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On the Record

The Transition from “The Developing World” to “A Developing World”

Editor Note: On January 9, Homi Kharas spoke on development in the post-2015 agenda at the Kapuscinski Development Lecture in Riga, Latvia. Watch video from the speech here.  

It is a great pleasure and honor for me to be here today. I am especially delighted to give a talk that honors Ryszard Kapuscinski. Kapuscinski was a product of a time when the world was divided into blocs: the First World of advanced capitalist countries; the Second World of communist, state-led societies; the Third World of underdeveloped states and impoverished people. His great success was due to his ability to bring to life the strange goings-on in the Third World for an audience that otherwise had no insight into the everyday life of ordinary citizens in other continents. He was curious about the world and about people, no matter where they lived or how exalted or ordinary they were. So I imagine that Kapuscinski would approve of the basic thrust of my talk today which is that we are entering a new phase of development, a phase where sustainable development is not just something for Third World countries or the developing world to attempt, but something that is deeply and fundamentally relevant for all societies, everywhere, including those in the First and Second Worlds. He’d be curious about this transition from “the developing world” to “a developing world”.

Of course I am not going to argue that all countries are the same or that they face the same priorities for change. But there is a sense that people everywhere have similar aspirations. They want the opportunity to build a better life for themselves and their families, to be assured of personal safety and justice, to be treated with dignity and respect, to connect with others and share experiences openly, and to do all of this in a way that our children’s, children’s children will thank us for.

In the past two years, there has been an unprecedented conversation about what to do after this year, 2015, when the Millennium Development Goals are set to expire. This conversation, led by the United Nations in the context of the post-2015 agenda, has engaged governments, civil society, business leaders, academics, scientists, and people from all walks of life about a vision for sustainable development. Among the many varied viewpoints offered there was one point on which there was general agreement. No one thinks any country anywhere, regardless of whether they are in the First, Second or Third Worlds, has found a path towards sustainable development, a path that satisfies the expectations of the current generation, without compromising the opportunities available for future generations—and a path that is broad enough for the 9 billion people who will be alive in 2050. We all believe that we must do something new, that “business-as-usual” will not suffice, that we must alter the social, environmental and economic trends that are shaping our societies.

Most of us also believe that if countries attempt to find a path to sustainable development together, pursuing the same broad vision jointly, sharing experiences, knowledge and sometimes financial resources, that the chances of success for each country will be higher. In other words, many of us believe that a multilateral, cooperative approach will produce better results than a go-it-alone approach. Partly, this is because of the fear that “global bads” like climate change, Ebola or the spread of other infectious diseases, or terrorism and crime might cross borders if left unchecked in any place in the world. But partly this is also because of the belief that “global goods” like ending poverty and hunger, free trade, knowledge exchange, technology innovations, and the expansion of markets can have important spillover benefits everywhere.

What the world needs now is a road-map, an action plan to make this broad vision operational and to change the functioning of the global economy. Three fundamental shifts are called for.

What the world needs now is a road-map, an action plan to make this broad vision operational and to change the functioning of the global economy. Three fundamental shifts are called for.

First, a shift towards providing everyone on the planet with services—health, education, nutrition, personal safety–that reach at least a basic minimum standard to give them a chance to participate in the global economy. The idea that we should leave no one behind means focusing more on the poorest and most vulnerable nations and on the poorest and most marginalized citizens within every nation.

Second, a shift towards a new growth pattern that sharply reduces carbon emissions and that builds resilient societies. Such a growth pattern should also provide jobs and enough opportunities to avoid increasing inequalities. It will be determined by the efficiency of new infrastructure that will be put in place over the next decade—the buildings, urban transport, electricity generation, transmission and distribution systems, and agricultural, forestry and land management practices—and by ensuring that access to this infrastructure is more equal, connecting every individual and small business to national and global markets.

Third, a shift towards a better governed globalization, with rules for trade and investment that level the playing field for all firms, and incentives that prevent overexploitation of our planetary resources. Global rules must balance between giving incentives for creating new products, like new vaccines and medicines or flood- and drought-resistant rice varieties, and giving incentives for cheaper access to and more rapid diffusion of these among and within countries. They must balance the need for stability in global systems, like finance, and the desirability of constant innovation to encourage finance to take risks and to flow to areas where returns are highest.

