Financial risk assessment and management in times of compounding climate and pandemic shocks
More than 4 million people have died from COVID-19, and many others face long-lasting effects on their lives and livelihoods. While the full social, economic, and financial implications of COVID-19 are yet to be seen, millions have lost their jobs, and incomes in many countries have sharply declined. This raises concerns about sovereign debt sustainability and financial vulnerability in the medium term, particularly in developing countries and emerging markets.
Irene Monasterolo
Professor of Climate Finance, EDHEC Business School – EDHEC-Risk Institute, Nice, France
Senior Research Fellow – Vienna University of Economics and Business
Senior Research Fellow – Boston University
Nepomuk Dunz
Junior Professional Officer – World Bank
Andrea Mazzocchetti
Postdoctoral Researcher – Ca’ Foscari University of Venice, Italy
Arthur H. Essenfelder
Lead Researcher on Performance Assessment of Disaster Risk Reduction Strategies – Euro-Mediterranean Centre on Climate Change and Ca’ Foscari University of Venice, Italy
The pandemic diverted the attention from another ongoing crisis: Climate change has affected the lives of more than 130 million people and resulted in over 15,000 deaths since the beginning of the COVID-19 crisis. Natural hazards such as tropical cyclones, floods, and wildfires are expected to become more frequent and intense in the coming years.
Understanding the economic and financial impacts of compound risks
With worsening climate change, compound risks (e.g., floods and droughts or pandemics and hurricanes hitting the same country shortly thereafter) could be more likely in the future. This should be the main concern for governments and financial supervisors because compound risks could exacerbate social and financial vulnerabilities. For instance, natural hazards destroying socioeconomic infrastructures, such as hospitals, provide a fertile ground for pandemics to spread, thus strengthening the pandemic’s socioeconomic toll and delaying recovery. In countries with limited fiscal space and capacity to respond, compound risk can lead to substantial fiscal impacts and slowed recovery.
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The assessment and management of compound risks require a better understanding of how shocks of different nature (e.g., pandemics, climate change) are entering and passing through the economy. Eventually, we need to identify which assets and sectors are most vulnerable yet relevant in shocks’ transmission and amplification, in the economy and finance. This information would support policymakers and financial supervisors, answering the following questions “What are direct and indirect impacts of compound COVID-19 and climate physical risks, and how do they affect socio-economic and financial stability?” “Under which conditions can effective recovery policies be implemented?” “To what extent can countries strengthen their financial resilience to compound risks?”
Fit for purpose tools to assess compound risk
Answering these questions calls for macroeconomic models where heterogeneous agents—such as banks, firms, households, government, and a central bank—interact and adapt their investment and financing behavior, based on available information and on their expectations about the future. Consistently with the real world we live in, agents differ with regard to access to information (for instance, asset managers may have better information about financial market reaction to COVID-19 than car dealers) and risk management tools. Agents endowed with different access to information, preferences, and expectations, may diverge in their risk assessment and management strategies, with implications for the shock recovery.
Compound risk can amplify losses
A recent paper applies such a macroeconomic model to Mexico and shows that when shocks compound, such as the case of COVID-19 and natural disasters, losses could get amplified. Economic impacts are shock dependent, as a hurricane that might affect the supply side first by destroying productive plants and infrastructure differs from COVID-19 that enters as an aggregate demand shock by curbing people’s ability and willingness to spend money. The interplay between supply and demand shocks in the case of compound risk matters for the shock transmission through the economy and thus overall economic, private, and public finance impacts. This amplified impact is captured by the compound risk indicator in Figure 1, which compares GDP impacts of compound risks versus the sum of individually occurring pandemic and climate risk. A value of the indicator higher than 100 signals that the impact of the compound shocks is higher than the impact of the sum of individual shocks. In the case of a compounding strong climate physical shocks with COVID-19, non-linear amplification effects emerge.
Figure 1. Compound risk indicator for Mexico
Source: Dunz et al. 2021.
Drivers of shocks mitigation and amplification
Diverging preferences, expectations, and risk assessment are a main driver of compound shock amplification. Timely governments’ fiscal response is crucial to support the economic recovery and influence economic expectations. However, procyclical banks’ lending can counteract the effectiveness of fiscal stimulus by limiting firms’ recovery investments, creating the conditions for public finance distress (e.g., public debt sustainability). For instance, banks may revise their lending conditions to firms due to the uncertainty about the duration of the crisis, despite government and central banks’ actions (e.g., credit guarantees, recovery investments). By limiting the ability of firms to invest and of households to consume, procyclical lending can trigger persistent and nonlinear macroeconomic effects, such as higher unemployment and lower GDP (Figure 1).
Banks’ lending behavior is thus relevant for the success of government fiscal policies, and for their financial sustainability. Indeed, government’s recovery funds, financed by issuance of debt, are less effective in fostering the economic recovery in presence of credit and labor constraints. Coordination of fiscal and financial policies could help to tackle the complexity of the implications of compound risk, creating the conditions for functioning credit markets, and preserving sovereign debt sustainability.
Insights to build back better
Introducing compound risk considerations in fiscal and financial risk management can help governments and financial authorities build resilience to compounding shocks that could be more likely in the near future. Nevertheless, the assessment of compound risks requires an adaptation of the analytical tools that support policy making. Accounting for adaptive expectations and finance-economy interactions (e.g., bank lending conditions) that affect economic and financial agents’ response (e.g., investment, consumption) in times of crises could improve our understanding of how and why individual and compounding shock impacts might amplify. Such a new generation of macroeconomic models can thus support investors and policy makers in the assessment of risk and in the design of better-informed risk financing strategies. This, in turn, would enable the role of public and private finance in building resilience to compounding climate, pandemic, and other risks, for the benefit of the environment, the economy, and society.
SDRs for COVID-19 relief: The good, the challenging, and the uncertain
In August 2020, as a response to the pernicious impact of the COVID-19 pandemic on the global economy and on the finances of member states, the International Monetary Fund (IMF) decided to issue $650 billion of special drawing rights (SDRs). Conceptually, SDRs are a form of unconditional financing for addressing urgent liquidity challenges.
