What is Financing for Development?


What is Financing for Development?

What’s being called the Financing for Development process is a massive undertaking by the entire international community — U. N. member states and multilateral institutions backed by civil society, the private sector and philanthropy — to update global financial flows, tools, mechanisms in order to pay for new development initiatives across the globe.

The current process came to a head when global leaders gathered in Addis Ababa, Ethiopia, on 13-16 July 2015 at what’s formally called the Third International Conference on Financing for Development. To see all of Citiscope’s reporting on the Financing for Development process from an urban perspective, see here; for full coverage of the conference from the International Institute for Sustainable Development, see here.

Why is this taking place now?

The Financing for Development (FFD) conference will be the first to take place in a string of major summits. Together, these will result in a new era in the world’s collective strategies for combating poverty, inequality, environmental degradation and climate change.

This new watershed framework is being called the Post-2015 Development Agenda. It takes into account the new Sustainable Development Goals (SDGs), to be finalized in September; the COP 21 climate summit in Paris, which will happen at the end of the year; and the Habitat III conference on cities, taking place in Quito in October 2016.

While much effort and attention has been paid to the details of these latter agreements, they will amount to little if their far-reaching aims cannot be adequately and sustainably financed. Hence, the FFD conference, taking place in parallel to but before the other agreements are struck, will work to come up with creative and robust new ways to raise the tens of trillions of dollars needed in coming years to pay for the ambitious new development framework.

What will come out of the Addis Ababa conference?

If all goes well, a full agreement on roles and responsibilities — as well as monitoring and accountability mechanisms — for all major players. (The “zero draft” of that document was released in March 2015.)

This includes the traditional donor countries and multilateral development banks. But the Addis conference will also place far more emphasis than in the past on two “newer” players: the private sector and developing countries themselves.

More broadly, many observers are hoping the conference will play an important coordinating role. In this, the event and its outcome document could signal new directions, priorities and roles for the next two decades that align today’s highly complex financial and political spheres with the common goal of ending poverty, reducing inequality and combating global climate change.

Surely discussions on these issues have taken place previously?

Absolutely — there were two important precursors to the Addis conference.

In 2002, global leaders came together in Monterrey, Mexico, for the first pointed discussions on new ways to finance development. The result was the Monterrey Consensus, which covered a broad swathe of issues — indeed, many of the same subjects that will be addressed in Addis — but is particularly remembered for an agreement by rich countries to set aside 0.7 percent of their gross domestic product for development financing in poor countries. While a landmark accord, few countries since have met this target.

The follow-up to the Monterrey conference took place in 2008 in Doha. In that event’s outcome declaration, rich countries again reiterated their pledges made at Monterrey — an important act, given that the Doha meeting took place during the height of the global financial crisis. Yet the crisis also kept many heads of state and government, and even the heads of the most prominent multilateral institutions, from attending the Doha conference.

How is the current process different from what has happened in the past?

In part, the difference will be in the rejiggered mix of finance, with far more emphasis placed on raising financing through the global private sector and through developing countries’ own revenue-raising mechanisms. In part the difference will also be in timing, with the stakes for the current FFD discussions far higher given the new scope of what they are intended to accomplish.

The new focus on the private sector and developing countries has been brought about by the fact that donor countries, at least since the 2007-08 financial crisis, have had far less money available than in the past for foreign aid. Yet these new realities also include developing countries that are agitating for greater say in how developing projects take place in their own countries.

There has also been a growing understanding of the massive potential for developing countries to raise their own revenues and finance their own development priorities. This is an opportunity that far outweighs the relatively small flows of overseas assistance that have traditionally been made available, though one that will also require strengthened accountability and capacity.

The potential of the private sector to engage on these issues, meanwhile, looms largest of all. While the development community has long been sceptical of whether adequate safeguards can be put in place to harness the opportunities provided by the global economy without placing the world’s poorest communities at risk, the private sector will inevitably need to play a significant role in any agreement that comes out of Addis Ababa. The development-related financing needs are simply too great.

What has been the global reaction to the Financing for Development process?

While there are indications that some key players are more engaged in the FFD process than they have been in the past, there has still been almost no broad recognition that this process is taking place. Indeed, even among those groups that will likely have a significant stake in the outcome, including development NGOs and other stakeholders, participation has often been token at best, or simply come too late.

Even more concerning are reports that the real powerhouses of today’s global finance do not have the Addis Ababa conference on their radar. This includes the world’s largest banks, institutional investors and funds. Yet it also includes the Chinese government, which has quickly become one of the world’s most important funders of large-scale infrastructure.

What’s at stake for cities and local governments?

The potential implications of the Financing for Development conference for cities and local governments are both physical and ideological. Both are significant and long-lasting.

The most expensive component of any new development initiative will revolve around infrastructure — a category that is so vast and all-encompassing as to be almost meaningless. This includes the building, updating and maintaining of roads and bridges, energy and water systems, schools and public buildings, and much more.

The development needs inherent to this category will come to some USD 1 trillion per year in developing countries alone through 2020, the World Bank has found. And according to the McKinsey Global Institute, the consultancy’s think tank, the world’s total infrastructural costs by 2030 could be as high as USD 67 trillion.

While much of this will be part of nationally driven projects, a huge amount of this infrastructure will be meant for local use. And according to a rising tide of voices, the authorities best placed to figure out how exactly those projects, and their funding, should go forward are those outside of the central government — at the city and regional levels, where the needs are best understood.

While the decentralization argument goes back centuries, cities and advocates are now seeing the FFD debate as key to their long-term goal of taking on greater control, and responsibility for, the raising, receiving and allocating of development financing. For many, this argument today holds particular potency, as city economies make up a huge proportion of most countries’ national economies.

What are the prospects for these sub-national aspirations?

The FFD negotiating draft does indeed have some key language on the local financing of infrastructure, on strengthening local taxation processes and on helping cities to access international credit markets. These remain highly politicized and contentious issues, however. Ultimately, it will be representatives of central governments who will be at the table in Addis Ababa.

See all of Citiscope’s coverage of the Financing for Development process here.

Get Citiscope’s email newsletter on local solutions to global goals.

Back to top

More from Citiscope

Latest Commentary