Military build-up instead of development

Strongman politics at the expense of the weakest

30.09.2025, Financing for development

Instead of long-term planning and investments in sustainability, defence spending is being boosted – and massively. What are the broader implications for poverty alleviation, climate funding and sustainable development? An analysis.

Kristina Lanz

Expert on international cooperation

Strongman politics at the expense of the weakest

Achieving peace with weapons? Rheinmetall spokesman Philipp Freiherr von Brandenstein unveils a new tank at the Eurosatory defence exhibition. © Keystone/laif/Meinrad Schade

The war in Ukraine has severely impacted the sense of security in Europe and also in Switzerland – a Russian invasion in Europe seems possible. Whereas NATO could rely on the massive protective might of America until just recently, that certainty has been in ever greater decline since Donald Trump took office at the White House. In 2014, after Russia invaded Crimea, NATO countries decided to increase their military spending to 2 per cent of gross domestic product. In 2024, 23 of the 32 NATO member countries attained this goal (overall NATO military spending reached 1.47 billion, of which almost two-thirds fell to the USA). In June this year, NATO announced its intention to raise military spending to 5 per cent of GDP by 2035, which represents more than a doubling. But where is this money to come from, and can the global military build-up really guarantee peace?

Arms race at the expense of the poorest

If the 5 per cent target is really to be attained by 2035, the question arises as to how this massive spending increase is to be funded. Most NATO members currently have a relatively high level of public debt: while the United States has a debt ratio of about 120 per cent of GDP, the EU’s average debt ratio is 81.5 per cent of GDP. Consequently, several countries (including the USA, France and Italy) have seen their creditworthiness downgraded by individual rating agencies in recent years.

While military spending is being stepped up, many countries face looming cuts in other areas, including social security, climate protection and international cooperation. Between 2022 and 2023, 15 members of the OECD Development Assistance Committee (OECD-DAC) scaled back development funding, most of them while expanding their military budget. From 2024 to mid-2025, a further eight DAC members decided to reduce their development spending, in part so as to pay for rising military expenditure. Initial OECD estimates are that official development assistance could contract by as much as 17 per cent in 2025, and that this trend will continue in the years ahead. The internationally agreed target of allocating 0.7 per cent of Gross National Income (GNI) to development assistance is thus receding steadily into the distance (in 2024, the OECD average fell to 0.33 per cent, and without domestic spending on asylum, to a feeble 0.29 per cent of GNI).

In parallel, the climate crisis is ruining livelihoods throughout the world, and both Europe and the USA are experiencing extreme weather events ever more frequently. It will take billions to combat and adapt to climate change. Besides, there are some 123.2 million displaced people on the move around the world, 673 million starving people and roughly 305 million are in urgent need of humanitarian aid – the needs are growing, even as the available funds diminish. In the West, too, more and more people are finding it impossible to finance their living costs and have lost trust in politicians. The upshot is the rise of extremist, populist and illiberal politicians.

While the political will for military upgrading is beyond doubt, there are dwindling scruples about building up the army, at least in part, at the expense of social security, poverty alleviation or climate protection.

And what is Switzerland doing?

In Switzerland, too, the trend is similar. In late 2024, the Parliament decided to increase defence spending by four billion francs between 2025 and 2028, bringing it to 1 per cent of GDP (from the current 0.7 per cent) by 2032. At the same time, cuts were announced to international assistance worth 110 million francs for 2025 and 321 million francs for the 2026-2028 period. And the discussion on cost-cutting is not yet over: further economy measures in various social fields and in climate protection are up for debate this autumn in the framework of the ‘relief package’.

While the wisdom of a rapid military build-up is also open to study in Switzerland (especially as it is surrounded by NATO countries and a cyberattack is far more likely than an air attack in the current context), Switzerland has no debt problem compared to many of its European neighbours. Its debt ratio of 17.2 per cent is almost preposterously low compared to other countries, and cost-cutting measures in that context are entirely unnecessary. Even with a significantly higher debt ratio of 62.5 per cent, Germany recently decided to relax its much less stringent debt rules so as to allow for an extraordinary boost to defence spending and the creation of a 500-billion-euro special fund for infrastructure projects and climate change measures. Switzerland would therefore have considerable leeway to fund higher military expenditure, expanded international cooperation, social welfare and also climate protection. What is missing is the political will.

Global rearmament – and then?

So, the world is rearming – and massively. Sweden’s Stockholm International Peace Research Institute (SIPRI) sees this as a landmark shift – away from the concept of security that has prevailed since the end of the Cold War, founded on arms control, confidence-building mechanisms and transparency, towards a security concept based on hard power and deterrence. According to SIPRI, massive defence spending may indeed deter potential aggressors, but does harbour the risk of accelerating an arms race and also of undermining attempts at dialogue, confidence-building mechanisms and possible new arms control agreements.¹ Besides, warnings can be heard from many quarters about the appreciable risks of procurement inefficiencies, overpricing, misuse and the bypassing of oversight mechanisms. As has been repeatedly demonstrated over recent years, Switzerland is already well experienced in this regard.

A military build-up in Europe and Switzerland may seem to make sense in the light of current threat levels, but what is to be the medium-to-long-term fate of all the new weaponry now being produced (quite apart from the fact that the arms industry is highly dependent on the fossil fuels industry, which is now re-gaining in strength)? What will our world look like in 10 years, if climate protection, social security and international cooperation are being rapidly scaled back in order to promote militarisation?

Towards a comprehensive security concept

It does not yet seem too late to invest in a comprehensive, holistic security concept that does not play military security off against social security, international assistance or international climate finance, but treats them all as equally important cornerstones of a comprehensive, long-term security policy.

Many security experts question the logic of a rapid military build-up, arguing that what is needed instead is better intra-European coordination and cooperation. Spain's Prime Minister Sanchez, too, underscored this by expressly rejecting the 5-per cent target, which he regards as unwise and counterproductive. He made clear that Spain is not prepared to make savings on welfare, international cooperation or the energy transition in order to hastily purchase off-the-shelf equipment from abroad and thereby exacerbate the problems of dependence on the USA and interoperability of European military equipment.

