Financing a Transformative Post-2015 Agenda: Where are the Current Discussions Taking Us?

The financing for development conference in Addis Ababa in July 2015 is expected to agree a finance for development framework to implement the post-2015 development agenda (the Sustainable Development Goals - SDGs), an agenda which itself is undergoing major discussions in the coming year. The European Report on Development (ERD) 2014(1) entitled ‘Financing and other means of implementation in the post-2015 context’, and implemented by Overseas Development Institute (ODI), ECDPM, DIE (German Development Institute), University of Athens and Southern Voice, is focused on exactly this theme. The report is scheduled to be launched at the end of the year. What have we learned so far from a series of consultations(2)[2] organised by partners in developing countries and Athens consultation(3) on infrastructure finance? And how does this relate to past and other, current discussions on finance for development? This article highlights a few issues that have come to our attention and does not intend to give the full breadth of issues under discussion.

What new issues require further reflection?

Financing for development is not a new issue, having discussed these issues as part of the 2002 Monterrey Conference for Development. However, a range of new issues concerning financing and implementation have emerged in the current discussions which were not fully addressed in the implementation that followed the Millennium Development Goals (MDGs). The MDG process approached implementation largely from a financing gaps perspective. Crudely speaking, a financing gap would be identified, and as long as aid was increased to fill this gap, poor countries would achieve the social progress embodied in the MDGs. Estimating financing gaps for the MDGs therefore aimed, successfully, at boosting the level of (developed country) aid to developing countries.

This approach to financing and implementation requires updating from a range of perspectives. First of all, the finance landscape has become more complex. There may still be an important role for public finance (especially domestic public revenues) in development, but its role seems to be evolving, as we consider the role of private sector flows and instruments as countries develop; aid is still regarded as an important resource, yet in a supportive and catalytic role rather than only in a delivery role; furthermore, remittances, South-South development co-operation and international capital flows such as bond inflows have risen relatively fast in the poorest countries. Thus a range of financing sources, both public and private, national and international, will be important for development, as is argued in the Intergovernmental Committee on Financing for Development report(4) which was released this August. We therefore need to examine the respective roles of different types of flows in different types of countries.

Secondly, the context of finance matters for i) how much finance is needed, ii) the impact of finance and iii) how much finance is mobilised. For example, the World Bank(5) argues that the cost of achieving any development goal depends on the efficiency with which the goal is pursued. They estimate the undersupply of infrastructure in developing economies at US$1 trillion per year until 2020, with an additional US$200 to US$300 billion per year to ensure green infrastructure; but these costs could be reduced by making more efficient use of existing infrastructure and by improving quality and management. McKinsey & Co.(6) argue that countries could reach a 60% improvement in infrastructure productivity (or US$1 trillion annual saving) through the scaling-up of good practice and making better use of existing infrastructure. As the policy environment can therefore contribute both to the mobilisation of finance and more effective use of financing, policy coherence for development is essential.

Finally, with the SDGs there is also a shift in the discussions towards the need for transformative sustainable development, reflected to some extent in the report of the Open Working Group on the Sustainable Development Goals.(7) This requires a shift from the MDGs approach focused on social development in developing countries, to a sustainable development transformational approach which balances reductions in inequality and poverty, with productivity and employment increases and lower CO² emissions and better natural resource management in developed and developing countries – that is a balance of economic, social and environmental objectives to promote a universal and transformative agenda. This is not a short term agenda where aid can quickly fill gaps, but a long term agenda, which the ERD 2014 will be examining in greater detail.

And what important considerations can we learn from country consultations?

The ERD 2014 has commissioned studies from and has held consultations in six countries (Bangladesh, Ecuador, Indonesia, Mauritius, Moldova and Tanzania), which inter alia are asked to provide empirical evidence on the role of different finance flows and the importance of policy context. Here we discuss lessons from just two, Tanzania and Mauritius.

The Tanzania ERD consultation for example focused on energy transformation, an area in which the government aims to promote access to modern energy sources and promote the role of renewable energy. The consultation highlighted that the development agenda should also touch on the economic and environmental aspects of development, a step in complexity from the MDGs which limited itself mainly to the social aspects. The discussions were about making a range of finance flows work for energy transformation. The consultation for example focused on the interest from the Tanzanian domestic private sector in developing renewable energy projects, with financing also planned from South-South flows, pension funds and development finance institutions, as well as aid grants. For example, a 100MW US$536 million geothermal project funded by the Climate Investment Funds is currently being developed, with support from the Government of Tanzania and loan contributions from the African Development Bank and commercial banks; also a 100MW wind farm is under development, using financing from domestic private sector actors, international firms and development finance institutions. In addition to relevance of finance, it is clear that the domestic policy context matters. Progress in renewable energy development seems to be hampered by a number of policy bottlenecks, including the presence of bureaucratic delays and the lack of appropriate price guarantees on renewable energy technologies. Thus finance needs to be complemented by other means of implementation to facilitate an energy transformation. The ERD 2014 aims to examine the relevance of context for finance in greater detail.

The discussions in Mauritius suggested structural transformation policies were made possible by establishing effective state-business relations that sought consensus on the direction of the economy, and shifted the economy from a monocrop sugar economy in the 1960s and 1970s into a diversified manufacturing, services and business economy. The share of agriculture fell from 25% of GDP in 1968 to 3.5% in 2013. Establishing a conducive policy framework also attracted finance. During the restructuring process sugar rents were directed to developing the garment and tourism industry promoting further diversification of the economy through private investment in industry and public investment in infrastructure. While comparatively small, aid was important as it facilitated the transformation by compensating the ‘losers’ of the restructuring process. The Mauritius illustration also shows that transformation is a never-ending story. With economic stagnation in 2005, the government shifted its focus to boosting job creation and economic growth through the ICT and financial services sector. This included bringing down connection costs and improving labour force skills. The contribution of ICT to GDP therefore grew from 4.1% in 2000 to 6.5% in 2010. Now, the search is on for appropriate instruments to attract private finance for infrastructure, as public finance is capped, and promote the role of public-private partnerships in sustaining transformation.

A research agenda for ERD

Financing for development is a complex issue. In order to move forward, a broader agenda needs to be adopted which examines the effects of different finance flows and the importance of complementary policies and institutions in mobilising and using finance effectively for sustainable development transformation,  a long term transformative agenda combining economic, social and environmental objectives. The ERD 2014 report will aim to examine these issues and provide suggestions for the financing for development framework. Stay tuned!

Further information on the European Report on Development can be found on the website and on the ERD 2014 project page.

Dr. Dirk Willem te Velde is the head of the International Economic Development Group at the Overseas Development Institute (ODI) and Leah Worrall is Project Officer of the International Economic Development Group at ODI.

Footnotes