Financing for development? Show me the money!
Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20
In 2009, Zambian economist Dambisa Moyo published her book, “Dead Aid”which shocked much of the international development community by claiming that ‘traditional’ systems of official development assistance (ODA) to Africa were not delivering, and arguing why we must find alternatives.
These conclusions triggered many stark reactions. That aid may have fallen short of its targets, and in some cases even run counter to them, is certainly a valid point; but to conclude that all forms of aid are therefore “dead”, and of no future use to developing countries, is quite a stretch. First, ODA spending is still alive and well: the OECD estimates that development aid flows hit an all-time high in 2013, at a record $135.1 billion; and while it has remained stable in 2014, overall ODA has increased by 66% in real terms since 2000, when the Millennium Development Goals (MDGs) were agreed to. To the credit of donor countries, these trends occurred when the world economy was being hit by the worst international financial crisis of our time. They were also the source of deep reflections on how to focus on development outcomes and impact, instead of only looking at the level of aid.
In this sense, the mainstream development co-operation debate is putting a lot of effort and innovation into how to use ODA flows more effectively – moving beyond traditional forms of aid and using it in more creative ways, through a wider range of partners and financing mechanisms, and performing more of a catalytic role. Indeed, ODA is increasingly being used as a lever to help countries attract other, complementary forms of financing that will be necessary to meet their development objectives. These other forms of financing include tax revenue and foreign as well as domestic investment. In 2015, the Sustainable Development Goals (SDGs) are being negotiated as successors to the MDGs – and to finance these goals, donors and developing countries alike fully agree on the crucial need for ODA to take on this leveraging role.
Indeed, aid alone (whether in its traditional or its more innovative forms) will not suffice for meeting the SDGs. In just one example, the resources needed every year to achieve the SDGs are estimated to be at least ten times greater than current levels of ODA. This leaves a vast space to be filled. First by donor countries delivering on their commitments to increase their support for financing for development. But also by mobilising private flows and investment that rely on ODA to fill the gap. For the first time in 2012, the share of global foreign direct investment (FDI) inflows going to developing countries exceeded that going to developed countries, making FDI by far the biggest source of capital flows to developing countries.
This said, the overall picture is not rosy: after passing $2 trillion in 2007, global FDI flows fell by 40% during the first two years of the global financial crisis. Six years later, in 2013, they were still down by 30%; in Europe investment outflows are down by as much as 80% since the crisis, with implications that stretch far beyond the Eurozone. The legacies of the crisis are still with us in the form of low investment, low growth and high unemployment. And even when we look beyond this immediate economic context, most developing countries continue to have particularly low levels of investment relative to GDP. In most African countries for instance, investment to GDP ratios struggle to reach 20%, well below the levels of most other developing and emerging regions. This relatively poor investment performance mainly results from a lack of adequate framework conditions through which countries can successfully attract and retain investment.
Developing countries therefore have a challenging task ahead if they hope to stimulate investment flows and make them work for development. To help governments rise to this task and enhance the necessary framework conditions, in June 2015 OECD Ministers plus partner countries that include developing and emerging economies, endorsed a comprehensive policy tool: the Policy Framework for Investment (PFI). Updated by a global taskforce in 2015 led by Myamar and Finland and composed by over 70 countries, the PFI is precisely aimed at addressing the structural conditions for investment in a coherent manner. This includes guidance for attracting investment in specific economic sectors, such as infrastructure, where ODA and private finance can work hand-in-hand particularly well. Based on the PFI, since 2006 the OECD Investment Policy Review process has been used by over 25 developing and emerging economies to assess and reform their investment environment so as to enhance private finance for development.
When they endorsed the updated PFI, Ministers encouraged countries to use the tool as a reference for development co-operation, and particularly as a path towards the SDGs. Exactly how different countries and regions can make the most use of the PFI, so as to attract investment that can complement ODA and tax in financing the SDGs, will be the topic of discussions at the Third International Conference on Financing for Development being held in Addis-Ababa next week. This could be a good opportunity for developing country governments as well as donors to move beyond traditional aid together, and towards more innovative and complementary forms of ODA and investment.