Weaponizing development finance in a new Cold War

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Where is the G7 Summit 2022? Schloss Elmau location and history | NationalWorld

by Anis Chowdhury     15 July 2022

After reneging on promised development aid and climate finance, the G7 rich nations have obligingly lined up behind US President Biden’s the Partnership for Global Infrastructure and Investment (PGII) at their 2022 Summit in Schloss Elmau (Germany). With the promised US contribution of US$200bn, G7 together aim to mobilize US$600bn of public and private funds for infrastructure investments in developing countries as an alternative to China’s multitrillion-dollar Belt and Road Initiative (BRI).

While the White House believes the BRI has provided little tangible benefit for many developing countries, “China continues to welcome all initiatives to promote global infrastructure development”, reiterates a Chinese foreign ministry spokesman to complement China’s contributions. Defending the BRI, he makes it clear that China is “opposed to pushing forward geopolitical calculations under the pretext of infrastructure construction or smearing the Belt and Road Initiative”.

Confusion abounds

President Biden unveiled an almost identical initiative, Build Back Better World (B3W) a year ago in 2021 at the G7 Summit in Cornwall (UK), claiming that it would define the G7 alternative to China’s BRI. But built on his domestic Build Back Better (BBB) framework, B3W was ‘dead in the water’ as BBB failed to attract the needed Senate votes.

Thus, PGII is a rebranding of Biden’s botched signature foreign policy initiative, removing references to his failed domestic agenda. But the sudden change in the course and rebranding “created significant confusion”.

The PGII Fact Sheet toned downed the B3W Fact Sheet’s rhetorical preamble that the US “is rallying the world’s democracies to deliver for our people, meet the world’s biggest challenges, and demonstrate our shared values.” Instead, PGII “will … advance U.S. national security”.

While little details have been forthcoming for the ‘dead’ B3W, the European Union (EU) launched in December 2021 its own Global Gateway for developing countries, aiming to mobilize €300bn in infrastructure investments by 2027. At the EU-African Union Summit in February 2022, the EU announced €150bn in financing for the Africa-Europe Investment Package, half of the bloc’s entire Global Gateway budget.

European leaders have reiterated that its Global Gateway and the G7’s initiatives should be complementary and mutually reinforcing. However, by allocating the lion’s share of the Global Gateway funds to Africa, the EU reveals its priority, while the geographical focus of G7’s non-European members remain vague.

It is also not clear how much of this is new money. A total of €135bn of Global Gateway’s funding will come from the already dedicated European Fund for Sustainable Development.

Similar confusions remain regarding UK’s Clean Green Initiative, launched at the 2021 Climate Summit (COP26), and Japan’s plan to raise US$65bn over the same period for regional connectivity. Speaking at the G7 event, the German host, Chancellor Olaf Scholz, implicitly acknowledged the confusion, saying there were advantages if the G7 countries showcased their offers under a common roof.

Far-fetched, risky and strings

Besides duplications and double counting, it is not clear how much of this money is grant or concessional aid vis-à-vis commercial loans. The initiatives explicitly mention leveraging public money for private sector funds. Such leveraging initiatives, e.g., much touted blended finance (BF), failed to mobilize any significant private fund. The Economist found the “trending blending” (i.e., BF) – the fad for mixing public, charitable and private money – “too starry-eyed, struggling to take off”, making the hope of filling a trillion-dollar financing gap far-fetched.

Public-Private Partnerships (PPPs) carry contingent fiscal risks, as acknowledged by the International Monetary Fund and the World Bank. PPPs are also found wanting in improving access equity, reducing poverty and enhancing sustainability. They are also found to distort national priorities, favouring private investors.

Trump’s Vice-President accused China of “debt diplomacy” and Biden’s Secretary of State claims that the Chinese loans with hidden terms cause “debt traps”. While no convincing evidence is found to back their claims, the US and other Western initiatives – by involving private capital – can contribute to debt crises. Developing countries’ debt crises often involved commercial loans or private sector money. For example, the 1980s Latin American debt crisis, triggered by sudden interest rate hikes to kill inflation, involved US, UK and Canadian commercial bank loans.

