Combining finance and policies to implement a transformative post-2015 development agenda : full report.
Date: 2015-09-16
Institutions: Directorate-General for International Cooperation and Development
Subjects: EU aid, activity report, aid policy, developing countries, development aid, development policy, financing, financing policy

EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies
to implement a transformative
post-2015 development agenda

Full Report
EN

MOBILISING EUROPEAN RESEARCH
FOR DEVELOPMENT POLICIES
This project is funded by the European Union 
and four EU Member States (Finland, France, 
Germany and Luxembourg).

EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies
to implement a transformative
post-2015 development agenda

Full Report

Disclaimer

The content of this report does not reflect the official 
opinion of the European Union or of its Member States.
Responsibility for the information and views expressed 
in the report lies entirely with the authors.

European Report on Development (2015), Combining finance and policies to implement a transformative post-2015 development agenda.
Overseas Development Institute (ODI), in partnership with the European Centre for Development Policy Management (ECDPM), 
the German Development Institute (Deutsches Institut für Entwicklungspolitik) (GDI/DIE), the University of Athens 
(Department of Economics, Division of International Economics and Development) and the Southern Voice Network, Brussels, 2015.

Freephone number (*)
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More information on the European Union is available on the Internet (http://europa.eu).
Cataloguing data can be found at the end of this publication.
ISBN: 978-92-79-43009-1
DOI: 10.2841/10510
ISNN: 2363-2399

Cover design: Global Concept Consulting
Infographic design: Global Concept Consulting
Conception/pre-press: Global Concept Consulting
Additional illustrations: Istock
© European Union, 2015

Reproduction is authorised provided the source is acknowledged.
Printed in Belgium

HELLENIC REPUBLIC 
National and Kapodistrian 
University of Athens

Southern Voice

On Post-MDG International Development Goals

S
2015

Foreword ERD 2015

Foreword ERD 2015

T his  year  marks  a  historic  momentum  for  the 

international  community  to  re-shape  the 
way  we  live  for  decades  to  come,  and  pave  the 
way  for  a  new  relationship  between  humankind 
and the planet that is our home. In the words of 
UN  Secretary-General  Ban  Ki-moon,  the  post-
2015  development  agenda  provides  a  unique 
opportunity “to end poverty, transform the world 
to better meet human needs and the necessities 
of economic transformation, while protecting our 
environment, ensuring peace and realizing human 
rights”. Indeed, business as usual is not an option, 
whether  in  terms  of  human  dignity,  equality  or 
sustainability. We have to act, and we have to act 
now - and together. 

The  post-2015  development  agenda  is  a  major 
priority for the EU. Our goal is to secure both an 
ambitious outcome in September 2015 and a clear 
commitment  from  all  to  follow  through  with  its 
implementation.

(SDGs)  will  cover 

The post-2015 agenda will mark a true paradigm 
its  core,  the  proposed  Sustainable 
shift.  At 
Development  Goals 
the 
three  dimensions  of  sustainable  development 
–  economic,  social  and  environmental  –  in  an 
integrated and balanced manner, as well as crucial 
issues  such  as  governance  and  peaceful  and 
inclusive  societies.  The  challenges  of  eradicating 

poverty  and  achieving  sustainable  development 
are  fundamentally  interlinked:  addressing  them 
together will allow us to adopt a truly transformative 
approach with real and sustainable impact.

The move towards a universal agenda means that 
the new goals and targets will apply to all countries: 
we will all be challenged to achieve progress locally, 
while contributing to the global effort. Everybody 
will need to play their part, based on the principles 
of shared responsibility, mutual accountability and 
respective capacities.  

The key message from the report is that policy and 
finance  are  crucial  to  implement  a  transformative 
post-2015 development agenda. Based on existing 
evidence  and  specific  country  experiences,  the 
European Report on Development 2015 shows that 
finance alone is not enough. It seldom reaches the 
intended  objectives,  unless  it  is  accompanied  by 
complementary policies. What we need therefore 
is  to  deliver  a  truly  transformative  post-2015 
development  agenda  with  the  right  combination 
of finance and policies.

to 

the  agenda 

In  this  context,  the  discussion  on  the  Global 
Partnership 
is 
implement 
absolutely fundamental.  To succeed, we need to 
mobilize and use effectively all relevant Means of 
Implementation, financial and non-financial, public 
and private, domestic and international. Crucially, 
these  need  to  be  underpinned  by  sound  policies 
and an enabling environment at all levels. 

forward  a 

report  puts 

research-based 
The 
independent  contribution  to  EU  thinking  and  to 
the  global  debate.  The  wealth  and  breadth  of 
knowledge contained in this report, together with 
its  findings  and  analysis,  provide  a  valuable  basis 
for meeting the great ambition and promise of the 
post-2015 development agenda.

Independent  research  has  an  important  role  to 
play in this debate, not least in identifying lessons 
and  possible  solutions.  This  is  also  the  objective 
of  this  year's  European  Report  on  Development, 
produced  with  the  support  of  the  European 
Commission  and  four  Member  States  –  Finland, 
France, Germany and Luxembourg.

Neven Mimica

Commissioner for International 
Cooperation and Development

4 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 5

 
Directors' Foreword

Directors' Foreword

W e stand at a critical juncture in approaches 

to  global  action.  During  the  course  of 
2015,  governments  will  come  together  to  agree 
a  new  framework  on  financing  for  development, 
adopt  a  post-2015  development  agenda 
including a set of sustainable development goals, 
and  frame  an  agreement  on  climate  change. 
The outcomes of these summits and subsequent 
actions  will  have  a  crucial  bearing  on  prospects 
for  poverty  reduction,  transformative  economic 
growth,  sustainable  development  and  avoiding 
dangerous climate change. The European Report 
on  Development  2015  is  a  must-read  document 
for  policy  makers  and  others  involved  in  these 
crucial  processes.  The  authors  take  an  in-depth 
look  at  the  role  of  the  different  types  of  finance 
in  development.  They  consider  also  approaches 
to the mobilisation of that finance and – critically 
– policies and for its effective use. As the authors 
rightly conclude, more finance is not a stand-alone 
prescription  for  delivering  on  a  transformative 
post-2015  agenda.  The  central  message  of  the 
report is that policy matters.

We  have  come  a  long  way  since  the  Monterrey 
Consensus  in  2002  which  focused  predominantly 
on  the  role  of  aid.  As  we  live  in  an  increasingly 
interdependent  world  linked  by  flows  of  trade, 
finance,  knowledge  and  technology,  aid  has 
international 
become 

the  small  change  of 

development. However, many national challenges 
can be met only through engagement and policy 
coherence  at  international,  regional  and  national 
levels. It is no longer a question of “North”helping 
“South” but of all countries working collectively to 
address what the UN now recognises as a universal 
agenda.  Better  and  more  coherent  policies  and 
financial contributions of all kinds will be needed.

for  particular  symptoms.  A  conducive  policy 
environment  will  be  required  at  the  global  level 
as  much  as  national  or  even  local  levels.  There 
are  no  blueprints:  different  types  of  finance  need 
to  be  used  strategically,  each  for  what  they  are 
best  suited  and  directed  to  where  they  are  most 
needed. Policy and regulatory frameworks need to 
be established to encourage these processes. 

The data presented in this report suggest we need 
a  more  comprehensive  approach  to  financing  for 
development.  Domestic  public  resources  have 
grown  rapidly  over  the  last  decade  and  are  the 
largest  source  of  finance  for  all  country  income 
groupings.  International  public  finance  has  also 
increased  but  is  declining  in  relative  importance. 
Domestic  private  finance  has  shown  the  fastest 
growth  but  is  still  low  at  low  levels  of  income.  
International  private  finance  has  been  highly 
volatile  compared  to  the  other  flows.  Innovative 
finance is promising but is yet to take off at scale. It 
is clear that there is a need to think about all types 
of finance for development and aid is only a small 
but pivotal source of finance.

On  the  evidence  presented  in  this  report,  we 
urge policy makers to consider and adopt general 
principles  for  the  mobilisation  and  effective  use 
of  finance.  Policy  and  finance  should  be  seen  as 
enablers  of  development,  and  not  just  as  cures 

If  we  get  this  right,  it  will  allow  all  countries 
to  generate,  attract  and  steer  finance  from 
unproductive  to  productive  uses,  achieve  better 
outcomes on the same levels of finance and even 
reduce  the  need  for  more  finance.  It  is  critical 
that  all  the  parallel  negotiations  on  financing 
for  development  and  the  post-2015  agenda 
this  year  converge  into  a  Global  Partnership 
involving  multiple  actors  and  based  on  the 
principle  of  universality,  while  acknowledging  the 
complementary role of differentiation. 

We are delighted that our three institutes and the 
active collaborators we have found at the University 
of Athens and within the Southern Voice network of 
think tanks in Asia, Africa and Latin America have 
once again been able to work together to produce 
this  European  Report  on  Development  and  hope 
that it will make a useful contribution to the debate 
in  this  historic  year  for  international  cooperation 
and sustainable development.

6 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 7

Kevin Watkins
Director
Overseas Development 
Institute

Dirk Messner
Director
German Development Institute/Deutsches 
Institut für Entwicklungspolitik (DIE)

Ewald Wermuth
Director
European Centre for Development 
Policy Management (ECDPM)

Acknowledgements

Acknowledgements

S upported  by  the  European  Commission 

and  four  Member  States  (Finland,  France, 
Germany and Luxembourg), the European Report 
on Development (ERD) is the main output of the 
‘Mobilising  European  Research  for  Development 
Policies’  initiative.  The  ERD  2015  team  is  led 
by  the  Overseas  Development  Institute  (ODI), 
in  partnership  with  the  European  Centre  for 
Development  Policy  Management  (ECDPM),  the 
German Development Institute (Deutsches Institut 
für  Entwicklungspolitik)  (GDI/DIE),  the  University 
of Athens (Department of Economics, Division of 
International  Economics  and  Development)  and 
the Southern Voice Network.

The  report  is  drafted  by  a  team  of  researchers 
from the five participating institutions, led by Dirk 
Willem te Velde (team leader) and other core team 
members (Debapriya Bhattacharya, Louka Katseli, 
James  Mackie  and  Peter  Wolff).  It  incorporates 
contributions 
Ingo  Bordon, 
from  San  Bilal, 
Vivienne  Boufounou,  Max  Büge,  Bruce  Byers, 
Alisa  Herrero,  Marie-Agnes  Jouanjean,  Nannette 
Sebastian  Grosse-Puppendahl, 
Lindenberg, 
Gideon  Rabinowitz,  Andrew  Shepherd,  Leah 
Worrall and others.

We  thank  other  experts  for  their  contributions 
made at public consultations in Athens, Brussels, 
Chisinau,  Dar  es  Salaam,  Dhaka,  Jakarta,  Port 
Louis and Quito in 2014. We thank the discussants 
at the pre-meeting of the OECD DAC High Level 
Meeting on the 15th December 2014 and at the 
launch of the European Year on Development in 
Latvia, 9th January 2015. We are also grateful for 
valuable  reviews  from  Paul  Engel,  Dirk  Messner, 
Simon  Maxwell,  Andrew  Norton,  Kevin  Watkins 
and others, and for helpful suggestions from Neil 
Bird, Raphaëlle Faure, Mikaela Gavas, Ilmi Granoff, 
Annalisa Prizzon, Andrew Rogerson, Judith Tyson 
and  Shelagh  Whitley.  We  acknowledge  those 
who provided comments at the ERD Peer Review 
Meeting in Brussels (17th September 2014): Yilmaz 
Akyuz,  Matthieu  Boussichas,  Jean-François  Brun, 
Giorgia Giovannetti, Inge Kaul, Hildegard Lingnau 
and Alice Sindzingre. We thank a number of other 
experts for their contributions during the drafting 
process  and  also  the  project  management, 
editorial,  and  support  team:  Gill  Hart,  Deborah 
Eade and Leah Worrall respectively.

from 

Finally,  we  thank  the  ERD  Steering  Committee 
members 
the  European  Commission, 
particularly  Gaspar  Frontini  and  Miriam  Cué  Rio, 
the  representatives  of  the  four  Member  States, 
and  François  Bourguignon  for  their  comments 
and suggestions.

The ERD does not necessarily reflect the policies 
or views of the participating research institutions 
or of the funding bodies and as such these should 
not be attributed to them.

8 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 9

Table of contents

Page 44

Page 62

Page 88

CHAPTER 1.

Introduction

CHAPTER 2.

Main lessons from studies 
on MDG finance needs

CHAPTER 3.

