Tag: Sustainable Development

The Impact of Technological Innovations and Economic Growth on Carbon Dioxide Emissions

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This policy brief offers an examination of the interplay between economic growth, research, and development (R&D), and CO2 emissions in different countries. Analysing data for 83 countries over three decades, our research reveals varying impacts of economic and R&D activities on CO2 emissions depending on country income level. While increased economic growth often leads to higher emissions due to greater industrial activity, our model indicates that increased GDP levels, when interacted with enhanced investments in R&D, is associated with reduced CO2 emissions. Our approach also recognizes the diverse economic conditions of countries, allowing for a more tailored understanding of how to tackle environmental challenges effectively.

Technological Innovation and CO2 Emissions

Human activity has over the past few decades significantly contributed to environmental problems, in particular CO2 emissions. The consequences from increased CO2 emissions, such as global warming and climate change, have motivated extensive research focused on understanding their impact and finding potential solutions to associated issues.

Economic growth, and research and development (R&D) can serve as differentiating factors between countries when it comes to their pollution levels, specifically measured by CO2 emissions per capita. Higher levels of economic growth are associated with increased industrial activity and energy consumption, which may lead to increased CO2 emissions. At the same time, countries that invest more in R&D often focus on developing cleaner technologies and implementing sustainable practices, which may result in reduced CO2 emissions.

In this policy brief, we analyse CO2 emissions’ dependencies on technological innovation and economic growth. For our analysis we group the considered 83 countries into three wealth levels: High, Upper Middle, and Lower Middle income levels. This grouping facilitates a better understanding of the complex interplay between wealth, innovation and growth and their projection into emissions. Considering each wealth level group separately also allows us to account for varying economic and developmental contexts.

Data

Based on data availability, we analyse 83 countries, spanning from 1996 to 2019, inclusive. We follow current research trends and use R&D intensity as a proxy for technological innovation (see Chen & Lee, 2020; Petrović & Lobanov, 2020; Avenyo & Tregenna, 2022).

Data on energy use originate from Our World in Data. R&D data from after 2014 are based on figures from the UNESCO Institute for Statistics. All other indicators come from World Development Indicators (WDI).

Table 1 presents an overview of the variables considered in our empirical model. Our response variable is CO2 emissions per capita. We include several covariates (i.e. urban population, renewable energy, trade), found to be significant in previous studies where CO2 emissions was considered the dependent variable (Avenyo & Tregenna, 2022; Wang, Zeng & Liu, 2019; Petrović & Lobanov, 2020; Chen & Lee, 2020).

Table 1. Variable description.

Additionally, we include quadratic terms for GDP and R&D to account for nonlinearity and non-monotonicity. Also, we incorporate the interaction term between GDP and R&D (see Table 3). This allows us to evaluate whether the impact of technological innovations on CO2 emissions is dependent on the GDP level, or vice versa.

Wealth Level Classification

Existing literature highlights significant variation between countries in terms of economic growth and income levels, particularly in relation to R&D expenditure and CO2 emission levels (see Cheng et al., 2021; Chen & Lee, 2020; Petrović & Lobanov, 2020; Avenyo & Tregenna, 2022). Given this we deployed the Mclust method (Scrucca et al., 2016; Fraley & Raftery, 2002), and classified our considered countries into three distinct groups based on their median Gross National Income (GNI) over a specified range of years for each country. Following this methodology, we obtained three groups of countries: High, Upper Middle and Lower Middle. The list of countries categorized by their respective wealth level is presented in Table 2.

Table 2. Countries within each wealth group.

Low-income countries, (as categorized by the World Bank in 2022) were not included in the analysis as the study focuses on the impact of technological innovations on CO2 emissions, innovations which are less frequent in such economies. Limited infrastructure, financial resources, and access to technology often result in lower levels of R&D activities in low-income countries, which reduces the number of measurable innovations.

The Hybrid Model

Our leading hypothesis is that country income levels (measured by GDP) mediates the relationship between innovation (measured by R&D expenditures) and CO2 emissions. To test this, one could estimate this relationship for each group of countries separately. This policy brief instead estimates the relationship for the whole sample of countries accounting for group differences via interaction effects. Specifically, our estimation allows for interaction terms between some or all covariates and the wealth level. This approach, which we refer to as the hybrid model, thus combines elements of both pooled and separate models. It is a great alternative to separate models as it allows for estimation of both group-specific and sample-wide effects, and as it contrasts differential impacts across wealth level groups.

We test two versions of the hybrid model, one full and one reduced. The full model incorporates interactions with all covariates while the reduced model includes some indices without interactions, resulting in a relationship shared across all wealth levels. The reduced model assumes that the variables Renewable energy consumption, Energy use and Trade exhibit the same relationship with CO2 emissions across all wealth levels.

Both the reduced and full hybrid models have similar coefficients for the variables and interactions that they share. While the coefficients share signs in both the full and reduced hybrid models, they are smaller, in absolute values, in the reduced hybrid model. In Table 3 we present the estimates from the reduced hybrid model.

Table 3. Results from the reduced hybrid model with CO2 emissions as dependent variable, by wealth group level.

Note: The upper part of the table (denoted “interaction variables”) depicts the coefficients for the interaction term between the variable in the respective row and the income group in the respective column. * denotes a 0.05 significance level. ** denotes a 0.01 significance level. ***denotes a 0.001 significance level.

Several things are to be noted from Table 3. First, for High and Upper Middle wealth level countries there is a significant positive association between innovation (as proxied by R&D) and CO2 emissions. However, the significance levels of the interaction term for R&D and GDP reveal that the relationship between R&D and CO2 is not constant across wealth levels even within each group. Specifically, it appears that relatively high values of GDP and R&D are associated with a decrease in CO2 emissions in High and Upper Middle wealth level countries. This suggests that in wealthier countries, advancements in technology and efficient practices derived from R&D are likely contributing to reduced emission levels. Interestingly, GDP has no direct effect on emissions for countries in these two wealth groups. Rather, GDP only affects emissions through the interaction term with R&D.

In turn, for the Lower Middle wealth level countries, R&D has no impact on CO2 emissions, whether directly or via interaction with GDP. Instead, higher GDP leads to a significant increase in emissions. This suggests that for these countries economic growth entail CO2 emissions while R&D activities are too small to have a mediating effect.

Second, medium and high-technology industry value added manufacturing is only significant for countries within the Upper Middle wealth level. This is in line with previous literature (see Avenyo & Tregenna, 2022, Wang, Zeng & Liu, 2019). A higher proportion of medium and high-technology industry value added is often negatively associated with CO2 emissions due to the adoption of cleaner and more environmentally sustainable technologies and practices within these industries. Additionally, these industries are often subject to stringent environmental regulations. As a result, these industries can contribute to reduced emission levels, becoming key drivers of sustainable economic growth and environmental protection (Avenyo & Tregenna, 2022). Interestingly, in our estimation, this result is evident only for Upper Middle wealth level countries.

Third, urban population is only significantly increasing emissions for High wealth level countries. Such positive relationship can be attributed to several factors. There is often a higher concentration of industrial and manufacturing activities in urban areas, leading to increased emissions of pollutants as urbanization increases (Wang, Zeng & Liu, 2019). Additionally, urban areas tend to have higher energy consumption and transportation demands, further contributing to higher emission levels.

When it comes to the factors jointly estimated across wealth groups, the positive relationship between renewable energy consumption and CO2 emissions is well-documented within the literature (Chen & Lee, 2020) which emphasizes the need for sustainable energy practices and efficient resource management to mitigate adverse environmental impacts. In line with this, the significant negative relationship between renewable energy consumption and CO2 emissions suggests that an increase in renewable energy usage is associated with a reduction in CO2 emissions. This is in line with previous findings demonstrating that technological progress helps reduce CO2 emissions by bringing energy efficiency (Akram et al., 2020; Sharif et al., 2019).

Conclusion

This policy brief analyses the effects of GDP and technological innovations on CO2 emissions. The theoretical channels linking economic development (and technological innovations) and CO2 emissions are multifaceted, warranting the need for an econometric assessment. We study 83 countries between 1996 and 2020 in a setting that allows us to disentangle the effects across countries with different income levels.

Our findings underscore the importance of considering the various income levels of the considered countries and their interplay with R&D expenditures in environmental policy discussions. Countries with Lower Middle income levels exhibit insignificant effects from R&D expenditures on CO2 emissions, while for Upper Middle and High wealth level nations, increased R&D expenditures incurs higher emissions.

The moderating role of GDP adds complexity to this relationship. At sufficiently high wealth levels, GDP weakens the effect of R&D on emissions. This alleviating effect becomes stronger as GDP increases until reaching a turning point, at which the impact reverses and R&D expenditures instead decrease emissions.

Our results on the significant nonlinear relationship between R&D, GDP and CO2 emission levels highlights the complexity of addressing environmental challenges within the context of macroeconomics. It suggests that policies promoting both R&D and economic growth simultaneously can foster more sustainable development paths, where economic expansion is accompanied by a more efficient and cleaner use of resources, leading to lower CO2 emissions. This decoupling of economic growth from emissions is likely to be further enhanced by governments incentivising research and development focused on improved energy efficiency and emission reduction.

