Investment in the least developed countries (LDCs) will need to rise by at least 11% annually through 2030, a little more than the 8.9% between 2010 and 2015, in order for them to achieve the sustainable development goals (SDGs). The United Nations’ World Economic Situation and Prospects 2017 report now focuses on the difficulties in securing sufficient financing for the SDGs, given the global financial system and current economic environment.
The United Nations Conference on Trade and Development’s (Unctad) 2014 World Investment Report estimated that developing countries would need US$2.5 trillion annually until 2030 to achieve their SDGs. According to the 2016 edition of Unctad Development and Globalization: Facts and Figures, in order to close the large infrastructure deficit in developing countries, spending must reach US$1.8 trillion to US$2.3 trillion per year by 2020 compared with the current US$800 billion to US$900 billion.
These UN estimated financing gaps have been corroborated by others, such as the World Bank, the Organization for Economic Cooperation and Development and World Economic Forum. For example, the estimated annual investment needed to attain the SDGs, according to WEF, is US$3.9 trillion compared with the current average of US$1.4 trillion — a yearly shortfall of US$2.5 trillion.
Avoidable financing gaps
Unfortunately, the financing gap is not because of a global shortage but problems of allocation due to global economic governance and geopolitics influencing investors, donors and developing countries. The current global environment — characterised by weak economic growth, slow trade expansion, soft commodity prices and volatile international capital flows — has made things worse.
If rich countries had met the 0.7% aid target from 2002, developing countries would now be better off by US$2 trillion at least. But overall aid has never ever reached even half the target since the 1960s and currently stands at 0.3%. The aid gap for 2014 alone was more than US$192 million. Furthermore, refugee spending is reducing country programmable aid.
Meanwhile, developing countries are losing a great deal to tax havens and transfer pricing or trade mis-invoicing by transnational corporations. As the Panama papers revealed, tax havens enable TNCs to not only evade taxes but also launder dirty money.
Illicit financial flows from developing and emerging economies between 2004 and 2013 were estimated at US$7.8 trillion, greater than the combined aid and foreign direct investment flows to poor countries. Between 2010 and June 2012, OECD countries froze US$1.4 billion of corruption-related assets but only returned US$147 million to the countries of origin. Thus, preventing or even reducing IFFs and returning the confiscated resources can help close the funding gap.
The imposition of a small tax on short-term capital flows — known as the Tobin tax — can not only lessen their volatility but also the risk of financial crises. This can reduce the need for holding foreign reserves for protection and enhance the development impact of capital flows.
A global Tobin tax could generate between US$147 billion and US$1.6 trillion a year, depending on the rate and coverage. Similarly, a global financial transactions tax system could generate significant resources, at least as much as aid, if not more.
Institutional investors hold trillions of dollars in liquid assets instead of investing them in long-term projects. For example, pension funds hold around US$34 trillion in assets, with the largest ones holding 76% of their portfolios in liquid assets. Meanwhile, sovereign wealth funds hold most of their funds in liquid financial assets in developed economies, with less than 5% in direct investments. Rising political risks have made raising long-term investments particularly challenging.
The only bright spot is improvements in developing countries’ domestic resource mobilisation. Developing countries have increased tax revenue collection over the last 15 years as tax incidence has become more regressive. The largest increases in revenue were in the LDCs, economies in transition and countries in Latin America and the Caribbean. In 2013, the most recent year with data available, developing countries raised about US$4.7 trillion in tax revenue, far short of their development finance needs.
Debt crisis threat
As most types of capital inflows decline, more developing countries are borrowing externally, resulting in a rising foreign debt-to-GDP ratio, reversing the trend in the last decade. Although modest, the recently rising external debt-to-GDP ratio is more pronounced in low-income countries, increasing from 31% to 35% of GDP in 2014/15.
Twenty low-income countries are at high risk of debt distress compared with 13 in April 2015; three of them are considered to actually be in debt distress. The sharp fall in commodity prices, rising US interest rates and protracted slow growth are likely to worsen the situation, particularly for LDCs and small island developing states.
Greater vulnerability to climate change and natural disasters will exacerbate their sovereign debt problems. Developing countries often get stuck in debt crises because there is no internationally agreed framework for timely, orderly and fair sovereign debt workouts.
The UN has also supported developing countries’ call for an internationally agreed legal framework for timely, orderly and fair sovereign debt workouts. It endorses developing countries’ call to strengthen international efforts to combat illicit financial flows and continues to remind developed countries to meet their aid commitment.
The UN has long argued for the reform of global economic governance in line with changing global economic circumstances and to better serve developing countries’ interests. It has also called for a truly international reserve currency (for example, special drawing rights) not linked to any country’s currency, and for the fair allocation of newly issued SDRs for international development finance.
Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions during 2008-2015 in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.
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