Financing and other means of implementation in a transformative
post-2015 context
Note on emerging messages prepared for the presentation at JICA, Tokyo, 11 March 2015
1 Introduction
In the framework of its on-going initiative on ‘Mobilising European Research for Development Policies’ the European
Commission and four EU Member States (Finland, France, Germany and Luxembourg) have commissioned ODI
(Overseas Development Institute), DIE (Deutsches Institut für Entwicklungspolitik), ECDPM (European Centre for
Development Policy Management), the University of Athens (Department of Economics, Division of International
Economics and Development) and the Southern Voice Network for the drafting of the 5th European Report on
Development (ERD 2015) on the topic of ‘Financing and other means of implementation in the post-2015 context’. The
main research question is “How can financial resources be effectively mobilised and channeled and how can
they be combined with selected policies to enable a transformative post-2015 agenda?” This note learns
lessons from implementation of the Millennium Development Goals (MDGs), reviews the financing for development
landscape, presents the report’s framework, applies it to two examples, and presents the main implications.
2 Lessons from the implementation of MDGs inform the ERD’s approach
The implementation of the MDGs following the 2002 Monterrey consensus on Financing for Development was
supported by a range of finance needs studies. While the studies on MDG finance needs were helpful in mobilising
additional ODA for the social sectors, and although country-level modelling on financing MDGs offered valuable
insights on trade-offs between different finance sources and development outcomes, a different way of thinking about
the role of finance in the post-2015 context is more useful. Rather we need to (a) consider a range of finance flows
(public and private, domestic and international), beyond aid, as well as the role of ODA itself (section 3); (b) consider
both financial and complementary policies together and separately (section 4); and (c) consider the role of finance
(including aid) and policies in enabling a transformative post-2015 development agenda (section 5). This report
builds on the lessons of MDGs and presents a new framework to consider implementation.
3 The financing for development landscape is changing rapidly
As countries move towards higher incomes, they tend to experience (Figure 1): (i) declining ratios of aid-to-Gross
Domestic Product (GDP) (ii) increasing tax-to-GDP ratios (stabilising when countries approach LMIC levels), and
within this, increasing shares of tax from incomes and profits and notably goods and services, but declining shares of
international trade tax revenues; (iii) increasing private investment-to-GDP ratios. Figure 2 depicts the evolution of
finance flows to developing countries, showing that the relative role of aid is declining, even though a more nuanced
analysis shows that it is still crucial in some context such as the poorest and most fragile states. Domestic public and
private resources are increasingly the most important financial sources.
Figure 1 Financial flows (% GDP) by income level
Figure 2 Trends in finance ($ bn, 2011 prices)
25
6000
ODA
20
Tax revenues
5000
Domestic public
resources
Domestic
private
resources
15
Domestic private finance
10
3000
2000
Remittances
5
FDI
International
private resources
1000
International public resources
0
% of GDP
4000
LIC
LMIC
UMIC
HIC
income per capita (US$ 2005 prices)
4086
1036
12615
Source: WDI data, all countries, 1980-2012
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: OECD, IMF, WDI, and ERD calculations
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Figure 3 shows a typical transformation in the types of financial flows on this basis of a synthesis of six country
illustrations commissioned for this report. At lowest levels of development, international public finance plays an
important financing role. Domestic revenues increase in relative terms as the economy and governance develop. As
economies develop further their domestic revenues, aid is being phased out, whilst private finance is gradually
increasing in importance. At the highest levels of income, private finance is often greater than public finance.
Bangladesh and Indonesia are interesting examples. Bangladesh has transformed its economy over the last the two
decades becoming the second most important garment producer in the world. Over 2000-2012, its GDP in current
dollar terms increased by 150%, aid inflows by 75%, whilst domestic tax revenues increased by a remarkable 280%.
Indonesia was essentially a closed economy before 1986 and most finance was based on oil revenues. After a
weakening in oil revenues, Indonesia engaged in trade and FDI policy reform that led to manufacturing FDI inflows
which transformed the economy towards a more outward oriented economy. In 1997, Indonesia was hit by the Asian
financial crisis which had major impact on the financial sector. It also led to a change in Indonesia’s debt from foreign
(short-term) loans toward long-term bonds and especially towards domestic debt and domestic private finance. More
recently, FDI has also increased in the services sectors.
Figure 3 The evolution in financing for development changes with levels of incomes
Dominant sources of finance
Domestic private finance
International private finance
Domestic private finance
International private
finance
Domestic public finance
Domestic public finance
Domestic private finance
International private
finance
Domestic public finance
International public
finance
International public
Level of income
4 A new framework for finance and policies to enable a transformative
development agenda
The report proposes a different way of thinking about finance and development and has four elements (Figure 4): a
future that aims for sustainable development transformation, a focus on long-term enablers, recognition of the role of
complementary policies and consideration of all types of finance. The approach puts forward the principle that action
to achieve sustainable development should focus on the drivers or enablers of change. Sustainable development
cannot be achieved without improving and financing six key areas – local governance, infrastructure, human capital,
biodiversity, green energy technology and trade. Furthermore, finance contributes to the enablers and vice versa and
these relationships depend on the policy context (which are included in non-financial MOI). This new approach
contrasts starkly with outdated views that aid or finance alone can directly deliver sustainable development outcomes.