Every country has a role to play in each of these three shifts, and this is why the post-2015 agenda is truly universal. It starts with every country putting its own house in order. There are still too many policies that work against sustainable development, like fossil fuel subsidies, tax loopholes, corporate secrecy that conceals illicit financial flows, and legal discrimination against women. It continues with making smart public investment decisions, at home and abroad. It is extraordinary that public investments are declining at a time when economists are generating estimates of benefits returned to various public investments in sustainable development of $20 to $100 for each dollar spent and when the cost of borrowing long-term money is only 2-3 percent per year for many rich country governments. And finally it means doing more research and encouraging more business innovation.

Looked at in this way, it is clear that a universal agenda for sustainable development is also a “beyond-aid” agenda. Civil society and mass movements in each country should be posing three questions about sustainable development. Are the policies of my country working in a coherent way toward sustainable development, both at home and abroad? Is my government trying to make sure that opportunities for high return public investments are being realized, at home and abroad? Are we creating enough new research and innovations to get us on the social and environmental trajectories that are necessary, at home and abroad?

The hope and expectation is that answers to these three questions will be sketched out in 2015. 2015 is an exciting year. It is a pivotal moment when global political agreement can be reached on the contours of sustainable development.

2015 has been designated as the first-ever European Year for Development, an opportunity for the largest providers of development cooperation in the world, the European Union member states, to assure their citizens that their policies, money and innovation efforts are contributing to a better world.

In May 2015, the World Education Forum will take place in Incheon, Korea. This is an important forum because the answer commonly given to some of the most pressing social sustainability problems of today—youth unemployment, social immobility, stagnant wages—is to improve education and skills for the 21st century. The forum should help outline what can be done to deliver quality education.

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Then, in July 2015, the United Nation’s third international conference on financing for development will be held in Addis Ababa, Ethiopia. At this conference, commitments should be made to help the least developed and most vulnerable countries, to create new channels for development finance that can handle the large volumes of investments that will be required to place economies on a low-carbon trajectory, and to ensure that businesses too are responsible and accountable for activities that contribute toward sustainable development. It is an important opportunity to get finance ministers to focus on sustainable development and for foreign ministers to establish priorities that can be met within current budget constraints.

In September 2015, Heads of State and Government will gather in New York at the General Assembly to agree on a set of sustainable development goals for the next fifteen years. Intergovernmental negotiations are underway, but the broad outlines of the agreement have been laid out. It will be comprehensive in scope across sectors and themes, going beyond the Millennium Development Goals to incorporate infrastructure, jobs and growth, and peace, justice and inclusive societies. And it will be universal in application, going beyond aid to cover policies ranging from sustainable production and consumption patterns to the sharing of tax information.

Finally, in December 2015, there is great anticipation that a historic agreement on combating climate change and its impacts will be concluded at the COP21 ministerial meeting in Paris.

Any one of these events could be momentous. Together, they offer the best opportunity for our generation to create a road map for “a developing world”.

Looking forward, the post-2015 agenda must take into account the extraordinary changes that have happened over the last fifteen years. The world cannot be subdivided any more into First World countries that provide aid and Third World countries that receive it. We cannot conceive of development any longer as something that is done “by” rich and systemically important countries “for” less advanced and smaller countries. In fact, when countries are able to take charge of their own development, when they are in the driver’s seat, they look for opportunities for trade, investment and technology transfer as much as for aid.

The biggest change in the world today is that so many more countries have taken control over and responsibility for their own development. Domestic taxes, not aid, are the most rapidly growing source of development finance everywhere except for a handful of countries. Today, there are only 33 low income countries in the world, half the number in 2000. Countries have become richer and are growing much faster than was the case in 2000. Almost all are growing—only nine have declining GDP per capita, compared to 36 in the 1990s. Fifty countries have had more than 3.5 percent per capita growth for a decade or more since 2000. Only 22 achieved this in the 1990s.

Along with growth, developing countries have seen a rapid expansion of domestic entrepreneurs and a middle class looking to make domestic markets more sustainable.

Along with growth, developing countries have seen a rapid expansion of domestic entrepreneurs and a middle class looking to make domestic markets more sustainable.

These changes suggest that more countries are in a better position to benefit from development cooperation than they were two decades ago. The post-2015 agenda will build on the foundations of progress achieved through the MDGs. Consider that between 2000 and 2011:

  • The number of children out of school globally almost halved, from  102 million to 57 million;
  • The share of emerging and developing economies in world exports rose from 23 percent to 37 percent;
  • Domestic credit provided by the financial sector as a share of GDP in low income countries rose from 26 percent to 38 percent.

