Give poor countries a chance to develop

5 Summits. 1 week. 17 Sustainable Development Goals.

Introduction by UN Deputy Secretary-General, Amina Mohammed

We all make choices about resources — what to buy, what to invest in and what to forgo. Now imagine making these decisions with the needs in mind of 100 million people or a billion people.

Political, finance and community leaders will gather at the United Nations for a special meeting to unlock ideas, resources and partnerships needed to accelerate progress on the Sustainable Development Goals.

When experts like Dr. Ngozi Okonjo-Iweala and Homi Kharas speak — people will listen. The former Minister of Finance and the Brookings Institute Vice President break it down — what it will take for countries to close the gap on financing to reach the SDGs.

The following is a guest post by Dr. Ngozi Okonjo-Iweala and Homi Kharas

At this July’s High-Level Political Forum reviewing progress on the sustainable development goals, the mood among officials was gloomy. The UN’s Sustainable Development Goals Report, 2019, called the challenges that remain “monumental.” The consensus view is that integrated solutions are needed. While it is clear that the goals themselves are related to each other — for example clean water is essential for good health outcomes — an integrated approach has not yet been properly developed with regard to financing. The time has come to get serious about this. As one report says: “when policy objectives or specific investments are not costed and budgeted, and not linked to investment plans and policy strategies, the development plan risks remaining a vision, rather than becoming a vehicle for change.

We need tools that can help us focus on financing specifics at the country level. Tools that help maximize the effectiveness of spending, as well as increase the volume of spending. But to get there we must refine the traditional frame for financing which is not working for low-income countries. Starting with financing availability and then trying to determine what can be done within the limited resources is leading to progress that is far too slow and outcomes that are far too fragmented given the urgency of the change that is needed. We need to reverse this process to start from the desired outcomes and then ask how much financing is needed and what is the gap, followed by a financing plan to fill that gap using domestic and external, public and private sources.

Assessing financing needs and actual spending levels

Any financing strategy must start with an assessment of costs to achieve the desired outcome. These financing “needs” can then be compared with what is actually being spent, as a first step in identifying financing “gaps” that an integrated financing strategy can look to address.

This deceptively simple logic is, however, not easy to implement. For a start, the SDGs do not fit neatly into budget classifications, so important assumptions must be made in using budgetary data to assess actual public spending levels on the SDGs. Take for example education as a category. There is readily available data on how much spending on education takes place (at least by governments; spending by households is less comprehensive), but it is far harder to get a global picture of whether the spending is being oriented towards meeting SDG targets, or, as importantly, whether spending levels on education will indeed accelerate SDG learning outcomes.

An additional complication is that, by design, many of the SDGs are interrelated. Dr Ngozi was a member of the Education Commission that looked “beyond education” to assess what needed to be done to achieve the SDG for education. The Commission found important linkages between early child education, nutrition and health and immunizations. The analysis concluded that health and nutrition positively impacted education outcomes in the short-term and long-term, and conversely that educational outcomes, especially women’s education and agency, affected child health outcomes.

Despite these difficulties, there is now a body of research that has built up financing needs across at least ten different SDG goals and targets. An earlier analysis, co-authored by Homi Kharas and John McArthur, found that there are considerable gaps between financing needs and actual spending levels in most, although not all, developing countries. In low-income countries, for example, we found that public spending levels on the SDGs amount on average to only $115 per person per year, while needs are in the range of $300/person/year.

With gaps like these, and given the strong interlinkages between goals, discussions of priorities seem pointless. The real issue is how to increase spending levels on the SDGs in poor countries.

Closing the Gap

Much of the talk about financing gaps for the SDGs stresses how large they are: “billions to trillions” is the refrain. The financing gaps relative to GDP are largest in low-income countries; all of them have financing gaps of over 10 percentage points of GDP. But from an aggregate global perspective, the order of magnitude of filling this gap, according to the analysis in Kharas and McArthur, is about $150 billion per year, compared to $600 billion per year to fill the gaps in lower-middle-income countries (which are also far more populous) and $250 billion per year to fill the gaps in upper-middle-income countries.

An integrated financing plan is needed to find this missing $150 billion for low-income countries.

