This month, the world’s states will define a financing strategy to meet the objectives of the sustainable development goals, at the third International Conference on Financing for Development in Addis Ababa, Ethiopia. While the resources allocated to development by developed countries will not be sufficient to finance this new agenda, there is one solution to achieving the SDGs: Use part of official development assistance to leverage domestic resources available in the “global south.”
There are clearly huge financing needs. While it might seem impossible to put a cost to the annual financing needs for the SDGs, the estimates referred to here and there are startling: Several trillion dollars are required for urbanization, transport, housing, the energy transition, agriculture, the eradication of poverty, health, education, access to water and sanitation, adaptation and resilience to climate change, the protection of the environment and biodiversity, and more.
ODA flows are negligible compared with these needs: $150 billion of gross ODA and $80 billion of other non-ODA public contributions, particularly financing from multilateral development banks.
How can this impossible equation be solved?
Before answering this question, we should bear in mind that the bulk of investments in developing countries are financed with domestic resources ($7 trillion to $8 trillion a year), to a lesser extent by foreign direct investment ($500 billion) and marginally by international public financing ($230 billion).
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However, these figures mask glaring disparities between low-income countries, which rely on international aid for 25 percent of their investments, and middle-income or emerging countries that self-finance the bulk of their investments.
In this context, what priorities should be given to international public financing?
A substantial proportion of international aid must continue to be earmarked for the development of the poorest and most vulnerable countries, in the form of grants and highly concessional loans. There would appear to be broad consensus on this point.
Another part of international public financing will need to be used to support public policies, assist local actors and catalyze other sources of financing to generate powerful leverage effects on investment.
Indeed, achieving these objectives will require modifying development trajectories by defining ambitious public policies that will set out the required regulatory frameworks, create the incentives to guide the decision-making of economic agents and unblock investment decisions.
The SDGs will be implemented thanks to local development actors. They are the decision-makers, the owners and the implementing agencies of the investment programs that will be essential in achieving the SDGs. For this reason, they will need to be the first beneficiaries of support and capacity building actions and financial assistance.
The central issue will be to build their capacities to directly access international — but especially domestic — financial resources. To achieve this, it is essential to strengthen domestic financial systems and actors (national development banks, public and private banks, insurance networks, and so on). After all, they are in the best position to mobilize domestic savings and allocate financing for sustainable development — they know the economic actors better than anyone, including their needs, their constraints, as well as the drivers and bottlenecks in their investment decisions.
Economic actors, state-owned and private companies, will also need to be supported using channels such as the implementation of legal, regulatory, tax, tariff, incentive-giving and transparent frameworks; the introduction of mechanisms to more effectively control investment-related risks (for example, in the form of guarantees); and actions to support and build their administrative, technical and financial capacities to scale up direct access to financial resources that match their investment needs.
Finally, international partners must also provide massive support to local authorities.
Due to deconcentration and decentralization movements, municipalities are increasingly responsible for the provision of basic services (housing, transport, access to water, sanitation and energy, and so on), which form the basis of the social pact between public institutions and citizens. Local authorities in the global south absorb 5 million additional inhabitants every month. Consequently, they must have the capacity to plan and manage such investment programs and to mobilize the resources required to finance them through local taxation, state transfers, direct borrowing and bond issues, among other measures.
The support for local actors requires a paradigm shift within international development finance institutions: to directly finance these actors rather than projects, to promote the implementation of a form of governance that is conducive to their development and their growth, and to increase their capacity to directly access domestic financial resources.
There is only one possible conclusion to this observation: The role of ODA — and more generally of international public development finance — is to support states and local actors by implementing mechanisms that catalyze international and domestic, public and private, and ODA and non-ODA resources for them. These all need to bring about leverage effects in order to maximize investment volumes.
Such mechanisms exist and have proved their worth, as is the case with guarantee mechanisms and public-private partnerships. It is also true of loan-grant blending mechanisms, which have been successfully developed by the European Commission since 2007.
The financial resources are in the global south. Those in the global north must set the objective of mobilizing them, facilitating access to them for local actors and channeling them toward investments in line with the SDGs.
This guest opinion is published in association with ID4D, an international blog for exchanges and constructive debates on development. Hosted and facilitated by the AFD, the French agency for development, ID4D is aimed at all development stakeholders.
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