Robust and predictable sources of financing for sustainable development

SDG indicators

SDG target 10.b: Encourage official development assistance and financial flows, including foreign direct investment, to States where the need is greatest, in particular least developed countries, African countries, small island developing States and landlocked developing countries, in accordance with their national plans and programmes
SDG indicator 10.b.1: Total resource flows for development, by recipient and donor countries and type of flow (e.g. official development assistance, foreign direct investment, and other flows) (Tier I/II)


SDG target 17.3: Mobilize additional financial resources for developing countries from multiple sources.
SDG indicator 17.3.1: Foreign direct investment, official development assistance and South-South cooperation as a proportion of gross national income1 (Tier I)


Target 17.5: Adopt and implement investment promotion regimes for least developed countries.
Indicator 17.5.1: Number of countries that adopt and implement investment promotion regimes for least developed countries (Tier III)

Many countries lack the capacity to mobilise sufficient funds under the right conditions to support programmes and implement reforms towards sustainable development. In addition, even at an aggregate level, there can be considerable fluctuation in resource flows from one year to the next -—
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. These economic flows can also have a vastly different impact on short and long-term sustained development depending on their source, type and volume. For this reason, financing strategies for the 2030 Agenda receive a prominent role in all implementation strategies.

There are two crucial challenges when it comes to financing development programmes. First, there is a general need for more resources to achieve the SDGs. Second, it is important to find the right mix and adequate terms of financing in order to have a lasting effect and reach those individuals, households and communities with the most urgent needs and where the highest impact can be achieved.

Different external financing sources are better for different aspects of development

The outcome documents of the most recent United Nations International Conferences on Finance for Development -—
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state that the primary responsibility for financing development belongs to the countries themselves. Therefore, governments must enhance their domestic resource mobilization so that financing needs are met in a predictable and sustained manner. However, the international community also has an important role to play. Sources of external financing include international trade, FDI and other private flows (from businesses and individuals), international financial and technical cooperation, and external debt. These different forms of economic flows are, however, not assumed to be equal in their effect on development.

International trade has expanded significantly in previous decades under the existing multilateral trading system, while many new and longstanding challenges remain. These issues are covered in Multilateralism for Trade & Development. International trade is an important engine for economic growth. With adequate support and fostering mechanisms, trade can encourage long-term investments and higher productivity, create jobs and livelihoods for millions, and provide important resources to finance public services and policy interventions. However, a high dependence on international markets could increase exposure to global volatility and macroeconomic imbalances, as well as imperil vulnerable or immature domestic industries to excessive competition. If not managed properly, trade can create imbalanced development opportunities thus promoting inequality across population groups, as well as between women and men (see -—
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and The Many Faces of Inequality).

Public debt is another essential financing mechanism for development. As long as funds raised by external or domestic borrowing support strategic productive investment, they can foster growth without threatening future financial stability. It is, therefore, important for countries to reach long-term debt sustainability. This topic is covered in depth in Developing countries' external debt sustainability.

FDI remains a vital source of financing for development. With inflows of US$790 billion in developing economies in 2019 -—
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, FDI was the largest source of external financing in these countries -—
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. Moreover, these flows are directly linked to the main drivers of productive growth and employment creation: establishment of new businesses and greenfield investments; expansion of operations; acquisition of machinery and equipment; upgrade of technology, knowledge and innovation; and others. However, FDI inflows are not distributed evenly among countries; instead, they are concentrated among countries with higher growth prospects, stronger rule of law and respect for contracts, and stable institutions. This means that some countries with urgent financing needs may be bypassed. FDI to LDCs represented only 1.3 per cent of global inflows in 2019, for example -—
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. In addition, this source of external financing remains tied to macroeconomic performance and the global economic climate. It is, therefore, typically a pro-cyclical flow that may be absent in times when sustained financing is most needed. FDI flows will be severely impacted by the global pandemic, with the expectation that 2020 levels will drop significantly lower than the trough attained during the 2008 financial crisis. LDCs and developing countries figure to be especially hard hit with their reliance on export and commodity-based investments, which have been hit especially hard during the pandemic.

Remittances lack the employment creation potential of FDI because they are managed directly by individuals and are mostly directed towards household consumption. Their capacity to raise productive investment is, therefore, limited. However, remittances are an indispensable source of income for many countries. In LDCs, for example, they are the most important source of external financing, remaining substantially higher than FDI in 2019 (US$51 billion compared with US$20 billion) -—
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. Remittances are also a stable source of income for families, contributing to housing, nutrition, health and education. Thus, they act as an important social safety net. In addition, in countries with an active support policy, remittances have become a significant source of funds for improving social and economic infrastructure.

