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 investments (FDI), official development assistance and South-South Cooperation as a proportion of total domestic budget (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)

The economic flows that support development vary from country to country in terms of source, type and volume. Furthermore, even at an aggregate level, there can be considerable fluctuations in resource flows from one year to the next (United Nations, 2017). They can also have a vastly different impact in effectiveness for short- and long-term sustained development. 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 also important to find the right mix and adequate terms of financing in order to have a lasting effect and reach those individuals, families and communities with the most urgent needs and where the highest impact can be achieved.

Different external financing sources are better as sustaining different aspects of development

The outcome documents of the most recent United Nations International Conferences on Finance for Development (Monterrey Consensus: United Nations, 2003; Addis Ababa Action Agenda: United Nations, 2015) state that the primary responsibility for financing development belongs to individual countries themselves. The main sources of funding must come from countries, and therefore governments must enhance their domestic resource mobilization so that the 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 extensively covered in Multilateral Trade & Development. This sector 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 before they are ready. If not managed properly, trade can create imbalanced development opportunities thus promoting inequality (see 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 Growing Concerns on Debt Sustainability.

FDI remains a vital source of financing for development. This can be explained, firstly, by its sheer magnitude. With inflows of US$718 billion in developing and transition economies during 2017, FDI was the largest source of external financing in these countries, accounting for 39 per cent of total finance for development (UNCTAD, 2018). Moreover, this international economic flow is 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 flows 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 are often bypassed. For example, FDI represents only 21 per cent of the external financing sources for LDCs (UNCTAD, 2018). In addition, although it is a relatively stable source of external financing, it remains tied to macroeconomic performance and the global macroeconomic climate. It is, therefore, typically a pro-cyclical flow that may be absent in times when sustained financing is most needed. The promotion of FDI in LDCs will be covered later in this section.

Remittances lack the employment creation potential of FDI because they are managed directly by individuals, and they are mostly directed towards household consumption. Their capacity to raise productive investment is, therefore, limited. However, remittances are an indispensable source of international economic flows for many countries. For example, in LDCs they are the second most important source of external finance, only slightly behind ODA and ahead of FDI (UNCTAD, 2018). Also, remittances are a stable source of income for families, contributing to housing, nutrition, health and education costs. Thus, they act as an important social safety net. In addition, in countries where they have been accompanied by an active support policy, remittances have become a significant source of funds for improving social and economic infrastructure.

Official international support has a uniquely important role when it comes to supporting global development, especially for LDCs and more vulnerable countries. In addition to its concessional nature, official support is the only source of financing available in many cases. Also, 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 measure 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. This is now recognized as an important source of finance for development and 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 (Besharati and MacFeely, 2019).

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 the recent trends in these flows for three groups of economies that face particular constraints in achieving their development goals.

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

Source: UNCTAD calculations based on data from United Nations (2019b).

Even expressed in current prices, the trends in external financing have not been homogeneous through time or among country groups. Resource flows to LDCs doubled between 2005 and 2016, the latest year for which data are available. However, most of this increase was registered between 2005 and 2008. Since then, total external funding for LDCs has fluctuated between US$47 and US$55 billion, with a downward trend in recent years. Figure 1 shows a more positive evolution for LLDCs, with an upward trend starting in 2010, following several years of stagnation. In contrast, funding for SIDS has shown more modest volumes and greater volatility. After a peak of US$22 billion in 2007, external financing effectively dried up, reaching only US$1.5 billion in 2016.

It is important to mention that there have been some critiques about the use of this variable as a measure of external financing for development for SDG indicator 10.b.1. 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 plus 17 non-DAC countries are included. The OECD themselves acknowledge that the coverage of private sector flows from non-DAC donors should be expanded (OECD, 2019b). This is a particularly important omission at a time when South-South Cooperation is increasingly important as a source of revenue and collaboration among developing and transition economies. Thus, the official data are likely to be an under-estimation of financial flows for development.

