Diplomats and their governments are in the middle of a huge exercise to update the world's development agenda.
Diplomats and their governments are in the middle of a huge exercise to update the world’s development agenda. For the last 14 years, governments and NGOs have rallied around the Millennium Development Goals (MDGs) – a set of eight goals that aim to reduce the unacceptable manifestations of poverty in poorer parts of the world, with support provided by rich countries in the form of aid.
While some progress has been made, governments have now signaled the need to shift to a more ambitious development agenda, one that recognizes how the world has changed in the past two decades and addresses the gaps in the MDGs. In short, this new agenda aims to increase the wellbeing of all citizens, particularly those that live in poverty, within the natural limits provided by the planet. The intention is to finalize this new agenda – with a set of goals and targets – by September 2015.
Attention has now started to shift from the ‘what’ of the agenda to the ‘how’. There are many components of the ‘how’ – policy choices, capacities, institutions, and technology to name but a few. Yet a perennial preoccupation of governments is financing. Where will the hard cash come from to fund these lofty aspirations?
In July next year governments will gather in Ethiopia to assess how they are going to pay for all of these new goals. For many developing country governments, a litmus test of any financing agreement will be how much support they get in the form of international aid, along with myriad other forms of financing – local taxation, private investment, remittances. Indeed, some of the poorest and least developed countries will be looking for a clear commitment from richer countries that they will meet previous commitments on official development assistance (ODA), including the international benchmark of 0.7% of GNI. Aid has been a crucial means by which many countries made progress on the MDGs, in particular for the low-income and least developed countries.
But the economies of many rich countries are still struggling, and their governments are finding it difficult to justify to domestic taxpayers that their money is being spent abroad rather than at home. The case for aid is strong, for moral reasons as well as for securing a safer and more prosperous global society and economy. But when times are tough at home, the electorate tends to look inwards.
A positive outcome from the Financing for Development (FfD) conference in Ethiopia, based on a broader understanding of the new agenda and how to finance it, could bolster the prospects of an ambitious development agenda. But a stalemate on financing, if it were to focus predominantly on ODA, could unravel what governments have so far agreed.
At the other end of the spectrum, some governments have emphasized that the private sector will step in and shoulder the burden of financing the new goals and targets. The discussion on the validity or means of this claim has not been very deep. More cynically, some have suggested that focusing on the private sector’s role is a deliberate tactic to steer the debate away from aid commitments.
But this critical question remains – can the private sector actually play a role in financing?
It’s a difficult exercise to work out how much achieving a set of goals will cost – so many factors come into play. Some goals require little or no money; others require hard investments in construction and infrastructure. Yet initial financing estimates to implement the SDGs run into the trillions of dollars; much higher than the amount of ODA on the table. UNCTAD estimates that annual investment needs for basic infrastructure, food security, climate change mitigation and adaptation, health and education in developing countries range from US$3.3 to US$4.5 trillion.
If the agenda is to be financed at all, it is clear that these resources will mostly come from private sources. But this means going far beyond philanthropy and our existing understanding of Corporate Social Responsibility. Instead, it is about steering the investment decisions that private actors make every day. These are in the real economy, by companies small and large, as well the investments of actors in the financial sector (banks, pensions companies, hedge funds).
Here the logic is very simple: The financing for development agenda should be largely about ensuring that private investment decisions move us towards the aspirations set out in the post-2015 agenda. To that end, the debate on private sector financing ultimately becomes one about incentives and regulatory frameworks.
Businesses and investors respond to incentives and act within the parameters set by regulatory authorities. Incentives may be enough when business opportunities lead to an alignment with the development agenda. For example, many private operators are driving investment in the deployment of renewable energies. However, when incentives and voluntary actions are insufficient, changes in regulation will also be needed, including on environmental and social impact reporting.
At a minimum, private sector operators should not be making investment decisions that undermine the achievement of the goals and targets: we will need a ‘do no harm’ principle for private investment. For example, if all countries need to be disaster-resilient, then the construction industry needs to adhere to building codes so that buildings can withstand earthquakes. But one step above this, private sector operators should be encouraged to make investments that help to achieve these aims more quickly. For example, an investor could change its business model so that its sourcing policies benefit a bigger range of local suppliers, or invest more in research and development for medicines to tackle neglected diseases.
After the new agenda is agreed, a first commitment from governments could be to review regulatory frameworks at all levels – national, regional and global – to see where they are SDG compatible or incompatible. Of equal importance, governments will need to consider how well regulatory environments fit together, in particular to prevent a regulatory race to the bottom.
For a successful post-2015 development agenda, regulations on private sector financing will be as much of a weapon in the armory of policy-makers as ODA has been for the MDGs.