SDRs were created in the late 1960s as a precautionary mechanism to address potential sovereign liquidity shortfalls in the context of the rigid monetary order of fixed exchange rates of the Bretton Woods system. SDRs were designed to serve as a low-cost reserve asset that could be sold by a government via the IMF acting as intermediary to another government and thereby converted into currency using an exchange rate pegged to a basket representing five of the world’s leading currencies. Currently, these five currencies are the U.S. dollar, the Chinese renminbi, the euro, the Japanese yen, and the British pound sterling. SDRs are not technically the IMF’s currency but a claim on reserves. To that effect, SDRs are not money per se but rather a means to establish a line of credit with a sovereign lender (government) acting as buyer of SDRs. Besides paying a low rate of interest on SDR use, countries benefit from the absence of refinancing risks imposed by conventional maturities. For foreign currency-strapped economies, many emerging markets, and lower-income economies in Africa, SDRs can, therefore, provide the immediate means to pay for vaccines and/or other health care investments.
The Good
As the pandemic has wreaked havoc on both developed and developing country finances, the IMF moved to address the liquidity shortfalls in the global economic system and help provide financing for many countries. Given the pronounced contraction in output and employment, this injection of liquidity represents a lifeline to countries with scarce reserves. SDRs buy time as they can be used to finance critical expenditure, build reserves, and service debts, although they do not provide a long-term remedy for underlying problems. In operational terms, the IMF SDR department facilitates the exchange of existing SDRs between countries and reduces any transaction costs.
The Challenging
The formula for SDR allocation is based on a country’s quota within the IMF, which reflects its relative position in the world economy (Table 1). The problem with the SDR allocation is that richer countries receive more than poorer countries. In fact, barely 3 percent of the $650 billion total in pandemic response went to low-income countries, and only 30 percent went to middle-income emerging markets. In other words, the countries that are most in need of financial relief and support are not the top beneficiaries of the SDRs. Instead, countries like the U.S., which can print its money, and China, which has several trillions in reserves, benefit the most.
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This disconnect occurs because SDRs were created to address potential liquidity shortfalls in an entirely different monetary system rather than in the present context. As a result, experts are proposing reforms to this system. In October 2021, the IMF began building support among members for a proposed “Resilience and Sustainability Trust”—a funding mechanism that would allow richer countries to channel their IMF reserves to poorer countries in need. By lending at cheaper rates and with longer maturities than the IMF’s traditional lending terms, and with funding targeted toward areas such as climate and pandemic preparedness, the trust could help channel funds toward development projects. Another potentially good option is for the IMF to work closely with the regional development banks, such as the African Development Bank, to channel some of the SDR financing through the regional bank’s lending program. Given the regional banks’ proximity to the client, this approach could help to ensure greater links to the development strategies and programs of member states.
Table 1. Select country SDR quotas and SDR allocations
Country
Quota (%)
Allocation (USD billions)
USA
17.43
79.5
China
6.4
29.2
France
4.23
19.3
United Kingdom
4.23
19.3
Nigeria
0.52
2.4
South Africa
0.64
2.9
Cote d’Ivoire
0.14
0.62
Kenya
0.11
0.52
Mali
0.04
0.18
Source: IMF.
The Uncertain
SDRs were not originally designed as open-ended cash transfers. For one, SDRs are not included in the assessment of debt sustainability. While the SDRs can provide liquidity, there is no mechanism for ensuring that money is used productively and reaches those in need. Conversion of SDRs into foreign currency happens on a sovereign level with few strings attached, meaning multilateral leaders cannot ensure that the SDRs are properly used for COVID-19 relief. There is also no discrimination between progressive or dictatorial countries in terms of SDR allocation. Some of the SDRs can end up being used by developing-country governments to pay debt service to public and private creditors in the absence of debt restructuring. For instance, SDRs can be used to boost reserves in Nigeria and South Africa, to pay back debt in the case of Argentina or, in the case of the CFA franc zone, especially in countries like Equatorial Guinea and Republic of Congo, to postpone necessary governance and exchange rate reforms. In this context, it would be good to have oversight by international experts to ensure SDRs are used for developmental impact. However, even assuming effective governance frameworks, for low-income African countries, the flows of SDRs may be too low to have a strong impact anyway.
Conclusion
Unless we believe limited liquidity shortfalls of a more-or-less temporary nature are the only consequence of current macroeconomic and public health stresses, policymakers should not just fall back on SDRs to avoid the more complex questions typically raised in the context of conventional debt or more permanent financial transfers. Beyond a limited (and welcome boost), liquidity SDRs appear to be an imperfect substitute for a financing package able to serve both specific pandemic relief and long-term development objectives. In sum, SDRs represent a second-best solution to a complex problem, with clear advantages and clear shortcomings.
SDRs for COVID-19 relief: The good, the challenging, and the uncertain
In August 2020, as a response to the pernicious impact of the COVID-19 pandemic on the global economy and on the finances of member states, the International Monetary Fund (IMF) decided to issue $650 billion of special drawing rights (SDRs). Conceptually, SDRs are a form of unconditional financing for addressing urgent liquidity challenges.
Ali Zafar
Author – The CFA Franc Zone: Economic Development and the Post-COVID Recovery
Macroeconomist
Twitter
zafarglobal
Jan Muench
Banker
Aloysius Uche Ordu
Director – Africa Growth Initiative
Senior Fellow – Global Economy and Development
Twitter
AloysiusOrdu
SDRs were created in the late 1960s as a precautionary mechanism to address potential sovereign liquidity shortfalls in the context of the rigid monetary order of fixed exchange rates of the Bretton Woods system. SDRs were designed to serve as a low-cost reserve asset that could be sold by a government via the IMF acting as intermediary to another government and thereby converted into currency using an exchange rate pegged to a basket representing five of the world’s leading currencies. Currently, these five currencies are the U.S. dollar, the Chinese renminbi, the euro, the Japanese yen, and the British pound sterling. SDRs are not technically the IMF’s currency but a claim on reserves. To that effect, SDRs are not money per se but rather a means to establish a line of credit with a sovereign lender (government) acting as buyer of SDRs. Besides paying a low rate of interest on SDR use, countries benefit from the absence of refinancing risks imposed by conventional maturities. For foreign currency-strapped economies, many emerging markets, and lower-income economies in Africa, SDRs can, therefore, provide the immediate means to pay for vaccines and/or other health care investments.
The Good
As the pandemic has wreaked havoc on both developed and developing country finances, the IMF moved to address the liquidity shortfalls in the global economic system and help provide financing for many countries. Given the pronounced contraction in output and employment, this injection of liquidity represents a lifeline to countries with scarce reserves. SDRs buy time as they can be used to finance critical expenditure, build reserves, and service debts, although they do not provide a long-term remedy for underlying problems. In operational terms, the IMF SDR department facilitates the exchange of existing SDRs between countries and reduces any transaction costs.
