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Unusually for the UN, there is just one goal for the Third International Conference on Financing for Development that opens in Addis Ababa, Ethiopia, next week. Admittedly it is a big ask. Member states must outline how the world will deliver on the incredibly ambitious development agenda outlined in the draft Sustainable Development Goals: 169 UN targets for progress by 2030 that include wiping out extreme poverty and malnutrition, ending avoidable child mortality, providing universal infrastructure access and a good deal else besides. And one thing is clear: the answer has to involve a lot more than aid. That requires a shift in how the world thinks about development and in how we pay for it.
Amanda Glassman and Casey Dunning make the case for domestic resource mobilization and data as Addis deliverables.
Things were somewhat different back in 2002, when the first international conference on financing took place in Monterrey, Mexico. Coming soon after the agreement of the Millennium Development Goals, that conference discussed debt relief, trade, private finance and domestic resource mobilization (AKA developing countries raising taxes) as tools of development finance. But the highlight of the conference was new aid commitments from industrialized countries including the US announcement of the Millennium Challenge Corporation. In the period 2000–2005, aid flows from industrialized countries increased by over 50 percent, with Monterrey an important spur. That aid surely played some part in the considerable development progress we’ve seen over the past fifteen years, perhaps especially in progress towards the health and education MDGs.
Director of Technology and Development and Senior Fellow
But the SDG agenda is much broader than the MDGs. Rough estimates suggest a multi-trillion dollar price tag (to say nothing of the necessity for policy reform). Compare aid flows — currently around $161 billion dollars. That doesn’t mean aid is irrelevant — it will remain vital to delivering on global public goods, and in helping some of the world’s most disadvantaged gain access to nutrition, infrastructure, health and education services. Still, even were aid flows to rise dramatically, alone they couldn’t deliver on an ambitious global development agenda. The truth is that development is no longer mostly about aid. It hasn’t been for many years.
So what we need to do now is focus on the other, non-aid sources of development finance that were discussed at Monterrey. And they are huge. Remittances to developing countries from migrants living overseas are worth more than twice aid flows: around $341 billion. Foreign direct investment and equity investment alongside private lending to developing countries is worth $928 billion each year (more than five time aid). Domestic private investment in the developing world — building factories and houses, filling offices with equipment — amounts to $3.7 trillion a year (more than ten times aid). And domestic government revenues from taxes and royalties are worth over $5.5 trillion — sixteen times the value of aid flows. CGD colleagues will be hosting a side event at the UN Conference in Addis showcasing these more and different sources of development finance. If you want to see how these numbers compare to aid have a look at this new infographic we made.
If you want to finance a transformative development agenda, it is pretty clear where the conversation should turn. Given Addis is about international cooperation, the conference should focus on what the global community can do to maximize government revenues, private investment and remittances. That means an agenda to help foster economic growth in poor countries as the best tool to increase domestic revenues and investment. And it means progress in opening up markets to exports from the world’s poorest countries, helping companies invest in developing markets and cooperation to make sure those companies pay a fair tax bill, and opening up jobs to migrants who can send remittances home. In a world of climate change it also means ensuring climate-friendly development policy at home and abroad. The draft Addis outcome document already has some language on these topics, but it would be great to see it considerably strengthened.
In short, a transformative development agenda requires a broad commitment to development-friendly policies that, for industrialized countries in particular, goes far beyond aid. The kind of policies measured by the Center for Global Development’s Commitment to Development Index. Owen Barder, who is in charge of the CDI, will be presenting it in Addis during the conference. Watching CDI scores over the next few years would be a good way to monitor if the rhetoric rich countries deliver in Ethiopia is matched by reality in terms of policy reform. Here’s hoping.
For so long we’ve operated under the prevailing assumption that greater economic cooperation among countries would guarantee peace and stability. But now, the world finds itself in a dramatically different context—one that is fractured socially, politically, and economically. Today, more than 2,500 top decision-makers from around the world are gathering to kick off the 48th World Economic Forum Annual Meeting in Davos, Switzerland to address these new challenges.
This year’s theme, “Creating a Shared Future in a Fractured World,” sets the stage for important discussions that prioritize global engagement and innovative solutions to address today’s challenges. Below, CGD’s experts weigh in to shed some light on the ongoing debates, with innovative evidence-based solutions to the world’s most urgent challenges, and also discuss what’s not on the agenda but should be.