Of course progress has not been even and new challenges have arisen. With growth and urbanization, the demand for infrastructure has outstripped supply. In fact, expressed as a share of GDP, the public capital stock in low income countries has fallen by 30-40 percent since its peak in the mid-1980s. Low public investment in infrastructure, especially in many municipalities with growing populations, is now a bottleneck to further per capita income growth as well as a constraint on the transformation of economies to a low-carbon trajectory.

Today, it is necessary to plan for a planet with 8 billion people by 2030 and 9 billion by 2050—a planet that is more urban, more middle class, older, more connected, more interdependent, more vulnerable, more constrained in its natural resources. It will be a planet where more than half the world’s poor live in conflict-affected countries needing stronger institutions. A planet where natural disasters, that have already cost $2.5 trillion since 2000, will become more common. Where environmental assets—coastal fisheries, forests, pastures–that account for half the income of the extreme poor, come under growing stress.

You will hear much talk in 2015 about the need for a “new global partnership.” In practice, what this means is that national and international policies, and politics, should be guided by principles of equity, universality, solidarity, sustainability, human rights and responsibilities shared in accordance with capabilities. This is already the practice for EU member states, where it is a proud tradition that all new members make efforts to transition from aid recipients to aid donors, to set up their own development cooperation agency and policies, and to contribute actively to international development cooperation processes. Increasingly, this is also the practice for many middle-income countries as well—the BRICS, Turkey, Mexico and others–although their approaches to development cooperation may differ from those adopted by the members of the Development Assistance Committee.

With so many countries, businesses and civil society organizations now actively engaging with sustainable development, it is important to establish ground-rules for cooperation—doing things together–and for coordination–avoiding waste, overlap or gaps. Historically, official aid donors cooperate with each other by pooling financial and technical assistance in joint activities, often under the auspices of a multilateral organization. But truly global cooperation is rare and will probably continue to be rare. There are too many differences among countries in the national interest and foreign policy considerations that provide context to aid. So cooperation can, and does, work well among smaller groups of like-minded countries, like the EU, but is hard to attain at a global level.

Coordinating development is much easier to do than cooperating on development. Coordination means sharing information about activities in a way that allows others to improve the effectiveness and efficiency of their work. For example, information on a country’s or a government’s total debt, from all sources, is needed to assess its creditworthiness and hence its ability to engage in more debt-financed spending. Information on future aid delivery is important to allow finance ministers to plan and budget appropriately. Information on the lessons of success and failure of specific development projects, including evaluations done by NGOs, can help improve the design of other projects. Monitoring progress towards the sustainable development targets can improve coordination for everyone interested in results. For all these reasons, the High-level Panel on the post-2015 agenda called for a data revolution as the basis of development coordination.

Of course, to provide information in a useable form, attention has to be paid to definitions and standards. This is why the discussions on modernizing official development assistance definitions, recently concluded among DAC members, is an important early achievement in the move towards sustainable development. The changes that have been adopted will direct aid resources to the poorest nations and allow rich countries more flexibility to use off-budget mechanisms like soft loans as an additional instrument of cooperation. They also introduce a new category of total official support for development in recognition of the idea that vastly more resources than aid will be required for the sustainable development goals to be achieved.

One the most important departures of the SDGs from the MDGs is this idea that aid alone will not be sufficient to get the job done. It is laudable and encouraging that even in this difficult fiscal environment many DAC countries have maintained or raised their aid levels. Raising aid to 0.7 percent of gross national income is a worthy endeavor. But even if somehow this promise were to be kept by all DAC countries, it would not be anywhere near enough. Aid would go up to $314 billion, compared to its actual level of $138 billion in 2013; but realistic estimates of the size of additional investment needs by developing countries are on the order of at least $1.5 trillion a year, or a 10 percent increase. So in thinking about aid allocations, we should also think about the possibility for using aid to catalyze funds from NGOs, philanthropists and the private business sector.

The Intergovernmental Committee of Experts on Sustainable Development Financing estimates that global public and private savings are in theory sufficient, but also notes that there are significant gaps in financing for specific sectors and for specific categories of countries.

One gap is for Least Developed Countries and other vulnerable groups like small island developing states and post-conflict countries. These countries are heavily reliant on grant aid. Looking forward, they will only get the needed resources from a combination of an increase in the volume of aid and a reallocation of aid away from middle-income countries that have other options. This process of reallocating aid towards the poorest nations is particularly challenging when aid is being given for the mitigation of and adaptation to climate change. For example, the majority of the $30 billion in fast-start financing for climate change that was promised for 2010-2012 went to large middle-income countries, with India, Indonesia and Brazil topping the list, and Thailand, Philippines, South Africa, China and Mexico also included in the top 20 recipients of climate-related aid. With more aid likely to be committed toward climate change issues, it will not be straightforward to ensure that political commitments to allocate more to LDCs and SIDS will actually be realized.

