

Leaders of developing countries argue that, because today’s rich countries are historically responsible for the majority of carbon emissions, they have an obligation to help poorer countries finance green infrastructure and decarbonization projects. A blank check from rich countries seems like it would go a long way towards meeting the world’s climate goals.

Perhaps acknowledging this imperative, or making the United States look like a friend to developing countries, President Biden recently published an ambitious international climate finance plan that essentially writes this blank check.

Biden pledged in April to double the United States’s climate finance assistance to $5.7 billion, and, at the UN General Assembly in September, he doubled that commitment. “Meeting [the climate challenge] requires mobilising financing on an unprecedented scale,” he said. It’s not empty rhetoric: U.S. development finance agencies have begun to pour money into green infrastructure projects abroad while scaling back funding for fossil fuel-intensive projects. Moreover, the Treasury Department is encouraging private financial institutions not just to get involved in these countries, but to factor climate risk assessments into all their investments as well.

The plan aims to prioritize poorer countries most vulnerable to climate disasters, such as Caribbean island states. U.S. policymakers are also courting the world’s largest emitters, such as India and China, in order to wean them off of fossil fuels. Sensing incredible opportunity, developing countries and other disaster-vulnerable states have been clamoring to secure climate finance from the United States, development banks, and private sources. They know they need the money badly.

On the surface, the logic behind the plan sounds like a win-win scenario: investment in productive green infrastructure around the globe not only staves off the climate crisis, but it also stimulates productivity and technological growth in a globally weak manufacturing sector. However, financial history indicates that accepting international climate finance may actually prevent developing countries from effectively tackling their development challenges.

Issues of conditionality, debt, and investor preferences threaten to skew the benefits of these agreements toward the United States. When rich-world financiers can impose their visions of green transitions on countries calling for help, they can deny developing countries the chance to craft their own democratic, inclusive, and bottom-up approaches to tackling climate change.

Emission Impossible

Any solution to the climate crisis must involve India, whose emissions are the third-largest in the world. And the Indian government knows it.

Responding to Indian Prime Minister Narendra Modi’s call for “partners to create templates of sustainable development in India” in August, U.S. Special Presidential Envoy for Climate John Kerry headed to New Delhi. Inaugurating the U.S.-India Climate Action and Finance Mobilization Dialogue in September, Kerry met with Indian government ministers and various private sector leaders to “discuss scaling up investment” towards the “clean transition.” The U.S. Development Finance Corporation already committed $500 million to India last year, with another $500 million on the way. The Washington Post projects that another round of investment commitments to India could come by the end of October.

In 2014, then-Vice President Biden and then-Secretary of State Kerry welcomed the newly elected Indian Prime Minister Narendra Modi to Washington, D.C. (Wikimedia Commons)

However, India needs $500 billion more in investment in order to meet its renewable energy goals by 2030. The Hindustan Times finds that India “would need to triple its current rate of annual investment to $110 [billion]” to meet that goal.

Investment is inching toward these ambitious targets. In just four months of 2021, investments in Indian renewables reached $6.6 billion, compared to a total of $6.4 billion the previous year. Indian green energy companies are raising billions of dollars through green bond issues—where investors loan them money earmarked specifically for allegedly green projects, to be paid back in yearly installments. In August, an $8 billion Indian green energy company hit the U.S. stock market, facilitating foreign investment into the sector.

Indian officials seem hopeful that foreign investment will catalyze a green transition and bring down their emissions.

Flooded in Debt

The greenhouse gases China, the United States, and India emit intensify the climate catastrophes that are wrecking vulnerable states, including those in the Caribbean. Caribbean states, for their part, simply can’t afford to do anything about these catastrophes without help.

Since 1990, the Caribbean region has experienced more than 385 climate-related disasters. The annual cost of catastrophic climate events stands at around $3 billion. After Hurricane Irma and Hurricane Maria in 2017, the Caribbean region faced recovery costs above $5 billion. The Inter-American Development Bank estimates that economic losses from unaddressed climate change in the Caribbean could total $22 billion annually by 2050.

In 2017, Hurricane Irma laid waste to the Caribbean. (Russell Watkins/DFID)

And the region’s countries have no way of paying for it. Middle-income Caribbean countries’ unsustainable collective external debt stands at $55.8 billion (excluding Cuba). Yearly average debt service payments keep rising, reducing regional fiscal space for deficit spending and borrowing on easier terms. Middle-income status prevents most Caribbean states from regular international debt relief efforts, and every successive storm mires them further in debt.

Many top Caribbean officials are requesting a solution called a “green debt swap,” whereby creditor countries forgive debt service payments on the condition that debtors use the foregone payments to invest in climate change adaptation and mitigation infrastructures. The UN’s Economic Commission for Latin America and the Caribbean proposed that the Green Climate Fund, a multilateral climate bank, buy Caribbean debt at a discount to free up spending on green infrastructure regionally. Because the U.S. government is a main contributor to the Green Climate Fund, it has immense influence over whether or not this proposal succeeds.

