Nigerian activists lobby African Finance ministers meeting. Credit: ActionAid

By Manuel F. Montes
NEW YORK, Oct 21 2019 (IPS)

Four years ago, UN member states proclaimed their ambitions for development in a document named “Transforming Our World”, also known as Agenda 2030.

Today, according to several assessments including of the UN’s inter-agency task force on financing for development (FfD) transformation has fallen off-track. It has received too little money, political commitment and action to change the workings of the global economy. Agenda 2030 spells out the Sustainable Development Goals (SDGs) needed to ‘transform our world’.

A cottage industry has arisen to produce estimates of the financial resources required, ranging from $1 trillion to $3 trillion per year. A second industry has emerged around the question of where to get the money.

By one UN estimate, global public and private investment amounts to around $22 trillion a year. It would take a redeployment of about 14% of that to meet the high-end estimate of $3 trillion. Many have questioned whether there is enough money and more have lamented that international aid flows appear insufficient. They miss two critical issues.

First is how to make sure that available resources are used for actual investments in the real world. Second is how to make sure that the investments that get funded advance goals of ending poverty, fighting climate change, and providing decent work. As things stand, vast sums are invested in ways that work against these goals.

The global financial system must be transformed to give priority to real investments in environmentally sound, employment-creating, long-term projects

This is especially true of private investment, much of which is directed at ‘securitization’, or the buying of other financial assets to turn a quick profit rather than supporting longer-term endeavors that boost jobs, welfare, and the environment.

Securitization is the result of decades of financial deregulation and tax cuts on capital gains and is driven by the thirst for large, instantaneous profits. To persuade the private sector to partner in long-term projects with real world benefits involves offering such enticements as a return of 10% or more.

Meeting such guarantees involves subsidies from public resources diminishing the public sector’s ability to make its own SDG investments. This unfortunate logic propels efforts at “impact investing,” “blended finance,” and “private-public partnerships”; Efforts which consume precious public-sector time and analytical resources, and where returns go to private finance, and risks are dumped on the public sector…

For the most part, the global financial system remains a part of the problem and not a partner in socially or environmentally sound development. What is to be done? The global financial system must be transformed to give priority to real investments in environmentally sound, employment-creating, long-term projects.

Private finance must be freed from the tyranny of asset price-driven financial markets. The logic of short-termism and of offloading risk onto others needs to be overturned. This kind of systemic reform once championed by academics and NGOs is now even taken on by the Financing for Sustainable Development Report, the UN’s ‘bible’ on financing.

Even as private finance begins to evolve to embrace new kinds of risk governments – for all their flaws – will retain the central role in identifying, designing, financing, and completing projects. This means that public finances need to be shored up. The best source of public money is taxation.

ActionAid research shows that where this is through an increase in value-added or other consumption taxes – it may unfairly burden poorer citizens, who spend larger portions of their incomes on buying goods and services.

What needs to be done involves multinational corporations with operations in developing countries. Capital flows need to be regulated to staunch the siphoning off of resources generated in developing countries; amounting to – according to ActionAid research for example – $147 million in Burundi in 2018.

The current investment regimes endorsed and enforced by the International Monetary Fund and others need to be upended.

Investment treaties and so-called free-trade agreements should no longer protect investors and corporations that make short-term loans (mostly searching for quick profits derived from high interest rates) to developing countries and those who gamble in international markets, using massive sums of money taken from the developing countries. How multinational companies hosted by developing countries are taxed also need to be changed to make possible the ‘reshoring’ of domestic resources.

Rules that allow or encourage companies to shift profits to rich countries or tax havens must be scrapped. Developing countries have faced significant resistance in pursuing global financial and tax reforms, not only from some of the world’s most powerful banks and companies, but also from the governments of the wealthy countries in which those enterprises are headquartered.

But rich-country governments need to become part of the solution. From climate change to widespread poverty and inequality, the problems confronting us are immense and the actions embodied in the SDGs are urgent. Systemic changes are vital to build the foundations on which to ‘transform our world’ in keeping with the vision of Agenda 2030.

*The views expressed in this article are his own.

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By Manuel F. Montes
NEW YORK, Sep 26 2017 (IPS)

In discussions at the UN about achieving Agenda 2030, it has become de rigueur to highlight the role of the private sector. It is often introduced as the discovery of the idea that private sector investment and financing is indispensable to achieving Agenda 2030.

For developed country diplomats and their associated experts this new celebrity treatment appears to be an article of faith, at least during negotiations on economic matters in the UN. They are foisting a misleading Trumpian exaggeration that is technically harmful to development policymaking and to Agenda 2030.

The practical, and long-running, reality is that investment by enterprises has always been indispensable to growth and development. It is NOT a new reality. It’s NOT a reality specific only to Agenda 2030. Except in old-style socialist economies where capital is controlled centrally by intention, private sector resources have always dwarfed those of the public sector. This private-public resource imbalance is not a newly-found situation; it is not specific to Agenda 2030.

