OECD calls for overhaul of the development finance system

Different paper currencies. Photo by: Shopify

BARCELONA — The development finance system needs overhauling, according to the Organisation for Economic Co-operation and Development, which gathers key economic data and aid spending figures from the world’s major economies.

In a report published Monday, the global forum identified a significant decline in external funding — foreign sources of funding that have the potential to affect development progress — to low-income countries. The figures indicate that the 2030 Agenda for Sustainable Development will not be achieved under the current system, the report states.

“We say we need to go from billions to trillions and the trillions are in the private sector so looking at those numbers the global outlook does cause some alarm.”

— Olivier Cattaneo, senior policy analyst on financing for sustainable development, OECD

Between 2013-2016, external finance to low-income countries — including official development assistance, foreign direct investment, remittances, and private debt — decreased by 12 percent, the report found. Preliminary data into 2018 revealed a continuing decline, with foreign direct investment to developing countries falling by 30 percent between 2016-2017, and project finance down 30 percent in the first quarter of 2018. Without further funding, and specifically increased private investment, development progress may be stunted, OECD said.

“We say we need to go from billions to trillions, but the trillions are in the private sector so looking at those numbers, the global outlook does cause some alarm,” said Olivier Cattaneo, one of the report’s authors and a senior policy analyst on financing for sustainable development at OECD.

Opinion: Yes, the private sector is good for development. The question is how.

Jorge Moreira da Silva, director of the OECD Development Co-operation Directorate, explains how development doesn't just benefit from the private sector — it requires its investment.

Countries are falling behind on their pledge to deliver development finance as made in the 2015 Addis Ababa Action Agenda, and the report states that urgent action is needed to fulfill the 2030 agenda. An estimated $2.5 trillion is needed annually to achieve the Sustainable Development Goals; 17 times more than existing ODS, which remains stable at $146.6 billion in 2017.

Why private investments are so low

Despite numerous reports of private sector pledges to development, private investment in low-income countries is not increasing. Cattaneo suggested a shift in investments following the 2009 financial crisis could be to blame.

“After the 2009 crisis, there had been a huge surge in foreign investment to the developing countries as investors were probably looking for higher returns,” he explained. Now the markets are in a better situation, those investments have been repatriated to areas of higher returns.

The volatility and short-term nature of private sector financing could also play a part, compared to traditional aid or public financing, Cattaneo said. The 2030 agenda requires a long-term investment strategy and private-sector investments usually come with a shorter term perspective.

“What will matter for us in the development community is how to deal with that and change investment patterns so it’s not only about short-term profits but also long-term value to increase the development footprint of private sector actors,” he said.

While other financial flows such as remittances and philanthropy are increasing, the amount isn’t enough to fill the funding gap.

The report stated that more transparency, new international standards, and greater policy coherence are needed in what should be seen as a “dynamic market, with providers competing to respond to global demands. Healthy competition will help to drive innovation, better-tailored financing to the needs of developing countries, and promote higher social and economic returns.”

How can this be achieved?

Getting there will include improving the measurement of development finance, shifting the emphasis from monitoring the volume of funds to measuring their impact.

“You see that sometimes metrics are decided by some people and firms in New York and when they look at the sustainability of investments they put, for instance, CO2 emissions, which is not necessarily the development footprint of an investment,” Cattaneo explained.

The report suggests that the creation of a new financing for sustainable development compass, as well as stronger frameworks and finance mechanisms, could help assess the various contributions and interlinkages between different actors and sources of financing.

The report also suggests smarter policy design could ensure existing financial resources are used to their full potential. As more actors and instruments enter the development finance space, better policy guidance is needed to mitigate the risks and build on the opportunities.

“It’s about ... how to shift the trillions by putting the right incentives in place in terms of tax or investment framework principles,” Cattaneo said.

Finally, OECD is calling for coordinated action to connect the supply and demand for financing for sustainable development. The report states that while public-private partnerships are becoming increasingly common, integration of SDG financing “remains elusive.” If this can be tackled, it could lead to increased innovation around partnerships and policies, Cattaneo stated.

About the author

  • Rebecca Root

    Rebecca Root is a Reporter and Editorial Associate at Devex producing news stories, video, and podcasts as well as partnership content. She has a background in finance, travel, and global development journalism and has written for a variety of publications while living and working in New York, London, and Barcelona.