Financing trends and 
challenges beyond 2015

List of Boxes 

List of Figures 

List of Tables 

Accronyms & Abbreviations 

Executive Summary 

16

18

20

22

26

1.1  The post-2015 policy context 

1.2  The policy challenges 

1.3  What the Report aims to contribute 

1.4  Evidence used to inform the Report 

1.5  Structure of the Report 

47

52

54

54

61

Main messages 

3.1  Classifying flows of finance 

3.2  Historical trends in sources of finance 

3.2.1  Overall finance trends 

3.2.2  Finance trends by country income group 

3.2.3  Trends by category of finance 

3.3 

 Future trends and proposals 
for mobilising finance 

3.3.1  Future trends in financing 

3.3.2 

 Proposals and instruments for scaling up 
development finance 

3.4  Conclusions 

89

90

96

97

98

101

119 

119

122 

127

Main messages 

2.1 

 Reviewing the basis of the studies 
on MDG finance needs 

2.1.1 

 The intellectual underpinning of the MDG 
approach to finance needs studies 

2.1.2 

 Methodological steps needed in finance 
needs studies 

2.2    The scale of finance required: 

comparing MDG and post-2015 contexts 

2.2.1 

 Finance needs to meet social objectives 
in the MDG context 

63

64 

64 

66 

71 

71 

2.2.2 

 Finance needs to meet economic and environmental   73 
objectives in the post-2015 development agenda 

2.3 

 Finance needs studies:  
achievements and lessons for financing 
post-2015 development goals

2.3.1    The MDG achievement: 

mobilising aid and influencing public expenditure 

77 

77 

2.3.2    Three implications for the post-2015 discussions  80 

on finance for development 

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Page 130

Page 160

Page 186

Table of contents

CHAPTER 4.

CHAPTER 5.

The role of policies in mobilising 
and using finance effectively

A framework for assessing the role of 
finance and policies in enabling 
a transformative post-2015 agenda

Main messages 

4.1  Mobilising finance 

4.1.1  Mobilising public domestic finance 

4.1.2  Mobilising international public finance 

4.1.3  Mobilising domestic private finance 

4.1.4  Mobilising international private finance 

4.2  Making finance more effective 

4.2.1  Effective use of public domestic finance 

4.2.2  Effective use of international public finance 

4.2.3  Effective use of domestic private finance 

4.2.4  Effective use of international private finance 

4.3 

 Linkages among flows: 
a catalytic role for ODA and DFIs 

4.4 

 Conclusions and implications 
for the global system 

131

132

132

135

136

137

143

143

143

149

151

154 

156 

Main messages 

5.1 

 An integrated conceptual framework 
for the role of finance and policies 
in enabling a transformative post-2015 
development agenda 

5.2 

 A focus on selected enablers 
of sustainable development 

5.2.1  Local Governance 

5.2.2  Infrastructure 

5.2.3  Human capital 

5.2.4  Biodiversity 

5.2.5  Green Energy Technology 

5.2.6  Trade 

5.3  Conclusions 

161

162 

166 

167

170

171

176

177

178

184

CHAPTER 6.

The link between finance 
and policies for selected enablers

Main messages 

6.1 

 The role of finance and policies 
for local governance 

187

188 

6.4 

 The role of finance and policies 
for biodiversity conservation 

6.4.1 

 Financing biodiversity conservation: 
different sources and instruments 

242 

243 

6.1.1 

 Local financial resources: 
municipal finance for infrastructure and services

189 

6.1.2 

 The role of policies and finance 
for local governance 

6.1.3 

 Conclusions and implications 
of finance for local government 

6.2 

 The role of finance and policies 
in infrastructure development 

6.2.1 

 Financing infrastructure: 
different sources, different effects 

6.2.2 

 Links between finance and policies 
for infrastructure development 

6.2.3 

 Conclusions and implications regarding 
investment in infrastructure 

6.3 

 The role of finance and policies 
in the development of human capital 

6.3.1 

 Financing human capital:  
different sources, different effects 

6.3.2 

 The role of policies and finance 
for human capital development 

6.3.3 

 Conclusions and implications 
for investment in human capital 

191 

200 

201 

204 

210 

220 

221 

222 

229 

239 

6.4.2  The role of policies and finance for biodiversity 

253

6.4.3 

 Conclusions and implications 
of environmental finance 

6.5 

 The role of finance and policies 
in the diffusion of green energy technology

6.5.1 

 Financing green energy technology: 
different sources 

6.5.2 

 The role of policies and finance 
for green energy technology 

6.5.3 

 Conclusions and implications of finance 
for green energy technologies 

258 

259 

260 

264 

277 

6.6  The role of finance and policies for trade 

277

6.6.1  Financing trade: different sources and effects 

278

6.6.2 

 Links between finance and policies 
for developing trade 

6.6.3 

 Conclusions and implications 
regarding investment in trade 

284 

292 

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Page 294

Table of contents

CHAPTER 7.

Synthesis & Conclusions: 
Enabling a post-2015 development agenda

7.1  Setting the scene 

7.2 

 Composition of finance flows: 
What has been learned? 

7.2.1  The finance mix varies by enabler 

7.2.2 

 The finance mix differs by level of income 

7.2.3    Financial sector development is key 
to unlocking transformative potential 

7.3 

 The interaction between policies 
and finance: What has been learned? 

296

298 

298

299

300 

302 

7.3.1  Policies are crucial for the mobilisation of finance  302

7.3.2  Policies are crucial for effective use of finance 

304

 7.3.3 

 Coordinating policies and finance is crucial 
in achieving triple-win sustainable development 
outcomes 

7.3.4 

 Finance cannot be treated independently 
from policy 

307 

308 

7.4 

 Steps towards a Global Partnership 
for the post-2015 development agenda 

310 

7.4.1  Financing for development as an on-going process  310

7.4.2  Keeping core principles in mind 

7.4.3  Involving multiple actors 

7.4.4 

 Introduce a monitoring 
and accountability framework 

7.5  Concluding remarks 

7.5.1 

 The pattern of finance for development 
evolves at different levels of income 

7.5.2  Policy matters 

7.5.3  Accountability and participation 

Final remarks 

310

316

317 

320 

320 

321

322

323

References 

Annex 1. 
The approach taken in the current European 
Report on Development compared 
with other reports 

Annex 2. 
Variation in flows across countries 

Annex 3. 
Further details of IFD 

324

368 

372 

375 

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List of Boxes

List of Boxes

Box  1.1 

SDGs proposed by the OWG 

Box  1.2 

Further research questions 

Box  2.1 

Approaches to costing the MDGs at the country level 

Box  2.2 

Estimating infrastructure finance needs 

Box  2.3 

Estimating sustainable energy finance needs in different scenarios 

Box  2.4 

Different finance options for reaching the MDGs 

Box  2.5 

Box  3.1 

 Analysing development goals in Bangladesh and Tanzania using a scenarios 
analysis of public finance and other policy options 

 Iillicit financial flows and their implications for public domestic 
revenue mobilisation (DRM) in developing countries 

48

53

67

74

76

81

84 

103 

Box  3.2 

 Recent trends and characteristics of development assistance from the BASIC and other developing countries 106 

Box  3.3 

 The rising share of ODA allocated to global public goods (GPGs) 

Box  3.4 

 The OECD DAC’s review of its development finance monitoring systems 

Box  3.5 

 Outward FDI flows 

Box  4.1 

 The impact of different CO2 policy scenarios on mobilising climate finance 

109

109

117

140

Box  4.2 

 A coherent international financial architecture for more and better capital flows to low-income countries 

142 

Box  4.3 

 Modelling the interaction between finance and policies 

Box  5.1 

 The importance of governance and effective state–business relations 

Box  5.2 

 Human capital policies in Ecuador 

Box  5.3 

 Social policies in Mauritius 

Box  6.1 

 Municipal Development Funds: a mixed experience 

Box  6.2 

 Insights from the Tanzania CI on the use of formula-based allocations and ODA 

Box  6.3 

 South Africa’s Provincial Equitable Share budget 

Box  6.4 

 Conditional non-matching grants 

Box  6.5 

 Finance and policies in enabling infrastructure investment in Bangladesh 

Box  6.6 

 The IBSA Dialogue Forum 

Box  6.7 

 Economic and social implications of alternative financing sources 
for infrastructure development: insights from a modelling study on Moldova 

Box  6.8 

 The Role and Impact of the African Development Bank 

145

168

171

172

194

197

197

198

202

206

208 

215

Box  6.9 

 Financing social development - lessons from the Ecuador Country Illustration 

Box  6.10 

 Global fund for social protection 

Box  6.11 

 Out-of-pocket (OOP) payments: Ghana, Tanzania and South Africa 

Box  6.12 

  Examples of programmes to enhance skills for employment 

Box  6.13 

 Financing TVET in Mauritius through a levy–grant system 

Box  6.14 

 Ethiopia’s Productive Safety Net Programme 

Box  6.15 

 GVCs in Africa - capturing the social gains in economic development 

Box  6.16 

 ILO Better Factories Cambodia: A blueprint for promoting international labour rights? 

Box  6.17 

 Private ecosystem restoration in Indonesia: a role model for private-sector engagement? 

Box  6.18 

 The role of finance and policies in the diffusion of renewable energy technology in Kenya and Tanzania 

Box  6.19 

 Policies for mobilising green energy technology finance: examples from Indonesia, Kenya and Tanzania 

Box  6.20 

 Factors influencing the uptake of improved solid cooking stoves and clean fuels 

Box  6.21 

 The enabling role of trade in Mauritius 

Box  6.22 

 Trade finance 

Box  6.23 

 Pro-trade policies: evidence from Bangladesh 

Box  6.24 

 Surmounting barriers to trade promotion: evidence from Moldova 

Box  6.25 

 Mauritius’ policies to mobilise trade finance 

Box  6.26 

 Women’s empowerment through financial inclusion 

Box  7.1 

 Development Finance Institutions: a new way to mobilise finance for transformation 

Box  7.2 

 Differentiation: illustrative stylised roles and responsibilities of country income groupings 

224

230

232

234

235

236

238

238 

248

266 

269 

270

279

280

285

285

289

293

301

315

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Combining finance and policies to implement a transformative post-2015 development agenda | 17

List of Figures

Figure  1.1 

Elements to underpin the SDGs 

Figure  1.2 

ERD timeline in relation to post-2015 processes 

Figure  2.1  Shifts in government spending in post-HIPC countries (percentage of GDP) 2000–2018 

Figure  2.2 

 Poverty spending in post-HIPC countries as a percentage 
of total government spending (percentage of GDP) 2001–2018, 

Figure  3.1 

 Trends in development finance (domestic public, domestic private, international private, 
and international public sources) obtained by developing countries (2011 $ bn), 2002–2011 

Figure  3.2 

Trends in development finance obtained by LICs (2011 $ bn), 2002–2011                  

Figure  3.3 

Trends in development finance obtained by LICs (% GDP), 2002–2011 

Figure  3.4 

Trends in development finance obtained by LMICs (2011 $ bn), 2002–2011 

Figure  3.5 

Trends in development finance obtained by LMICs (% GDP), 2002–2011 

Figure  3.6 

Trends in development finance obtained by UMICs (2011 $ bn), 2002–2011 

Figure  3.7 

Trends in development finance obtained by UMICs (% GDP), 2002–2011 

Figure  3.8 

Financial flows (percentage of GDP) by income level 

Figure  3.9 

External debt (percentage of GDP) by country income level 

Figure  3.10  Public and private flows (% GDP) by income level 

Figure  3.11   Total domestic public revenues across country income groups (percentage of GDP) 2002–2011 

Figure  3.12  PR/GDP for resource-rich (RR) and non-resource-rich (NRR) developing countries 

Figure  3.13  Tax revenues across country income groups (% GDP) 2002–2011 

Figure  3.14  Non-tax revenues across country income groups (% GDP), 2002–2011 

Figure  3.15  Revenues for selected taxes (percentage of GDP) at different country income levels 

Figure  3.16   Net ODA (as percentage of GDP, excluding debt relief) across country 

income groups (excluding China and India), 1995–2012 (static membership) 

Figure  3.17   Net ODA per capita (excluding debt relief, 2012 $ rate) across country 

income groupings (dynamic membership) (excluding China and India), 1995–2012 

Figure  3.18   Net OOF per capita (current $) across country groupings (dynamic membership) 

(excluding China and India) 1995–2012 

Figure  3.19   Gross fixed capital formation by the private sector less FDI (as percentage of GDP) 

across country groupings, 1995–2012 

49

50

79

79 

98 

99

99

99

99

99

99

100

100

101

102

102

103

103

104

107 

107 

111 

112 

Figure  3.20   Levels of domestic credit to the private sector (percentage of GDP) across country income groups, 1995–2012 

