This post is the latest in our special issue: “Climate Change and Financial Markets – Risk, Regulation, and Innovation.” To learn more about the special issue and the work of the Global Financial Markets Center around climate change and financial markets, please read the special issue’s introduction here. And to review all The FinReg Blog posts that touch on climate change, go here.
On September 1, 2019, Hurricane Dorian made land fall in the Bahamas and rested there for about 40 hours, causing untold destruction, shattering the Abaco islands and Grand Bahama, and uprooting many lives and people in unprecedented fashion. With wind gusts up to 220 mph, Dorian was the most powerful hurricane on record to crash into the Bahamas. The country incurred losses and damages estimated at over US$3.4 billion (one-quarter of its national GDP), which left a gaping hole in the government’s fiscal plans. The Bahamas islands were caught completely off-guard and rendered hapless to address the aftermath. By September 11, the death toll was 50 people and 5,000 people were missing; the total official death toll is now 74 people with 282 people still missing.
The terms “disaster and debt” have featured prominently in this and other stories considering the aftermath in the Bahamas and other island nations in the Caribbean. Over the last 20 years, 11 hurricanes have hit the Bahamas, with an average cost of 4.3 percent of GDP. In any given year, from 2000 to 2015, 33% to 200% of GDP in the Caribbean were wiped out by hurricanes. In 2016, the World Bank estimated that the average annual loss due to hurricanes alone in the Caribbean was US$ 835 million. For Haiti, infrastructural damage on account of Hurricane Matthew was estimated at US$ 1.1 billion in 2016. In 2017, Hurricanes Maria and Irma – two successive category five hurricanes – were also estimated to have triggered US$5.4 billion in loss and damages in Anguilla, The Bahamas, British Virgin Islands (BVI), Sint Maarten, and Turks and Caicos Islands.
Destinations such as the Bahamas are known in the international activist community as “tax havens” for their supposed facilitation of tax avoidance through lax and unclear rules. Economists Emmanuel Saez and Gabriel Zucman have documented how global financial elites and major corporations have used these offshore financial centers to stow away excess financial assets and receive tax-free or high interest from financial markets. The Bahamas is ranked number 22 among 133 countries on the Tax Justice Network Financial Secrecy Index for having very secretive banking laws and systems, lack of corporate transparency, and lax tax and financial regulation.
In June 2018, the financial sector made up between 10 and 15 per cent of the Bahamas’ gross domestic product, with the international banking sector operations grossing $171.1 billion (assets valued at $256 billion) in the country. Despite its relative size and contribution, it is noteworthy that offshore finance in the Bahamas only accounts for less than 3 percent of GDP and 1 percent of government revenues. Therefore, profits are mostly extracted from the country. Nonetheless, for Bahamians, it is considered a major source of middle-class employment and social mobility. Yet, the island nation’s financial and tourism sectors are extremely vulnerable and unprepared for the climate crisis and other external shocks. As an industry that was birthed as a result of their evolution from plantation economies to resort economies, of which offshore finance is an integral part. The financial sector of the Bahamas and other tax “havens” is perfectly situated in the conundrum of “damned if you do or damned if you don’t.”
The story of the Bahamas is not unlike other low tax island jurisdictions that tie their economic development to the extreme shocks of financial markets, while also facing the worst effects of the climate crisis and seeing more intensive climate-change-induced disasters, including increasingly ferocious hurricanes. However, the framing of these nations as villains who undermine the law-abiding global tax system fails to appreciate their long history as ex-colonies of the North. In several cases, they were governed and reshaped by external powers for more than 200 years. This relationship directly contributed to their post-colonial marginalization in the international financial system and vulnerability to climate disruption.
The effects of colonialism on hindering present-day climate resilience
European colonialism has changed local ecosystems and reduced environmental capacity over centuries, while creating a racialized hierarchy among those bearing the climate crisis’ worst effects. In turn, the rate of change worsened the effects of the climate crisis through changed farming practices, coastal erosion, loss of protective tree and vegetative cover, ecosystem damage, rapid extraction of natural resources that have accelerated the incidence of droughts, and the interaction between human society and animal systems that generate pandemics. The unequal effects of the climate crisis is also reflected in no less starker terms where rich industrialized nations have contributed the most to global heating and spurred the related instability in the financial system.
