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Global action. A body, akin to WTO, which can enforce rules to govern multilateral action on climate change is the need of the hour.

Ahead of the first global stock take on climate action, due to take place at COP28 in Dubai, a new report released by the United Nations on November 14has reiterated the need for more action and delivery of stronger commitments by countries to avert the climate crisis.

The target set at COP21 in 2015under the Paris Agreement, of limiting temperature rise to 1.5degrees above the pre-industrial levels, is set to be breached in light of the insufficiency of the existing national climate action plans.

Climate change is a global problem and requires global solutions. The doomsday-like out comes depict a serious collective action problem. It is therefore important to reflect on the multilateral mechanism to combat climate change, as setup under the aegis of the United Nations Framework Convention on Climate Change (UNFCCC),such that despite there being a formal institutional arrangement, countries are failing to deliver collectively.

Firstly, decisions concerning climate action are currently left to individual nations. However, time and again, it is reported how emission reduction target shave fallen short of what is necessary to curtail global climate change, i.e. to cut emissions by 43 per cent by2030 (compared to 2019 levels)— implying that the national targets clearly do not suffice.

Moreover, government leaders pledge targets several years into the future, which holds little credibility for democratic economies. While 2030 is set as the year for meeting the GHG emission reduction targets, one can only be cautiously optimistic and not forget that the Kyoto Protocol (signed atCOP3 in 1997) was unsuccessful in stemming global emissions despite the binding commitments announced by industrialised countries during the period 2008-2012.

 Uncertain targets

As regards carbon neutrality, the targets go even further ahead with India projecting net-zero emissions by 2070; China by2060; and the US and Europe by2050. That many net-zero targets are uncertain and postpone immediate climate action into the future is also duly noted in the latest UN report.

National strategies to counter climate change are necessary to account for contextual differences. Yet, to keep target son track, mandatory international review and progress reporting may be a better recourse for transparency in climate action, policy learning, and to tide the gap between ambitious implementation path and reality.

Secondly, multilateral negotiations on climate change are based on the principles of‘ equity’ and ‘common but differentiated responsibility and respective capability’.

Developed nations, which are historically high-GHG emitters, are therefore required to undertake binding commitments to reduce emissions and provide appropriate financing to the lesser developed countries for their transition towards low-carbon pathway. Developing countries’ approach to climate negotiations tend to be guided by these principles to secure national interests.

However, it can be questioned if such multilateral principles misalign incentives and dissect the sense of urgency from global climate action, especially if the lesser developed countries may seek leniency today and postpone appropriate climate mitigation measures because the developed nations freely polluted yesterday.

Such arguments cannot possibly bode well for an issue which has serious consequences for the entire planet, and more so for the lesser developed parts of the world.

Rather, this should be another learning from the failure of Kyoto Protocol, under which emission reduction commitments were required only of developed countries, even when developing countries such as China overtook the US in annual emissions in 2006.

Thirdly, UNFCCC has a facility to provide technical and financial assistance to the lesser developed countries which may find themselves vulnerable to climate change and less capable to introduce climate mitigation measures.

However, climate finance commitments as well as the actual needs of developing countries have remained unmet. Following up from COP27, there remains no clarity regarding the funding sources and the implementation of the ‘loss and damage fund’ which the developed nations agreed to establish to support the developing countries suffering from climate change impacts.

Arranging climate finance and supporting developing nations in their path towards adaptation and mitigation is a cost to the developed countries, and more so to their multinational companies which seek to lower production costs in their global supply chains by manufacturing in lesser developed parts of the world.

Unilateral measures

It remains to be seen what incentives unilateral measures such as the Carbon Border Adjustment Mechanism(CBAM) — as that introduced by the European Union, proposed in the US, and its prospective expansion to cover more sectors and products — are likely to have in pushing western multinationals towards reducing carbon footprint at their global factories and thus, in turn, aiding the mitigation agenda of the developing countries.

In conclusion, while efforts by countries and multilateral institutions to address climate concerns must be lauded; setbacks and failure of collective action should provide the international community with serious lessons, and pave the way for: (i) more stringent monitoring and accountability of GHG mitigation measures, (ii)transparency in reporting, and(iii) adequate and pertinent financing mechanisms that keep divergent interests in check.

Just as a rule-based system, through GATT and later WTO, brought discipline and fairness in multilateral trade, a similar legal body governing multilateral action on climate change can possibly help deliver the power of collective action.

Else, the world will witness more unilateral measures, such as the CBAM, which may potentially cause more harm to the lesser developed parts of the world without adequate low-carbon transition support from the developed nations which are implementing such measures.

Dayal is Associate Fellow and Pohit is Professor at National Council of Applied Economic Research (NCAER). Views expressed are personal.

In her 2009 book Dead Aid, Zambian economist Dambisa Moyo probes why Africa trails in economic prosperity compared to other emerging nations. Global narratives often overlook the need for creative, transformative and continent-specific changes.

One such area is Africa’s financial sector. As a pivotal player in Africa’s development, the sector, unfortunately, has been unable to realise its economic potential fully. This shortcoming has contributed significantly to the macroeconomic instability and debt crises many African nations grapple with today.

Over the past two decades, research has consistently indicated a positive correlation between financial development and economic growth. However, the pace of macro-financial evolution in Africa has been disappointingly slow.

Factors such as financial frictions, structural rigidities and institutional underdevelopment, coupled with unsuitable financial system structures, have put a stranglehold on Africa’s credit dynamics and macro-financial stability.