References

  • Akram, R., Chen, F., Khalid, F., Ye, Z., & Majeed, M. T. (2020). Heterogeneous effects of energy efficiency and renewable energy on carbon emissions: Evidence from developing countries. Journal of cleaner production, 247, 119122.
  • Avenyo, E. K., & Tregenna, F. (2022). Greening manufacturing: Technology intensity and carbon dioxide emissions in developing countries. Applied energy, 324, 119726.
  • Chen, Y., & Lee, C. C. (2020). Does technological innovation reduce CO2 emissions? Cross-country evidence. Journal of Cleaner Production, 263, 121550.
  • Cheng, C., Ren, X., Dong, K., Dong, X., & Wang, Z. (2021). How does technological innovation mitigate CO2 emissions in OECD countries? Heterogeneous analysis using panel quantile regression. Journal of Environmental Management, 280, 111818.
  • Fraley C. and Raftery A. E. (2002) Model-based clustering, discriminant analysis and density estimation. Journal of the American Statistical Association, 97/458, pp. 611-631.
  • Petrović, P., & Lobanov, M. M. (2020). The impact of R&D expenditures on CO2 emissions: evidence from sixteen OECD countries. Journal of Cleaner Production, 248, 119187.
  • Scrucca, L., Fop, M., Murphy, T. B., & Raftery, A. E. (2016). mclust 5: clustering, classification and density estimation using Gaussian finite mixture models. The R journal, 8(1), 289.
  • Sharif, A., Raza, S. A., Ozturk, I., & Afshan, S. (2019). The dynamic relationship of renewable and nonrenewable energy consumption with carbon emission: a global study with the application of heterogeneous panel estimations. Renewable energy, 133, 685-691.
  • Wang, S., Zeng, J., Liu, X., (2019). Examining the multiple impacts of technological progress on CO2 emissions in China: a panel quantile regression approach. Renew. Sustain. Energy Rev. 103, 140–150.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

An Overview of the Georgian Wine Sector

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Georgia has an 8000-year-old winemaking tradition, making the country the first known location of grape winemaking in the world. In this policy brief we analyze and discuss major characteristics of the wine sector in Georgia, government policies regarding the sector and major outcomes of such policies. The brief provides recommendations on how to ensure sustainable development of the sector in a competitive, dynamic environment.

Introduction

The Georgian winemaking tradition is 8000 years old, making Georgia the world’s first known location of grape winemaking. There are many traditions associated with Georgian winemaking. One of them is ‘Rtveli’ – the grape harvest that usually starts in September and continues throughout the autumn season, accompanied with feasts and celebrations. According to data from the National Wine Agency, the annual production of grapes in Georgia is on average 223.6 thousand tones (for the last ten-years), with most grapes being processed into wine (see Figure 1).

Figure 1. Grape Processing (2013-2021)

Source: National Wine Agency, 2022. Note: Some producers do not participate In Rtveli and the total annual quantity of processed grape in the country might therefore be higher than the numbers presented in the figure.

Wine is one of the top export commodities for Georgia. It constituted 21 percent of the total Georgian agricultural export value in 2021 (Geostat, 2022). Since 2012 wine exports have, on average, grown 21 percent in quantitative terms, and by 22 percent in value (Figure 2). The average price per ton varies from 3 thousand USD to 3.9 thousand USD (Figure 2). Exports of still wine in containers holding 2 liters or less constitute, on average, 96 percent of the total export value.

Figure 2. Georgian Wine Exports (2012-2021)

Source: Geostat, 2022.

The main destination market for exporting Georgian wine is the Commonwealth of Independent States (CIS) countries which account for, on average, 78 percent of the export value (2012-2021). The corresponding share for EU countries is 10 percent. As of 2021, the top export destinations are Russia (55 percent), Ukraine (11 percent), China (7 percent), Belarus (5 percent), Poland (6 percent), and Kazakhstan (4 percent).  While Russia is still a top market for Georgian wine, Russia’s share of Georgian wine exports declined after Russia imposed an embargo on Georgian wines in 2006. The embargo forced market diversification and even after the reopening of the Russian market and Georgian wine exports shifting back towards Russia, its share declined from 87 percent in 2005 to 55 percent in 2021.

While there are more than 400 indigenous grape varieties in Georgia, only a few grape varieties are well commercialized as most of the exported wines are made of Rkatsiteli, Mtsvane, Kisi, and Saperavi grape varieties (Granik, 2019).

Government Policy in the Wine Sector

The Government of Georgia (GoG) actively supports the wine sector through the National Wine Agency, established in 2012 under the Ministry of Environmental Protection and Agriculture (MEPA). The National Wine Agency implements Georgia’s viticulture support programs through: i) control of wine production quality and certification procedures; ii) promotion and spread of knowledge of Georgian wine; iii) promotion of export potential growth; iv) research and development of Georgian wine and wine culture; v) creation of a national registry of vineyards; and vi) promotion of organized vintage (Rtveli) conduction (National Wine Agency, 2022).

During 2014-2016, the GoG’s spending on the wine sector (including grape subsidies, promotion of Georgian wine, and awareness increasing campaigns) amounted to 63 million GEL, or 22.8 million USD (As of November 1, 2022, 1 USD = 2.76 GEL according to the National Bank of Georgia). Out of the spending, illustrated in Figure 3, around 40-50 percent was allocated to grape subsidies implemented under the activities of iv) (as mentioned above).

There are two types of subsidies used by the GoG– direct and indirect. Direct subsidies imply cash payments to producers per kilogram of grapes. As for indirect subsidies, they entail state owned companies purchase grapes from farmers.

Starting from 2017, the GoG decided to abandon the subsidiary scheme and decrease its spending on of the wine sector.  The corresponding figure reached a minimum of 9.2 million GEL (3.3 million USD) in 2018. Meanwhile, the grape production has been increasing, reaching its highest level in 2020 (317 thousand tons). In 2020, the GoG resumed subsidizing grape harvests to support the wine sector as part of the crisis plan aimed at tackling economic challenges following the Covid-19 pandemic. The corresponding spending in the wine sector increased from 16.7 million GEL (around 6 million USD) in 2019 to 113.4 million GEL (41 million USD) in 2020, out of which the largest share (91 percent) went to grape subsidies. In 2021, the GoG continued its extensive support to the wine sector and the corresponding spending increased by 44 percent, compared to 2020. The largest share again went to grape subsidies (90 percent).

Figure 3. Grape Production and Government Spending on the Wine Sector (2014-2021)

Source: Ministry of Finance of Georgia, National Statistics Office of Georgia, Author’s Calculations, 2022.

In 2022, the GoG have continued subsidizing the grape harvest to help farmers and wine producers sell their products. During Rtveli 2022, wine companies are receiving a subsidy if they purchase and process at least 100 tons of green Rkatsiteli or Kakhuri grape varieties grown in the Kakheti region, and if the company pays at least 0.90 GEL per kilogram for the fruit. If these two conditions are satisfied, 0.35 GEL is subsidized from a total of 0.9 GEL per kilogram of grapes purchased (ISET Policy Institute, 2022). Moreover, the GoG provides a subsidy of 4 GEL per kilogram for Alksandrouli and Mujuretuli grapes (unique grape varieties from the Khvanchkara “micro-zone” of the north-western Racha-Lechkhumi and Kvemo Svaneti regions), if the buying company pays at least 7 GEL per kilogram for those varieties (Administration of the Government of Georgia, 2022). Overall, about 150 million GEL (54.2 million USD), has been allocated to grape subsidies in 2022.

Policy Recommendations

Although the National Wine Agency is supposed to implement support programs in various areas like quality control, market diversification, promotion and R&D, these areas lack funding, as most of the Agency’s funds are spent on subsidies. Given that the production and processing of grapes have increased over the years, subsidies have been playing a significant role in reviving the wine sector after the collapse of the Soviet Union (Mamardashvili et al., 2020).  However, since the sector is subsidized as of 2008, the grape market in Georgia is heavily distorted. Prices are formed, not on the bases of supply and demand but on subsidies, which help industries survive in critical moments, but overall prevent increases in quality and fair competition. They further lead to overproduction, inefficient distribution of state support and preferential treatment of industries (Desadze, Gelashvili, and Katsia, 2020). After years of subsidizing the sector, it is hard to remove the subsidy and face the social and political consequences of such action.

Nonetheless, in order to support the sustainable development of the sector, it is recommended to:

  1. Replace the direct state subsidy with a different type of support (if any), directed towards overcoming systemic challenges in the sector related to the research and development of indigenous grape varieties and their commercialization level.
  2. Further promote Georgian wine on international markets to diversify export destination markets and ensure low dependence on unstable markets like the Russian market. Although wine exporters have in recent years entered new markets, to further strengthen their positions at those markets, it is vital to:
    • ensure high quality production through producers’ adherence to food safety standards.
    • promote digitalization – e-certification for trade and distribution, block chain technology for easier traceability and contracting, e-labels providing extensive information about wine etc. – enabling producers to competitively operate in the dynamic environment (Tach, 2021)
    • identify niche markets (e.g. biodynamic wine) and support innovation within these sectors to ensure competitiveness of the wine sector in the long-term (Deisadze and Livny, 2016).