Official international support plays a unique role when it comes to supporting global development, especially for LDCs and other vulnerable economies. In addition to its concessional nature, official support is the only source of financing available in many cases. Especially in situations of low rentability or high risk, official support can become important for mobilizing additional resources. This source of funding is described in greater detail in Official Support for Sustainable Development.

In this context, it is also important to monitor South-South Cooperation. Links and connections between countries of the Global South have expanded in volume and scope over the previous decades. This is explained to a certain extent by the increasing political and economic weight of several emerging and developing economies across Asia, Africa and Latin America. It is now recognized as an important source of finance for development. Its importance is emphasized in the 2030 Agenda and the Addis Ababa Action Agenda. However, for a variety of reasons, including the lack of a universally accepted definition and opacity regarding its scope and coverage, South-South Cooperation has proven hard to quantify -—
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. For this reason, at the 51st session of the UN Statistical Commission in 2020, a special working group on the measurement of development support was established to develop an indicator for SDG target 17.3 -—
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. This work will include recommendations on how to measure South-South Cooperation.

Recent trends in external financing

Financing for development is a crucial element of the 2030 Agenda. SDG target 10.b seeks to “encourage official development assistance and financial flows, including foreign direct investment, to States where the need is greatest [...]” To this end, SDG indicator 10.b.1 measures total resource flows for development. Figure 1 presents recent trends in these flows for three groups of economies, LDCs, LLDCs and SIDS, that face heightened challenges in achieving their development goals.

Figure 1. Total resource disbursements for development (SDG 10.b.1)
(Billions of current US$)

Source: UNCTAD calculations based on data from -—
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.

Even expressed in current prices, the trends in external financing have not been homogeneous through time or across country groups. Resource flows to LDCs increased fourfold between 2000 and 2018. However, most of this increase was registered before 2010. Since then, total external funding for LDCs has increased at a slower rate and with some transitory reversals. Figure 1 shows a more disappointing evolution for LLDCs. The years from 2000 to 2007 showed sustained growth in funding, followed by several years of stagnation. An improvement during the years 2012 to 2015 was followed by three straight years of decline, falling back to 2006 levels in 2018. Funding for SIDS has shown more modest volumes and greater volatility. After a peak of US$22 billion in 2007, external financing has seen steep declines, practically drying out in 2018.

The use of this variable as a measure of external financing for development for SDG indicator 10.b.1 has received some criticism. Some important sources of funds are missing. For example, remittances, an important flow in many developing countries, is not included. Furthermore, only the 30 DAC countries and 17 non-DAC countries are included. -—
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acknowledge that the coverage of private sector flows from non-DAC donors should be expanded. This is a particularly important omission at a time when South-South Cooperation is increasingly important as a source of revenue and a driving force for collaboration among developing and transition economies. Thus, the official data of this indicator are likely to under-estimate total financial flows for development.

SDG indicator 17.3.1 examines financial support for development from multiple sources, but as a proportion to GNI. This transformation puts external financing in context with all sources of income in the national economy. Figure 2 shows the results for LDCs, LLDCs, and SIDS. The figure also includes remittances because, although not part of the official SDG indicator, they are an important revenue source for many countries.

Figure 2. FDI, ODA and remittances
(Percentage of GNI)

Source: UNCTAD calculations based on data from -—
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and -—
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.

Figure 2 shows the importance of external financing flows to LDCs, LLDCs and SIDS. The three sources combined on occasion amount to 15 per cent or more of total GNI, though in recent years this share has been decreasing, driven mostly by slowdowns in FDI or ODA. In fact, although a sizable source of financial flows, FDI shows high volatility, in addition to a downward trend since 2008 for LLDCs and SIDS. Remittances for all three groups routinely account for more than 4 per cent of GNI and they are significant both in terms of high volume and low volatility. They have surpassed FDI for all three groups since 2013, apart from SIDS in 2014 and 2016. Remittances represent a more stable inflow than FDI, with a standard deviation almost 10 times lower over the period covered in figure 2. The observed downward trends for FDI and ODA in these groups of economies indicate room for policies to attract investment and other sources of funds to the places where they are most urgently needed.

There is a risk that the measures to contain the COVID-19 outbreak may put a brake on all the sources of financing described above. The global economic recession of 2020 will entail less available official and private resources, capital flight from developing economies and increased risk aversion, higher unemployment and lower wages, and rising financing costs.2 A consequence of this may be reversals in hard-earned progress towards development goals. As described in each of the chapters cited above, it is crucial to implement measures aimed at sustaining the financing sources of the most vulnerable economies.