However, the discovery, unearthed in the UN, is being deployed to justify the so-called “leveraging” of limited public resources to “de-risk” private investment. At the end of the day, this amounts to seeking ways to subsidize the private sector for the things the public sector wants to happen in order to achieve Agenda 2030.

The new celebrity treatment of private investment and financing by developed countries is quite ironic because, as reported by the UN’s financing for development technical task force (in which the staffs of the IMF, the World Bank, and WTO participate) in its 2017 report, the growth of private non-residential investment (in new factories and ventures) in DEVELOPED countries is at an unprecedented low at this point in time.

The limit of developed country officials touting the indispensable role of the private sector is that they are unwilling and legally unable themselves to commit to developing countries that their private sectors will respond to and responsibly perform in support of the UN Agenda. What they can do is to think about means to devote some of their official development assistance (ODA) to provide subsidies and guarantees. And of course, developed countries seek credit for doing this – by adjusting the ways in which ODA is measured.

If the private sector finds it in its commercial interest to undertake Agenda 2030 activities, then such subsidies would be a waste of the already historically dwarfed taxpayer resources.

State leadership in channeling private resources for new facilities and economic activities has long been the secret of successful development. Singapore imposed mandatory employer and employee contributions to the Central Provident Fund which were then channeled to fund housing development.

The upfront costs of construction were paid back from mortgage payments. The private sector (employees and employers) provided the original financing and the private sector (households living in the housing development) paid back the upfront costs. The Singapore government knew even then, in the late 1960s, of the extreme dominance of the private resources in any development effort.

The truly fresh reality is that the financial sectors in developed countries are sitting on a pool of money which – instead of being channelled to creating new wealth in the form of new economic activities, new facilities and upgraded infrastructure – is being applied to trading of financial assets and computer entries representing claims on existing wealth.

For US companies particularly, instead of being invested towards creating new jobs, cash hoards are applied toward stock buybacks to increase the value of existing financial assets “in the market.”

This unstable (inverted) pyramid of money resting on existing assets is already – at present – flitting in and out of developing economies as private portfolio flows, creating short-term external liabilities and often swamping their control over their exchange rates, with harsh impacts on their export competitiveness (during the boom phases) and their ability to import critical inputs (during the inevitable busts).

Is the exaggerated, and allegedly newfound, indispensability of the private sector’s role in financing Agenda 2030 more a matter of seeking means to prop up the unstable financial assets pyramid hanging over developed economies?

The scaling up of “blended finance” and “public-private partnerships” (PPPs) is the new development silver bullet and happens to be very helpful to the propping up needed by developed country financial sectors. The World Bank has been involved in an effort to standardize provisions of PPP contracts to expand their use in developing countries.

Public-private partnerships are as old as development but the new models have seen the risks and costs of failing projects falling on the public sector. The incidence of failures is disquieting. There is, for example, the failed ten-year public-private project to privatize and modernize the London underground, whose costs are now sitting on Her Majesty Treasury’s books after 2009.

After an initial spurt, the central government of China had to rein in PPPs by local governments in the mid-1990s when the costs of failures rose steeply in the books of national banks. With these kinds of problems, the public sector in developing countries might as well take the risks themselves under the “old-style” approaches of blended finance.

This will require the kind of state leadership over the economy shown by Singapore in the late 1960s, through long-term planning and the mobilization of domestic resources. This will in turn require that developing countries recover “old-style” policy space to regulate financial lending and external capital flows.

Instead, as their contributions to the SDGs, developed countries and business associations like to distract from regulation by narrating examples of successful finance blending public guarantees with private money, then wring their hands about the difficulty of “scaling up” these instances. Bespoke approaches do not scale up easily. The way to scale up SDG investment is to provide enterprises with stable financing frameworks at reasonable cost as a platform on which they can undertake risk.

Policy space in developing countries is severely limited after decades of capital account liberalization. Governments are stymied from making available long-term finance at reasonable interest to finance infrastructure and new economic activities.

Countries with open capital accounts have a hard time providing these facilities because their banks have to provide their own lenders an interest rate high enough to compensate for possible foreign exchange losses when foreign investors experience ‘mood changes’ against the country.

Every developing country external payments crisis recalls the need to avoid currency mismatches in financing domestic investment. Foreign currency financing should be relied on mainly for imported goods and services that can be paid back with prospective foreign earnings.

Relying more on domestic currency financing will require upgrading the domestic financial sector, but this is a desirable end in itself. It is timely for developing countries to re-establish their development banks which they had shut down in many structural adjustment programmes. Development banks are able to provide long-term finance, while raising long-term resources themselves.

Rather than devote their limited resources to torturous ways to subsidize and seduce the private sector to take risks on the UN’s Agenda 2030, governments in developing countries should recapture their policy space to regulate and direct private sector resources to the service of sustainable development.

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By Manuel F. Montes
GENEVA, Nov 12 2014 (IPS)

As the international community wades into the political discussions regarding the alternatives to the Millennium Development Goals (MDGs) after 2015 and the design of the Sustainable Development Goals (SDGs) as mandated by the Rio+20 conference, it is timely to consider the question of whether development is a matter mostly of individual effort on the part of nation-states or whether there are elements in the international economic system that could serve as significant obstacles to national development efforts.

