Countries in the Global South, which are the least responsible for carbon emissions and the climate crisis, are feeling its impacts first and most severely. Climate change is leading to more frequent and intense extreme weather events around the world. Caribbean islands and other Small Island Developing States in particular are responsible for just 0.2% of emissions, yet are being repeatedly devastated by the intensified hurricanes of a hotter world.

This crisis poses an existential threat to human society, and indeed to all life on earth. The IPCC has reported that temperatures are rising faster than at any time for at least 2,000 years, with CO2 levels in the atmosphere the highest for 2 million years. Unless deep and rapid cuts in emissions occur, the Paris Agreement goals will be out of reach, and the planet devastated.

Yet, the climate debt is not being paid. Rich countries are failing to meet their already inadequate commitments to provide climate finance to mitigate and adapt to the effects of climate change, whilst spending every UN climate conference avoiding the topic of payment for the damage caused by the climate emergency.

There is another illegitimate form of climate debt that is being paid every day by poor countries to the rich countries. It takes the form of interest payments on their massive debts: debt built up in rebuilding from hurricanes, paying off loans to development banks for climate investment, and adapting to their farmland becoming desert.

Dominica and the spiral of climate debt

Dominica, a small island of 70,000 people in the eastern Caribbean, is on the front line of the climate emergency. In 2016, tropical storm Erika devastated the island, causing damage equivalent to 90% of its GDP. Only a year later, the event was dwarfed by Category 5 hurricane Maria, which destroyed over 90% of the island’s structures, causing an estimated US$1.3 billion of damage, more than double the value of everything the country produces in a year, a barely credible 226% of GDP.

Days after hurricane Maria, Dominica had to find several million dollars for a debt repayment that fell due. Its debt had already risen to the very high level of 72% of GDP after Erika, and rose further to 78% of GDP in the aftermath of Maria.

Dominica’s geography and exposure to intensifying tropical storms puts it at the forefront of the climate crisis. In fact, around 80% of the most damaging disasters since 2000 have been tropical storms, and over 90% of them have been in Small Island Developing States, with over 60% in the Caribbean. Extreme climate events tend to be particularly disastrous for small island states as their small landmass means that the entire country is often affected.

Dominica’s colonial history as a slave island is also a factor: the exclusive focus on banana production served the interests of the British Empire. Since its independence in 1967, Dominica has needed to diversify its economy to avoid reliance on a single crop, with the attendant exposure to price fluctuations and climate-related crop failure.

The pandemic, which has almost eliminated tourism and affected remittances, has further exacerbated Dominica’s problems.

However, Dominica is not doomed by history and geography. It has passed impressive climate resilience legislation that aims to make the island hurricane-proof, through building codes, diversified agriculture, geothermal energy and sustainable high-end tourism. It has successfully reconstructed after Erika and Maria.

But this requires funding. In the aftermath of Maria, Prime Minister Skerrit gave an emotional address to the UN, asking for reconstruction grants in order to not “let 72,000 Dominicans shoulder the world’s conscience on climate change on their own.” His appeal was not answered. Dominica is now assessed by the International Monetary Fund (IMF) as being at high risk of debt distress.

The relationship between the climate and debt crises

Climate-vulnerable countries like Dominica are trapped in a vicious circle of climate-related disasters and debt. Every time they are hit by a hurricane, they go further into debt to cover the costs of reconstruction. As an increasing proportion of their national income goes to debt payments, they are less able to invest in preparing for future disasters, or in rebuilding when they arrive.

Their creditors, who profit from the interest on their mounting debt, are governments and companies in the Global North that caused the climate crisis and its destructive effects in the first place.

Wealthy, high-polluting countries have recognised in principle their greater responsibility for responding to the climate crisis. The 1992 United Nations Framework Convention on Climate Change, signed by all UN member states, asserts that those states which have historically contributed the most to climate change are most responsible for dealing with its impacts. Wealthy polluting countries committed in 2009 to providing $100 billion per year in climate finance. Even if one ignores the widespread over-reporting by countries, this target is not being met.

Worse, around two thirds of climate finance is offered in the form of loans, often at market rates of relatively high rates of interest. 90% of the climate finance received by Latin America and the Caribbean in 2018 was in the form of loans. Instead of addressing the historic climate debt owed by Global North countries, most climate finance is adding to the unsustainable debt of Global South countries, whilst generating profits for lenders in the North.

