(local) governance, infrastructure, human capital, (biodiversity) natural capital, (green energy) technology and trade.
Financing and other means of implementation in a transformative post2015 context (emerging messages, 9 December 2014) 1 Introduction In the framework of its on-going initiative on ‘Mobilising European Research for Development Policies’ the European Commission and four EU Member States (Finland, France, Germany and Luxembourg) have commissioned ODI (Overseas Development Institute), DIE (Deutsches Institut für Entwicklungspolitik), ECDPM (European Centre for Development Policy Management), the University of Athens (Department of Economics, Division of International Economics and Development) and the Southern Voice Network for the drafting of the 5th European Report on Development (ERD 2014-2015) on the topic of ‘Financing and other means of implementation in the post-2015 context’. The report will be finalised in 2015. This note describes emerging messages.
2 Research questions, approach, methodology The main research question is “How can financial resources be most effectively mobilised and channeled and how can they be combined with selected enabling policies and other means of implementation (MOI) to achieve a transformative post-2015 agenda?” The report proposes a different way of thinking about finance and development and has four elements (Figure 1): a future that aims for sustainable development transformation, a focus on long-term enablers, recognition of the role of complementary policies and consideration of all types of finance. The approach puts forward the principle that action to achieve sustainable development should focus on the drivers or enablers of change. Sustainable development cannot be achieved without improving and financing six key areas – (local) governance, infrastructure, human capital, (biodiversity) natural capital, (green energy) technology and trade. Furthermore, finance contributes to the enablers and vice versa and these relationships depend on the policy context (which are included in non-financial MOI). This new approach contrasts starkly with outdated views that aid or finance alone can directly deliver sustainable development outcomes. Past econometric studies and a new modelling study for the ERD confirm the quality of governance is crucial for the effectiveness of FDI, aid, national budgetary spending and domestic private finance.
Figure 1 The ERD framework: linking policies and finance for sustainable development
3 Lessons from the implementation of MDGs inform the ERD’s approach The implementation of Millennium Development Goals (MDGs) following the 2002 Monterrey consensus on Financing for Development was supported by a range of finance needs studies. While the studies on MDG finance needs were helpful in mobilising additional ODA for the social sectors, and although country-level modelling on financing MDGs
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offered valuable insights on trade-offs between different finance sources and development outcomes, a different way of thinking about the role of finance in the post-2015 context is more useful. Rather we need to (a) consider a range of finance flows (public and private, domestic and international), beyond aid, as well as the role of ODA itself; (b) consider both financial and non-financial MOI (which we define as complementary policies and enablers) together and separately; and (c) consider the role of finance (including aid) in enabling a transformative post-2015 development agenda.
4 The financing for development landscape is changing rapidly As countries move towards higher incomes, they tend to experience (Figure 2): (i) declining ratios of aid-to-Gross Domestic Product (GDP) (ii) increasing tax-to-GDP ratios (stabilising when countries approach LMIC levels), and within this, increasing shares of tax from incomes and profits and notably goods and services, but declining shares of international trade tax revenues; (iii) increasing private investment-to-GDP ratios. Figure 3 depicts the evolution of finance flows to developing countries, showing that the relative role of aid is declining, even though a more nuanced analysis shows that it is still crucial in some context such as the poorest and most fragile states. Domestic public and private resources are increasingly the most important financial sources.
Figure 2 Financial flows (% GDP) by income level
Figure 3 Trends in finance ($ bn, 2011 prices)
25
6000 ODA
20
Tax revenues
Domestic public resources
5000 Domestic private resources
15 10
3000 2000
International private resources
Remittances 5
FDI
1000
0
% of GDP
4000 Domestic private finance
0
International public resources LIC
LMIC
UMIC
HIC
income per capita (US$ 2005 prices) 4086 1036 12615
Source: WDI data, all countries, 1980-2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: OECD, IMF, WDI, and ERD calculations
5 Implications: policy matters and aid can be more transformational There are two emerging policy messages: (i) Complementary policies are crucial for both the mobilisation and effective use of finance. On the mobilisation side, an appropriate policy framework can generate and attract more finance (e.g. a political settlement in Ecuador combines better tax capacity and policy with effective use of taxes for social development) and a small policy change can unleash more finance (e.g. poor regulatory frameworks hold back private investment in renewable energy in Tanzania). On the effectiveness side, better policies can pull finance from unproductive to productive uses, achieve more results with the same amount of finance (e.g. when infrastructure projects are managed more efficiently), or even reduce the need for finance (e.g. when fuel subsidies which are a quarter of Indonesia’s budget are reformed, or when access to trade has improved). Changes to domestic and international policies and systems work together, e.g. in mobilising and using tax revenues more effectively, or in creating financial rules for efficient and stable financial sectors. (ii) There is unique role for international public finance as a catalyst for promoting better policies and more resources for sustainable development transformation. Aid is still important and its transformational impact increases when it is used to build tax capacity (e.g. support to the Rwanda Revenue Authority helped raise tax revenues from 9% of GDP in 1998 to 14.7% in 2005), leverage private finance through development finance institutions (e.g. in renewable energy projects in Uganda), or supports human capital of vulnerable groups in countries undergoing transformation (e.g. retaining programmes in Mauritius accompanying sugar and garment sector restructuring).
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