Hundreds of mangrove seedlings are growing in a small bay of an island south of Fiji's main island Viti Levu. The Pacific Island Countries are vulnerable to climate change and need resources to adapt. Credit: Tom Vierus/Climate Visuals

By Labanya Prakash Jena
Sharm El-Sheikh, Nov 18 2022 (IPS)

The Pacific Island Countries (PICs) – 14 small island developing nations in the Pacific Ocean – comprise one of the most exposed and vulnerable regions to climate change and natural calamities. The region did not cause this climate crisis; the crisis stemmed from heavy carbon emissions by developed countries. Yet paradoxically, the countries in the region are also the least resourced to adapt to climate change.

The IMF estimates that the PICs need an additional investment of an average of 9% of GDP on developing climate-resilient infrastructure over the next ten years. Some countries’ climate-resilient infrastructure needs more than 10% of their GDP. However, this much capital mobilisation is impossible for the region with low per capita income, volatile economy, lack of fiscal space, and low saving rate. Besides, these countries have also committed to ambitious targets to decarbonize their economies.

In this scenario, international climate finance mobilisation is critical to make the region resilient and prosperous. The longer the delay in building the much-needed climate-resilient infrastructure, the higher the cost and greater the risk of exposing these countries to extreme events for a longer time.

Labanya Prakash Jena, Commonwealth Regional Climate Finance Adviser, Indo-Pacific Region, argues international climate finance mobilisation is critical to make Pacific Island Countries resilient and prosperous. Credit: Commonwealth

Tackling the bottlenecks

There are two primary bottlenecks to international climate flows: institutional structure and lack of capacity at various levels. The PIC region’s institutional structure is plagued by limited administrative and financial capabilities, inadequate program management and accountability, and an obscure audit system to mobilise international public climate finance.

In addition, these countries lack the capacity to design and structure projects and develop a robust and tangible climate adaptation project pipeline. Besides, the region is not strategically allocating available capital, including budgetary outlays, international climate finance, development aid, and private finance. The primary focus of international institutions must be to address these challenges quickly.

Options for international climate finance: Grants, debt, equity

The total GDP of the PIC region is only about USD10 billion, with an average per capita income of approximately USD4,000 and a gross capital formation rate of 20%, according to the World Bank. This translates to a maximum domestic capital mobilisation of USD 2 billion per year. Meanwhile, the IMF estimates that the region needs an additional capital of USD 1 billion per annum for climate resilience infrastructure investment.

International grant capital is the only option to fund climate adaptation projects in the region. The reason is that any form of debt capital, even if in the form of concessional debt capital over the long term, is not an economical one. The PIC region cannot pay back debt, and it is unlikely the region’s economic size will increase at a rapid rate in the future to pay back debt.

Although the region’s primary sources of international climate finance – the Green Climate Fund (GCF), World Bank, and Asian Development Bank (ADB) – provide grants, it is only for project preparation and capacity development. These financers mostly provide debt financing, albeit at a better rate than private financers.

However, the low debt servicing ability of the region arrests them, raising foreign debt capital. It is even more problematic if the debt capital is in foreign currency (e.g., USD) – the borrowers face huge foreign currency due to expected and unexpected devaluation in the local currency, and borrowers face currency risk.

Equity capital is not the best form of financing for climate adaptation projects. Unlike climate change mitigating projects, they do not generate clear cash flows as the beneficiaries are difficult to identify to monetize climate adaptation projects. Hence, equity capital is not an efficient source of capital for climate adaptation projects.

Strategic allocation of capital is key

Unlike developed and developing countries, the PIC region does not have a have strong domestic financial and banking sector, and it rarely attracted foreign capital for large-scale investment. So, it is futile to expect large-scale private financing flows to bridge the financing gaps for their climate actions.

Moreover, the public goods nature of climate adaptation projects does not attract private financers. Hence, public financing, including capital Government budgetary outlays, international climate finance, and other development aids must be spent judiciously.

The crux is strategically allocating the available capital and aligning projects’ needs with the mandates of the public finances. One of the most efficient ways is to carve out the climate financing as a separate portfolio and decide where and how the capital would be used in various climate adaptation projects.

In addition, the climate change divisions of these countries can work closely with the Ministry of finance to mainstream climate adaptation in national development plans and sector policies and bring climate change perspectives in economic decision-making. The countries can also need to identify the projects which offer dual benefits of climate migration and adaptation, which brings a lot of attention to global climate financers.

For example, nature-based carbon sequestration through ocean conservation, forestry, and wilding (wetland, grassland) sequestrates carbon, offers natural shields, and protects human life and properties in extreme weather events. The global impact investors will find these projects attractive as they help the region become climate-resilient and create a global public good, helping everyone, including the financer’s country.

Way forward

International institutions must support Pacific Island countries to strengthen administrative and financial structures for better transparency and accountability, which can help the PICs access global public capital. In addition, Governments in the region must strategically allocate climate finance, prioritise climate actions in decision-making, integrate adaptation projects with national climate action plans, and identify suitable projects offering dual climate mitigation and adaptation benefits.

The international institutions can also help the countries identify and design projects to develop pipeline projects for funding. There is a dire need to develop institutional and local capacity to meet the needs of climate change-related economic activities in the region. But if addressed, the region will be able to finally make headway in addressing the deep adaptation challenges they face due to climate change.

• Labanya Prakash Jena is the Commonwealth Regional Climate Finance Adviser for the Indo-Pacific Region.

IPS UN Bureau

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“Just as the world is moving towards multi-polarity, so is Asia … The economic fragmentation of the region and the competitive pursuit of security interests may well consign the Asian Century into a brief interlude rather than a millennial transformation”. Photo credit: Public domain via Wikimedia Commons

By Shyam Saran
NEW DELHI, Jun 1 2015 (IPS)

It has been apparent for some time that we are in the midst of a historic shift of the centre of gravity of the global economy from the trans-Atlantic to what is now becoming known as the Indo-Pacific.  

