The UNDP estimates that 82 developing (low- and middle-income) countries (60 percent) can be classified as ‘highly debt vulnerable’, and the vulnerabilities are far from limited to shorter-term liquidity concerns. More than half the countries have now breached the ratio of gross public debt-to-GDP (a key indicator of solvency) deemed sustainable according to their debt sustainability assessments.

What lies ahead? Low- and middle-income countries’ service on external debt will amount to US$3.18 trillion between 2022 and 2025, including $1.44 trillion in public debt. With rising interest rates and the expiration of the Debt Service Suspension Initiative, default risk will rise and problems of debt overhang will intensify. To avoid further setbacks, orderly and pre-emptive debt-restructurings should be prioritized, and additional liquidity support measures should be made available to vulnerable economies by the international community. 

A third divergence: Decarbonization pathways will set the template for the future

In the short run, high energy prices have captured policymakers’ attention, threatening longer-term responses to the climate crisis. Limiting warming to 1.5 degrees Celsius requires, at the very least, a complete decarbonization of the global energy system through bold and immediate measures. This involves a credible global collective effort and using all available policy tools. But, as some effects of decarbonization may disproportionately affect less advantaged groups, this process also involves fairness considerations on two fronts: (1) complete regulation to prevent CO₂ leakage to both poorer countries and vulnerable groups within a country; and (2) country-specific allowances for common-but-differentiated responsibilities (and for what we term ‘space to develop’).

Is decarbonization likely to occur under these considerations—or even likely to be achieved at all? Let’s be honest on the latter: The outlook is grim. Fossil CO₂ emissions last year returned to their pre-pandemic levels while major economies have continued to inject billions of dollars to support fossil fuel-intensive sectors. That decarbonization would be fair and driven by a collective effort is no less grim. Some countries would face hard distributive and political challenges, some would embark on a low-hanging fruit agenda, and some would exert policy retaliation in the presence of CO₂ leakage.

How to converge on decarbonization: The question of CO2 leakage needs to be addressed head-on. Decarbonization will not be achieved solely through carbon pricing (although that will also be needed). For developing and emerging economies to move forward on energy transitions, they need financial and technological transfers that are not currently on the multilateral agenda. Energy transitions will create jobs, foster innovations, and create the conditions for a global pathway that secures the Paris Agreement targets.

An uncertain period

In recent years, we had stopped thinking about ‘global divergence’ and focused instead on specific sectoral, geographic or population ‘gaps’ within a converging global pathway. We are now entering an uncertain period. The unequal and unsustainable churning of the global economy is threatening to divide the world into pathways that will not meet.

Over the following months, granular data will allow us to track trends across diverse development contexts and describe emerging trends. Many will build upon past trends with a twist: new balances of power, new pockets of productivity, new digital technologies, rising social norms and expectations, more extreme weather patterns, new financial flows, greater gender equality, and an aging demographic profile, among other shifts.

The current turmoil presents us with a unique opportunity to learn about the interlocking divergences, identify signals and microtrends in the making and adjust our policy response. 

We hope to write more about how these new challenges and threats evolve soon.