In parallel, every effort should be made at the domestic policy level to restore public trust in politicians. Investing in retirement provisions, social security and healthcare are just as integral to this endeavour as investing in the energy transition and environmental protection. At the foreign policy level, the commitment to multilateralism, diplomacy, climate funding and international cooperation should be strengthened, as the only way to guarantee long-term security is through cooperation, dialogue and the observance of international obligations for the common good. Spain and Germany are demonstrating that security policy can be conceived more broadly, rather than as something that they play off against each other. As a rich and relatively debt-free country, Switzerland could afford to join in this endeavour and lead the way.

¹ START – the last remaining arms control agreement between Russia and the USA to limit strategic nuclear weapons – expires in 2026; currently, neither Russia nor the USA seems keen on extending that agreement. Besides, almost all nine nuclear States continued their intensive nuclear modernisation programme in 2024.

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UN Financing for Development Conference

Sevilla: peace, joy, tortilla?

26.09.2025, Financing for development

Attendees at the fourth UN Financing for Development Conference (FfD4) in Seville were in no doubt that more money had to be procured from where it is available, namely, from companies and high net worth individuals. Opinions nevertheless diverged considrably as to the "how".

Andreas Missbach

Director

Voicing opposition to debt burdens and shrinking space: civil society protest at the FfD4 conference building in Seville. © Jochen Wolf / Alliance Sud

The FfD4 conference in early July took place in one of the most problematic phases for global development in decades. Official development finance seems set to dwindle by 17 per cent in the year 2025 alone. On top of that, the fate of USAID – once the world's biggest donor – was definitively sealed during the very conference itself. With less than five years remaining to the deadline, there is still an annual funding gap of more than 4 billion US dollars for meeting the UN Sustainable Development Goals (SDGs).

It is not as though there were a basic lack of funds – since the last FfD conference in Addis Ababa in 2015, the wealthiest one per cent of the world's population has increased its wealth by more than 33.9 trillion dollars, i.e., 22 times the amount that it would take annually to eliminate absolute poverty. According to the UN Organisation for Trade and Development (UNCTAD), Africa alone could raise almost 89 billion dollars annually if illicit financial flows were stopped. One half of that amount is down to tax avoidance by corporations, and the commodities sector is far and away the leading source of such financial flows. Switzerland ought really to be taking an interest in this.

Notable (and less notable) absences

The conference's non-binding final document, the "Compromiso de Sevilla" had already been approved almost unanimously on 17 June in New York. Hence, no further negotiations took place in Seville. The USA had been very instrumental in watering down the text with respect to climate, for example. Yet that country withdrew from the process two weeks before the conference, becoming the only country not to support the final document. Furthermore, the USA stayed away from Seville.

Despite this, there were more than 15,000 attendees at the conference, including 60 Heads of State and Government, 80 ministers, UN Secretary-General António Guterres, and high-level representatives from UN agencies and other international organisations. For its part, Switzerland opted not to send a high-level delegation. The lack of ministerial status meant that in the official part of the conference, Switzerland could only take the floor at the very end. And because no Federal Councillor bothered to attend, Switzerland missed out on dialogue with the 60 Heads of State and Government in attendance. The road to Seville is simply longer than to Davos, and besides, it was much too hot there.

Because the Financing-for-Development process encompasses much more than "development finance" as understood in the context of international cooperation, several Federal Councillors could well have attended. Action to combat tax avoidance and illicit financial flows was just as high on the agenda as the topics of debt and debt relief, trade and development, or systemic issues of the international financial architecture.

A programme with a bias

One topic dominated the agenda, namely, "Mobilising Private Resources", which was about the incentives that could be deployed to persuade profit-oriented companies and investors to fill the gap left by the shortfall in government funds. Empty clichés were deployed, such as "Accelerating the Shift and Private Climate Investment at Scale", "Catalytic Pathways to Scale Private Investment", "Unlocking Ecosystems for Inclusive Private Sector Growth", "Impact Investing, from Pioneering Innovations to Scalable Solutions", and so on and so forth.

One might think that this was because "business representatives" made up 40 per cent of attendees, and they were holding a "Business Forum" of their own. In the official sessions, however, the topic was just as dominant among governments (especially those from the North) and international organisations. The same was true for Switzerland. Most of the events it organised revolved around the topic (e.g., "Accelerating SDG Impact through Outcomes-based Financing").

Private sector strengthened, mission accomplished? Spanish Prime Minister Pedro Sánchez with UN Secretary-General António Guterres and European Commission President Ursula von der Leyen. © Bianca Otero / ZUMA Press Wire

Civil society disagrees

Fortunately, civil society too organised numerous side events, where it was also pointed out that in Seville, much old wine was being put into old wineskins. Daniela Gabor, for example, economist and member of the UN Expert Group on Financing for Development, recalled that already in 2015, the World Bank came up with its motto "from billions to trillions" in regard to funding implementation of the Addis Ababa Action Agenda (the outcome of the third financing for development conference). Public-private partnerships and de-risking were already central pillars of the Agenda at the time. The idea was (and still is) to use taxpayer funds from the international cooperation (IC) budgets of the Global North to create "investable projects" for large investors like BlackRock or pension funds. In reality, this meant assuming risk so that such investors could garner attractive "risk-adjusted returns" on their investments in water, road or energy projects.

That most certainly did not work and – according to Gabor – not for a lack of sufficient funds for de-risking from multilateral development banks, the EU or the Biden administration. It failed because even with tax monies being used to fund risk-taking, major projects were still much too costly for the countries in the Global South.

Meanwhile, the "small is beautiful" version of de-risking has emerged, whereby "impact" investments are to be promoted for implementing individual SDGs, and not just for major infrastructure projects. They are meant to reach "beneficiaries" in the Global South directly. However, beneficiaries must also pay for renewable energy, for instance, as the returns have to come from somewhere. IC terminology notwithstanding, the “beneficiaries” are in fact no more than clients and borrowers. It is this version of the de-risking agenda that Switzerland, too, is also promoting.

Objections were forthcoming not just from civil society, but also from government representatives from the Global South. South Africa's Planning Minister Maropene Ramokgopa, for example, urged realism and recalled that the private sector only plays a part where a profit can be made, and that "blending" cannot therefore replace concessional funding especially in the prevailing debt situation. In addition, an event held by Small Island Developing States highlighted entirely different risks that ought to be of pivotal importance. They were not the risks to investors, but those confronting people as a result of sea level rise. This is where "de-risking" is needed.