The Challenging
The formula for SDR allocation is based on a country’s quota within the IMF, which reflects its relative position in the world economy (Table 1). The problem with the SDR allocation is that richer countries receive more than poorer countries. In fact, barely 3 percent of the $650 billion total in pandemic response went to low-income countries, and only 30 percent went to middle-income emerging markets. In other words, the countries that are most in need of financial relief and support are not the top beneficiaries of the SDRs. Instead, countries like the U.S., which can print its money, and China, which has several trillions in reserves, benefit the most.
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This disconnect occurs because SDRs were created to address potential liquidity shortfalls in an entirely different monetary system rather than in the present context. As a result, experts are proposing reforms to this system. In October 2021, the IMF began building support among members for a proposed “Resilience and Sustainability Trust”—a funding mechanism that would allow richer countries to channel their IMF reserves to poorer countries in need. By lending at cheaper rates and with longer maturities than the IMF’s traditional lending terms, and with funding targeted toward areas such as climate and pandemic preparedness, the trust could help channel funds toward development projects. Another potentially good option is for the IMF to work closely with the regional development banks, such as the African Development Bank, to channel some of the SDR financing through the regional bank’s lending program. Given the regional banks’ proximity to the client, this approach could help to ensure greater links to the development strategies and programs of member states.
Table 1. Select country SDR quotas and SDR allocations
Country
Quota (%)
Allocation (USD billions)
USA
17.43
79.5
China
6.4
29.2
France
4.23
19.3
United Kingdom
4.23
19.3
Nigeria
0.52
2.4
South Africa
0.64
2.9
Cote d’Ivoire
0.14
0.62
Kenya
0.11
0.52
Mali
0.04
0.18
Source: IMF.
The Uncertain
SDRs were not originally designed as open-ended cash transfers. For one, SDRs are not included in the assessment of debt sustainability. While the SDRs can provide liquidity, there is no mechanism for ensuring that money is used productively and reaches those in need. Conversion of SDRs into foreign currency happens on a sovereign level with few strings attached, meaning multilateral leaders cannot ensure that the SDRs are properly used for COVID-19 relief. There is also no discrimination between progressive or dictatorial countries in terms of SDR allocation. Some of the SDRs can end up being used by developing-country governments to pay debt service to public and private creditors in the absence of debt restructuring. For instance, SDRs can be used to boost reserves in Nigeria and South Africa, to pay back debt in the case of Argentina or, in the case of the CFA franc zone, especially in countries like Equatorial Guinea and Republic of Congo, to postpone necessary governance and exchange rate reforms. In this context, it would be good to have oversight by international experts to ensure SDRs are used for developmental impact. However, even assuming effective governance frameworks, for low-income African countries, the flows of SDRs may be too low to have a strong impact anyway.
Conclusion
Unless we believe limited liquidity shortfalls of a more-or-less temporary nature are the only consequence of current macroeconomic and public health stresses, policymakers should not just fall back on SDRs to avoid the more complex questions typically raised in the context of conventional debt or more permanent financial transfers. Beyond a limited (and welcome boost), liquidity SDRs appear to be an imperfect substitute for a financing package able to serve both specific pandemic relief and long-term development objectives. In sum, SDRs represent a second-best solution to a complex problem, with clear advantages and clear shortcomings.
Navigating the debt legacy of the pandemic
COVID-19 has left a legacy of record-high debt and shifted the trade-offs between benefits and costs of accumulating government debt. How do these trade-offs manifest themselves? And how does the current debt boom compare with previous episodes? We argue that the debt legacy of the pandemic is exceptional by historical standards in a way that warrants prompt policy action.
The pandemic’s debt legacy
The recent fiscal deterioration in advanced economies and emerging market and developing economies (EMDEs) stands apart over the past half-century. Output collapses and government spending to keep economies afloat triggered a massive increase in global debt levels. In 2020, global government debt increased by 13 percentage points of GDP to a new record of 97 percent of GDP. In advanced economies, it was up by 16 percentage points to 120 percent of GDP and, in EMDEs, by 9 percentage points to 63 percent of GDP.
Even before the pandemic, the global economy experienced an unprecedented wave of debt accumulation that started in 2010—the largest, fastest, and most broad-based of four global debt waves since 1970. In EMDEs, the accompanying widening of fiscal deficits and the speed at which both government and private debt rose far exceeded changes in previous waves of debt.
This rapid increase in debt is a major cause for concern because of the risks associated with high debt. Previous waves of debt ended in widespread financial crises, such as the Latin American debt crises in the 1980s and the East Asian financial crisis in the late 1990s.
Trade-offs of debt accumulation
The pandemic has vividly illustrated the benefits of accumulating debt in the role of large fiscal support programs during the 2020 global recession. They were a critical policy response to avoid worse economic outcomes. They supported household incomes, kept businesses afloat, and helped stabilize financial markets.
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However, as the initial recovery from the pandemic gives way to a new normal, the balance of benefits and costs of debt accumulation is increasingly tilting toward costs. The costs of debt include interest payments, the possibility of debt distress, constraints that debt may impose on policy space and effectiveness, and the possible crowding out of private sector investment (Figure 1).
As the global economy strengthens, financial conditions are likely to tighten, whether because central banks begin to normalize monetary policy or because investors expect higher inflation. In EMDEs, this may be accompanied by depreciations that put pressure on debt sustainability in those countries with a large share of foreign currency-denominated debt. Even where foreign currency-denominated debt is limited, rising borrowing cost may erode debt sustainability, especially if growth fails to rebound strongly. Record-high EMDE debt makes countries vulnerable to financial market stress. Meanwhile, a recovery in domestic demand and closing output gaps may make additional fiscal stimulus unhelpful.
Ongoing debt booms
And many EMDEs are now particularly vulnerable to financial stress. More than two-thirds of EMDEs are currently experiencing debt booms. Their median government debt boom currently underway is similar in magnitude to, but has already lasted three years longer than, the median past debt boom (Figure 2). Current booms have been accompanied by a considerably larger fiscal deterioration than past booms (Figure 3). And booms currently underway have also been associated with slower output, investment, and consumption growth than in previous episodes.
Historically, about half of such booms in EMDEs were associated with financial crises either during the boom itself or in the two years after the end of the boom. Government debt booms associated with financial crises featured significantly weaker macroeconomic outcomes than booms without crises.
Low-income countries (LICs) are particularly at risk of debt distress, both because of high debt levels and because of a fragile composition of debt. In LICs, government debt rose by 7 percentage points, to 66 percent of GDP, in 2020. The composition of LIC debt has become increasingly non-concessional over the past decade as they have accessed capital markets and borrowed from non-Paris Club creditors. Since the end of April 2021, about one-half of LICs have been classified as being at high risk of debt distress or already in debt distress.
