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More and Better Financing for Development

Homi Kharas's picture

One of the major issues in the Open Working Group’s outcome report on the shape of the post-2015 agenda is the availability and access to financing to allow the goals to be met. There is a great temptation to simply try and calculate the financing needs for each goal and add them up to get the total financing need. Because this approach seems simple, it is appealing to many. The problem is that it is conceptually wrong.
 

First, financing cannot be easily separated from the policies and institutions in place in a particular country or region. To take just one example, there is no simple way of computing the amount of spending needed to improve the level of learning in a country so that all children pass some basic numeracy and literacy level. A lot depends on the overall efficiency of the schooling system. (In fact, the available research shows almost no robust relations between spending and learning outcomes, but conceptually one could imagine that in a specific country a calculation like this might be possible to do.)

Second, many development goals and outcomes depend on each other. It will cost less to reduce avoidable child deaths if women and girls are better educated than otherwise. Or, to take the most recent example of cross-sectoral effects, maybe the best way of reducing malnutrition is through better sanitation. We tend not to have good estimates of all these cross-effects, so typically when financing needs for one sector are calculated it is assumed that the situation won’t change much in other sectors. But if progress is made across the board in many sectors, the unit costs come down, sometimes quite dramatically.

Third, many of the costs of delivering public services take the form of wages paid to public sector employees—think of the salaries of teachers, doctors, nurses and the administrative staff in their ministries. Approaches to civil service salaries depend a lot on the macroeconomic context of each country. In Ghana, for example, after discovery of oil seemed to put the country on a path towards greater prosperity, teachers and health workers went on strike for higher wages. More generally, in any economy with a boom resulting from commodity price increases or new mineral discoveries, or even for one attracting large amounts of foreign direct investment, there will be pressures to raise wages. So costing social development goals also depends on the macroeconomic situation.

If we can’t easily add up how much money is needed, what, you might ask, is the point of having an international conference on financing? I think the answer is that the amounts, instruments and organization of financing have to change in important ways.

We should face the fact that developed countries are unlikely to commit substantial more resources to ODA. The commitments made to replenish IDA, the Global Fund and to the Global Partnership for Education have all fallen short of what was desired. Least Developed Countries (LDCs) rely most heavily on ODA, but most ODA still goes to middle income countries. Should there be a reallocation of ODA to LDCs? What about meeting the needs of disaster-prone small island economies? Or should ODA now be used to fund the growing array of global public goods (like clean energy) bearing in mind that most of the demand for such financing comes from large, relatively well-off middle income countries?

Alongside these issues of how to make better use of ODA are issues about the role and function of non-concessional financing agencies, like the multilateral development banks, IFC and bilateral non-concessional agencies. These were historically the main providers of infrastructure finance for middle income countries, but today they are small relative to other financial offerings or to the scale of what is needed. Is there a plan to see if these institutions are fit for purpose in terms of scale and instrumentality?

The BRICS have announced a New Development Bank to provide infrastructure financing, but it is not clear whether this will operate cooperatively or competitively with the existing financial institutions. China has proposed collaborating with the United States on infrastructure investments in Africa, following the bold new commitments of the US’ Power Africa program. These are encouraging signs of a potential collaboration between South-South Cooperation and traditional development cooperation, but there is much work to do to agree on operational modalities.

Businesses will also have a significant role to play in financing development, especially on the growth-related aspects of the agenda but also in selected parts of the social and environmental components. But businesses operate best in an environment of transparent rules and development-appropriate regulations, which have yet to be fleshed out.

It is these kinds of questions that should be at the forefront of the financing for development conference to be held in Addis in July next year. The questions arise because of a new context for development—more ambitious goals, more access by more countries to alternative sources of private capital, a global environment where low real interest rates are likely to prevail for a decade or more, more middle income countries with huge infrastructure bottlenecks, a growing level of deal flows across the world and a level of engagement by the business community in development of all kinds that is far more serious than before.

Encouragingly, the Global Development Network, in partnership with the Bill and Melinda Gates Foundation, has announced a new Next Horizons Essay Contest 2014 to solicit the best ideas. So if you have thoughts about how to organize development financing better, this is a chance to submit your thoughts to the scrutiny of your peers. Who knows, you may win a cash prize and the world may be exposed to a new idea that delegates can debate at Addis next year.
 

Comments

Submitted by Ann Kele on

"China has proposed collaborating with the United States on infrastructure investments in Africa !" Yes, it would be a helpful cooperation. Russia should be also involved in countries where earlier they had economic ties such as Egypt ! Beside the infrastructure investments you should focus on the agriculture. Special species of plants and animals for Africa could be an important field of research institutes and scientists taking into consideration the effects of the climate change.

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