112

Figure  3.21   Market capitalisation of listed companies (as percentage of GDP) across country income groups, 1995–2012 

Figure  3.22  Remittances (as percentage of GDP) across country income groups, 1995–2012 

Figure  3.23  FDI (as a percentage of GDP) across country income groupings, 1995–2012 

Figure  3.24  FDI/GDP for resource-rich and non-resource-rich developing countries 

113

115

115

116

List of Figures

Figure  3.25   Net portfolio equity and bond flows (as percentage of GDP) across country income groupings, 1995–2012 

Figure  3.26  Bond issuances in SSA (excluding South Africa) 2007–2013, $ mn 

Figure  3.27   Commercial banking loans (as percentage of GDP) across country income groupings, 1995–2012 

Figure  3.28  Gross investment (share of global GDP) 1965–2010 

Figure  3.29  Gross capital inflows to SSA as a share of developing country inflows 

Figure  3.30  Finance raised by different IFD instruments 

Figure  4.1 

 Subsidies on fossil fuels, green finance needs, and subsidies and investment in renewable energy 

Figure  4.2 

Interest rate spread by region, 1995–2011 

Figure  5.1 

 Integrated conceptual framework for finance and policies in enabling a transformative 
post-2015 development agenda 

Figure  5.2  Selected enablers for sustainable development 

Figure  6.1 

The role of policy for mobilisation and effective use of finance for local institutions 

Figure  6.2 

The role of policy for mobilisation and effective use of finance for Infrastructure 

Figure  6.3 

Infrastructure funding from bilateral ODA and MDBs ($ bn), 2000–2011 

Figure  6.4  Private-sector investment in infrastructure by region, 1998–2012 

Figure  6.5  PPPs in infrastructure project finance 

Figure  6.6 

The role of policy for mobilisation and effective use of finance human capital 

Figure  6.7  Sources of healthcare financing by region, 2011 (as a percentage of GDP) 

Figure  6.8  Public spending on education in country income groups in 2000 and 2010 

Figure  6.9 

The role of policy for mobilisation and effective use of finance for biodiversity 

Figure  6.10   Trends in biodiversity-related bilateral ODA (three-year averages, 2004–2012, $ bn, constant 2011 prices) 

Figure  6.11   Five main sectors receive 91% of biodiversity-related ODA (average 2010–2012, 

bilateral commitments, $ bn, constant 2011 prices) 

Figure  6.12   The role of policy for the mobilisation and effective use of finance for green energy technology 

Figure  6.13   Global new investment in renewable energy ($ bn) by asset class, 2004–2013 

Figure  6.14   Finance from development banks for renewable energy projects ($ bn) 

Figure  6.15   R&D investment in renewable energy, 2004–2012 ($ bn) 

Figure  6.16   Fossil-fuel subsidies vs. Fast Start Climate Finance in (UNFCCC) Annex 2 countries (in $ mn) 

Figure  6.17   The role of policy for mobilisation and effective use of finance for trade 

Figure  6.18   AfT flows (constant prices, 2011, US$ mn) 

Figure  6.19   General picture of trade finance 

Figure  6.20   Trade finance offered by banks 

Figure  7.1 

 Financial flows (percentage of GDP) by income level 

Figure  7.2 

  The evolution in financing for development changes as country income levels rise 

Figure  7.3  Summary of policies for effective mobilisation and use of finance 

118

118

119

121

121

126

134

150

163 

166

189

202

205

206

212

222

225

226

243

252

252 

260

261

264

265

271

278

281

283

283

299

300

306

18 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 19

List of Tables

List of Tables

Table  1.1  Overview of commissioned papers 

Table  3.1  Categories of financial flows 

Table  3.2  Selected characteristics of different sources of finance 

Table  3.3 

Volatility by flow (as a percentage of GDP) and by country income group (1995–2011) 

Table  3.4  How is investment financed? 

Table  3.5 

Existing and emerging innovative financing for development (IFD) proposals and mechanisms 

Table  4.1  Potential benefits of blended finance, compared to loans or grants 

Table  4.2 

Inward FDI and development 

Table  4.3 

The role of policies in the mobilisation and effective use of finance: illustrative examples 

Table  4.4  Reforming the international system 

Table  5.1 

Enablers for sustainable development: some illustrative examples 

Table  6.1  Suitability of different municipal funding sources 

Table  6.2  Conditional grants versus unconditional grants 

Table  6.3  Annual investments in infrastructure in developing countries, by source 

Table  6.4 

Instruments to mobilise and channel finance for biodiversity conservation 

Table  6.5  Sources of multilateral finance for renewable energy 

Table  6.6 

International Finance Institution (IFI) trade finance programmes 

Table  7.1 

 Illustrative examples of a Finance and Policy monitoring and accountability framework 
(rationale, actors and indicators) 

60

90

92

95

113

123

148

153

158

159

183

190

196

204

244

262

287

318 

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Combining finance and policies to implement a transformative post-2015 development agenda | 21

Acronyms & Abbreviations

$ 

€ 

ACP 

ADB 

United States dollar

Euro

Africa, Caribbean and Pacific

Asian Development Bank

AfDB 

African Development Bank

AfT 

AWF 

BFC 

Aid for Trade

African Water Facility

Better Factories Cambodia

BIFFL 

Bangladesh Infrastructure Fund Limited

DC 

Domestic credit

DCFTA 

Deep and Comprehensive Free Trade Agreement

DEG 

DFI 

DFID 

DIE 

DRC 

DRM 

EBA 

Deutsche Investitions und Entwicklungsgesellschaft

Development Finance Institution

(UK) Department for International Development

Deutsches Institut für Entwicklungspolitik

Democratic Republic of Congo

Domestic Resource Mobilisation

Everything But Arms Initiative

BIOFIN 

Biodiversity finance initiative

EBRD 

European Bank for Reconstruction and Development

Bn 

Billion

BNEF 

Bloomberg New Energy Finance

EC 

ECA 

European Commission

Export credit agency

BoP 

Balance of payments

ECDPM 

European Centre for Development Policy Management

BRICs 

Brazil, Russia, India and China

ECOSOC  United Nations Economic and Social Council 

CBD 

CDC 

CDM 

CER 

CGE 

CI 

CIC 

CL 

Convention on Biological Diversity

Commonwealth Development Corporation

Clean Development Mechanism

Certified emissions reductions

Computable general equilibrium

Country Illustration

Climate Innovation Centre

Commercial banking loan

CO2 

Carbon dioxide

COFIDES  Compañía Española de Financiación del Desarrollo

EF 

EI 

EIB 

EITI 

EPZ 

Environmental fund

Extractive industry

European Investment Bank

Extractive Industries Transparency Initiative

Export Processing Zone

EPZDA 

Export Processing Zones Development Authority

ERD 

ES 

ETS 

EU 

European Report on Development

Ecosystem service

Emissions Trading Scheme

European Union

CPAN 

Chronic Poverty Advisory Network

EU-AITF 

European Union-Africa Infrastructure Trust Fund

CSO 

CSR 

CTF 

DAC 

Civil society organisation

Corporate social responsibility

Clean Technology Fund

 (Organisation for Economic Co-operation and Development) 
Development Assistance Committee

Ex-Im 

Export-Import

EXIM 

Export-Import Bank of the United States

FDI 

FFD 

Foreign direct investment

Financing for development

Acronyms & Abbreviations

FiT 

FMO 

Feed-in tariff

Dutch development bank

FPFD 

Finance and Policy Development Framework

FS 

FSB 

Frankfurt School

Financial Stability Board

FUNDEF 

(Brazil’s) Special fund for primary education

GAVI 

Global Alliance on Vaccines and Immunisation

GCF 

GDP 

GEF 

Green Climate Fund

Gross Domestic Product

Global Environment Facility

GEEREF 

Global Energy Efficiency and Renewable Energy Fund

GFC 

Gross fixed capital formation

GFSP 

Global Fund for Social Protection

GHG 

GIZ 

GNI 

GNP 

GPG 

GSP 

GTT 

GVC 

GW 

Ha 

HIC 

Greenhouse gas

Deutsche Gesellschaft für Internationale Zusammenarbeit

Gross National Income

Gross national product

Global public good

Generalised System of Preferences

Green technology transfer

Global value chain

Gigawatt

Hectares

High-income country

HIPC 

Heavily indebted poor country

HIV 

HLP 

Human immunodeficiency virus

 United Nations High-Level Panel of Eminent Persons 
on the Post-2015 Agenda

IADB 

Inter-American Development Bank

IAM 

IBRD 

IBSA 

Integrated Assessment Models

International Bank for Reconstruction and Development

India-Brazil-South Africa

ICESDF 

 Intergovernmental Committee of Experts 
on Sustainable Development Financing

ICOR 

Incremental capital-output ratio

ICT 

IDC 

Information and Communication Technology

Industrial Development Corporation

IDCOL 

Infrastructure Investment Development Company Limited

IEA 

IET 

IF 

IFC 

IFD 

International Energy Agency

International Emissions Trading

International Futures

International Finance Corporation

Innovative financing for development

IFFIM 

International Facility for Immunisation

IFI 

International Finance Institution

IFPRI 

International Food Policy Research Institute

IGFT 

Intergovernmental fiscal transfer

IIFC 

ILO 

IMF 

Infrastructure Investment Facilitation Centre

International Labour Organization

International Monetary Fund

IPCC 

Intergovernmental Panel on Climate Change

IPP 

IPR 

IT 

Independent power producer

Intellectual property right 

Information technology

kWh 

kilowatt hour

LAC 

LDC 

LG 

Latin America and the Caribbean

Least developed country

Local government

LGCDG 

Local Government Capital Development Grant

LIC 

Low-income country

LIMITS 

 Low climate Impact scenarios and the implications 
of required Tight emission control Strategies

LMIC 

Lower middle-income country

LPG 

M&E 

Liquefied Petroleum Gas

Monitoring and evaluation

22 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 23

MAMS 

MAquette for MDG Simulation

OPEC 

Organization of the Petroleum Exporting Countries 

MDB 

MDF 

MDG 

MDL 

Multilateral development bank

Municipal Development Fund

Millennium Development Goal

Moldovan Leu

OPIC 

OWG 

O&M 

PA 

Overseas Private Investment Corporation

Open Working Group on the Sustainable Development Goals

Operation and maintenance

Protected Area

MDRI 

Multilateral debt relief initiatives

PBGS 

Performance Based Grant System

MDWPP  Multi-donor Water Partnership Programme

PCD 

Policy coherence for development

MENA 

Middle East and North Africa

PCSD 

Policy coherence for sustainable development

MFA 

MIC 

Mn 

MNE 

MOI 

MSA 

Multi-Fibre Arrangement

Middle-income country

Million

Multinational enterprise

Means of implementation

Municipal support agreement

PDA 

PEP 

PES 

PFI 

PFM 

PIDA 

Private development assistance

Public employment programme

Payment for Ecosystem Services

Private finance intervention

Public finance management

REM 

RMB 

RMG 

RR 

Remittance

Chinese Renmibi

Ready-made garments

Resource rich

RWSSI 

Rural Water Supply and Sanitation Initiative

SDG 

SDR 

Sustainable Development Goal

Special drawing right

SE4All 

Sustainable Energy for All

SEZ 

SGF 

SME 

SOE 

Special Economic Zone

(Global Environment Facility) Small Grant Fund

Small and Medium-Sized Enterprise

State-owned enterprise

SREP 

Scaling-Up Renewable Energy in Low Income Countries

Acronyms & Abbreviations

UNESCO  United Nations Educational, Scientific and Cultural Organization

UNFCCC  United Nations Framework Convention on Climate Change

UNSDSN  United Nations Sustainable Development Solutions Network

UNTT 

 United Nations System Task Team on the Post-2015 
Development Agenda

UPE 

US 

USA 

VAT 

WB 

WDI 

WEF 

Universal Primary Education

United States

United States of America

Value-added tax

World Bank

World Development Indicators

World Economic Forum

WHO 

World Health Organization

WWF 

World Wide Fund for Nature

Programme for Infrastructure Development in Africa

SRES 

Special Report: Emissions Scenarios

MSME 

Micro, Small and Medium Enterprise

PORT 

Portfolio flow

MTEF 

Medium Term Expenditure Frameworks

PPA 

Power purchase agreement

MW 

NCE 

Megawatt

New Climate Economy

NEPAD 

New Partnership for Africa’s Development

NGO 

NIF 

Non-government organisation

Neighbourhood Investment Facility

NODA 

Net official development assistance

NOOF 

Net other official flows

NPL 

Non-performing loan

NREGA 

National Rural Employment Guarantee Act

NRR 

NTR 

ODA 

ODI 

Non-resource rich

Non-tax revenue

Official Development Assistance

Overseas Development Institute

OECD 

Organisation for Economic Co-operation and Development

OOF 

OOP 

Other official flow

Out-of-pocket

PPCR 

Pilot Program for Climate Resilience

PPP 

 Public–private partnership 
* Graphs which measure in US dollars PPP refers 
to purchasing power parity