SDG indicator 17.3.1, of which UNCTAD is a co-custodian, also examines financial support for development from multiple sources, but as a proportion to total domestic budget. This transformation puts external financing in context with available public resources. Figure 2 shows the results for some LDCs where the data are available.1 Figure 2 includes remittances because, although not included in the official SDG indicator itself, they are an important revenue source for some countries.

Figure 2. FDI, ODA and remittances in selected LDCs, 2017
(Percentage of budgetary central government revenue)

Source: UNCTAD calculations based on data from IMF (2019), OECD (2019c) and UNCTAD (2019b).
Notes: Only countries with available information are included.

Figure 2 shows the high diversity of financing mechanisms being used by countries, even within LDCs. In some countries, external resources are very high with respect to domestic resources, while they are relatively lower in other cases. For some countries, such as Nepal or Togo, remittances are the main source of external funds. In Malawi, ODA is almost as high as the central government budget. On the other hand, FDI accounts for around 50 per cent or more of the budget in Mozambique, Cambodia and Myanmar. Depending on factors such as economic structure, investment policies or economic migration outflows, countries receive different financing combinations. There is, however, room for policies to attract investment and other sources of funds to the countries where they are most urgently needed.

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

SDG target 17.5 encourages countries to promote investment for LDCs. All developed economies have implemented some policies and measures to encourage outward FDI, including investment in LDCs. Emerging economies have also begun to do so. These policies include mainly investment guarantees, financial and fiscal support and – at the international level – ODA as well as the conclusion of IIAs. Furthermore, governments of countries for destination for investment have also put in place investment policies and measures to attract inward FDI to the country.

The intention of SDG indicator 17.5.1 is to measure the “number of countries that adopt and implement investment promotion regimes for LDCs”. As custodian of this indicator, UNCTAD has held various consultations about policies and measures that home countries (i.e., donor countries) could adopt to promote their FDI outflows to go to LDCs, and how these efforts could be measured in the SDG context.

However, home countries do not currently have investment promotion regimes specifically targeting certain groups of countries, such as LDCs. Instead, one could measure 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. In addition, one can count the number of BITs that were concluded with LDCs – a form of IIAs concluded bilaterally and thus allocable to LDCs. UNCTAD has information on investment treaties readily available. Data on other types of investment promotion for LDCs are also available.

Countries are modernizing international investment agreements

In 2012, UNCTAD launched a policy tool (UNCTAD, 2015) to modernize IIAs, after which over 150 countries have formulated more sustainable, development-oriented IIAs. These modernized IIAs emphasize investment for sustainable development and focus on reforming investment policy.

UNCTAD has also presented “Action Packages” for investment to mainstream SDGs into IPAs and strategies (UNCTAD, 2018). Modern industrial policies often directly promote SDG-related industries, such as clean energy, electric cars, ecotourism, health care and education, but the process of modernizing industrial policies is slow.

After active years of concluding “new generation” IIAs, investment treaty making reached a turning point in 2017. The number of new IIAs concluded in 2017 was 35, while 56 terminations of “old generation” IIAs entered into effect that year. At the same time, new large regional treaties continued to be established actively in Africa and Asia in particular, also with LDCs (UNCTAD, 2018). To review investment promotion for LDCs, it is possible to look at the bilateral IIAs, namely BITs concluded with LDCs. According to UNCTAD (2019a), developed economies have 222 BITs in place with LDCs. Transition economies have established 16 BITs with LDCs, and developing economies (other than LDCs) about 283 BITs. In addition, LDCs have some 27 BITs in place with other LDCs (see figure 3).

Figure 3. Bilateral investment treaties with LDCs by development status

Treaty making with LDCs peaked at the turn of the millennium and reached its lowest point in 2010 when only a couple of new BITs were signed, and one entered in force. Thereafter, the pace of treaty making with LDCs has started to revive slightly. The increase in developing countries’ BITs after 2000 reflected a greater emphasis on investment in development strategies related to South-South cooperation, as well as the emergence of some developing country firms as global players (UNCTAD, 2006) (see figure 4).