For the policymaker looking to improve the delivery of benefits, or for the financial institution trying to expand its customer base, the gap between technical solutions and the situation of the average technology user represents fertile ground for the many new opportunities that the digital economy provides.
This year, the global migration crisis finds itself buried in the agenda. However, it will remain one of the most urgent issues for generations to come if international leadership fail to tackle human mobility with pragmatic, fact-based policy tools. Now more than ever, innovation is imperative. To that end, Michael Clemens has a unique proposal.
Meeting the Sustainable Development Goals will require a major ratcheting up of private finance. So far, that hasn’t happened. Strengthening the role of the MDBs in mobilizing the private sector should be high on the agenda at Davos, says Nancy Lee.
There is no shortage of skepticism about whether global leaders at WEF are serious about addressing the needs of the poor and vulnerable, writes Cindy Huang. Visible progress through core business commitments would send an important signal that refugees are a crucial investment, not a cost—and that corporate leaders are committed to taking action towards, not just talking about, solutions that deliver social and economic impact.
In a world with the 2030 Agenda for Sustainable Development, the international investment policy system stands as an obsolete regime in urgent need of revision and reform. This is the main conclusion of the analysis that the think tank CIECODE conducted for CGD’s 2017 Commitment to Development Index (CDI). The analysis measures the amount of “sustainable development content” included in International Investment Agreements (IIAs) signed between developing and developed countries. Here, we look at best practices, main issues and which countries could do better.
But, first, what do IIAs have to do with sustainable development? By balancing foreign investor’s protection on one hand and States’ right to pursue public policy interests on the other, IIAs have the capacity to influence the type of foreign investments and the conditions under which they are made. Foreign investments have been developing countries’ main source of external finance for the last two decades (beyond remittances, external debt, or ODA) and that they have concrete implications in host countries’ day-to-day realities (job creation, environmental impact, fiscal revenues generation, or the promotion of vulnerable social groups).
Worldwide, the investment regime is a complex spaghetti bowl made up of more than 3300 IIAs (mainly, Bilateral Investment Treaties and Free Trade Agreements), which has been expanding relentlessly since the early 80’s.
Figure 1: Trends in Number of IIAs Signed, 1980-2017
Note: Preliminary data for 2017. 3,323 is the cumulative number of all signed IIAs, independently of their entry into force. Terminated IIAs, for which termination has entered into effect, are not included.
CIECODE has analyzed over 300 IIAs signed by developing countries with the 27 CDI countries, and has observed that sustainable development is often poorly secured in these agreements. When IIAs include social or environmental safeguards, they are so weak and full of caveats that their impact is highly diminished. They are focused on protecting foreign investors’ rights and interests leaving aside their obligations. Finally, they have failed in finding equilibrium between protecting foreign investors from unjustified discrimination measures by the host states and ensuring that these retain their right to regulate for pursuing public policy interests. This bias has prevented IIAs from becoming a useful tool to boost and promote sustainable investments at the global and domestic level.
CIECODE’s analysis also shows that IIAs signed with those developed countries most in need are the ones presenting the scarcest development content.
Figure 2: Development Content of IIAs Related to Human Development of Partner Country
Source: CIECODE’s analysis for 2017’ Commitment to Development Index. Data available.
Leaders and laggards
These general conclusions hide many interesting facts and variance at country level. For instance:
Four EU countries (Denmark, Germany, Portugal, and Spain) have obtained the minimum score on all the analyzed issues, meaning that in their treaties there is no disposition in place promoting sustainable development through foreign investment. This is a surprising result as both Denmark and Germany are leaders on the CDI overall—ranked first and fifth in the 2017 edition.
At the upper end of the scoreboard, Canada stands alone as the best student of the class, with the United States and New Zealand in second and third, respectively. In their treaties, they explicitly recognize the right of the Parties to regulate in pursuit of their legitimate public policy objectives. Further, detailed provisions to ensure the independence and transparency of the dispute resolution system are in place.
Although none of the existing IIAs are yet perfect instruments to promote sustainable development, the results of the analysis indicate that some countries are aware of the links between foreign investment and sustainable development when drafting and negotiating their agreements. There is a huge opportunity for countries to learn from each other’s policy design and make their investment agreements more development-friendly.