Many climate-vulnerable countries also cannot access zero-interest loans from international financial institutions like the IMF. The most indebted countries are largely classified as middle income, meaning that they must pay interest. IMF loans are conditional on recipient countries implementing austerity policies, which has recently provoked large-scale protests in Sudan, Tunisia, Kenya and elsewhere.

The lack of support from the international community leaves climate-vulnerable countries with no option but to look to the international capital markets to raise funds. The proportion of Global South debt owed to private creditors has increased dramatically over the last ten years to around 30% of its total debt. In an era of zero interest rates for rich countries, Global South countries continue to pay around 10% annual interest on bonds and loans.

These high interest rates reflect that the loans are inherently risky.  Lending for development is premised on the assumption that the investment will bring returns for the borrowing government, enabling them to repay the loans later. But investment for climate adaptation is fundamentally about reducing future damage, rather than generating income. Hurricane-resistant buildings will not normally bring profits.

In a final irony, lenders are beginning to factor climate vulnerability into interest rates, on the principle that Caribbean islands, for example, are at higher risk of default because they will continue to be hit by intensifying hurricanes. In other words, Global North lenders punish climate-vulnerable countries for being the casualties of the climate crisis. The result is that higher repayments mean debt becomes unsustainable at an increasing rate, increasing the risk of default and further driving up interest rates.

This vortex of spiralling debt is driving some Global South countries into measures that exacerbate the climate crisis. Exploitation of natural resources can be one of the only ways of earning foreign currency revenue through exports. Yet forest exploitation can lead to deforestation, soil erosion and ecosystem degradation, exacerbating the effects of future climate-related droughts and storms, while fossil fuel exploitation intensifies the underlying climate emergency. Creditors are even insisting that countries undertake activities that harm the environment, in order to keep paying off their debts. Suriname’s private creditors have insisted that it factor in future profits from potential drilling for oil into any restructuring of its debt, while Pakistan’s efforts to reduce its reliance on coal-fired power stations have been obstructed by the outstanding debts owed to China for their construction.

The international response

When the pandemic hit in 2020, world leaders were not slow to see the risk of the debt crisis tipping over into a wave of sovereign defaults. In April 2021, the G20 announced the suspension of debt payments for up to 73 of the poorest countries, and has subsequently extended the Debt Service Suspension Initiative until December 2021. This was followed by the Common Framework in November 2020, which aimed to provide a format for all creditors, including private lenders, to come together to agree to restructuring debts for countries with unsustainable debt.

The G20 rose to the occasion in terms of speed and rhetoric, but has fallen far short on substance. Debt suspension served only to push a small proportion of Global South debts into the future. The majority of the most indebted and most climate-vulnerable countries, which are classified as middle income, were ineligible and thus excluded.

The Common Framework, meanwhile, is yet to achieve anything. Only three of the 73 eligible countries have applied, and none of the three have seen any debts restructured. Private creditors have taken no substantial steps to cooperate, flatly refusing Zambia’s request for debt restructuring, and continuing to hold out on Chad, while China is proving reluctant to join the negotiations with Ethiopia. Unless all creditors participate, the process will fail, since the Framework is set up to prevent hold-outs from continuing to be paid, and profiting from other creditors’ concessions.

Global South countries realise that, without a process to compel private creditors to participate, and with no concrete prospects for debt cancellation, applying to such a program is not worth the potential damage to their credit ratings. Countries, especially those that have no better options than borrowing on the private finance market, worry that if they try to restructure debts to private creditors, they will pay even higher interest on future loans.

It is symptomatic of the power imbalances in global decision-making that the response to the debt crisis has come from the G20 — a self-selected group of mainly rich creditor countries, of which many are former colonial powers bearing heavy responsibility for the climate crisis — rather than the UN, where the Global South has a presence. Indeed, in 2015 the UN voted to move towards creating a sovereign debt restructuring mechanism, with 136 countries in favour, 41 abstaining and just 6 against. However, the 6 included the US and UK, jurisdictions under which most international debt contracts are governed, essentially blocking progress. Small island developing states have been vocal in demanding a more just approach to climate finance and debt, but they are simply not at the table when decisions are taken on the debt crisis. It is no surprise then that those decisions reflect the interests of creditors rather than climate justice.

