The world economy is awash with liquidity and the cost of debt has never been so low – still many developing countries struggle to obtain sources of international finance for long-term productive investment. UNCTAD’s Trade and Development Report, 20151 argues that dedicated government action is needed to correct this shortfall if ambitious development goals are to be achieved.
This task cannot be entrusted entirely to financial markets. Instead, specialized public institutions and mechanisms designed specifically for this purpose will be crucial. As UNCTAD’s Secretary-General Mukisha Kituyi notes, “most successful big investment pushes have managed to effectively mix public and private initiatives in some way or another, and so in a very basic sense, all development finance is blended. The big issues are who is doing the blending, how and to what end?”
Development banks, designed specifically to compensate for the short-termism of private capital flows and markets, should be strengthened, the report contends. At the international and regional levels, these banks have accumulated extensive skills and knowledge over the years, but their reach is hampered by limited lending capacity.
Development banks should concentrate on projects with positive externalities and long-term economic and social returns, including infrastructure and social investments, as well as supporting small and medium-sized enterprises and sectors (such as agriculture) and activities (innovation) that are essential for development but often seen as too risky by private finance.
South–South cooperation could offer one way to enhance the role of development banks, the report concludes. There is a wealth of experience to draw on in the South but also resources to be tapped more widely. Loans disbursed by just three national banks in China and Brazil in 2014 stood at $1,762 billion.
Sovereign wealth funds (SWFs), holding more than $7 trillion assets – of which $6 trillion are owned by developing countries, offer another source to boost long-term financing. Most of them, however, make the same portfolio decisions as private institutional investors. While more than half of all sovereign wealth funds invest in infrastructure (mostly energy, transport and telecommunications), the target is often developed, not developing countries. In order to take better advantage of such funds, policy measures to boost project management capabilities in developing countries may help address criticism that there are too few large scale projects to attract sovereign wealth funds.
Public–private partnerships have garnered much attention as a mechanism for financing infrastructure projects when public budgets are constrained. The report notes, however, that public–private partnerships have a chequered record in delivering public services. Furthermore, in many cases they have not actually created additional finance: from an accounting point of view, they have taken some debts off the current government budget, but have augmented future obligations and liabilities. Hence, even in countries with a long history of public–private partnerships, the lion’s share of investment in infrastructure in developing countries remains public, not private.
Official development assistance (ODA) continues to play a critical role in resource mobilization, particularly for the poorer and more vulnerable developing countries. ODA provided by members of the Development Assistance Committee of the Organization for Economic Cooperation and Development currently rests at just 0.29 per cent of their gross national income in 2014, well below the target level of 0.7 per cent of gross national income and lower than the share reached in the early 1990s.
Yet even these numbers may be optimistic, the report notes, as the measure includes ODA modalities that do not generate net financial flows to the receiving country, such as internal-donor expenditures and debt relief.
The report documents other trends in the ODA landscape:
• Since 2008, less than 40 per cent of total ODA by Development Assistance Committee members has been directed towards economic infrastructure development and other productive activities.
• Blending ODA with private capital for long-term investment has been rising, with the aim of increasing resource mobilization. However, the use of public aid for leveraging private finance should be considered with caution, to avoid the risk of privatizing benefits and socializing losses without actually adding new funding for development.
• South–south cooperation is adding more resources and fresh approaches to development assistance. Development assistance originated in developing countries account for an increasing share of total development cooperation, and is more oriented towards infrastructure development and economic activities.
Report: http://unctad.org/en/PublicationsLibrary/tdr2015_en.pdf
Overview: http://unctad.org/en/PublicationsLibrary/tdr2015overview_en.pdf
