A New Approach to Finance for Development

Achieving the Sustainable Development Goals will not be limited by an overall lack of money, but rather will depend on “the way finance is mobilised and used”. That’s the message from the European Report on Development 2015, released this week.

The independent report, authored by researchers from numerous development think-tanks, also argues that:

• Focus on Official Development Assistance (ODA) to achieve the MDGs has led to the neglect of other sources of financing for development, such as increasing domestic tax revenue and private finance
• The different drivers of development (such as human capital, infrastructure, and green energy technology) each require different combinations of financial flows, and
• Finance alone is not enough, but must be accompanied by complementary public policies.

The financing for development landscape has changed significantly since the 2002 Monterrey Consensus, where the emphasis was on aid. Now, the report argues that "in an increasingly interdependent world linked by flows of trade, finance, knowledge and technology, aid has become the small change of international development."

Gaspar Frontini, Head of Unit for Policy and Coherence at DEVCO said “the idea is how to help countries evolve in their model of financing, making the best possible use of all available sources, as they develop in time. ODA remains important, and indeed key for the most vulnerable countries, but in order to implement the ambitious post-2015 agenda, countries will need to mobilise financing well beyond that.”

There is still considerable finance available for development, but it is not necessarily used appropriately.

“[Foreign direct investment] does not reach the most vulnerable and poorer segments of society; tax-to-GDP ratios have changed very little in many [low-income countries]; SMEs and infrastructure are starved of capital; and much international public finance does not go to the poorest countries.”

So what can be done?

James Mackie, a Senior Adviser on EU Development Policy from ECDPM, highlighted best practice from Ecuador.

To secure more tax revenue the country renegotiated international contracts with multi-national companies in the oil and telecoms sectors, and it reformed the internal tax system, simplifying procedures to bring in more, smaller contributions.

"It's no longer just a few rich people who feel they are paying for everything and do their best to escape the system, it's actually being spread out and people quite low down at the top end of the informal sector are beginning to pay small amounts of taxes. That of course increases accountability - they expect the government to deliver. They've paid something, they want something back. It's internal voices."

As a result, ODA has dropped to virtually nothing and Dr Mackie said Ecuador is now in command of its own destiny.

“They’ve got a budget, it’s their money, they can use it and they have invested it very heavily in human capital development, so health, education and social protection.”

The ERD also calls for “investment in absorptive capacity in order to make more effective use of [Financing for Development]”.

Dr Mackie explains: “You will often hear development bankers (from the World Bank or African Development Bank) say what we lack is not the money but the good, bankable proposals ... People who want to build the infrastructure or set up a school, their capacities to show how they money is going to be properly used with a proper business plan and so on, that basic capacity is often lacking.”

This collaborative piece was drafted with input from Giuseppe Balducci (DEVCO) with support from the capacity4dev.eu Coordination Team.

Teaser image courtesy of World Bank.