How to use the potential of innovative development financing

Employment & Income,Inclusive Economy25 Jun 2014Saskia Hollander

Now that Official Development Assistance (ODA) has been declining for the past few years, academic discussions on how to attract additional public and private sources of funding for sustainable development are heating up. These sources include increasing local access to financial services and raising tax revenues, as well as improving the way overseas remittances are measured and used, and enhancing corporate social responsibility. Until now, however, such innovative sources of development financing have not been used to their full potential, due to both political and measurement shortcomings. 

This was the main message emerging from the two EADI 14th General Conference working group sessions on ‘Finance for Development’. The participants discussed a broad spectrum of innovative sources of development financing, ranging from increasing tax revenues, fighting illicit financial flows, creating a more conducive environment for overseas remittances, increasing access to finance at the local level and enhancing corporate social responsibility. The political debate on development financing has changed significantly since the time when the MDGs were formulated (see for example ‘Milestone or deadlock’). The academic world needs to take a number of pitfalls into account when assessing the way additional financial flows contribute to sustainable development. More sound research needs to be done on how to measure various financial contributions and their effects on development. This has to go hand in hand with a policy agenda on fighting corruption and removing the incentives for those who benefit from a prejudicial status quo.

Reforming tax systems

Various presentations addressed ways to improve tax systems and manage of financial flows so as to boost the mobilization of domestic resources in developing countries. According to Dawit Tadesse Tiruneh, of St. Mary’s University, Ethiopia, the money lost to capital flight in Sub-Saharan Africa exceeds the total amount of ODA and foreign direct investment received by these countries. Moreover, oil rich countries account for 72 percent of total capital flight. While the problem of illicit financial flows is certainly not new, Dawit Tadesse Tiruneh argued that the problem has been allowed to grow, both by developing countries, where government officials largely benefit from capital flight, and the international community.

According to Christian von Haldenwang of the Deutsches Institut für Entwicklungspolitik, Indonesia belongs to the group of developing countries with a particularly low tax performance, mainly because of the high political and electoral risks associated with measures to reform the tax system, such as raising tax revenues and introducing individual assessments.

Jean François Brun of the Université d’Auvergne, France, pointed to a number of shortcomings in academic research on the negative effects of the ‘shadow economy’. While most analyses also include unregistered micro-activities, the tax burden of which is generally underestimated, they call for research primarily focused on tax evasion, which is contingent on – or, at least, reinforced by – corruption that allows economic agents to escape taxation and punishment.

The role of remittances

A second group of presentations dealt with the contribution of overseas remittances to economic development in the least developed countries (LDCs). Participants in this session stressed that remittances are a major source of development finance for developing countries with a significant number of overseas migrants, with the effect being the largest in rural communities. For this reason, in the discussions on the post-2015 development agenda, the inclusion of migration has been largely emphasized by both developing countries and international organizations like the International Organization for Migration (IOM). Besides individual remittances, Barbara Bonciani of the University of Pisa, Italy, pointed out the largely underestimated value of collective remittances through hometown migrant associations.

Despite their scale, the potential of remittances as an additional source of development financing is not fully utilized. In his study on the effects of remittances as development finance for rural hometowns in the Philippines, for example, Jeremiah Manuel Opiniano of the University of Santo Tomas and the Institute for Migration and Development Issues (IMDI) in the Philippines, argued that remittances are mainly used to fulfill primary livelihood necessities and not for long-term investment. In order to fulfill the potential of remittances as development financing, the international community and developing countries must work together to create an enabling financial infrastructure at local level that is conducive to investment.

However, Agnes Pohle of the University of Kassel, Germany, warned that the environmental impacts of investments need to be taken into account in creating this infrastructure. Based on her fieldwork on remittances investment in agriculture in Kerala, India, she argued that in the long-run, remittances may increase the vulnerability of the poor if they are used to invest in non-sustainable agricultural productivity.

More generally, Clara Capelli of the University of Pavia, Italy, argued that to fully assess the impact of remittances on development, a different measurement for a country’s economic scale and performance is required. Instead of using Gross National Income (GNI), she calls for Gross National Disposable Income (GNDI) to be used to measure a country’s development performance, as this includes both net factor income and unilateral transfers. GNDI is, however, rarely available in major international reports and datasets and is often confused with GNI. A different approach to national income indicators would provide a more sound basis for policy-making and would help achieve the development potential of the huge volumes of remittance inflows to developing countries.

What about the private sector?

Besides increasing the mobilization of public resources, the private sector is also increasingly being called upon to pay its share in achieving sustainable development. Involving the private sector in multilateral discussions on sustainable development financing – for example through the UN Global Compact – aims to mainstream issues like financial inclusiveness and environmental sustainability into the core business of private enterprises and multinationals. In his presentation, Armando Garcia Chiang of the Universidad Autónoma Metropolitana, Iztapalapa, Mexico, gave an example of how this is achieved in practice. In his study on corporate social responsibility (CSR) in the Mexican oil industry, he assessed the impact of the ‘Petroleos Mexicanos Integral Contracts for Exploration and Production’, according to which new oil operators must allocate 1% of their annual budget to social development, and comply with CSR plans. Yet, as Chiang argued, the benefits of such plans are only realized if they are based on different types of actions to increase social responsibility and are targeted at various regions.

Other participants analysed the potential of building international reserves as a self-insurance strategy against shocks (Dennis Essers, University of Antwerp, Belgium), the benefits of South-South cooperation as additional external resource mobilization (Davide Villani, UNSAM, Argentine Republic), and increasing access to finance at the local level (Khalid Rouggani, Université Hassan I, Morocco, and Maité le Polain, Université Catholique de Louvain, Belgium). Overall, this session’s presentations shared an important message for policy-makers to generate the political will to fight corruption and to create an enabling environment for financial inclusion. The conclusion can also be drawn from all of them that, in order to better realize the benefits of innovative development financing, academics from different disciplines – sociology, environmental planning, economics, econometrics, anthropology – need to work closer together to come up with better ways to measure and assess the impact of various financial resources for sustainable development.

The Broker reports from the EADI conference ‘Responsible Development in a Polycentric World: Inequality, Citizenship and the Middle Classes’, 23 – 26 June 2014 in Bonn, Germany. The Broker is main media partner during this conference.