It's taxes, stupid!

No one disputes that the "private sector" and the super-rich possess considerable assets that could be harnessed for realising the SDGs and implementing the Compromiso. Still, there are means other than hoping to lure them with scarce IC funds or relying on their philanthropy. Luckily, that too could be heard in Seville. If one wanted to hear it. Switzerland did not.

"Domestic Resource Mobilisation" is another key plank of the "Compromiso de Sevilla". More tax revenue enables the countries of the Global South to depend less on development funding and to develop their economy and society from the inside out.

This could have been heard from Aminata Touré, former Prime Minister of Senegal: "When it comes to taxes, there is an ongoing injustice from which Africa has suffered for centuries. (…) We have debts because of tax avoidance and evasion, (…) because European multinationals exploit our commodities and pay no taxes. (…) This is why the African Union is so strongly committed to a binding UN tax convention. We want a fair distribution of the right to tax. Taxes should be paid where wealth is created. That is hard to explain because it is so simple. Every school child understands that the richer you are, the more taxes you pay.

A German Finance Ministry representative had a remarkably similar message: "Steadily diminishing development finance creates an even greater need for more decisive measures against illicit financial flows, the German government has long been committed to this. Corporations and the super-rich must make their fair contribution towards the global tax pie."

Coalitions of the willing

Nobel Prize Laureate in Economics Joseph Stiglitz underlined other key aspects of the tax agenda: “The USA is now paying part of that price [of inequality] with the capture of our government by the techno-oligarchs. That agenda of (…) letting the rich escape taxation, of cutting taxes for the oligarchs, Trump wants to make global. (…) But the world can’t be held hostage, (…) there can be coalitions of the willing. (…) There’s been a very a rich discussion here of the rationale for why we ought to be taxing the super-rich. It’s obvious you don’t need to have a Nobel Prize to figure that out. (…) We’ve created tax havens around the world. (…) We could have regulated them. (…) We allow them to exist. (…) There are some special interests who benefit from them. We need global norms, we need global rules”.

Such coalitions were already emerging in Seville. Spain and Brazil announced a joint initiative for the global taxation of the super-rich. Nine countries – Brazil, France, Kenya, Barbados, Spain, Somalia, Benin, Sierra Leone and Antigua and Barbuda – are willing to commit to introducing a "solidarity levy" on business and first-class flight tickets and on private jets.
The "Sevilla Platform for Action" through which the Seville "Commitment" is to be implemented, contains these and 130 other voluntary initiatives. There is something of a contradiction between commitment and voluntary action, but considering the state of multilateralism, even a list setting out some good suggestions represents progress.

Switzerland: from the SPA to the gym

Although the "Compromiso de Sevilla" is non-binding, the "platform" voluntary, and key topics are missing, the conference did show that there are various coalitions of European, African and Latin American countries pursuing solutions. Switzerland should draw up the following to-do list as a pragmatic minimum programme:

Create a multi-stakeholder roundtable that involves private creditors of overindebted countries in the Global South.
Cease hindering the negotiations on a UN tax convention and instead collaborate constructively with countries in the Global South.
Emulate the example of Spain which, at Seville, committed to reaching the UN target of 0.7 per cent of GNI for IC by 2030.

Those who prefer less pragmatism can find comprehensive problem-solving suggestions available Alliance Sud’s latest publication “The New Deal – A New Switzerland for a Just World”.

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North-South dispute at the FfD4 Conference

A quarrel between friends

30.09.2025, Financing for development

Last July's UN Conference on Financing for Development saw a quarrel escalate between friends, but one that escaped the attention of virtually everyone outside the room. The war of words between Gustavo and Emmanuel would merit no further mention, had their surnames not been Petro and Macron.

Andreas Missbach

Director

Straight talk in Seville: After Colombia's President Gustavo Petro (left) speaks candidly about historical guilt and ongoing exploitation, France's Emmanuel Macron (right) is incensed. Between them: Kenya's President William Ruto. © Reuters / Jon Nazca

Reaching far back in time (to 20,000 BC), the Colombian President volleyed: "The white, Aryan societies in the USA and Europe are unwilling to acknowledge that existing and living on this planet will require the transformation of a fossil fuel-based economy founded on death and profit."

Petro contended that for the Global North, migration had become a more important problem than the climate crisis: "Today, votes are being won in the North by adopting an anti-migration stance. (…) Why is migration the issue? Because the electorates in those countries, which belong to the G20 and the Global North and which generate large amounts of CO₂, are largely "Aryan".

Emmanuel was not pleased, and riposted with a raised index finger: "It is a bit strange to be lectured by someone from the South, just because he comes from the South. And I demand respect. (…) I cannot for a moment see how we will arrive at a common agenda based on your narrative and your paradigm. (…) There are politicians in Europe who very strongly oppose the extreme right."

We can only hope that the two friends have made up and, above all, that this episode has no greater implications. That would be a geopolitical disaster. Considering that Kimxipu(tin) are still setting themselves up as the true spokespersons for the Global South, and that the USA will at best remain an illiberal democracy, Europe and the democracies of the Global South need to close ranks. It is only in such a constellation that we can still conceive of a multilateralism that encompasses democracy, human rights and the peaceful coexistence of peoples. And such democracies are to be found mainly in Latin America.

To this end, however, Europe, including Switzerland, needs to reach out to these countries. In tax matters, for example, or regarding a topic that the Gustavo Petro Government has placed on the international agenda, namely a UN convention on the raw materials needed for the energy transition. At the United Nations Environment Assembly in December, Colombia plans to table a resolution so that negotiations on a binding agreement can proceed.

As Alliance Sud illustrated in its recent publication "The New Deal", and as Emmanuel Mbolela also underlines in his article, it is of the utmost importance, in making the just transition, to avoid a repeat of the resource curse in the case of transition minerals. We may well quarrel loudly over this, but we must reach agreement.

Andreas Missbach, Managing Director of Alliance Sud, attended the UN Conference on Financing for Development in Seville as a member of Switzerland's official delegation.

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Article

World Bank reform: Back to the future?

29.06.2025, Financing for development, Climate justice

At the UN conference in Seville, the future direction of international financial institutions is also at the centre of discussions. However, the development of the World Bank remains far from the urgently needed revolution.