There is some good news
In terms of the inclusion of sustainable development and human rights content in investment treaties, the overall situation is still unsatisfactory (the average score of the 300 IIAs analyzed by CIECODE is below 2 out of 10). But, it’s at the same time true that almost all the improvements have taken place in the last 5 to 10 years (see Figure 3). The Investor-State Dispute Settlement system (ISDS) is a relevant area in which some advances have been observed.
Figure 3: The Evolution of Development Content on IIAs (2017-2000)
Originally, the ISDS was designed as a tool to protect foreign investors against undoubtedly discriminatory measures by host states. It grants foreign investors the possibility to take their disputes with host states to private international arbitration courts and seek for economic compensation if they believe any law or measure by the host state has damaged its investments and reduced its expected profit.
Today, with more than 60 new ISDS cases presented to tribunals each year, the system has mutated into something vastly different from its original expectations—at times with grave consequences. It gives foreign investors the power to challenge democratic choices by host states, elevates property rights over any other consideration (incl. human rights) and allows for fully confidential procedures. In recent decades, it has allowed investors to oppose health legislations against tobacco and environmental laws against industrial discharges' contamination, and even to challenge the end-of-apartheid laws in South Africa. States, exposed to unforeseen legal and financial risks, may decide to freeze legitimate government policymaking or even withdraw existing regulations. Many actors—from the UN and the EU to academia—agree on the main strands of this verdict.
CIECODE’s analysis shows that the ISDS dispositions are the ones in which few improvements have been made. Around 70 percent of the analyzed agreements do not include any meaningful content to improve the ISDS’ transparency, impartiality, or due process standards.
But there is a new and promising trend. More than 20 States have signed the UN’s Convention on Transparency in ISDS since 2014. This Convention, once in force, will oblige States (and their investors) to comply with a set of stringent transparency standards such as the publication of all relevant documents by the ISDS tribunal or the admittance of any “third persons” affected by the dispute to the process. While these might seem as minor improvements, they are almost disruptive innovations in a system that has remained untouched for almost three decades.
Sustainability and public pressure
One of the most unexpected conclusions of the analysis comes from applying CIECODE’s methodology to the investment chapter of the draft version of the EU-US Transatlantic Trade and Investment Partnership (TTIP). Despite the concerns with loss of democracy and the power of big corporations that the TTIP provoked in European and North American societies, none of the 300 IIAs analyzed in CIECODE’s study have shown a more development-friendly approach than the TTIP’s draft. This draft safeguarded states’ policy space to “achieve legitimate policy objectives, such as the protection of public health, safety, environment or consumer protection” and granted that the ISDS would operate under adequate independence, fairness, and openness.
The fact that the TTIP’s draft—being produced under high levels of social awareness and public scrutiny—is the IIA with the most advanced provisions in terms of development-content and transparency highlights the importance of public scrutiny to achieve sustainability outcomes in policymaking.
Meeting the 2030 Agenda
Today, it is no longer enough for investments to create jobs, contribute to economic growth, or generate foreign exchange. The development challenges that lie ahead demand investments that, on top of everything else, are not harmful for the environment, bring social benefits, promote gender equality, and help local companies to move up the global value chain.
If the 2030 Agenda for Sustainable Development is to be taken seriously, the international community must rise to the occasion and fast track the reform of the global investment policy regime in a coherent and ambitious manner. There are evidences, experiences, and best practices ready to be exploited.
Javier Perez is the director of CIECODE, a Spanish research institute working in development and specialized in the analysis of public policies with an impact on sustainable development, social justice and human rights. Economist and jurist, his main area of expertise is international trade policies and its implications for development and human rights. Lately he has lead two innovative projects to monitor and evaluate the Spanish parliamentarian activity from a PCD perspective. Javier worked until 2011 at Oxfam International as Economic Justice Research Coordinator.
Maria Vega is a researcher at CIECODE. She holds a BA in Journalism from Universidad Complutense de Madrid and a MA in International Public Administrations and Politics from Roskilde University. Her main area of expertise is the analysis of migration public policies from a PCD perspective.
