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Indonesia’s Ascent to OECD Membership: A step closer toward gender-responsive climate change solutions?

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Indonesia’s interest in approaching developed country status is reflected in President Joko Widodo’s plan to join the OECD (Organisation for Economic Cooperation and Development) instead of the (Brazil, Russia, India, China) alliance. The historical relationship between Indonesia and the OECD has become stronger since 2007, promoting initiatives for growth and information sharing. Access to information, materials, and money for gender-inclusive climate programmes would be easier with the OECD’s support, improving transparency and accountability and allowing adaptive management to handle gender and power dynamics effectively. In this blog, a PhD researcher at the International Institute of Social Studies Irma Nugrahanti poses questions on the potential of the membership.

Image by Ahmad Syahrir on Pexels.

Recently, President Joko Widodo has expressed an interest in joining the Organization for Economic Co-operation and Development (OECD) as a member instead of the BRICS (Brazil, Russia, India, China, and South Africa) coalition. During his G20 visit to India, he started to seek support from OECD countries such as France.

 

Indonesia is already a familiar face to the OECD

Indonesia is not new to OECD partnership having been a critical partner of the OECD since 2007, where the nation’s relationship with the Organization has greatly deepened. For example, in order to participate in knowledge exchange on creative ideas to accelerate development, Indonesia joined the OECD Development Centre in 2009. In 2012, Indonesia became the first Key Partner of the OECD to sign a Framework of Cooperation Agreement (FCA), and a Privileges and Immunities Agreement in 2013. Furthermore, Indonesia opened the OECD’s first Southeast Asian regional office in Jakarta in 2015. Additionally, Indonesia helped establish the OECD Southeast Asia Regional Programme in 2014 and held one of its initial co-chair positions from that year to 2017.

This application comes with an expectation to increase Indonesia’s per capita income. The average annual per capita income of OECD members is over $10,000 USD. According to a World Bank report, Indonesia’s current gross national income (GNI) per capita is $4,500, and it is categorized as an upper-middle-income country. The goal is for this GNI to increase to $5,500 in 2024.

If Indonesia’s application is successful, this means Indonesia will move closer to becoming an ‘economically developed’ country. Indonesia can use the OECD standards as a benchmark and as best practices and will also receive support for its development initiatives. Indonesia will be the third Asian country (after Japan and South Korea) to become an OECD member. With a GDP that ranks 16th internationally based on market prices and 7th based on purchasing power parity (PPP), Indonesia has one of the most significant economies in the world. Only three other OECD nations have economies that are larger than Indonesia on a PPP basis: the United States, Japan, and Germany.

 

What does this mean to climate change and gender inequality issues in Indonesia?

Since 2014, Indonesia has been using climate change budget tagging to differentiate between climate-relevant and development expenditures based on the intended impact of the activity. This practice followed the objective-based definitions of climate-relevant activities and expenditures from OECD Rio Markers. The adoption of Indonesia’s climate budgeting, which is also responsive towards gender, has the potential to move significantly with Indonesia’s membership in the Organization for Economic Co-operation and Development (OECD).

First, this participation can make it easier for the country to have access to crucial knowledge and best practices, such as technical help and policy guidance, improving the government’s capacity to incorporate gender issues into climate budgeting successfully. Additionally, better data collecting and research assistance would help Indonesia detect and rectify gender inequities in climate policies. Indonesia could benefit from studying how OECD members incorporate gender-responsive budgeting into their policies to address environmental and climate concerns. For instance, examining the practices of OECD countries such as Ireland, where the development of a tagging system has been instrumental in linking budget allocation line items to key dimensions such as equality, green initiatives, well-being, and alignment with Sustainable Development Goals (SDGs). Additionally,  Austria has demonstrated the efficacy of gender budgeting methods, extending their implementation to the city level since 2006. The budgeting method played a crucial role in shaping sustainable practices, as seen in the development of green cities. Third, by fostering peer review and accountability systems, the OECD would encourage transparency and accountability in the allocation of funds for gender-inclusive climate programs. Indonesia can have better access to climate finance sources that give priority to projects that take gender equality into account, enhancing its ability to address the unique climate-related difficulties faced by both men and women.