What to do?
National policymakers, as well as the global community, need to act urgently to address debt-related risks. Unfortunately, there is no easy policy fix that EMDE policymakers can implement to overcome these risks. For these economies, containing the potential risks associated with accumulating debt may mean resorting to alternatives for borrowing, including better spending and revenue policies, in an improved institutional environment. Spending can be shifted toward areas that lay the foundation for future growth, including education and health spending as well as climate-smart investment to strengthen economic resilience. Government revenue bases can be broadened by removing special exemptions and strengthening tax administrations. Business climates and institutions can be strengthened to support vibrant private sector growth that can yield productivity gains and expand the revenue base.
The global community can play a significant role in supporting a return to fiscal sustainability in EMDEs. In the near term, this includes supporting the vaccine rollout in these economies, where it has lagged and has weighed on the recovery. In the medium term, this includes fostering an open and rules-based trade and investment climate that has been a critical growth engine for many economies in the past. For some EMDEs, and LICs in particular, additional support may be needed to return debt to manageable levels, including debt relief.
Navigating the debt legacy of the pandemic
COVID-19 has left a legacy of record-high debt and shifted the trade-offs between benefits and costs of accumulating government debt. How do these trade-offs manifest themselves? And how does the current debt boom compare with previous episodes? We argue that the debt legacy of the pandemic is exceptional by historical standards in a way that warrants prompt policy action.
The pandemic’s debt legacy
The recent fiscal deterioration in advanced economies and emerging market and developing economies (EMDEs) stands apart over the past half-century. Output collapses and government spending to keep economies afloat triggered a massive increase in global debt levels. In 2020, global government debt increased by 13 percentage points of GDP to a new record of 97 percent of GDP. In advanced economies, it was up by 16 percentage points to 120 percent of GDP and, in EMDEs, by 9 percentage points to 63 percent of GDP.
M. Ayhan Kose
Nonresident Senior Fellow – Global Economy and Development
Franziska Ohnsorge
Manager, Prospects Group – World Bank
Naotaka Sugawara
Senior Economist, Prospects Group – World Bank
Even before the pandemic, the global economy experienced an unprecedented wave of debt accumulation that started in 2010—the largest, fastest, and most broad-based of four global debt waves since 1970. In EMDEs, the accompanying widening of fiscal deficits and the speed at which both government and private debt rose far exceeded changes in previous waves of debt.
This rapid increase in debt is a major cause for concern because of the risks associated with high debt. Previous waves of debt ended in widespread financial crises, such as the Latin American debt crises in the 1980s and the East Asian financial crisis in the late 1990s.
Trade-offs of debt accumulation
The pandemic has vividly illustrated the benefits of accumulating debt in the role of large fiscal support programs during the 2020 global recession. They were a critical policy response to avoid worse economic outcomes. They supported household incomes, kept businesses afloat, and helped stabilize financial markets.
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However, as the initial recovery from the pandemic gives way to a new normal, the balance of benefits and costs of debt accumulation is increasingly tilting toward costs. The costs of debt include interest payments, the possibility of debt distress, constraints that debt may impose on policy space and effectiveness, and the possible crowding out of private sector investment (Figure 1).
As the global economy strengthens, financial conditions are likely to tighten, whether because central banks begin to normalize monetary policy or because investors expect higher inflation. In EMDEs, this may be accompanied by depreciations that put pressure on debt sustainability in those countries with a large share of foreign currency-denominated debt. Even where foreign currency-denominated debt is limited, rising borrowing cost may erode debt sustainability, especially if growth fails to rebound strongly. Record-high EMDE debt makes countries vulnerable to financial market stress. Meanwhile, a recovery in domestic demand and closing output gaps may make additional fiscal stimulus unhelpful.
Ongoing debt booms
And many EMDEs are now particularly vulnerable to financial stress. More than two-thirds of EMDEs are currently experiencing debt booms. Their median government debt boom currently underway is similar in magnitude to, but has already lasted three years longer than, the median past debt boom (Figure 2). Current booms have been accompanied by a considerably larger fiscal deterioration than past booms (Figure 3). And booms currently underway have also been associated with slower output, investment, and consumption growth than in previous episodes.
Historically, about half of such booms in EMDEs were associated with financial crises either during the boom itself or in the two years after the end of the boom. Government debt booms associated with financial crises featured significantly weaker macroeconomic outcomes than booms without crises.
Low-income countries (LICs) are particularly at risk of debt distress, both because of high debt levels and because of a fragile composition of debt. In LICs, government debt rose by 7 percentage points, to 66 percent of GDP, in 2020. The composition of LIC debt has become increasingly non-concessional over the past decade as they have accessed capital markets and borrowed from non-Paris Club creditors. Since the end of April 2021, about one-half of LICs have been classified as being at high risk of debt distress or already in debt distress.
What to do?
National policymakers, as well as the global community, need to act urgently to address debt-related risks. Unfortunately, there is no easy policy fix that EMDE policymakers can implement to overcome these risks. For these economies, containing the potential risks associated with accumulating debt may mean resorting to alternatives for borrowing, including better spending and revenue policies, in an improved institutional environment. Spending can be shifted toward areas that lay the foundation for future growth, including education and health spending as well as climate-smart investment to strengthen economic resilience. Government revenue bases can be broadened by removing special exemptions and strengthening tax administrations. Business climates and institutions can be strengthened to support vibrant private sector growth that can yield productivity gains and expand the revenue base.
The global community can play a significant role in supporting a return to fiscal sustainability in EMDEs. In the near term, this includes supporting the vaccine rollout in these economies, where it has lagged and has weighed on the recovery. In the medium term, this includes fostering an open and rules-based trade and investment climate that has been a critical growth engine for many economies in the past. For some EMDEs, and LICs in particular, additional support may be needed to return debt to manageable levels, including debt relief.
Enhancing climate change resilience through self-protection, public investment, and market insurance
Between 1980 and 1999, natural disasters caused 1.2 million deaths worldwide. Since 2000, 520,000 have been caused by natural disasters. An optimist sees evidence of climate change adaptation. A realist would say that the death toll is huge and we have been lucky in recent years to avoid even greater losses. Rising global greenhouse gas emissions mean that Mother Nature will throw even harder punches. Just this summer, Germany suffered greatly from a flood, and urban flooding in China’s Zhengzhou submerged the city with 8 inches of water in one hour. Countries like India and Belgium have also faced devastating floods in the last few weeks, not to mention the wildfires ripping through Greece, Turkey, and the United States. While the levees in New Orleans provided protection against Hurricane Ida, dozens died in the Northeast from the flooding. If we fail to adapt to these shocks, we will suffer from an increased risk of deaths due to disasters, destruction of the capital stock, and a disruption in economic activity.