Over the last few weeks a couple of (fantastic) co-authors and I have published two papers about progress towards the SDGs (links below). Working on the papers has helped me think through what a short time fifteen years is in development, and how much a timeframe can shape what is seen as the best solution to a problem. And they raise the question: do the fifteen year targets of the SDGs stand in the way of their vision of integration and sustainability? If you wanted to achieve long term development progress, you’d probably focus on technology change, learning and innovation in policies, and improving institutional functioning. If you wanted to improve outcomes in fifteen years, you’d probably focus on throwing money at technical solutions. The problems with the second approach include that we don’t have the money, and the technical solutions won’t necessarily work best over the long term.
The first paper, written with Dev Patel, looks at the demand for innovation to meet the SDGs. At one level, it suggests that the need for new technologies and approaches is actually quite low: along most of the income distribution, there are countries already (reportedly) succeeding in meeting the SDG targets we look at, suggesting it may be possible with the body of knowledge that currently exists to bring the maternal mortality ratio of a country with a GDP PPP per capita of $2,850 to under 70, for example. The amount of progress most countries could get by “moving to the policy frontier” is more than they would get from the world as a whole moving to better outcomes at a given level of income at any reasonable rate of global technology advance. Or to put it another way, in a period of 15 years, national policy decisions on funding and focus likely dominate global technology change as the most powerful tool for increasing the rate of progress.
A second paper with Mallika Snyder asks Meeting the Sustainable Development Goal Zero Targets: What Could We Do? The paper emphasizes how much more than money achieving the targets would take—including massively improving the quality and sustainability of service delivery alongside increasing demand, for example. But it also notes that in many cases we do at least understand the technical solutions that could deliver (close to) zero goals. It also suggests if we used such solutions and achieved a lot of progress towards the SDGs by 2030, we would likely have spent trillions of dollars in the effort.
Looking at the papers together leaves me with the feeling that fifteen years may be too short a period to map out a holistic, far reaching vision of sustainable development. As the 2015 UN General Assembly resolution proclaimed, the SDGs present an “integrated and indivisible” balance of the three dimensions of sustainable development: the economic, social and environmental. They recognize the “deep interconnections and many cross-cutting elements” of the goals and that “social and economic development depends on the sustainable management of our planet’s natural resources.” I strongly believe all of that is true about long term development, but I think this is less true about progress over a decade and a half.
For example, over periods as short as fifteen years, the link between increases in income and increases in health are fragile. Over a decade and a half, the generational effects of greater school enrollment on child health will only have started to emerge. For a process that will play out over a few centuries, the relationship between climate change and broader development progress over fifteen years is going to be comparatively limited—and the vast majority of climate change that will occur over that time is locked in by emissions we’ve already released.
Again, as the analysis in my paper with Dev suggests, the hope for making considerably accelerated progress during the SDG timeframe relies primarily on “moving to the existing policy frontier” rather than investing in technology. In part, that reflects that researching and rolling out technologies simply takes too long to imagine a huge impact of new technologies in fifteen years. (Think: adoption of TCP/IP in 1983 and only three percent of the world using the Internet in 1998, or the first mobile phone call in 1973 and less than one mobile subscriber per 1,000 people worldwide in 1988).
So while long term development is driven by interlinked progress across a range of measures of the quality of life underpinned by institutional development and technological change, rapid progress over a period of as short as fifteen years is more likely to be driven by spending more on existing solutions. The problem with an approach based on existing technical solutions is the same as it was when proposed by “costing studies” of the Millennium Development Goals fifteen years ago. It ignores the institutional and other barriers to effective rollout.
One case where this isn’t true appears to be basic health programs including vaccination and bednet provision, where rollout of simple solutions at scale really has made a huge difference to health outcomes. And there will be other exceptions across the SDGs—including cases where norms and institutions or complementary outcomes and technology availability change so rapidly that fifteen years is quite long enough to see a major impact. Again, it isn’t clear the SDGs are actually having the effect of encouraging short-termism. And, frankly, when it comes to people dying from easily prevented conditions, short-termism is not only justifiable but a moral imperative. Still, when it comes to sustainable global progress, fifteen years simply isn’t a long enough time-frame to realize the full vision of the SDGs.
