Co-Authored with Mari Elka Pangestu
By investing now to build a green, resilient and inclusive economy, countries can turn the challenges of COVID-19 and climate change into opportunities for a more prosperous and stable future.
The decade following the 2009 global financial crisis was characterised by growing structural weaknesses in developing countries, which have been further aggravated by the COVID-19 pandemic and climate change, worsening poverty and inequality. These weaknesses include slowing investment, productivity, employment, and poverty reduction; rising debt; and accelerating destruction of natural capital. The pandemic has already pushed over 100 million more people into extreme poverty and worsened inequality. The effects of climate change are expected to push an estimated additional 130 million people into extreme poverty by 2030.
COVID-19 and climate change have starkly exposed the interdependence between people, the planet, and the economy. All economic activities depend upon ecosystem services, so depleting the natural assets that create these services, eventually worsens economic performance.
The decade following the 2009 global financial crisis was characterised by growing structural weaknesses in developing countries, which have been further aggravated by the COVID-19 pandemic and climate change, worsening poverty and inequality.
Figure 1: Global income losses due to the COVID-19 pandemic
A business-as-usual recovery package that neglects these interlinkages would not adequately address the complex challenges that confront the world nor its structural weaknesses and would likely result in a lost decade of development. Targeting socioeconomic, climate change and biodiversity challenges in isolation is likely to be less effective than a coordinated response to their interacting effects. A continuation of current growth patterns would not address structural economic weaknesses and would erode natural capital and increase risks that affect long run growth. As the depletion of forests, oceans, and other natural assets worsen, the cost of inaction is becoming more expensive than the cost of climate action and it is the poor and vulnerable who are most disadvantaged by it.
The GRID approach
The solution is to adopt a Green, Resilient and Inclusive Development (GRID) approach that pursues poverty reduction and shared prosperity with a long-term sustainability lens. This approach sets a recovery path that maintains a line of sight to long-term development goals; recognizes the interconnections between people, the planet, and the economy; and tackles risks in an integrated way. Research from the University of Oxford, World Economic Forum and Observer Research Foundation has all shown that a green recovery will not just be beneficial for combating climate change but also offer the best economic returns for government spending and yield development outcomes. The GRID approach is novel in two respects.
First, though development practitioners have long worried about poverty, inequality and climate change, the GRID approach pays particular attention to their interrelationships and thus, on the cross-sectoral nature of critical development policies. Second, achieving GRID implies simultaneously and systematically addressing sustainability, resilience and inclusiveness. GRID is a balanced approach focused on development and sustainability and tailored to each country’s needs and its Nationally Determined Contributions (NDC) objectives. Such a path will achieve lasting economic growth that is shared across the population, providing a robust recovery and restoring momentum on the Sustainable Development Goals (SDGs).
Research from the University of Oxford, World Economic Forum and Observer Research Foundation has all shown that a green recovery will not just be beneficial for combating climate change but also offer the best economic returns for government spending and yield development outcomes.
Recovering from COVID-19 with GRID
The pandemic has inflicted a particularly harsh blow on developing economies. Most urgently, a fast and fair vaccine rollout is critical to an L-shaped recovery. Vaccine access and deployment presents challenges unprecedented in scale, speed and specificities, which will require strong coordination.
Looking ahead, setting a path to GRID will require urgent investments at scale in all forms of capital (human, physical, natural, and social) to address structural weaknesses and promote growth. Special attention is needed on human capital development to rebuild skills and recover pandemic related losses, especially amongst marginalised groups. While the pandemic has amplified the challenges of providing education for all, it has also highlighted how disruptive and transformational technologies can be leveraged in addition to traditional in person learning to help education services withstand the unique pressures of this time.
Recovery packages are an opportunity to prioritise investments in the infrastructure needed to develop and roll out transformative technologies.
Women must be at the center of the GRID agenda as powerful agents of change. Education for girls, together with family planning, reproductive and sexual health, and economic opportunities for women will accelerate the green, resilient and inclusive dimensions of development.
