The rich world’s debt to island states

Isabella Massa is Senior Economist at the United Nations Sustainable Development Solutions Network.

ROME – The appearance of Hurricane Elsa in the Caribbean this month, well before the usual start of the hurricane season in the Atlantic, reminds us of what lies ahead for the small island developing States (SIDS) of the world in coming years. These states are already suffering from the devastating effects of climate change and will now have to spend heavily on repairs and resilience-building measures. Rich countries and their fossil fuel companies have largely contributed to the problem, so they should help cover the growing climate costs of SIDS.

Due to their unique circumstances, the 58 SIDS of the world – of which 38 are members of the United Nations – have belonged to a special group within the UN since 1992. In a new study of this cohort for the UN, we identified three overarching structural vulnerabilities facing SIDS today.

First, because most SIDS have small populations (less than one million), their exports are concentrated in only a few activities. When COVID-19 hit, tourism-dependent SIDS were hit much harder than most other countries, especially developed economies. In 2020, the GDP of Barbados, Fiji and the Maldives decreased by 17.6%, 19% and 32.2%, respectively, compared to 3.5% in the United States. Many SIDS have also experienced a sharp decline in international remittances – another key source of livelihood.

Second, many SIDS tend to incur higher shipping costs as they are far from major shipping routes around the world and have to purchase in smaller volumes than large economies can. The island states of the Pacific Ocean are the most distant. In the Indian Ocean, the Maldives and the Seychelles are far from shipping routes and major markets. And in the Caribbean, beaches differ, with some islands located much closer than others to US ports.

Finally, due to their physical geography, SIDS present extraordinary environmental vulnerabilities and face particular risks, including food insecurity. In a large country, a disaster like a hurricane or drought usually affects only one region directly; but in a small island nation, disaster often strikes most or all of the country simultaneously, straining both the emergency response and the costs of economic recovery. Additionally, the heavy reliance on food imports has left many SIDS with epidemics of diabetes and obesity – an issue that should be viewed as an indictment of the global food industry, and as geographic vulnerability of these countries.

Elsa was not a one-time event. Human-induced climate change is already causing sea level rise and hurricanes, floods, droughts, forest fires, heat waves and more intense crop failures. The land areas of several Pacific island countries have already shrunk, suggesting that their populations will eventually have to migrate elsewhere. In the Maldives, where fresh water has always been scarce, groundwater sources are constantly threatened by rising sea levels and changing precipitation. And in the Caribbean, high-intensity hurricanes, like the three that struck in 2017, not only cause death and destruction, but also leave countries with massive recovery bills and heavy debt. By strengthening the physical infrastructure, these countries can become much more resilient. Such resilience has a very high social return, but also high initial investment costs.

In a recent report by the International Monetary Fund measuring the additional costs that small developing states (SDSs) face in meeting the Sustainable Development Goals, all but two of the 25 countries studied are in the SIDS cluster. Focusing particularly on the additional costs of building sustainable infrastructure in these countries, the IMF concludes that the 25 SDSs cannot finance the SDGs on their own. The international community’s commitment to “leave no one behind” in achieving sustainable development can only be fulfilled by providing additional financing for the development of SIDS.

Yet despite their urgent and rapidly growing needs, many SIDS are not eligible to borrow on favorable terms from official development banks and newly created special climate funds. They are told they are too rich, even as they suffer one devastating environmental disaster after another, and even as the pandemic continues to cripple their economies and put their populations at risk.

There are three main ways that rich countries can – and should – help offset the damage they have caused. First, they should invest more capital in multilateral development banks (including the Inter-American Bank, the Caribbean Development Bank, the Asian Development Bank, and the African Development Bank). By borrowing at low interest rates in global markets, multilateral development banks can turn an additional $ 1 of paid-in capital into an additional $ 5 or more of new loans to countries in urgent need.

Second, rich countries should tax their fossil fuel industries to help cover the growing global costs resulting from their production of fossil fuels. The oil and gas industry retains a substantial market value, even though its

most of the hydrocarbon products are to be phased out by mid-century. Rather than paying huge dividends to their shareholders, oil and gas companies should be taxed to collect revenue to be transferred to SIDS and other vulnerable countries to cover the costs of climate damage and resilience.

Third, rich countries should tax their billionaire class, especially now that their wealth has grown to unimaginable proportions. The world’s 2,755 billionaires now command $ 13.1 trillion, an increase of about $ 5,000 billion since the start of the pandemic. As recently leaked tax returns have shown, billionaires in the United States often pay disproportionately low taxes, if any. They need to start paying their fair share, rather than just taking tourist walks in space. Additional income should be directed towards urgent sustainable development needs, including those of SIDS.

The world is reaching a breaking point. The rich are vaccinated; the poor are not. The rich dump greenhouse gas emissions; the poor suffer the consequences. The rich enjoy skyrocketing capital gains; the poor lose their jobs and their livelihoods. Yet our destinies are linked in the end. Global pandemics and environmental crises do not respect national borders. The rich world’s own future interests require justice, decency, and a global financial strategy that recognizes and responds to the urgent needs of vulnerable states and peoples.

Copyright: Project Syndicate, 2021.

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