In 2014, Mark Lowcock, then head of the UK’s Department for International Development, pulled off an unexpected coup: securing an agreement between donor governments on new rules for counting official loans as aid. Some neat diplomatic footwork is needed again now, because negotiations over extending this agreement to donors’ investments in the private sector are threatening to fall apart. Among the consequences could be that the UK walks away from using internationally agreed standards for measuring aid and starts to create its own statistics. Other countries may follow.
A better measurement system for unbiased aid allocation
Consistent aid data has intrinsic value, and the details of disagreements between countries are interesting, but the bigger picture is this: using aid to mobilize private finance is one half of the globally-agreed strategy for financing the Sustainable Development Goals (the other half is domestic revenue mobilization in developing countries). If donor governments do not get enough recognition for putting money into the private sector, they may allocate too little, and if aid statistics are inflated, they may allocate too much. The world needs an accurate system of measurement so that allocation decisions are undistorted and driven by expected development impact alone. And besides quantities, quality matters too: governments are also disagreeing over safeguards intended to protect the developmental nature of aid and, crucially, ensure that it does not become a means of providing state aid to domestic firms by the back door. But there is also a risk of imposing constraints on development finance institutions (DFI) that will limit their positive impact.
This is a complex topic with much for governments to disagree about, but negotiations are stuck on square one: how to count loans as aid. This new CGD note lays out all the gory details—here we present the nub of it. It should be stressed that negotiations are ongoing and these proposals are subject to change.
Where we are now
Governments are stuck between a rock and a hard place. The rock is the 2014 deal for loans to the official sector (sovereigns, municipalities, state-owned enterprises) which has set a benchmark that some countries refuse to undermine. The hard place is the regulated system of official export credits and lending rates observed in private markets, which define loans that should not be counted as aid. The problem is that, at least in the current low interest rate environment, the 2014 benchmark implies some loans made by export credit agencies, and sometimes private financiers, could count as aid.
A further twist is that there are actually two proposed methods for counting private sector aid: the “institutional” method, which counts the full face-value of money governments give to their DFIs; and the “instrument” method, which calculates a number for aid—known as the ‘grant element’ of a loan—in every transaction between a DFI and a private enterprise. The deal currently on the table deviates from the 2014 official-sector deal, using a “private sector surcharge” to push down the ODA content of some shorter-term loans in the instrument method, in attempt to minimise inconsistency with the market, and export credits. Those countries which do a lot of lending and intend to use the instrument method feel unfairly treated by others who intend to use the institutional method which they, in turn, regard as an egregious scheme for inflating aid numbers.
The truth is that there is no perfect answer. Even if donors carefully calculated aid using parameters tailored to each transaction, there would still be disagreement over what those parameters should be and no objective means of resolution. But an administrative system for creating aid data needs to be simpler, and compute aid by sorting investments into several boxes. There is a danger of getting hung up on a few transactions that might look wrong and forgetting the bulk. Export credits are not always the right comparator because DFIs often lend to riskier enterprises. Plus, the current low interest rate environment will not last forever. A deal should be struck that meets holdouts halfway on the quantitative side of instrument method, to be followed by qualitative safeguards to isolate transactions stray close to state aid, and ensure that only those with a clear development rationale, and which private investors would not finance themselves, get counted as aid.
a system that deviates from the 2014 deal by identifying sectors where lending to a private enterprise is notably more or less risky than lending to the state; or,
a more finely differentiated system of private sector risk premia that looks less like the 2014 official sector deal but which creates scope for giving the holdouts some of what they want, but not everything.
Although not currently the sticking point in negotiations, the proposals for equity need revising too. The introduction of a cap on negative ODA in the instrument method threatens to transform equity investing into an ODA pump. If I had my way, the institutional method would also be revised so that governments report an ex-ante grant element estimate when they inject capital into their DFIs, based on the institution’s targeted rates of financial return and its geographic coverage. But that may be too much to ask.
A last word on transparency
A compromise is worthwhile on the assumption that most reported PSI will be genuine aid, even if somewhat inflated. This assumption needs to be verified. As things stand some DAC member governments want to retain the right to redact some transaction level data for PSIs on the grounds of confidentiality. The DAC must find a way to permit public scrutiny of how much aid is being claimed from what investments on what terms in what places, even if based on averages at some level of aggregation. DFIs should also publish the development rationale for each investment they make. Secrecy will only strengthen suspicions that ODA is being misused.