Kristina Lanz

Expert on international cooperation

Laurent Matile

Expert on Enterprises and Development

The idea of attracting private capital on a large scale to finance roads, hospitals and other urgently needed infrastructure projects in the poorest countries also proved to be an illusion at the World Bank. © Shutterstock

In 2015, the World Bank launched a new strategy and vision – the “Forward Look: A Vision for the World Bank Group in 2030”. This was the birth of the Maximize Finance for Development approach, which aimed to massively increase private finance for development through sectoral and policy reforms, as well as the use of guarantees and various de-risking instruments. As a result, the slogan “from billions to trillions” became a much-repeated mantra in the broader development community. Fast forward to 2023 – the World Bank initiated a strategy process termed the “Evolution Roadmap”, which is supposed to make it better equipped to address modern development challenges and to renew its credibility. While the Evolution Roadmap changes the World Bank’s mandate and mission to include major global challenges, most notably climate change, operationally and financially, it is more a deepening and a continuation of the Maximize Finance for Development Approach (despite the fact that the “billions to trillions” slogan has in the meantime been debunked as a myth even by notable World Bank economists).

The (silly) dream goes on

Indeed, ten years after the launch of the slogan “from billions to trillions” – “well-meaning but silly” according to the CEO of the Private Infrastructure Development Group (PIDG), Philippe Valuhu, recently quoted by the FT, progress in finding private finance to fill the ever-growing funding gap (4,000 billion a year for the SDGs not counting climate financing needs) – has been very disappointing. The basic idea to use public funding to attract large amounts of private money, particularly from institutional investors did not materialize. The (over-) simplistic hope was that pension funds and insurance companies in rich countries would line up to finance roads, hospitals and other basic infrastructure sorely needed in developing countries.

Originally, when the slogan “from billions to trillions” was launched, the assumption was that every public dollar could leverage two or more private-sector dollars. Such a “leverage ratio” is only achieved in rare cases. A recent ODI study shows that “blended concessional finance” – i. e. public capital (mainly provided by MDBs) at below-market rates – attracted, in 2021, for every dollar, some 59 cents of private co-financing in Sub-Saharan Africa – the region where needs are greatest – and 70 cents elsewhere. Multilateral development banks (MDBs) and development finance institutions (DFIs) have been and remain at the forefront of these “mobilization” efforts. By 2023, they together succeeded in mobilizing some 88 billion USD of private financing for middle-income and low-income countries (MICs and LICs), out of which 51 billion were mobilized by the World Bank Group (including its private sector arms IFC and MIGA), representing around 60% of the total amount of private financing mobilized. However, only 20 billion USD were mobilized for sub-Saharan Africa and only half of this reached the poorest countries (LICs). By way of comparison, the region received USD 62 billion in aid in the same year. Furthermore, more than 50% of these private funds went to just two sectors: banking and business services, and energy. By comparison, education and health and population together received less than 1%.

While the evidence is obviously disappointing, the amount of financing that MDBs should be able to “crowd-in” for development projects has become an idée fixe for donors and other stakeholders. So, the dream goes on, and the level of ambition has been raised considerably under the Evolution Roadmap. Although the WB's current president, Ajay Banga, has admitted that the “billions to trillions” formula is unrealistic, and its chief economist, Indermit Gill, has called it a “fantasy”, the Bank is experimenting with new and increasingly sophisticated models, including the bundling of loans into financial products that are then sold to private investors – a practice known as securitization, with the aim of freeing up capital to issue more loans.

New instruments are constantly being developed and praised for their potential to attract private capital: the idea is to extend the use of risk-sharing instruments such as guarantees, new investment vehicles and insurance solutions to mobilize private capital. The World Bank's most recent products are “outcome bonds”, aiming at mobilizing funding from private investors for projects in developing economies, by transferring performance risks to investors who are then rewarded if the underlying activities are successful.

Is climate finance being privatized?

Under the Evolution Roadmap, the World Bank has changed its vision to add “on a liveable planet” to its existing twin goals of eradicating extreme poverty and boosting shared prosperity. In line with this addition, it has positioned itself as a key player in achieving the new climate finance target agreed to at the COP29 in Baku. According to a statement released before the conference, the “World Bank Group is by far the largest provider of climate finance to developing countries”. In 2024, it reportedly delivered 42.6 billion in climate finance (amounting to 44% of its total lending). While there are also significant problems with regards to accounting and transparency of WB climate finance, this article focuses primarily on climate finance as part the broader privatisation agenda pursued by the WB.

As the World increasingly looks to multilateral development banks as providers of climate finance, the focus shifts away from much-needed public finance solutions. A recent analysis by the Bretton Woods Project highlights how the World Banks climate finance is deeply embedded in its broader privatisation agenda. This is also particularly visible in its development policy financing (DPF), which in 2023 accounted for 22% of IDA and IBRDs (the WB organisations in charge of providing loans and grants to poor and middle-income countries) climate finance. DPF is a form of non-earmarked, fungible budget support that is linked to concrete policy reforms (prior actions). Most of the prior actions required were linked to market-based reforms, including de-risking measures for private investment or the removal of consumer subsidies on fossil fuels (which are found to have a particularly punitive impact on the poorest segments of populations).

Furthermore, the majority of MDB climate finance comes in the form of loans, rather than grants, thus increasing the debt burden of already highly indebted countries. In fact, in 2023, loans accounted for 89.9% of IBRD and IDA climate finance (the two WB organisations that account for the largest share of WB climate finance). The fact that these loans – which by definition have to be paid back with interest – are also attributable to the climate finance of WB member states also stands in sharp contradiction to the “polluter pays” principle.

Evolution reversed

The WB Evolution Roadmap is hence far from a revolution in terms of its private sector agenda but could be classified as “more of the same, including climate”. However, the expansion of climate finance is now being severely challenged by the new US administration. While recently reaffirming its commitment to the WB (and IMF), Treasury Secretary Scott Bessent called for a return to its core mandates and reforms of “expansive” programs. The Bank should support “job-rich, private-sector-led economic growth”, and move away from its social or climate programs. Mr. Bessent stressed that the Bank should be “technology neutral” and prioritize the affordability of energy investments. In most cases, this means “investing in the production of gas and other fossil fuels”. In order not to offend the new US administration, the Bank has become rather silent on its climate agenda and following a request by the US has recently decided to end its moratorium on nuclear energy and a vote on reintroducing financing for the exploration and extraction of gas should follow in the near future. Whether the US administration will be able to force the WB to reverse the expansion of its vision and mandate and to move away from its “Paris alignment” commitment or whether the European chairs will be in any position to oppose such disastrous decisions, as well as what role Switzerland will play, remains to be seen.