The Not-So-Fine Print

Biden’s climate finance plan is ambitious only in that it promises unprecedented investments in green technologies. In all other respects, however, it adheres to a forty-year-old system of financial rules that threatens developing countries with the self-serving motives of rich-country governments and investors.

To be sure, debt swaps promise to lessen the Caribbean region’s ecological and economic burdens by unlocking money to pay for climate change mitigation, and U.S. investments could help India meet its energy transition goals. But history demonstrates that, in courting foreign investment, developing and vulnerable countries are playing with a financial power imbalance that isn’t in their favor.

For one, the climate finance plan directs the Treasury Department to “support strengthening public financial management in developing countries and emerging markets… enabling environments for private climate finance.” This kind of phrasing suggests a U.S. attempt to make other countries’ financial systems friendlier to and reliant on U.S. investors.

In keeping with Biden’s “foreign policy for the middle class,” the plan requires U.S. agencies to “identify ways to significantly increase, as per its mandate, support for environmentally beneficial, renewable energy, energy efficiency, and energy storage exports” and to “facilitate U.S. exports and jobs for the American middle class.” The key word is exports—it’s plausible that climate finance assistance will only go to countries that promise to purchase U.S.-made goods. Not only is this threat reminiscent of Cold War-era foreign aid conditionality, but enforced dependence on U.S. exports can have damaging economic consequences.

The end result is likely a world where U.S. investors can overrule the legitimate economic development needs of the populations of recipient countries, India and Caribbean states included.

Foreign Interest

Economists Jayati Ghosh and C. P. Chandrasekhar argue that unrestricted financial flows and reliance on foreign capital endangers developing countries. Investment from the United States, for example, improves a country’s ability to import U.S. goods. That’s not necessarily good: cheaper or more advanced U.S. technologies can more easily undercut nascent Indian green manufacturing firms and halt the local employment they might generate.

Reviewing Western firms’ investments in renewable energy projects across West Africa, Steffen Haag summarizes that “developers of renewable energy projects based in the Global North import almost everything—from the technology used to the skilled workforce to construct the plants. This risks excluding African enterprises and preventing value creation on site.”

Not only does foreign finance hold back inclusive industrialization, but it often furthers economic inequality. Financial liberalization often shifts investors’ money into real estate and stocks and away from investments in industry. This class of asset-holders profits handsomely at the expense of most others, and their new economic power forces governments around the world to slash corporate and income tax rates to appease them. This “race to the bottom” prevents governments from collecting tax revenues to plow into social welfare expansions or industrial investments. In India, all of this has already happened—and there’s nothing to suggest that green financialization will be markedly different.

In all cases of successful industrialization-led development, governments have directed money toward priority industries. When foreign investors play larger roles in a country’s politics, however, such an industrial policy is only possible where governments’ and foreign investors’ interests coincide.

Ghosh and Chandrasekhar warn policymakers that those interests might not coincide often. Because foreign investors are normally concerned with higher returns over shorter time horizons, “the chances of funding long-run, possibly risky but necessary projects (such as investment in transportation, green energy, health, and education) diminish greatly. It is then difficult to promote key interconnected sectors that are important for economic diversification and employment generation.”

Left unchecked, the rules of globalized finance can prevent developing country policymakers from substantially improving economic development outcomes.

India’s financial liberalization in the 1990s helped entrench a two-tier economy. (Robert Pittman)

Debt Sustainability

These consequences were not yet clear in the early years of globalized finance. Developing countries’ governments borrowed extensively from abroad during the 1970s to fund industrialization and social welfare. But foreign capital can flow both ways. In the 1980s and 1990s, when foreign investors abruptly refused to lend to certain countries (for varying reasons), many of those countries defaulted on their unsustainable debt.

Technically, their debt was sustainable until foreign investors decided it wasn’t.

Many of these defaulting countries secured debt relief agreements with their creditors. But Ghosh and Chandrasekhar noted that “most studies of debt relief efforts since the 1990s have found that debtor countries did not benefit over time through more sustainable debt burdens.” That’s often because debt relief initiatives imposed various conditionalities on recipient countries. Most famously, the International Monetary Fund’s “structural adjustment programs” forced recipient countries into fiscal austerity, which included massive public spending cuts, regressive consumption taxes, and privatizations of state industries and the huge job losses they involved.

That’s not good news for Caribbean states asking for debt swaps. The United States could hypothetically mandate that Caribbean states use foregone debt service payments to buy U.S. goods and green technology, preventing them from spending on local green infrastructure programs that could help alleviate their 25 percent youth unemployment rate.

