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21

Oct

2021

How Would the World Deliver $100 Billion in Climate Aid?

 
 

In a recent New York Times opinion piece, Larry Fink, the Chairman and CEO of the $10 trillion financial giant, BlackRock, and an outspoken advocate for ESG investment, argues that rich countries (OECD + China, as per Fink’s classification) should annually provide $100 billion in climate mitigation aid to developing countries. He assesses that to decarbonize, developing countries need to invest about $1 trillion annually in new technology and infrastructure (the math is a bit unclear; we think he means that institutional investors will provide the rest $900 billion). Because developing country governments do have not the resources, overseas institutional investors (such as BlackRock) will need to step in.

The problem is that these investors fear political risks and poor institutional infrastructure in developing countries. In Fink’s perspective, an annual aid infusion of $100 billion “in the form of grants and subsidies can absorb some of the risks that come with investing in emerging economies. They can make climate projects a viable option for institutional investors.” Thus, $1 of foreign aid would attract $9 from institutional investors.

Fink needs to clarify what will be subsidized and how this will reduce political risks that institutional investors fear. But assuming Fink has worked out his theory of change, the issue is how will $100 billion be delivered. Fink thinks that existing multinational agencies such as the World Bank can do the job but he is not averse to setting up new institutions.

We agree with Fink about the seriousness of the climate crisis and how institutional investors can help the decarbonization process. However, one issue with this argument is that Fink’s proposal for $100 billion in decarbonization aid ignores concerns regarding the effectiveness of foreign aid in achieving governance and development goals. Recall the criticism directed at Jeffrey Sachs’ 2005 book, The End of Poverty, which proposed, ironically, annual $100 billion foreign aid. Why should climate aid be different? When delivering such a significant amount of aid, organizational challenges would inevitably emerge for donors, recipients, and implementing partners.

Foreign aid, whether for mitigation or adaptation, could cause governance problems in recipient countries. This is sometimes called an “aid curse.” If aid is distributed through existing governmental channels, aid strengthens the status quo, clientelism, and corruption. Think of Afghanistan. John Sopko, the inspector-general for Afghanistan reconstruction, notes that American aid created “endemic corruption.” In 2019, aid misuse and corruption prompted the U.S. State Department to withhold $160 million aid. Distinguished commentator on Asian affairs, Kishore Madhubani writes: “If the United States fails to understand the key structural mistakes it made in Afghanistan and elsewhere, it will continue to repeat them. Yet there are few signs of any serious rethinking. Instead, many people in Washington are blaming the Afghans for this catastrophic failure, pointing their fingers in particular at corruption. But corruption requires both demand and supply. If the United States hadn’t drowned Afghanistan in a tsunami of poorly accounted for dollars, corruption wouldn’t have happened.”

Some might believe that aid-created corruption could be reduced if aid is channeled through non-governmental organizations (NGOs). The problem is that aid delivery corrupts the NGO sector, turning them into aid subcontractors as opposed to representatives of the population. NGOs start playing the aid game, seeking to ingratiate themselves with donors, as opposed to serving the local population. This is sometimes called the NGOization of civil society.

Moreover, as NGOs receive foreign funds to provide public goods, developing country governments begin to see them as political competitors. No wonder about 40 countries have enacted laws restricting NGOs access to foreign funds. Even if rich countries can be persuaded to provide mitigation or adaptation aid, it is not clear how aid will be delivered to developing countries.

Climate change requires international cooperation. Rich countries, the primary creators of the climate problem, also have an obligation to help developing countries deal with climate change. But international support should probably focus on climate adaptation, and not mitigation. Moreover, providing aid without a clear theory of change, and without leveraging past foreign aid experience will probably lead to failure. In terms of political optics, foreign aid as an implicit subsidy for BlackRock is probably not a good idea. Climate change and international development communities should focus on creating an adaptation aid framework so that aid moneys are put to appropriate use.

Previous version of this commentary was published on Forbes.com

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About the Author: Aseem Prakash

Aseem Prakash is Professor of Political Science, the Walker Family Professor for the College of Arts and Sciences and the Founding Director of the Center for Environmental Politics at University of Washington, Seattle....

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About the Author: Nives Dolsak

Nives Dolsak is the Director of the School of Marine and Environmental Affairs and the Stan and Alta Barer Endowed Professors in Sustainability Science at University of Washington, Seattle....

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