Why we should lend more money to richer countries

15 December 2014
Articles and blogs
Government representatives will converge on Addis Ababa next summer to discuss how best to fund a new set of Sustainable Development Goals (SDGs).

But while the SDGs are aspirational, committing us to eradicate absolute poverty and convert rapidly to greener growth, there are three legitimate reasons for concern about what Addis can achieve.

For a start, the old divide between ‘donors’ and ‘recipients’ no longer makes sense. Maybe 30 of the 190 countries represented in Addis are major providers of aid, including some emerging economies, and likely to stay that way until 2030. Another 30 or so remain chronically dependent on external assistance. The remainder, a whopping 130, fit into neither category. What agenda would this crushing majority be willing to back, and why?

Second, the success of the SDGs depends on the private sector including thousands of non-profits and hundreds of millions of households that are at best symbolically represented in Addis – but we cannot assume that private interests are automatically aligned with the SDGs. Government declarations that the private sector should provide hundreds of billions in additional funding will not impress public opinion much in 2015, if it ever did in 2000. We need a serious effort to monitor how public support catalyses private investment, as well as its financial and development impact.

And third, Addis needs to overcome the impasse that climate change funding and development finance debates seem stubbornly stuck in. However much we pay lip service to the idea that public contributions by advanced economies to climate mitigation efforts elsewhere must be ‘new and additional’, the reality is that these are overwhelmingly financed by development budgets.

So what can realistically be achieved in Addis?

A new report, Financing the post-2015 SDGs: a rough roadmap, written by Annalisa Prizzon, Homi Kharas and me, proposes two seemingly counterintuitive ideas: focus international grants on the least creditworthy countries; and boost access to non-concessional aid for countries that are actually doing rather well.

Developing countries face several years or more of relatively benign global capital market conditions, offering unprecedented opportunities to fund major investments in sustainable infrastructure as well as social progress and global public goods. International grants should, and can, be reserved as much as possible for the least creditworthy and most vulnerable countries. This should also be true for international public finance for climate change mitigation, regardless of whether that counts as aid or not.

However there is also a ‘missing middle’ pattern, whereby countries that achieve middle income status suffer badly from the premature withdrawal of grant-based aid. Their declining levels of aid aren’t matched by a proportional rise in tax revenue. We propose a thorough overhaul of the system of multilateral development banks and the process by which countries ‘graduate’.

These countries also suffer as their access to loans on harder terms stagnates. A new international target on market-related official lending would encourage new providers like China and India to increase this type of support. Just 0.5% of lender GDP would correspond to some $170 billion from G7 countries and as much again from emerging economies. 

These proposed short but feasible international responses go 'with the grain' of how the world is changing, and yet allow participants at Addis to talk, responsibly, about large numbers.

If we can get the financing right we stand a chance of achieving the aspirations of the new development goals: an end to poverty in all its manifestations everywhere and a sustainable future.