Hold onto your hat: the UN Finance Report is out

Unbridled excitement! Hold onto your hat! The Report of the Intergovernmental Committee of Experts on Sustainable Development Financing was published on 8 August.  This is the complement to the Open Working Group Report on post-2015, on which I commented the other day. Together, the two reports provide the key building blocks for the next stage of the post-2015 discussion – and possibly also of the climate settlement, also due in 2015. Nothing is yet settled, and in particular there will be a Financing for Development Conference in Addis Ababa in July 2015. But have we made progress?

I guess the answer to that question depends on what you mean by ‘progress’. What we do have from ICESDF is a useful statement of principles about development finance. That is an achievement and a valuable platform for future work. What we do not have yet is either a strong articulation with the OWG Report, or a set of specific proposals. So, there is more to do.

I begin by summarising the report. I then commend the statement of principles, but go on to make five observations. These amount to an agenda of further work:

• First, cross-referencing the report of the Open Working Group and its predecessors.
• Second, more careful analysis of the aggregation of costs in different areas.
• Third, a more sophisticated analysis of what different kinds of countries might need and over what time period.
• Fourth, a better analysis of absorptive capacity constraints.
• And fifth, independently of technical and institutional constraints, analysis of the economics of finance: issues of absorption and spending, Dutch disease, crowding-in and crowding-out savings, investment, or the private sector, and debt sustainability.

The next steps will happen within the UN, partly in preparation of the FFD conference. There are also two other important reports on the horizon, an OECD/DAC flagship report on finance and the European Report on Development for 2014.

A summary of the ICESDF Report

The Report has an introductory overview of global finance, with a note on ‘needs’, then a strategic approach consisting of nine principles, then a set of 29 recommendations structured around a framework of national/international, public/private, plus blending, plus governance.

The Report does not estimate needs, either in general, or with respect to the goals and targets recommended by the OWG. However, it offers a range of costs dawn from the literature. The Report emphasises that these cannot be added up, because aggregation ‘does not adequately take into account the synergies and cross-cutting nature of sustainable development’.

This is the key diagram:

Source: http://sustainabledevelopment.un.org/content/documents/4588FINAL%20REPORT%20ICESDF.pdf

Note that the X-axis is logarithmic. The MDGsMillennium Development Goals ‘need’ about $US 100bn a year, climate change mitigation about $US 1000 bn, and non-energy infrastructure a good deal more. It will be interesting to see whether analysis of the OWG Report either changes these numbers or enables them to be specified more accurately.

The ‘Strategic Approach’ consists of nine principles, as follows:

1. Ensure country ownership and leadership in implementing national sustainable development strategies, along with a supportive international environment.
2. Adopt effective government policies as the lynchpin of a sustainable development financing strategy.
3. Make use of all financing flows in a holistic way.
4. Match financing flows with appropriate needs and uses.
5. Maximize the impact of international public finance.
6. Mainstream sustainable development criteria in national financing strategies.
7. Exploit synergies across the economic, environmental, and social dimensions of sustainable development.
8. Adopt a multi-stakeholder, people-centred and inclusive approach to achieve tangible results on the ground.
9. Ensure transparency and accountability of financing at national, regional and international levels.

The organising framework distinguishes between public and private funding and national and international funding, as in the diagram below. Note the emphasis on intermediaries and on national expenditure versus global public goods.

Source: http://sustainabledevelopment.un.org/content/documents/4588FINAL%20REPORT%20ICESDF.pdf

The recommendations cover the main types of finance, along with a section on governance.

1. Domestic public financing

• Promote tax reform, tax compliance and deeper international cooperation
• Ensure good financial governance and public financial management
• Internalize externalities and mainstream environmental sustainability
• Address inequity and the social protection imperative
• Effectively manage public debt
• Explore the potential contributions of national development banks

2. Domestic private financing

• Provide access to financial services for households and micro-enterprises
• Promote lending to small and medium-sized enterprises
• Develop financial markets for long-term investment and enhancing regulations to balance access and stability
• Strengthen the enabling environment
• Strengthen economic, environmental, social and governance (EESG) and sustainability considerations in the financial system

3. International public financing

• Meet existing commitments
• Make use of all international public financing sources and instruments
• Use international public resources efficiently and effectively

Plus this diagram showing schematically how aid needs change with level of development.

