Remaking the global trade system for a sustainable future
Capital Availability or Capital Absorption? Unlocking Financing for Sovereign and Private Sector Trade-related Finance for Sustainable Climate Action in the Global South
In the words of WTO Director-General Dr. Ngozi Okonjo-Iweala, global trade is “a force for good for climate and part of the solution for achieving a low-carbon, resilient and just transition.” At its best, it can reduce the cost of mitigation and adaptation and accelerate the low-carbon transition by facilitating the spread of clean technologies, encouraging sustainable production and consumption, and supporting international cooperation and climate action.
Trade, however, requires capital. With heavy and increasing debt burdens – at the end of 2021 the external debt stock of developing economies reached over US$11 trillion, more than double the amount a decade ago – many developing countries and small island states are constrained in their ability to attract capital and invest in sustainable trade infrastructure, making the transition to a low-carbon economy ever more challenging.
Critically, in considering the grand vision of “remaking the global trade system for a sustainable future,” we address both trade finance and investment. Trade finance is, by definition, short-term financing to enable the flow of goods and services in the market today, while investment is a longer-term financial partnership that can more dramatically shape the underlying topography of global trade. Governments and the private sector in the Global South need investment to build the industries that will power economic growth for decades to come. Trade in 2040 begins with investment today.
There is no single solution to scale climate finance in the Global South, and the most resilient systems comprise many diverse actors operating across the economy. Therefore, we take a broad approach in this paper, discussing financing for both sovereigns and the private sector in developing countries. Part I focuses on sovereign finance and centers around the funding challenges of increasing climate action costs (in particular adaptation) for sovereigns in the Global South – exacerbated by ever-rising debt burdens. Part II focuses on private sector trade finance and investment into adaptation and mitigation activities. For each, we propose recommendations to unlock finance for sustainable climate action in the Global South.
Across the board, a critical theme emerges: the challenge of capital absorption in the Global South. Much of the conversation around trade finance and investment today focuses on the issue of capital availability – which is absolutely essential. However, expanding the pool of available capital alone does not address the challenges of capital absorption. Therefore, we devote significant discussion to the transaction-level barriers faced by both governments and the private sector in attracting and deploying capital for climate action in the Global South, as well as to solutions such as investment facilitation.
With thanks to Graziella Kiragu for exceptional research support
 World Bank Group. (2022, December 6). Debt-service payments put biggest squeeze on poor countries since 2000. World Bank. Retrieved April 18, 2023, from https://www.worldbank.org/en/news/press-release/2022/12/06/debt-service-payments-put-biggest-squeeze-on-poor-countries-since-2000