Lastly, Indonesia can generate accurate performance measurements for its climate policies, particularly those pertaining to gender equality, by using OECD markers and indicative lists. This makes it possible to monitor development more effectively and spot potential problem areas. On the basis of OECD principles, regular monitoring and evaluation can help with adaptive management, enabling Indonesia to modify its climate policies and projects in response to gender dynamics and power relations.

Even though Indonesia has to go through a rigorous process to become an OECD member, Indonesia could benefit a lot from the OECD to achieve a stronger economic and inclusive governance system. The ongoing endeavour of the Indonesian government entails the implementation of a budget tagging system, designed to identify and monitor expenditures in accordance with the nation’s climate objectives while placing gender sensitivity first. By incorporating gender and climate change considerations into government budgeting and planning, this procedure aims to increase the efficiency, accountability, and fairness of resource allocation. Indonesia can further enhance its approach by linking budget allocations to various equality dimensions and Sustainable Development Goals, in accordance with OECD principles. Complemented by the knowledge-sharing initiatives with OECD members, this will ensure that a gender-responsive climate budget adheres to global standards. Overall, Indonesia’s membership in the OECD presents a significant opportunity for it to improve its gender-responsive climate budgeting procedures and, as a result, contribute to more just and efficient climate action.

References:

Antara (2023) Indonesia’s OECD Bid: Jokowi Requests for Support from France, Tempo. Edited by P.G. Bhwana. Available at: https://en.tempo.co/read/1770317/indonesias-oecd-bid-jokowi-requests-for-support-from-france (Accessed: 19 September 2023).

Muthiariny, D.E. (2023) Indonesia Seeks OECD Membership, to Be First in ASEAN, Tempo. Available at: https://en.tempo.co/read/1758337/indonesia-seeks-oecd-membership-to-be-first-in-asean (Accessed: 19 September 2023).

The OECD Development Assistance Committee (DAC) (no date) OECD DAC Rio Markers for Climate, OECD DAC. Available at: https://www.oecd.org/dac/environment-development/Revised%20climate%20marker%20handbook_FINAL.pdf (Accessed: 19 September 2023).

OECD (no date) Key Partner Indonesia – OECD & Southeast Asia, The OECD and Southeast Asia. Available at: https://www.oecd.org/southeast-asia/countries/indonesia/ (Accessed: 19 September 2023).

OECD (no date a) Accession to the Organisation – OECD, OECD Legal Affairs. Available at: https://www.oecd.org/legal/accession-process.htm (Accessed: 19 September 2023).

World Data (no date) The 50 largest economies in the world (no date) Worlddata.info. Available at: https://www.worlddata.info/largest-economies.php (Accessed: 19 September 2023).

World Bank (2022) GNI per capita, Atlas method (current US$) – Indonesia, World Bank Open Data. Available at: https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=ID (Accessed: 19 September 2023).

World Bank (2023) Gross domestic product 2022, PPP – World Bank, World Development Indicators database. Available at: https://databankfiles.worldbank.org/public/ddpext_download/GDP_PPP.pdf (Accessed: 19 September 2023).

Opinions expressed in Bliss posts reflect solely the views of the author of the post in question.

About the author:

Irma Nugrahanti is a Ph.D. researcher at the International Institute of Social Studies of Erasmus University Rotterdam. She is a six-time scholarship recipient and a gender equality and inclusive governance enthusiast. Her doctoral research focuses on the link between gender-responsive climate budgeting and climate change policies in Indonesia. Combining her years of experience in finance and policy advocacy with her research project, she aspires to fill the knowledge gap in understanding the intersectional gender-responsive budgeting practice to ensure the promotion and implementation of equity-responsive policies for climate change adaptation and mitigation responses in Indonesia.”

