Downward Mobilisation

A single term stalks climate policymaking: “the finance gap”. Denoting the additional investment required to meet global climate and development goals beyond what has already been committed, nearly every major report written by policymakers on the state of global green investment refers to it. Never mind that the numbers ― as high as $9 trillion a year by 2030 ― are incredibly fuzzy. Policymakers invoke the “finance gap” not to be accurate, but to argue that governments must “mobilise” or “catalyse” private sector investment in the interest of global welfare.

Every major global governance institution with a voice in development ― from the World Bank and the International Monetary Fund to the United Nations and the G20 ― agrees that the finance gap will not be bridged unless governments mobilise private capital. Indeed, doing so has become a sort of sine qua non of both decarbonisation and development.

Importantly, arguing that governments should mobilise investment is not the same as arguing that governments should invest themselves. Policymakers have their reasons: these high-level reports emphasise that public budgets are not enough to plug the finance gap; that public finance is “scarce”; that it must be used efficiently. Because governments lack the cash to meet these financing gaps themselves, so the argument goes, they must mobilise other sources — chiefly the private sector — to meet their goals.

Encouraging private investment in decarbonisation is not, in and of itself, the problem, not least when we consider that policies promoting private investment in critical industries have played a key role in successful industrial programs throughout history. But to argue that the scarcity in public financial capacity justifies and demands a reliance on private finance is deeply irresponsible. As this essay explores, not only is this apparent scarcity constraint imposed on the Global South by the structures of global economic governance, but attempts to mobilise private capital under these constraints will not deliver anything like an adequate response to the advancing climate crisis. 

Rather, promises to mobilise private capital mean nothing without first mobilising public capital. This is not only a question of quantity, but of quality: to be worth anything, investment must be coordinated, predictable and non-extractive. Policymakers could start by looking to the United States and China, both of which illustrate that successful private capital mobilisation requires significant public investment and economic coordination. Instead, they stick their heads in the sand, refusing to acknowledge that any climate policy that fails to centre the state is one that cedes the speed and scale of the green transition to uncoordinated, rent-seeking private actors.

A user’s guide to mobilising private capital

While the term is a common fixture of insider policy circles, it is worth asking: what, exactly, does mobilising private capital mean? People around the world urgently need trillions of dollars of investment in essential sectors like clean energy, health and social welfare, and resilient infrastructure. The logic of “mobilisation” assumes that states cannot plug this “finance gap” themselves, and therefore the private sector and its trillions in cash must be called upon to deliver. So far, so simple. However, because infrastructure and social service projects in the Global South appear too risky to private investors seeking high and stable returns, policymakers have judged that they must carefully use what money they do have to “derisk” these private investments. Through financial instruments like loan guarantees, credit enhancements, and political risk insurance, governments and other actors shoulder these risks and boost investors’ returns, and in doing so reassure the private sector that their bottom lines will be just fine. 

At an event at the World Bank’s Spring Meetings in April, leaders of the Bank’s new Private Sector Investment Lab highlighted possible avenues for the Bank to better derisk development and decarbonisation. If the Bank can make progress here, they contend, more finance will flow,  and growth and development will follow. On the face of it, both the aim and many of the policies that stem from it are reasonable, promising real improvements. Nevertheless, it is important to expose and resist the rhetorical sleight of hand policymakers use to justify mobilising private capital in the first place: the assumption that public budgets are scarce.

That public budgets are constrained is true in a narrow sense. For one, official development assistance for developing countries fell by $4 billion last year, with the least developed countries (LDCs) losing the greatest share. Wealthier Northern countries were two years late in meeting their $100 billion climate finance pledge to Global South countries, and a portion of even this belated total came from reclassifying pre-arranged loans and grants as climate finance. Worse still: some spending classified as climate finance is really not climate finance at all (with no agreed definition of the term, it is ripe for abuse), or simply circles back to donor countries.

To some degree, these broken promises are an unfortunate consequence of shifting domestic political priorities across the Global North, but US policymakers in particular seem uninterested even in doing what they can. Notably, without the need for Congressional approval, the US could issue more Special Drawing Rights (SDRs) and/or lend support to proposals for SDR bonds (see Box 1). These actions would leverage the IMF to improve countries’ ability to manage their imports and borrow more sustainably. Unfortunately, despite some recent interest in better using SDRs, inaction has long left this arrow rattling aimlessly around policymakers’ quiver. In short: Northern policymakers continue to contribute to the very scarcity of finance that they bemoan.