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Green Banking and Its Development in Belarus

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Climate change and environmental protection are challenging both policymakers and society. People are getting increasingly concerned about the careful consumption of water and energy, use of biodegradable products, and biodiversity. In these conditions, more and more companies and industries adopt “green” and “sustainable” standards in their work. The financial sector is also involved in this process. For banks and other financial institutions, green activities require adopting new approaches, strategies, and instruments. This brief discusses green banking with a special focus on the development and challenges of this industry in Belarus. It concludes by providing policy recommendations for green banking development in the country.

Introduction

Sustainable development is one of the main global challenges, and an important role in facilitating and funding it belongs to green financing. The UN Environment Program defines green financing as “to increase the level of financial flows (from banking, micro-credit, insurance, and investment) from the public, private and non-profit sectors to sustainable development priorities”. Such financing can be provided by banks, financial institutions, nonfinancial private companies, governments, and individuals. The instruments of green financing range from climate, blue, and sustainability bonds to green credits and mortgages. One of the leading roles in the field is played by banks, which will be the focus of the current brief. This brief first offers a general overview of green banking. Then it and a discusses the existing green banking practices and challenges in Belarus. It concludes by providing policy recommendations for the development of the Belarussian green banking sector.

Green Banking: An Overview

The Indian Bank’s Association defines a green bank as “a normal bank which considers all the social and environmental/ecological factors, with an aim to protect the environment and conserve natural resources”. Moreover, the Finance Initiative of the UN Environment Program states that all green banks’ operations and activities should be consistent with sustainable development goals (Tara, K., Singh S., Kumar, R., 2015).

Considering the importance of green and sustainable development, it is natural to expect increasingly more financial companies and banks to implement eco-friendly instruments and policies. However, there is still much work to be done to ensure that market players consider green aspects in their deals. For example, while the European “green” financial market is growing rapidly, the Green Assets Ratio (GAR, the share of green loans, bonds to total bank’s assets) was only at 7,9% for the EU banking sector in March 2021 (Huw Jones, May 21, 2021).

A necessary component to speed up banks’ uptake of green practices is an appropriate regulatory and supervisory framework. Indeed, as green aspects become part of the traditional banking activities – e.g., international financing, work in foreign markets, participation in financial programs and projects -, there  is a need to develop common rules of work, principles, and standards in the green financing sphere. Today, several international initiatives and platforms provide such rules. For example, the Energy efficient Mortgages Initiative supports green mortgage development in Europe (Energy Efficient Mortgages Initiative, n.d.). The International Capital Markets Association acts as a (self-) regulatory organization that forms, implements, and manages principles and standards of green social, or sustainable bonds. One of the famous standards in green finance is the Equator Principles, a set of guidelines for project financing evaluation that incorporates social and environmental risks management (Equator Principles, n.d.). The Climate Bonds Initiative supports the mobilization of the bond market to meet the challenges of climate change (Climate Bonds Initiative, n.d.).

At the same time, most national monetary regulators work on legislation and rules of green banking development. The financial sector in general and the banking sector in particular are highly regulated. Financial institutions distribute owned and borrowed funds by providing short- and long-term credits and investing in numerous financial instruments with different levels of risk in national and foreign currencies. Monetary regulators need to control the their activity in order to minimize banks’ risks (credit, liquidity, and currency risk, etc.). For this reason, it is essential to have clear guidelines for dealing with new instruments (climate, social, blue, sustainability bonds, green mortgages, etc.), as their characteristics are likely to differ from the traditional ones. For instance, green bonds may have distinct characteristics of issuing and circulation. Green mortgages can be considered less risky than traditional credits due to more liquid collateral (energy-efficient buildings). There are specific measures that could make green instruments more attractive for banks, for instance by introducing green capital requirements or regulation against greenwashing.

Apart from guidelines, recommendations, and rules, central banks can create additional incentives for developing the green financial market. For example, the Bank of Bangladesh established a preferential lending Fund for projects in spheres such as renewable energy, energy efficiency, alternative energy, and green industry (Ulrich Volz, March 2018). Also, the Central Bank of Hungary introduced preferential capital requirements for energy-efficient housing loans (Liam Jones July 13, 2021).

Another important aspect of regulation and incentives created by monetary regulators is environmental and climate change risks management. Climate change and the green transition increase the environment-associated financial risks for banks. Banks’ financial losses can result from not only storms floods, tsunamis, and temperature increases, but also financial problems of borrowers due to stricter environmental legislation and changes in social and environmental norms and standards.  According to the ECB survey, many banks develop sustainable development strategies, but very few include environment-associated financial risks in their risk management. Therefore, the ECB works on creating incentives and regulations for banks in green risks-management. It is expected that bank stress-testing will start in 2022 (Harrison C., Muething L., 2021). At the same time, the Bank of Bangladesh, with IFC support, has developed guidelines on social and environmental risk management for the banking sector (Ulrich Volz, 2018).

Based on the above mentioned, there is still much to be done to ensure that market players consider green aspects in their deals. Green banking is still a new thing, but its implementation takes place in many countries, and green finance is an essential element of sustainable economic development.

Green Banking in Belarus

In this section, we overview the current state and perspectives of green banking development in Belarus. The country takes its first steps in green finance market development. Socio-economic development program of the Republic of Belarus for 2016-2020 has incorporated green projects in spheres such as transport and agriculture, recycling, eco-labelling and eco-certification development, as well as a study of the implementation of green bonds and green investment bank creation (Ukaz № 466, December 15 2016). In 2016, the National Plan of Activities on Green Economy Development in the Republic of Belarus till 2020 was adopted. The plan included the development of areas such as organic agriculture, eco-tourism, energy-efficient construction, and smart cities (CMRB Decree, № 1061, December 21, 2016). However, none of these projects were introduced with links to green financing and green banking. The National Plan of the Activities of Green Economy Development in the Republic of Belarus till 2025 pays more attention to green finance. In this plan, there is a description of implemented projects in recent years and a list of instruments (green bonds, credits, insurance products), tools (indexes, ratings, databases, etc.), entities and elements of the green finance ecosystem (MNREPRB, 2021). Still, there is no plan or detailed strategy of special regulation, rules, or framework of green banking development.

In the absence of precise plans from the government, green banking in Belarus began to emerge at the micro-level. Banks started to provide green products for their clients, participate in sustainable initiatives, and implement green management in their work. One of the main incentives to transition towards more sustainable banking practices comes from the investors’ side. In the case of joint investment and lending programs implementation, many foreign partners require that the bank applies modern green standards.

Another incentive to this transition builds on reputational risks and competition. Today, there is a public demand for eco-products, energy-efficient construction, and environmental protection. Banks that consider these issues have a competitive advantage and gain a positive reputation among their clients. Moreover, some commercial banks with foreign capital have to introduce green standards and green management at the request of their parent companies.

A few green initiatives by Belarusian banks are worth mentioning here. The Belinvestbank can be distinguished as one of the brightest examples of green banking in Belarus. The financial institution started transforming into EcoBank – it began to hold green financing transactions in the framework of the Global Trade Financial program (a program by the International Finance Corporation), adopted a new ecological and social strategy, issued a charity-bonus payment card made from recycled plastic, and held activities in ecological spheres (Belinvestbank, 2020). The bank plans to issue green bonds, establish green projects accelerator, continue green financing, and build new communications approaches with its clients (Belinvestbank, 2019a). Green financing is one of the main lending spheres of the EBRD, which planned to purchase a share of Belinvestbank.

Priorbank is another case of a green banking initiative in Belarus. The bank presented a new type of lending that allows consumers to buy only energy-, water- and heat-efficient products (Priorbank, 2021).

The Development Bank of Belarus launched a program of ecological projects financing for small and medium businesses and individual entrepreneurs for preferential interest rates (DBRB, n.d.).

As part of the Belarus Sustainable Energy Finance Program (BelSEFF) framework, funding was provided by banks such as MTBank, BelVeb Bank, BPS-Sberbank, and Belgazprombank with EBRD support (Tarasevich. V., 2014). Agreement about energy-efficient projects financing between MTBank and Nordic Environment Finance Corporation can be highlighted as one more example of a green initiative (Aleinikov & Partners, n.d.). The last but not least example of green activities is the joint project of BNB-Bank and North Ecological Financial Corporation in which they offered loans to private individuals and legal entities for the purchase of hybrid and e-vehicles, as well as for building infrastructure for e-vehicles. (BNB-Bank, n.d.).

Some Belarusian banks implement standards of environmental management into practice. For example, the Sustainable Development Report of Raiffeisen Bank International mentions that the Raiffeisen Group plans by 2025 to reduce carbon dioxide emissions by 35% (Raiffeisen Bank International, 2019). They also present plans on water savings, reduction of paper document flow and energy consumption. Priorbank is involved in this process as part of the Raiffeisen Group. Similar goals can be found in the Sustainable Development Report of Bank BelVeb. The environmental priories of the bank are to reduce pollution, restore biodiversity, and increase the efficiency of water,  energy, and other resources consumption (BelVeb, 2019). In the Social Report of Belarusbank it is mentioned that the bank tries to consider negative environmental effects and ecological factors in their lending-decisions (Belarusbank, 2020).