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The dangerously optimistic global climate finance agenda: why blended financing and domestic resource mobilization won’t help close the climate finance gap

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The global climate finance agenda in its current form is insufficient for tackling climate change and fostering a green transition across the globe. Calls to close the massive climate finance gap that prevents developing countries from accessing much-needed funds often rely on the expectation that domestic resource mobilization and blended finance can help close the gap. In this article, we demonstrate why this expectation seems wildly optimistic and argue that instead of relying on insecure trends, global policy makers should take action by developing policies that grant a bigger role for public money and innovative monetary solutions.

Source: Asian Development Bank is licensed under CC BY 2.0
Source: Asian Development Bank is licensed under CC BY 2.0

Many emerging economies are having a tough time – they are still struggling to recover from the pandemic and simultaneously suffer from unprecedented debt levels and cost-of-living crises. What’s more, the climate crisis is manifesting itself more than ever, and international financial promises to enable a just energy transition across the globe continue to be broken. Meanwhile, the costs of climate mitigation, adaptation, and loss and damage are soaring, which makes it even less likely that these countries will get the climate funding needed to respond adequately to the crisis. As a result, the climate financing gap is widening.

In a response to these developments, the COP26 and COP27 presidencies some months before last year’s November COP27 summit launched an Independent High-Level Expert Group equipped with the task of “scaling up investment and finance to deliver on climate ambition and development goals”. This distinguished group of experts launched their report in November, calling for a “rapid and sustained investment push […] to drive a strong and sustainable recovery out of current and recent crises […] and to deliver on shared development and climate goals.”

The investment push that’s needed relies on domestic resource mobilization and blended finance that together with other financial levers form part of the so-called Grand Match financing strategy. This strategy was proposed by Amar Bhattacharya, Meagan Dooley, Homi Kharas, Charlotte Taylor and Nicholas Stern in a bid to foster a big investment push for emerging markets and developing economies. However, both the total amounts assumed for blended finance (USD 395 billion) and domestic resource mobilization (USD 653 billion) are unlikely to materialize and are unlikely to close the climate finance gap, as we will show.

 

Blended financing and domestic resource mobilization failing to deliver

As early as 2016, the rising popularity of blended finance as a way to close the global climate finance gap could be observed; in April that year, British weekly newspaper The Economist ran an article called “Trending: blending” that examined “[t]he fad for mixing public, charitable and private money”. In the past few years, the concept of blended finance has gained further traction; key global financial institutions such as the World Bank, IMF, and the G20 have pointed to blended finance as a solution to close the global climate investment gap. For example, during its last spring meeting, the IMF emphasized that its members should “recognize the importance of stepping up climate finance from all sources, including by mobilizing private investment”. Similarly, domestic resource mobilization (DRM), whereby governments channel their own resources towards public goods and services, such as by raising taxes or by improving auditing processes, is viewed as an important climate financing tool.

However, blended finance has not delivered on its promise. Back then, The Economist observed that “few data exist on the scale and success of blended finance”. Now, with more data available, it’s becoming clear that private investments made in low- and middle-income countries through blended finance actually have decreased from USD 150 billion to 100 billion, and between 2019 and 2021, only USD 14 billion was pledged  to poor countries through private channels. Similarly, the mobilization of domestic resources has not held up to its promises — its potential has been overestimated.

These tools are therefore unlikely to sufficiently help close the finance gap that has arisen. And with the current grim global economic outlook, an increasing number of low-income countries are already in debt distress and are increasingly impacted by the loss and damage of climate change itself, thus decreasing their ability to use these tools even more.

In fact, the reliance on these financing mechanisms is dangerously optimistic, as this prevents us from considering the additional sources of finance that are needed to provide climate investments at the scale and time needed. Here’s why:

 

1.    There is a huge climate finance gap, especially in low-income countries, and it’s becoming bigger, not smaller.

By 2025, if no measures to increase climate funds are taken, the amount of money needed by emerging economies (excluding China) to address the effects of climate change – generally referred to as the climate finance gap – would amount to USD 1 trillion (as estimated in 2022). Lower-income regions such as South Asia and Africa have the largest investment needs (7-14 times and 5-12 times more investment, respectively), but these are not being met. While most of the money needed to close the gap is supposed to be sourced through domestic resource mobilization (USD 653 billion) and private investment, supported by public funding through blended finance (USD 395 billion), in reality, this is not happening.

