Financing for development – a hot button issue

Article as analysis
The third conference on Financing for Development will take place in Addis Ababa in July. Poor countries are hoping for concrete outcomes as to the funding of the global Post-2015 Agenda.

UN Member States have been negotiating Sustainable Development Goals (SDGs) in New York since January. They are to be adopted by the UN General Assembly in September and succeed the UN Millennium Development Goals (MDGs) next year. Simultaneously, negotiations for the next Conference on Financing for Development (FfD) have begun. This conference is at least as important as the UN Summit. Specifically, it is expected to decide how the SDGs are to be funded.

The Financing for Development process

The UN Conference on Financing for Development in Addis Ababa is the third of its kind. The first took place in Mexico in 2002 and culminated in what is known as the Monterrey Consensus. A follow-up conference took place in 2008 in Doha, Qatar. Both conferences were moderately successful. They did indeed provide good analyses, but remained vague and noncommittal on implementation. Industrialized countries prefer to make decisions in bodies where they are amongst themselves, such as the OECD, G20 or the International Monetary Fund. The Post-2015 process triggered a new dynamic. Noble goals without adequate funding are not worth the paper they are written on. Owing to the relative success of the MDGs, the industrialized countries are now interested in a global sustainability agenda with ambitious goals, and failure at Addis Ababa is therefore politically not an option for them. Besides, failure in Addis Ababa would also jeopardize the successful conclusion of the climate negotiations in Paris in December 2015.

However, the industrialized countries are now attempting to merge the FfD process fully with the Post-2015 Process. The Addis Ababa Conference is now remodelled according to the means of implementation for the SDGs. This is already clear from the language being used. For example, Switzerland, amongst other countries, no longer speaks of FfD, but of FfSD – Financing for Sustainable Development. Developing countries are critical of this. They would certainly like to take advantage of the synergies between the two processes, but are calling for the continued independence of the FfD process, as their focus is specifically on systemic development financing issues such as debt relief, introducing capital controls or reforming international financial institutions. Besides, the implementation of the SDGs must now include the environment, which so far has not been part of the FfD negotiations. The new topics could replace old ones that were not much liked by the industrialized countries.

What will the sustainable future cost?

Just how much funding it will take to effectively implement the SDGs is hard to predict. A UN Committee of Experts estimates that measures to combat absolute poverty worldwide will by themselves cost US$ 66 billion per year. Eliminating poverty would call for annual infrastructure investments of US$ 5000-7000 billion, as well as further investments in the (public) education and health system. In making cost calculations, however, it should also be borne in mind that the cost of inaction will be much higher in the long run.

It is clear that traditional official development assistance will not be enough to finance the SDGs. It will continue to play a key role in the poorest countries and in countries destabilized by strife and conflicts. Alliance Sud is therefore calling for at least half the development budgets of donor countries to go towards the poorest countries. Should development aid budgets remain just as big – or small – as hitherto, greater concentration on the poorest countries would nonetheless create big losers as well. In middle-income countries, current development assistance programmes and projects would have to be abandoned. Total expenditure would need to be increased substantially if this is to be avoided. The old demand for 0.7 per cent of gross national income to be allocated to development aid has therefore lost none of its urgency.

Additional funds are needed to supplement official development assistance. "Domestic resource mobilization" is the magic phrase introduced by industrialized countries. Yet merely bolstering national institutions is not enough to increase domestic tax revenues. Illicit financial flows and legitimate profit remittances by multinational corporations are known to be the chief obstacles to domestic resource mobilization. Even industrialized countries with very highly developed tax systems and well-resourced authorities must grapple with the financial consequences of tax evasion. What is needed is a globally coordinated procedure and an equal say for developing countries. In particular, the UN Committee of Experts on International Cooperation in Tax Matters must be strengthened. It will also be necessary to tax the commodities sector and disclose payment flows if developing countries are to be assisted in boosting their tax take.

The role of the private sector

In middle-income countries, private investors can indeed contribute meaningfully to the attainment of the SDGs. They will only be developmentally useful, however, if sensible government regulations can effectively limit potentially negative impacts and optimize positive ones. The leeway available to developing countries to successfully introduce such regulations is nevertheless drastically curtailed by numerous bilateral and multilateral international trade and investment agreements. Revisions are called for in this regard.

There is little likelihood of agreement on concrete payments in Addis Ababa. But if the world community is serious about a transformative agenda for a sustainable future, it must make the right decisions in Ethiopia. This should include a discussion of the general framework for world trade and the scope for co-determination by developing countries in the bodies that determine this framework. Domestic resource mobilization in developing countries calls for a globally coordinated procedure to combat illicit financial flows. And the long-overdue promise by industrialized countries to allocate 0.7 per cent of their gross national income to development assistance must finally be honoured.