Revolution postponed

As the World’s development community gathers in Sevilla to discuss the future of development finance, some of the sticking points may become clearer. Once more the “Sevilla compromise” highlights the enormous financing gap of 4 trillion USD needed to reach the Sustainable Development Goals by 2030. While it acknowledges that “private investment in sustainable development has not reached expectations, nor has it adequately prioritized sustainable development impact”, the document goes on to outline a broad set of measures aimed at “increasing the mobilization of private finance from public sources by strengthening the use of risk-sharing and blended finance instruments”, with MDBs playing a key role in this agenda. While the frantic search for new instruments and ways to make development and climate projects “bankable” and thus more appealing for private investors continues, the debt crisis takes on speed and the role of the public sector as a provider of much-needed development and climate finance is further weakened.

According to the World Bank chief economist Indermit “since 2022, foreign private creditors have extracted nearly $141 billion more in debt-service payments from public-sector borrowers in developing economies than they have disbursed in new financing.” Today, several African countries spent more than half of their resources on debt repayment and Indermit event admits that some countries simply use World Bank loans (which have a longer maturity rate) to pay back their private creditors, thereby diverting scarce resources “away from areas critical for long-term growth and development, such as health and education”.

While private capital certainly can and should play a role in sustainable development and climate finance, it is time to abandon simplistic solutions and to address the root causes of current multiple crisis. This would include a much-needed reform of the WBs governance structure to give countries in the Global South more decision-making power, as well as broad-based debt restructuring and cancellations, as well as investments in domestic resource mobilisation and a fairer global tax system with the aim to combat rising inequalities world-wide. It does not look like Sevilla will be the place, where the much-needed revolution starts, but the fight goes on.

AFGHAN FUND

"The economy needs to be stabilised"

01.10.2024, Financing for development

While billions in Afghan currency reserves are being managed in Geneva, civilians in Afghanistan are suffering from the indescribably precarious economic situation in the country. Shah Mehrabi, Co-chair of the Board of the Afghan Fund, is now calling for targeted disbursements.

Isolda Agazzi

Expert on trade and investment policy / Media relations French-speaking part of Switzerland

The quantity of Afghani banknotes in the country fluctuates greatly. Banknote dealers are omnipresent in Kabul. © Keystone/EPA/Samiullah Popal

Three years after the Taliban came to power, Afghanistan is teetering on the brink. The rights of children and women are being violated: the latter have become virtually invisible in public spaces – sports facilities, hammams, beauty salons and parks are off-limits for them. Their education ends with primary school, and there is strict gender segregation at work places. Media and opposition forces are being repressed. One-half of the population now live in poverty and 90 per cent can no longer meet their basic food needs.

"The economic situation is extremely precarious, mainly because of restrictions on the banking sector, the disruption of trade and commerce, the weakening and isolation of public institutions, and the virtual absence of foreign investment and financial support from foreign donors in sectors such as agriculture and manufacturing", the United Nations warned earlier this year.

Meanwhile, millions of dollars being managed from Geneva by the Fund for the Afghan People (Afghan Fund) remain unused. The Fund was set up two years ago to manage the foreign currency reserves of the Afghan Central Bank (DAB); those reserves were frozen when the Taliban took power in August 2021. At the time, the Federal Reserve Bank in New York was holding 7 billion USD of these reserves. Another 2.1 billion USD are now in Europe and other countries. To prevent the money deposited in the USA from being frozen by the victims of September 11, President Biden suggested that half that amount should be placed abroad. The sum of 3.5 billion USD was therefore deposited in an account with the Bank for International Settlements located in Basel, and a foundation for managing the funds was created in Geneva, namely, the Afghan Fund (see also here). Its purpose is to manage the monies and to return some of it to the DAB in accordance with strict specifications. At the end of June 2024, the assets, including interest, were worth 3.84 billion USD.

Nine per cent deflation

Now, two years on, not a single cent has been repaid. Why is this? "First, there is some misunderstanding of the rules, in that this money is not meant for humanitarian purposes, but to stabilise the financial system", says Shah Mehrabi, one of the two Afghan Co-Chairs of the Board of the Fund, speaking by phone from the USA. The professor at Montgomery College in Maryland points first to macroeconomic aspects: currency reserves are assets held by central banks in foreign currency for the purpose of ensuring a country's solvency and influencing its monetary policy. The aim is to protect central banks from a rapid devaluation of the national currency. These reserves play a key role in stabilising the exchange rate, boosting the trust of citizens, providing liquidity for the banking system, and meeting import costs.

"The DAB has now announced a contraction of the money supply, i.e., the amount of money in circulation", he adds. "Why is that? The freezing of the reserves is one contributing factor. When there is less money in circulation, people have less purchasing power, economic activity declines, and this in turn impacts prices and exchange rates. This is precisely what we are witnessing in Afghanistan: enterprises cannot raise funds to invest, which leads to dwindling demand for goods and services. They therefore continue to lower prices so as to incite people to buy. The result is deflation, which is just as harmful to an economy as inflation".

Solid structure built

"We have accomplished a lot", he continues. But what exactly? Regarding the governance of the Fund, he confirms that a solid structure has been created: statutes have been adopted and a Board of Trustees appointed, which will report transparently on the management of the assets. He himself forms part of the Board, along with Anwar-ul-Haq Ahady, former DAB Director and Ex-Finance Minister of Afghanistan, Jay Shambaugh, a representative of the US Treasury Department, and Ambassador Alexandra Baumann, Head, Prosperity and Sustainability Division of the FDFA. Decisions are made unanimously, which implies that each member has de facto veto power.

The Board of Trustee members elaborated a proactive investment strategy and tasked a consulting firm with working out compliance and audit measures. This is designed to prevent money laundering and the funding of terrorism. The post of Executive Secretary was created, a communications strategy was drawn up and an international advisory panel established.