National and international investment policies of home countries promote investment in developing countries

SDG target 17.5 encourages countries to promote investment for LDCs. Developed economies have implemented some policies and measures to encourage outward FDI, including investment in LDCs and other developing countries. Emerging economies have also begun to do so. These policies include mainly investment guarantees protecting outward investors against certain political risks in a host country, financial and fiscal support, mostly in form of loans, or direct capital participation by a home state in an investment project abroad. The conclusion of IIAs is yet another policy tool. Furthermore, governments of countries receiving investment have also put in place investment policies and measures to attract inward FDI to their economies.

The intention of SDG indicator 17.5.1 is to measure the “number of countries that adopt and implement investment promotion regimes for developing countries, including LDCs”. As a result of work done by UNCTAD, as the custodian of this indicator, the definitions and measurement methodologies were agreed upon in late 2019 by the IAEG-SDG -—
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.

Investment promotion instruments are generally available for outward investment in any foreign country or economy. Promotion tools targeted specifically at supporting investment in LDCs could not be identified, nevertheless a limited number of countries promote outward investment in selected developing or transition economies.

Even if most home countries do not yet have in place investment promotion regimes targeting specific groups of countries, such as LDCs, progress on these indicators can be assessed by looking at the number and amount of investment guarantees and financial and fiscal support that home countries and international institutions have provided to investors when investing in LDCs and other developing countries. In addition, one can count the number of BITs concluded with LDCs, as this type of IIAs are concluded bilaterally and can thus be allocated to LDCs.

In total, UNCTAD identified 22 countries that provide for at least one type of instrument for promoting outward investment in other countries, including LDCs in 2020. The most common policy instruments are investment guarantees or insurance policies (at least 16), but countries provide also loans for internationalization of local companies (at least 13). Almost half of identified countries offers minority equity participation as well (at least 11).

The COVID-19 outbreak has also affected the number of IIAs concluded in 2020, leading to a low number of IIAs with substantive investment protection standards. The conclusion of an IIA usually requires intensive negotiations involving the travel of government officials, organization of domestic consultation meetings and preparatory steps that vary from one country to another. While governments were able to shift some of these activities online, for example negotiations of the AfCFTA's Investment Protocol resumed in late 2020, treaty making activity in 2021 is likely to continue to be somewhat suppressed.

Modernizing international investment agreements slowed down

UNCTAD works with members states to modernize IIAs using the Investment Policy Framework for Sustainable Development first developed in 2012 and updated in 2015 -—
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. Since then, over 150 countries have formulated new sustainable, development oriented and equitable IIAs. These modernized IIAs emphasize investment for sustainable development and focus on reforming investment policy.

Modernization of the stock of 2 500 old-generation IIAs in force today is still outstanding. Most recently, UNCTAD has launched the IIA Reform Accelerator -—
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to expedite this process. The Accelerator responds to the need for change of substantive aspects of the IIA regime by focusing on a selection of reform-oriented formulations for eight key IIA clauses (including fair and equitable treatment, and indirect expropriation provisions). The IIA Reform Accelerator identifies ready-to-use model language, accompanied by recent IIA and model BIT examples.

This work is further supported by UNCTAD “Action Packages” for investment to mainstream SDGs into IPAs and investment strategies -—
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. Modern industrial policies often directly promote SDG-related industries, such as clean energy, electric vehicles, ecotourism, health care and education, but the process of modernizing industrial policies is slow. This progress has further slowed down, at least momentarily, due to the COVID-19 pandemic and the related slowdown in IIA negotiations.

In 2020, the number of effective treaty terminations exceeded the number of treaties concluded, with only 21 newly signed IIAs compared with 42 IIAs terminated. More than half of the newly signed IIAs were concluded by the United Kingdom as a consequence of leaving the European Union. Notable among the newly signed IIAs is the Regional Comprehensive Economic Partnership (RCEP) which covers 15 signatories in the Asia-Pacific region, including three LDCs. When reviewing investment promotion for LDCs, it is possible to analyse bilateral IIAs, namely BITs concluded with LDCs. According to -—
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, developed economies have 224 BITs in place with LDCs and developing economies (other than LDCs) about 283 BITs. In addition, LDCs have some 28 BITs in place with other LDCs (see figure 3).

Figure 3. Bilateral investment treaties with LDCs by development status of donor countries

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Treaty making with LDCs peaked at the turn of the millennium but fell to a low point in 2019, when only three new BITs were signed and none entered in force. Thereafter, the pace of treaty making with LDCs began to revive slightly. The increase in developing countries’ BITs after 2000 reflected a growing emphasis on investment in development strategies related to South-South cooperation, as well as the emergence of some developing country firms as global players -—
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(see figure 4). This pace, however, has slowed down since 2017.