Based on the information above, the conclusion is that Belarusian financial institutions gradually introduce principles of green banking. Most green projects in Belarus are implemented with the support of international financial organizations, parent institutions, or by request from foreign bank partners. Today, Belarusian banks carry out two types of green banking activities. First, they incorporate an environmental perspective in their everyday activities, not directly related to green finance: for example, by reducing water and electricity consumption and waste, switching to electronic document management, providing green incentives to their employees, etc.. Second, banks integrate an environmental perspective into their financial activities using green instruments, for instance by providing loans to the population and corporate sector based on  sustainable finance principles.

At the same time, Belarusian banks do not work with climate-related and environmental risks management. This is not surprising, as, normally, regulators would initiate and incentivize this process, but in Belarus, neither the National Bank nor any other regulator deals with environmental risk management rules for banks. Another challenge is that Belarusian banks do not take part in international green financing initiatives, such as the Equator Principals or the Climate Bond Initiative. Finally, the narrowness of the Belarusian financial market and absence of clear rules and definitions restrict green bond markets and green mortgage development.

Recommendations

Investment in green projects imposes positive externalities on society that are not necessarily internalized by the market. As reflected in the international practices discussed earlier, support from the government and financial authorities might be necessary both in monetary and regulatory terms. Even if developing countries like Belarus may not have a green transformation on top of their agenda, they will soon be faced with the necessity to adapt to the European Green Deal, at least with respect to their trade with the EU. Hence, they will also need policies that promote and support green finance development.

Based on international experience and national issues of green banking, the following recommendations can be highlighted (Luzgina A., 2021):

  1. The adoption of supportive regulation/rules of work with green instruments, including green, sustainable and/or sustainability-linked bonds, green mortgages, and green project financing. This regulation can include criteria for identifying green projects and construction, principles of green projects evaluation, rules of green bonds issuing, tax benefits, and/or preferential credit eligibilities. The ResponsAbility Investments Survey confirms the necessity to implement special rules on green lending development in emerging economies. According to the survey, 40% of respondents believe that an affordable regulatory environment is a key element of green loan market development (ResponsAbility Investments AG, 2017).
  2. The implementation of economic and social incentives for green banking activity popularization. Such incentives can include lower interest rates on green loans, providing tax exemptions for companies and people involved in green projects realization, subsidizing the process of green bonds verification, and holding study activities on green economy and finance. According to ResponsAbility Investments Survey, 60% of respondents agree that special green credit lines of public financial institutions have played an important role in green finance development. At the same time, governments subsidize the process of bonds verification issued by SMEs in Russia (at the stage of adoption), Singapore, and Japan (Vinogradov E. April 2, 2020).
  3. The creation of an additional section in the Belarusian currency and stock exchange for green corporate and state bonds circulation. Green or sustainable bonds have special characteristics in terms of issuing purposes and listing features that require highlighting them in a separate section.
  4. Guiding the development of climate-related and environmental risks management as well as green management rules implementation for all banks. Based on the international experience, this area of green banking requires incentives from the Government and Central Bank, as it is poorly studied and associated with additional costs for banks. Financial institutions are not sufficiently motivated to implement green risks management principles on their own.
  5. Extending the international collaboration in the field of green finance. This activity may include participating in not only international programs on green financing or foreign investments attraction but also international initiatives such as Principles for Responsible Banking, Climate bonds Initiative, Equator Principles, etc..
  6. The development of a green banking methodology and (or) strategy/ concept by responsible bodies. The introduction of green banking requires the development of new approaches, definitions, and rules that are within the competence of not only the Central Bank but also the Ministry of Economy (in terms of SMEs support), Ministry of Finance (in terms of funding), Ministry of Agriculture (in terms of the development of bioproducts standards), Ministry of Architecture and Construction (in terms of energy-efficient building definition and indicators), Ministry of Natural Resources and Environmental Protection, etc. An institutional body could coordinate this work by developing a methodology of green banking in discussion with the National Bank, ministries, and other interested parties (NGOs, banks). The association of Belarusian Banks can perform this function as it knows the specifics of banking legislation, can identify the existing obstacles of green banking and other challenges in the field, and is interested in developing the Belarusian banking system in line with current trends.

Conclusion

Green finance as a whole and green banking in particular will continue to develop. Monetary regulators are working on green rules and risk management implementation for banks. Financial institutions from different countries are participating in international green initiatives and developing sustainable strategies.

Green banking development is an international process which Belarus cannot ignore. Today, the majority of green activities at the national level are based on the initiative of banks. Contracts with international financial institutions and requirements of parent companies and investors motivate Belarusian banks to implement green instruments and approaches. Traditionally, the banking system works under restricted and highly regulated conditions. Therefore, it is necessary to introduce clear rules of green banking by the government as well as to increase the attractiveness of green financing, including economic and social incentives development.

Otherwise, the existing policy gap in green banking will widen and the opportunities for collaboration between Belarusian banks and foreign financial institutions will diminish. Finally, the absence of green regulation will deteriorate the quality of risk management in the Belarusian banking system compared to the world level.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

For a Better Budget Management of Infrastructure Investments

Aerial photo of buildings and roads representing infrastructure investments

Many developing countries rely on investment-to-GDP metrics as a sign of progress towards their development goals. Unfortunately, too often the focus on investment pushes aside the issues of adequately maintaining existing infrastructure. The result could be disastrous to human lives, health, and well-being. Lack of maintenance of existing infrastructure is a well-known problem, not only in developing economies but also in some developed countries. However, how much the government should plan to spend on maintenance over the lifetime of infrastructure assets is neither a simple nor straightforward question. In this policy brief, we examine the cases of two transition economies – Georgia and Estonia – and provide a more general discussion of the challenges and possible solutions to infrastructure maintenance issues. We argue that relevant research along with properly aligned incentives could help the countries overcome these problems and optimize infrastructure spending.

Introduction

The efficiency of infrastructure investment has gotten quite some attention in the past years. A recent book by G. Schwartz et al. (2020) shows that countries waste about 1/3 (and some even more) of their infrastructure spending due to inefficiencies. With poor management, the major budgetary efforts undertaken to make room for infrastructure investments go to waste. The question of how much the country should plan to spend on maintenance over the lifetime of infrastructure assets is neither simple nor straightforward. In two recent ISET-PI blog posts, Y. Babych and L. Leruth (2020a, b) stress the importance of striking the right balance between new infrastructure investments and the rehabilitation and maintenance of existing infrastructure. Without this balance, the up-keep of public infrastructure could either be too expensive for the budget to handle, or, at the other extreme, would quickly deteriorate to the point where it is no longer operational and needs to be rebuilt from the ground up (which is the case in many developing countries, including Georgia, Armenia, Ukraine, and others). This policy brief focuses on the reasons why developing (and even some developed) countries tend to invest too little in public infrastructure maintenance and what can be done to solve this problem. We first examine the cases of Georgia and Estonia, two post-Soviet transition economies with different approaches to infrastructure maintenance financing. This analysis is then followed by a more general discussion about the infrastructure maintenance challenges and potential solutions.

Maintenance vs. Investment: the Cases of Georgia and Estonia

Developing countries tend to use investment (public or private) as a share of GDP to measure their economic progress and prospects. Georgia is one of the countries that has invested a lot in public infrastructure. Public investment grew sharply between 2003-2007 to 8% of GDP and settled at 6% of GDP after 2017 (PIMA GEO 2018).  The capital stock is about 90% of GDP. In comparison, in Estonia, another post-Soviet economy, public investment was about 4% of GPD, whereas the capital stock was 57% of GDP in 2015. Yet, the quality of Georgia’s public infrastructure is much lower than in Estonia (Georgia is in 69th place globally according to Global Competitiveness Index 2017-2018, while Estonia is in 32nd place).  The reason for this is quite simple:  management, especially the maintenance of public infrastructure. Both countries recently went through a Public Investment Management Assessment (PIMA), a comprehensive framework developed by the IMF to assess infrastructure governance. The results suggest that Georgia is much weaker than Estonia in planning, budgeting, and maintenance. (A complete summary of the assessment results can be found here).

Georgia’s case is far from unique. The country belongs to the vast majority of emerging economies that have not efficiently linked their medium- and long-term infrastructure plans within a sustainable fiscal framework. Moreover, infrastructure planning deficiencies spread way beyond the emerging markets: Allen et al. (2019) estimate that 56% of all world countries do not have a proper Public Investment Program.

Why is Infrastructure Maintenance a Challenge for Many Countries?

Even though maintenance, rehabilitation, and new investments are intrinsically linked, the practical process of integrating these three infrastructure components is complex. Blazey et al. (2019), for example, identify the following reasons:

  • Political economy reasons—governments will opt for a ribbon-cutting rather than maintaining existing assets;
  • Fiscal reasons—budget funding for operations and maintenance is prone to be cut when fiscal space is limited;
  • Institutional reasons—in many countries, separate agencies still prepare investment and current expenditure budgets;
  • Capacity reasons— up-to-date information on the state of assets may not be readily available.

A number of international studies (usually sectorial) point to the high cost of neglecting maintenance. A study on the upkeep of bridges and roads in the US shows that 1$ of deferred maintenance will cost over 4$ in future repairs. The same holds for airports. In Africa, the World Bank estimates that timely road expenditure of $12 billion spent in the 80s would have saved $45 billion in reconstruction costs during the next decade. It is not only rehabilitation costs that increase with poor maintenance: user costs can increase dramatically (Escobal and Ponce, 2003); health costs in terms of injuries or deaths; and ecological costs (the water lost daily because of leaks could satisfy the needs of 200 million people according to the World Bank, 2006).