It must start with their own efforts to raise domestic resources. The investments in human and physical capital that would lead to achieving the SDGs have huge social rates of return. Governments that are successful in delivering these outcomes would enjoy enormous support. Even [AFR1] business communities across the world are starting to understand that paying their fair share of taxes to achieve these goals would be beneficial to their bottom-line.

Low-income countries have opportunities to raise domestic revenues. They can get more by fairer taxes on mineral-extracting multinational companies; from bringing into the public treasury monies that currently flow illegally abroad; by reducing tax expenditures on subsidies going to the rich.

But this is not easy work. Even if leaders are willing to make a greater effort to raise taxes, they may not have the capacity to do so. They need help, and that is coming, but slowly. The OECD/G20 base erosion and profit shifting action plan has allowed more jurisdictions to gain access to information to reduce tax avoidance, and work is underway to address challenges of digitalization and of minimum tax levels. But actual resources going to low-income countries from these efforts remains small.

At the World Bank, a Stolen Asset Recovery initiative helps national authorities to pursue asset recovery cases. The experience shows how long and arduous the task can be. At the OECD, Tax Inspectors Without Borders can help build country capacities; their work has helped individual countries raise tens of millions of dollars, but this is far short of the hundreds of billions required.

The administratively easiest way to raise domestic revenues is through a VAT or sales tax. But governments need to be careful. These taxes can be regressive and, in practice, they are, according to the Commitment to Equity research. The poorest households spend the largest fractions of income on consumption of goods and end up paying more than their fair share of indirect taxes. Raising tax levels will, in the first instance, hurt these households. That puts a greater burden on governments to ensure that the benefits from public spending more than compensates — a tall order[AFR2] for some governments that lack effective institutions.

There are also options to expand external finance to fill financing gaps. Aid is an obvious example. Despite the challenging global environment, the hope is that donors will stick to their commitment particularly for low income countries if objectives are to be met.

There are, however, other sources of external finance that can be tapped. In the present global conjuncture, with slowing growth, interest rates are at very low levels. This can be advantageous for some developing countries with strong macroeconomic fundamentals who can tap private markets directly or, at even more favorable rates, tap private markets through the intermediation of multilateral and other official lending agencies. One study from a researcher at the Banca d’Italia estimates that multilateral banks can unlock $1.4 trillion in lending through more aggressive use of their balance sheets.

Getting to scale

At the end of the day it will require the combination of different types of finance — domestic and external, public and private — that will provide the scale that is needed for a multi-sectoral, integrated push forward on the SDGs. A national financing plan must link these different types of finance with the different sectors and gaps that have been identified. All money is not the same. We have seen first-hand the instincts of cabinet officials to avoid borrowing for recurrent expenses like health and education, despite ample evidence that these can have enormous development and welfare benefits. And conversely the instincts of official development bankers to avoid even the smallest risk of future debt servicing difficulties in beneficiary countries, despite considerable evidence that well-structured investments improve creditworthiness.

Financing strategies need to surmount these instincts. They can be powerful tools to give poor countries a fighting chance to develop.

5 Summits. 1 week. 17 Sustainable Development Goals.

23 September Climate Action

23 September Universal Health Coverage

24–25 September Sustainable Development

26 September Financing for Development

27 September Small Island Developing States

About the authors:

Dr. Ngozi Okonjo-Iweala serves as the Board Chair of Gavi. She has twice served as Nigeria’s Finance Minister. Dr Okonjo-Iweala also serves on the boards of the Rockefeller Foundation and the Center for Global Development. She is also the chair of African Risk Capacity, a specialized agency of the African Union to help member states prepare for and respond to extreme weather events and natural disasters.

Homi Kharas is the Interim Vice President and Director of the Global Economy and Development program. In that capacity, he studies policies and trends influencing developing countries, including aid to poor countries, the emergence of the middle class, and global governance and the G-20. His most recent co-authored/edited books are “From Summits to Solutions: Innovations in Implementing the Sustainable Development Goals” (Brookings Press, 2018).

Our World. Our Future.

A platform for discovery and sustainable development from the United Nations Deputy Secretary-General, Amina J. Mohammed