PR 

Public revenue

PRSP 

Poverty Reduction Strategy Paper

PSA 

PSC 

Project-support agreement

Public-service contract

PSNP 

(Ethiopia’s) Productive Safety Net Programme

PV 

Photovoltaic

RefPol 

Reference policy

R&D 

RDB 

REDD+ 

Research and development

Regional development bank

 Reducing Emissions from Deforestation and Forest Degradation, 
and the conservation and sustainable management of forests 
and enhancement of forest carbon stocks

REKI 

Restorasi Ekosistem Indonesia

SSA 

SSC 

Sub-Saharan Africa

South–South Cooperation

SWF 

Sovereign Wealth Fund

TANESCO  Tanzania Electricity Supply Company Limited

TFP 

TNC 

TR 

Tr 

Total factor productivity

Transnational corporation

Tax revenue

Trillion

TST 

Technical Support Team

TVET 

Technical and vocational education and training

UHC 

UK 

Universal health coverage

United Kingdom

UMIC 

Upper middle-income country

UN 

United Nations

UNCTAD  United Nations Conference on Trade and Development

UNDESA  United Nations Department of Economic and Social Affairs

UNDP 

United Nations Development Programme

UNEP 

United Nations Environment Programme

24 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 25

Executive Summary

W e  need  a  completely  new  approach 

towards  finance  for  development  -  this 
is what follows from the lessons learned from the 
implementation  of  the  Millennium  Development 
Goals  (MDGs),  the  changes  in  the  Financing 
for  Development  (FFD)  landscape  and  practical 
analyses  of  key  enablers  of 
transformative 
development  which  combines  economic,  social 
and environmental dimensions.

This report analyses the considerable changes in 
the  FFD  landscape  since  the  2002  Monterrey 
Consensus.  It  notes  that  the  implementation  of 
the Consensus came to focus largely on the role 
of  Official  Development  Assistance  (ODA)  and 
paid  insufficient  attention  to  the  importance  of 
increasing domestic tax revenue and encouraging 
private  finance.  Yet  in  some  of  the  countries 
that  were  achieving  the  greatest  progress  in 
reducing  poverty,  domestic  tax  revenue  carried 
the  main  burden.  This  calls  for  adopting  a 
more  comprehensive  view  of  FFD  that  takes 
fully  into  account  the  crucial  role  of  public 
finance  and  private  finance,  both  domestic 
and  international.  This  will  set  the  scene  for 
international  public  finance  to  be  a  valuable 
complement to other flows of FFD.

The  European  Report  on  Development  2015’s 
main  message  is  that  finance  alone  will  not  be 
sufficient  to  promote  and  achieve  the  post-2015 
development agenda. Policies also matter. Indeed, 

they are fundamental. Appropriate and coherent 
policies will ensure that finance is used effectively 
to  achieve  results  and  that  it  is  not  wasted  or 
underused. Good policies will also help to ensure 
that more finance is mobilised as success breeds 
further  success.  The  Report 
identifies  many 
examples of governments that are making effective 
policy choices in mobilising and using finance for 
major enablers of transformative development, 
including  local  governance,  infrastructure,  green 
energy  technology,  biodiversity,  human  capital 
and trade.

Given  the  challenges  encountered  in  the  follow-
up  of  the  Monterrey  Conference,  it  is  crucial  to 
develop  an  appropriate  system  of  monitoring 
and  accountability  that covers as many flows of 
finance  as  possible  and  that  stimulates  the  right 
actions  in  the  finance  and  policy  framework, 
nationally  and  internationally.  This  accountability 
the  Sustainable 
system  must  cover  both 
Development Goals (SDGs) and their targets and 
the finance and policies required to achieve them. 
It  can  then  guide  implementation  of  the  post-
2015 agenda in a way that covers finance, policies 
and partnerships.

Overall  our  analysis  suggests  that  it  is  not 
an  overall  shortage  of  funds  that  will  be  the 
constraining factor in achieving a transformative 
post-2015  development  agenda.  Rather,  it  is 
the way finance is mobilised and used that will 
determine  success  in  achieving  the  goals  that 
the  agenda  enshrines.  This  in  turn  will  require 
efforts  to  improve  the  effectiveness  of  each 
category of financing by drawing on its unique 
characteristics in support of particular enablers 
of  development,  to  expand  the  range  of 
possible sources of finance through appropriate 
policies  and  also  to  combine  different  flows  as 
effectively as possible. This will call for reform of 
national finance and policy frameworks, as well 
as concerted efforts at the international level.

Combining finance and policies to implement a transformative post-2015 development agenda | 27

Executive Summaryagenda’. 

development 

T his  Report  addresses  ‘combining  finance 

and policies to implement a transformative 
post-2015 
The 
experience  of  pursuing  the  MDGs  has  provided 
lessons  in  terms  of  countries’  successes  and 
failures that can be applied to using finance and 
policies  to  achieve  a  post-2015  development 
agenda. This Report draws out some of the lessons 
that could help to inform a new finance and policy 
framework for development (FPFD) that highlights 
the role of both policies and finance in supporting 
the long-term enablers (or drivers) of sustainable 
development. 

The policy context 

The  vision  of  global  development 
is  at 
a  critical  juncture,  and  the  need  to  move 
beyond  ‘business  as  usual’  is  stronger  than 
ever.  Representatives  of  the  world’s  nations  will 
come  together  in  September  2015  to  agree  on 
a  new  post-2015  development  agenda.  In  the 
words  of  UN  Secretary-General  Ban  Ki-moon, 
‘offers 
the  post-2015  development  agenda 
a  unique  opportunity  for  global  leaders  and 
people  to  end  poverty,  transform  the  world  to 
better  meet  human  needs,  and  the  necessities 
of  economic  transformation,  while  protecting 
our  environment,  ensuring  peace  and  realizing 
human rights’. It will thus mark a transformative 
‘paradigm  shift  for  people  and  planet’  (UN 
Secretary-General Synthesis Report, 2014).

The  post-2015  development  agenda  stems  from 
two  converging  processes:  the  follow-up  to  the 
2010 Millennium Summit, which mandated the UN 
Secretary-General  to  initiate  a  process  to  succeed 
the Millennium Development Goals (MDGs), and the 
follow-up to the 2012 United Nations Conference on 
Sustainable Development (‘Rio+20’), which launched 
the process to develop the SDGs. 

In  parallel,  but  closely  linked  with  these  processes, 
two strands on FFD have also converged: the follow-
up to the 2002 Monterrey Conference on Financing 
for Development and the follow-up to Rio+20, which 
gave the mandate to prepare options for a sustainable 
development  strategy,  as  set  out  in  the  report  of 
the  Intergovernmental  Committee  of  Experts  on 
Sustainable Development Financing (ICESDF). 

The Third International Conference on Financing for 
Development to be held in Addis Ababa in July 2015 
is expected to discuss ‘an ambitious agreement on 
policies,  financing,  technology  transfer,  capacity-
building  and  systemic 
for 
Development Co-facilitators’ elements paper, 2015) 
to underpin the post-2015 development agenda. 

(Financing 

issues’ 

The policy challenges

resources 

The  development  agenda  is  ambitious  and  the 
challenges  it  poses  seem  enormous.  In  the  post-
2015  context,  therefore,  mobilising  additional 
financial 
to  pursue  development 
goals  will  not  suffice.  Such  efforts  need  to  be 
complemented  with 
improved  national  and 
international  regulatory  and  policy  frameworks, 
along  with  investments  in  absorptive  capacity  in 
order to make more effective use of FFD. Indeed, 
finance  and  policy  are  synergistic:  better  policy-
making is needed to make the most effective use 
of  finance  but  also  to  attract  and  channel  new 
financial resources to where they are most needed.

The  global  policy  processes  for  designing  and 
implementing  an  ambitious  and  transformative 
post-2015  agenda  are  taking  place  in  a  context 
that  differs  significantly  from  when  the  MDGs 
were  agreed.  Some  policy  challenges  are  well-
known, but there are also new ones with respect 
to public and private finance. 

Take the following examples:

 While  domestic  tax  revenues  are  growing 
in  all  country  income  groupings,  systems 
of  domestic  revenue  mobilisation  (DRM)  in 
developing  countries  are  immature,  leading 
to low or inefficient tax collection, high levels 
of  tax  evasion,  and  capital  flight.  The  key 
challenge  therefore  is  to  raise  domestic  tax 
revenues  in  a  way  that  can  best  support 
sustainable development. 

 Concessional  loans  and  grants  are  stagnating 
(although ODA reached a record high in 2013) 
and are also selective in where they flow. They 
do  not  systematically  prioritise  the  poorest 
economies,  can  be  unpredictable  and  are 
not  always  as  effective  as  they  might  be.  The 
challenge  is  how  to  make  use  of  ODA  in  a 
more transformative way and to tap into new 
aid resources from emerging economies. 

  Private  capital,  which  often  appears  to  be  in 
abundant  supply,  is  highly  selective  in  where 
it  flows,  what  it  funds  and  on  what  terms. 
It  favours  financial  markets  in  developed 
countries,  fast-growing  emerging  economies, 
the extractive sectors and the formal economy, 
including  larger,  established  firms.  It  requires 
large  lending  margins,  and  often  bypasses 
small  and  medium-sized  enterprises  (SMEs) 
in  productive  sectors,  and  people  living  in 
poverty, of which 2.5 billion do not use banking 
services.  Achieving  the  SDGs  will  require 
the  mobilisation  of  resources  from  private 
sources  including  foreign  direct  investment 
(FDI),  bank  loans,  bond  issuance,  equity  and 
other risk capital and private transfers as well 
as the use of risk-mitigation instruments. The 
mobilisation  and  effective  channelling  of 
private  resources  requires  a  supportive 
investment climate and complementary use 
of public policies and finance.

  Developing and emerging economies have been 
driving  global  growth  over  the  past  decade, 
but  the  world  economy  remains  vulnerable  to 
financial  shocks,  with  the  risk  of  volatile  and 

unpredictable  trading  conditions  and  financial 
flows.  While  there  has  been  modest  progress 
in developing global trade and climate rules in 
recent years, the challenge remains to promote 
a  global  and  stable  financial  system  that 
encourages  the  mobilisation  and  effective 
use  of  global  savings  to  support  sustainable 
development.  Although  the  global  community 
is placing the spotlight on international tax rules, 
these  remain  poorly  regulated,  with  too  much 
scope for tax avoidance, tax evasion and transfer 
pricing, which permits the extensive use of tax 
havens. The challenge is to promote collective 
action on global tax rules. 

What this Report aims to contribute

In order to formulate actions to overcome the policy 
challenges,  the  main  research  question  addressed 
in this Report is: ‘How can financial resources be 
effectively  mobilised  and  channelled  and 
how can they be combined with selected 
policies to enable a transformative post-
2015 agenda?’ Several academic studies 
and  policy  documents  have  discussed 
the role of finance in different dimensions 
of  sustainable  development.  Most  of  the 
latter  examine  these  questions  from  the  starting 
point of finance. By contrast, this Report starts from 
sustainable  development  objectives  (focusing  on 
the  enablers  or  long  term  drivers  of  sustainable 
development)  and  then  presents  a  framework  on 
how finance and policies can contribute to achieving 
them.  The  Report  focuses  specifically  on  the  links 
between finance and policies and aims to encourage 
these to be discussed jointly. This approach leads 
to three contributions to the literature:

  First, the Report considers a range of financial 
flows rather than focusing on ODA alone.
  Second,  it  examines  the  role  of  selected 
enablers  or  long-term  drivers  of  sustainable 
development.
  Third, it provides further evidence on the way 
in  which finance  and policy  are  interlinked in 
contributing to sustainable development. 

28 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 29

Executive SummaryIntroduction  
 
 
 
 
 
 
Evidence used to inform the Report 

The Report's approach to financing 
for development 

This Report proposes a different way of thinking about finance and policies, based on four elements:

Both the lessons learned from the implementation 
of the MDGs and the changes in the FFD landscape 
suggest  that  we  need  a  completely  new 
approach towards finance for development: 

 A range of studies on finance needs supported 
the 
implementation  of  the  MDGs.  They 
emphasised  financial  gaps  to  be  filled  with 
ODA, but this represented only a partial vision 
of how needs could best be met. Furthermore, 
the  context  has  since  changed,  making  it 
necessary to move from development aid as 
a  ‘silver  bullet’  to  considering  all  available 
sources of finance. 

