Nations in Debt

The last two blogs dealt with insurance against catastrophic damage that is associated with the accelerating impacts of climate change (September 12^th and September 19^th). Both blogs were focused on the United States. The first was focused on the increasing withdrawal of private insurance companies from vulnerable markets, while the second blog dealt with the complex state of federal contributions to supplement local insurance, mainly through FEMA. Recent coverage of the increasing impact of climate change focused on the destruction of two relatively small towns: Lahaina in Maui, Hawaii, destroyed by uncontrolled wildfire, and Derna in Libya, destroyed by an uncontrolled flood that was amplified by the destruction of two ill-maintained dams. The Lahaina destruction resulted in the death of about 100 people while that in Libya resulted in the death of thousands. Lahaina is in the US and expecting help from the US federal government. Derna is not in the US and the Libyan government is basically nonexistent. Both stories disappeared from the news after only a few days. The survivors from Lahaina will slowly try to recuperate with the help of local and federal funds. What will the survivors of Derna do?

Obviously, Derna and Libya are not alone. Recently, the NYT published an article on the difficulties that most developing countries face in trying to adapt to the increased threats of climate change. The article’s emphasis was on the situation in Ghana, with the full realization that it is common to most developing countries. Below is the most general citation from that article:

            Crisis and Bailout: The Tortuous Cycle Stalking Nations in Debt

The debt load for developing countries — now estimated to top $200 billion — threatens to upend economies and unravel painstaking gains in education, health care and incomes. But poor and low-income countries have struggled to gain sustained international attention. In Ghana, the I.M.F. laid out a detailed rescue plan to get the country back on its feet — reining in debt and spending, raising revenue and protecting the poorest — as Accra negotiates with foreign creditors.

Still, a nagging question for Ghana and other emerging nations in debt persists: Why will this time be any different?

The latest rescue plan outlined for Ghana addresses key problems, said Tsidi M. Tsikata, a senior fellow at the African Center for Economic Transformation in Accra. But so did many of the previous ones, he said, and still crises recurred.

The last time Ghana turned to the fund was in 2015. Within three years, the country was on its way to paying back the loan, and was among the world’s fastest-growing economies. Ghana was held up as a model for the rest of Africa.

Details about the global debt situation are shown in Figure 1.

Figure 1 – Total debt by country  (Source: Seeking Alpha)

On the scale of Figure 1, it seems that there is not much difference between rich and poor in terms of the ratio between the various debt forms and the GDP of the countries (a factor slightly greater than 2 between the largest debt ratio, Japan, and the smallest one, Brazil). However, one important factor is missing in the figure – the strength of the currencies of the various players. If a disaster strikes the United States, (issues with inflation aside) the US can just print more money to satisfy immediate needs. Brazil and other developing countries cannot do the same.

Figures 2 and 3 show two important factors in play that should convince rich countries to help poor countries face the destructive impacts of climate change.

Figure 2 shows the cumulative global contributions to carbon emissions, the main driver of today’s changes in atmospheric chemistry, and therefore the main culprit for accelerating climate change. The two leading contributors to this accumulation are the US and the European Union.

Figure 2 – Cumulative global contributions to carbon emissions (Source: Our World in Data)

Figure 3 – Share of energy consumption by fuel (Source: Visual Capitalist)

Global players such as the UN do not have the effective enforcement power required for reparations. Figure 3 shows the energy/fuel consumption of fuels for a list of countries and blocks of countries that roughly correspond to the G20 country collections. The largest coal consumers are developing countries (South Africa, China, India, etc.). The atmosphere is global and carbon dioxide (the most prevalent greenhouse gas) spreads easily throughout. Therefore, a good self-empowering argument can be raised for rich countries to help poor countries in the adaptation and mitigation of climate change. Doing so will actively participate in the global energy transition away from using coal, the most polluting energy source.

The largest threat that is starting to convince rich countries that it is in their self-interest to help developing countries confront climate change, comes from the unavoidable results of failure. This is also transparent in the fate of Libyan survivors of the deadly floods in Derna. The threat is the uncontrolled increase in environmental refugees who feel that their livelihoods and even lives are being destroyed. They find their countries unable to confront the destruction, forcing them to try to search for shelter in countries with better chances of confronting the danger.

I wrote about this issue in previous blogs (see April 3, 2018) and every semester I show my students a film about the issue made by the American army (The Age of Consequences) that shows that the border security of the rich countries is threatened by an increasingly large number of people who feel no longer safe in their own country.

For the first time, last year, in the COP27 global climate meeting, this issue took center stage (see November 22, 2022 blog). It is a certainty that this issue will be central in the coming COP28 conference in the United Arab Emirates.

There are two international organizations that have it in their charters to help developing countries confront global economic threats, these are the World Bank and the IMF (International Monetary Fund). The next blog will focus on these organizations.

Stay tuned.