The Addis Ababa Action Agenda on Financing for Development (United Nations, 2015) clearly identifies and as a relevant element in the financing of sustainable development programmes. As shown in Robust and predictable financing sources, these flows are relatively small when compared to domestic public resources or . However, they are still essential since they frequently function as “seed funds” or catalysers of additional resource mobilization in sectors or projects where other funding options are limited, or where other investors are reluctant to participate. Furthermore, for some countries in vulnerable situations, official funds are frequently the only source of financing available.
For these reasons, the importance of official flows is often highlighted in the 2030 Agenda. In fact, they are referred to in 11 targets, including sector-specific official support to agriculture1, health2, water and sanitation3, clean energy4, biodiversity5 and others.
It is important to highlight the commitment of developed economies under SDG target 17.2 to dedicate 0.7 per cent of their gross national income to ODA to developing countries and 0.15 to 0.20 per cent to. As shown in figure 1, there is a significant gap between this commitment and actual ODA funds made available for development. This cumulative shortfall could compromise the financing of the 2030 Agenda.
This chapter covers concessional resources to two sectors: infrastructure in economic sectors and agriculture. Although the role of this source of financing is essential everywhere, these two areas are directly related to productive growth and its impact on sustainable development.
Official flows remain supportive of infrastructure projects
Investment in modern and efficient economic infrastructure (roads, information and communication technologies, water supply, electrical power) is essential to achieving sustainable development objectives. Long-term strategies for economic growth, poverty reduction and environmental sustainability all have infrastructure development as a common element. A recent report (Bhattacharya, 2015) estimates that the global economy needs to invest between US$5 and 6 trillion (in constant 2010 prices) in economic infrastructure every year over the period from 2015 to 2030. Additional funds equivalent to US$600 to 800 billion per year would be necessary to make this investment sustainable. Developing countries will account for about two thirds of the investments required to accommodate higher growth and structural change. These figures do not take into account and its important role in economic development, including, for example, national data infrastructure (UNCTAD, 2016).
Figure 2 shows the global infrastructure needs by sector with a 2030 horizon, as estimated by Woetzel et al. (2016). Given these needs and the current and expected investment trends, the largest infrastructure investment gaps will be concentrated in the generation and distribution of electricity, followed by transport infrastructure.6 In addition, significant additional resources are needed across all sectors for climate change mitigation and adaptation (UNCTAD, 2014).
Even if most of the funds for infrastructure investment will come from the public sector and private actors, including through public-private partnerships and other forms of blended finance, ODA will play a significant role, particularly for LDCs and countries in vulnerable situations. For this reason, SDG indicator 9.a.1 monitors “total official international support (official development assistance plus other official flows) to infrastructure”.7
Figure 3 shows total official flows and those directed to economic infrastructure, in constant prices. While the global financial crisis of 2007/2008 had a profound impact on overall concessional financing flows, those targeting infrastructure projects were sustained. In recent years, after a marked increase in 2015, official support flows have remained constant. ODA and OOFs in support of infrastructure reached US$58.9 billion in 2017, accounting for about 24 per cent of the total flows.
Of this, almost equal shares were assigned to energy and transportation projects (see figure 4). The low share for communications can be explained by the role of private companies as a source of financing in this sector.
Official support – a significant source of funding for infrastructure in LDCs, LLDCs and SIDS
Just ten countries received half of all official international support to infrastructure. The largest recipients were India (11.5 per cent of the total), Turkey (6.0 per cent), Indonesia (4.6 per cent), Brazil (4.5 per cent) and China (4.4 per cent). However, these are also some of the largest developing economies and official support represents only a small share of their total sources of domestic and external financing.
For other countries, official international support has a higher weight relative to the size of their economies. In some cases, because of special needs in terms of economic infrastructure or lack of access to other sources of development financing, official support is fundamental. Figure 5 shows the international support to infrastructure relative tofor developing economies and countries in transition, as well as for three other groups: LDCs, LLDCs and SIDS. These three groups receive a higher share of funds from ODA compared to other developing or transition economies.
The need for infrastructure development, particularly transport, is of central importance for economic development in LLDCs due to their isolation from international markets. For LLDCs, to reach the global average road and rail network density, they would need to build almost 200,000 km of paved roads and 46,000 km of rail lines at a cost of about 2 per cent of their GDP. This means that there is an important investment gap at current investment levels (UN-OHRLLS, 2018). This points to the importance of all sources of funding for infrastructure projects. LLDCs were recipients of US$6.9 billion in development assistance to economic infrastructure in 2017, equivalent to almost one per cent of GDP. In fact, ODA is the most important source of non-national funding for LLDCs, particularly for lower-income economies.