"Targeted disbursements possible"

"The measures we took were part of the requirements that have to be fulfilled before any disbursement", Shah Mehrabi continues. "My view is that the conditions now exist for targeted disbursements to stabilise the exchange rate, print banknotes and pay for imports. They should be made in small tranches however, as injecting too much money would cause inflation."

He adds that, despite significant challenges, the Afghani has remained stable, particularly against the U.S. dollar, thanks to the DAB sound monetary policies. These include foreign exchange auctions, tighter controls on smuggling, increased exports, humanitarian aid inflows, and remittances. “However, this stability has also led to deflation due to global price drops and the Afghani's appreciation. Currently, the deflation rate stands at -9.2%, slightly better than the previous -9.7%. To further ease deflation, the Central Bank may need to reduce dollar auctions and increase the circulation of Afghani banknotes”, he concludes.

Taliban not recognised by the international community

The political situation is rather complex, however. The international community does not recognise the present regime. Legal and diplomatic resources are limited, which diminishes the Fund's ability to negotiate. Yet there are no international sanctions on the DAB. The Taliban, for their part, do not recognize the Afghan Fund. They want their money back. At any rate, says the economist, something is being done with a portion of the assets frozen by the USA – in stark contrast to the 2.1 billion USD frozen by the EU.
"We cannot let the Afghan people suffer. It is now in the interests of everyone to proceed actively with these disbursements. Humanitarian aid alone will not solve the problem. Long-term development is the key. We must act", concludes Mehrabi, whose mandate for the Afghan Fund was extended in September for a further two years, as was that of the other members of the Board.

SDC returns to Kabul

Like most countries, Switzerland, too, has no current plans to relaunch long-term development cooperation in Afghanistan, but is at least returning to the country. "The SDC (Swiss Agency for Development and Cooperation) will open a humanitarian office in Kabul in the autumn of 2024", its spokesman Alain Clivaz confirms. "It will be housed in the premises of the former cooperation office, which was closed in 2021. The humanitarian office there will comprise four members of the Swiss Humanitarian Aid Unit (SHA). The SDC Team is responsible for implementing, supporting and monitoring projects funded by the SDC."

The FDFA Spokesperson points out that the security situation in Afghanistan is still a complex one and entails considerable risks to all activities in that country. He affirms nonetheless that the SDC is closely monitoring developments in the situation and has a widely-supported security arrangement for its staff, which is making this return to Kabul possible.

"At the technical level, the SDC Office contacts Taliban representatives whenever this is necessary to project implementation", he concludes.

Alliance Sud views a presence in Afghanistan as important, even though humanitarian aid alone cannot replace a functioning economy. Switzerland must ensure that the monies being managed by the Afghan Fund are repaid to the DAB with all due care. This must be done so that the Afghan people are not penalised several times over: on the one hand, by a repressive regime and sanctions, and on the other, by being ostracised by the international community.

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International Cooperation Strategy 2025-2028

Development cooperation: hovering over the abyss

21.06.2024, International cooperation, Financing for development

The Federal Council adopted the long-awaited Dispatch on the 2025–2028 International Cooperation Strategy in mid-May. In it, the Council stands by its policy of funding aid to Ukraine at the expense of the Global South, thereby ignoring the outcomes of the public consultation.

Laura Ebneter

Expert on international cooperation

Development cooperation: hovering over the abyss

© Ruedi Widmer

In terms of content, the Government makes no significant headway and relies on tried and tested themes and implementation approaches in the 2025–2028 Strategy. And this in a world which, according to the Strategy, is more fragmented, unstable and unpredictable. In this context, the Federal Council opts for more flexibility – its word of the moment. We need flexibility to cope with the current crises, said Federal Councillor Ignazio Cassis at the press conference. But anyone reading the Strategy will soon realise that flexibility merely means funding the entire CHF 1.5 billion in aid for Ukraine from the International Cooperation (IC) budget, and that the amounts for other countries and programmes will therefore be "flexibly" cut back.

Here today, there tomorrow

At the press conference on 10 April on the Bürgenstock Peace Conference and aid to Ukraine, Federal Councillor Ignazio Cassis had already spoken of the continuous reallocation of resources in international cooperation. Resource allocation was a strategic, dynamic process and not a static approach. Such a dynamic approach can certainly be useful, for example, when it comes to flexibly interlinking the three pillars of international cooperation, namely, humanitarian aid, development cooperation, and peace building (the term 'nexus' is also used). In any case, the boundaries between these areas are often fluid.

International cooperation that constantly shifts its resources between different regions and countries cannot build serious, long-term partnerships. Yet, this is precisely what is needed to operate effectively and efficiently. It takes trust and long-term commitment, in other words, relations that are forged and preserved through development cooperation programmes. Or, as Federal Councillor Cassis said during a dialogue with NGOs in 2022: "Reliability, trust and predictability". If Swiss international cooperation becomes a geopolitical pawn, it will lack the networks and staffing it needs on the ground. The war in Ukraine has marked a turning point, but this ought not to become a reason for Switzerland’s international cooperation programme to jettison what has been built up and jointly achieved with partner countries over many years.

Walking the tightrope for Ukraine

In deciding to fund aid to Ukraine from the international cooperation budget, the Federal Council is dealing several blows at the same time. First, it is a refusal addressed to the Global South, which for years has been calling on wealthy countries to meet the internationally recognised target of 0.7% of gross national income for official development assistance (ODA). Under the Federal Council's proposal, Switzerland's ODA (not including asylum costs) will be 0.36% in 2028. Where, then, is the much-vaunted humanitarian tradition when it is needed?

Another rejection is directed at those who took part in the consultation process. An overwhelming 75% majority of the organisations, parties and cantons that responded to a relevant question stated expressly that aid to Ukraine must not be at the expense of other IC regions and priorities such as Sub-Saharan Africa or the Middle East. No political party supports the funding of Ukraine's reconstruction from IC, except for the Swiss People’s Party (SVP), which, to go by its party programme, wants to dispense with development cooperation altogether. Unfortunately, in the wrangling over federal finances, the Parliament has so far failed to identify ways of implementing this, that could attract majority support.

