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New Global Financing Pact UPSC NOTE

 


  • On June 22-23, 2023, France is set to host an international Summit for a New Global Financing Pact. 

  • Called for by French President Emmanuel Macron

  • This summit fit into an international context marked by the cascading consequences of concurring climate, energy, health and economic crises, particularly in the most vulnerable countries

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Challenges faced by sustainable finance

  • International funding is unpredictable and poorly structured, and does not address the liquidity challenges of developing countries.

  • For instance, only 25% of global climate investment goes to South Asia, Latin America, and Africa, which house some of the most vulnerable regions.

  • Further, global funds clamp down on the fiscal independence of these countries by posing several conditions before the money comes in.

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  • Domestically, too, the tax structures of developing countries lead to institutional weakness, illicit finance flows, and higher risk perceptions.

  • The consequence: 

  • Developing countries pay for their own development transitions through limited public funds. 

  • It’s ard to mobilise private players to take the jump here because the returns are not high enough to bear the real or perceived risks of investing in low- and middle-income countries. 

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Steps to be taken

  • The summit will be successful if it can serve as a critical point for the transformation of international financial and development architecture. 

  • It must, therefore, include three components: Pact, platform, and pathway.

1. Create a pact for global flows of finance:

  • First, create a pact for global flows of finance that covers two levels of social contracts — domestic and international.

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At the domestic level

  • At the domestic level, high debt limits the fiscal space of developing countries.

  • Increasing this space of countries would need modernising and standardising existing tax structures, 

  • Clamping down on illegal cross-border money movement, 

  • Empowering tax administrations and curbing ineffectual fossil fuel subsidies. 

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At the international level

  • Finance is needed for adaptation as well as loss and damage stemming from climate change.

  • The international social contract must rest on a strong foundation of global solidarity rather than empty pledges.

  • New resources can be mobilised by tapping into global flows, such as taxing the production of fossil fuels, shipping of goods, and transportation of fossil fuels.

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  • For instance, taxing each barrel of oil just one dollar would generate around $30 billion per year.

  • Such an approach decouples financing for the vulnerable from the political resistance of taxpayers in rich countries.

2. Create a global platform 

  • Create a global platform to de-risk finance and mobilise large volumes of private investment in sustainable infrastructure.

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  • Vulnerable countries need several types of blended finance – for scaling renewables, clean tech for livelihoods, transitioning away from fossil fuels, and the co-development of emerging clean technologies. 

  • Financing these needs novel mechanisms, such as a Global Clean Investment Risk Mitigation Mechanism that pool risks across geographies and lower costs for all. 

  • Particular attention should be given to hedging against currency fluctuation risks that increase the cost of finance. 

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  • Transparency and real-time data can bridge the psychological and financial divides.

3. Political pathway

  • Chart a political pathway that creates time-bound deliverables on climate finance from one summit to another. 

  • The summit must outline the maths of finance, the mechanisms of delivery, and establish the momentum for real investment over the next two years. 

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  • When we approach the 80th anniversary of the UN in 2025, reformed finance for sustainable development should have formed the basis for renewed and meaningful multilateralism. 

  • The Global South, from where the bulk of global growth will come, should treated well.

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: New Global Financing Pact UPSC NOTE
New Global Financing Pact UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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