Past econometric studies and a new modelling study for the ERD confirm the quality of governance is crucial for the
effectiveness of FDI, aid, national budgetary spending and domestic private finance.
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Figure 4 The ERD framework: linking policies and finance for sustainable development
5 Applying the framework to selected enablers: infrastructure and governance
The report applies the framework to six selected enablers. Here we discuss the examples of infrastructure and local
governance.
Infrastructure
A review of econometric studies, a synthesis of country illustrations and infrastructure modelling commissioned for this
report show that infrastructure is important for all dimensions of sustainable development.There are large unmet longterm finance and policy needs for infrastructure. Whilst aid and private finance is increasingly flowing to developing
countries, it is not nearly enough, and what is available is not always spent well. Long-term finance for infrastructure
requires not only the mobilisation of domestic resources but also the active support of Development Banks and
Finance Institutions (DFIs) in employing appropriate financial instruments. Blending facilities such as the EU-Africa
Infrastructure Trust Fund or the Neighbourhood Investment Facility can prove instrumental in pooling financial
resources, mobilising additional private finance and enhancing the impact and efficiency of finance for infrastructure.
Better delivery systems, as well as transparent mechanisms and appropriate monitoring procedures, can improve
development outcomes, supported by appropriate policies and regulatory frameworks to reduce transaction costs and
risks. Some estimate that measures such as scaling up good practice and making better use of existing infrastructure
could help countries reach a 60% improvement in infrastructure productivity. Thus efficient public finance
management could dramatically reduce infrastructure finance needs for developing countries (which otherwise
would amount to more than a 1$ trillion a year).
Local governance
Governance generally is the most fundamental enabler of development. The report’s country illustration for Mauritius
for example shows how good policy and effective state-business relations set out a successful trajectory for the
economy. In this case public and private finance followed good policy frameworks. The report also finds that
better political settlements, governance and the ability to raise domestic revenues go hand in hand. We focus
on local governance because of the importance at local levels in the provision of many critical functions and because
few other reports focus on the financing aspects at this level. The record of local government performance is mixed.
Evidence suggests that it is essential to ensure that domestic policies on the roles of local government are fully
worked out so that local governments are properly equipped to meet their mandates both in terms of
capacities and in terms of regulatory frameworks. Allocations from central government, which may include an
element of international as well as domestic public finance, remain the principal source, but there are also positive
examples of local governments raising revenue locally, provided that adequate regulatory frameworks and public
finance management systems are in place. Expectations that revenue can be raised locally should not be exaggerated
at low income levels as this may lead to regressive taxes and charges and revenue-raising capacities are likely to be
low. As countries develop, local governments can be progressively brought into broader processes of public-sector
reform to enhance their contributions to eradicating poverty, and these contributions can be significant. As financial
management capacities increase, it becomes an option to borrow as a partial solution for financing infrastructure.
Finally, at the local level there is perhaps also more scope for private funding through collective user-fee solutions,
although their ability to raise funds will depend on the levels and distribution of local wealth and ability to provide
services for disadvantaged groups.
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Table 1 Policies for effective use and mobilisation of finance for infrastructure and local governance
Policies for
mobilisation
Policies for
effective use
Infrastructure
National:
• Capacity building for project appraisal
and selection
• Appropriate and transparent regulatory
frameworks
• Capacity building for transparent and
effective PPPs
International:
• Assistance in project preparation,
blended finance and other instruments
to catalyse finance
National:
• Capacity building for implementation,
budgeting, monitoring and evaluation
• Transparent and stable regulatory
frameworks
• Specialised facilities and economic
zones
International:
• Monitoring role by DFIs
Local governance
National:
• Adequate local government frameworks,
accountability and capacity
• Local tax revenue capacity
• Local borrowing powers
International:
• ODA for capacity building and improving
coordination and administrative capacity
National:
• Clear mandates from central government
• Capacity building programmes
• Regulatory framework for local finance
• Effective political settlement
International:
• Transparency initiatives
• Support for capacity in fiscal and debt
management and reform of legal system
.
6 Implications for discussions on Finance and Policy Framework
1. The pattern of finance for development evolves at difference levels of income. A key government objective
should be to move the financing pattern to the next level and, as the volume of each form of finance declines, to
ensure it is put to best use. This has implications for the mobilisation and use of all types of flow, including, for
example, ensuring a more transformative role for international public finance in the evolving pattern of finance.
2. Policy matters: finance is not enough on its own and it is essential to adopt appropriate and coherent domestic
and international policies for its effective mobilisation and use:
a. Domestic policy and financial frameworks that promote mobilising domestic resources and facilitating
their effective use for sustainable development. This includes an effective regulatory framework to govern
private sources and adequate capacity to raise public revenues, and applies to developing and developed
countries.
b. A conducive global system and policy environment that supports the mobilisation of finance and
includes supportive agreements on climate change, an improved global trade regime, better global tax rules
and the management of the global financial system.
3. Accountability and participation: Given the new financing context, and within it the importance of using several
different types of finance in synergy (domestic, international, public, private), it is essential to create a framework for
on-going dialogue between the various stakeholders involved in each type of finance during the implementation of the
post-2015 agenda. Participation in such a dialogue will allow stakeholders to monitor progress, hold each other
accountable, jointly manage the evolving pattern of finance and make adjustments as required. The dialogue will
need to be informed by data from appropriate monitoring and evaluation (M&E) systems.
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