Into irrelevance with the debt brake applied

Foreign observers have not failed to notice that Switzerland is relaxing with its comfortable and lucrative special status as a neutral country, while failing to play a substantial enough role in Ukraine's defence, whether in the form of military or humanitarian support. With a debt ratio of 17.8% of gross domestic product, Switzerland cannot credibly explain to the international community its inability to come up with additional funds for Ukraine. At the same time, through their funding proposals for upgrading the army and for a 13th OASI pension payment, the SVP and the FDP (The Liberals) are peddling the idea that Switzerland can simply renege on its international obligations.

Switzerland is thus increasingly isolating itself and becoming internationally irrelevant. Goodbye mediator role, goodbye humanitarian tradition and reliable partner. The Federal Council has correctly read the signs of the times, but has opted for the path of isolation. That is why only the Parliament can now act to remedy the situation and bring about a change of direction for Ukraine and the Global South.

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Global, Opinion

Human security threatened by “military coup” in Council of States

21.06.2024, Financing for development

A careful reading of the International Cooperation Dispatch 2025–2028 sent by the Government to the Parliament left us somewhat aghast. But the big shock came at the beginning of June, when the IC also came under scrutiny in the Council of States as part of the discussion on the army dispatch.

Andreas Missbach

Director

Human security threatened by “military coup” in Council of States

A careful reading of the International Cooperation Dispatch 2025–2028 sent by the Government to the Parliament left us somewhat aghast. As we already knew that the national government intends to fund support for Ukraine entirely at the expense of the Global South, the cause was one telling detail. In the German version, the Government stated the following about the decline in the ODA ratio (of which we were already aware, regrettably): "This is due to the fact that the growth of GNI [gross national income, i.e., the economy] has significantly outstripped that of the funds allocated to IC, as a result of the financial measures taken in connection with the debt brake." Whaaat? Can it be that in times of financial crises and epidemics, all those that can afford it, do contract debt to pump-prime their economies, while people in Federal Berne think that reducing government debt via the debt brake will lead to economic growth? But then came clarification: it was merely a translation error from the French version.

We were truly aghast on June 3rd as we followed the deliberations of the Council of States. First came the rejection of a motion that would have provided the increase in army spending by 2030 so desperately wanted by the conservative male majority, at least on an exceptional basis and in combination with exceptional funding for aid to Ukraine. But immediately thereafter, that majority decided to increase the army budget for weapons purchases by 4 billion, while simultaneously slashing development cooperation funds by 2 billion. A frontal attack on IC! (One annoying detail about the unique link forged in this manner and on this scale between the army and international cooperation is that it constantly brings military metaphors to mind...).

This, despite the statement by the newly created State Secretariat for Security Policy itself, that "A direct military threat from a land or air attack on Switzerland is unlikely in the near-to-medium term." Threats from cyber-attacks, for example, have nevertheless intensified. The following statement by the Government in the security policy report had either been forgotten or had never been taken on board: "It [foreign-policy] helps to strengthen international security and stability by offering good offices, helping to promote peace, standing up for international law, the rule of law and human rights, tackling the causes of instability and conflict through development cooperation and providing humanitarian aid to alleviate the plight of civilians." After all, expecting that even the notion of human security may have landed with the majority in the Council of States is truly asking too much.

But the battle to salvage IC is not yet lost, the counterattack is on, and we will not surrender! Please excuse the military metaphors.

global

Article, Global

ODA funding – when more is less

27.03.2023, Financing for development

Global inequality is growing steadily – unlike development financing by OECD members. Rich countries like Switzerland rely mainly on dubious accounting practices to whitewash their contribution.

Laura Ebneter

Expert on international cooperation

Dormitory in an asylum shelter in Poya barracks (Fribourg, Switzerland), which has been used as an asylum shelter for refugees from Ukraine since January 2023.
© Peter Klaunzer/Keystone

In 1969, the Development Assistance Committee of the Organisation for Economic Co-operation and Development (OECD DAC) introduced the internationally recognised benchmark for official development finance, namely Aide publique au développement, or Official Development Assistance (ODA). Since then, it has been the yardstick for gauging the volume and quality of the funds provided and has formed the basis on which to assess whether donor countries are honouring their promises.

ODA is defined as development finance which (a) is provided by state or local governments; (b) aids the economic development and welfare of recipient countries; and (c) is concessional, i.e., involves pure grants or concessional loans. Interpreting this definition invariably spawns highly technical and at the same time political debates. The core issue is deciding which public expenditures can be ascribed to ODA. OECD Member States are criticised from many quarters for artificially inflating their effective contributions by means of dubious and creative accounting practices, thereby constantly watering down the definition of "development assistance".

How OECD members gloss over their stinginess

Criticism of eligibility is forthcoming from the OECD itself, from the countries of the Global South, and from non-governmental organisations worldwide. There are two main tendencies – artificially inflating ODA by including funds which, strictly speaking, do not qualify as development assistance (ODA inflation); and simultaneously cutting funds in areas where they are urgently needed (ODA diversion). Here is how it works:

1. Costs of asylum seekers in Switzerland

Since 1988, it has been possible for the costs of housing and educating refugees for the first year of their stay in the donor country (in-donor refugee costs) to be imputed to ODA. While the OECD leaves it up to the countries themselves to decide whether and how much asylum spending they impute to ODA, Switzerland always uses this wriggle room to the full. In 2021, these expenditures made up 9% of Switzerland's total ODA. This includes the lump sums paid to the cantons by the State Secretariat for Migration, the costs of the federal asylum centres (incl. employment programmes), the costs of legal representation during the procedures, those of interpreters and the costs to the cantons for children in the federal asylum centres who are required to attend school. Even though these funds are used to protect people in Switzerland, they have no development implications and do not help to alleviate poverty and inequality in the Global South.

For 2022, ODA can be expected to go through the roof, owing to the inclusion of the costs of caring for Ukrainian refugees (with no additional investment in development cooperation). At worst, asylum costs will be included without any increase in the ODA ratio, which would mean real cuts in other areas. This would mean that poorer countries, which are in any case already feeling the effects of the war, would also be paying for the hosting of Ukrainian refugees in Europe.