Conceptually, however, the link between maintenance, rehabilitation, and new investments is simple to understand. Figure 1 below, adopted from Thi Hoai Le et al. (2019), clarifies this point. As discussed in Babych and Leruth (2020b), when planned maintenance activities (such as planned repair, upkeep, etc.) are insufficient, then the rate at which infrastructure is deteriorating will be high, and the unplanned maintenance costs will increase as well. This response would, in turn, result in a higher total cost. If the amount of planned maintenance activities is excessive, then the unplanned costs may be low, but the total cost is higher than optimal. In order to strike the optimal balance, there need to be just enough planned maintenance activities. 

Figure 1. Optimal zone of maintenance.

Source: Thi Hoai Le et al., (2019).

Conceptually simple maybe, but the devil(s) is (are) in the details. We have already listed above some of the reasons why integration is complex. Data availability is another issue raised by numerous Public Investment Management Assessments made by the IMF. The reporting standards are simply not built in a way that would allow for the compilation of maintenance and rehabilitation data (although aggregate estimates of investment data are available). In any case, the Government Finance Statistics Manual of the IMF (2014) does not separate maintenance expenditure, which is undoubtedly an area that requires further deepening.  More fundamentally perhaps, as pointed out long ago by Schick (1966), there is an additional issue relating to governance philosophy: “planning and budgeting have run separate tracks and have invited different perspectives, the one conservative and negativistic, the other innovative and expansionist …”. Finally, with governments looking for the ‘cheap’ route through public-private partnerships (PPPs) to finance infrastructure development, fiscal risks have increased in advanced and emerging economies in the early 2000s (IMF, 2008). To our knowledge, there have been no systematic assessments of PPP-related fiscal risks since IMF’s report in 2008, but as fiscal positions have deteriorated with the Covid-19 pandemic, PPP projects are likely even riskier today.

What Can Be Done to Improve Infrastructure Maintenance?

Leaving the data, PPPs, and inter-departmental culture issues aside, several considerations that emerge from a closer look at Figure 1 can feed the policy discussions. Let us first consider the notion of planned maintenance (the orange line). In principle, as a project is developed, the cost of maintenance is projected over its life cycle. If the infrastructure is maintained accordingly, its life span may even exceed the projections. At the time the project is conceived, a schedule of maintenance expenditure is also planned and integrated into the analysis. In the figure above, one would expect that these cost assumptions are located in the ‘optimal maintenance zone’ with a limited amount to be spent on unplanned maintenance later on. This level of planned maintenance should then be integrated as a ‘given’ in all subsequent budgets. Usually, as we have already mentioned, it is not.

If we now move to ‘unplanned’ maintenance (the line in blue), we are really referring to situations when infrastructure must be brought back to shape after months (or even years) of neglect. In some cases, this can no longer be labeled as maintenance, and it becomes rehabilitation. Reduce regular maintenance a bit more and the authorities must start over.

Finally, the continuity of the curves is misleading: it is wrong to say that things are necessarily smooth even in the optimal zone.

Let us look more closely at the leading causes and the ways to overcome the problems that arise when optimizing maintenance expenditure.

Setting benchmarks: One explanation for the shortage of maintenance planning outlined above is the lack of information on the practical implementation of such planning.  There are too few studies on maintenance expenditure for policymakers to set benchmarks and develop reliable estimates. The existing studies in this area tend to focus on OECD countries (where data availability is less of a constrain) and on the transportation sector (roads, rail, etc.) perhaps because the private sector is more often involved (see, for example, the American Society of Civil Engineers from 2017, that concluded that 9 percent of all bridges are structurally deficient). Some studies have looked at buildings (e.g., Batalovic et al., 2017 or the Ashrae database, 2021) and unsurprisingly concluded that the age of the construction and its height are significant variables to explain maintenance outlays. However, we are not aware of studies that would, for example, distinguish between different types of maintenance in order to limit overall costs. We are neither aware of studies investigating which organizational arrangements are the most efficient (as discussed by Allen et al., 2019). The bottom line is that there is not much to use as a benchmark, and an effort must be made to build reliable estimates.

Policy dialogue on maintenance is needed:  The abovementioned considerations of the consequences of delayed, unplanned, and sometimes unexpected maintenance bring us to our next point. Things break down when they are not maintained (and sometimes break down when they are maintained too), and such long-term aspects must be more present in the policy dialogue with developing countries. Clearly, delaying maintenance increases fiscal costs in the short- and longer-term (Blazey et al., 2019).

The smoothness of the curves in Figure 1 can be misleading because insufficient maintenance may suddenly trigger a major problem (a bridge or a dam can collapse, as it happened in Italy and in India recently,)  and this will entail high costs, even disasters involving in human lives. The major collapses of nuclear plants (as in Chornobyl, Ukraine, and more recently in Fukushima, Japan) are other examples of the same problem. In addition, studies estimate that poor maintenance of transmission lines could be one of the reasons for electricity blackouts (Yu and Pollitt, 2009). In fact, the lack of maintenance increases the speed at which the value of the existing capital of infrastructure is eroding. While politicians may well hope that this will not happen during their tenure, the probability of a failure increases as maintenance decreases.

On top of the above, inefficiency in maintenance expenditures can be aggravated by wrongly set incentives, both for domestic actors and foreign donors. Indeed, the latter play an important role in infrastructure investment in many developing countries. In Georgia, for example, 40% of infrastructural projects are funded by foreign donors. Setting the right incentives for both parties, as well as their interplay, are thus of immense importance.

Aligning the incentives: Incentives are against maintenance. As pointed out by Babych and Leruth (2020a), capital investment and rehabilitation look good on paper. Maintenance, on the other hand, is considered a current expenditure item in the Government Finance Statistics (GFS) (IMF, 2014). Spending more on maintenance will therefore not look good since 1) more maintenance will reduce government savings in the short term; 2) spending less on maintenance will increase the need for virtuous-looking investment expenditure in the medium and long term. Yet, in spite of the lack of clear benchmarks, donors can play an essential role by stressing the need to systematically integrate maintenance in the budget and in the Medium-Term Expenditure Framework (MTEF). To some extent, it is already the case. In Georgia, projects that are funded by donors tend to follow better appraisal procedures. However, ex-post audits are irregular – e.g., no individual projects audits were completed by State Audit Office during 2015-2017 (PIMA GEO, 2018). If donors could include these audits in their dialogue, it would clearly be helpful. Training subnational governments in proper maintenance management would be even more critical as capacities tend to be weaker than in the center.

Overcoming a potential moral hazard problem of donor involvement: Excessive donor involvement in new investments could also be counterproductive. Donors should carefully examine the need to build new infrastructure and first consider the possibility of performing some rehabilitation while holding the authorities accountable for the maintenance of existing ones. If the authorities are expecting a donor to eventually replace a piece of infrastructure that does not function, the incentives to maintain it are greatly reduced.

Conclusion

  • Developing economies, but also emerging ones like Georgia, as well as Armenia, Ukraine and others, would benefit from proper incentives and support from the international donors to integrate maintenance into the infrastructure planning framework;
  • This is especially important for local governments, who lack the financial and human capital resources to maintain local infrastructure properly, making regions outside of the capital city less attractive places to invest or live in;
  • Given the absence of transparent and comparable sources of information about the composition of maintenance expenditures – for example, the Government Finance Statistics (IMF), which does not distinguish between maintenance and rehabilitation expenditures, – donors could insist that governments compile these expenditures and report on them, at least for the major projects;
  • The culture of maintaining rather than rehabilitating or replacing is directly linked to the sustainable development goals and the circular economy concept. In light of their commitment to Agenda 2030, the international community and the national governments in countries like Georgia should consider prioritizing and implementing the set of reforms suggested in their respective PIMAs.

