Donor countries need to reform development finance to meet 2030 pledge

This article is brought to you in association with OECD.

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External finance to poor countries is declining, despite a promise by the international community three years ago to increase development finance flows, in particular through private investment, according to a new OECD report. The Global Outlook on Financing for Sustainable Development 2019 shows there was a 12% drop in external finance to developing countries from 2013 to 2016, a decline that casts serious doubt on the world’s ability to achieve the 2030 Sustainable Development Goals. Of the external financing data that is available beyond 2016, foreign direct investment to developing countries fell by 30% over 2016-17 and project finance was down 30% in the first quarter of 2018, the report shows. Official Development Assistance (ODA) from advanced economies is steady but below target, while other flows such as remittances and philanthropy are increasing but comparatively small. The decline comes as the need for financing for sustainable development is growing due to population growth, conflict and environmental degradation. The international community pledged at a 2015 United Nations conference in Addis Ababa to ramp up development finance, using private investment as a lever. “Donor countries have not followed through on their 2015 promise to expand development finance flows,” said OECD Development Co-operation Director Jorge Moreira da Silva, launching the report at the Paris Peace Forum. “Development finance is not a cost – it is an investment that will help us achieve peace and prosperity on a global level, as defined by the Global Goals.” The report calls for more efforts to mobilise domestic resources, which are at least as important for sustainable development as external flows. For example, tax revenues are by far the biggest financial resource for poor countries. Yet tax revenues in low-income and least-developed countries average just 14% of GDP, less than half the OECD country level of 34% and below the 15% that is the recommended minimum for effective state functioning. As another example, the transaction cost of migrants sending money home to relatives in developing countries can be as high as 14-20%. The report says that reducing transfer costs by just 1% would increase the value of total remittances (USD 466 billion in 2017) by USD 30 billion – equivalent to nearly a quarter of total ODA flows. The report calls for an overhaul of the development finance system to improve transparency, set clear international standards and empower recipient countries to make optimal choices. It also calls for more to be done to measure the impact, rather than just the volume, of development finance, and for a more strategic interplay of suppliers, intermediaries and beneficiaries to ensure the maximum impact of each dollar spent. On domestic resources, the international community should support trade and private sector development, identify and remove barriers to investment, build tax revenue capacities and help developing countries to prevent tax avoidance and evasion.