Matthew E. Kahn
Provost Professor of Economics and Spatial Sciences – University of Southern California
Somik V. Lall
Global Lead on Territorial Development Solutions and Lead Economist for Sustainable Development in Africa – World Bank
Twitter
somikcities
Ideally, we take proactive steps in the anticipation of shocks so that natural disasters cause less risk to our lives, livelihoods, and property. Given that some damage ex post is inevitable, a resilient society has insurance mechanisms in place to help the victims rebuild their lives and their communities.
Given that global greenhouse gas emissions are likely to continue to rise in the coming decades, we must invest in resilience. We have three different adaptation strategies. We can invest in self-protection to reduce our risk exposure; this includes migrating away from areas that are prone to hazards or taking proactive steps such as putting a home on stilts to reduce risk exposure. The second is to rely on government investment in spatial protection strategies such as seawalls and levees. A third strategy would be to purchase insurance to guarantee that we receive a payment if a disaster occurs.
Figure 1. Enhancing climate change resilience through self-protection, public investment, and market insurance
Source: Authors.
Seminal research by Isaac Ehrlich and Nobel Laureate Gary Becker emphasizes the strategic interactions among these three. Extra resilience can be achieved if private self-protection and government investment are complements so that these investments reinforce each other. A property owner who puts her house on stilts in a levee-protected area has greater protection against sea level rise due to the synergies between the investments. Progress over time in civil engineering means that such new ideas can diffuse across the world. The growth of global insurance giants creates new opportunities for insurers seeking to expand in the developing world by offering policies and using their “deep pockets” to diversify their risk exposure using instruments such as catastrophe bonds. In this sense, the rise of global financial markets helps to protect more and more individuals from the ex-post losses associated with place-based climate shocks. If global insurers offer insurance buyers a good premium price on coverage, then policy buyers will invest less in self-insurance.
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Alternatively, well-intended policies could actually discourage private adaptation efforts. If an at-risk location invests in spatial protection, this could attract more people to move to the area. This dynamic can increase the population’s overall risk exposure. If the national government subsidizes disaster insurance this creates an incentive for individuals to invest less in their own self-protection. Such public insurance can also crowd out efforts by the private sector insurance industry to invest in the research to price risk and incentivize asset owners to invest in their own self-protection. Given the risks in designing new products and the required upfront fixed costs, for-profit firms will be less likely to incur these costs if they are competing with the government selling a subsidized version of the same product.
Through the lens of the Ehrlich and Becker framework, development institutions that promote economic growth help people to become more resilient. Poor people are less likely to be able to afford self-protection strategies ranging from air conditioning, high-quality housing, foods, and medicines that each help to maintain one’s health and well-being in the face of adverse shocks. Such person-based strategies provide people with the resources they need to cope with the specific climate challenges they are confronted with. As poor people grow richer, they have the resources to finance migrating to those geographic areas that offer them a higher quality of life. In this sense, person-based resilience strategies have implications for development as individuals choose where they want to live.
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By Danny Cullenward and David G. Victor
2020
Any government investment in infrastructure targeted to reduce risk exposure will be place-based. A levee is built in a specific location. Even rich governments do not have the resources to build levees everywhere. This raises the issue of spatial resource allocation. Should governments use their scarce funds to protect productive, populated places or target their poor population? This question highlights that climate change will exacerbate the classic equity versus efficiency trade-off that every nation often confronts. If a nation builds infrastructure to protect its productive hubs then the economic growth that this creates can be taxed and used for redistribution. Poor people in other areas can be urged to move to productive places. Climate change will pose deep issues of how to protect poor people who seek to remain in less productive and increasingly at-risk places.
Fifty years ago, Ehrlich and Becker wrote about the trade-offs between investment in self-protection, public investment, and market insurance. While their focus was idiosyncratic risks such as a fire or burglary, their logic applies to accelerating adaptation to the systematic risks posed by climate change. The market approach to adaptation emphasizes having up-to-date information about emerging risks and providing incentives and a menu of strategies to help affected individuals, firms, and governments to cope with these risks. As climate science improves due to satellite deployment and big data processing, maximizing the synergies between the resilience channels of self-protection, self-insurance, government insurance, and market insurance will play a crucial role in determining the medium-term costs of climate change.
The promise of services-led development
Manufacturing-led growth has been the central development paradigm for centuries, but it is time to shift the spotlight. The share of industry in total employment across low- and middle-income countries (LMICs) has, strikingly, remained almost unchanged in recent decades (Figure 1). Rather, the share of the services sector increased from 40 percent to 50 percent between 1991 and 2018, offsetting almost the entire decline of agriculture. The most common response to this structural transformation is worries about “premature de-industrialization” and renewed calls for lower-income countries to expand manufacturing. The promise of services-led development is instead overlooked but it should not be as our new book “At Your Service? The Promise of Services-Led Development” shows.
Figure 1. Services, not industry, are driving structural transformation in LMICs
Source: “At Your Service? The Promise of Services-Led Development,” World Bank.
The growth dividend of services
Services jobs all too often conjure up images of someone selling goods on the side of the road or in a small retail shop. But this misses the diversity of opportunities with services—and the extent to which they are contributing to income gains. Much like manufacturing, ICT (information and communications technology), finance, and professional services are highly traded internationally, offshorable, and linked to other sectors. Cargo transportation and wholesale services are internationally traded because they are linked to the export and import of goods. Accommodation, food, passenger transportation, and health care are also exported as international travelers buy these services.
Gaurav Nayyar
Senior Economist, Finance, Competitiveness and Innovation – World Bank
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Mary Hallward-Driemeier
Senior Economic Adviser, Finance, Competitiveness and Innovation – World Bank
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Elwyn Davies
Economist – Firms, Entrepreneurship and Innovation Unit, World Bank
Several developing economies have leveraged these export opportunities regardless of their level of industrialization. IT and professional services account for more than half of all services exports in Costa Rica, Ghana, India, Pakistan, and the Philippines. And around 50 percent of all online freelancers that deliver services remotely are based in India, Pakistan, and Bangladesh alone. China, Costa Rica, Jordan, Turkey, and Thailand are in the top 10 health tourism destinations worldwide. Even though currently hit by the COVID-19 pandemic, tourism-related transportation and accommodation services accounted for two-thirds of services exports even in less traditional destinations, such as Rwanda, Tanzania, and Uganda.