References

  • Allen, R., M. Betley, C. Renteria and A. Singh, “Integrating Infrastructure Planning and Budgeting,” in Schwartz et al. (2020), pp. 225-244 (2019).
  • American Society of Civil Engineers, Infrastructure Report Card, Reston, Va, (2017).
  • ASHRAE, Purpose of The Service Life and Maintenance Cost Database, available at., (2021).
  • Babych, Y., and L. Leruth, “Tbilisi: a Growing City with Growing Needs,” ISET-PI Blog available at, (2020a).
  • Babych, Y., and L. Leruth, “To Prevent, to Repair, or to Start Over: Should Georgia Put’ Maintenance’ Ahead of ‘Investment’ in Its Development Dictionary?,” ISET-PI Blog available at, (2020b).
  • Batalovic, M., K. SokolijaM. Hadzialic, and N. Batalovic, “Maintenance and Operation Costs Model for University Buildings,” Tehnicki Vjesnik, 23(2), pp. 589-598, (2017).
  • Blazey, A., F. Gonguet, and P. Stokoe, “Maintaining and Managing Public Infrastructure Assets,” in Schwartz et al. (2020), pp. 265-281 (2019).
  • Escobal, J. and C. Ponce, “The Benefits of Rural Roads: Enhancing Income Opportunities for the Rural Poor,” Working Paper 40, Grupo de Analysis Para el Desarrollo (GRADE), Lima, Peru, (2003).
  • IMF, “Fiscal Risks—Sources, Disclosure, and Management,” Fiscal Affairs Department, Washington DC,(2008).
  • IMF, GFS, Government Finance Statistics Manual, IMF, Washington DC, (2014).
  • PIMA EST, Republic of Estonia: Technical Assistance Report-Public Investment Management Assessment, IMF, Washington DC, (2019).
  • PIMA GEO, Republic of Georgia: Technical Assistance Report-Public Investment Management Assessment, IMF, Washington DC, (2018).
  • Rozenberg, J., and M. Fay, eds, “Beyond The Gap: How Countries Can Afford The Infrastructure They Need While Protecting The Planet,” Sustainable Infrastructure Series, The World Bank, Washington DC, (2019)
  • Schick, A., “The Road to PPB: The Stages of Budget Reform,” Public Administration Review, 26(4), pp. 243-258, (1966).
  • Schwartz, G., M. Fouad, T. Hansen, and G. Verdier, Well Spent : How Strong Infrastructure Governance Can End Waste in Public Investment, IMF, Washington DC, (2020).
  • Thi Hoai Le, A., N. Domingo, E. Rasheed, and K. Park, “Building Maintenance Cost Planning and Estimating: A Literature Review,” 34th Annual ARCOM Conference, Belfast, UK (2019).
  • World Bank, The Challenge of Reducing Non-Revenue Water in Developing Countries – How The Private Sector Can Help,” Water Supply and Sanitation Board Discussion Paper Series No 8, Washington DC, (2006).
  • Yu, W., and M. Pollitt, “Does Liberalization Cause More Electricity Blackouts?,” EPRG Working Paper 0827, Energy Policy Research Group, University of Cambridge, United Kingdom, (2009).

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Gender Equality and Economic Development: From Research to Action

20180608 Gender Equality and Economic Development Poster 01

It’s increasingly being acknowledged that gender inequality is not just a human rights issue, but of first order importance for economic development. It is also an issue of high priority for the Swedish government, with the feminist foreign policy gaining a lot of attention worldwide. This policy brief shortly summarizes presentations held during a full day conference at the Stockholm School of Economics on June 1, 2018. The event focused on how gender discrimination negatively impacts the productivity of low and middle income economies, but also how reforms and specific initiatives can better the situation. The perspective was both long term, how norms and laws governing women’s rights have evolved over time, and short term, illustrating the current challenges women and societies face, with a particular emphasis on the situation in Eastern Europe. This was the 7th installment of SITE Development Day – a yearly development policy conference organized with support from the Swedish Ministry for Foreign Affairs.

From Research: Causes, Costs and Remedies

Cross-country differences in gender equality are often explained by variation in formal institutions such as laws and policies, and informal institutions such as social norms, religion and culture. A recent literature has focused on understanding the underlying drivers behind the variation in gender norms, arguing that these norms themselves may be functions of predetermined fundamentals such as geography, language and external shocks such as wars, revolutions or the slave trade. An influential line of research has emphasized that certain agricultural conditions have given prominence to technologies that require more muscular strength (the plow), whereas in shifting agriculture, hand-held tools like the hoe and the digging stick, require less upper body strength, are more labor intensive and easier to combine with child care. The former conditions are therefore associated with a stricter gender division of labor that generated a norm that the natural place for women is in the home. That these differences still linger have been empirically shown looking at cross-country variation in outcomes such as female labor force participation, political representation, inheritance rules, polygamy, parental authority and women’s freedom of movement. The variation is also found among second generation immigrants, where the attitudes from the parents’ ancestry are reflected also among those born and raised in western societies with more equal gender norms.

There has been an increasing emphasis on trying to estimate how gender inequality inhibits economic development, and to put numbers on the foregone economic development and growth from continuing inequality. A key indicator of inequality in this respect is the gender gap in labor force participation. There has been progress globally in this respect, but we are still far from equality and outcomes vary dramatically across regions and countries. Traditional approaches to estimate the benefits of increased female labor force participation (flfp) has assumed perfect substitutability between men and women. New evidence suggests that this may not be true, that men and women are complementary, which implies that increased flfp increases production beyond just the fact that more people are put to work. This also means that more women in work increases the productivity of men, in other words a win-win situation. This complementarity effect can take place at the workplace (think of diversified company boards), but recent research suggests that this is particularly true at the macro level. This is likely because men and women tend to work in different sectors and occupations that are themselves complementary, yielding the additional benefit at the macro level. Estimates of welfare gains of eliminating barriers to female labor force participation to levels seen in the US, suggest improvements of on average 22 % in South Asia and 18 % in the Middle East and North Africa region.

One important policy tool to influence gender outcomes, and sometimes also gender norms, is tax and benefits policy. These sets of policies are almost never explicitly gender biased, but the impact of details of policies in areas such as inheritance law, parental leave, pensions and taxes all affect the incentives that men, women and couples face. It is also important to understand that these policies often operate in an environment that is far from being without a gender bias, suggesting that there may be motivation for government intervention to correct outcomes and also lead the way to slowly change norms. As models of household decision-making suggest that partners may not operate as a unitary actor maximizing joint welfare, and women typically have lower bargaining power within the household, policies that leave discretionary power to the couple may lead to highly unequal outcomes. Instead policies may need to be individualized, such as tax policy and parental leave policy.

The conference also contained a panel specifically focusing on Eastern Europe. The communist legacy meant that these countries, in some dimensions such as flfp, started from much more equal levels than other countries at comparable levels of income in the 1990s. The most immediate gender crisis in some ways was on behalf of men, whose life expectancy dropped dramatically. This crisis for men also created externalities in the form of domestic violence and orphaned children. Since 1990, there has therefore been some reversals in gender outcomes, and in some areas, such as political representation, the region on average performs quite poorly. Individual countries also face very different challenges. In Georgia the sex ratio at birth increased dramatically in the 1990’s as economic hardship and conflict coincided with the introduction of new technology to determine the sex of a child in utero. In Belarus inequality strikes both ways, with men having more than 10 years lower life expectancy, have higher retirement age and are drafted to military service. On the other hand women are under-represented in politics and largely responsible for unpaid homework, partly due to a very generous 3 year-long paid maternity leave policy. The tradition of bride kidnapping in parts of Central Asia (as high as 10-25 % of women in parts of rural Kyrgyzstan) was brought up, and research showing birthweight losses of children to kidnapped mothers equivalent to those measured elsewhere in conflict zones (100-200 g) suggest that this is indeed a real violation of these women.

To Action: Policies for gender equality

The SDG 2030 agenda and the concurrent finance for development process both emphasize the importance of having all sectors of society onboard in the quest of achieving the new development goals. The event therefore included representatives of both the private, public and civil societies, and featured a range of different initiatives across these sectors. A sector in which many women work for foreign companies in developing countries is textile. Here foreign companies can lead the way through initiatives beyond direct wage and employment policies that improve women’s welfare, such as information campaigns devoted to personal hygiene or policies that transfer salaries directly to the personal account of the employees (an approach that matters when there is unequal bargaining power within the household, as shown through research). Also initiatives to reduce harassment and support female careers can make a difference. A sector on the other side of the spectrum is the telecommunications sector, which is very male dominated. This bias typically start from an early age, and is reinforced by gender stereotypes. Active work in the community to early on reaching out with tech programs explicitly targeting girls can make a difference, and so can making people aware of unconscious biases.

Aid agencies and NGOs also play an important role in promoting gender equality in partner countries. Research shows that women in relative terms tend to spend resources in ways that benefit the family more, and discrimination can be counteracted through policies specifically targeting women and trying to strengthening their situation both outside and inside the household. Initiatives that give women access to credits, and foster collective action and political engagement have been tested on large scale in for instance India. Aid financed investment funds target female entrepreneurs, and engage in programs to integrate women into the investment process. Investors also have the leverage to stress the importance of partner companies investing in their female employees, for instance though education, safe transportation and separate changing rooms. A major player like Sida can engage in a dialogue also with partner governments to incentivize them to live up to commitments made in conventions and treaties, but also empower change agents that can put pressure on patriarchic structures. In the health sector, priority is given to sexual and reproductive rights, but beyond targeted interventions it is also important to mainstream a gender perspective into all types of projects and programs. It’s acknowledged that measuring impact is a challenge, and some partners are perceived as more receptive than others, but the perception is that attitudes are changing.

A Government Perspective

From the Swedish government’s side it was emphasized that gender equality is a goal in itself, as well as a prerequisite for economic development. The by now well-known feminist foreign policy is based on three R’s: that all women and girls should have access to rights, representation and resources. The policy is backed up by an action plan with clearly expressed goals in areas of peace and violence, political representation, economic empowerment and sexual and reproductive health rights. These goals will be evaluated for results (a fourth “R”) and, due to international demand, the foreign ministry is currently preparing a handbook for feminist foreign policy to document the process and the lessons learned. In the collaboration with Eastern Partnership countries, gender equality became part of the summit declaration in 2015. There’s an increasing willingness to talk about gender in the partnership countries, but many challenges remain, as also exemplified by recent experience from working in the government of Ukraine. Swedish initiatives are often a catalyst for change, though, with EU politicians and administrators slowly following pace. It was emphasized that to argue for the case of women and girls, data and research is crucial, so the FREE initiative to create a center of excellence in gender economics (FROGEE) was received with much appreciation.