Private sector loans usually have much higher interest rates and shorter repayment periods than bilateral loans from governments and multilateral development banks, without equitable restructuring or refinancing mechanisms. Developed countries have resisted developing countries’ demand for a fair and orderly multilateral sovereign debt restructuring architecture despite the landmark 2014 UN General Assembly resolution. The West also resisted overhaul of unjust trade and tax rules that disadvantage poor countries.

By explicitly claiming that their initiatives are “values-driven”, the Western money are likely to come with strings attached. Biden asserting, “concrete benefits of partnering with democracies”, value-driven is a code word for asking developing countries to take a side in the new Cold War.

Trust deficits

The rich nations never are behind pledging; but ever they fulfil. More than half a century ago they promised to deliver 0.7% of their Gross National Income (GNI) as development aid. Only 5 rich countries met this commitment consistently so far. With 0.18% of its GNI, the US ranks at the bottom in 2021.

Total development aid from the rich members of the Organization for Economic Development and Cooperation (OECD) hardly exceeded half the promised amount. Oxfam has estimated that 50 years of broken promises meant an accumulated US$5.7tn worth of undelivered aid by 2020.

Yet many used the Syrian refugee crisis and the pandemic to cut their overseas development assistance (ODA). Some powerful countries have turned to ‘creative accounting’, e.g., counting refugee settlement and ‘peace-keeping’ military operations costs as ODA.

The Deputy Secretary-General of the United Nations is “deeply troubled over recent decisions and proposals to markedly cut Official Development Assistance to service the impacts of the war in Ukraine on refugees”.

The G7 wealthy countries also failed to deliver arbitrarily determined pledged US100bn a year by 2020 to help developing countries adapt to climate change and mitigate further rises in temperature. The OECD reported US$79.6bn in climate finance in 2019. But OECD climate finance numbers are disputed for double counting and including non-concessional commercial loans, ‘rolled-over’ loans and private finance.

The G7 leaders also pledged to double their aid by 2010, earmarking US$50bn yearly for Africa. But by 2008, only one third of the promised increased had been delivered. The OECD admitted that G7 countries had fallen US$19bn short of the target.

Aid volumes only tell us part of the tale – the quality of aid is an equally if not more important story. Most development aid lack transparency and predictability. Despite promising to untie, aid is increasingly being ‘tied’ – requiring recipients to implement donor projects or to buy from donor country suppliers – compromising aid-effectiveness significantly. Most notably, the US is ranked bottom on aid effectiveness among 27 of the world’s wealthiest countries.

Cooperation, not competition

Development aid has long been an instrument of influence for rich Western countries. China is a new comer in development finance. Its role has increased significantly, making it one of the world’s largest development financers due to the wealthy Western countries’ failed promises, duplicity and betrayal, resulting in declines in funding from OECD donors.

China has now a bigger presence in international development finance than the world’s six major multilateral financial institutions put together. Many developing countries have few options other than to rely on China. The Chinese finance typically is demand driven and comes with no political strings or policy conditionality attached.

Nevertheless, there are some justifiable concerns with China’s development finance model, such as lack of transparency, excessive use of Chinese workers, provision of chiefly commercial loans, adverse environmental impacts.  In 2019 at the launch of a new phase of BRI, Christine Lagarde, the IMF’s then Managing Director highlighted “benefit from increased transparency, open procurement with competitive bidding, and better risk assessment in project selection”

Lagarde also observed  China’s learning and steps towards improving. She expressed satisfaction at China’s decision to use its new debt sustainability framework to evaluate BRI projects and the launching of its green investment principle.

Thus, the US and its allies must abandon their use of aid as a hegemonic tool. Instead of seeing China as a strategic threat in a new Cold War, they should complement China’s effort. Multilateral and bilateral donors should also move to harness the positive potential of China to bridge development gaps for better, more sustainable, development outcomes.