It should not, therefore, be surprising that labor productivity growth in services has matched that of manufacturing across LMICs in many regions since the 1990s and performed particularly well in South Asia and sub-Saharan Africa. Productivity growth in services during the past three decades in LMICs has also exceeded that in high income countries, contributing to catch-up (Figure 2).
Figure 2. Labor productivity growth in services has been strong in LMICs since the 1990s
Source: “At Your Service? The Promise of Services-Led Development,” World Bank.
The power of digital technologies, intangible capital, and linkages
The challenge for LMICs is that jobs tend to be concentrated in less productive services. High-skill and productive services, such as IT and professional services employ only 5-10 percent of services workers in lower income countries, compared with 15–20 percent in high-income countries. In contrast, low-skill subsectors such as retail and personal services that have provided little by way of productivity gains employ two-thirds of services workers compared with 30 percent in high-income countries. If LMICs could increase their share of employment in more productive services to mirror that of high-income countries, productivity could increase by one-third.
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But new opportunities for scale and innovation make low-skill services more productive. For example, restaurants and hairdressers can scale up through investments in intangible capital such as marketing and software that enable branching and franchising. There are similar possibilities to achieve scale in arts and entertainment services where streaming platforms such as Netflix and YouTube are fast enabling artists to deliver their creative content to international markets remotely. Small retailers can innovate through digital apps that automate skill-intensive tasks such as inventory management and accounting. Similarly, for ridesharing drivers, the platform substitutes both map-reading skills and numeracy skills.
At the same time, high-skill, productive services such as ICT and professional services, are expanding opportunities for low-skilled workers through their linkages with other sectors. For example, when indirect exporting is included (i.e., selling to other sectors that export, such as agriculture and manufacturing), the unskilled labor content in every thousand dollars of exports of business services in the Philippines, at around $150, approximates that for ready-made garments in Bangladesh.
The importance of services for industrialization
Even though services provide growth opportunities in the absence of industrialization, they are also increasingly important in improving the competitiveness of the manufacturing sector. Services are embodied in manufactured goods as inputs, such as design, marketing, logistics, or e-commerce platforms and account for one-third of the value of gross manufactures’ exports across countries. With the advent of “smart” production processes, ICT services—as the predominant producers and users of data—will play an especially crucial role in boosting manufacturing productivity.
Services also complement industrialization through their bundling with manufactured goods, which adds value postproduction. Smartphones are increasingly combined with apps that stream music and movies where the latter constitute audiovisual services. Car manufacturers offer financial services through monthly installment payment plans. For producers of consumer durables, after-sales services, such as advertising, warranties, and equipment maintenance account for the lion’s share of total revenues.
Given the growing contribution of services to development, ignoring this agenda is no longer an option. There is a need to emphasize expanding services trade, fostering technology adoption, training workers and firms to upgrade skills, and targeting services that provide wider benefits to help ensure that services-led development is indeed in the service of development.
COVID-19’s impact on overall health care services in Africa
In addition to directly causing the deaths of at least 200,000 people in Africa, the COVID-19 pandemic is also disrupting critical health services and undermining years of progress fighting other deadly diseases, such as human immunodeficiency virus (HIV), tuberculosis (TB), and malaria, which continue to be the leading causes of death in the region. In order to better understand the extent of this impact, a recent report by The Global Fund utilizes data from urban and rural health care facilities in 24 African countries and seven Asian nations to investigate and compare the spillover impacts of the pandemic on essential health care services for HIV, TB, and malaria.
Leo Holtz
Research Assistant – Africa Growth Initiative
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In 2020, access to health care services declined significantly throughout the world compared to 2019. The authors attribute this unprecedented decline in patient attendance to challenges facing both medical facilities and the patient community (Figure 1). For patients, the fear of contracting COVID-19 from their visit was the most cited reason for not seeking medical care. The inability to reach health care facilities due to disruptions in public transportation and stay-at-home orders was also a prominent challenge for patients looking to access health care—a problem, according to the authors, that has been more relevant for urban residents.
Figure 1. Reasons for disruption to health care services from the perspective of medical facilities and patients
Source: “The Impact of Covid-19 On HIV, TB and Malaria Services and Systems For Health: A Snapshot From 502 Health Facilities Across Africa And Asia,” The Global Fund, 2021.
For medical facilities, the focus on COVID-19 reduced access to standard health care services overall, as some facilities either reduced or stopped offering some standard medical services or were overwhelmed with treating COVID-19 patients presenting acute symptoms of respiratory infection. While noting that the reduction in overall services is detrimental to all patients’ well-being, the authors warn that hampering access to health care may specifically elevate the mortality rate of children under 5.
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Because COVID-19 remains the dominant focus of medical practitioners, international donor organizations, and governments, The Global Fund posits that this shift in focus to COVID-19 resulted in a reduction of “general health communication campaigns … [that] encourage people to seek out health care.” As a consequence, testing and treatment of diseases like HIV/AIDS, TB, and malaria have dipped.
More specifically, regarding HIV, the authors argue that the interruptions in testing and treatment of the disease, paired with prospective patients’ increased wariness in seeking medical care, may have heightened the risk of individuals unknowingly spreading it. Although Asia experienced the most severe disruptions to HIV health care services, the significant declines in preventive health care services for HIV in Africa pose particularly devastating consequences for the region, as it accounts for 67 percent of the global population living with HIV/AIDS
Figure 2. Impact of COVID-19 on HIV treatment referrals (left) and testing (right)
Note: The line graph describes service delivery for the same period in 2020 (left y-axis).The gray blocks represent the number of COVID-19 cases diagnosed per surveyed facilities (right y-axis).
Source: “The Impact of Covid-19 On HIV, TB and Malaria Services and Systems For Health: A Snapshot From 502 Health Facilities Across Africa And Asia,” The Global Fund, 2021.
Drug-sensitive TB was the most severely affected infectious disease, with a nearly 60 percent decline in diagnoses and a nearly 80 percent decline in treatment referrals relative to 2019 (Figure 3). In Africa, treatment referrals returned to near pre-pandemic levels by September 2020; however, drug-sensitive TB diagnosis in Africa remains off-track, recovering only to roughly 20 percent of 2019 levels in September 2020. Both metrics for TB depict much more severe disruptions to TB health care services in Asia.
Figure 3. Impact of COVID-19 on TB diagnosis (left) and referrals (right)
Note: The line graph describes service delivery for the same period in 2020 (left Y axis).The gray blocks represent the number of COVID-19 cases diagnosed per surveyed facilities (right Y axis).
