Development finance: hundreds of billions more available
Today sees the launch of the OECD Development Co-operation Report 2014: Mobilising Resources for Sustainable Development. In today’s post, Erik Solheim, Chair of the OECD Development Assistance Committee (DAC) argues that hundreds of billions more could potentially be mobilized for poverty alleviation and sustainable development over and above the $134 billion in development assistance donated last year.
The enormous development progress seen over the past 20 years has been unprecedented in human history. Extreme poverty has been halved and 600 million people were brought out of poverty in China alone. The mortality rate for children under age five has been almost halved, saving 17,000 children every day. Economic growth and better government policies explain much of the progress. But official development assistance (ODA) has also been a great success and contributed to global improvements. However, much more and better financing will be required to eradicate extreme poverty and promote green growth.
Official Development Assistance is increasing and has never been higher. The main donors in the OECD Development Assistance Committee increased development assistance by 6.1% last year, reaching an all-time high of 134.8 billion dollars. Additionally, emerging and increasingly important donors like China, Turkey and Arab nations provided around 15 billion dollars. On top of that, Development banks such as the World Bank and Asian and African Development Banks, granted 40 billion dollars in more market-based loans not considered development assistance.
The Bill & Melinda Gates Foundation and other private foundations provided around 30 billion for development, while organizations like the Red Cross and World Vision International raised more than 30 billion dollars from the public. Remittances sent home to their families by overseas workers added 350 billion dollars to the flow of finances into developing countries. Foreign direct investments, by far the largest source of external finances to developing countries, amounted to 600 billion dollars.
Together, this adds up to more than one thousand billion dollars of external financing for poverty reduction, schools, hospitals, infrastructure and jobs in developing countries.
Several additional thousands of billions of dollars could potentially be made available for poverty eradication and green growth, and development assistance can help unlock these resources. Domestic resources such as taxes are the most important source of financing for developing, even in many of the poorest countries. For example, more than 1300 billion dollars is spent on education in developing countries every year but only 15 billion of this comes from development assistance.
Yet, while OECD countries collect on average 34% of their gross domestic product as tax, developing countries achieve only half this rate. The combined GDP of the developing world is over 30,000 billion dollars and adding a mere 1% increase in tax mobilization in the developing world could add 300 billion dollars for public services, schools and hospitals. The OECD has rolled out two programmes – Tax for Development and Tax Inspectors without Borders – to improve tax revenue generation. A pilot project assisting Kenya’s tax administration returned an incredible 1650 dollars in taxes for every dollar invested.
About 5000 billion dollars annually will be required for infrastructure investment to green our economies and support a future population of 9 billion people. The private sector will need to finance most of the required investments in roads, railroads, sustainable agriculture and green energy infrastructure. But development assistance can help mobilize such private investments.
Using financial instruments such as public guarantees, development assistance can help alleviate some of the risks associated with investing in developing countries and mobilize more private finances. New and innovative financing mechanisms like social impact bonds only mobilise 2 billion dollars out of the more than 600 billion dollars that the UN estimates potentially could be mobilized. Institutional investors such as pension funds and sovereign wealth funds are sitting on a staggering 83,000 billion dollars in assets in OECD countries alone. But their investments in infrastructure only represent around 1% of those 83,000 billion.
Encouraging leadership, improving the regulatory environment and using development assistance to alleviate risk would make it easier for institutional investors to finance roads and green energy generation in developing countries. An extraordinary 830 billion dollars would be mobilized for infrastructure investments in developing countries just by directing an additional 1% of our wealth and pension funds to this purpose.
Billions could be mobilized for global development by turning bad investments into good investments. Developing countries lose more to illicit capital outflows such as corruption, money laundering and tax evasion than they receive as inflows from aid and private investments. Poor countries are losing as much as one thousand billion dollars a year to illicit capital flows. These billions are invested in crime and lavish lifestyles rather than schools and hospitals. Illicit flows can be stopped by sharing information and streamlining regulations while prosecuting and jailing financial criminals in developed and developing countries alike.
Global development would improve if we directed more investments from public bads to global public goods. The 544 billion dollars spent on fossil fuel subsidies would do more good if invested in green energy. Any portion of the 1700 billions of defence expenditures would provide security and save lives if directed to peace instead of war. Better rules facilitating global trade could benefit everyone and raise global output by more than 400 billion.
Development assistance has been a huge success. But more and better financing for development is needed to eradicate poverty and support green growth. Traditional and emerging providers of development assistance must work with private investors and developing partners to mobilize more private investments and domestic resources.