Figure 4. Number of BITs with LDCs signed and entered in force each year

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Typically, LDCs’ BITs with other countries are still “old generation” treaties that are in need of modernization so that they can help achieve more sustainability-oriented development outcomes. BITs and other IIAs could be reformed in five areas: (i) safeguarding the right to regulate, while providing protection; (ii) reforming investment dispute settlement; (iii) promoting and facilitating investment; (iv) ensuring responsible and sustainable investment; and (v) enhancing systemic consistency -—
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. LDCs concluded 86 “new generation” BITs between 2010 and 2020, while 449 existing “old generation” BITs, dating from before 2010, have not yet been reformed. Most of these old generation BITs make little or no reference to sustainable development objectives or to the right of LDCs to regulate investment in the public interest. UNCTAD’s Investment Policy Framework for Sustainable Development -—
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, its Reform Package for the International Investment Regime -—
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and the newly released IIA Reform Accelerator -—
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can guide countries in reforming these old-generation IIAs.

Developed economies, including many EU member states, have the largest number of BITs with LDCs; for instance, Germany has 33. The top ten economies, listed in table 1, are also well placed to contribute to the modernization of investment agreements with LDCs to consider sustainable development and social responsibility. The LDCs with the most BITs in place with other economies comprise Yemen, Ethiopia and Sudan (see table 1). Efforts to modernize investment treaties would have a potentially large effect on these LDCs to promote investment for development.

Table 1. Economies with the most BITs with LDCs, as of end-2020

Top 10 developed countries with most BITs with LDCs

Developed countryNumber of BITs
Germany33
Switzerland25
France18
Belgium and Luxembourg17
United Kingdom17
The Netherlands16
Italy15
Portugal7
Spain7
Sweden7

Top 10 LDCs with BITs

LDC countryNumber of BITs
Yemen36
Ethiopia32
Sudan30
Bangladesh29
Senegal28
Mozambique27
Cambodia26
Guinea24
Laos23
Mali22
Mauritania22

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Note: Belgium/Luxembourg are included as a group because they negotiate treaties together as an economic union -—
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Africa was the main recipient for development finance

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collects data on funds mobilized from the private sector by development finance interventions, such as investment guarantees, syndicated loans, credit lines and direct investment in companies. According to preliminary data by OECD, a total of US$260 billion was mobilized globally from 2012 to 2019, with a drop of 10 per cent in 2019 from the previous year. In 2019, over nine per cent of the amounts mobilized supported LDCs, totalling US$4.4 billion. Support to LDCs increased by 14 per cent from 2018.

In the period 2017-2018, development finance was divided evenly across the five continents. Among LDCs, the top recipients were Uganda, Myanmar, Benin, Mauritania and Bangladesh, receiving half of the support to LDCs. The top sectors receiving development finance in LDCs were energy (US$677 million), banking (US$503 million), industry and construction (US$303 million) as well as communications (US$211 million).

Overall, investment guarantees were the instrument that mobilized the most funds for LDCs, US$2.6 billion according to preliminary figures for 2019, accounting for about 60 per cent of the total. Other financing tools included direct investment, syndicated loans, credit lines and co-financing. In 2017-2018, the largest bilateral providers were France, the United States of America, the United Kingdom, Finland and the Netherlands. The flows from Finland consisted of direct investment only; the Netherlands mainly offered syndicated loans; whereas the other three utilised more often investment guarantees.

LDCs’ own measures help to attract investment

A complete direct measure of SDG indicator 17.5.1 is not yet available. Instead, in addition to the data presented above, investment promotion regimes put in place by LDCs themselves, or other outward investment promotion measures directed to LDCs, can be examined. LDCs’ own investment promotion regimes play an important role in attracting FDI (see figure 5).

Figure 5. Number of new national investment promotion and facilitation measures
(Number of policies)

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Notes: This graph depicts data on positive investment measures (i.e., new investment promotion or facilitation schemes).

Between 2010 and 2020, at least 406 new investment promotion and facilitation measures were introduced around the world, of which 57 by LDCs. These measures mainly include investment facilitation, investment incentives and special economic zones. Investment incentives are the most common mechanism, accounting for almost half of all new measures (49 per cent). Investment facilitation was more common in countries other than LDCs. Africa (28 per cent) and Asia (37 per cent) accounted for the bulk of new promotion and facilitation measures introduced by all countries between 2010 and 2020. Africa also accounted for 79 per cent of all promotion and facilitation measures introduced by LDCs during this period, with Asia accounting for the rest.

Notes

  1. Indicator 17.3.1 was changed from as a proportion of total domestic budget to as a proportion of GNI (United Nations, 2020a, 2020b).
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    expect a decline in global workers’ remittances of 20 per cent in 2020.

References

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