A new system of development finance
November 27, 2008
by FT
By Jeffrey D. Sachs
Governments meet in Doha this weekend to review the global system of
development financing, the means by which resources flow globally to
support sustainable development. The system is broken, though the
conferees are unlikely to say so clearly.
Just as we need an overhaul of financial market regulation, we also
need an overhaul of development finance, if we are to address problems
of poverty, hunger, and climate change.
Development financing involves three main processes: development aid
for the poorest countries, those which cannot attract market-based
financing for necessary investments; direct and portfolio investments,
mainly for emerging markets and resource-rich poor countries; and
financing for global public goods, such as climate-change mitigation
and adaptation.
Aid flows are far below promised levels and are unpredictable; market
flows are heavily concentrated in a few countries, and are subject to
panicky reversals; and global public goods are disastrously
under-financed, good intentions without backing.
There is no point of accountability. When aid is promised but not
delivered, nobody really cares except the poor countries themselves.
And more often than not, the poor get blamed for some malfeasance or
another as the reason why aid hasn’t flowed.
Development ministers piously proclaim that they will honour their
commitments, such as to double aid to Africa by 2010, even as their
finance ministers are cutting their aid budgets.
What’s shocking is that the rich world has not been able to organize
itself to increase aid to Africa by a measly $25bn per year (less than
10 cents per hundred dollars of rich-world income), even as they’ve
committed at least $2.5tr in the past month for financial-sector
bailouts.
The “reformed” aid architecture has actually deprived aid of its
political support in the rich countries. Aid reformers have generally
argued for “budget support,” meaning money to the treasuries of the
poor countries, rather than “tied aid” in the form of investment
projects supplied by industrial and construction companies, or
targeted support through specialized global funds for disease control,
education, agriculture, and so forth.
Industrial enterprises in the US, Europe, and Japan that might have
sold power plants, road construction, port facilities, and the like
backed by aid funds, have lost interest and contact with development
aid. And the rich-country public does not trust general budget
support, since it doesn’t know how their money is being used.
The most successful aid in recent years has been for targeted purposes
through global funds to provide immunizations for children, or to
fight aids, TB, and malaria. The public then clearly understands how
money translates directly into lives saved. Aid can be counted in bed
nets, antiretroviral treatments, doses of measles vaccine. The
results can be counted in the dramatic reductions of deaths from
malaria, measles, polio, and other diseases now strikingly evident.
These funds have won public backing and increased financing.
The first true reform of the aid system, therefore, should reconnect
aid with measurable inputs and outputs, through targeted global funds
and programmes. International aid donors should pool their money into
global funds for primary education, food production (supplying seed
and fertilizer to peasant farmers), clean water and sanitation, family
planning and contraceptives (through the United Nations Population
Fund), nutrition (through UNICEF and the World Food Programme), and
for infrastructure. The public would see clearly how their money is
used. Projects would be monitored and audited. Successes and
failures would be transparent.
The second reform should be to “re-tie” aid, in part, by encouraging
national donor agencies to support infrastructure projects provided by
national companies.
China is doing this by the investment of billions of dollars
throughout Africa, to notable benefits on the ground throughout
Africa. Japan has a history of success of this kind of aid in
south-east Asia. With a deep recession in the high-income world,
direct financing of companies to build vitally needed roads, power
plants, port facilities, and the like in the poorest countries would
be a triple win: for development, for macroeconomic stimulus, and for
building a domestic political base for meeting aid commitments.
The goal, of course, should be to enable countries to graduate from
development aid, and to rely on market financing. Yet market
financing is heavily concentrated in a few emerging markets and
resource-rich poorer countries.
To expand the range of market financing, the key step is build the
infrastructure in the poorer countries so that market-based
investments become profitable. And financial measures are needed to
prevent dramatic reversals in private flows, as we have experienced
since the collapse of Lehman Brothers in September. Perhaps the key
step here is currency swap lines from the rich-country central banks
to the poorer countries, so that market panics do not sweep over the
emerging markets.
Traditional development aid (whether reformed or not) and market-based
financing do not finance global public goods, such as the heavy
investments needed for climate change mitigation and adaptation or to
protect biodiversity.
We need new forms of global financing for the research, development,
demonstration, and diffusion of sustainable energy technologies, such
as carbon capture and sequestration, and advanced technologies in
power generation. Africa has remarkable solar potential, enough for
itself and for Europe, but it requires a big scientific, engineering,
and public-private financing effort on a region-wide scale, yet
financing is not available.
Small funds such as the Global Environmental Facility have been
established for these purposes, but they are in the millions of
dollars per year category rather than the tens of billions needed.
Innovative financing is essential. We should adopt a global carbon
levy in which each country provides a few dollars per tonne of carbon
dioxide emitted to finance global investments in mitigation and
adaptation. Switzerland and Norway have recently advanced such
proposals.
An analogous small tax on global transport and on global financial
transactions can add significant and needed international funding. A
levy on airline tickets is already functioning and can be complemented
by a similar levy on international shipping.
An overhaul the international finance system is now likely. The
financial crisis has already triggered the process. There is much
talk about Bretton Woods II. The world should remember that the first
Bretton Woods agreement involved much more than financial regulation,
and looked forward to post-war reconstruction, development, and trade.
This time around we need a similarly expansive vision, in which a new
system of development finance addresses the great challenges of
sustainable development: poverty alleviation, disease control, climate
change, and well-functioning global financial markets that serve all
countries, rich and poor.
Jeffrey D. Sachs is the director of the Earth Institute, Quetelet
professor of sustainable development, and professor of health policy
and management at Columbia University
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November 28, 2008 1:06 pm | 
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