Due to their structural characteristics, such as small populations and geographic remoteness, an economic reliance on trade and tourism, and a high vulnerability to natural disasters and climate change, SIDS have significant infrastructure requirements, both in terms of building new facilities and maintaining and adapting existing ones (OECD, 2018). As seen in figure 5, the importance of official international support to economic infrastructure in these economies has grown in recent years, increasing from about 0.20 per cent of GDP in 2006 to 0.74 per cent in 2017.
Long-term investment in infrastructure for sustainable development, especially in developing countries with special needs (LDCs, LLDCs and SIDS) remains insufficient, despite the growing infrastructure challenges. Stronger consideration should be given to the positive impact of infrastructure, as developing countries will require large-scale investment to build high quality, resilient and inclusive infrastructure (United Nations, 2018). Official international support will remain a key component in the financing of the infrastructure investments required to achieve the .
Agriculture no longer a priority for ODA, even when challenges keep mounting
The agricultural sector employs a large share of the labour force, and it also plays an essential role in food security and rural development. In many countries, agricultural products are traded internationally and constitute an important source of revenue. However, even if agriculture remains a crucial economic sector in many developing economies, agricultural productivity remained stagnant during the 1960s to 1980s and it has only increased gradually since then. This could be attributed to several factors, including unsupportive policies and insufficient resources to develop this sector (Chimhowu, 2013).
In addition to the urgent need for increases in productivity, agriculture must also embrace sustainable practices and adapt to climate change. On one hand, the sector contributes to greenhouse gas emissions, natural habitat loss and unsustainable use of water resources, among others (see Signs of a greening economy?). Reducing the environmental impact would require important investments. On the other hand, agriculture is especially affected by climate change, extreme climatological events, such as drought and fires, and meteorological disasters, such as floods, storms, heat waves or sandstorms. Significant resources are needed for adaptation and mitigation. In many countries, official flows in the form of ODA and OOFs play a key role in financing agricultural development. In this sense, SDG indicator 2.a.2 measures “total official flows (official development assistance plus other official flows) to the agriculture sector”.8
During the 1970s and 1980s, agriculture was a major recipient of international assistance, accounting for 15 to 20 per cent of total ODA (Cabral and Howell, 2012). However, the relative importance of agriculture as a beneficiary of ODA has declined since then. Several factors are behind this shift, including changing donor priorities, pressure from environmental groups and evidence of insufficient improvements in productivity (Chimhowu, 2013).9
As shown in figure 6, while ODA to agriculture has continued to increase in absolute terms, it has remained stable, at a low level, when expressed as a share of total concessional resources. Indeed, since 2005 the four-per-cent mark has not been exceeded. In 2017, these flows reached US$9.3 billion, equivalent to 3.7 per cent of global official international support.
Even if ODA to agriculture has declined relative to other sectors, it still represents an important source of funding for many developing economies. Map 1 shows the weight of these flows relative to the value added of the primary sector.10 It can be seen that several economies in Central and West Africa, Central Asia and the Caucasus still rely on ODA as an important source of financing for the development of the agricultural sector.
Notes: As specified in the metadata for SDG indicator 2.a.2 (see Note 8), official international support to infrastructure includes sector codes in the 311 series of the DAC classification. Countries in gray: developed economies or countries not included in the CRS database.
Do official international flows contribute to developing the agricultural sector? A recent study on the effectiveness of agricultural ODA in Sub-Saharan Africa found that development assistance does have a positive relationship with agricultural productivity, in general terms. However, the specific effects vary according to the destination of the funds and the characteristics of the recipient economies. For example, it has been argued that ODA creates a substitution effect towards agricultural production activities related to the industrial or export sectors, and away from food crop production. Furthermore, institutional factors such as government effectiveness, property rights and business freedom strengthen the positive impact of international support on agricultural productivity (Ssozi et al., 2019). For policymakers in both donor and recipient economies, it is important to consider the right mix of funds and ensure supporting institutional reform in order to maximize the positive impact of ODA in agriculture.
- SDG indicator 2.a.2: Total official flows (official development assistance plus other official flows) to the agriculture sector.
- SDG indicator 3.b.2: Total net official development assistance to medical research and basic health sectors.
- SDG indicator 6.a.1: Amount of water- and sanitation-related official development assistance that is part of a government-coordinated spending plan.
