PARIS—A tsunami of cash is headed for developing countries to address climate change—and with it growing worries that the money will overwhelm the poorer economies it is meant to help. Wealthy nations are preparing a plan to send more than a trillion dollars each year to the developing world by 2030, a flood of foreign investment that would be unprecedented in modern history.
Much of it would come from the rich world’s big institutional investors: pension funds, insurance companies, asset managers, private-equity firms and others. The goal is to provide financing on a massive scale for renewable-energy projects in developing countries and infrastructure to protect poor nations from rising seas, drought and other impacts of global warming.
But capital flows of that magnitude risk sowing economic instability, economists and global finance officials say, particularly for smaller, poor countries that lack the financial institutions to channel the money into productive investment. A string of financial crises in the developing world has shown that foreign investment surging into these countries often leaves a mess.
Debts balloon, currencies become overvalued and economies face a painful reckoning when foreign investors get spooked. “Rather than being a boon, it could end up being a curse," said Eswar Prasad, an economist at Cornell University who is advising the Group of 20 major economies on the subject.
“This behooves very careful thought in terms of how the financing is structured." United Nations climate negotiations are the driving force behind the climate finance plan. The financing offered by wealthy nations persuaded poorer countries to agree to Paris accord targets, even though the U.S., Europe and a handful of other
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