Solutions

The climate crisis is also a debt crisis, and the two cannot be addressed in isolation from each other. Any potential solution has to recognise the mutually reinforcing effects of the interlocking crises, and address both elements with seriousness. The urgency of the climate crisis requires debt cancellation, not mere suspension of payments. In order to prevent future debt crises, grant-based climate finance must be available to enable countries to adapt to and mitigate the climate crisis without saddling them with more debt. Rich countries must accept their responsibility to pay for the loss and damage already caused.

As the urgency of the crisis becomes clear, false and partial solutions have begun to proliferate, which misleadingly present the crisis as solvable without deviation from business as usual. ‘Green’ and ‘nature performance’ bonds — types of loans from private companies to Global South governments which connect repayments to progress on often hazy environmental protection indicators — increase the debt burden, and risk being simply a new way for investors to profit off Global South debt while gesturing towards the climate emergency. Debt swaps, where some debt is written off in return for debtor countries investing in conservation goals or climate adaptation and mitigation, can be of some benefit if they involve significant debt cancellation. However, in practice, the amounts of debt written off have been inadequate to the scale of the crisis because debt swaps are complex and costly to implement, and give power to creditors to determine environmental priorities.

The pandemic has revealed the vastly different circumstances of rich countries, able to print money at almost no cost to protect lives and jobs and stimulate the recovery, and poorer countries that must borrow at high interest, adding to already unsustainable debt piles. The climate crisis requires much greater and longer-term investment, which will be out of reach for Global South countries that must devote a significant proportion of their income to repaying debt. Without debt cancellation, vulnerable countries will never be able to free up sufficient resources to respond to the challenges of the climate emergency.

Large-scale debt cancellation could take place through a strengthened Common Framework or an alternative mechanism, but it must be open to all countries that need it, and require all creditors, including private ones, to participate.

As climate-related extreme events become more frequent, the world needs a mechanism that allows countries to suspend debt repayments in the immediate aftermath of a calamity, when resources are critically needed for the emergency response. An automatic interest-free moratorium on debt repayments should be followed by assessment of the impact of the disaster, and debt restructuring if needed. This would build on important innovations already taking place at the level of debt contracts, where ‘state-contingent clauses’ in some contracts allow for debt repayments to be paused and adjusted following a disaster.

Ultimately, a multilateral debt workout mechanism is needed that would provide a structure to enable effectively-bankrupt states to bring their debts down to sustainable levels. It needs to be enforceable by law, in the same way as individual bankruptcy proceedings, to prevent vulture funds from suing.

These reforms to the debt system are necessary but not sufficient. A just climate transition requires costs to be met in a sustainable way through climate finance grants, rather than by affected countries taking on debt. A new fund should be created under the United Nations Framework Convention on Climate Change, funded by rich and polluting countries, to provide support to countries experiencing climate-related disasters.

Climate justice is essential to the future of the planet, and it is impossible without debt justice. The Global South is not responsible for creating the climate crisis, and the legacy of colonialism and unsustainable debt have left it least able to afford the investment needed to mitigate and adapt to the coming emergency. Global South leaders from around the world are demanding debt cancellation for climate justice. COP26 in November will be a crucial moment of solidarity between protesters in the street, Global South negotiators in the conference hall, and communities around the world who are rising up to demand collective liberation from debt, exploitation and climate catastrophe.

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This article was first published by Progressive International.

Odd-Helge Fjeldstad, Sigrid Klæboe Jacobsen, Peter Henriksen Ringstad, Honest Prosper Ngowi Lifting the veil of secrecy: Perspectives on international taxation and capital flight from Africa (Bergen: Chr. Michelsen Institute, 2017). The book is available as open source and can be accessed here.

This is a timely collection. Published when newspapers are saturated with tax-related scandals and fraud allegations, the book analyses some of the main issues surrounding illicit financial flows, in particularly concerning tax heavens. The focus of the book is Africa – the continent that suffers most from capital outflow, not only but especially in terms of economic development. Targeted at, among others, policy makers, tax practitioners, civil society organisations, students and researchers, the aim of the book is to contribute to widening the debate around tax havens and offer policy-relevant data and findings.

The book starts by considering the scale of the problem. Loss to African countries in corporate tax evasion is higher than anywhere else in the world – with a tax system which enables tax avoidance. Particularly egregious is the behaviour of multinational companies in the extractive industry who pay absurdly small amount of tax by registering profits to tax havens. Among the continent’s rich wealth is frequently hidden in havens outside national tax authorities and beyond judicial reach.