- SDG indicator 7.a.1: International financial flows to developing countries in support of clean energy and renewable energy production, including in hybrid systems.
- SDG indicator 15.a.1: Official development assistance and public expenditure on conservation and sustainable use of biodiversity and ecosystems.
- For more information on investment needs specific to transport infrastructure, see chapter Adapting transport for sustainable development.
- Note that the definition of infrastructure for the purpose of this indicator could vary from other classifications. According to the DAC classification, official flows to infrastructure can be divided into infrastructure in social and economic sectors. The former includes education, health, population policies, water supply and sanitation, and government and civil society; the latter comprises transportation and storage, communications, energy, banking and financial services, and business services (OECD, 2019c). As specified in its official metadata, funding from all official international donors directed to infrastructure in economic sectors in developing countries is considered for SDG indicator 9.a.1 (United Nations Statistics Division, 2019).
- According to the official metadata, this indicator measures funding from all official international donors to the agricultural sector in developing countries (United Nations Statistics Division, 2019). This corresponds to sector code 311 of the DAC classification, including sub-sectors such as agricultural development, agricultural policy, agricultural water and land resources, food crop production, livestock, industrial/exports crops, rural co-operatives, agricultural inputs, agrarian reforms, among others (OECD, 2019c).
- In order to reflect current practices in terms of ODA to the primary sector, a broader definition could also include other relevant sectors, such as rural livelihoods, rural development and food security, and take into account the spread of ODA-financed projects over mutiple sectors (Cabral and Howell, 2012). However, even with this definition, ODA directed to agricultural projects still shows a decline in relative terms, although at a slower rate.
- The primary sector is broader than agriculture (it also includes hunting, forestry and fishing.) It is used in Map 1 as a denominator since data on value added for agriculture is not available for all countries.
- Bhattacharya A, Oppenheim J and Stern N (2015). Driving sustainable development through better infrastructure: Key elements of a transformation program. Global Economy & Development Working Paper No. 91. Brookings Institute.
- Cabral L and Howell J (2012). Measuring aid to agriculture and food security. Briefing Paper No. 72. Overseas Development Institute.
- Chimhowu A (2013). Aid for agriculture and rural development: A changing landscape with new players and challenges. WIDER Working Paper No. 2013/014. UNU-WIDER.
- FutureStructure (2013). What is soft infrastructure? November.
- OECD (2018). Making Development Co-Operation Work for Small Island Developing States. OECD Publishing. Paris.
- OECD (2019a). DAC glossary of key terms and concepts. Available at http://www.oecd.org/dac/dac-glossary.htm (accessed 15 May 2019).
- OECD (2019b). Creditor Reporting System (CRS). Available at https://stats.oecd.org/Index.aspx?DataSetCode=CRS1 (accessed 26 April 2019).
- OECD (2019c). DAC and CRS code lists. Available at http://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/dacandcrscodelists.htm (accessed 14 May 2019).
- Ssozi J, Asongu S and Amavilah V (2019). The effectiveness of development aid for agriculture in Sub-Saharan Africa. Journal of Economic Studies. 46(2):284–305.
- UNCTAD (2014). World Investment Report 2014: Investing in the SDGs, an Action Plan. United Nations publication. Sales No. E.14.II.D.1. Geneva.
- UNCTAD (2016). Development and globalization: Facts and figures 2016. Available at https://stats.unctad.org/Dgff2016/ (accessed 19 April 2019).
- UNCTAD (2019). UNCTADStat. See https://unctadstat.unctad.org/ (accessed 10 April 2019).
- United Nations (2015). Report of the third international conference on financing for development. A/CONF.227/20. Addis Ababa. 3 August.
- United Nations (2018). Financing for Development: Progress and Prospects 2018. United Nations publication. Sales No. E.18.I.5. New York.
- United Nations Statistics Division (2019). SDG indicators: Metadata repository. See https://unstats.un.org/sdgs/metadata/ (accessed 14 May 2019).
- UN-OHRLLS (2018). Financing infrastructure in the transport sector in landlocked developing countries: Trends, challenges & opportunities. Available at http://unohrlls.org/about-lldcs/publications/ (accessed 4 June 2019).
- Woetzel J, Garemo N, Mischke J, Hjerpe M and Palter R (2016). Bridging global infrastructure gaps. McKinsey Global Institute. Available at https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/bridging-global-infrastructure-gaps (accessed 26 April 2019).
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