To get more information about the presentations during the day and references to the data and literature discussed above, please visit this page.

Participants at the conference

  • Ann Bernes, Ambassador for Gender Equality and Coordinator of Sweden’s Feminist Foreign Policy, Ministry for Foreign Affairs.
  • Raphael Espinoza, Senior Economist, IMF.
  • Paola Giuliano, Associate Professor of Economics, UCLA, Anderson School of Management.
  • Michal Myck, Director at CenEa, Poland.
  • Anna-Karin Dahlberg, Corporate Sustainability Manager at Lindex.
  • Richard Nordström, General Director at Hand in Hand.
  • Karin Kronhöffer, Director Strategy and Communication at Swedfund.
  • Anne Larilahti, VP Head of Sustainability Strategy at Telia.
  • Jesper Roine, Deputy Director, SITE.
  • Charles Becker, Research Professor of Economics, Duke University.
  • Tamta Maridashvili, Researcher, ISET-PI, Georgia.
  • Lev Lvovskiy, Research Fellow, BEROC.
  • Elsa Håstad, Director at the Department for Europe and Latin America at Sida.
  • Inna Sovsun, Vice President at Kyiv School of Economics (KSE), Ukraine.
  • Anna Westerholm, Sweden’s Ambassador for the EU Eastern Partnership.
  • Carin Jämtin, Director General at Sida.
  • Torbjörn Becker, Director at SITE.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Development Policy After the Millennium Development Goals: Where Do We Go From Here?

20130916 Development Policy After the Millennium FREE Network Policy Brief Image 01

This policy brief reports on a discussion of the Post-2015 Development Agenda held during a full day conference at the Stockholm School of Economics on August 23, 2013. The event was organized jointly by the Stockholm Institute of Transition Economics (SITE) and the Swedish Ministry for Foreign Affairs and was the third installment of Development Day, a yearly development policy conference. The Millennium Development Goals established in year 2000 has been an essential concept for global and national efforts to promote economic, social and human development. Highlighting income poverty, health, education, gender equality and environmental sustainability, the targets have focused global efforts on a set of quantifiable and comparable measures of progress. The question for the development community as these goals reach their endpoint is how to build a successful agenda for the future beyond year 2015. To discuss this challenging question, the conference brought together a distinguished and experienced group of policy oriented scholars and practitioners from governments, International Financial Institutions, the business community as well as NGOs.

In September 2000, world leaders adopted the United Nations Millennium Declaration, committing their nations to a global partnership to reduce extreme poverty. The declaration defined eight time-bound targets expiring in 2015, the so-called Millennium Development Goals (MDGs). These goals specify areas of focus; eradicate extreme poverty and hunger, achieve universal primary education, promote gender equality and empower women, reduce child mortality rates, improve maternal health, combat HIV/AIDS, malaria and other diseases, ensure environmental sustainability, and develop a global partnership for development. They also set explicit targets such as halving the number of people living on less than US$ 1.25 a day and reducing maternal mortality by three quarters from 1990 to 2015. Some commendable success has indeed been realized; already in 2010 the worldwide goal to reduce by half the proportion of people living on less than US$ 1.25 a day was achieved. However, much less progress has been seen in some other areas, including maternal health, and there are countries for which none of the goals are expected to be achieved by 2015. Nevertheless, the use of quantifiable, comparable and time-bound targets to create awareness and direct political resources is generally regarded as a success. The question for the development community as 2015 quickly approaches is thus how to build a successful post-2015 development agenda that builds on what has worked but also incorporates areas identified as missing.

The process to establish a new agenda of course raises many questions and reveals some of the trade-offs involved. There seems to be a consensus that the Millennium Declaration and the MDG framework should serve as a starting point, but there are many details to pin down. For instance, there are important challenges not directly mentioned in the original eight goals such as political conflict, rising inequality and youth unemployment. Many also argue that environmental sustainability, though included, may deserve a more prominent role in the future agenda. On the other hand, loading the Agenda with more and more goals may also dilute the global effort across too many areas, and some scholars argue that the whole idea with specific goals is counterproductive based on an organic view of development ill-suited for social engineering from above. To protect credibility, it is also important to get a sense of what is realistic to aim for, and what responsibility to ascribe to the already developed world. Moreover, even if a consensus can be reached with regards to the goals, opinions on how to best reach those goals will most definitely vary widely.

To get the process towards a new agenda started, the UN Secretary General has launched several initiatives including task teams, special advisors and consultations, but also a High-level Panel of Eminent Persons co-chaired by the Presidents of Indonesia and Liberia, and the Prime Minister of the United Kingdom; also including as its member Gunilla Carlsson, Swedish Minister for Development Cooperation. The panel, led by executive secretary and lead author Homi Kharas, submitted a report to the Secretary General on May 31. The program of Development Day 2013 started with a presentation of the report by Dr. Kharas, and remarks from Minister Carlsson. This was followed by an academic session corroborating projections of the report and outlining its limitations, and two panel discussions on sustainable development and Sweden’s potential as a leader in this process. Below follows a short representation of the main arguments and debates of the day.

A New Global Partnership: Eradicate Poverty and Transform Economies through Sustainable Development

Homi Kharas, Senior Fellow and Deputy Director at the Brookings Institution, presented the main messages contained in the report in the first session. An analysis of the situation since year 2000 shows many positive signs such as high global economic growth; increased international connectedness; a reduction in global inequality; and a substantial drop in absolute poverty rates. However, there are also many challenges ahead; rapid population growth, political conflicts, and the fact that the majority of the extremely poor live in conflict zones, increasing urbanization, a deteriorating environment and dwindling aid flows. This, in turn, leads Dr. Kharas to conclude that ‘business as usual’ is no longer feasible, and a new framework replacing the MDGs is needed.

The report seeks to address these issues and is conceived to serve as a set of guidelines, new goals and targets for the UN Secretary General and for the UN member states for the post-2015 period. At the core of the report is a bold aspiration to eradicate absolute poverty by 2030 through a unified framework of sustainable economic growth, increased social equality and environmental sustainability, and a new global partnership paradigm. This universal agenda, in turn, is proposed to be reached via five paradigm shifts to the status quo, (i) universal inclusion and equality, (ii) environmentally sustainable development, (iii) a transformation of national economies for sustainable growth, (iv) peace and effective, transparent public institutions, and (v) a new and more inclusive global partnership. In the report these broad and major shifts are further delineated across 12 illustrative targets, which, if met, will directly affect more than two billion people across the world and would require about $30 trillion spent by the governments worldwide.

Dr, Kharas emphasized that the report was prepared in cooperation with 5000 civil organizations, 250 large international corporations, and thematic, regional and country consultations all over the world, with another one million people taking part in an online questionnaire. He stressed that this kind of broad cooperation and consultation is needed to implement the goals set by the report and especially to operationalize these goals at the level of each of the member states.

Gunilla Carlsson, Swedish Minister for International Development Cooperation and a member of the UN High-Level Panel, continued the discussion and commended the members of the Panel on the impressive amount of work put in the report. She also emphasized the universal character of the agenda presented in the report, largely applicable both to developing and developed countries.

Carlsson stressed what she identified as the core values of the report; eradication of extreme poverty, prevention of violence and conflict, and inclusive peace. She further underlined the importance of local and global partnerships across governments, business communities and civil society. Broader public-private partnerships are essential both for fostering innovation in development work and to guarantee sufficient amounts of financing. The exact design of such a framework, however, is still an open question, but she hopes Sweden can serve as a leading example.

Both Homi Kharas and Gunilla Carlsson also showed great optimism when asked about the potential to implement the substantive initiatives by 2030. They stressed that not only does the world at present have more resources and more aid flows than it ever have, but the international community, including both public and private actors, is also showing more willingness to help the developing countries integrate successful development models than ever before.

Comments and Reflections

Martin Ravallion, Edmond D. Villani Professor of Economics at Georgetown University, started the commentary and reflection session. He showed how there is a strong current trend of between-country convergence of inequality rates (more equal countries becoming more unequal, while more unequal countries are becoming more equal) and declining poverty rate. The latter decline is to a considerable extent driven by Chinese economic growth, but this is far from the only source. He also underlined that the rate of poverty reduction has increased since the adoption of the MDGs in the 2000s, but said it was too early to judge the success or failure of the MDGs on these grounds.

Based on current trends, Ravallion also presented some estimates of the possibility to achieve the core objective of the report, eradication of absolute poverty by 2030. From a broad range of alternatives, the best case scenario, based on 3% annual growth rates of the world economy, absence of major economic crises and at least not decreasing participation of the poor in the benefits of growth, estimated a fall in absolute poverty rates from about 19% at present to 3% by 2030. In a less optimistic scenario, but historically not unlikely, levels of inequality and poverty would fall at a much slower rate, causing 12% to 14% of the world population to live below the absolute poverty line by 2030. Thus, the conclusion is that total eradication of absolute poverty by 2030 is hardly achievable, but substantial progress can be made, and it depends critically on continued high levels of world economic growth.

Professor Ravallion also stressed that these projections were made possible through a recent revolution in data availability, something the High Level Panel was asking for. To a large extent, this is attributed to a massive data collection effort by the World Bank, which not only provided better coverage of countries around the world, but also allowed for deeper insights into the nature of extreme poverty, including re-calculations and harmonization of cross-country comparable Purchasing Power Parity consumption baskets. This revolution provided more reliable inputs for his prediction models and improved the precision of estimates considerably.

