What is Financing for Development

What is Financing for Development

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  WHAT IS FINANCING FORDEVELOPMENT?
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  WHAT IS FINANCINGFOR DEVELOPMENT? Page 1 12/9/2015 What is Financing for development? This document aims at raising awareness of college students who receive their first introductory training course on international development. At the end of this course, the students will understand the need for synergies between the public and private sectors in order to increase available fund to fulfill the Sustainable Development Goals (SDGs). It is of the utmost importance that the international community mobilizes itself towards the fulfillment of the SDGs within the next 15 years. The self- explanatory figure explains the process of financing for development while the short text brings an overall explanation.
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  WHAT IS FINANCINGFOR DEVELOPMENT? Page 2 WHAT IS FINANCING FOR DEVELOPMENT? Economic growth is the path every country of the World is taking to move forward with the increase of the population. We all know that the development stage is different from country to country, but there is an internally recognized “classification” of the countries with regard to their respective level of development. However, as mentioned by Soubbotina and Sheram1, “Is the goal merely to increase national wealth, or is it something more subtle? Improving the well-being of the majority of the population? Ensuring people’s freedom? Increasing their economic security?” In fact, it is probably a mix of all these more noble intentions. Least develop countries (LDC), Lower middle income countries (LMIC) and Upper middle income countries (UMIC) need money in their journey towards development and the financing has traditionally been provided by international public financing organisations, mainly in the form of Official Development Assistance (ODA). The public sector is financing these countries for one main reason: to gain developmental benefits. However, there is not enough funds from the public sector to provide for the immense development needs in emerging economies, therefore the private sector becomes increasingly involved. But why would the private sector make the decision to get involved? Private investors are generally looking for low risks and high returns on their investments. However, these considerations may also be associated with development benefits, either by contributing to government revenues; to providing jobs and incomes; to expanding the access to and quality of infrastructure and social services and to increasing innovation and cost competitiveness.2 In addition to this, some investments make a profit at the same time as generating development benefits, while others may have the two purposes.3 Whether financing for development comes from the public or the private sector, there is one shared obligation: it is of the utmost importance that the international community mobilizes itself towards the fulfillment of the SDGs within the next 15 years. Financing for development comes from four different sources: the domestic public finance, the international public finance, the domestic private finance and the international private finance. The overall amounts provided for development assistance is difficult to grasp as in some cases, only rough estimates are available or there is a lack of comprehensive data or data comes from informal channels. However we can bring forward some numbers.  In 2013, total ODA accounted for around US$135 billion4. 1 Beyond Economic Growth – Meeting the Challenges of Global Development, The International Bank for Reconstruction and Development/THE WORLD BANK, 2000 2 Mobilizing Private Investment for Post-2015 Sustainable Development, Homi Kharas and John McArthur, Briefing Note, July 16, 2014 3 Harnessing all resources to end poverty, Development Initiatives, March 2013 4 Source: OECD - DAC http://www.oecd.org/dac/stats/aid-at-a-glance.htm
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  WHAT IS FINANCINGFOR DEVELOPMENT? Page 3  The social impact flows to developing countries (flows that bring developmental benefits) totalled US$ 670.9 billion in 2010, while profit- seeking flows (those that look for low risk and high return) totalled US$ 997.3 billion3. Through grants, concessional and non-concessional loans and other means such as guarantees, equity investments and risk sharing instruments, the Governments of the OECD countries (the multilateral development banks or MDBs) are in a position to catalyze, mobilize and create synergies necessary for the emerging countries’ to increase its contribution to development (Domestic Resource Mobilization or DRM, the process in which countries transparently raise and spend their own funds to provide for their people5) as well as the domestic and international private sources of financing to invest in development projects.6 The role of the MDBs is to strengthen the LDC, LMIC, UMIC domestic policies, legal, regulatory and institutional environment (the enabling environment) so the private investments are unlocked and can contribute to the development. With this regard, Policy Guidance and Technical Assistance are key functions of the MDBs. As far as the Private sector is concerned, Domestic Direct Investments and Foreign Direct Investments (FDI) are important sources of financing. Remittances and private philanthropy are also quite important, the latter often looking where there could be an edge which can really make a difference to the total effort7. Banks remain important investors for infrastructure projects but since they have mostly short-term liabilities, a much broader group of investors needs to be involved with long-term liabilities. Therefore, we see the need for diversification of the financing through institutional investors and others for equity flows, bonds, short-term debt flows and syndicated bank loans. Financing is urgently needed for different types of activities such as in the infrastructure sector of emerging countries to deliver services for the population. Investments in the agriculture sector and the extractive industry as well as in the social sector and the service sector are also needed. As the figure below is showing, the collaboration between countries (LDC, LMIC, UMIC and developed countries) as partners is necessary for the achievement of the SDGs. The financing process is in place to make this happen within the next 15 years. 5 USAID 6 From Billions to Trillions: MDB Contribution to Financing for Development, July 2015 7 The Role of Private Philanthropy in Development, Mr. Geoffrey Lamb, Gate Foundation, December 2015.
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  WHAT IS FINANCINGFOR DEVELOPMENT? Page 4 THE WORLD WE WANT 8 Looking mainly for developmental benefits. Looking mainly for low risks and high return. Good governance (including peace and security) Environmental sustainability Social inclusion Economic development (including the end of extreme poverty) Domestic Public Finance Domestic Private Finance International Public Finance International Private Finance FINANCING FOR DEVELOPMENT Grants Concessional loans Risk-sharing instruments Guarantees Non- concessional loans Equity investments Foreign Direct Investment Remittances Equity Flows Bonds Private philanthropy Short term debt flows Syndicated bank loans Direct Investments Least Developed Countries, Lower Middle Income Countries, Upper Middle Income Countries and … Developed Countries of the OECD Infrastructure and decarbonization Agriculture Extractive industry Social sector Service sector Domestic Resource Mobilization Inputs Activities Outputs 8 https://www.worldwewant2015.org/