Technology and innovation will play an essential role in promoting low carbon growth. Recovery packages are an opportunity to prioritise investments in the infrastructure needed to develop and roll out transformative technologies.
One takeaway from Glasgow has been that securing green finance at scale will be essential for the GRID agenda. However, developed countries found it difficult to secure the necessary funding for developing countries to implement the green transition to sustainable and equitable development.
But there may be a silver lining. The global economy is awash with excess savings estimated at around $3.9 trillion that are earning negative or low returns and there are $46 trillion of pension funds in search of reasonable returns. The low carbon transition may offer an opportunity for investors, especially as the returns to green investments begin to exceed investments in more conventional technological choices.
Necessity and urgency of systemic investments and transformations
Transformational actions will be needed in key systems — for example, energy, agriculture, food, water, land, cities, transport and manufacturing — that drive the economy and account for over 90 percent of greenhouse gas emissions. Without significant change in these sectors, neither climate change mitigation nor sustained and resilient development are possible. Such a transition, by addressing economic distortions, will promote greater economic efficiency and reduce adverse productivity and health impacts, leading to better development outcomes.
Domestic resource mobilisation can also be increased by enhancing tax progressivity, applying wealth taxation, and eliminating tax avoidance. There is also a need for greater selectivity and efficiency in spending.
But the fruits of the transition may not be evenly distributed and will require a range of social and labour market policies that address adverse impacts, safeguard the vulnerable and deliver a just transition. The GRID approach, therefore, supports a transition to a low carbon economy while considering countries’ energy needs and providing targeted support for the poorest.
Significant reforms of fiscal systems will be needed to mobilise domestic resources and finance the transition. Taxes on externalities are a large and unused source of potential revenue, which can create incentives for the private sector to invest in more sustainable activities. Domestic resource mobilisation can also be increased by enhancing tax progressivity, applying wealth taxation, and eliminating tax avoidance. There is also a need for greater selectivity and efficiency in spending.
A strong private sector involvement will be needed. The scale of investment needed far exceeds the possibilities of the public sector. Reforms are needed to remove constraints to private investment in appropriate sectors and technologies. Thus, at the country level, a strong partnership and dialogue between the public and private sector is urgently needed. And further developing and implementing green financial sector regulation, such as reporting standards and green taxonomies, can help harness investors’ increasing appetite for sustainable investments, which offer both measurable impacts on the environment and society.
However, sustainable and substantial flows of finance across borders will need to supplement domestic efforts. Multilateral development banks (MDBs) and Development Finance Institutions (DFIs) must focus on catalytic and transformational investments in priority areas to develop green, inclusive and resilient project pipelines that support economic growth, and job and income generation. On this front, MDBs can help lower risks for private capital through guarantees and blended finance. But at the end of the day the most effective way to attract private capital is through policies that correct distortions that render environmental destruction profitable.
Multilateral development banks (MDBs) and Development Finance Institutions (DFIs) must focus on catalytic and transformational investments in priority areas to develop green, inclusive and resilient project pipelines that support economic growth, and job and income generation.
Climate change is a reality shaping lives as we speak and not a distant mirage that will materialise only in the future. From Pacific Island nations facing rising sea levels to the Sahel region struggling with longer dry seasons, climate change is changing lives of the poor and vulnerable across the world. The future for the world’s climate vulnerable groups will remain bleak unless we transform policy and economic thinking and secure the financing that is needed.
Countries face a historic opportunity to establish a better way forward. Despite the damage wrought by the pandemic, the exceptional crisis response offers a unique opportunity for a “reset” that addresses past policy deficiencies and chronic investment gaps. Crisis related expenditures can be used to invest in new opportunities, such as accelerating digital development, an expansion of basic service provision, improvements in regional supply chains, strengthening ecosystems services, and policies to catalyze job creation in growth sectors. Private sector dynamism and innovative financing will need to power the recovery and to create economic growth and employment through investment and innovation. Public-private partnerships and key upstream policy reforms can spur private investment (including FDI), support viable firms through restructuring, and enable the financial system to support a robust recovery through the resolution of non performing loans.