  The  focus  on  finance  needs  associated  with 
the  MDGs  often  ignored  the  crucial  role  of 
policy.  There  is  thus  a  need  to  think  beyond 
only  policies  or  only  finance  and  promote 
discussions that can foster joint thinking on 
appropriate policies and finance.

  The  MDGs  successfully  attracted  ODA  for 
specific  social  sectors,  but  in  a  post-2015 
context with proposed SDGs that seek to be 
more comprehensive and transformative, it is 
important  to  consider  long-term  enablers  for 
such  a  development  agenda.  This  requires  a 
new way of thinking about the role of different 
finance  sources  and  a  better  understanding 
of  structural  transformation  and  poverty 
eradication.

This  Report  uses  a  wide  range  of  evidence  to 
examine  the  research  question.  It  reviews  (a) 
the  lessons  from  the  MDGs  with  regard  to  FFD, 
including the importance of the policy context in 
relation to a range of financial flows; (b) financial 
flows  to  different  country  income  groupings 
from  1990  as  well  as  innovative  sources  of  FFD, 
emphasising the need to consider a wide range of 
flows; and (c) the role of domestic and international 
policy  in  mobilising  and  making  more  effective 
use  of  finance  in  six  areas  –  local  governance, 
infrastructure,  human  capital,  biodiversity,  green 
energy technology and trade - which we analyse 
in the Report as the key enablers that contribute to 
a transformative post-2015 development agenda.

A set of ERD commissioned papers form a crucial 
part  of  the  evidence  gathered  for  this  Report: 
Country  Illustrations  (CIs),  Background  Papers 
and Modelling Studies.

Country  Illustrations  were  commissioned  on 
Bangladesh,  Ecuador, 
Indonesia,  Mauritius, 
Moldova  and  Tanzania.  These  provide  country-
based  evidence  on  links  between  finance  and 
for  selected  enablers  of  sustainable 
policy 
development,  and  how  these  affect  social, 
economic  and  environmental  dimensions  in  a 
transformative vision of sustainable development.

Background  Papers  were  commissioned  to 
provide further evidence on issues such as taxation 
and  development,  the  roles  of  development 
finance,  climate  finance,  the  role  of  MDGs 
in 
(LICs),  South–South 
Cooperation (SSC) and finance for agriculture.

low-income  Countries 

Two types of modelling studies were commissioned 
in order to explore some of the relationships between 
finance  and  policies  for  the  selected  enablers 
(e.g.  infrastructure)  in  greater  depth:  modelling 
on  Bangladesh,  Moldova  and  Tanzania  and  other 
modelling exercises based on global models.

1 

2 

 Consideration of all types of finance 
(public, private, domestic and international)

 Recognition of the role of complementary 
policies (national and international)

3 

4 

 A focus on long-term enablers 

 A transformative post-2015 
development vision

This framework contrasts sharply with the view that it is possible to achieve a transformative post-2015 
agenda with finance, and ODA in particular, alone. It also takes the objective of sustainable development 
transformation as central, with finance flows playing a supporting role. 

1

Consider all financial resources 

Finance options have changed

FFD  options  have  changed  dramatically  by 
country  income  grouping,  and  over  time.  For 
example,  consider  the  following  financial  flows 
(expressed in 2011 constant prices):

 Domestic  public  revenues  (tax  and  non-tax 
revenues)  rose  by  272%,  from  $1,484  billion 
(bn) in 2002 to $5,523 bn in 2011

 International  public  finance  (net  ODA  and 
Other  Financial  Flows  (OOF))  rose  by  114%, 
from $75 bn in 2002 to $161 bn in 2011

 Private  domestic  finance  (measured  as  Gross 
Fixed Capital Formation by the private sector, 
less FDI) rose by 415%, from $725 bn in 2002 
to $3,734 bn in 2011

 Private  international  finance  (net  FDI  inflows, 
portfolio equity and bonds, commercial loans 
and remittances) rose by 297%, from $320 bn 
in 2002 to $1,269 bn in 2011

Thus,  since  the  2002  Monterrey  Consensus,  in 
real terms (2011 dollars) developing countries 
have  had  access  to  an  additional  $0.9  tr  in 
private  international  finance,  $3  trillions  (tr) 
in private domestic finance and $4 tr in public 
domestic revenues. Public international finance 
increased by just under $0.1 tr (and 
the total is now less than 1.5% of 
the total resources available). 
Figure  1  depicts 
evolution of finance flows 
to developing countries.

the 

30 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 31

Executive Summary 
 
 
 
 
 
 
Figure 1 | Trends in finance ($ bn, 2011 prices)

Figure 2 | Financial flows (% GDP) by income level

Figure 3 | Integrated conceptual framework for finance and policies in enabling a transformative post-2015 development agenda

6000

5000

4000

3000

2000

1000

0

Domestic public resources

Domestic
private resources

International private resources

International public resources

2002 2003

2004 2005 2006 2007 2008 2009 2010 2011

25

20

P
D
G

f

o
%

15

10

5

0

1036

4086

12615

ODA

Tax Revenues

Domestic private finance

FDI

Remittances

LIC

LMIC

UMIC

HIC

Income per capita (US$ 2005 prices)

Sources: OECD, IMF, WDI, and authors’ calculations

Sources: WDI data (FDI, ODA, remittances and tax 
revenues) for all WDI countries, 1980-2012, log scale 
but labels converted from logs

The composition of finance evolves 
at different levels of income 

Figure 2 shows that as countries move towards 
higher  incomes,  they  tend  to  experience: 
(a)  declining  ratios  of  aid-to-Gross  Domestic 
Product (GDP); (b) increasing tax-to-GDP ratios 
(stabilising  when  countries  approach  LMIC 
levels), and within this, increasing shares of tax 
from incomes and profits and notably goods and 
services,  but  declining  shares  of  international 
trade  tax  revenues;  and  (c)  increasing  private 
investment-to-GDP ratios. 

The  data  shows  that  domestic  public  resources 
have grown rapidly and are the largest source 
of  finance  for  all  country  income  groupings. 
International  public  finance  has  also  increased 
but is declining in relative importance. Domestic 
private finance has shown the fastest growth, but 
is still much lower (as a percentage of GDP) in LICs 
than  in  lower  middle-income  countries  (LMICs) 
and upper middle-income countries (UMICs), with 
rapid  transformations  continuing.  International 
private finance has been highly volatile compared 
to the other flows. Innovative finance is promising 
but is yet to take off on a large scale. These trends 
set  the  context  and  also  present  a  number  of 
key challenges that need to be addressed in the 
post-2015  development  agenda  and  FPFD.  For 
example,  it  is  clear  that  there  is  both  a  need  to 
think  more  about  public  resources  ‘beyond  aid’ 
and also to consider new approaches to ODA.

National and international
policies for effective use
of finance

Financial flows

Public and Private
Domestic and International

National and international
policies to mobilise finance

Selected enablers for
sustainable development
Local Governance
Infrastructure
Human Capital
Biodiversity
Green Energy Technology
Trade

2

Consider policy 
and finance together 

The Report’s framework for assessing 
the role of finance and policies together 

Figure  3  sets  out  the  integrated  conceptual 
framework  that  is  central  to  this  Report.  It 
describes  the  role  of  financial  flows  (public  and 
private, domestic and international) in promoting 
illustrates  how 
sustainable  development. 
finance flows that are mobilised with the help of 
policies can promote the enablers. One of the key 

It 

messages is that the role of finance in promoting 
sustainable  development  needs  to  be  seen  in 
the  policy  context.  This  framework  is  intended 
to  promote  the 
joint  discussion  of  policies 
and  finance  (through  the  illustrative  examples 
of  sustainable  development  enablers,  whose 
selection is explained above).

32 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 33

Executive Summary2 
 
Policies are crucial for the mobilisation 
and effective use of finance

The  Report  demonstrates  that  policies  matter 
in financing for development. Although there is 
considerable  finance  available  for  development 
at  the  global  level,  it  does  not  follow  that  it  is 
used appropriately. FDI does not reach the most 
vulnerable and poorer segments of society; tax-to-
GDP ratios have changed very little in many LICs; 
SMEs and infrastructure are starved of capital; and 
much international public finance does not go to 
the poorest countries. Indeed, there is a need to 
overcome  a  number  of  market,  governance  and 
coordination  problems  in  order  to  mobilise  and 
channel financial resources to their most effective 
use. However, appropriate actions can effectively 
overcome these challenges by addressing market, 
coordination and governance failures.

The Report identifies a range of specific policies that 
help  to  mobilise  finance.  For  instance,  regulatory 
reforms (e.g. clear property rights, land titles or cutting 
bureaucratic red tape for licensing) help to mobilise 
private-sector  resources  as  well  as  investment  in 
infrastructure,  human  capital,  trade  or  technology. 
The CIs show that some countries have successfully 
mobilised  more  tax  revenues  (as  a  percentage 
of  GDP)  by  building  administrations  that  limit  rent-
seeking  and  curtail  the  use  of  tax  exemptions, 
enhancing compliance, renegotiating contracts with 
major foreign companies, computerising the customs-
clearing  process,  and  adopting  a  broad-based 
value-added  tax  (VAT)  with  a  reasonable  threshold. 
In  such  ways,  countries  can  use  policy  frameworks 
to  raise  domestic  finance  and  address  otherwise 
low  and  stagnant  tax-to-GDP  ratios.  Low  levels  of 
domestic  public  finance  are  neither  predetermined 
nor  insurmountable  and  are  to  a  large  extent  a 
question  of  public  policy.  Countries  can  also  use 
policy  to  attract  FDI  and  use  it  for  development 
objectives. The CIs show that when countries adopt 
better macro-financial policies, the volatility in foreign 
investment flows is markedly reduced, and that very 
small regulatory changes can make the difference in 
attracting foreign investment.

for 
Figure  4  distinguishes  between  policies 
mobilisation  and  polices  for  effective  use  of 
finance.  We  summarise  the  broad  principles  for 
mobilisation of finance, as follows:

1 

2 

3 

4 

  Finance can promote enablers (for example, local 
governance,  human  capital,  infrastructure, 
green  energy  technology  and  trade),  which 
in turn can also attract more public and private 
finance.  This  creates  a  virtuous  circle  between 
the  enablers  and  finance:  examples  include 
mobile  phone  technology  for  mobile  banking 
services, and human capital for FDI.

   An  appropriate  regulatory  framework 
is 
of  critical  importance  in  order  to  attract 
private  finance.  For  example,  clear  property 
rights  or  land  titles  help  to  mobilise  private 
domestic  finance  by  providing  collateral,  and 
an improved and more transparent and efficient 
investment  climate  can  unleash  more  finance. 
Enhanced  competition  in  transport  services 
and benchmarks in contract provision promote 
finance for and investment in infrastructure. Rules 
that  create  incentives  for  institutional  investors 
to finance infrastructure in developing countries 
or green technology, rather than in liquid assets, 
help to channel international private finance to 
sustainable development purposes.

   Development  of  financial-sector  instruments 
and  the  capacity  to  apply  them  can  mobilise 
instruments  or 
private  resources.  Blending 
instance,  can 
public-sector  guarantees,  for 
enhance  credit  availability,  which 
turn 
in 
leverages more private-sector finance. 

 A conducive international policy environment 
can be critical in setting the right conditions, e.g. 
transparent global financial rules and standards 
for  global  finance,  appropriate  trade  policies 
for  investment  in  agriculture  in  developing 
countries (abolishing harmful trade distortionary 
subsidies),  tax  regulations  for  tax  havens,  or 
appropriate  climate-mitigation  deals  to  set  a 
carbon price that will mobilise climate finance.

The Report also identifies five general principles for the effective use of finance:

1 

2 

3 

to 

identifying  and 

 The ability to implement, manage or facilitate 
finance  effectively  requires  the  presence 
local  public 
of  sufficient  national  and 
capacities.  In  domestic  public  finance,  this 
relates 
implementing 
sound  investment  projects  (including  those 
with  co-benefits  across  the  economic,  social 
and environmental dimensions of sustainable 
development) and for ensuring that there are 
good social systems (e.g. health and education) 
supported by significant expenditure on them. 

