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South-South cooperation — a complement to North-South cooperation — continues to grow rapidly, more than doubling between 2006 and 2011.
While data on concessional South-South flows is incomplete, they are estimated
at between $16.1 and $19 billion in 2011, representing more than 10 per cent of global public finance flows. Non-concessional South-South flows, such as foreign direct investment or bank loans, have also expanded dramatically in recent years.34 International trade and cross-border private finance Global trade also continues to grow, albeit at a slower pace than before the international financial and economic crisis, and trade flows have assumed increased importance for resource mobilization in many developing countries. For least developed countries, the average trade-to-GDP ratio has risen from 38 per cent in 1990 to 70 per cent in 2011.35 The rise of global value chains in trade has tightened the link between trade and investment flows.
Gross flows of foreign direct investment to developing countries reached $778 billion in 2013, exceeding foreign direct investment to developed economies. Foreign direct investment is the most stable and long-term source of private sector foreign investment. However, least developed countries receive only a small fraction (less than 2 per cent) of these flows.36 In sub-Saharan Africa, foreign direct investment is driven primarily by investment in extractive industries, with limited linkages to the rest of the economy. Furthermore, the contribution of foreign direct investment to sustainable development is not uniform. In recent years, the composition of foreign direct investment appears to be changing. For example, globally, investment in finance and real estate increased from 28 per cent in 1985 to nearly 50 per cent of total foreign direct investment in 2011, whereas investment in manufacturing fell from 43 per cent to 23 per cent over this time.37 The nature of international portfolio investment in emerging markets has evolved over the past 15 years, as the markets of many countries have deepened and become more globally integrated. In particular, as domestic debt markets have grown, foreign investors have increased their purchases of local currency debt, and now play a dominant role in some emerging markets. However, these flows have been very volatile, reflecting a short-term orientation of international capital markets.38 In the United States, for example, the average holding period for stocks has fallen from about eight years in the 1960s to approximately six months in 2010.39 United Nations, 2014, Trends and progress in international development cooperation, 34 Report of the Secretary-General, E/2014/77.
Calculations are three-year averages based on statistics from the United Nations Conference on Trade and Development (UNCTAD), available from http://unctadstat.
unctad.org/EN/ (accessed 8 August 2014).
UNCTAD, World Investment Report 2014 (United Nations publication, Sales No. E.14.
UNCTAD foreign direct investment database, available from http://unctadstat.unctad.
UN, 2014, International Financial System and Development, Report of the SecretaryGeneral, A/68/221.
LPL Financial Research, Weekly Market Commentary, 6 August 2012. Available from: http://moneymattersblog.com/login/login/wp-content/uploads/2012/08/ WMC080712.pdf.
12 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing Private cross-border transfers from individuals and households have also grown substantially. An estimated $404 billion was remitted to developing countries from migrants in 2013, representing a more than tenfold increase in recorded remittances from 1990, when they were estimated at less than $40 billion.40 In addition, philanthropic finance from private individuals, foundations and other organizations to developing countries amounted to approximately $60 billion in 2013, with the majority coming from private donors in developed countries.41 Philanthropic actors are particularly engaged in global sectoral funds, such as in the Global Fund to Fight AIDS, Tuberculosis and Malaria and the GAVI Alliance.
A portion of international inflows has been used by some countries to build foreign exchange reserves, in part as a form of self-insurance against the volatility of international capital flows. Foreign exchange reserves increased from $2.1 trillion to $11.7 trillion from 2000 to 2013. Developing countries, primarily emerging market countries, hold almost $8 trillion, with the top five emerging market countries holding about 65 per cent of this.42 Migration and Remittances Team, Development Prospects Group, “Migration and 40 Remittances: Recent Developments and Outlook”, Migration and Development Brief No. 22 (Washington, D.C., World Bank, 2014); World Bank, Migration and Remittances Factbook 2011, 2nd ed. (Washington, D.C., 2014).
Hudson Institute, “The Index of Global Philanthropy and Remittances” (Washington, 41 D.C., 2013).
Data based on IMF article IV reports and IMF International Financial Statistics.
42 III. Strategic approach Figure IV illustrates the analytical framework that has guided us in formulating this sustainable development financing strategy. Financial sources can be arranged into four categories: domestic public, domestic private, international public and international private sectors. The challenge for policymakers is to channel and incentivize more of these diverse and decentralized sources of financing into desired investments in sustainable development.
As depicted in figure IV, financing decisions, in all cases, whether public or private, are influenced by national policy frameworks and the international financial architecture, the extent of appropriate and effective financing institutions, and the design and development of instruments to facilitate and help overcome
impediments to investment in sustainable development. In this spirit, the following precepts guide our strategic approach:
1. Ensure country ownership and leadership in implementing national sustainable development strategies, along with a supportive international environment. Each country is responsible for its own development. The implementation of sustainable development strategies is realized on the national level. However, national efforts need to be complemented by international public support as necessary, and an enabling international environment.
2. Adopt effective government policies as the linchpin of a sustainable development financing strategy. All financing is done within the context of national and international policy environments that set rules, regulations and incentives for all actors. Thus, effective institutions and policies and good governance are central for the efficient use of resources and for unlocking additional resources for sustainable development.