Figure 4. Trends in new BITs signed and entered in force each year with LDCs

Typically, LDCs’ BITs with other countries are still “old generation” treaties that are in need of modernization so that they can help to achieve more sustainably oriented development outcomes. BITs and other IIAs are 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 investment; and (v) Enhancing systemic consistency (UNCTAD, 2017). LDCs have established some 80 “new generation” BITs between 2010 and 2019. 468 “old generation” BITs, that were established before 2009, also exist and have not yet been updated.

Even recent BITs with LDCs make little reference to investment for sustainable development. For example, out of 30 new LDCs’ BITs, analyzed by UNCTAD, just over 50 per cent (17 treaties) have a reference to sustainable development (or a related concept) in the preamble or contain a corporate social responsibility clause.

Developed economies, including many EU member states, have the largest number of BITs with LDCs; for instance, Germany has 33 BITs with LDCs. These economies listed in table 1 are also well placed to contribute to the modernization of trade agreements with LDCs so as to consider sustainable development and social responsibility.

Some LDCs have a large number of BITs with other economies, such as Yemen, Ethiopia and Sudan among others (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 bilateral investment treaties with LDCs, as of end-2018
Top 10 developed countries with most BITs with LDCs

Developed countryNumber of BITs
Germany33
Switzerland26
Belgium and Luxembourg19
France19
The Netherlands18
The United Kingdom18
Italy15
Portugal9
Spain8
Sweden7

Top 10 LDCs with BITs

LDC countryNumber of BITs
Yemen37
Ethiopia32
Sudan32
Bangladesh30
Senegal29
Mozambique27
Cambodia26
Guinea24
Laos23
Mali22
Mauritania22

Source: UNCTAD (2019a).
Note: Belgium/Luxembourg are included as a group because they negotiate treaties together as an economic union (Ministry of Foreign and European Affairs, Luxembourg, 2018).

Africa was the main recipient for development finance

OECD (2019d) carried out a pilot data collection on funds mobilized from the private sector by development finance interventions, such as investment guarantees, syndicated loans, credit lines and direct investment in companies. A total of US$152.1 billion was mobilized globally in 2012-2017. According to preliminary figures, 8 per cent of the amounts mobilized supported projects in LDCs, amounting up to US$12.2 billion.

The main beneficiary region, receiving 27 per cent of global funds, was Africa. Of that amount, half went to projects in five recipient countries: Nigeria, South Africa, Ghana, Egypt and Kenya. Almost one quarter of funds supported projects in Asia, and one fifth went to projects in Eastern Europe. 17 per cent of funds supported projects in America, with Argentina, Brazil, Mexico, Colombia and Chile the top five recipients.

Overall, investment guarantees were the instrument that mobilized the most funds (US$26.6 billion) in 2012-2017, accounting for about 42 per cent of total funds mobilized globally. The latest data collection focused on investment guarantees and noted that, in 2016-2017, LDCs received 2 per cent of funds obtained by investment guarantees (US$26.6 billion globally), equaling about US$0.5 billion. One of the LDCs, Myanmar, was among the top 10 recipient countries, receiving about 0.6 per cent of funds mobilized by investment guarantees.

LDCs’ own measures help to attract investment

A direct measure of the current SDG indicator is not yet possible. 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
Source: UNCTAD (2019c).
Notes: This graph depicts data on positive investment measures; i.e., those that introduce new investment promotion or facilitation schemes.

Between 2010 and 2018, at least 287 new investment promotion and facilitation measures were introduced around the world, of which 41 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 (45 per cent). Investment facilitation was more common in countries other than LDCs.

Africa (30 per cent) and Asia (36 per cent) accounted for the bulk of new promotion and facilitation measures introduced by all countries between 2010 and 2018. Africa also accounted for 85 per cent of all promotion and facilitation measures introduced by LDCs during this period, with Asia accounting for the rest.

Notes

  1. The denominator of this indicator, “total domestic budget”, is ambiguous. It could refer to different levels of government and different types of accounts. Many of these variables are not available in the context of LDCs. Figure 2 reports figures using the budgetary central government revenue as denominator. For more details on this and other government finance statistics, see IMF (2014).

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