Economic Growth

Financing for Development: Enter the Private Sector

Why the discussions on financing development in 2015 are vastly different from those in 2000

July 14, 2015

As experts meet this week in Addis Ababa, Ethiopia, for the third international conference on Financing for Development, the discussions have the potential to advance not just much-needed funding for new development goals, but a different discourse on development. With the Millennium Development Goals (MDGs) set to expire in less than six months, the UN General Assembly is ready to adopt the Sustainable Development Goals (SDGs)—a new set of international goals and targets to eradicate poverty by 2030 and build inclusive societies.

The current draft contains 17 overarching goals and 169 targets, a greatly expanded list compared with the MDGs’ 8 objectives. The new proposal is not just a reboot (and expansion) of the MDGs, rather, its holistic approach and focus on economic development mirror a broader shift in the approach to development that has taken place over the past 15 years.

For the better part of the post-war twentieth century, development policy relied for funding largely on official development assistance (ODA) from governments. For example, ODA comprised 70% of the resources flowing from developed to developing countries in the 40 years after World War II, with private investment making up the remaining 30%. That began to change with the global economic integration of the 1990s, and, by the year 2000, the weighting had shifted decisively— with private investments making up the lion’s share of capital flows to developing countries.

The MDGs were agreed on at just this tipping point, so it’s perhaps unsurprising that they would reflect the experience of decades of ODA-centric precedent. However, they are now frequently critiqued as little more than a debate over where to target aid rather than how to generate economic growth.

Recognizing this, the architects of the SDGs aim to foster economic growth as a means to eradicate poverty and achieve peaceful, inclusive societies. This shift helps explain why the role of the private sector is an important topic at Addis, most obviously in discussions of helping to finance the substantial investment that the SDGs require.

UN estimates put the cost of providing a safety net to eradicate extreme poverty at $66 billion per year, and annual investment requirements to improve infrastructure could be rise to $7 trillion globally. But that is only one facet of the discussions about the role of the private sector in making the SDGs’ aspirations a reality.

“It has been a complicated discussion, because public funds are scarce and the needs are huge, so when people bring up the private sector—it is perceived by some as diluting efforts to get developed country governments to pay their fair share,” says Mirko Serkovic, an expert on climate change negotiations. This underscores the importance of productive dialogue not just on securing funding, but on defining where the private sector can contribute more broadly on a range of themes—from project finance and encouraging investment to technology transfers and removing barriers to doing business.

One SDG-related UN proposal, for example, urges large corporations to mentor small and medium-sized enterprises that are already in their supply chains, with the goal of helping the SMEs overcome vulnerabilities and take advantage of their relative flexibility and grassroots network. This kind of support could entail technology transfer, sharing of best practices and help in navigating international trade standards.

Ultimately, “creating jobs creates hope, and building linkages builds markets. Doing so through private-sector investment is key to sustainability, particularly in the Palestinian Territories, where aid has distorted the market on some level, creating unsustainable dependencies,” says Jennifer Atala, an expert in economic development and the MENA region.

According to recent UN data, SMEs account for approximately 90% of businesses and more than 50% of jobs worldwide. Since this sector is so large, it is often targeted by those wanting to strengthen local economies.

The challenges involved in raising funding for the SDGs make discussions of initiatives like these at Addis all the more important. The sharing of know-how is key to ensuring that each dollar donated delivers the greatest value possible.