The G7 Summit: A Missed Opportunity to Renew Multilateralism Amid Overlapping Crises
By Lara Merling
Group of 7 (G7) leaders met in Schloss Elmau, Germany last week from June 26-28 for a key summit amid converging crises: Russia’s war in Ukraine, the consequential severe impacts on food and energy prices, the ongoing pandemic, a looming debt crisis in the Global South and a worsening climate crisis. However, the G7 Leaders’ communiqué ultimately did not reflect the urgency or multilateral coordination required to meet the moment or address the underlying causes of these overlapping crises.
Balancing climate goals and “energy security”
Climate featured prominently in the G7 Leaders’ communiqué, with a majority of the commitments directly addressing climate issues. G7 leaders recognized the urgency of the energy transition and expressed concerns that the world is not on track to achieve the Paris Agreement targets.
G7 leaders called on countries to revisit their Nationally Determined Contributions (NDCs) in alignment with the 1.5-degree goal of the Paris Agreement and committed to domestic implementation of mitigation measures to achieve their own NDC targets. This included some strengthened sectoral goals such as phasing out fossil fuel subsidies by 2025, scaling up funding for nature-based solutions by 2025 and reaching net-zero emissions for the international aviation industry by 2050.
As a forum for climate cooperation, G7 countries committed to setting up a “Climate Club” as an “intergovernmental forum of high ambition” for countries to collaborate on mitigation strategies and prevent carbon leakage. The G7 aims to establish it by the end of 2022, with more information on eligibility and whether it would account for historical emissions or support lower-income vulnerable countries due in coming months.
Concomitantly, leaders stated that supporting Ukraine and overcoming dependence on Russian energy exports is an immediate priority. While the G7 reiterated a commitment to take steps towards phasing out domestic coal plants—calling it “the single biggest cause of global temperature increase”—some G7 members have been ramping up the use of coal to make up for current energy shortages. Others have walked back some of their previous commitments around ending public finance for fossil fuels, citing price pressures and supply issues caused by the war. The communiqué explicitly states, without any details on implementation that public investment in the gas sector is currently justifiable by concerns for energy security as a “temporary” response and as long as it avoids “creating lock-in effects” and is aligned with the 1.5-degree goal.
Supporting a global recovery
The leaders of G7 countries recognize the global scope of climate change, pandemic preparedness and securing a just transition to net-zero. As such, they “assume their responsibility” to work with partners towards this end, including a pledge for both additional financing, as well as capacity development and support for policy reforms.
G7 leaders committed to meet the yet-unfulfilled 2009 pledge to provide $100 billion annually in climate finance for developing countries. Furthermore, they reiterated the pledge to scale up climate and disaster risk finance and insurance – a welcome development in line with demands made by the Vulnerable Group of 20 (V20) Finance Ministers.
To support pandemic preparedness and resilience, the G7 committed $1 billion to a newly established fund at the Word Bank. The estimated finance gap in that area is around $10.5 billion. Meanwhile, the newly established Resilience and Sustainability Trust (RST) at the International Monetary Fund (IMF) is also positioned to re-channel Special Drawing Rights (SDRs), the IMF’s reserve currency, from wealthy countries to developing countries facing severe bottleneck and liquidity issues. Since the IMF’s historic allocation of $650 billion in SDRs last August, however, just $200 billion in SDRs have gone to developing countries due to the IMF’s quota system. As a result, the G7 has pledged to re-channel $100 billion in SDRs, including through funds established at the IMF such as the RST.
While welcome, these pledges, even if fully met, do not come close to the financing required to achieve the 2030 UN Sustainable Development Goals (SDGs) and support a just global transition. In fact, financing needs are further compounded by a looming debt crisis in the Global South, which could be severe on countries’ fiscal space and stability. Despite the acknowledgment that many developing countries and emerging markets are at risk of debt distress, and the urgency of improving frameworks for restructuring debt, the G7 has not taken steps to address the issue. G7 leaders “encourage further efforts” to implement the Group of 20 Common Framework with no acknowledgment of its inadequacy and need for reform. Private creditors, which have been the major roadblock in implementing the framework, are mostly within the jurisdictions of G7 countries. As such, G7 leaders should swiftly act to require them to participate in restructurings, instead of “urging” them to do so.