A second gap is for lower middle-income countries. These countries have the smallest resources available for public spending relative to their GDP. Low income countries benefit from high aid levels. Upper middle-income countries have significant domestic tax bases to draw on. But lower middle-income countries are caught in between. They suffer from a sharp fall-off in access to aid before they have strong enough institutions to collect taxes effectively. For example, a country starts to be graduated from the International Development Association’s grants when per capita gross national income levels rise above $1,195. But, as a matter of practice, at this income level domestic tax authorities tend to still be weak. So total available funds for development investments falls, just at a time when urban infrastructure, demand for electricity for small and medium enterprises, and other pressing needs are rising.

In the 1980s, these lower middle-income countries could turn to public lending agencies like the World Bank for assistance, but today the World Bank and other multilateral development financing institutions are small—in 2013, the total net financial flows from the multilateral system were less than $22 billion. Many lower middle-income countries have the fiscal capacity to borrow more, but they are being forced to access private capital markets and pay high risk premiums. For example, Kenya issued 10-year bonds in mid-2014 at an interest rate of slightly less than 7 percent. Compare this to less than 1 percent charged by the World Bank. The money comes from the same sources—private savings—but through different channels. So there is a significant opportunity to take advantage of the liquidity and low interest rates available in private capital markets today and to on-lend those funds to lower middle-income countries at far lower cost than is currently being done.

There are many other possibilities especially in infrastructure where there is a long history of private financing. Infrastructure financing is a third major gap in today’s funding structures and is receiving a lot of attention.

This is only one example of how private saving can be used to support sustainable development. There are many other possibilities especially in infrastructure where there is a long history of private financing. Infrastructure financing is a third major gap in today’s funding structures and is receiving a lot of attention. In 2014 alone a half-dozen new infrastructure facilities were set up: the G-20’s Global Infrastructure Hub, the World Bank’s Global Infrastructure Facility, the African Development Bank’s Africa50 Fund, the BRICS’ New Development Bank, and the Chinese-led Asian Infrastructure Investment Facility to name a few of the most prominent.

Each of these funds and facilities has identified a specific niche to ease one of the bottlenecks to more infrastructure finance, whether that be the supply of bankable projects, the presence of dedicated multi-skilled teams on the ground to bring projects over the finish line, the absence of sound regulatory and policy frameworks or the access to additional equity and debt finance, technical assistance or guarantees.

There is an understanding that enough infrastructure will not be built simply by relying on private initiative. Existing public-private partnerships in infrastructure have plateaued at a level of around $200 billion per year. But if they are to reach the scale that is necessary of at least $1 trillion, public agencies must be more proactive, including by ensuring that infrastructure, once built, is properly used and maintained.

The biggest contribution that business can make to the sustainable development goals is to provide jobs and market innovations, like inclusive value chains that include poor households in growth processes as consumers and producers. But too often businesses do not concern themselves with social and environmental sustainability without regulations that establish a level playing field.

There is no “correct” level of regulation for all countries. Much depends on the structure of markets and competitive forces in a given situation. But more and more firms, especially large firms, seem to be ready to adopt sustainable practices. It is time to move these firms from voluntary standards to systematic sustainable development accounting practices for all businesses. This is the idea behind the call by the United Nations Secretary General, in his synthesis report on the post-2015 agenda, for mandatory reporting standards on firms’ social and environmental footprints as well as on financial returns. It is high time for businesses to be held accountable for sustainable development by their shareholders, in accordance with standards set by public regulators in a dialogue with civil society.

Let me recap. Effective partnerships solve problems. The post-2015 agenda calls for a new global partnership, a new spirit of multilateralism to solve the pressing problems of our day. We should make three promises this year to the generations that will be born after 2030. First, by 2030, every child should start life in a family that is free of poverty and hunger, and should have access to the health, education, nutrition and other services that will give it a good start. Second, by 2030, every large firm and public agency should have social and environmental sustainability hardwired into their investment decisions. Third, by 2030, we should have strong multilateral institutions in place that can support sustainable development on a global scale.

If we can make these three promises in 2015, with credible plans for getting there by 2030, then we will indeed transition to “a developing world”.

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