The Bahamas and other offshore financial centers pursued financial services in response to the niche market opportunity that arose from the pro-corporation economic policies of rich countries. What has been elusive, however, is the ability of these small countries to evolve their main economic sectors into more robust, dynamic industries. This is because offshore capital does not reside in the country and thus does not contribute to building a productive domestic economy that could, for example, help rebuild after major natural disasters. The present climate crisis exposes these vulnerabilities that are closely linked to nations’ historical circumstances. These interconnecting dots broadly represent the predicament the Caribbean and other regions of the Global South, whose earlier response to “market demand” for certain kinds of financial services is punished today with hefty fines and costly regulatory mechanisms. It would appear that being an offshore financial center has failed to help these countries recover from the major economic fallouts that follow a natural disaster.
Financialized capitalism has not only increased the asymmetries of productive capacity and the nature of returns to major corporate stock holders that operate in the Bahamas and other island nations, but has obscured the pernicious ways in which financial actors contribute to the climate crisis. The Caribbean’s long legacy and place as an economic periphery to major industrialized countries and racialized space of extractive capital remain intact and further dulls the neglect and complacency of global actors to pay for their obligations due to their historical actions and responsibilities regarding the climate crisis.
In the process of recovering from natural disasters, the sovereignty of these countries is chipped away at as every climate-induced disaster burdens them with more unsustainable debt, owed ultimately through intricate financial links to Wall Street investors and major creditors. In December 2019, the Caribbean Development Bank (CDB) approved an Exogenous Shock Response Policy-based loan of US$50 million to the country, implementing a ‘reform program’ to enhance both fiscal sustainability and economic and physical resilience. Additional loans of $80 million loan came from the Inter-American Development Bank (IDB) and up to $200 million of domestic banks. Next, in February 2020, the International Monetary Fund offereda US$200 million loan to the Bahamas that was later rejected. Less than a year after the hurricane, the government has requested a US$252 million emergency loan from the IMF with a five-year repayment schedule to address both the continued fallout of Dorian and the unexpected costs stemming from the COVID-19 pandemic. In 2018, Bahamas public debt was $7.8 billion dollars, has increased $1.2 billion since 2017. This amount is equivalent to 63.3% of Bahamas GDP just before Hurricane Dorian. Revenue losses were also estimated at $565.8 million. The fiscal black hole that Hurricane Dorian triggered meant the government’s debt was expected to rise to $9 billion by 2021, with a debt to gross domestic product (GDP) ratio of 66.5 percent, as a result.
Before Dorian, 2017 had been recorded as one of the worst hurricane seasons in history, when two category five hurricanes, Maria and Irma, wreaked unprecedented damage to life, property, and infrastructure in the Caribbean, amounting to over US$5.4 billion. In Puerto Rico alone, Maria caused $90 billion in damage. The majority of the island lost electric power for 328 days, the longest blackout in U.S. history. Richer countries may be able to isolate the effects of major disasters. In contrast, the heavy damages that poorer island nations face are all-encompassing and wide-reaching. Having suffered a period of colonization that included the curtailment of indigenous means of protecting the environment and the plundering of resources, institutions, and infrastructure, these countries are in an inordinately weaker position against major climate-induced disasters. As the current Atlantic hurricane season has started in full swing, the COVID-19 pandemic hinders these countries’ ability to respond quickly and bring relief to people without increasing the risk of disease spread. On top of all this, many of these countries, like the Bahamas, are still far from recovered from previous losses. Examples include Dominica’s 2017 Hurricane Maria and Fiji’s 2016 Cyclone Winston, where 77 and 87 per cent, respectively, of their incurred losses and damages remain unfunded.