 The  design  and  implementation  of  public 
and  private  standards  facilitates  the  effective 
use  of  finance.  While  standards  need  to  be 
defined  nationally,  global  coordination  and 
benchmarking  can  help.  Standards  can  relate 
to  public  procurement,  accountability  in  public 
revenues from natural resources, public financial 
management,  PPP  contracts  and  standards 
for  green  technologies  or  resilience  to  climate 
change.  Global  standards  can  help  in  raising 
standards at the country level. 

clear 

incentives 

regulatory 
 An  appropriate  and 
framework  allows  competition  and  provides 
better 
the  diffusion  of 
for 
technology  in  addition  to  directed  finance. 
Financial and prudential regulation is required 
to  avoid  financial  crises  at  the  global  level, 
and  especially  in  developed  countries.  There 
is also a need for better regulatory frameworks 
and supervision of banks, more innovation and 
competition in the banking sector and better 
regulation of the non-banking sector – such as 
corporate  bonds,  stock  markets  and  pension 
funds – in order to improve the terms on which 
finance is made available. 

4 

5 

 Improving  transparency,  information  and 
accountability contributes to the effective use 
of finance. For instance, a lack of transparency 
regarding government taxes paid by investors 
hampers  the  quality  of  public  investment. 
Transparency  concerning 
large-scale 
acquisition  of  land  by  foreign  interests  could 
improve the governance of natural capital.

the 

in 

 Finally,  policy  coherence  towards  specific 
development objectives is vital to the effective 
use  of  finance.  It  is  important  to  ensure  that 
policies in different sectors do not undermine 
policies to promote sustainable development 
and  to  take  an  integrated  approach.  Lack  of 
policy coherence will lead to wasted finance. 
Investing 
‘white-elephant’  projects  or 
inefficient productive capacities behind closed 
borders  will  not  promote  transformation  in 
the  long  run.  Financing  the  development  of 
technologies  without  building  the  human 
capital  required  to  employ  them  will  be 
a  half  measure.  Providing  more  capital  to 
development  finance  institutions  (DFIs)  or 
raising credit without the prospect of projects 
in  which  to  invest  can  lead  to  excessive 
‘financialisation’ and indebtedness. Improving 
access  to  credit  without  improving  the  terms 
on which it is available can still be prohibitive 
for firms. Policy coherence also applies at the 
global  level,  e.g.  through  the  global  rules 
on  trade,  finance,  climate,  migration  and 
technology. 

1

2

3

4

5

34 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 35

Executive SummaryFigure 4 | Summary of policies for mobilisation and effective use of finance

Policies for effective use
NATIONAL
National capacities
Standards, transparency
Regulatory framework
Policy coherence
(e.g. trade policy)

INTERNATIONAL
Global rules/standards
Donor co-ordination and DFIs

Policies to mobilise finance
NATIONAL
Regulatory framework
Financial sector instrument
Public sector capacity
(e.g. project preparation)

INTERNATIONAL
Development finance
instruments/special funds
International policy environment
(trade, tax, climate, finance)

Financial flows

Public and Private
Domestic and International

Enablers for
sustainable
development

Finance cannot be treated 
independently from policy

Policy  is  crucial  alongside  finance  to  implement 
a transformative post-2015 development agenda. 
Poor  or  adverse  policy  can  stop  the  potential  of 
finance, but appropriate policy can:

 Generate, attract and steer finance - the design 
of  clear  policy  frameworks  for  transformation 
helped Mauritius to attract and steer both public 
and private finance (CI Mauritius).

    Unleash  more  public  and  private  finance  - 
reductions in tax exemptions helped to raise public 
finance in Tanzania, but weaknesses in the energy 
regulatory  framework  limited  investment  from 
private finance for renewable energy (CI Tanzania).

   Increase  the  stability  of  international  private 
finance  -  an  ERD  modelling  study  (Fic,  2015) 
shows that global banking (Basel III) rules lead to 
benefits for sub-Saharan Africa (SSA) that are ten 
times greater than the costs. 

 Pull  finance  from  less  productive  to  more 
productive  uses - better tax policies such as 
reducing bad transfer pricing or tax-avoidance 
practices can lead to large benefits. The ERD 
modelling study (Fic, 2015) suggests this could 
release $ 3.5 bn in Africa; similarly a relaxation 
of restrictions on sovereign wealth fund (SWF) 
investment  can  lead  to  more  finance  for 
infrastructure in developing countries.

the  productivity  of  infrastructure  by  scaling 
up  good  practice  and  making  better  use  of 
existing infrastructure could help countries to 
improve  infrastructure  productivity  by  60%, 
estimated  to  be  worth  annual  savings  of  $1 
tr.  As  another  example,  better  competition 
policies 
improve  the  terms  under  which 
banking finance is available. It is estimated that 
private investors across Africa face additional 
costs of around $15 bn (2% of credit extended) 
compared to the average interest rate spread, 
simply  to  obtain  finance.  More  competition 
and innovation aimed at lowering the interest 
rate spread in SSA to the average of LICs and 
MICs would increase the availability of finance 
by  more  than  1.2%  of  GDP  and  increase 
investment by 6%.

 Reduce  the  need  for  finance  -  the  finance 
gap  for  renewable  energy  is  estimated  to  be 
between $400 bn and $900 bn. This is similar 
to  the  current  level  of  fossil-fuel  subsidies 
(more  than  $500  bn  in  2010),  which  means 
that  reducing  such  subsidies  could  free  up 
finance  for  other  purposes.  Lower  subsidies 
are also likely to reduce the need for additional 
green  investment  since  there  would  be  fewer 
incentives  to  use  fossil  fuels.  As  a  further 
example, Duty-Free Quota-Free (DFQF) access 
to  the  markets  of  the  G20  countries  (beyond 
the  European  Union,  which  already  provides 
such  access)  could  increase  LDCs’  national 
incomes  on  average  by  0.5%  of  GDP  (World 
Bank,  2013).  This  is  similar  to  the  $30–40  bn 
provided in Aid for Trade (AfT) each year.

3

 Focus finance on the enablers 
of sustainable development

Six selected enablers  
for sustainable development 

the  drivers  or  enablers  of  change.  Sustainable 
development cannot be achieved without improving 
and financing six key areas:

Local  Governance.  Governance  generally 
is 
the  most  fundamental  enabler  of  development, 
and  we  focus  on  local  governance  because  of 
its  importance  in  the  provision  of  many  critical 
functions and because few other reports focus on 
the financing aspects at this level. 

  Infrastructure,  which  econometric  studies  show 
is  important  for  all  dimensions  of  sustainable 
development, a conclusion supported by an ERD 
commissioned  study  modelling 
infrastructure 
scenarios, and by the CIs.

Human capital, whose importance in development 
is supported by a range of empirical studies, also 
has a direct link with the eradication of poverty.

is 

 Biodiversity 
important  for  all  dimensions 
and  most  directly  for  environmental  progress. 
The  Report  yields  new  insights  with  respect  to 
financing because biodiversity is often referred to 
as a public good. 

Green Energy technology and its dissemination 
lie at the heart of a move from a high-carbon to a 
low-carbon economy.

Trade, whose importance as an enabler comes out 
very  strongly  from  the  CIs  and  yields  differential 
insights,  especially  with  respect  to  the  role  of 
private-sector finance.

The  Report’s  focus  on  enablers  contrasts  starkly 
with outdated views that ODA or finance alone can 
directly achieve sustainable development outcomes.

 Lead to more results with the same amount 
of finance – for example, measures that boost 

The  Report  argues  that  action  to  achieve 
focus  on 
sustainable  development 

should 

36 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 37

Executive Summary3 
 
 
 
 
 
Figure 5 | Selected enablers for sustainable development

Local Governance

Infrastructure

Trade

A TRANSFORMATIVE
POST-2015 AGENDA

Human
Capital

(Sustainable
Development)

Biodiversity

Green energy
technology

The finance mix varies by enabler

The composition of finance differs markedly by 
enabler. Finance for institutions and governance 
seems  to  be  largely  public,  mainly  provided 
through  tax  revenues,  and  international  public 
finance  can  play  a  part,  particularly  in  LICs,  as 
shown in the ERD commissioned CIs.

Patterns of finance for human capital vary across 
education, health and social protection, although 
all  depend  heavily  on  domestic  public  finance. 
In  the  education  sector,  finance  varies  by  level 
of  education  although  most  comes  from  public 
sources, including ODA, for primary and secondary 
schooling. Private spending by richer households 
and  migrants’  remittances  is  also  important. 
Formal training, such as Technical Education and 
Vocational  Training  (TVET)  schemes,  is  financed 
mainly 
this 
approach can be regressive. There is also evidence 
in 
of  public–private  partnerships 
Malaysia) or tax levies for training being allocated 
and used according to private-sector interests (as 

from  private  sources,  although 

(PPPs) 

(as 

in  Mauritius).  Funding  for  health  systems  comes 
mainly from public sources, although private out-
of-pocket  (OOP)  expenses  can  also  be  critical. 
While  the  reliance  on  OOP  expenses  tends  to 
make it harder for poorer people to obtain access 
to health care, this could also create opportunities 
for  private-sector  insurance  and  micro-insurance 
schemes  to  complement  public  funding.  Well-
designed,  publicly 
social-protection 
systems  are  essential  to  safeguard  investment  in 
human capital, especially in times of turbulence. 

funded 

is 

source 

the  principal 

Finance for infrastructure and green technology 
tends  to  come  from  a  mixture  of  public  and 
private  sources,  although  national  government 
expenditure 
for 
infrastructure. There is a clear progression in the 
use  of private finance,  including  bond financing, 
as  country  income  levels  rise.  Due  to  the  large 
upfront  requirements, 
infrastructure  or 
renewable  energy  projects  usually  depend  on 
the  blending  of  private  finance,  ODA  grants, 
technical assistance and OOF. Such blending has 
increased  since  the  2007–2008  global  financial 

large 

institutions 

crisis  in  the  context  of  the  rising  presence  of 
development  finance 
(DFIs)  and 
multilateral  development  banks  (MDBs).  Public 
funding  has  been  used  primarily  to  alleviate 
risks  and  attract  private  investment.  MDBs  from 
emerging  economies  also 
increasingly  use 
blended  instruments.  Although  significant  ODA-
backed concessional and non-concessional loans 
are  common  in  LICs,  public  grants  remain  the 
main source of finance. While private expenditure 
on  research  and  development  (R&D)  for  green 
technology  is  rare  in  LICs,  there  is  often  private 
(generally 
investment 
supported by some form of public finance).

renewable  energy 

in 

Trade finance is largely provided by private banks 
through  the  extension  of  Commercial  Letters  of 
Credit,  although  this  is  changing  rapidly  in  the 
wake of the global financial crisis. In Bangladesh, 
for  instance,  exporters  of  ready-made  garments, 
especially  SMEs,  are  starting  to  bypass  the 
banking  system  by  developing  and  negotiating 
trade directly on ‘Open Account’ terms with their 
trading  counterparts  (Bangladesh  CI),  and  DFIs 
and MDBs are creating Special Purpose Vehicles 
to support private-sector development by pooling 
private  and  public  funds.  LICs  continue  to  have 
very  limited  access  to  trade  finance  and  rely  on 
AfT finance to build trade-related capacity.

DFIs  are  playing  an  increasing  role  in  leading 
transformations in key areas such as infrastructure, 
green  energy  and  trade,  by  leveraging  private 
finance,  supporting  the  selection  of  appropriate 
projects  and  policies,  and  providing  technical 
assistance,  credit  and  risk-mitigation  instruments 
and blended finance.

4

Steps towards a Global Partnership 
to implement a transformative 
development vision

for 

The  UN  Secretary-General’s  Synthesis  Report 
(2014)  discusses  establishing  a  new  Global 
Partnership 
the  post-2015  development 
agenda at the Third International Conference on 
Financing  for  Development  (para.  24  ff)  in  July 
2015.  This  renewed  Global  Partnership  would 
establish  a  common  foundation  and  contribute 
to new ways of thinking about collective action in 
much the same manner as previous non-binding 
agreements have done. The Conference outcome 
could  therefore  provide  a  set  of  common 
principles  on  the  nature  and  value  of  different 
types  and  combinations  of  finance  and  policy, 
and  how  these  are  best  used  to  enhance  the 
enablers  of  transformation.  There  are  four  steps 
to consider.

Financing for development 
as an on-going process

A  finance  and  policy  framework  under  such  a 
Global Partnership would steer global collective 
action  up  to  2030  by  stimulating  domestic 
and 
international  efforts  by  all  countries, 
commensurate  with  their  capacities.  Moreover, 
as our analysis shows, private sources of finance 
that  lie  beyond  the  direct  control  of  national 
governments  are  gaining 
importance, 
especially  at  higher  levels  of  country  income 
level.  It  is  important  to  seek  a  formula  that 
encourages their engagement and participation 
in the financing and implementation of the post-
2015 development agenda.

in 

38 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 39

Executive Summary4Keeping core principles in mind

The post-2015 development agenda is expected 
to  be  ‘universally  applicable’  while  ‘taking  into 
account  different  national  realities,  capacities 
and levels of development’, building on the two 
principles  of  universality  and  differentiation  (UN 
Secretary-General  Synthesis  Report,  2014).  Both 
principles  would  make  the  new  framework  very 
different from the MDGs and would help to move 
the debate away from the donor–recipient model, 
which most stakeholders seek to put behind them.

