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1. Lowering the Cost of Capital for Climate and SDG Finance in Emerging Markets and Developing Economies (EMDEs)

Author:
Jeffrey Sachs, Lisa Sachs, Ana Maria Camelo Vega, and Bradford M. Willis
Publication Date:
04-2025
Content Type:
Special Report
Institution:
Columbia Center on Sustainable Investment
Abstract:
Today, the world’s fastest-growing economies face the steepest borrowing costs — even for clean energy projects with solid fundamentals. This is not a function of global capital scarcity. Trillions are available. The problem lies in systemic barriers that prevent capital from flowing to where it’s most urgently needed. The high cost of capital in EMDEs not only undermines critical financing for the energy transition and sustainable development; it also limits the ability for US- and EU-based financial institutions to invest in and finance projects in EMDEs, despite institutional and stakeholder appetite and interest for transition finance. This paper provides a holistic diagnosis of the structural forces inflating the cost of capital in EMDEs – including sovereign credit ratings, investor risk perceptions, development finance mandates, and regulatory norms – and it outlines ten actionable solutions to unlock long-term, affordable finance for climate and sustainable development – at the speed and scale required by both global goals and national ambitions. Each of the proposed approaches deserves careful discussion, consideration, and exploration; they are presented in this paper as a roadmap for discussion, including in the context of relevant global discussions on financing climate action and sustainable development, including the UN Financing for Development Agenda, the UNFCCC COP process, and the G20 Sustainable Finance Working Group.
Topic:
Development, Emerging Markets, Climate Finance, Sustainable Development Goals, and Capital
Political Geography:
Global Focus

2. Restructuring sovereign debt: The need for a coordinated framework

Author:
Sean Hagan
Publication Date:
05-2024
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
When a sovereign's debt is unsustainable, all stakeholders—the sovereign, its official creditors, and most private creditors—share an interest in a restructuring that quickly restores sustainability. Notwithstanding this general alignment of interests, the current restructuring process is subject to delay and unpredictability. Concerns regarding intercreditor equity have been exacerbated by the "sequential" nature of the restructuring process, where official creditors are generally expected to commit to debt relief terms before private creditors. To speed up the restructuring process, this Policy Brief proposes that the restructuring of official claims and private claims proceed in a parallel yet coordinated manner. To address intercreditor equity concerns, a new contingency mechanism would be available to allow simultaneous decision making: Before one creditor group decides to accept an offer, these creditors would know what everyone else is being offered. Such a mechanism would not be mandatory—there may be circumstances where one group is prepared to move before the others. Such a "Coordinated Framework" will require greater information sharing, consistent with the types of transparency reforms that have been advanced by the International Monetary Fund.
Topic:
Emerging Markets, IMF, and Sovereign Debt
Political Geography:
Global Focus

3. The economic case for climate finance at scale

Author:
Patrick Bolton, Alissa M. Kleinnijenhuis, and Jeromin Zettelmeyer
Publication Date:
06-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
It will be impossible to contain the global temperature rise to 1.5 to 2 degrees Celsius above pre-industrial levels unless emerging market and developing economies (EMDEs) decarbonise much more rapidly. This policy brief examines the economic case for advanced-country financial support for replacement of coal with renewable energy sources in EMDEs. Such conditional financial support is necessary in the sense that an exit from coal consistent with keeping the global temperature rise to between 1.5°C and 2°C will not happen without it, desirable from the perspective of the financier countries, and financially feasible. Although the global economic benefits of phasing out coal are very large, the costs of exiting coal generally exceed the benefits to EMDEs. However, the collective economic benefits to advanced countries greatly exceed those costs. These net benefits are positive even for small coalitions of advanced countries (G7 or G7 plus EU). The fiscal costs of financing the coal exit in EMDEs (without China) are modest as a share of G7+EU GDP at about 0.3 percent of GDP per year, assuming public-sector participation in renewable energy investment costs through blended finance of around 25 percent. Although providing climate finance to EMDEs is economically desirable and feasible from the G7 perspective, it is not happening at the necessary scale, partly because of incentives and political-economy challenges. Advanced countries are more likely to be willing to commit financing to climate action outside their borders if they have more control over how this money is spent. Developing countries are reluctant to phase out coal unless sufficiently large financial support is forthcoming for renewable investments that are consistent with their development goals. These problems could be overcome by tying renewable finance to a coal phase-out. Already-existing Just Energy Transition Partnerships with South Africa, Indonesia and Vietnam are prototypes of this approach. They should be scaled up, with sufficient grants to pay for coal closures and the social transition in coal communities, by explicitly conditioning funding on a coal phase-out and through a stronger governance structure to implement these deals.
Topic:
Climate Change, Emerging Markets, Climate Finance, Renewable Energy, Coal, Carbon Emissions, and Emerging Economies
Political Geography:
Global Focus