3. Make use of all financing flows in a holistic way. Meeting financing needs for sustainable development requires optimizing the contribution from all flows, including public, private, domestic and international. Each type of financing has specific characteristics and strengths, based on different mandates and underlying incentives. Maximizing synergies, taking advantage of complementarities, and building on an optimal interplay of all financing sources is essential.
4. Match financing flows with appropriate needs and uses.
Different sustainable development needs and project characteristics require different types of public, private and blended financing. While private financing will be essential, all private finance is not the same. Long-term sustainable development investments should be financed with long-term funds.
14 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing
In each category of finance, decision-making is decentralized among the separate institutions and actors. Funding decisions in domestic and international private sectors are inherently dispersed among multiple actors, and the delivery of international public funds is also highly fragmented, despite efforts at coordination.
Cohesive financing strategies, based on the principle of country ownership, are thus essential to facilitating the coordination of diverse sources of financing.
In the light of the cross-cutting dimensions of financing strategies, coordinated national decision-making is needed. Governments should also effectively communicate their strategic frameworks.
In what follows, we highlight particular policy areas pertaining to each of the four groups of financing sources, and blended finance and suggest a toolkit of policy options and financial instruments, to be used within a cohesive national sustainable development strategy. Notwithstanding the wide range of options proposed below, the choice of specific policy measures should be determined by domestic political considerations and other country-specific circumstances.
A. Domestic public financing There are three primary roles for domestic public finance: (a) increasing equity, including through poverty reduction; (b) providing public goods and services that markets will eschew or underprovide and enacting policies to change incentives of private actors; and (c) managing macroeconomic stability.43 In addition, domestic resource mobilization reinforces a country’s ownership of public policy and allows countries to move towards financial autonomy. National public finance strategies should reflect these motivations as they guide the implementation of sustainable development strategies.
Promote tax reform, tax compliance and deeper international cooperation Domestic resource mobilization depends on many factors, such as the size of the tax base, a country’s capacity to collect and administer taxes, tax elasticity, the volatility of sectors being taxed, and commodity prices. While optimal tax policy design is necessarily reflective of a country’s economic and social situaRichard Musgrave, Theory of Public Finance: A study in public economy (New York, 43 McGraw-Hill, 1959).
18 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing tion, Governments should follow generally accepted principles of sound public finance management, e.g., tax systems should be fair, efficient and transparent.
Governments may also prioritize real income gains at the bottom of the income distribution through progressive tax policies, such as “earned-income tax credits”, and VAT exemptions on basic goods and services. More generally, the tax base should be as wide as possible, while maintaining equity and efficiency. Indeed, widening the tax base has been instrumental in recent advances in tax collection in many developing countries, including least developed countries and small island developing States. Key indicators of success in tax reform include high-level political commitment, administrative and policy reform and strong leadership in the revenue administration.44 Socially balanced user fees for some public services may be warranted so that beneficiaries contribute to the cost of the service, though they are not encouraged for essential social services.
However, there are limits to what individual Governments can accomplish on their own in the globalized economy. For example, national jurisdictions sometimes compete with other countries through offers of tax incentives to attract and hold employers, eroding the tax base of both competing countries.
Ending harmful tax competition needs to be based on cooperation between competing countries, while respecting the sovereign right of countries to design their national tax regimes. This would generally be done in a regional or international forum. Such forums can also stimulate cooperation to stem illicit financial flows, as discussed in section V.45 Whereas, to date, technical assistance to the revenue and customs sector has attracted a minimal share of ODA,44 going forward more focus should be placed on responding to national requests for strengthening fiscal management capacity and capacity-building for domestic resource mobilization. In addition, examples of successful reforms can inspire policy design elsewhere. The benefits of broader international forums on tax cooperation are palpable (see section V). Additional capacity-building efforts should target institutional capacities to collect adequate revenues from extractive industries.
In resource-rich countries, the management of natural resources is particularly critical. Fiscal rules governing the extractive industries should ensure that the public interest is appropriately compensated. Governments can also design policies to ensure that a share of resource earnings are saved and invested for the benefit of future generations, as in sovereign wealth funds. When tax revenues from resource extraction are volatile, Governments can accumulate surplus earnings in years of high prices and smooth government expenditures in years of low prices through commodity stabilization funds. International cooperation is needed to tackle the illicit trafficking of natural resources, including from countries in situations of conflict. Transparency and anti-corruption programmes, including voluntary initiatives, are also relevant in many cases.
Ensure good financial governance and public financial management Combating corruption plays an important part in complementing efforts to improve domestic revenue mobilization. Corruption can have adverse effects on businesses, individuals and public financial management. High scores on corruption indicators are also strongly associated with low public revenue. To advance the fight against corruption, all countries should strive to ratify and implement the United Nations Convention against Corruption and should make further combined efforts, particularly on prevention, enforcement and stolen asset recovery (see section IV.C).
A central element of good financial governance is proper planning and execution of the budget. Generally accepted principles of good budgeting address the stages of formulation, approval, execution and audit. These principles should ensure that public spending is consistent with national sustainable development strategies, inclusive of environmental, social, economic, gender, and other goals.