  Universality - implies that the new framework 
will  apply  to  all  countries  and  governments 
and  not  only  to  developing  countries.  On 
this basis, each government will be expected 
to  pursue  the  agreed  goals  in  a  manner 
that  is  appropriate  for  their  country,  and  to 
contribute resources (finance and other means 
of implementation (MOI)) to the global effort 
commensurate with their means. 

    Differentiation  -  this  concept  is  an  important 
complement  to  the  notion  of  universality  (UN, 
2014, para. 84) in that it clarifies that while the 
new  framework  should  apply  to  all  countries, 
given  the  differences  in  capacities  and  needs, 
not all can or should be expected to contribute 
to its achievement in the same way. This implies 
firstly,  that,  although  contributions  may  differ, 
each is important. All contributions are valued. 
Secondly that these responsibilities do not apply 
only to governments, but call for all stakeholders 
to contribute according to their capacity.

A  useful  and  relatively  simple  way  to  distinguish 
between roles and responsibilities with respect to 
finance and policies for development is to look at 
three main groups of countries by income levels: 
(a) LDCs/LICs and fragile states; (b) MICs; and (c) 
HICs or developed countries. It also needs to be 
recognised  that  small  and  vulnerable  economies 
face  special  challenges,  which  implies  that  they 
cannot  be  easily  categorised  as  LICs  or  MICs 
(e.g.  some  small  MICs  have  very  large  debts). 
The  broad  distinctions  between  what  each  of 
these groupings would be able to do in terms of 
mobilising  and  making  effective  use  of  finance 
are  identified  in  Box  1  but  further  differentiation 
is possible.

Involving multiple actors

The Global Partnership that is expected to be part 
of  the  universal  post-2015  development  agenda 
implies  that  all  governments  should  make  an 
explicit commitment to it. Relevant actors, each with 
a distinct role and responsibility, include national 
governments  and  their  various  departments, 
country  income  groupings,  autonomous  state 
bodies  (e.g.  export  credit  or  export  promotion 
agencies), and non-state actors such as business 
organisations  or  associations,  financial  and  non-
financial  firms,  and  other  national  stakeholders 
such  as  academic  institutions,  think  tanks,  CSOs 
and labour unions. Multilateral institutions such as 
the World Bank, the International Monetary Fund 
(IMF),  Regional  Development  Banks  (RDBs)  and 
other DFIs are also key stakeholders.

Box 1 | Illustrative stylised roles and responsibilities of country income groupings

For LICs/LDCs, fragile and small and vulnerable states: 

•	

•	

	Mobilisation  requires  an  essential,  often  tough,  domestic  effort  to  improve  the  regulatory  environment  and  administrative 
capacities,  to  build  up  the  tax  revenue  system,  combat  tax  evasion  and  to  start  to  mobilise  private  capital  flows,  including 
remittances.  Ensuring  effective  regulation  and  supervision  of  the  financial  markets  encourages  private  capital.  Well-managed 
domestic public finance will tend to attract international public finance (including ODA and SSC) to fill development finance gaps. 
These may also have a catalytic role in helping to reform the domestic revenue system.

 Effective  use  involves  focusing  domestic  budget  allocations  on  transformative  priorities  and  associated  enablers,  as  well  as 
channelling  international  public  resources  to  invest  in  human  capital,  capacity-building  and  strengthening  institutions,  and 
creating specialised facilities or funds to direct public and private resources to specific enablers, most notably infrastructure and 
networks. 

For MICs: 

•	

•	

	Mobilisation at this level entails greater emphasis on DRM as the major source of FFD. Strengthening the tax effort and extending 
the tax base are important priorities. MICs can be expected to have a well-developed domestic private finance sector and should 
also be able to attract higher levels of international private finance (although small and vulnerable MICs face challenges in this 
area that are similar to those facing LICs). Small amounts of ODA may be still be used in a catalytic fashion to stimulate other 
finance (including tax revenues). Development of stock exchanges and bond markets can mobilise additional private resources, as 
can PPPs, which might save resources over a project’s lifetime. At the same time, as countries move to MIC status they also move 
into the league of potential SSC providers contributing external financing (international public and private finance) or concessional 
lending to other countries and to global public goods (GPGs). This effort needs to be acknowledged and encouraged. The UN 
Secretary-General Synthesis Report (2014) suggests that ‘more countries will need to commit to increasing their contribution to 
international public finance, and set targets and timelines to do so’ (para. 111).

	Effective use involves, among other things, allocating the domestic budget to transformative priorities and associated enablers, 
encouraging private investment to support public investment in key enablers such as infrastructure, reducing ODA to a minimum 
and using it mainly to pursue social or environmental goals and/or enhance leverage of other resources. At the national level, policy 
coherence for sustainable development (PCSD) and a serious commitment to establish and maintain a supportive international 
policy framework need to be major policy priorities. MICs can also be expected to play a growing role in global governance 
in helping to establish such a policy environment and through their willingness to accept and adhere to global standards, as is 
increasingly the case for the G20 and the UN. 

For HICs/developed countries

•	

•	

	Mobilisation involves sufficient DRM to finance national efforts towards achieving the goals as well as providing the basis for 
sizeable  ODA  contributions  and  major  concessional  lending  to  the  countries  most  in  need.  Given  their  developed  domestic 
private finance markets, HICs should be able to attract large volumes of international private finance, although it is important to 
prevent illicit transfers, which among other things may undermine poorer countries’ ability to mobilise finance.

 Effective use involves in particular ensuring that resources intended to achieve domestic and international goals are allocated 
most effectively and making serious efforts to adjust other internal and external policies to ensure greater policy coherence to 
support development objectives. In their role as major contributors to establishing a conducive international policy framework, 
they need to ensure by means of proper incentives, rules, regulations and oversight that GPGs – including an open trade regime, 
environmental  sustainability,  and  financial  stability  etc.  –  are  provided  in  a  consistent  and  inclusive  manner.  Further,  domestic 
policies in areas such as climate resilience and economic development also have important spill overs on other countries. 

40 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 41

Executive Summary 
 
Introduce a monitoring and accountability framework

Three main findings inform a new finance and policy framework for development

Part  of  the  success  of  the  MDGs  was  that  they  allowed  for  specific  monitoring  and  follow-up.  Yet  in 
terms of the finance and policy provisions of the Monterrey Consensus it was really only international 
public finance that was assigned a target that could be monitored. A major challenge for a new finance 
and policy framework is to establish targets and other measures that can incentivise finance as well as 
other aspects of financing and implementation in the years ahead. This is not an easy task but it is vital 
in order to make genuine progress. Equally, it is important in terms of promoting transparency and the 
full participation of all those whose support will be required to make the framework a reality. A strong 
effort in this direction is ultimately what will give substance to the term ‘global partnership’. Data will be 
crucial in order to achieve the necessary monitoring and ensure transparency. The main report provides 
an illustrative example table on what such a finance and policy framework might look like.

1

The pattern of finance for development evolves at different levels of income. A key government 
objective should be to move the financing pattern to the next level and, as the volume of each form 
of finance changes, to ensure it is put to best use. This has implications for the mobilisation and use of 
all types of flow, including, for example, ensuring a more transformative role for international public 
finance in the evolving pattern of finance.

2

Policy matters. Finance is not enough on its own and it is essential to adopt appropriate and coherent 
domestic and international policies for its effective mobilisation and use:

   Domestic  policy  and  financial  frameworks  that  promote  mobilising  domestic  resources  and 
facilitating  their  effective  use  for  sustainable  development.  This  includes  an  effective  regulatory 
framework to govern private sources and adequate capacity to raise public revenues, and applies to 
developing and developed countries. 

 A conducive global system and policy environment that supports the mobilisation of finance and 
includes supportive agreements on climate change, an improved global trade regime, better global 
tax rules and the management of the global financial system

3

Accountability  and  participation.  Given  the  new  financing  context,  and  within  it  the  importance  of 
using several different types of finance in synergy (domestic, international, public, private), it is essential 
to create a framework for on-going dialogue between the various stakeholders involved in each type of 
finance during the implementation of the post-2015 agenda. Participation in such a dialogue will allow 
stakeholders to monitor progress, hold each other accountable, jointly manage the evolving pattern 
of  finance  and  make  adjustments  as  required.  The  dialogue  will  need  to  be  informed  by  real  time 
data  from  appropriate  monitoring  and  evaluation  (M&E)  systems,  including  on  finance  flows  and  on 
complementary policies.

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Executive SummaryConclusion 
 
 
CHAPTER 1.

Introduction

1.1  The post-2015 policy context 

1.2  The policy challenges 

1.3  What the Report aims to contribute 

1.4  Evidence used to inform the Report 

1.5  Structure of the Report 

47

52

54

54

61

1.

Combining finance and policies to implement a transformative post-2015 development agenda | 45

T he vision of global development is at a critical 

juncture,  and  the  need  to  move  beyond 
‘business  as  usual’  is  stronger  than  ever.  Acting 
through the United Nations (UN), representatives 
of  the  world’s  nations  will  come  together  in 
September  2015  to  agree  on  a  new  post-2015 
development  agenda.  This  ambitious  and 
universal  agenda  will  reinforce  the  international 
community’s  commitment  to  poverty  eradication 
and  sustainable  development,  and  will  seek  to 
integrate in a coherent and balanced manner the 
social,  economic  and  environmental  dimensions 
of sustainable development (UN, 2013). 

In  the  words  of  UN  Secretary-General  Ban  Ki-
moon, 
the  post-2015  development  agenda 
‘offers  a  unique  opportunity  for  global  leaders 
and  people  to  end  poverty,  transform  the  world 
to better meet human needs, and the necessities 
of economic transformation, while protecting our 
environment, ensuring peace and realizing human 
rights’. It will thus mark a transformative ‘paradigm 
shift for people and planet’ (UN Secretary-General 
Synthesis Report, 2014).

The  post-2015  development  agenda  is  set  to 
four  main  components:  Declaration; 
include 
(SDGs)  and 
Sustainable  Development  Goals 
targets; 1  Means  of  Implementation  (MOI)  and 
Global Partnership 2; and Follow-up and Review.

A  key  milestone  in  agreeing  a  compact  for  the 
Global  Partnership  will  be  the  Third  Conference 
on Financing for Development (FFD) to be held in 
Addis Ababa, 13–16 July 2015. It will build on the 
holistic  conceptual  framework  of  the  2008  Doha 
Declaration  and  the  2002  Monterrey  Consensus, 
and address the comprehensive range of Means 
of  Implementation  required  to  achieve  the  post-
2015 development agenda, including an enabling 
policy  environment  and  financial  resources.  Its 
outcome  will  make  an  important  contribution  to 
and support the implementation of the agenda. 

The  post-2015  development  agenda  is  expected 
to  be  global  in  nature  and  universally  applicable. 
This  is  fundamental,  as  universality  will  require 
universal  commitment  and  actions,  while  taking 
into account different national realities, capacities 
and 
levels  of  development.  Universality  also 
implies that achieving the agenda will be a shared 
responsibility 
(UN  Secretary-General  Synthesis 
Report,  2014).  Indeed,  the  ambitious  scope  of 
the  post-2015  development  agenda  will  pose 
unprecedented  challenges  at  both  the  national 
and  international  level.  It  will  require  thus  require 
‘a stronger, more accountable and inclusive Global 
Partnership to mobilise action by all countries and 
stakeholders at all levels’ (European Council, 2014).

As part of this Global Partnership, it will be crucial 
to  address  all  means  of  implementation  (MOI), 
including  the  mobilisation  of  financial  resources 
from diverse sources – domestic and international, 
public  and  private  –  and  ensuring  their  effective 
use.  But  finance  alone  is  not  the  solution:  to 
achieve the post-2015 development agenda, the 
Global  Partnership  will  need  to  address  finance 
and policies together – we refer to this as a ‘Finance 
and  Policy  Framework  for  Development’  (FPFD). 
Although  MOI  is  variously  defined,  it  is  widely 
acknowledged to include but also to go beyond 
financial resources 3. The Technical Support Team 
to the Open-Working Group on the SDGs (2013: 
1)  describes  MOI  as  ‘the  interdependent  mix  of 
financial resources, technology development and 
transfer, capacity‐building, inclusive and equitable 
globalization  and  trade,  regional  integration, 
as  well  as  the  creation  of  a  national  enabling 
environment  required  to  implement  the  new 
sustainable  development  agenda,  particularly 
in  developing  countries’.  The  UN  Secretary-
General’s Synthesis Report (2014) includes under 
MOI ‘Financing our future’, ‘Technology, Science 
and  Innovation’  and  ‘Investing  in  capacities  for 
sustainable  development’  –  focusing  on  finance, 
technology and innovation and capacity building.