As the book tells us, ‘the global network of offshore financial centres … popularly known as ‘tax havens’ or ‘secrecy jurisdictions’ … make it possible for rich elites and large multinational companies to drain large amounts of wealth out of Africa.’ Many of these tax havens are located in predictable places, small tropical islands such as the Cayman and the British Virgin Islands, but also in rich OECD countries such as Ireland, the Netherlands, Luxembourg, Singapore, and the United Kingdom.

Despite the notorious difficulties in assessing the scale of the problem, the authors present some shocking figures. Globally, there is approximately USD 8 trillion of personal financial wealth in offshore accounts. This figure rises to USD 32 trillion when tangible asset like property, artwork and jewellery are included. Yet as a proportion of total wealth, Africa is the most afflicted continent in the world. ‘Africans hold USD 500 billion in financial wealth offshore, amounting to 30% of all financial wealth held by Africans.’ In terms of lost taxation from this ‘flight’, it is suggested that African countries are deprived of an estimated annual figure of USD 15 billion. However, as the book states, ‘The inclusion of non-financial wealth, or higher estimates from available literature, could push this figure as high as USD 60 billion annually.’ In short, the situation is catastrophic.

One of the many strengths of the book, is the representation of experts from the Global South. This can be seen in the make-up of the team of this collection: Thirty in total, they include experts, academics, activist, political and economic advisors, and importantly come from a variety of backgrounds and geographies. As a few examples: Professor Annet Oguttu – first black woman to get a doctorate in tax law at the University of South Africa, where she later became the first female Professor; Dr Honest Prosper Ngowi – an Associate Professor of Economics at Mzumbe University in Tanzania; Professor Leonce Ndikumana – Professor of Economics University of Massachusetts at Amhest and Dr Caleb Fundanha – the Director of the Institute for Finance and Economics and Chief Executive Officer of Macroeconomic and Financial Management Institute of Eastern and Southern Africa.

The volume is organised into five sections: each one opens by introducing a topic and is then complimented by shorter articles with more in-depth discussion and case studies. Setting the scene in the introduction, the authors take up, what seems an unwieldy task: not only understand the impact that tax havens have in economic terms on the continent, but also explore ways in which the global networks of offshore financial centres affect domestic tax bases, political institutions, and citizen’s participation. To note briefly, there is no clear explanation as what kind, or in what, the ‘citizen’s participation’ is referred to.

After defining some important concepts and giving an overview of the historical evolvement of tax heavens, the book moves to talk about its estimated scale and impact on the African continent as well as about the intricate relationship between capital flight, global corporations, bank secrecy and the elites, i.e. the power-accumulation nexus.  Importantly, there is an acknowledgement of the difficulty in quantifying the exact amount of money being lost due to, amongst other things, the mismatch in trade statistics and often inaccurate methodologies used to estimate losses. This is an argument that is widely adopted by the international community as the search for more reliable methodologies continues.

The actors involved in the network of tax heavens, including the so-called ‘Big Four’ (EY, Deloitte, PwC and KPMG) are explored in detail. These actors – also referred to as ‘lobbyists’ – according to the study, play one of the central roles in pushing for tax incentives and benefits for multinational companies, to the extent that this influences legislation in certain countries as explored by John Christensen here. The exploration of the extractives sector on the African continent and its relationship with tax havens is probably one of the most insightful parts of this collection. Detail-rich, it illustrates how multiple actors (including domestic players), navigate their way in interests-driven financial schemes in order to – to put in simple terms – squeeze as much revenue and pay as little tax.

The final section of the book gives an overview of some of the actors involved in trying to tackle issues associated with tax havens as well as the measures and initiatives these actors are supporting. The overview is comprehensive, covering the historical development of these initiatives, mentioning the current changes and importantly underlining the importance of building capacity in the African countries in tax administration, including taxpayer services and increasingly important e-tax systems.

Structurally, the book has various shortcomings. Due to the fact that some of the shorter articles in the five sections were not written specifically for this collection (but rather adapted), at times there is a sense that the information is fragmented. The lack of cross-referencing within sections and shorter articles throughout the book also adds to this effect. Moreover, there are several times where the same concepts are being defined and explained repeatedly, while it helps in our understanding, this repetition breaks the flow of the book.

