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New Paths for Development Finance

Mareeg.com-WASHINGTON, DC – When the Millennium Development Goals (MDGs) expire next year, the
world will be able to count many achievements.

Mahmoud_Mohieldin
Mahmoud_Mohieldin

The number of people lacking access
to safe drinking water has been halved, improving the lives of over 100 million slum
dwellers; gender equality in education has been strengthened; and health care has
become more accessible for millions of people. But there is still much to be done;
many countries are lagging behind, and there is a great deal of discrepancy within
countries.

The post-2015 development agenda promises to take on the MDGs’ unfinished business,
while adding objectives related to inclusion, sustainability, employment, growth,
governance, and cooperation. Success will depend on world leaders’ ability to apply
past experience not only to developing effective policies and programs, but also to
finding innovative ways to finance them.

A recent World Bank Group (WBG) report – Financing for Development Post-2015 –
identifies three major considerations that should inform the next development
agenda. First, most of the world’s poor now live in middle-income countries, and
many live in high-income countries. Second, the focus of debate about development
financing has broadened from the quantity of aid to its quality – including its
power to leverage other sources of finance. Finally, emerging economies have become
important engines of global economic growth, with increasingly close ties to
developing countries.

In this changing economic landscape, financing a transformative development agenda
will require an unprecedented level of cooperation among governments, donors, and
the private sector, as well as policies and institutions that facilitate more
efficient use of existing resources and attract new and diverse sources of funding.
The WBG report points to four foundational pillars of development financing:
domestic resource mobilization; better and smarter aid; domestic private finance;
and external private finance.

Domestic resources constitute the largest pool of funds available to developing
countries, which mobilized $7.7 trillion in 2012, largely through taxes, duties, and
natural-resource concessions. But, while developing-country revenues have grown 14%
annually since 2000, average tax revenues in the poorest countries stand at only
10-14% of GDP, compared to 16-20% in middle-income countries and 20-30% in
high-income countries.

Improved domestic resource mobilization and management – for example, through better
tax administration, greater capacity to negotiate and manage natural-resource
contracts, and stronger mechanisms for limiting capital flight and illicit financial
flows – would improve the situation considerably. Subsidy reform also offers
significant scope for revenue gains. In 2010, only 8% of some $400 billion in
fossil-fuel subsidies reached the poorest 20% of the population.

But this does not relieve major economies of their responsibility to support
development. On the contrary, better and smarter aid is critical to financing the
post-2015 development agenda.

While developing countries’ resources dwarf official development assistance (ODA),
which amounted to $128 billion in 2012, they constitute upward of 40% of government
budgets in fragile and conflict-affected states. As a result, over the last few
decades, ODA has played a central role in lifting people from extreme poverty,
financing investments in human and physical infrastructure, and smoothing the path
of economic reform.

But fiscal pressures in many of the wealthiest countries have resulted in a 6%
decline in ODA since 2010 (in real terms), despite the emergence of new government
donors and large private foundations. In this context, world leaders must identify
mechanisms for improving ODA’s effectiveness. For example, they can channel aid
toward sectors like health care and education, where private finance is unlikely to
materialize, while using ODA to attract more private-sector financing, such as
through public-private partnerships or mitigation of investment risk.

This brings us to the third crucial source of development funding: domestic private
finance. Building a robust private sector capable of fostering inclusive growth,
creating jobs, and broadening the domestic revenue base demands improved access to
finance for micro, small, and medium-size enterprises. Financial inclusion,
supported by a strong regulatory framework, encourages responsible lending and
promotes innovation. It is up to governments to create an environment that enables
businesses to take root, compete, and grow. In exchange, firms must go beyond
minimum corporate social-responsibility standards to help advance human well-being
and environmental sustainability.

The final piece of the development-financing puzzle is external private funding,
delivered via foreign direct investment, international bank loans, bond and equity
markets, and private remittances. Although global savings amount to $17 trillion and
liquidity is at an all-time high, a relatively small share of these resources is
being channeled toward investments that support development objectives, such as
closing the massive infrastructure gap.

Higher-quality projects and innovations aimed at mitigating risk can clear the way
for private-sector participation, while well-designed public-private partnerships
and developed domestic capital markets can help “crowd in” investors in critical
areas. Local-currency bond markets, vertical funds for global public goods, carbon
markets, and new mechanisms to attract institutional investors and sovereign wealth
funds would also help. Finally, with remittances exceeding $400 billion annually,
there is scope to develop financial instruments that would facilitate diaspora
communities’ investment in development projects.

This approach to development financing is not entirely new. In 2002, the United
Nations International Conference on Financing for Development produced the Monterrey
Consensus, which emphasized the importance of domestic resource mobilization, aid,
investment, trade, institutions, and policy coherence in financing development.

As a recent UN resolution points out, what is needed now is a follow-up conference,
where world leaders examine the lessons learned since 2002 to determine how to
advance the post-2015 development goals in the context of a changing global economic
landscape. A “Monterrey II” meeting would help countries obtain a clearer and more
realistic picture of the financing sources available, enabling them to prioritize
the needed investments – and thus contribute to the successful launch of the
post-2015 development agenda.

Mahmoud Mohieldin is the World Bank President’s Special Envoy.

: Project Syndicate

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