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Five key facts on Financing for Development

09-07-2015

Mackie. J, Williams. R. (2015). '5 key facts on Financing for Development'. ECDPM Talking Points blog, 7 July 2015.

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For positive development outcomes, both developed and developing countries need to ensure the right policy environment to make the best and most effective use of the resources available to them. For developing countries, these potential resources are growing quickly and so the need to effectively capture and use them is vital if the global community is to achieve the post-2015 Sustainable Development Goals.

As Ewald Wermuth, ECDPM’s new Director, argued at the recent Expert Meeting on Financing for Development in the Hague – Official Development Assistance (ODA) can play a role in catalysing international funds that create these ‘enabling’ regulatory environments in the first place. Its a case of the ‘chicken and the egg’ – we need to consider new approaches to development assistance and aid that allows developing countries to make the best use of resources ‘beyond aid’.

Courtesy of Kaleidos Research

The Financing for Development debate in a nutshell

As experts on international development and finance from around the world convene in Addis Ababa for the Third UN Financing for Development conference, we bring you 5 key facts you need to know about ‘Financing for Development’:

1. Taxes and other public resources are the largest source of finance for development

The European Report on Development shows us that the vast bulk of the funds for development in developing countries comes first and foremost from their own domestic tax revenue, followed by domestic private finance. Want an example? Then think of China, which helped the world meet Millennium Development Goal 1 (halving global poverty by 2015) by targeting poverty at home with domestic public funds and domestic private capital. In particular, the European Report on Development shows us that:

  • Domestic public revenues (tax and non-tax revenues) rose nearly three-fold by 272%, from $1,484 billion (bn) in 2002 to $5,523 bn in 2011
  • International public finance (net ODA and Other Financial Flows (OOF)) nearly doubled by 114%, from $75 bn in 2002 to $161 bn in 2011
  • Private domestic finance (measured as Gross Fixed Capital Formation by the private sector, less FDI) quadrupled by 415%, from $725 bn in 2002 to $3,734 bn in 2011
  • Private international finance (net FDI inflows, portfolio equity and bonds, commercial loans and remittances) rose nearly threefold by 297%, from $320 bn in 2002 to $1,269 bn in 2011

European-Report-on-Development-Finance-Figure1-2-500

Source: European Report on Development 2015


2. We need a completely new approach towards financing international development

We have learned a lot in implementing the Millennium Development Goals over the last 15 years. There is a need to go deeper and look at what really drives or enables development if you want transformative change. Again, the European Report on Development highlights six examples of enablers that, if well managed and funded, can promote transformative development – local governance, infrastructure, human capital, green energy technology, biodiversity and trade. These enablers combine economic, social and environmental dimensions.

The Sustainable Development Goals currently being negotiated at the UN in New York are a welcome move in this direction reflecting a more up-to-date, qualitative and (as the name suggests) sustainable approach to development. They target enablers like local governance, human capital, infrastructure, green energy technology and trade and we need to consider how we can best finance them.

3. Finance alone will not be sufficient to achieve the post-2015 development agenda

Policies also matter. In fact, policies are fundamental. 6 country illustrations were undertaken for the European Report on Development in places where transformative change had occurred and identified a range of specific policies that help to mobilise finance – like regulatory reforms, building administrations, tax reforms and incentives for foreign direct investment. Just look at the case of Mauritius….


ERD5-Infographic-2-Mauritius-Country-Illustration-500

Source: European Report on Development 2015


4. The role of Official Development Assistance is changing

Outside the focus of the European Report on Development, but very much interlinked to some of the its key messages is the ongoing debate about aid effectiveness. Let us take the example of the EU which is the world’s biggest donor of Official Development Assistance (ODA). While this assistance will still have a place in international cooperation in the years to come, there are many challenges ahead for the EU’s support to developing and fragile states.

European aid is heavily fragmented amongst all its member states, which reduces its effectiveness. The EU has still not met its commitment, made at the Second UN Financing for Development Conference in Monterrey in 2002, to commit 0.7% of its Gross National Income in Official Development Assistance to developing countries by 2015. The principle of this threshold 0.7 target dates back to 1970 when it was agreed at the UN General Assembly. While the EU did recently recommit itself at the May 2015 European Council to achieving this, recent moves by certain member states, including Finland which recently slashed its aid budget by 43%, shows that the road ahead may be difficult.

The EU’s aid efforts are certainly valuable and necessary, but they are smaller than promised, less effective than they could be and only a minor proportion of the resources that go into the development of countries. All this leaves the EU in a weaker position to persuade its partners at the UN’s upcoming Financing for Development Conference that it is serious about its commitments and that it seeks an ambitious agenda going forward.

Source: Capacity4Dev

5. The new development agenda will be universal – it affects us all

A new defining feature of the Sustainable Development Goals (SDGs) is the principle of ‘Universality’. This implies that all countries (including those in Europe) need to contribute to and achieve the SDGs. Europe will have to work out how to translate global – and albeit rather general – goals and targets into ambitious, meaningful, fair and context-specific national and regional policies that are relevant and in their strategic interests.

We will need a Global Partnership to implement a transformative vision for development with better participation by stakeholders in developing countries and better systems of accountability for everyone in meeting the goals they agree to. For Europe, this also means driving forward reforms to the global economy that will support the mobilisation of finance in developing countries – an improved global trade regime, tax rules and transparency and better management of the global financial system.

2015 will be a major paradigm shift in global governance and international development. Ensuring global common goods like equitable growth, health and gender equality (while combating climate change at the same time) means we are in it together.


Image courtesy of the 2015 European Report on Development

A modified version of this article was translated into Dutch and published in Oneworld.nl.

The views expressed here are those of the authors and not necessarily those of ECDPM.

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Cross-cutting TopicsDevelopment Finance and TaxationDevelopment FinanceEurope