Even without conditionality, the terms of international debt relief themselves are stacked in favor of creditors—in the case of Argentina’s debt swaps, sometimes farcically so. Regardless of whatever debt swap Caribbean states could arrange with the United States, private creditors currently have the legal leverage to refuse to chip in at all. Essentially, their profits come at developing countries’ expense.

An activist protests against the New York law firm that arrested Argentina’s debt swap. (Jubilee Debt Campaign)

This financial cycle is complex, interconnected, and disadvantageous to developing countries. Ghosh and Chandrasekhar conclude that “emerging market investments have effectively transferred financial resources from the developing to the advanced economies and exacerbated pre-existing asset and income inequalities.”

A Cure Worse than the Disease

India, Caribbean states, and other countries calling for climate finance assistance are walking into a financial trap. When the world of finance remains imperial in nature—when governments at the centers of global finance have, time and time again, used their control over money flows to condition global development—green transitions financed by foreign borrowing won’t have outcomes conducive to inclusive economic development.

It won’t matter if citizens of developing countries have their own ideas about how to tackle climate change in ways that support their own economic development and industrialization. The fine print of Biden’s climate finance plan allows the U.S. government to dictate to developing countries what climate solutions are “right” and what solutions aren’t.

It’s hard to claim that the U.S. government or the investors it leads are acting in developing countries’ best interests, whatever those may be. Investors’ commitments to creating as much renewable energy capacity as possible are fraught with their own environmental and financial concerns; the resources renewable energy installations require threaten the health of marginalized communities. Worse, renewable energy production based in developing countries could supplement rich-country power grids without improving local energy security. Communities deserve a voice in the implementation, regulation, and outputs of green investment projects. But local democratic accountability gets in the way of foreign investors’ profits.

Just because developing countries need to finance their green transitions doesn’t mean that they should accept blank checks from rich-country policymakers—especially not when the economy they originate from is historically bankrupt.

Making Economics Political Again

It seems unfair that richer countries, many of which colonized today’s developing countries and/or treated them like geopolitical playgrounds during the Cold War, can continue to impose conditions on the flows of global finance. Yet again, the rich world makes emerging markets their financial sandboxes.

How can developing countries improve their bargaining positions in order to secure rich countries’ money without conditions? For one, leaders of developing countries can overcome this power imbalance by working together in forums skeptical of the globalized status quo.

This solution has been attempted once before. In 1974, through the G77 (developing countries’ alternative to the rich-country G7 and G20) and the UN Conference on Trade and Development, the world’s formerly colonized countries announced proposals for a New International Economic Order (NIEO). The proposals acknowledged that the economy we know today “was established at a time when most of the developing countries did not even exist as independent states and which perpetuates inequality.” While many of the G77 have attempted to realize at least some of these proposals, the global economic crises of the 1980s and the end of the Cold War shot their ambition. Reviving this kind of economic solidarity between developing countries is a necessary first step toward tackling the climate crisis without conditionality.

The content of the NIEO matters as much as its form. While many of its proposals are better tailored to the global economy of the 1970s, not the financialized world its signatories exist in today, the most salient part of the NIEO is its bold call for the unconditional transfers of financial resources and technology from richer countries to developing ones. This transfer encompasses investment agreements without conditionality, loosened intellectual property restrictions, and equal local involvement and participation in development projects.

A Spanish consortium helped build Morocco’s Ouarzazate Power Station, the largest concentrated solar power plant in the world. (Richard Allaway)

When today’s unbalanced global economy allows richer countries to expropriate the natural resources, land, and labor of developing countries—a process known as ecologically unequal exchange—defending the right of developing countries to make their own economic futures is more necessary than ever.

To be sure, many authoritarian governments were fans of the NIEO because it would give them more control over their economies. But authoritarian governments also exist today, without the NIEO. One could argue that all governments would be far more accountable to their populations if they couldn’t rely on foreign investors to prop up economic exploitation.

Leaders and policymakers must consciously choose to reject economic dependency and the conditionality it brings in favor of state-led development strategies—which, for all their faults, created today’s economic powers. All the above recommendations are contingent on making this shift.

But that may be the hardest task of them all: changing leaders’ preferences requires both leaders and citizens to demonstrate a longer-term commitment to improving their communities and states. It’s plausible that the looming threat of climate change, with the vast inequalities it’s already exposing and the more frequent emergencies it forces leaders to deal with, will catalyze democratic mobilizations that can force this necessary change in political perspective.

Economic challenges like climate finance are, at their hearts, just politics. The world’s billions in military spending and the rapid success of Operation Warp Speed prove that, as John Maynard Keynes said, “anything we can do we can afford.” The problem was never the affording. The problem is the doing—which has nothing to do with finance and everything to do with the world’s unequal distributions of political power.

Climate Crossroads: Beware the Blank Checks of Climate Finance