Finance for Sustainable Development

updated December 2016

Supply and Demand

All countries commit financial resources to improve the standard of living of their people. Whilst the demand within poorer countries to pursue this objective is proportionately greater, their access to finance for sustainable development through conventional channels is limited.

Inadequate legal and physical infrastructure deters foreign direct investment into these countries. Sovereign debt financing has improved in Africa but low credit ratings continue to constrain this option. Whilst domestic resource mobilisation through tax and institutional investment is expanding, national budgets available to support poverty reduction strategies remain modest relative to developed economies, when expressed as a ratio of GDP.

Dedicated sources of finance for sustainable development are available to shore up this funding gap for low income countries. Foreign aid typically supports social programmes, economic development and institutional capacity building.

Multilateral development banks, such as the World Bank and the African Development Bank, provide concessionary loans for infrastructure projects. These often fund special economic zones, where favourable tax and regulatory environments are designed to attract foreign direct investment.

An important informal source of finance for development is the value of remittance payments sent by migrant workers to their families. According to the World Bank, this value reached $432 billion in 2015, almost three times the total amount of foreign aid for that year.

For many of the world’s poorest countries, remittances sent by migrant workers represent a significant percentage of GDP and the greatest source of foreign currency. In Tajikistan, the world’s most remittance-dependent country, about half of the work force is absent, sending remittances amounting to 37% of GDP.

Remittances have the advantage over foreign aid of reaching households directly, cutting out any losses through corruption or unnecessary layers of bureaucracy. On the other hand, remittances cannot be channelled into strategic national development projects.

Unfortunately, recent years have seen the emergence of forces which threaten to widen the gap between the supply and demand for finance for sustainable development. The inward-looking political dynamic prevailing in European and North American donor countries seems likely to put downward pressure on their aid budgets. Question marks over the effectiveness of foreign aid have been co-opted to justify political backsliding on aid promises.

This comes at a time when demand for development finance has expanded to meet the challenge of the Sustainable Development Goals (SDGs) approved by world leaders in 2015. The targets relating to human development are particularly ambitious – including the elimination of poverty and hunger, and the provision of universal access to energy, safe water, education and health services. This new vision to “leave no one behind” is radical and has significant implications for cost.

Meanwhile, the international community must contend with growing awareness of the expense of adapting to global environmental change. Whilst responsibility for most degradation largely rests with industrialised countries in the northern hemisphere, the impact is likely to be felt disproportionately in poorer countries located in tropical regions.

Estimating the cost of climate change mitigation and adaptation in developing countries can barely keep pace with new evidence of the scale of harmful impacts. The same is true of financial projections for meeting the Aichi Biodiversity Targets, a set of goals agreed under the Convention on Biological Diversity. Whichever estimates are adopted, the annual cost of tackling environmental change in the poorest countries alone will amount to hundreds of billions of dollars, several times the current supply of foreign aid.

It is clear that conventional sources of finance for the poorer countries will not be sufficient to meet this perfect storm of rising demand. Endorsement of the SDGs was not accompanied by a plan to pay for them, despite the efforts of the UN Financing for Development Conference held in Ethiopia two months beforehand. References to “innovative sources of funding” and “leveraging private capital” are often deployed in relation to this shortcoming but tend to lack substance in the contexts that matter most – assisting the very poorest households and adapting or compensating for environmental degradation.

Putting a price on sustainable development must overcome the complication that many of the Goals overlap. For example, a programme to diversify crops on small farms in Africa makes as much good sense for poverty reduction as for adaptation to climate change.  Protecting a tropical forest preserves biodiversity as well as reducing carbon dioxide emissions. These “win-win” options are valuable for prioritisation but confuse the financial equations.

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What is Financing for Development?
A World Bank manager explains the basic financial tools available for financing the SDGs, from grants to equity

from Development Finance Forum


Domestic Resource Mobilization
In this MOOC presentation, Ngozi Okonjo-Iweala, former Nigerian Minister of Finance, emphasises the importance of tax collection in financing national development policies

from Development Finance Forum

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