If there are obstacles in the international economic system, it is important that the post-2015 development agenda and the SDGs address the question of the elimination or the reduction of these obstacles.

Manuel F. Montes

The limited number of successfully developing countries since the 1950s has provoked a debate over whether the success of these countries required their success in eluding international obstacles to development.

The question is to evaluate features of the international system on the basis of how these features are conducive to enabling long-term investment toward economic diversification.

Terminologies of previous development orthodoxies litter the development literature – import substitution, industrialisation, basic needs, structural adjustment, Washington Consensus and Millennium Development Goals (MDGs).

Each of these orthodoxies tended to be a reaction to perceived weaknesses or missing elements from the immediately previous one. The most recent orthodoxy, as exemplified by the MDGs, is that development is about poverty eradication.

But poverty eradication is an overly narrow, possibly misleading, perspective on development.“Poverty eradication is a desired outcome of development but its achievement is permanent only with the movement of a significant proportion of the population from traditional, subsistence jobs to productive, modern employment”

Poverty eradication is a desired outcome of development but its achievement is permanent only with the movement of a significant proportion of the population from traditional, subsistence jobs to productive, modern employment.

The association of development with poverty reduction created for the donor community the pride of place in economic policy in developing countries.

But this place can be at the cost of reducing the responsibility of donor countries in helping to maintain an enabling international environment for development in trade, finance, human resource development and technology.

In the MDGs, these issues are crammed into “MDG-8”, the so-called global partnership for development, with a very selective and poorly defined set of targets.

Development requires not just higher levels of income, nutrition, education, and health outcomes but in the first place involves higher levels of productivity and capabilities.

Higher levels of productivity and capabilities are possible only with structural transformation of the economy.

In turn, in most societies, according to a report by the Secretary-General of the U.N. Conference on Trade and Development (UNCTAD), such a structural transformation has been “associated with a shift of the population from rural to urban areas and a constant reallocation of labour within the urban economy to higher-productivity activities.”

Structural transformation is only possible with substantial and sustained investment over decades in new activities and products, not just in anti-poverty programmes.

Where the international economic system is hostile to investment in new, productivity enhancing economic activities is where its elements create obstacles to development.

One example of an externally based obstacle is aid volatility which has been shown to have highly negative impacts on macroeconomic performance and domestic investment.

Capital and technological investments are required to overcome the enormous productivity gap between developing and developed countries which characterises the world economy.

In 2008, a ratio of the average Gross National Income (GNI) per worker in the countries of the Organisation for Economic Cooperation and Development (OECD) versus those in the least developed countries (LDCs) was 22:1 in favour of the OECD countries.

This imbalance has worsened by a factor of five in comparison to the earliest days of capitalist development. In the nineteenth century, taking the Netherlands and the United Kingdom as the richest countries and Finland and Japan as the poorest, the productivity gap was only between 2 to 1 and 4 to 1.

The international economic system is lacking crucial mechanisms for delivering long-term, stable resources required by developing countries to upgrade their capabilities.

Dependence on commodity exports sustains the productivity gap between developed and developing countries.

Abundant global liquidity and growing trade imbalances fuelled a commodity boom in the 2000s which benefited many developing countries, including many LDCs.

All previous global liquidity booms had ended with serious economic crises in developing countries. The more recent commodity price boom did not introduce an enduring improvement in macroeconomic balances, especially for low-income countries (LICs).

While in the 2000s LDCs experienced the strongest growth rates since 1970s, according to UNCTAD, more than one-quarter of LDCs actually saw GDP per capita decline or grow slowly in the 2002-2007 global boom.

Even the middle income region of Latin America presents evidence of insignificant structural improvement in fiscal and current account balances.

Previous commodity boom periods had similarly not been an occasion for structural change in LDCs. UNCTAD suggests that between the 1970s and 1997, manufacturing as a proportion of GDP increased by less than two percentage points in LDCs as a group, a period which saw various episodes of commodity and global liquidity booms.

When considering LDCs from Africa alone and including Haiti, manufacturing fell from 11 to 8 percent during the same period.

Developing countries had extensively liberalised their trade regimes in the 1980s. In the aftermath, UNCTAD finds that some LDCs have more open trade regimes than other developing countries, and others are more open than even developed countries.

These policies had been intended to facilitate economic diversification. Instead of the expected outcome, greater trade liberalisation has been accompanied by greater concentration in the structure of exports.

The international economic system labours under the constraint that the highest decision-making bodies in key institutions, such as the International Monetary Fund (IMF), do not provide sufficient voting weight and policy influence to countries most affected by their operations.

One effort under way but under enormous political obstruction is to update voting weights in line with the changed economic structure. Even the G20, where important developing countries sit, has been unable to advance progress. (END/IPS COLUMNIST SERVICE)

(Edited by Phil Harris)

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

*  Click here for the Research Paper on which this column is based.

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