Financing for Sustainable Development: Money and the Right Policies
IMF Blog, June 11, 2015
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- Authors: Min Zhu, Sarwat Jahan
- Published: June 11, 2015
New goals, new world
- The United Nation’s Sustainable Development Goals replace the Millennium Development Goals and broaden development to embrace economic, social, and environmental issues.
- The world has become increasingly interconnected since the early 2000s; global trade flows have increased steadily in the past two decades (Chart 1).
- Many frontier economies are rapidly integrating with global financial markets:
- In 2014, Côte d’Ivoire, Ghana, Kenya, Senegal, Vietnam and Zambia issued government bonds totaling about US$7 billion.
- Official development assistance has declined as the main source of capital flows to developing countries:
- Official development assistance dropped from 1.6 percent of developing countries’ collective GDP in 1990 to 0.7 percent of GDP in 2012 (Chart 2).
- Increased integration raises exposure to external shocks such as swings in global commodity prices, capital flows, and changes in exchange rates.
Mobilize domestic revenues
- To fund development needs and build resilience against shocks, many developing countries need both higher revenues and better-managed tax collection and administration.
- Country experiences show domestic policy can yield large results (Chart 3):
- Peru increased its domestic tax ratio from 6 to 13 percent of GDP over the 1990s, and stabilized it at about 17 percent since 2010.
- Other examples of important strides include Tanzania and Vietnam.
- There is substantial scope to strengthen domestic resources while addressing environmental concerns through:
- Energy price reform.
- Carbon pricing.
- The IMF supports countries to:
- Strengthen capacity to raise money at the national level.
- Reform energy taxation and subsidies, among other measures.
- Major advanced and emerging market economies can assist via collective action:
- Fulfilling foreign aid commitments to support the most vulnerable.
- Enhancing international tax cooperation.
- Reviving the global trade liberalization agenda.
- Agreeing national targets for reducing CO2 emissions at the climate change summit in Paris in December 2015.
Resilience through the right policies
- Money alone is insufficient; countries need policies tailored to their circumstances to translate and implement the Sustainable Development Goals.
- Needed policy objectives include:
- Maintaining an attractive environment for investment.
- Making effective use of available resources on priority areas such as health and education.
- Helping countries recover and rebound from severe external shocks.
- Policy measures should:
- Raise the contribution from domestic resources to fund goals.
- Ensure borrowed funds and tax revenues are used effectively to address infrastructure gaps and promote inclusion.
- Support growth that is strong, sustained, and broadly shared, while keeping debt levels sustainable.
- Roles and responsibilities:
- Countries are in the driver’s seat for their development goals.
- More advanced economy partners should adopt measures to foster stable global economic and financial conditions.
- International institutions act as technical advisors and support teams working with countries.
IMF support and reforms
- The IMF is working with developing countries to strengthen resilience in a more connected world.
- The IMF is exploring options to:
- Refine financing facilities to boost access to IMF concessional resources for the poorest and most vulnerable countries.
- Provide stronger safety nets for countries that have access to foreign capital markets and are exposed to capital flow shocks.
- These reforms aim to enable developing countries to be better prepared to handle economic shocks while pursuing their development objectives.
Source: Financing for Sustainable Development: Money and the Right Policies — Min Zhu, Sarwat Jahan, June 11, 2015