Current global mechanism for determining access to concessional finance inappropriate

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PROVIDENCIALES, Turks and Caicos Islands – The current global mechanism for determining access to finance using gross national income (GNI) is inappropriate, “unjust” even, and urgently needs to be replaced. This was the consensus from high level economic and international development experts speaking at the final seminar of the Caribbean Development Bank’s (CDB) 52nd Annual Meeting on Wednesday in the Turks and Caicos Islands.

The seminar: ‘Measuring Vulnerability and Resilience for Small States’ brought together Dr Keith Nurse, a member of the United Nations Economic and Social Council (ECOSOC) and principal of the Sir Arthur Lewis Community College in Saint Lucia, Professor Eric Strobl of the Department of Economics and Oeschger Centre for Climate Change Research at the University of Bern in Switzerland and Ambassador Aubrey Webson, chair of the Alliance of Small Island States (AOSIS) and Antigua and Barbuda’s Permanent Representative to the United Nations.

Leading off the seminar, CDB Economist Jason Cotton presented an overview on the Recovery Duration Adjuster (RDA), CDB’s proposed measure to replace the current GNI-based system for determining access to concessional finance.

“This is an issue that we would like to see realised for small island developing states as we have been working on and advocating for this change for decades,” responded ambassador Webson, sharing how AOSIS initially came together as a grouping in 1990 around the issue of climate change and its outsized impacts on small states.

However, accessing concessional financing is still a challenge for such states, he highlighted.

“We believe conditions for access should take into account the unique and extreme vulnerabilities of the islands. Yet today, access falls woefully short for many of these islands – especially the islands in the Caribbean, despite the very clear evidence that the mechanism being used which denies opportunity and access to finances, is unjust.”

Dr Nurse noted the dilemma for small states which have often been the first to ‘graduate’ from least developed country status and the attendant access to concessional finance, because their small population base and economic structure make it easier to meet certain indicators, especially during “boom years”.

“At the same time that we’re saying that small states are the most vulnerable, it is the small states among the least developed country category that have been the ones to graduate. For example – Botswana was first, 1994, Cape Verde, 2007, the Maldives 2011, Samoa in 2014, Equatorial Guinea in 2017, Vanuatu was due to graduate in 2020,” he outlined.

“The reason why is … you only need to have two of the criteria to graduate. So, in small states what you find is that they have, in many cases, mono-economies [like] the tourism sector which can generate high levels of GNI with the surplus being easily redistributed into the educational sector, health, infrastructure and so on. So small states with mono-economies, particularly in boom years, can generate significant growth in their human asset index. This is far more difficult for larger least developed countries with large rural populations and high levels of poverty historically,” shared Dr Nurse.

However, he stressed that the focus on GNI and human assets masks deep vulnerabilities including the impact of climate change which are not adequately captured in the existing  economic and environmental vulnerability indices.

“So, one of the concerns that we have is how can you graduate a country that you know is going to be severely impacted? And so, the issue of the internal resilience capacity … should be the key indicator that we should be using. Let us move away from just the use of economic growth which has severe limitations and does not take into account all of the sustainability issues.”

Panellists agreed that any new measure must consider the lived reality in small island developing states, their extreme vulnerability to climate change and natural disasters and how this hinders growth and development.

Professor Strobl shared an experience earlier in his career which brought this into sharp focus.

“I remember when I first started doing this research and I focused on just GDP. After a lot of work, I was very proud of it, and I presented my findings at a conference in Jamaica. I started to show the impact and mentioned that the average hurricane causes an initial 7 percent drop in growth which then recovers. And I remember there was someone in the audience who said  ‘Dr Strobl, I find your results offensive because the IMF is going to come in and say since the impact only lasts a year, we have nothing to worry about’ whereas I know that my cousin is still suffering from the effects seven years ago when the hurricane hit.”

Against this background, he underlined the flaws in using GNI and called for a more appropriate measure, stating:

“Understanding the complexity is a very challenging task. One really has to understand how these events impact economies, and I believe that just concentrating on GNI alone is not going to help a lot of countries. Some countries are going to get finance when they probably don’t need it and other ones are not going to get it when they really do need it.”

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