Billions to trillions redux
The need for additional support and finance is acknowledged by G7 leaders. Rather than proposing solutions to address the lack of fiscal space, or the need for debt relief, G7 leaders promised to mobilize hundreds of billions. The caveat is most of that financing Is expected to be delivered by the private sector.
The G7’s proposal hinges on what seemed like a “defunct” idea – that small amounts of public finance can mobilize and leverage large amounts of private investments and deliver on development goals. The G7 launched the “Partnership for Global Infrastructure (PGII)” to replace “Build Back Better World” (B3W), which was launched last year and already discontinued.
PGII has a stated goal of mobilizing $600 billion in investments by 2027, with $200 billion coming from the United States. It is unclear how much G7 countries plan to contribute and what their leveraging expectations are. Looking at the concrete commitments, some observers note they are currently as low as $170 million for the United States, meaning that for every dollar put forward by the US, it would attract over $1,000 in private investment.
In practice, leverage ratios for similar frameworks have not even been able to match the investment of the public side. In 2019, the British Overseas Development Institute calculated that for each dollar of public money, only 37 cents were mobilized in low-income countries, $1.06 in lower-middle-income countries and 65 cents in upper-middle-income countries. Most flows of private finance were also directed towards countries with credit ratings. Even when the World Bank allocated funds to specifically support and guarantee private investments, it had trouble spending that money.
Rather than come to terms with the limitations of this approach and the failure to deliver, the G7 is directing multilateral development banks (MDBs) to use their resources for policy loans that promote regulatory reforms rather than for direct project support, infrastructure investments, or to strengthen public services and social protections systems. Instead the MBDs are instructed to use the funds they do have for reforms and guarantees that could “enhance the mobilization of private finance.” These reforms are reminiscent of the conditionalities imposed by the World Bank in the era of Structural Adjustment Programs, with a focus on deregulation and liberalization. These programs and measures have contributed to creating the current crisis and are unlikely to resolve them.
To deliver on the SDGs, the G7 must let go of this failed framework and promote other approaches that can crowd-in private investment and have a better track record of delivering in terms of development outcomes – such as industrial policy. For this, it needs to focus on systems issues and much needed reforms of the multilateral system.
Rebuilding a multilateral system that is fit for purpose
If last year’s communiqué offered a glimmer of hope for a revival of multilateralism towards securing a just and inclusive recovery, many of those pledges remain unmet. Most notably, the need to reform the “rules-based” multilateral order and rewrite the rules that govern the global economy has been left unaddressed. G7 leaders attribute the current woes to Russia’s war and COVID-19, but this fails to acknowledge that many of the current issues and trends predate the pandemic and Russia’s war; they have, instead, laid bare the stark power imbalances and lack of resilience within the current multilateral system.
The response of advanced economies to COVID-19 encapsulates these dynamics. Wealthy countries were quick to implement trade restrictions on health-related items, strike deals with vaccine manufacturers and vaccinate their citizens, while developing countries fought for over two years on a waiver on intellectual property rights at the World Trade Organization (WTO) that would allow them to make their own vaccines and COVID-19 products.
Advanced economies were also able to immediately introduce large stimulus packages to support households and businesses during the health crisis. The IMF estimates that the additional spending on COVID-19 response measures amounted to almost 12 percent of gross domestic product (GDP) on average for advanced economies, less than 6 percent for emerging markets and 3 percent for low-income countries. G7 countries accounted for close to 75 percent of global spending, even though they account for only 10 percent of the world population. This does not align with the vision for an inclusive, resilient multilateral system, but rather has contributed to growing global inequity and instability.
As Kevin P. Gallagher and Richard Kozul-Wright recently argued, it is time for a new Bretton Woods moment, and for the G7 to deliver on its pledge to work towards “equitable, inclusive and sustainable solutions to global challenges.” The G7 members should use their voice and position within the current multilateral framework and institutions in support of such reforms. As the main shareholders within institutions such as the World Bank and IMF, and strong voices within the G20, the WTO and the UN system, members of the G7 can prevent fragmentation of leadership on a much-needed reform of the international financial architecture toward one that is fit to respond to the challenges of the 21st century.
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