Source: http://sustainabledevelopment.un.org/content/documents/4588FINAL%20REPORT%20ICESDF.pd

4. International private financing

• Channel international funds towards long-term investment in sustainable development
• Manage volatility of risk associated with short-term cross-border capital flows
• Facilitate the flow of remittances and private development assistance

5. Blended finance

• Strategically assess the use of blended financing and innovative partnerships
• Explore the potential contributions of DFIs in support of blended finance
• Strengthen capacity development efforts

6. Global governance for financing sustainable development

• Strengthen systemic coherence and global economic governance
• Adopt trade and investment rules that are fair and conducive to sustainable development
• Strengthen global financial stability
• Strengthen regional cooperation
• Enhance international cooperation on taxes
• Fight illicit financial flows
• Strengthen sovereign debt crisis prevention and resolution
• Foster harmonized monitoring and accounting systems and a data revolution
• Strengthen global partnership to facilitate effective sustainable development cooperation

An assessment

I have to say that nothing in the report made me cry out in pain – or in surprise. Or, actually, in excitement. This is a pretty complete statement of the conventional wisdom. Compare and contrast, for example, the EUEuropean Union Communication of 2013 on ‘Beyond 2015: towards a comprehensive and integrated approach to financing poverty eradication and sustainable development’. I commented on that here. Or see the Report of the World Economic Forum’s Global Agenda Council on Poverty and Sustainable Development on Paying for Zero. I was a member of that group, and posted our conclusions on the website. They are pasted in again at the end of this piece for ease of reference.

All these documents emphasise the importance of country leadership and of domestic revenue. They all acknowledge that different countries have different needs. They all emphasise the role of the private sector. They all call for international finance to be greater in scale and better-managed. They all recognise the need for better regulation, including with regard to taxation. And finally, they all recognise the need for investment in global public goods.

So, I guess that’s good news. There are no gaping gaps, no improbable propositions, no immoderate demands. It is an achievement to have reached consensus on general principles.

However, I think we might have expected more – in five ways. At least, we can see where more work is needed.

First, I know that the OWG Report was only published in June, but surely there could have been more cross-referencing, if only in an Annex, to the topics covered by the OWG and to predecessor reports like the UN Secretary General’s Report of last year and the High-Level Panel on Post-2015? This new report leaves the analysis to be carried out at a later stage. At the end of the day, what are the financing needs for different aspects of sustainable development? As yet, we have no idea. Of course, money is not the only issue (see below), but the topic will doubtless feature in the final post-2015 settlement.

Second, it really abdicates responsibility to say that cost estimates cannot be added up, because aggregation ‘does not adequately take into account the synergies and cross-cutting nature of sustainable development’. Of course. And to repeat, money is not the only issue. Nevertheless, could we not at least have had a worked example in a box, in the form of a country case study? Or a rule of thumb?

Third, we might have expected a more sophisticated analysis of what different kinds of countries might need and over what time period. An obvious point, which the report duly makes, is that poor countries ‘need’ more than rich ones, and simultaneously have less capacity to raise finance domestically. The diagram above illustrates the point schematically, with accompanying text as follows:

‘Acknowledging the multiple roles that international public finance will need to play in the sustainable development agenda, the Committee recommends that the level of concessionality of international public finance should take into account both countries’ level of development (including their level of income, institutional capacity, and vulnerability) and the type of investment, as depicted in Figure 6. Concessionality should be highest for basic social needs, including grant financing appropriate for least developed countries. Concessional financing is also critical for financing many global public goods for sustainable development. For some investments in national development, loan financing instruments might be more appropriate, particularly when the investment can potentially generate an economic return.’

That statement begs many questions? For example, there is an active debate just now about aid to middle income countries. Could that have been acknowledged? Or even sides taken?

In all these respects, a comparison is with the report of the Advisory Group on Climate Financing, which reported in 2010. When I commented on that at the time, I was critical that it was more of a civil service review than a global deal. Nevertheless, it went a great deal further than the ICESDF in working out how funding might be generated. As I observed:

‘The analysis is invaluable, and will indeed be useful to policy-makers. The report classifies different sources, explains how they might work, and calculates how they might sensibly be combined to reach the target of $US 100bn a year. It notes that funding can come from public sources, development banks, carbon markets and private capital. And it reviews options such as levies on international transport, financial transactions taxes, carbon-market levies and profit-sharing by private companies. There is serious analytical work embedded in the text, for example on the difference between net and gross value of foreign direct investment, or the inframarginal rents of carbon market flows (whatever they might be). Few will read this report and not learn something new. Paragraph 64, by the way, if you want a definition of inframarginal rent.’

