Post-2015 Millennium Development Goals: More and Better Finance Will Not Be Enough

Last week, I participated in a panel organized by the U.N. General Assembly Open Working Group, which is tasked with preparing a proposal on the sustainable development goals (SDGs). The SDGs will build on the Millennium Development Goals (MDGs) and include economic, social and environmental dimensions. The panel included Amar Batthacharya, director of the G-24 Secretariat; Mukhisa Kituyi, UNCTAD’s secretary-general; and Jeffrey Sachs, director of the Earth Institute at Columbia University.

What has become clear is that the current consensus for more and better financing for development will not be enough to meet the SDGs. In addition to the quality and quantity of finance, governments will need to come up with policies to associate financial flows with the other inputs of sustainable growth such as the transfer of skills and technology.

In the current vision for financing for development, which originates from the 2002 Monterrey Consensus and the 2008 Doha Declaration on Financing for Development, finance is a critical input for attaining the SDGs and governments should encourage more and better finance.

The more finance argument:  Most of the money to finance sustainable development will continue to come from domestic resources. The High-Level Panel on the Post-2015 Development Agenda rightly stresses that countries should therefore continue efforts to invest in stronger tax systems, broaden their domestic tax base and build local financial markets. Raising domestic revenues to expand public services and investments remains vital for sustainable growth, and creates ownership and accountability for public spending. However, domestic revenues alone—especially in low-income and fragile countries—will not be enough given the scale of the resources needed to attain the SDGs. External finance, which includes official development assistance, private capital flows (foreign direct investment, portfolio and loan flows) as well as remittances and other flows will help complement domestic sources.

The better finance argument:  External flows can bring risks such as the volatility associated with hot money  (short-term and volatile capital flows). The vulnerability of countries to the volatility of private capital flows can be reduced by attracting more stable long-term finance from institutional investors including sovereign wealth funds, private corporations, development banks and other investors.

Encouraging more and better finance for development is good policy but it will not be enough. Beyond the quality and quantity of finance, it will be crucial for governments to “get a bigger bang for their buck” and ensure that the money they will raise will help achieve the SDGs in the most effective way.

The evidence on capital flows to sub-Saharan Africa (SSA) illustrates this point, as the region has benefited from more and better finance since the 2002 Monterrey Consensus. Over the past decade, private capital flows to SSA have grown by 19.4 percent per year and have overtaken official debt assistance. Stable long-term flows in the form of foreign direct investment (FDI) remain the engine of external finance to SSA with 75 percent of total private capital flows.

However, although SSA has attracted more and better finance in the form of foreign direct investment, about three-quarters of such investment went to resource-rich countries and in extractive industries over the past decade. The prospects for increased investment in this sector look strong given the discovery of new resources in the continent. Yet, in most SSA countries, the linkages between extractive industries, local firms and employment markets, and domestic financial systems are tenuous.

One way for governments to better leverage FDI flows for long-term economic growth in SSA is to associate them with knowledge and skills transfer from multinational companies to the domestic private sector. In the medium to long term, SSA policymakers can also anticipate the type of FDI their countries will attract and build a strategy in advance to develop the future technology and skills that will be needed for the expected investments. In the short term, policymakers can provide incentives for investors to include local businesses in the value chain and invest in education and training. This is increasingly happening, for instance, in the information, technology, and communications sector in SSA. Initiatives to develop local content legislation in resource-rich countries should take a flexible and strategic long-term view to meet the SDGs.

Other avenues for governments to better use finance to attain SDGs include the use of innovative technologies to increase financial literacy, financial inclusion and the use of green energy in power projects.

In sum, for finance to help attain the SDGs, governments will need to ask more than just money from financial flows. Including a requirement in the SDGs for governments to not only seek more and better quality finance, but also ensure that such finance supports sustainable development in the most efficient way would support this commitment. The process will also need to engage the private sector and an initiative like the U.N. Global Compact can provide a forum to discuss ways to make finance an effective input for achieving the SDGs.

The process for governments to extract non-monetary benefits from financial resources will need to include both domestic and foreign governments. In that regards, the recommendation of the High-Level Panel on the Post-2015 Development Agenda to infuse global partnerships and cooperation into all the SDGs should be supported.