Source: “The Impact of Covid-19 On HIV, TB and Malaria Services and Systems for Health: A Snapshot From 502 Health Facilities Across Africa And Asia,” The Global Fund, 2021.
The global death rate from malaria has declined 60 percent since 2000, but Africa still accounts for 94 percent of the world’s annual malaria cases and deaths. Importantly, the reduction of malaria treatment in Africa (Figure 4), where the disease is endemic, poses a serious threat to large numbers of susceptible Africans—especially children under the age of 5, who comprise the vast majority of annual malaria deaths.
Figure 4. Impact of COVID-19 on malaria diagnosis (left) and treatment (right)
Note: The line graph describes service delivery for the same period in 2020 (left y-axis).The gray blocks represent the number of COVID-19 cases diagnosed per surveyed facilities (right y-axis).
Source: “The Impact of Covid-19 On HIV, TB and Malaria Services and Systems for Health: A Snapshot From 502 Health Facilities Across Africa And Asia,” The Global Fund, 2021.
The authors warn that the disruption to critical health care services poses a serious threat to undiagnosed individuals, their local communities, and global health security. The risk that undiagnosed individuals will infect others with HIV or TB—or succumb to malaria without pursuing treatment—is now much higher than before the pandemic. Moreover, the authors warn that the pandemic has effectively derailed years of progress in reducing the disease burden in Africa and the rest of the developing world. In response to these challenges, The Global Fund recommends health care facilities implement adaptive measures to reduce the volume of visits to clinics and improve health services delivery. Such actions include providing long-term drug prescriptions to ensure uninterrupted access to medication, door-to-door decentralized distribution of long-lasting insecticidal nets, and incorporating TB screening in digital health screenings for COVID-19.
For more on supporting health care systems in Africa, read Africa CDC Director Dr. John Nkengasong’s Foresight Africa 2021 essay, “Building a new public health order for Africa—and a new approach to financing it.” For more on innovative and technological solutions to complex health care challenges, see AGI Senior Fellow Landry Signé’s recent paper, “Strategies for effective health care for Africa in the Fourth Industrial Revolution.”
Industries without smokestacks in Tunisia: Creating jobs in tourism and ICT
Tunisia, like many African countries, is facing an influx of young people into its workforce, but the country doesn’t have enough jobs to absorb them. Recent research, though, reveals that there might actually be great potential and even a comparative advantage for job creation in Tunisia in “industries without smokestacks” (IWOSS). IWOSS are sectors that share much in common with manufacturing, especially their tradability and tendency to absorb large numbers of low-skilled workers. Examples of IWOSS include agro-industry, horticulture, tourism, and some information and communication technology (ICT)-based services.
Through an adequate management of these sectors, job creation and export development could allow the creation of new areas of comparative advantage and have a positive impact on other sectors as well. As Tunisia’s economic growth rate has lowered to 2 percent in the period from 2012 to 2019 (according to the Central Bank of Tunisia), we must consider new strategies and other policy improvements to reverse this trend and boost job creation in the country.
The challenges in this area are spread over several fronts. The Tunisian labor market suffers from a mismatch between labor demand and supply, as well as a strong imbalance linked to the gender gap. This phenomenon mainly concerns women, young people, and graduates (European Training Foundation, 2019). The latter are often excluded from the labor market due to a mismatch of skills required to enter the job market, despite their acquisition of qualifications and degrees.
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Thus, our research proposes a way out of youth unemployment through an analysis of the Tunisian economy since the 1960s, including forecasts following the COVID-19 crisis, with the aim of providing an alternative perspective that looks beyond conventional “smokestacks” manufacturing and builds on strengths to find room for improvement in industrial policy, including nontraditional agriculture or services.
Why are IWOSS so important?
This study aims to show how the job creation, combined with the identification of the skills required to work in a given field, might have a concrete impact in decreasing youth unemployment. The impact of IWOSS on the Tunisian economy emerged as early as the 1980s, when the market shifted toward this new economic sector, which represented 44 percent of Tunisia’s GDP on average between 2015 and 2019.
Furthermore, through a comparative approach with other activities, we find that the growth in value added by activity sector indicates the relative importance of IWOSS sectors—especially the tourism sector, followed by the transport and financial sectors—to the Tunisian economy. Because of their particular potential for growth in the Tunisian context, we examined the specific IWOSS subsectors of tourism, financial services, and ICTs, and found that, generally, their contributions to the Tunisian economy result in a better capacity to resist and adapt to structural shocks.
Table 1. Growth in added values by activity sectors at prices of the previous year (annual change in %)
Source: Table from Mouley, and Elbeshbishi, (2021). “Addressing youth unemployment through industries without smokestacks: A Tunisia case study.” The Brookings Institution.
Recommendations
The COVID-19 crisis had an undeniable impact on all sectors of the Tunisian economy—especially tourism—though agriculture, fisheries, and ICT suffered least. Given the widespread damage on top of the already high youth unemployment rate, a multistakeholder response is essential for creating jobs for young Tunisians. In order to unearth the employment generation capacity of IWOSS sectors, key constraints that inhibit the growth of these sectors have to be addressed. In short:
Tourism. Tunisia still needs some crucial enablers like political stability, public-private partnerships, and the development of promotional campaigns that further enhance Tunisian culture, traditions, and national heritage to make the tourism industry even more prosperous. Building infrastructure, especially improving transport and communications for tourism, would also have a positive impact on other sectors such as agriculture and construction.
Information and communications technology. For the purpose of enabling greater development of the ICT sector, policymakers should commit to enhancing social inclusion and making high-quality ICT training and education accessible. Such interventions could lead to the development of e-Administration and encourage investments in the ICT industry to create jobs. The “Digital Tunisia” and “Smart Tunisia” programs provide a clear strategy to this end.
Financial services. Policymakers should aggressively encourage a transition to digital tools, promote digital payments, and support the development of further technological innovation.
In the end, we find that the ICT, financial services, and tourism sectors can be critical for addressing the country’s jobless growth challenges, if interventions like improved infrastructure, better access to long-term financing, and enhanced digitization, among others, can be implemented.
USAID’s local staff are an overlooked resource to advance locally led development
Last week’s House Foreign Affairs Committee Hearing on locally led development highlighted the bipartisan consensus about its numerous benefits. Subcommittee chairman Rep. Joaquin Castro (D-TX) noted that each of the last four administrations has advanced this vital foreign aid reform because “evidence indicates that working with local partners improves the effectiveness and sustainability of our foreign assistance programs.” Ranking Member Rep. Nicole Malliotakis (R-NY) concurred saying, “until we support meaningful local ownership of local challenges and build the capacity of local organizations to solve these problems themselves, our foreign assistance will not have lasting impact.”