Fourth, and now we’re getting down to serious business, there is a big jump from saying that ‘this is what countries need’ to saying that ‘therefore this is how much finance they and we need to raise’. The assumption in those statements is that finance is the only constraint, which is patently not the case. There may be problems with regulatory regimes, which the report does recognise, but what about other aspects of absorptive capacity – institutional, infrastructural, human resource or whatever? Also, are there no problems with sequencing? We had big debates about this in ODIOverseas Development Institute (London) at the time of the Africa Commission, which recommended doubling aid to Africa. Tony Killick, Mick Foster, Paolo de Renzio and others all piled in. See, for example this paper on absorptive capacity from 2005, which summarised the constraints as follows:

Source: file:///C:/Users/Simon/Documents/Simon's%20work/2021.pdf

I would have liked to see more analysis of this, since it is a problem that is going to bedevil the next stage of negotiation about post-2015. As I commented with respect to the OWG Report

‘I am concerned by the overall cost and impact of meeting all these 170 targets at once. Are there no priorities, no trade-offs? In particular, but I’ll come back to that, what happens with respect to climate change could act as a great disruptor. It would be really useful, before the goals and targets are finalised, to test their feasibility in a few countries, with different income levels and prospects. Obviously, feasibility depends in part on the global enabling environment and on finance, but that is a topic worth discussion in its own right.’

Finally, and independently of technical constraints, it would have been extremely useful if the ICESDF Report had delved into the economics of finance: issues of absorption and spending, Dutch disease, crowding-in and crowding-out savings, investment and the private sector, and debt sustainability. These are crucial to development and climate finance, and present many challenges to policy-makers. See for example this ODI Briefing Paper from 2006, co-authored by Mick Foster and Tony Killick, on ‘What would doubling aid do for macro-economic management in Africa?’ . This examined aid utilisation in Ethiopia, Ghana, Mauritania, Mozambique, Tanzania, Sierra Leone and Uganda’. It concluded that

‘the most striking result is the absence of countries classified as having both fully absorbed and fully spent the aid increase – the donors’ preferred outcome. A second clear result is that governments were better at spending aid increases through their budgets than they were at absorbing them through increased imports. There is a tension between these outcomes and the ‘golden rule’, that governments should avoid large excesses of spending over absorption.’

Further

‘The increases in aid-financed public expenditure contemplated across Africa must be accompanied by increased absorption of the aid if it is not to risk crowding out private sector growth. However, the necessary increased demand for foreign exchange may not be forthcoming without REER appreciation and this may reduce the profitability of exporting, jeopardising eventual reductions in aid dependence. Donors risk pressing ahead with plans for massive aid increases without sufficient prior analysis of the implications for private sector growth, and for the incentive to export.’

There is much subsequent literature on this topic. Did the ICESDF consult it? Did it take a view?

Next steps

These observations on the ICESDF Report constitute an agenda for further work. Thus

• First, cross-referencing the report of the Open Working Group and its predecessors.
• Second, more careful analysis of the aggregation of costs in different areas.
• Third, a more sophisticated analysis of what different kinds of countries might need and over what time period.
• Fourth, a better analysis of absorptive capacity constraints.
• And fifth, independently of technical and institutional constraints, analysis of the economics of finance: issues of absorption and spending, Dutch disease, crowding-in and crowding-out savings, investment and the private sector, and debt sustainability.

Luckily, the ICESDF report is not the end of the story. No doubt there will be further work on the topic at the UN, in preparation for the Secretary General’s report in the autumn on post-2015, and the Addis Ababa FFD Conference next year. In addition, however, there will be two important reports in the autumn.

First, the OECDOrganisation for Economic Cooperation and Development will be launching a flagship report on 7 October on ‘Mobilizing resources for development’. There is a website already, and even a video. The purpose of the report is described as follows:

‘At the Development Assistance Committee’s High-Level Meeting in December 2012, DACDevelopment Assistance Committee (of the OECD) Ministers called for modernising the DACDevelopment Assistance Committee (of the OECD) statistical system and devising new, broader measures of total official support for development. The 2014 DCR complements work to fulfil this mandate by exploring the many potential sources of development finance, as well as the diverse means of mobilising additional resources to fund the implementation of the post-2015 goals. This will include a focus on mobilising financial resources from the private sector.’

Second, the EUEuropean Union will be publishing the next in its series of European Reports on Development at the end of December. ERD 2014 will deal with finance and other means of implementation in the post-2015 context. Its website says that

‘The report will ask the overarching research question:‘How can financial resources be most effectively mobilised and channelled and how can they be combined with non-financial means of implementation, to effectively support a transformative post-2015 agenda?’. We have commissioned 6 country illustrations in Bangladesh, Ecuador, Indonesia, Mauritius, Moldova and Tanzania to gather evidence on the role of finance and other means of implementation in unlocking economic, social and environmental (or sustainable development) transformations.’

I like the concrete orientation of both these projects. Let’s see whether or not they need us to hold onto our hats.

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 Image: http://dholman.wordpress.com/category/uncategorized/page/6/

Extract from Paying for Zero: Global Development Finance and the Post-2015 Agenda

Financing a transformational post-2015 sustainable development agenda will require policymakers and publics to amplify the key components of the current system that work well while addressing key constraints and exploiting new opportunities to match the evolving mix of needs and actors around the world. We highlight the following key conclusions to that end.