Owen Barder, Senior Fellow and Director for Europe at the Center for Global Development, further emphasized this importance of credible statistics. Barder was somewhat skeptical to the report’s claim to be bold and offering a new approach, arguing that it largely reiterated the goals (jobs for young people, partnership with the private sector, reform of the financial system, etc.) already in the Millennium Declaration from year 2000. He also argued that the claim of success for the MDGs is almost entirely made on the basis of paragraph 19 of the Declaration; the objective to reduce by half the number of people living in absolute poverty. Much less progress has been made on the other explicit objectives, and all other aspects emphasized in the Millennium Declaration but which were not necessarily a part of the MDGs.

Barder suggested that there is too little effort to consistently measure whether rich countries are playing their part in the global partnership. Against that background he presented some preliminary results on the last round of the Center for Global Development’s Commitment to Development Index, calculated on the basis of OECD counties’ participation in aid, trade, investments, migration, environment, security and technology transfers. Over the last 10 years, OECD countries demonstrated on average a modest increase from four to five points on a ten-point scale, with Sweden ranked third from the top with a score of 7.2 for 2011 and 6.8 for 2012. Interestingly enough, this deterioration in the index for Sweden is mainly due to deterioration in the security component of the index, in turn resulting from larger sales of arms to undemocratic regimes, and from decreasing aid and immigration. There is obviously variation across countries, but on average there is scant improvements during the 13 years since the Millennium Declaration. This led Barder to question whether the developed countries have contributed their share to the objective of ending poverty, or if too much of the heavy lifting is left for the developing countries.

Barder concluded the presentation by pointing out the difference in language used in the report, namely the imperative used in the parts of the report describing recommendations for the developing countries, and the subjunctive used for recommendations for the developed countries. Again, to him this difference signaled the need to re-emphasize the importance of political commitment and operational goals also for the already developed countries in the Post-2015 Agenda.

Johan Rockström, Executive Director at the Stockholm Resilience Centre, started out noting that the population of the world is estimated to increase to eight billion people by 2030 and to nine billion by 2050. This, in combination with the currently prevailing development paradigm that emphasizes short-term economic growth over long run sustainability, causing degradation of biodiversity and climate change, means that we are hitting the planetary ceiling of eco-capacity. This suggests that ‘business as usual’ is no longer an option, and a new development paradigm is needed.

To address this issue, Rockström formulated a set of goals for human development balancing the needs of the environment, the needs of society and the needs of the people, all within the Earth’s life-support system. He proposed a broader framework for thinking about these issues, the so-called Sustainable Development Goals (SDGs rather than MDGs), which rebalances the relative weight on environmental, human and economic development with relatively more emphasis on the first two. This approach unifies the MDGs with planetary necessities (material use, clean air, nutrient and hydrological cycles, biodiversity, and climate stability), and sustainable development goals (sustainable food and water security, universal clean energy, governance for sustainable societies, etc.).

Discussion Panels

The first panel of the day focused on issues of sustainable development and was started by Klas Waldenström, Senior Advisor on the Post-2015 Development Agenda at Sida. He argued that the main challenge to the new partnership paradigm discussed earlier, will be the creation of trust both across nations and across the private and public sectors. Referring to the experience of Sida, he cited the successful creation of a network of 25 private Swedish companies focusing on models of sustainable development. An important role of official foreign aid in these partnerships, he argued, was to blend direct financial transfers with a combination of political support and business sector outreach, thereby potentially leveraging the financial flows with alternative sources of capital.

David Fergusson, Deputy Director at the Office of Science and Technology at USAID, called for more and better data in order to be able to operationalize and evaluate the new strategies that hopefully will come out of the report. He also reiterated the importance of transformative solutions for sustainable development and the need to understand that ‘business as usual’ is no longer an option. He also referred to the successful cooperation between Sida and USAID as an example of international collaboration of a new kind, more of which will be needed in the future to overcome the status quo and achieve the goals put forward by the report.

Garry Conille, Special Advisor to President Ellen Johnson Sirleaf of Liberia and UNDP, discussed his experience of working with the MDGs and stressed that possibly the most challenging part was the negotiation between different stakeholders to reach a set of issues well-defined and contained enough to be operational. From his point of view, the major challenge is the operationalization of the rather opaque and broadly defined MDGs and how to find a proper allocation of resources across the many commendable ambitions. He therefore called for an effort to make the post-2015 agenda more practical.

The issue of operationalization was discussed further by Stefano Prato, Managing Director at the Society for International Development. He argued that with such large shifts proposed by the post-2015 agenda, it is perhaps difficult to understand how to work with the vision put forward by the panel. His suggestion for the Panel was to dig deeper into the challenging areas of the report but also to develop more applied recommendations for the member states and especially so for the private institutions desired as part of the new partnerships.

This need for operationalization was supported by Jakob Granit, Centre Director at the Stockholm Environment Institute. In his opinion, the broad vision as presented in the report is indeed difficult to work with, but he also suggested that progress on parts of the agenda can be instructive for how to go further also with the more challenging parts. He also emphasized the importance of a regional approach, building on existing networks of regional partnerships, and again stressed the importance of public-private partnerships to solve common international issues.

The second panel was devoted to the role Sweden can play in global sustainable development and the post-2015 agenda. The discussion was started by Ulla Holm, Global Director at Tetra Laval Food for Development Office. She presented some of Tetra Laval’s experiences of sustainable development work in Bangladesh, an example of a successful public-private partnership. In her view, one of the main pillars of sustainability is to prevent unnecessary food loss, and this can be achieved by building an integrated value chain that supports rural development in the long run. The crucial challenge on this path is the need for concurrent public and private investments, and how to overcome coordination problems and lacking trust across stakeholders. She therefore stressed the need to construct successful public-private partnerships on a large scale and in different areas, but also to make sure to document and scale up the existing models in order to replicate success in the most cost efficient way.

Erik Lysen, Director for International Affairs at the Church of Sweden, stressed the challenges in changing existing institutions and briefly discussed the main motives that could make such changes to occur. He also argued that some of the strongest motives that would actually provide the necessary motivation for change, namely fear, could not be desirable in the long run, but still viable in a context of post-2015 agenda if complemented with better social protection, institutes of civil society and a broader public discussion. Here, NGOs could act as watchdogs and catalysts, strengthening the desire for building new institutions and providing material and human support for their construction at the same time.

Stefan Isaksson, Head of Policy Analysis at the Department for Aid Management at the Ministry for Foreign Affairs, continued the discussion on the challenges of changing existing institutions. He described current efforts to remodel the Swedish aid management system in order to become a more effective bureaucracy. In his view, the major shift in thinking is that of understanding aid less as simply giving money away and more as an investment for a common future. This is needed to improve the selection process of aid projects and also to motivate better the need to make projects and their results measurable and accountable. To achieve this, broader collaboration and consultations across stakeholders is needed. He also mentioned that perhaps at present many aid projects are too conservative, that the failure rate is too low because it reflects an aversion to risk that partly defeats the purpose of official foreign aid. The private sector will always be reluctant to venture into areas with high risk even if the potential social rate of return is high, so for official aid to serve as a more effective complement to private flows, more risk tolerance may be needed.

The issue of understanding aid as investment was discussed in detail by Jonas Ahlen, Investment Manager at the Storebrand Kapitalförvaltning. He described current efforts in the area of sustainable investments, mainly centered in microfinance and agricultural loans. In his opinion, broader involvement in such practices from the private sector would facilitate a transition to sustainable practices, but would at the same time require changing existing regulations in home countries to incentivize and alleviate the risks. He also stressed the need for broader public-private partnerships in these areas and briefly described the new consultative practices established by the Ministry of Finance in Sweden to catalyze private capital participation in for instance infrastructure projects in Sub-Saharan Africa.

Finally, Homi Kharas added to the Sweden-centered discussion by stressing that there exists no systematic assessment of what public-private partnerships can do. In his opinion, possibly the most important role for Sweden is to create conditions that would facilitate public-private partnerships in development and aid. By developing and experimenting with forms of public-private partnerships, as well as with new ways of measuring and monitoring of performance of such partnerships, Sweden could create a case for broader involvement of private funding and thus accomplish perhaps the most difficult part of bridging the post-2015 with the experience and skills of the private sector.

Conclusions

In sum, the discussion at the Development Day 2013 clearly highlighted the importance of sustaining some of the positive trends seen lately for economic and human development but also highlighted how crucial it is to take environmental sustainability into account. There is a growing consensus that long run human development necessitates an understanding of the planetary boundaries, even though exactly what trade-offs this involves and where to put the relative weight on more short run economic development is still debatable. There was also a wide consensus around the importance to get all different parts of society involved and working in tandem. Foreign aid cannot be expected to pull the heavy load by itself. The challenges are far too wide and important. Instead, much hope was attributed to public-private partnerships, but there is a lot of work that remains to make sure these vehicles generate the hoped for solutions. The capital, experience and skills of the private sector are needed. On the other hand, getting the incentives right is not a trivial challenge. Finding models of partnerships that work and can be scaled up may be an area in which Sweden can set an example and lead the way for other nations striving to contribute to long run sustainable development.

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