And the finance gap might be even bigger than we think. For example, in a recent report Oxfam estimates that the annual shortfall for necessary investments in health, education, social protection and tackling climate change in low- and middle-income countries could be as high as USD 3.9 trillion.

 

  1. Advanced economies are not keeping their promises

Meanwhile, public finance is not contributing sufficiently. In 2009, high-income countries pledged to help fund the energy transition in developing countries by promising to commit USD 100 billion annually. But in 2020, only USD 83 billion had been pledged. What’s worse, to get to this figure, existing development assistance (ODA) money was relabelled as climate finance for developing countries. And only one-third of the funds that have been committed are in the form of grants, which means that debts continue to accumulate due to loans.

 

  1. Blended finance should be helping funnel private funds to low-income countries, but it’s still mostly public money

 Blended finance[1] has gained the status of a silver bullet. The assumption underlying the belief in the effectiveness of this tool is that public capital investments would lever private investments according to a certain ratio of the ‘blend’. If done properly, investing by blending different financial sources indeed could result in a multiplied number of private investments that could be used to finance climate action.

However, the amount of private money available to match each public dollar is overestimated  – in reality, much less private money is invested, while public funds continue to form the largest share of the total amount. In one report, the IMF for instance expects the ratio of private to public money to be 9:1. In 2020 however, private finance constituted only around 50% of global climate finance, with the rest being public finance. And in low-income regions where climate investments need to increase most strongly, even a public-private ratio of 1:1 is often not tenable. In Sub-Saharan Africa, for example, around 90% of climate finance comes from public sources.

 

  1. Mobilizing domestic resources requires challenging reforms

The IMF anticipated that emerging economies could raise as much as USD 236 billion in additional taxes by 2025 through domestic resource mobilization. To do this, they would have to implement relevant tax and administrative reforms to tackle their sometimes very low tax rates and high levels of tax exemptions.[2] However, implementing and enforcing these kinds of reforms is challenging. Emerging economies are renowned for administrative capacity constraints that prevent them from addressing tax evasion and keeping avoidance under control. Studies on the projected development of tax-to-GDP ratios in emerging economies show that their tax revenues are expected to only slightly, but not significantly, increase.

Moreover, some international support initiatives have already been in place, such as the Tax Inspectors Without Borders (TIWB) assistance programmes between 2012 and 2020. This has helped raise the tax revenues of these countries by a mere USD 537 million – a figure far below the necessary additional USD 417 billion in domestic resource mobilization estimated in the IHLEG’s report.

 

  1. Countries are holding on to their money – tightly

Lastly, in response to the Russian invasion of Ukraine and the subsequent spike in inflation levels, a global monetary tightening cycle has begun. This has resulted in capital outflows by the private sector from emerging economies, which is bound to substantially hinder these countries’ economic growth. It has already been shown that the simultaneous monetary and fiscal tightening policies across the globe impact developing countries and emerging economies disproportionately.

This makes efforts to close the climate finance gap seem even more unrealistic, especially given the high value of the dollar and the outstanding dollar-denominated debt in the Global South. Of the low-income countries eligible for special IMF support, as of 2023, nine are currently in debt distress, while 27 are at a high risk, 26 countries at a moderate risk, and seven countries at low risk of debt distress.

 

More realism needed if we want to close the gap

The global climate finance gap (excluding China) currently amounts to a stunning 1 trillion until 2025 under the business-as-usual scenario. Promises of the past have not been lived up to while the climate crisis and green energy transition are becoming more urgent every day. Global policy makers seem to rely on domestic resource mobilization and blended finance to close the gap.