[.box][.box-header]Box 1: What are Special Drawing Rights?[.box-header][.box-paragraph]Special Drawing Rights, or SDRs, are a synthetic asset that theInternational Monetary Fund is authorised to issue to member governments. SDRs represent a claim on the five global reserve currencies ― dollars, RMB, yen, euros and pounds ― and their value is based on a basket of these currencies. So, while the SDR is not itself a currency, governments can trade them for hard currency with other governments, for instance, to help finance import purchases and service debt.[.box-paragraph][.box-paragraph]The IMF has distributed SDRs en masse to members in response to crises, notably during the COVID-19 pandemic and after the2008 financial crisis. But because SDRs are allocated to countries in proportion to their contributions to the Fund, the lion’s share of SDRs is held by richer countries.There are proposals to rechannel SDRs to poorer countries and, more ambitiously, proposals to retool them to meet growing global investment needs. These include the African Development Bank’s suggestion that governments use SDR reserves to support the multilateral development banks, which the IMF recently signed off.[.box-paragraph][.box]

However, public finance is scarce globally in a broader, more insidious sense: whether it is the legacy of the IMF’s Structural Adjustment Programs, the World Bank’s Development Policy Financing loans, or the anti-welfare biases of the credit rating agencies ― all part of what’s called “the Washington Consensus” (see Box 2) ― global economic governance is decisively skewed toward austerity and against public investment. These arrangements leave Global South countries unable to undertake substantial public investment and dependent on attracting foreign private investment, exposing them to the threat of sudden capital flight and crises related to currency fluctuations, borrowing and the balance of payments^[1] — particularly if the U.S. Federal Reserve hikes interest rates, as it has done over the past year.

[.box][.box-header]Box 2: What is the Washington Consensus?[.box-header][.box-paragraph]The Washington Consensus is the pejorative label first used to refer to the set of macroeconomic policies the World Bank and IMF (both based in Washington, DC) recommended to countries facing debt crises in the 1980s, including reducing budget deficits, enshrining central bank independence and liberalising trade and finance. It has since become identified with a broader set of neoliberal policies promoted in particular after the end of the Cold War that seek to pare back the role of the state: selling state assets, privatising service provision and state-owned enterprises, deregulating business (including by lowering corporate taxes), cutting back on labour rights, and restricting public spending. Needless to say, the term’s pejorative label is by this point well deserved. As a result, many lower-income governments stockpile dollar reserves to cushion against these shocks, to the detriment of domestic economic health. Rooted in a commitment to public austerity, the Washington Consensus makes public finance scarce ― yet the foreign capital-driven growth model it prescribes has failed to demonstrate substantial progress in the last 30 years. It certainly has not made the climate crisis any easier to address, whether through investing in clean energy or in the infrastructure needed to adapt to already mounting impacts.[.box-paragraph][.box]

Tying your own hands

Despite this clear and mounting evidence, policymakers refuse to recognise that the global economy’s bias toward austerity makes their goal of mobilising private capital much harder to achieve.

Mobilising private investment is hardly a straightforward affair. Indeed, many of the investors being courted to support projects across the Global South cannot easily — or will not — do so. The barriers they face include but are certainly not limited to: their fiduciary duties; their high, inflexible, subjective hurdle rates; and their treatment of emerging market investments as inherently short-term and speculative. These constraints on private investment are especially biting where infrastructure is concerned: infrastructure is hard to value or trade and is thus hard to standardise and aggregate into investors’ portfolios. 

Left to their own judgments, then, private investors will skew away from the Global South. Overcoming these barriers via derisking, as intended by influential institutions like the World Bank, requires significant public financial support. To be sure, investments in mineral extraction, infrastructure projects, and new manufacturing can be highly extractive or harmful, even to the point of displacing communities and degrading the environment. Avoiding these harms is a vital priority. But the total absence of investment at this critical juncture will also be to the detriment of global development, decarbonisation, and the countless communities in need of resilient social and physical infrastructure.

This is where the scarcity of public capital bites, and bites hard. Policymakers’ calls to mobilise private capital are tied at the hip to Washington Consensus-era thinking that private markets, rather than governments, are better at providing resources and allocating capital. Nowhere is this more clearly evidenced than in the IMF and World Bank’s worries about public deficits — a concern that they enforce through conditions attached to their lending.

Global South governments’ efforts to engineer a just transition themselves, particularly in poorer countries, are hampered by a simmering debt crisis: net financial flows to Global South countries are currently negative, a consequence of high interest rates, and many of those countries already spend more on interest payments to creditors than on health and education. Flagship programs designed to support climate efforts in the Global South consist overwhelmingly of expensive market-rate loans ― but even within these programmes, the money is barely flowing.

Overall private investment in infrastructure has stagnated across the Global South. But even where governments have successfully mobilised private capital, the results have been wanting. Energy infrastructure is a case in point: governments often lock themselves into unfriendly contracts with creditors, and vulnerable communities wind up facing higher prices for services. Moreover, derisking can often open the door to the privatisation of key public services. The price of mobilising private capital under the current austerity-minded Washington Consensus is therefore further dependence on fickle foreign investors and the lack of publicly accountable control of critical infrastructure. 

There is an alternative

China and the United States, the top two destinations for clean energy investment in 2023, are ploughing public spending into the investments that green industrial transformation requires ― and are successfully mobilising private capital along the way too. In doing so, they demonstrate the massive potential of choosing to eliminate scarcity in public finance.