4. The Motives for Chinese and Western Countries’ Sovereign Lending to Africa

Author:
Eckhardt Bode
Publication Date:
05-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper is one of the first to show systematically that the motives for sovereign lending to African countries differed considerably between China and Western countries during the last two decades. While Chinese lending mainly served its own economic or geopolitical objectives, which is well-known from the existing literature, Western countries’ lending also pursued objectives that appear to be at odds with their self-interests but whose precise nature is not yet well-understood. Using a new, da-taset on loans from China, Western countries and multilateral organizations to African countries, I empirically examine a broad variety of potential motives, aim at separating the motives pursued by the national governments from those pursued by their lending agencies, and employ an estimation strategy with increasingly complex fixed effects that yields additional interesting insights into the specificities of the motives.
Topic:
Economics, Emerging Markets, International Trade and Finance, Financial Crisis, Geopolitics, and Sovereign Lending
Political Geography:
Africa, China, and Global West

5. African Sovereign Defaults and the Common Framework: Divergent Chinese Interests Grant Western Countries a “Consumer Surplus”

Author:
Eckhardt Bode
Publication Date:
05-2024
Content Type:
Policy Brief
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
• China has become a major player in sovereign lending towards Africa during the past two decades but has recently been faced with increasing defaults. A new African debt crisis is looming. • Differences in the motives of sovereign lending between China and Western creditor countries contribute to preventing effective global sovereign debt management under the “Common Framework for Debt Treatment” in this looming African debt crisis. Chi-nese lending during the past two decades was motivated primarily by its own economic interests while most of the Western countries’ lending appears to be at odds with their self-interests but is not yet well-understood. • Debt settlements under the Common Framework that involve China are less generous than past settlements with the Paris Club alone. This is an obstacle to a rapid and sus-tainable economic recovery of financially distressed African countries. • Western countries derive a kind of “consumer surplus” from the agreements under the Common Framework because they are prepared to make greater concessions than Chi-na. They could transfer this hypothetical surplus as additional (conditional) Official De-velopment Assistance to the defaulted African countries to alleviate social hardship.
Topic:
Emerging Markets, International Trade and Finance, Financial Markets, Lending, Economic Crisis, Sovereign Debt, Consumer Behavior, and Geoeconomics
Political Geography:
Africa and China

6. Optimal Investments in Africa’s Road Network

Author:
Sebastian Krantz
Publication Date:
07-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper characterizes economically optimal investments into Africa's road network in partial and general equilibrium - based on a detailed topography of the network, road construction costs, frictions in cross-border trading, and economic geography. Drawing from data on 144 million trans-continental routes, it first assesses local and global network efficiency and market access. It then derives a large network connecting 447 cities and 52 ports along the fastest routes, devises an algorithm to propose new links, analyzes the quality of existing links, and estimates link-level construction/upgrading costs. Subsequently, it computes market-access-maximizing investments in partial equilibrium and conducts cost-benefit analysis for individual links and several investment packages. Using a spatial economic model and global optimization over the space of networks, it finally elicits welfare-maximizing investments in spatial equilibrium. Findings imply that cross-border frictions and trade elasticities significantly shape optimal road investments. Reducing frictions yields the greatest benefits, followed by road upgrades and new construction. Sequencing matters, as reduced frictions generally increase investment returns. Returns to upgrading key links are large, even under frictions.
Topic:
Emerging Markets, Globalization, International Trade and Finance, Infrastructure, Economic Growth, Investment, and Roads
Political Geography:
Africa