In other recent Congressional hearings, USAID Administrator Samantha Power has repeatedly called for the U.S. Agency for International Development to advance locally led development. “In order for us to get the most out of our programs” she said, “we need to increase local partnerships and address staffing shortfalls,” calling the push toward locally led development “the essence of whether the development we do is going to be sustained over time.” In March, Power struck a similar chord, “effective development is driven by those on the ground with local knowledge and expertise.”
In her July testimony, Power identified USAID’s massive shortage of contracting officers (COs) and agreement officers (AOs) as a critical problem standing in the way of more locally led development. She said each USAID CO “has managed over 65 million dollars annually over the past four years—more than four times the workload of their colleagues at the Department of Defense.” Given such a heavy workload, it may be understandable that some USAID staff would choose the path of less resistance, leading them back to USAID’s traditional U.S.-based implementing partners. In fact, in 2017 USAID found that just 25 of its U.S.-based implementing partners received fully 60 percent of its funding, reducing competition and innovation. Power also explained that, according to the latest data, just 5.6 percent of funding went to USAID’s local partners. Yet, however understandable this procurement shortcut may be, it is leading to U.S. foreign assistance investments that too frequently have no local roots and which essentially evaporate into thin air, as the recent headlines from countries like Afghanistan and Haiti demonstrate all too clearly.
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This nonlocal approach and its negative consequences are recognized by the agency and USAID has already made several attempts to increase implementation through local actors. For example, since 2009, initiatives like Local Solutions, the Local Systems Framework, and the Journey to Self-Reliance, Local Works, the New Partnerships Initiative (NPI), and USAID’s Acquisition and Assistance Strategy have all taken steps in the right direction. Yet the vast majority of USAID’s funding still does not flow through local actors because USAID has not changed its ways of doing business through vigorous procurement reform and the requisite staffing levels of COs and AOs to implement it.
Hitting precisely on these points, in July, Sen. Chris Coons (D-DE), chairman of the Senate appropriations subcommittee that oversees USAID’s budget (SFOPs), asked Powers what she considered to be a potential strategy for “increasing the localization of our assistance programs” and how additional staff would ensure U.S. funds better support local partner-led initiatives. Coons added, “I look forward to working with you on tackling USAID’s procurement processes and the challenges in terms of both regulations and staffing.” On the House side, SFOPs chairwoman Barbara Lee’s FY22 bill, which has already passed the House, also clearly supports the growth of locally led development, requiring USAID to report to Congress on funding for programs “implemented directly by local and national NGO entities” and also on how USAID plans to increase these resources in the future.
This recognition by top decisionmakers on the Hill and the administration is very encouraging. Finally, the wonky problem of USAID’s business practices has come to light as perhaps the single largest barrier to advancing locally led development. There is urgency to more effectively use U.S. foreign aid, and thankfully, a major part of the solution Power, Coons, and Lee are seeking is already working at USAID and has already proven its mettle in response to the COVID crisis—USAID’s local staff.
When USAID’s foreign service officers (FSOs) were evacuated at the start of the COVID-19 pandemic, then Administrator Mark Green, delegated authority to USAID’s local staff, mainly foreign service nationals (FSNs), to continue the work of USAID without their American supervisors. The FSNs were given special temporary authority to sign contracts and obligate funds on behalf of the U.S. government; that is, to act as COs and AOs. By making this delegation of authority permanent, Administrator Power could quickly and significantly increase USAID’s cadre of COs and AOs, opening the door to much greater progress on locally led development. Doing so would also allow the agency to more fully benefit from the local contacts of these very valuable local professionals, who USAID staff regularly refer to as “the backbone of the agency.”
This idea is supported by the Modernizing Foreign Assistance Network (MFAN), which called on appropriators to “evaluate the continuation of the expanded management and supervisory roles of Foreign Service Nationals during USAID’s COVID-19 response.” Similarly, the USAID Alumni Association has called for USAID to “accelerate efforts to enhance the roles and responsibilities of Foreign Service National (FSN) employees in USAID’s field missions. This should include responsibilities for program management.” In addition, recently acting USAID Administrator Gloria Steele has also endorsed the idea of local staff having warrants to act as COs and AOs, saying “they stay with USAID, they are retained … so having them keep their warrants will help solve a number of problems at once and is a win-win.”
Quickly increasing the number of USAID COs and AOs by extending or reinstating the warrants of well-qualified and experienced FSNs is well within the authorities of the administrator. To do so most effectively, USAID should be able to increase the salaries for qualified FSNs (enable them to become a grade 12 or 13) in line with the increased responsibilities, authorities, and accountabilities that holding a warrant entails. A clear set of norms to reflect on bias or perceived conflicts of interest in the local context should also be put in place. Then, USAID should also open a pathway for more FSNs to become CO/AOs by having them work under the supervision of FSOs who would then recommend they receive a warrant to sign contracts and agreements.
These steps would also help USAID advance its commitments to diversity, equity, and inclusion (DEI), and professional recognition and fairness. Retired FSNs have been vocal about their subordinate position within USAID, and while some mission directors have created FSN senior advisor positions in the front office, USAID’s overall unwillingness to recognize them as fully-capable professionals takes its toll. Former FSNs like Jamal al Jibiri, detailed their reasons for frustration, noting that when American officials arrived at post and met with the FSNs: “They would always have this one line about ‘we would be nothing without you guys; if it wasn’t for you nothing would operate; it’s you guys who run everything so we really need you guys and appreciate you.’” The former Jordanian FSN continued to explain why these statements were so defeating. “If there was a real appreciation for the FSNs,” he said, “it would be reflected in how we are compensated and how we’re seen, but to tell us that everything would fall apart without us, but not to take that into consideration when you’re looking at compensating us or looking at rewarding us, then it’s meaningless.” Unfortunately, many similar accounts can be found in the archives of the Oral History Program of the Association for Diplomatic Studies and Training (ADST).
In this regard, part of the solution to USAID’s critical CO/AO shortage has the potential to advance both locally led development and the effort to decolonize USAID’s staffing model. USAID leaders should carefully consider this opportunity to reduce a major obstacle to achieving the agency’s goals on locally led development. Hill leaders who favor locally led development and DEI should also support this innovation by USAID. The FSNs’ decades of professional contributions and the positive experience of their mission leadership during COVID-19 show that they are ready to do more.