The United States’ Inflation Reduction Act (IRA) put the muscle of the federal government’s tax system and financing authorities behind decarbonisation. There is no legal limit on the total volume of tax credits that the federal government will provide to clean energy project development. Every qualifying project can get a subsidy, including those not owned and managed by private firms, like community and municipal projects. The Department of Energy can use its loan authorities to provide vast amounts of extremely cheap debt to more ambitious projects. And the $27 billion soon to be invested through the Greenhouse Gas Reduction Fund is designed to support local resiliency projects nationwide. Every single one of these key IRA programs is being advertised as a way to “crowd in,” mobilise and coordinate private investment. Indeed, the Act goes so far as to write the requirement to “leverage private capital” into the authorising statute of its Greenhouse Gas Reduction Fund. 

Investment has already skyrocketed since the law’s passage. To be sure, it will take time to determine the precise sector-by-sector impacts of the IRA, especially as its constituent parts are still being rolled out. But it is hard to argue that it has not undergirded the two-year boom in battery and solar manufacturing in the US since the law was passed, demonstrating how policy certainty, the promise of public spending and mechanisms for channelling investment through subsidies, grants and regulations can mobilise private capital toward state-directed goals.

China, meanwhile, has been doing much of this for far longer than the United States. The fact that China installed more solar panels in the last year alone than the United States cumulatively has is testament to what dedicated industrial policy looks like. Chinese provincial governments and state-owned enterprises provide extensive credit to public and private green technology developers, and those firms now supply the whole world with solar panels, batteries, electric vehicles, and more. China does not need one massive transformative Inflation Reduction Act when it has been subsidising and shaping industry to meet its goals for years, even creating a ruthlessly competitive consumer market to force rapid innovation in EV manufacturing.

Both the United States and China have their industrial policy problems, of course. For one, the IRA does not go far enough to support a comprehensive phaseout of fossil fuels or longer-term adaptation needs;  indeed, fossil fuel investment has boomed under Biden. Moreover, despite its carve-outs for disadvantaged communities, the law’s benefits may still accrue disproportionately to wealthier and whiter communities. Meanwhile, China continues to rely heavily on coal (though it may soon reach “peak coal”) and widespread underconsumption may threaten the economic sustainability of its investment pushes. These are acute problems, to be sure, but where decarbonisation is concerned, and relative to the rest of the world, they are the consequences of genuinely transformative policymaking.

The state is not for sale

The judgement that scarce public finances prevent private capital mobilisation does not mean that mobilising private capital is always or inherently good. While private investment can play a significant role in the process of industrial transformation, private investors in both the Global North and South have routinely proven themselves untrustworthy and even harmful partners in achieving public goals.

There is a critical difference between mobilising private capital for manufacturing-led industrial transformation and for vital services. Industrial transformation relies on the considerable technological expertise embedded in private firms; to that end, using public resources to call forth and coordinate those capacities can promote growth and development. None of that generally applies to service provision, where offloading public assets and public service capacities to private actors, usually below market value and with subsidies attached, promotes rent-seeking over quality improvements, whether it’s in senior healthcare in the United States, water infrastructure in the United Kingdom, education and healthcare in Kenya, or toll highways in India. 

This logic holds where decarbonisation is concerned, too. It’s worth using public finance to mobilise private capital toward promoting green manufacturing of, and stabilising supply chains for, essential energy system components. But deregulating the energy grid — privatising it — will not advance the urgent task of decarbonisation. Competitive private energy generation and today’s wholesale energy market structures cannot support a coordinated, large-scale buildout of renewable energy, certainly not without large volumes of public financial support. 

Policymakers should also remember that a government that spends liberally on inclusive public education, health, social welfare and climate resilience for its citizens is a government that will be better able to attract and preserve longer-term private investment in manufacturing and in moving up global value chains. They should not neglect building state administrative capacity through public spending, either: doing so helps create policy certainty while insulating governments from regulatory capture by corporations, consultants, and nonprofits. It can take time for spending to translate into results, but that is hardly a reason to avoid it.

What is certain is that the same policymakers focused on mobilising private capital seem set against the very reforms that would support lower-income countries’ ability to spend on urgent climate change mitigation and adaptation projects, and to build the state capacity they need to meet both climate-related and other urgent goals. This orientation is revealing: while the United States and China demonstrate the benefits of jettisoning neoliberal development policy, the Washington Consensus remains on life support elsewhere. So long as countries in the Global South remain unable to mobilise adequate public financial resources, the biases of private institutional investors and the inaction of Global North policymakers will set the speed limit on the pace of global decarbonisation.

The meaningful constraints on mobilising public finance toward the green transition are a function of the global economic system we are in. To change the system, shift its constraints. At this juncture, policymakers have two options. They can stick to the scarcity status quo, or they can give themselves the power to plug the global finance gap by acting on what we already know: that public spending can buy us the capabilities to coordinate the massive investment the world needs.