The following text is the introduction to the episode 'The ecological economics of the international monetary system', from the Economy for Rebels podcast. You can listen to it here: https://open.spotify.com/episode/6NqQElh1TCXzu6qhFxnaGj

I n recent years, environmental policymaking has become increasingly dominated by a single term: the “finance gap” (or “investment gap"). This concept refers to the investments needed to achieve global climate and development goals, beyond what has already been pledged. Most sources estimate a green finance gap to be between $3 and $5 trillion annually by 2030 (about 4% of global GDP), with the vast majority of the money needed for low- and middle-income countries.

Such a framing, however, can distort our collective responses in ways that can be unhelpful and even harmful. For example, this framing presumes that the primary impediment to building a sustainable society is necessarily the quantity of finance available for mitigation projects. This diverts attention away from “real” social challenges (How to sustainably transform our transportation and food systems? How to phase out fossil fuels? How to limit the overconsumption of the wealthiest?, etc.) in the hopes that more investment will simply resolve deep structural issues.

Perhaps even more importantly, by focusing on maximizing the quantity of green investments, the “finance gap” approach avoids questioning whether the financial system, itself, needs to be transformed. Indeed, why is it that the poorest and most climate-vulnerable countries - those in need of the greatest amount of finance for sustainable development and adaptation - are actually net exporters of financial resources to the wealthiest countries?^[1] Why are these same countries racing after foreign investment to expand environmentally damaging activities like fossil fuel and mineral extraction, despite their obvious negative impacts?

To answer these questions, in a series of recent articles^{[2] [3] [4]}, we explore how the international monetary and financial system (IMFS) might pose one of the primary obstacles to a more socially and environmentally just planet. We argue that the IMFS  - a complex network of institutions and practices that governs cross-border investments, trade, and financial transactions within and between countries - both reinforces and relies upon continued environmental breakdown. Without a major shift in our financial and monetary institutions, even well-meaning efforts to “green” economies could exacerbate our environmental predicament.

Here’s a brief introduction to the problem at hand: The international monetary and financial system has evolved through centuries of geopolitical power struggles, resulting in a global “hierarchy of currencies”. Those at the top of the hierarchy are countries that issue dominant (“hard”) currencies like the US dollar, Euro, and Japanese Yen. These currencies are universally trusted as stable units of account and widely demanded as a means of exchange and store of wealth across the world. This gives countries issuing these currencies immense freedom to pursue domestic policy objectives without facing foreign constraints. To put it simply, the world is very happy to accept and hold dollars, and the United States can never run out of US dollars.

In contrast, lower-income countries, whose currencies are lower on the hierarchy, face significant financial challenges. Their peripheral (“soft”) currencies are less trusted, forcing them to find ways to access dominant currencies. Without foreign currency inflows, low-income countries are unable to repay creditors, stabilize their currencies, or import necessities from abroad like medicines, food, energy, and technologies that can help mitigate climate change.

This dependence on a foreign currency creates a vicious cycle with profound environmental consequences.

First, to attract foreign investment, low-income countries must offer investors high rates of return. This hollows out domestic production, reinforcing dependence on extractive sectors. It also causes them to suffer from persistent issues of external indebtedness and high borrowing costs. Indeed, the most climate-vulnerable countries are now spending 5 times more on interest payments to foreign creditors than they are on addressing the climate crisis.^[5]

Moreover, to guarantee continuous inflows of foreign currency, low-income countries compete by offering tax breaks, low wages, and relaxed environmental regulations. This “race to the bottom” undermines sustainable development efforts and heightens social inequalities.

Finally, given their domestic financing constraints, these countries generally rely on exports of low value-added sectors like agriculture, mining, oil, etc.. Such raw material exports are highly environmentally-damaging. A recent UNEP report suggests that up to 90% of biodiversity losses and more than half of all greenhouse gas emissions are concentrated in extraction and raw materials processing.^[6] As such, some of the most ecologically important and biodiverse countries on Earth - Democratic Republic of Congo, Indonesia, Brazil, Argentina and Colombia - are often forced into expanding extractive and pollution-intensive industries.^[7]

This immense pressure to export resources creates a perverse dynamic. The continuous outflow of inexpensive raw materials and energy feeds the productive and financial power of wealthy countries, privileging unsustainable growth. As can be seen in the recent upheaval around inflation, failure to maintain this “cheap” inflow of resources results in worsening social divisions, unemployment and financial instability.

The IMFS thus perpetuates a system where a select group of powerful countries gain short-term benefit from the continued financial and ecological dominance of other countries. While countries like China may present an important alternative, it also appears to rely on many of the same environmentally-intensive patterns to strengthen the power of the Remnibi.^{[8] [9]}

In short, without addressing the unequal structures of the IMFS, efforts to fill in the “finance gap” will remain underfunded and may even be counter-productive. International cooperation and systemic reforms will be essential to support pathways to building a global economy grounded in social justice and environmental sustainability.

Notes

^[1] https://www.project-syndicate.org/commentary/imf-world-bank-spring-meetings-need-to-get-four-things-right-by-lawrence-h-summers-and-n-k-singh-2024-04

^[2] Svartzman, R., & Althouse, J. (2022). Greening the international monetary system? Not without addressing the political ecology of global imbalances. Review of International Political Economy, 29(3), 844-869.

^[3] Althouse, J., & Svartzman, R. (2022). Bringing subordinated financialisation down to earth: the political ecology of finance-dominated capitalism. Cambridge Journal of Economics, 46(4), 679-702.

^[4] Althouse, J., & Svartzman, R. (2024). Prospects and roadblocks to a" sustainable" international monetary and financial system. In Understanding Green Finance (pp. 182-198). Edward Elgar Publishing.

^[5] Woolfenden, T., & Khushal, S. S. (2022). The debt and climate crises: Why climate justice must include debt justice. Debt Justice. https://debtjustice.org.uk/wp-content/uploads/2022/10/Debt-and-the-Climate-Crisis-Briefing-October-2022-UPDATED.pdf

^[6] UNEP (2024): Global Resources Outlook 2024: Bend the Trend – Pathways to a liveable planet as resource use spikes. International Resource Panel. Nairobi. [https://wedocs.unep.org/20.500.11822/44901]

^[7] Dempsey, J., Irvine-Broque, A., Gaster, T., Steichen, L., Bigger, P., Carolina Duque, A., Linett, A., Porto Ferreira, G. & Kaechele, N. (2024). “Exporting Extinction: How the International Financial System Constrains Biodiverse Futures,” The Centre for Climate Justice, Climate and Community Project, and Third World Network. [https://climatejustice.ubc.ca/news/exportingextinction-how-the-international-financial-system-constrains-biodiverse-futures].

^[8] Svartzman, R., & Althouse, J. (2022). Greening the international monetary system? Not without addressing the political ecology of global imbalances. Review of International Political Economy, 29(3), 844-869.

^[9] Tausch, L., & Althouse, J. (2024). Towards a theory of ecologically unequal exchange (EUE) as a multi-tiered hierarchy: Investigating the interdependence of global and domestic environmental inequalities to explain China's rise to power. FMM Working Paper, no. 100.