A high ambition for sustainable development finance, shared by all

1. Ambitious goals in the post-2015 sustainable development framework – addressing the reduction of poverty and inequality in all its forms while tackling the interwoven imperatives of global environmental sustainability – will require accompanying ambition and innovation in development finance.

2. Building on the 2002 Monterrey Consensus, primary responsibility for financing poverty reduction will rest with developing countries themselves. In addition, however, vital contributions will be made by international public and private finance, contributing both to national development and the provision of global public goods.

3. Development finance will increasingly be integrated across types. Flows from different sources will need to complement each other, with public finance leveraging additional private sector finance, and with flows from all sources adhering to common standards of measurement and reporting regarding transactions, beneficiaries, and impacts. Transparency and accountability towards results must be a centrepiece of post-2015 finance.

On Official Development Assistance (ODA)

4. The goal of ending extreme poverty by 2030 should not be confused with endingODAby 2030. The need forODAgoes well beyond tackling PPP$ 1.25/day poverty, for example in public health or the provision of global public goods, in addition to other sustainable development priorities. Even a fully successful extreme poverty agenda will likely require targeted support beyond 2030; andODAwill also be needed to help lift poor people above higher thresholds, such as PPP$ 2/day.

5. The principle of common but differentiated responsibilities means that high-income countries should follow-through on the commitments they have promised, but also that middle-income countries (MICs) and emerging economies should be encouraged to make contributions to global poverty reduction and the provision of global public goods.

6. ODA will need to prioritize the poorest countries, and programs within those countries which target the poorest people and which most effectively reduce poverty.

7. The vast majority of the needs of  MIC swill be financed through domestic resource mobilization and access to international markets. However, manyMICs, especially those which are fragile states, will merit some continued aid, including for humanitarian purposes and technical cooperation for institutional strengthening.

8. Graduation from aid needs very careful consideration. It will be necessary to ensure that emerging lower-middle-income countries (LMICs), especially those with large numbers of extreme poor, do not face a stark drop-off in access to external finance. This might require a rethinking of thresholds and bolstering of concessional finance.

9. There will be pressure to redefineODAso as to include a wider range of peace-keeping activities. In principle, this should not be encouraged. Similarly, it is not acceptable for climate budgets to ‘cannibalize’ other components of aid budgets.

10. Improving the capacity of developing countries to mobilize their own resources should be an important element ofODA. In many cases, and without imposing unwanted conditionalities, it will be necessary to invest significantly in broadening the tax base, raising tax revenues, and combating fraud. International coordination should also be strengthened to avoid situations where tax policies in developed countries undermine developing countries’ capacity for domestic resource mobilization, for example in the areas of illicit financial flows.

11. Strong partnerships will also be required, consistent with the core principles of aid effectiveness (such as those outlined in the Paris, Accra, and Busan outcome documents) between traditional and new donors, including emerging official donors and the large number of impact investors and philanthropic organizations.

On private sector investments and responsibility

12. The private sector will play a major part in providing development finance post-2015, often partnering with governments and civil society. It is also important to recognize the non-financial private sector contributions that can be extremely valuable, including core business, shared value, and ‘do no harm’ contributions. It is essential that responsible business practices be promoted among national and international companies. Mandatory reporting is one way to promote high standards and accountability.

13. Governments will need to improve the policy and regulatory environment for enterprise creation and growth and for promoting investments that create jobs.

14. Greatly enhanced instruments are needed to accompany and incentivize the amount and nature of private finance that will be required to achieve a post-2015 sustainable development agenda. The biggest ticket investments are in infrastructure, energy, and agriculture (including water), all of which will typically require some degree of ‘blending,’ whether in the form of risk guarantees, advantageous long-term borrowing instruments, or other appropriate structures.

15. Innovative tools can also play an important role in leveraging and expanding available public sector resources, as has been the case with the Advanced Market Commitments for vaccines and the International Finance Facility for Immunizations. The growing importance and sustainability focus of large institutional investors, including sovereign wealth funds, can provide critical opportunities for innovation.

On the links to climate finance

16. The global challenge of climate financing extends far beyond traditionalODA. In addition to the structural transformations required to achieve a low-carbon global economy, there will be need for specific resources, public and private, to address climate change mitigation and adaptation in middle-income and low-income countries.

17. Many of the private and public infrastructure investments for sustainable development will be the same ones that determine the future of the world’s climate change mitigation and adaptation efforts. Despite the political divisions, the practicalities of financing poverty eradication, sustainable development and climate change mitigation and adaptation are deeply interwoven. Promoting financing that brings multi-dimensional benefits is key to addressing these challenges.

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