What the structural inaccuracies also do is that they take away from effectively conveying the response to research objectives that were laid out at the start of the book. The data and analysis to further understand how tax havens affect domestic taxation bases, political institutions and ‘citizen participation’ gets somewhat diluted in lengthy explanations. While it is understandable that when trying to unveil the complex financial and political structures at play, there is a sense that there is not enough emphasis on how the material connects to the research questions. What is also lacking is a conclusion. The book seems to end abruptly and leaves the reader ‘hanging’; I would have liked to see the analysis being comprehensively concluded.

What the book does do however, it is it opens up a much-needed debate around the importance of looking beyond financial impacts of tax havens to start a wider discussion on its effects on domestic law-creation, people’s perceptions and attitudes toward taxation, in order to understand the mechanism and policy that can be used to deter the abuse of the global financial system. The book offers a solid grounding that can inform future research, studies and debates. Available as open source, graphically appealing and detail-rich, the book is an accessible resource for those interested in peering behind the veil of secrecy.

Lifting the Veil of Secrecy is available as open source and can be accessed here.

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This article was published in the Review of African political Economy (ROAPE).

Around the world, democratic institutions are under attack. From Narendra Modi in India to Jair Bolsonaro in Brazil, authoritarian leaders are getting organized to rig the rules, capture the courts, spread lies, and criminalize dissent.

But the institutions that claim to defend democracy are unfit to address this global crisis. On the contrary, groups like the Organization of American States (OAS) have abetted attacks on democracy. In the case of Bolivia, for example, the OAS provided cover for a bloody military coup against the government of Evo Morales on the basis of manipulated statistics. “There is no credibility in the OAS,” Bolivian President Luis Arce said in March.

The time has come to build an alternative: an institution with the technical skills, legal expertise, and global reach to combat disinformation, to challenge persecution, and to provide real-time defense of democratic institutions.

Over the past year, we have dispatched delegations of data scientists, trade unionists, and parliamentarians to observe the electoral process in embattled democracies around the world — from Ecuador to Turkey to Brazil.

Along the way, we have earned a reputation with anti-democratic forces around the world. At the CPAC conference in Brazil back in September, extreme-right Colombian senator María Fernanda Cabal called the Progressive International a “group of convicts” for our successful efforts to beat back Keiko Fujimori’s coup attempt in Peru. “Don’t let the Progressive International believe that they are going to do what they did in Peru,” she said to the Brazilian audience. “From now, we are going to start writing down the names of electoral observers.”

But against these vicious attacks, we have seen major triumphs. In Ecuador, our international pressure helped ensure the presence on the ballot of the country’s largest political force. In Bolivia, vigilant international solidarity help ensure a stable democratic process that returned the Movement Toward Socialism (MAS) to power. In Peru, our team of data scientists helped refute the claims of electoral fraud with which Fujimori attempted to steal the election. legal to annul tens of thousands of votes and steal the election.

Now, we are building from these victories to launch a global Observatory — and we are inviting you to build it with us.

From organizing delegations to preparing investigations, the PI Observatory will ensure greater transparency, integrity, and accountability in our democracies. “Democracy is a fragile plant,” said PI Council member Noam Chomsky. “Today the threat is severe from a resurgent proto-fascist right. The formation of this Observatory should create a badly needed barrier to these destructive tendencies.”

The timing of the launch is critical. Just this month, we are preparing to travel to two key battlegrounds: Chile and Honduras. In Chile, the promise of a new and inclusive constitution is under threat by reactionary forces that declare their support for military dictatorship. In Honduras, candidates face daily assassination attempts as their prospects for victory rise. The Observatory will bring the eyes of the world to bear witness to these authoritarian tactics, and to stand up for the right to fair elections that they seek to undermine.

The stakes are even higher in the year to come. Elections in Colombia, France, and Brazil promise to shape the political trajectories of entire continents for years to come. “Brazil is at a critical juncture,” says São Paulo’s former mayor Fernando Haddad. “Now more than ever, we need an institution to observe, protect, and defend our right to free and fair elections. The launch of the Progressive International Observatory is a source of hope here in Brazil and around the world.”

With today’s launch, we invite you to become a part of this Observatory — to protect the “fragile plant” of democracy to grow and flourish around the world.