In the Paris Agreement, the international community’s abysmal job of allocating financial support for historical climate-related damage provided little relief for most of the small-island or low-income countries facing simultaneous ecological and economic ruin. Climate reparations through an international program for climate stabilization have therefore become essential to reduce the harm of the climate crisis and support long-term systems, rapid response financial needs, and long-term resilience programs.
The need for “loss and damage” financing
Based on the UN’s Warsaw International Mechanism for Loss and Damage associated with Climate Change Impacts (WIM), scaled-up finance and rapid response measures must be directed to help communities recover in the immediate term and address their exposure in the long-term. Within international climate policy, “loss and damage” refers to the harms caused by anthropogenic climate, including both extreme events and slow onset events. Loss and damage provides the basis for quantifying a compensatory mechanism for both apparent economic effects and non-economic effects. Under the Paris Climate Agreement, governments have recognized (to a limited extent) this need to supply climate change-related financing under the category of loss and damage as distinct from financing for adaptation and mitigation needs.
Yet the international community has not taken any action towards offering such loss and damage financing because of opposition of major powers like the United States. On the contrary, the IMF and other financial actors seem poised to continue profiting from loss and damage. After Hurricane Idai and Kenneth in 2019 struck Mozambique, the country’s losses amounted to over US$4 billion. Its economy depends on agriculture and mineral exports that are products of its almost 500-year colonial history and pattern of economic development as an independent nation for only 45 years.
To recover from the hurricanes, Mozambique borrowed US$130 million from the World Bank, US$118 million loan from the IMF, and US$30 million from the Netherlands. These amounts are not nearly sufficient in a country whose external debt surpassed 85 per cent of GDP. London-based financial institutions have also been reported to have injected close to US$2 billion in secret loans, of which US$700 million have gone missing and US$200 million were allegedly spent on bribes. The policy position of the IMF is that it can only offer further loans; debt relief or write-offs are not automatic or standard practice. The grim lesson here is that low-income countries that are least responsible for climate catastrophes should not be further drowned in debt to survive or meet basic recovery needs.
These macroeconomic figures only give a partial picture about the losses, disruption and further marginalization that these communities face as a result. Loss of jobs and livelihoods can create a sense of despair and increased reliance on others for support, even in trying times. The added burden on households and families in these circumstances can have widespread and potential lifelong mental and physical health consequences. Dislocation of family and community life and disruption to education and health services can prove detrimental for young people and working people, especially when entire islands become inhabitable. Damage to infrastructure and ecological systems reduce the adaptive capacity of the environment and further hamstrung the community to respond to other potential human and climate disasters. These situations further burden health and education services, and food production, as health and nutrition needs are dependent on charitable donations. Moreover, not to mention the possibility of climate refugees and migration is very real. In an increasingly xenophobic and nationalistic world, these realities offer little hope and comfort for would-be climate refugees.
The recent and ongoing major destruction caused by extreme weather cannot be divorced from the historical processes and events and the evolution of the international economy over centuries. Former colonial powers and current economic giants like the United States, Great Britain, the Netherlands, Portugal, Germany and France have contributed to a global system in which marginalized outposts serve the financial interests of Northern elites. Climate breakdown is built into this economic framework. Their geopolitical relations create significant winners in major corporations and financial interests that can profit from funding post-disaster recovery and renewable energy, and exceptional losers in island countries and low-income countries that lack the economic and physical infrastructure to bounce back. Rich countries must overcome their delay and unwillingness to reckon with their role in accelerating these disasters. Specifically, they should recognize that that marginalized countries have not had an equal part to play, and therefore should not equally (or disproportionately) pay. Dedicating specific financial and institutional resources to loss and damage through climate reparations is not only a just recognition of the long shadow of colonialism, but a necessity to ensure the survival of the Global South.
Keston K. Perry a lecturer in economics and political economist at the Department of Accounting, Economics and Finance within the Faculty of Law and Business, University of the West of England, Bristol. This post is adapted from his paper, “Realising Climate Reparations: Towards a Global Climate Stabilization Fund and Resilience Fund Programme for Loss and Damage in Marginalised and Former Colonised Societies,” available on SSRN.