This is an emerging centre of economic dynamism and comprises what was earlier confined to the Asia-Pacific but now includes the South Asian region as well.

This is a region which now accounts for nearly 40 percent of world gross domestic product (GDP), which is likely to rise to 50 percent or more by 2050.  Its share of world trade is now 30 percent and growing.

Shyam Saran

This year, the region has become the largest source of foreign direct investment (FDI), surpassing the European Union (EU) and the United States. China has been the main driver of this historic shift, but other Asian economies have also made significant contributions.

As the Chinese economy begins to slow, India shows promise of regaining an accelerated growth trajectory under a new and decisive political leadership. This will help extend the scale and direction of this shift. Its geopolitical consequences will be profound.

It must be recognised that the economic transformation of Asia, in particular the spectacular growth of China, has been enabled by an unusually extended and liberal global economic environment, underpinned by the faith in globalisation and open markets.

It has also been enabled by a U.S.-led security architecture in the region which kept in check, though did not resolve, the long-standing political fault lines and regional conflicts over competing territorial claims and unresolved disputes.

This relatively benign and supportive economic and security environment is in danger of unravelling precisely at a time when the situation in the region is becoming more complex and challenging.  Paradoxically, this is partly a consequence of the very success of the region in achieving relative economic prosperity.“The danger is that instead of an inclusive and regionally integrated Asia, we may end up with exclusive and competing clusters, moving at different speeds, with different norms and standards. This may well undermine the very basis of Asia’s economic dynamism”

We are witnessing new trends in the region which, unless managed with prudence and foresight, may well sour the prospects of an Asian Century.

The relatively open and liberal trade and investment regime, in particular access to the large consuming markets of the United States, European Union and Japan, is now under serious threat.

Protectionist trends are already visible in these advanced economies as they struggle with prolonged economic stagnation which is the fall-out of the global financial and economic crisis of 2007-2008.

Instead of the consolidation and expansion of the open and inclusive economic architecture that had hitherto been the hallmark of the regional and global economy, we are witnessing its steady fragmentation.

In the Indo-Pacific region, there are competing regional trade arrangements and investment regimes, with no clarity on the contours of a new and emerging economic architecture.

The United States is spearheading its Trans-Pacific Partnership (TPP) which will include some Asian economies, but not India and China.

China has countered by proposing a free trade area encompassing the current Asia-Pacific Economic Cooperation (APEC) membership.  This will include China and the United States but not India and some of the Association of Southeast Asian Nations (ASEAN) economies.

The Regional Cooperation Economic Partnership (RCEP) would include all ASEAN countries plus China, Japan, Republic of Korea, India, Australia and New Zealand, but not the United States.

And finally, there is the East Asia Summit process (EAS) which includes all the above-mentioned countries but also the United States and Russia.

The danger is that instead of an inclusive and regionally integrated Asia, we may end up with exclusive and competing clusters, moving at different speeds, with different norms and standards.  This may well undermine the very basis of Asia’s economic dynamism.

In the security field, too, we are witnessing a growing salience of inter-state tensions and competitive military build-up.

The U.S.-led security architecture remains in place formally but its erstwhile predominance is diminished.

The gap between the military capabilities of China and the United State is closing steadily. As China’s security footprint expands beyond its shores, it will inevitably intersect with the existing deployment of the forces of the United States and its allies and partners.

Faced with an increasingly uncertain security environment and threatened by a more insistent assertion of territorial claims by China, the countries of the region, including Japan, Republic of Korea, members of ASEAN, Australia and India are building up their own defences, in particular maritime capabilities, and this itself is escalating tensions.

There is as yet no emerging regional security architecture which could help manage inter-state tensions in the region. This includes the growing possibilities of confrontation between the United States and China.

In the absence of such a regional security architecture, based on a broad political consensus and a mutually acceptable Code of Conduct, the region may well witness a heightening of tension and even conflict.  These developments would inevitably and adversely impact on the dense network of trade and investment relations that bind the countries of the region together and erode the very basis of their prosperity.

In this context, mention may be made of the Chinese One Belt One Road (OBOR) initiative which seeks to deploy China’s surplus capital to build a vast network of transport and infrastructural links not only across the Indo-Pacific but also straddling the Eurasian landmass.

The newly established Asian Infrastructure Investment Bank (AIIB) initiated and led by China would become a key financing instrument for the OBOR.  China has also recently come out with a new Defence White Paper, which puts forward a new strategy of Open Seas, shifting the emphasis from coastal and near sea defence to an expanding naval presence which matches China’s growing global profile and world-wide location of Chinese-controlled economic assets.

While China’s investment in regional infrastructure in Asia may be welcome, it will inevitably be accompanied by a security dimension which may heighten anxieties among countries in the Asian region and beyond.

It is apparent from the above analysis that it is no longer possible for any major power in the Indo-Pacific to unilaterally seek a position of overweening economic dominance or military pre-eminence of the kind that the United States enjoyed over much of the post-Second World War period.

Just as the world is moving towards multi-polarity, so is Asia.  It is now home to a cluster of major powers with significant economic and security capabilities and interests. The only practical means of avoiding a unilateral and potentially destructive pursuit of economic and security interests would be to put in place an inclusive economic architecture underpinned  by a similarly inclusive security architecture which provides mutual reassurance and shared opportunities for promoting prosperity.

The economic fragmentation of the region and the competitive pursuit of security interests may well consign the Asian Century into a brief interlude rather than a millennial transformation. (END/COLUMNIST SERVICE)

Edited by Phil Harris   

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

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