2. Private sector instruments

In 2016, the OECD Development Assistance Committee decided that the vehicles known as private sector instruments (PSIs) - in other words, various types of loans and investments to private sector enterprises, and guarantees extended to financers who back them - could also be counted as ODA. Because the members of the OECD DAC could not agree on a common definition of "concessional in character" for loans to the private sector, provisional reporting arrangements of PSIs were adopted, which undermine the core value of concessionality. For PSIs to be imputed to ODA, only the additionality of development funds now needs be shown, which is, in principle, eroding the concept of ODA.

So far, the only rationale for crediting PSIs seems to be the perception of private sector as the answer to the lack of and urgent need for development funding. In this connection, a look at the recipient countries is interesting: by far the lion's share of the funds raised through PSIs goes to middle-income countries (2018: 59%, 2019: 51%), compared to 7% (2018) and 2% (2019) received by least developed countries (LDCs). Donor countries need to agree on rigorous and binding criteria and standards, as well as effective transparency and accountability mechanisms that regulate the use of PSIs in development cooperation and do not jeopardise the all-important concessional nature of official development assistance.

PSIs have so far played a marginal role in Switzerland (approx. 1% of ODA in 2021). But this share could well increase massively in coming years, given the ever-greater strategic orientation of international cooperation towards cooperation with the private sector.

3. Donated Covid-19 vaccine doses

In 2021, the Development Assistance Committee decided that COVID-19 vaccine doses donated to poorer countries could be counted as development spending at the reference price of USD 6.72 per vaccine dose. This is as absurd as it is unscrupulous, as these vaccine doses were never bought with poor countries in mind – on the contrary, excessive purchases by rich countries meant that they were neither available nor affordable to other countries. Switzerland's positioning raises further doubts, as it is the only country that is unwilling to disclose the amount of excess vaccine doses it has donated, for reasons of data protection.

The impact on the ODA ratio is considerable. Compared to the previous year, total ODA for all OECD countries was up by 8.5% mainly on the back of COVID-19 support, especially in the form of vaccine donations. Without these vaccine donations, ODA for 2021 would have increased by just 4.8%. The Development Committee is currently debating the reference price that can be applied to ODA donations for 2022. Rather than negotiate the price, DAC members would do better to limit such imputation to vaccine doses actually bought for the Global South.

Restoring credibility

The ongoing dilution of ODA is undermining the credibility of donor countries. Meanwhile, the Global South lacks the wherewithal for combating the multiple crises that are forcing many people into poverty, hardship and hunger. It seems odd for the OECD DAC itself to be setting the criteria governing the eligibility of public development spending. This is so because, despite the DAC's mandate to ensure the quality and integrity of ODA, most of the agreements reached to date run counter to this and negatively impact the quality and quantity of the funds reaching countries in the Global South. An initial step towards enhancing the integrity of ODA could be to establish an independent statistical body - for example, an official board composed of experts from donor and recipient countries. Only such a board will be able to reform the rules and restore the credibility of reported development funding.

If, as they assert, the rich countries really believe in transparency, sincerity and honouring international commitments, they must cease their petty accounting practices and keep their promises. ODA must be redefined in a strict sense, and put the focus on overcoming poverty and inequality. Switzerland should strive for such a strict ODA definition in the OECD DAC and also apply it in its reporting. Yet another crucial step would be to achieve the 0.7% target without including the costs of asylum, donated COVID-19 vaccines, private sector instruments and scholarships for foreign students in Switzerland. When all these costs are subtracted from the 2021 figures, Switzerland's ODA ratio was just 0.44% (see chart). This is almost a third short of the UN target of 0.7% of gross national income agreed in 1970.

ODA in crisis

The war of aggression against Ukraine has shown how quickly official development assistance funds can come under pressure. Shortly after the onset of the war, many countries froze or reduced their development cooperation and humanitarian aid budgets, and in some cases, funds were expressly reallocated to meet the costs of housing Ukrainian refugees.

In Switzerland, despite several attacks on development funding in Parliament, it is still not possible to tell how the international cooperation budget will evolve. With the massive expansion of military spending in the years ahead, which is not feasible if the debt brake is to be observed, cuts to weakly earmarked expenditure in the federal budget are already in prospect for 2024. However, cutting back on development spending at this time is exactly the wrong move, as the needs of poorer countries stemming from the multiple crises have never been greater and their action leeway more restricted, owing to the acute debt crisis.

Advent of the grant equivalent

The year 2019 witnessed the introduction of the grant equivalent as a better measure of the "effort" deployed by donor countries. What this means in essence is that pure grants (a greater effort by the donor) and loans (a smaller effort) should not be depicted as equivalent in ODA. Since 2019, therefore, it has only been possible to report the grant component of loans as ODA. So far, so good.

The problem is that grant equivalents are only credible if donors calculate the present value of repayments at current market interest rates. Instead, the DAC opted for fixed interest rates of 6, 7 or 9 per cent (comprising a "base rate" of 5 per cent plus a "risk margin" of 1, 2 or 4 per cent, depending on the per capita income of the borrowing country). These high rates underestimate the present value of repayments, which leads to inflated grant equivalents – and this even for loans granted at market conditions.

Current OECD figures show that the overall ODA impact of the change in methodology has so far been negligible (+2.3% in 2018, +3.6% in 2019 and -0.2% in 2020). The change is nevertheless significant for particular countries that provide a major portion of their ODA via loans to least developed countries (LDCs): in 2020, it was +19% for Japan, +9% for Spain and -12% for France. Switzerland is only marginally impacted by this new methodology, as it imputes only few loans to ODA.

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Public development financing

Alliance Sud favours higher development spending by Switzerland's and the strictest possible definition of it. The now 50-year-old funding target of 0.7% of gross national income should at last be met, without including asylum costs.

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What it is about

In 1969, the Development Assistance Committee of the Organisation for Economic Cooperation and Development (OECD/DAC) introduced Official Development Assistance (ODA) as the internationally recognised benchmark for official development finance. Since then, the "ODA ratio" has been the yardstick with which to verify the volume and quality of the funds provided. It forms the basis for gauging whether donor countries are honouring their promises. Yet many stakeholders, Alliance Sud among them, are critical of OECD member countries for resorting to dubious and creative accounting practices to artificially inflate their reported development funding.

Alliance Sud is campaigning for Switzerland finally to meet the UN target of 0.7% of gross national income adopted over 50 years ago, without including expenditure that remains in the country, such as asylum costs. It is also striving for the adoption of the strictest possible definition of development spending by the OECD.

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