The hope

International efforts are underway to alleviate Africa’s debt, support the United Nations’ sustainable development goals and provide climate finance for Africa’s transition needs. Given the incapacity of the public sector to carry alone the burden of poverty alleviation and growth, serious efforts are afoot to bring in private finance for investments and social spending. With the African Union joining the G20 this year – being granted the same status as the European Union – the expectations of a global African partnership are high.

If the influx of public and private capital into Africa is partially correct, the African development landscape will become more crowded, straining balance sheets and financial systems as a result. The new flow of resources will bring along a host of macro-financial interactions to manage including implications for Africa’s ‘current account’ of the balance of payments. Africa stands to be scrutinised further through the lens of global finance and private finance expectations.

While the digitalisation of finance advances and the potential introduction of central bank digital currency might aid finance in Africa, it is not enough. We must distinguish between the financial system’s ability to provide transaction services (where digital modes help) and its capacity to intermediate funds from savers to borrowers and assume credit risk (where a well-functioning financial system is needed). Africa needs both, but it certainly needs more capacity in the latter for sustainable growth.

The doubt

Is Africa’s financial sector  prepared for a more prominent role in its growth and stabilisation? Can it handle new global financial flows and their attendant risks and tribulations? The annual Absa Africa Financial Markets Index, produced by OMFIF, provides hope. The survey highlights three crucial trends: improved market infrastructure, increased environmental, social and governance initiatives and rapid growth in digital technologies and market integration. However, economies with underdeveloped financial markets have a high money-to-gross-domestic-product ratio, indicating a lack of attractive economic alternatives.

At the same time, the report warns of foreign exchange inadequacies, external sector management weaknesses and external shocks to the financial system, such as geo-economic and geopolitical fragmentation. Rising interest rates in advanced economies have led to exchange rate depreciation, capital outflows as well as weaker foreign exchange reserves across Africa.

The priority

Africa must take immediate steps to demonstrate its commitment to overhauling its financial system. The plan should enhance its ability to manage exogenous risks and explicitly address, thus far, the neglected endogenous risks that are often the case of financial instability and derail economic development. It must also clearly state that inept governance of new resources, including financial misconduct or regulatory violation, will not be tolerated.

Crafting Africa’s financial sector future  

To effectively address the specific challenges faced by Africa, a strategy tailored to its specific circumstances is essential. This strategy must be deeply rooted in Africa’s realities rather than being a mere adaptation of international experiences, which may no longer be a viable approach.

Africa’s financial sector is a continent of contrasts. While vast regions still lack access to essential financial services, others are ripe for a commercial and market-oriented financial system. Some areas might benefit from a ‘utility’ style financial sector, while others might thrive on a system grounded in risk and return theory. For instance, very basic banking and payment services may suffice for Africa’s fragile states and conflict-ridden countries.

With its diversity and varied financial behaviors of its households, businesses and governments, Africa demands an innovative approach. While the specifics of this approach warrant further discussion, the following issues could serve as a springboard for crafting a tailored financial sector strategy, shaping Africa’s financial future.

For one, the continent’s economic systems are not homogeneous. We need to define and better differentiate between countries with an emerging financial sector, countries where a financial sector exists but is nascent and countries with a rudimentary financial sector. It may be necessary to revise and adjust the financial sector frameworks to these broad classifications.

Beyond these categories, another consideration to note is that Africa harbours the youngest population in the world. Its demographic structure means there are different expectations of what money and credit are about and historical reasons why large swathes of the population have been left behind. Thus, it is essential to understand the demand side of financial credit and services as well as the behaviour of Africa’s households and small- and medium-sized enterprises.

It is also crucial to have an agreed criterion on three matters of policy debates. First is how to measure financial development progress best, second, the causality between financial depth and growth and third, the suitability of a banking-based versus a market-based financial system for what parts of Africa.

To add, the strategy will benefit from mapping the financial system to identify vulnerabilities and how the demand and supply side of finance work. In practice, this would mean using available data to develop a proof-of-concept sectoral map, noting financial linkages between banks, corporates, households and the government. It would thus be possible to explore regional approaches to some of the micro aspects of the financial sector that could facilitate intermediation and credit. These could be regional platforms on data, information, financial taxation, regulation and knowledge exchange and scenario building to understand precisely where Africa’s financial sector trails.

As we strive to overcome the financial sector challenges in Africa, it is crucial to understand that building an effective financial system is akin to running a marathon, not a sprint. There may be stumbles and falls along the way, but the accurate measure of success lies not in the speed of progress but in the endurance to keep moving forward.

The key to this endurance is a financial system that is meticulously tailored to meet Africa’s specific needs. A robust and well-designed financial sector becomes paramount as Africa gears up to harness international resources and foreign investments.

The international community has a significant role to play in this journey. It must rally behind Africa, extending not just financial resources but also technical support. Encouraging Africa to build and fortify its financial systems before new resources flow into the continent is a critical step toward sustainable development.  Without it, the influx of resources could become a breeding ground for failure and disappointment. Therefore, as we move forward, let us ensure that Africa builds a financial sector that is ready to weather the storms and equally capable to partner in Africa’s growth and prosperity.

Udaibir Das is a Non-Resident Fellow at the National Council of Applied Economic Research, a Senior Non-Resident Adviser at the Bank of England, a Distinguished Fellow at the Observer Research Foundation America and a Distinguished Visiting Faculty at the Kautilya School for Public Policy. He is the former Assistant Director and Adviser of the International Monetary Fund’s Monetary and Capital Markets department. He held various positions at the Bank for International Settlements, the World Bank and central banks.