However, as this blog post has shown, the empirical success of blended finance remains very limited, while the challenges to boost domestic resource mobilization remain huge. Time is, however, very limited. Instead of relying on insecure trends, global policy makers should act by developing policies that grant a bigger role for public money and innovative monetary solutions.

References

Abdel-Kader, K. & De Mooij, R. (2020). Tax Policy and Inclusive Growth. IMF Working Paper. https://www.imf.org/en/Publications/WP/Issues/2020/12/04/Tax-Policy-and-Inclusive-Growth-49902

ADB (2022). African Economic Outlook 2022. African Development Bank Group. https://www.afdb.org/en/knowledge/publications/african-economic-outlook

Attridge, S. (2022). The potentials and limitations of blended finance. In D. Schoenmaker & U. Volz (Eds.), Scaling Up Sustainable Finance and Investment in the Global South. CEPR Press. https://cepr.org/system/files/publication-files/175477- scaling_up_sustainable_finance_and_investment_in_the_global_south.pdf

Benedek, D., Gemayel, E., Senhadji, A., Tieman, A. (2021). A Post-Pandemic Assessment of the Sustainable Development Goals. IMF Staff Discussion Note. https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2021/04/27/A-Post-Pandemic-Assessment-of-the-Sustainable-Development-Goals-460076

Bhattacharya, A., Dooley, M., & Kharas, H. (2022). Financing a Big Investment Push in Emerging Markets and Developing Countries for Sustainable, Resilient and Inclusive Recovery and Growth. London: Grantham Research Institute on Climate Change and the Environment, and Washington, DC: Brookings Institution. https://www.lse.ac.uk/granthaminstitute/publication/financing-a-big-investment-push-in-emerging-markets-and-developing-economies/

Fenocchietto, R. & Pessino, C. (2013). Understanding Countries’ Tax Effort. IMF Working Paper. https://www.imf.org/external/pubs/ft/wp/2013/wp13244.pdf

Gallagher, K. P., & Kozul-Wright, R. (2021). The case for a new Bretton-Woods. John Wiley & Sons.

Global Infrastructure Facility. (2023). Global Infrastructure Facility. https://www.globalinfrafacility.org/

G20 (2019). G20 Osaka Leaders’ Declaration. G20. https://www.mofa.go.jp/policy/economy/g20_summit/osaka19/en/documents/final_g20_osaka_leaders_declaration.html

Hill, S., Jinjarak, Y., Park, D. (2022). How do Tax Revenues Respond to GDP Growth? Evidence from Developing Asia, 1998–2020. Asian Development Bank. https://www.adb.org/sites/default/files/institutional-document/782851/ado2022bp-tax-revenues-gdp-growth.pdf

IFC (2023). Blended Concessional Finance. International Finance Corporation, World Bank Group. https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/bf

IMF (2023a). Chair’s Statement of Forty-Seventh Meeting of the IMFC. https://www.imf.org/en/News/Articles/2023/04/14/pr23120-chairs-statement-forty-seventh-meeting-of-the-imfc

IMF (2023b). Nigeria’s Tax Revenue Mobilization: Lessons from Successful Revenue Reform Episodes. IMF Country Report No. 23/94. https://www.imf.org/en/Publications/selected-issues-papers/Issues/2023/03/07/Nigerias-Tax-Revenue-Mobilization-Lessons-from-Successful-Revenue-Reform-Episodes-Nigeria-530628

IMF (2023c). List of LIC DSAs for PRGT-Eligible Countries As of February 28, 2023 https://www.imf.org/external/pubs/ft/dsa/dsalist.pdfhttps://www.imf.org/external/pubs/ft/dsa/dsalist.pdf

IMF (2022). Mobilizing Private Climate Financing in Emerging Market and Developing Economies. IMF Staff Climate Notes.

