Developing countries—emerging, middle-income, and least developed—will be going to the Third Financing for Development (FfD) Conference in Addis Ababa in July 2015 with a set of demands to reform and rebalance the international financial system in order to facilitate the realization of the Sustainable Development Goals (SDGs).
On 19 July 2014 the Open Working Group of the United Nations agreed on a draft set of 17 SDGs, taking the first steps toward a renewed development agenda for after 2015. To mobilize the resources for a renewed development agenda beginning in January of next year, the General Assembly agreed to convene the FfD, which will take place 13-16 July 2015 in Addis Ababa. The conference will occur shortly before the September 2015 UN Summit that is expected to agree on the ambitious post-2015 SDGs. Developing countries lobbied intensely to have the FfD conference precede the summit because they have become increasingly skeptical about taking on new international obligations—implicit in the draft SDGs—without adequate resources and the enabling international economic environment to meet new obligations.
The Global Economic Situation
When the FfD Conference takes place, the global economy will still be struggling to overcome the near collapse in 2007-2008 of the international financial system. Unlike previous crises, the current one originated in the developed North. For the countries of the global South, the first reality is that they are net investors in developed countries. The international financial system is not mobilizing resources for development for them. For almost two decades, the net flow of investment has been from developing to developed countries.
Developing country international reserves can help stem some potential financial problems, but they certainly are not large enough to withstand large bank runs. Industrialized economies, middle income developing countries, and even quite a few least developed countries have removed foreign exchange controls both on the inflow and outflow sides over portfolio investment activities (except for those suspected of terrorist links). As a result, the international economy is now shorn of many public policy tools to monitor and control volatile private capital movements. The conventional wisdom was that allowing freer capital movements would increase the availability of financing for developing countries and thus raise their rates of investment.
Unfortunately, even in the years of explosive private financing flows, the actual result has been little or no increase in the rate of investment worldwide. The record suggests that the underlying issue is not the availability of finance, either public or private, but the lack of demand for investment. Diminished public policy space is the result because of the reduced scope for public authorities to “dream up,” respond to estimated future needs, and plan investment projects such as in infrastructure and energy. Such space is severely restricted when public authorities feel compelled to continually signal their prudent management approach by meeting fixed or declining public sector deficit targets of private foreign investors, who are ready and able to move their funds at a moment’s notice. The scale of vulnerability is greater the greater the amount of short-term private funds invested in a developing country; thus the availability of finance is not a driver of the amount of investment activity and can even be a hindrance.
Draft SDG target 10.5 currently reads: “improve regulation and monitoring of global financial markets and institutions and strengthen implementation of such regulations.”
A Global System Conducive to Financing Development
Estimates of the scale of necessary financing for the SDGs and the post-2015 development agenda are substantial but well within the capacity of the global system. The August 2014 report of the Intergovernmental Committee of Experts on Sustainable Development Financing (ICESDF) indicated that the global economy generates savings of $22 trillion annually. The experts estimated that for infrastructure alone $5-7 trillion annually would be required and for eradicating extreme poverty $66 billion annually.
The FfD process has consistently treated the scale and direction of financing for development and the institutional environment as two sides of the same coin. Moreover, both the domestic and international environments are intimately connected. Developing countries, for example, can mobilize domestic financing from national savings and taxes for development, but such an effort can be undone by capital flight and tax evasion if international cooperation is inadequate to monitor and reduce illegal activities.
It is therefore important for the discussions in Addis to result in an outcome that incorporates means of monitoring and accountability in building a global system conducive to financing development.
This paper identifies six critical areas for which institutional progress is deemed essential in the global South.
1. Mobilizing domestic financial resources for development. In this context, it is important to note that public domestic finance in developing countries more than doubled between 2002 and 2011, increasing from US$ 838 billion to $ 1.86 trillion. This bright spot in the FfD process must be strengthened with international cooperation, upgrading international tax cooperation and multilateral efforts against capital flight and tax evasion.
2. Further developing domestic financial sectors in developing countries to help mobilize greater long-term finance is essential, which will require not only better domestic financial regulation and supervision and capital account management but also external support to make capital management tools effective in developing countries. All foreign investors must recognize a host state’s rights to protect the public interest.
3. International trade as an engine for development. Activities are mainly in the WTO’s domain and in the proliferation of free trade agreements (FTAs). In general, less-than-universal trade agreements contain more stringent restrictions on national policies and undermine robust multilateralism.
4. Increasing international financial and technical cooperation for development is another promising area. Since 2002 net ODA flows from all OECD/DAC countries increased significantly, from $84 billion in 2000 to $134.8 billion in 2013. The Monterrey Consensus called for “[E]ffective partnerships among donors and recipients…based on the recognition of national leadership and ownership of development plans” (paragraph 40).
5. Lessening the burden of external debt. Developing countries have experienced the largest development reversals during debt crises, including through the economic reform programs—under the auspices of the IMF and the World Bank and coordinated with donor countries—triggered by these episodes.
6. Enhancing the coherence and consistency of the international monetary, financial, and trading system. Emerging and developing countries should seek comprehensive governance reform of the IMF, and a process to review governance and accountability mechanisms in other development agencies should also be launched in Addis.
What is at stake for developing countries at the July meeting is not so much how much more financing can be made available, but rather the extent to which future financing flows are fit for the purpose of achieving the agreed goals of sustainable development. The revival of multilateral cooperation will be required to regulate volatile private capital flows, mobilize long- instead of short-term international financing, open greater public policy space for investment, and mitigate the scourge of sovereign debt crises.
Manuel F. Montes is Senior Advisor on Finance and Development at the South Centre, Geneva.