# 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 -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- , FDI was the largest source of external financing in these countries -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . 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 -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . 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) -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . 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 -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . 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 -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . 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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## 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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