Climate change knows no borders. Its devastating effects, from melting polar ice caps to destructive wildfires and floods, impact the entire world. Regardless of geography or economic status, we are all in this fight together. As we strive for greener economies and a low-carbon future, it is crucial to ensure that emerging markets are not unfairly burdened. This principle is exemplified by the recent unrest in Sri Lanka, highlighting the need for a just transition toward sustainable growth.
Understanding the Sri Lanka Economic Crisis
Sri Lanka, classified by the World Bank as a “lower middle income” country along with Algeria and Egypt, faced the consequences of ill-conceived economic policies. Heavy debt was incurred without proper consideration of its sustainability. This should serve as a warning to other nations guilty of the same practice. However, the Sri Lankan economic collapse was driven by multiple factors.
The COVID-19 pandemic devastated tourism and prompted the return of many Sri Lankans working abroad. Remittances, a significant contributor to the country’s GDP, dried up, creating a substantial income loss. Moreover, the government had to increase spending on imports and debt servicing due to the absence of tourism revenue and remittances.
When fuel prices soared following Russia’s invasion of Ukraine, Sri Lanka lacked the funds to import the necessary fuel, leading to inflation and fuel shortages. The population faced long waits to refuel their vehicles, and frequent power cuts became the norm.
Meanwhile, the nation’s push for a greener economy, while commendable, resulted in unintended consequences. The sudden ban on chemical fertilizers by the former president led to reduced food production, both for domestic consumption and export. Farmers suffered income losses, exacerbating food shortages.
Implications of Sri Lanka’s Economic Crisis for Developing Nations
According to the World Economic Forum (WEF), emerging markets require an additional $94.8 trillion in investments to achieve a net-zero economy by 2060. Such a staggering sum, surpassing the world’s annual GDP, would need to be spread over time. While governments in emerging markets have committed to reducing carbon emissions, financing this effort solely through higher taxes would burden the poorest communities. The WEF warns that relying on emerging economies alone for funding would result in a disruptive transition, deepening poverty levels.
Standard Chartered Bank’s study confirms this concern, indicating that if emerging markets were to self-finance the transition through higher taxes and borrowing, average household consumption would decline by 5%. Consequently, emerging market households would be $2 trillion poorer annually. For those already struggling to make ends meet, higher taxes leading to a 5% reduction in income may provoke civil unrest. Such a scenario would undermine climate action and jeopardize the success of the net-zero transition.
As we navigate the path towards a sustainable future, we must ensure that the burden of change is shared equitably. A just transition requires careful consideration of the economic and social implications for all nations, particularly those in emerging markets. Only by working together and addressing the challenges collectively can we achieve a greener, fairer, and more prosperous world.