7. Urbanized and Savvy – Which African Firms are Making the Most of Mobile Money?

Author:
Charles Ackah, Aoife Hanley, Lars Hecker, and Michael Kodom
Publication Date:
09-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
Our analysis of over 500 Ghanaian firms sheds light, for the first time, on how certain firms managed to extract value from mobile money. Our regressions point to the usefulness of this form of cashless payments in stabilizing sales during the COVID pandemic. Perhaps the most important message from our analysis is the recognition that the benefits from mobile money extend beyond its purpose as a tool for transacting cashless payments. We reveal that firms using these additional tools supported by MoMo (e.g. for planning or saving purposes) report higher sales resilience, all things equal. Our findings appear to echo the literature on private householders (e.g. Jack and Suri, 2014). However, while the latter report a positive effect due to remittances, our finding is more likely driven by enhanced ability of businesses to streamline their planning and sales.
Topic:
Emerging Markets, Globalization, Urbanization, Money, Innovation, and Digitalization
Political Geography:
Africa

8. Export impact on dividend policy for big Colombian exporting firms, 2006–2014

Author:
Federico Merchan
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper studies the impact of exogenous export demand shocks on firms’ dividend policy using firm specific real exchange rate variation as instrumental variable. IV exclusion restriction is plausibly satisfied because real exchange rate shocks were unanticipated -partly explained because of international oil price fluctuation-, and first stage results confirm relevance condition fulfillment. The results indicate that big private Colombian exporting firms decree dividends as a way to mitigate the agency cost generated by exogeneous exports variation via higher free cash flow and cash flow volatility, especially in poor managerial quality firms. Evidence supports agency cost theory and denies signaling.
Topic:
Development, Emerging Markets, Globalization, International Trade and Finance, and Exports
Political Geography:
Global Focus

9. China as an International Lender of Last Resort

Author:
Sebastian Horn, Bradley C. Parks, Carmen M. Reinhart, and Christoph Trebesch
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
Topic:
Debt, Emerging Markets, International Trade and Finance, Financial Crisis, Belt and Road Initiative (BRI), and Sovereign Debt
Political Geography:
Africa, China, and Asia

10. Korea has increased its lending to emerging-market and developing economies but faces risks if their debt problems grow

Author:
Julieta Contreras and Adnan Mazarei
Publication Date:
07-2023
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Over the last few decades, South Korea has transitioned from an aid beneficiary to a provider of financial aid to emerging-market and developing economies (EMDEs). This Policy Brief examines Korea’s role as a creditor to EMDEs and how EMDE debt problems affect it as a creditor. For now, Korea’s direct exposure to EMDEs is not large. In 2021, the latest year with comprehensive data, the stock of Korea’s claims on EMDEs amounted to almost $11 billion, about 0.6 percent of its GDP. Although this share is larger than those of some countries with similar GDP per capita, such as Italy and Spain, it is well below the shares of others, such as China and Japan. The immediate risks from Korea’s lending are limited, but it is vulnerable to risks from a systemic EMDE debt crisis in other ways, particularly through trade. It is therefore in Korea’s interest to continue to play a constructive role in ongoing international efforts, especially through the G20, to establish more effective debt restructuring frameworks.
Topic:
Debt, Development, Emerging Markets, Markets, and Economies
Political Geography:
Asia and South Korea