Neil McCulloch (2019). What Nigerians really think about tax. International Centre for Tax and Development – ICTD. https://www.ictd.ac/blog/what-nigerians-really-think-about-tax/

OECD (2018). OECD DAC Blended Finance Principles for Unlocking Commercial Finance for the Sustainable Development Goals. OECD. https://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/OECD-Blended-Finance-Principles.pdf

OECD/UNDP (2020). Tax Inspectors Without Borders Annual Report 2020. OECD/UNDP. http://www.tiwb.org/resources/reports-case-studies/tax-inspectors-without-borders-annual-report-2020.pdf

OECD (2022). Statement by the OECD Secretary-General on climate finance trends to 2020. OECD. https://www.oecd.org/environment/statement-by-the-oecd-secretary-general-on-climate-finance-trends-to-2020.htm#:~:text=29%2F07%2F2022%20%2D%20Climate,increase%20from%202018%20to%202019.

Oxfam (2020). Climate Finance Shadow Report 2020. Assessing progress towards the $100 billion commitment. Oxfam. https://www.oxfam.org/en/research/climate-finance-shadow-report-2020

Oxfam (2023). False Economy: Financial wizardry won’t pay the bill for a fair and sustainable future. Oxfam. https://www.oxfam.org/en/press-releases/oxfam-warns-rich-country-financial-wizardry-puts-their-own-interests-ahead-worlds

Songwe, V., Stern, N., & Bhattacharya, A. (2022). Finance for climate action: Scaling up investment for climate and development. London: Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science. https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2022/11/IHLEG-Finance-for-Climate-Action.pdf

Tett, G. (2022). The flood of green finance must be diverted from the west. Financial Times. https://www.ft.com/content/95c28b9e-7844-4ab7-8401-42d1cca133a8

The Economist (2016). Trending: blending. The Economist. https://www-economist-com.proxy.library.uu.nl/finance-and-economics/2016/04/23/trending-blendingg

UNCTAD (2022). Trade and Development Report 2022. Development prospects in a fractured world. UNCTAD. https://unctad.org/tdr2022

World Bank (2023). Global Economic Prospects. The World Bank Group. https://openknowledge.worldbank.org/server/api/core/bitstreams/254aba87-dfeb-5b5c-b00a-727d04ade275/content

[1] According to the OECD, blended finance is “‘the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries’, with ‘additional finance’ referring primarily to commercial finance’” (OECD 2018).

[2] In this context, the IHLEG recommends an incremental tax effort of at least 2.7% of EMDEs’ GDP, equal to USD 650 billion, so an additional USD 417 billion by 2025 on top of IMF projections (Bhattacharya et al., 2022).

Opinions expressed in Bliss posts reflect solely the views of the author of the post in question.

About the authors:

 

Sara Murawski is a policy advisor and researcher in the field of international trade and investment, finance and European integration. She has worked in the world of journalism, think tanks, NGOs, the Dutch and European Parliament as well as with many activist groups. At Sustainable Finance Lab, Sara is project leader on the project “Changing ‘Fiscal Rules’ and reforming the EU fiscal framework” that tries to shift the debate in the Netherlands from frugal to forward looking. The continuous dialogue with experts, policy officials and local actors in developing her thoughts, output and activities is crucial for her.

 

 

Rens van Tilburg is director of the Sustainable Finance Lab at Utrecht University. Rens has experience working in the European and Dutch parliament and as an advisor on innovation policies for the Dutch government.  With the academic think tank the Sustainable Finance Lab Rens has worked extensively on banking, asset management, supervision, public finance and monetary policies. Focusing on financial stability issues and the impact of climate change and biodiversity loss. 

 

 

 

Anna Ghilardi is a research intern at Sustainable Finance Lab. She attained her bachelor’s degree in Economics and Business Economics at Utrecht University, where she wrote her thesis about the impact of previous monetary policy on European house price growth before and during the Covid-19 pandemic. She is now completing a double degree master’s programme in European Governance, a two-year curriculum attended both at University College Dublin, Ireland and Utrecht University. Therefore, she is currently writing her master’s thesis at Sustainable Finance Lab on Poland and Bulgaria’s capacity to single-handedly fund their climate finance gap in view of the European Union’s climate neutrality ambitions.

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