This  Report  addresses  ‘combining  finance  and 
policies  to  implement  a  transformative  post-
2015 development agenda’. While these involve 
major  challenges,  the  experience  of  pursuing 
the  Millennium  Development  Goals  (MDGs)  has 
provided lessons in terms of countries’ successes 
and  failures  in  using  finance  and  policies  to 
contribute  to  eradicating  poverty  and  achieving 
sustainable  development.  This  Report  draws  out 
some  of  the  lessons  that  could  help  to  inform 
a  new  FPFD  that  includes  the  role  of  policies 
and  finance  in  supporting  the  long-term  drivers 

(or  enablers)  of  sustainable  development.  It 
also  draws  on  commissioned  papers  (Country 
Illustrations,  Background  Papers  and  Modelling 
Studies) to provide further evidence. 

This  introductory  chapter  outlines  key  processes 
in the post-2015 policy context (Section 1.1), the 
policy  challenges  this  Report  addresses  (Section 
1.2) and what it aims to contribute (Section 1.3). 
It then presents the evidence used to inform the 
report (Section 1.4) and the broad structure of the 
Report (Section 1.5).

   1.1 

 The post-2015 policy context

T he  post-2015  development  agenda  stems 

from  two  major  and  converging  processes: 
the  follow-up  to  the  2010  Millennium  Summit, 
which  mandated  the  UN  Secretary-General  to 
initiate  a  post-MDGs  process,  and  the  follow-
up  to  the  2012  United  Nations  Conference  on 
Sustainable  Development 
(‘Rio+20’),  which 
launched  the  process  to  develop  the  SDGs.  At 
the  MDGs  Special  Event  in  September  2013, 
the UN General Assembly agreed to bring these 
together ‘in a single framework and set of goals’, 
addressing both poverty eradication and the three 
dimensions of sustainable development. 

In  parallel  with  but  closely  interlinked  with  this 
process, two strands on financing for development 
(FFD)  have  also  converged:  the  follow-up  to 
the  2002  Monterrey  Conference  on  Financing 
for  Development  and  the  follow-up  to  Rio+20, 
which  gave  the  mandate  to  prepare  options  for  a 
sustainable  development  strategy,  as  set  out  in 
the  report  of  the  Intergovernmental  Committee 
of  Experts  on  Sustainable  Development  Financing 
(ICESDF).  The  Third  International  Conference  on 
Financing for Development scheduled for July 2015, 
is expected to discuss ‘an ambitious agreement on 
policies,  financing,  technology  transfer,  capacity-

building  and  systemic 
for 
Development Co-facilitators’ elements paper, 2015) 
to underpin the post-2015 development agenda. 

(Financing 

issues’ 

The debate on the post-2015 development agenda 
has  been  informed  by  a  series  of  reports  making 
recommendations that should apply to all countries. 
These include the United Nations High-Level Panel 
report (HLP, 2013), the United Nations Sustainable 
Development Solutions Network report (UN SDSN, 
2013),  the  United  Nations  Global  Compact  (2013) 
reports and the report of the UN Secretary-General 
(2014),  A  Life  of  Dignity  for  All.  These  reports 
share a broad vision of the post-2015 development 
agenda (see also Khatun, 2013).

‘The  Rio+20  outcome  document,  The  future  we 
want, inter alia, set out a mandate to establish an 
Open  Working  Group  to  develop  a  set  of  SDGs 
for  consideration  and  appropriate  action  by  the 
General  Assembly  at  its  68th  session’  (OWG, 
2014b).  In  response,  the  OWG  proposed  17 
SDGs, each with associated targets (see Box 1.1 ). 

1   In accordance with UNGA resolution 68/309 ‘the proposal of the Open Working Group shall be the main basis for integrating sustainable development goals 

into the post-2015 development agenda, while recognizing that other inputs will also be considered’.

2    In accordance with UNGA resolution 69/108 the report of the Intergovernmental Committee of Experts on Sustainable Development Financing (ICESDF), the 
outcome of the Open Working Group (OWG) and the Synthesis Report of the UN Secretary-General will ‘serve as important inputs for the preparations’ of the 
Third FFD Conference.

3     In the literature MOI covers both financial and non-financial factors. For example, the OWG (2014b) outlines considerations under the Global Partnership and 
MOI (Goal 17): finance, technology, capacity building, trade and systemic issues (policy and institutional coherence, multi-stakeholder partnerships and data, 
monitoring, and accountability). 

1.1

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Combining finance and policies to implement a transformative post-2015 development agenda | 47

CHAPTER 1. IntroductionBox 1.1 | SDGs proposed by the OWG 

1     End poverty in all its forms everywhere

2     End hunger, achieve food security and improved nutrition, and promote sustainable agriculture

3      Ensure healthy lives and promote well-being for all at all ages

4      Ensure inclusive and equitable quality education and promote life-long learning opportunities for all

5     Achieve gender equality and empower all women and girls

6      Ensure availability and sustainable management of water and sanitation for all

7      Ensure access to affordable, reliable, sustainable, and modern energy for all

8      Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

9     Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation

10      Reduce inequality within and among countries

11      Make cities and human settlements inclusive, safe, resilient and sustainable

12      Ensure sustainable consumption and production patterns

13     Take urgent action to combat climate change and its impacts

14      Conserve and sustainably use the oceans, seas and marine resources for sustainable development

15      Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, 

combat desertification, and halt and reverse land degradation and halt biodiversity loss

16     Promote peaceful and inclusive societies for sustainable development, provide access to justice 

for all and build effective, accountable and inclusive institutions at all levels

17      Strengthen the means of implementation and revitalize the global partnership for sustainable development

that 

the  proposal  of 

In  September  2014,  the  UN  General  Assembly 
‘decided 
the  Open 
Working  Group  on  Sustainable  Development 
Goals  contained  in  the  report  shall  be  the  main 
basis  for  integrating  sustainable  development 
goals  into  the  post-2015  development  agenda, 
while  recognising  that  other  inputs  will  also  be 
considered’  (UN  General  Assembly,  2014).  The 
OWG report builds on the unfinished business of 

the MDGs but also goes much further, integrating 
the three dimensions of sustainable development 
across the agenda and breaking new ground with 
goals  on  inequalities,  inclusive  and  sustainable 
economic  growth,  industrialisation,  sustainable 
consumption  and  production,  energy,  climate 
change, peace, justice and institutions. The SDGs 
are also underpinned by the proposed Goal 17 on 
MOIs and Global Partnership. 

The  UN  Secretary-General’s  Synthesis  Report 
‘The  Road  to  Dignity  by  2030’  (2014)  integrates 
the  various  post-2015  inputs  and  reaffirms  the 
OWG’s  report  as  the  ‘main  basis’  for  the  SDGs. 
In  an  effort  to  ‘frame  the  goals  and  targets  in 
a  way  that  reflects  the  ambition  of  a  universal 
and  transformative  agenda’,  it  puts  forward  six 
‘essential and interconnected elements’ – dignity, 
people, prosperity, planet, justice and partnership 
–  that  could  help  to  ‘maintain  the  17  goals  and 
rearrange them in a focused and concise manner 
that enables the necessary global awareness and 
implementation at country level’ (see Figure 1.1).

In contrast to the sequence followed for the MDGs 
– when the 2002 Monterrey Conference took place 
after the agenda-setting process – the 2015 Addis 
Ababa Conference will be held two months before 
the September UN Summit to agree the post-2015 
development  agenda.  The  conference  outcome 
is  thus  set  to  make  a  major  contribution  to  the 
overall post-2015 agenda and in particular to the 
component on MOI and Global Partnership.

comprehensively, 

to  a  broader  concern 

Informed  by  the  work  of  the  ICESDF,  discussions 
have  also  moved  beyond  the  MDGs’  focus  on 
mobilising  more  official  development  assistance 
to  address 
(ODA) 
implementation 
including 
(but  not  limited  to)  making  more  efficient  use  of 
different  types  of  finance  and  the  role  of  policies 
in  this  regard.  Effective  government  policies  and 
institutions  constitute  an  essential  cornerstone  of 
financing strategies for sustainable development. It 
is not just about resources but also about how best 
to  use  them  and  to  unlock  additional  resources. 
The  ICESDF  (2014)  report  includes  domestic  and 
international  policy  recommendations  to  create 
a  national  and  global  enabling  environment 
for  financing  sustainable  development.  These 
recommendations address both the mobilisation of 
new finance and the effective use of existing FFD. 

Figure 1.1 | Elements to underpin the SDGs 

Dignity
To end poverty
and fight inequality.

People
To ensure healthy lives,
knowledge, and the inclusion
of women and children.

Planet
To protect our
ecosystems
for all societies
and our children.

SUSTAINABLE
DEVELOPMENT
GOALS

Prosperity
To grow a strong,
inclusive,
& transformative
economy.

Partnership
To catalyse
global solidarity
for sustainable
development.

Justice
To promote safe
and peaceful societies,
and strong institutions.

Source: UN Secretary-General Synthesis Report (2014: 20)

that 

It  also  stresses 

The  UN  Secretary-General’s  Synthesis  Report 
(2014:  89)  specifically  welcomes  these  policy 
the 
recommendations. 
outcome of the July 2015 Addis Ababa Conference 
will  help  to  set  the  stage  for  discussions  on 
the  United  Nations  Framework  Convention  on 
Climate  Change  (UNFCCC)  due  to  take  place 
in  Paris  in  December  2015,  which  will  seek  to 
establish a new climate agreement to prevent and 
reduce dangerous global levels of anthropogenic 
emissions.  The  Synthesis  Report  further  stresses 
the need for coherence and strengthened cross-
linkages  between  the  financing  frameworks  for 
sustainability and climate change.

Figure 1.2 shows timeline of the present Report in 
relation to post-2015 processes.

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Combining finance and policies to implement a transformative post-2015 development agenda | 49

CHAPTER 1. IntroductionFigure 1.2 | Timeline of the present Report in relation to post-2015 processes

2000

2002

2005

2008

2009

2010

2011

2012

2013

2014

2015

2016

Post-2015
Agenda

MDG Summit
Sept 2010
Mandate on
Secretary-
General (SG) to
initiate post-2015
process

POST MDG PROCESS

SYNTHESIS PROCESS

July 2012 
SG establishes High-Level 
Panel of eminent persons 
on the Post-2015 Deve-
lopment Agenda (HLP)

May 2013 
Released report
(recommendations) 
to the SG.

69th UN General
Assembly (GA)
Sept 2014
International
negotiations
begin

United Nations GA
15-28 Sept 
Summit at Head of State 
& Government level to 
adopt post-2015
agenda

SDG PROCESS

Rio+20 Conference
June 2012 
Establishes the Open 
Working Group on the 
Sustainable Develop-
ment Goals (OWG), 
High Level Political 
Forum on Sustainable 
Development (HLPF), 
and Intergovernmental 
Committee of Experts 
on Sustainabl

Development
Finance

Other
Processes

2002
Monterrey
Conference
on Financing for
Development.
0.7% GNP>ODA

2008
Doha Declaration 
reaffirms ODA 
commitment

POST MDG PROCESS

UNFCCC PROCESS

2009
Copenhagen Accord
outcome of
UNFCCC Conf. of
the Parties (COP)

2011 
Durban Platform
outcome of
UNFCCC COP

Third International 
Conference on Financing 
for Development
13-16 July 
Addis Ababa

UNFCC COP
30 Nov-11 Dec 
Paris

UNCCD PROCESS ongoing

UNCCD PROCESS ongoing

Millennium Summit
established MDGs

UNDP PROCESS UNDP mandate to support on MDG delivery: finishes along with MDGs end of Dec 2015

DCF PROCESS Global partnership for development

2005 
World Summit
established the Deve-
lopment Cooperation 
Forum (DCF)

OECD DAC PROCESS Modernising the ODA definition: ongoing

Expert Reference Group on external financing for development:
for improved DAC measurement and monitoring of external development finance

Other
Reports

July 2014 
Development
Cooperation Forum

2011
Busan Fourth High
Level Forum on Aid
Effectiveness
establishes GPEDC

GPEDC GLOBAL PARTNERSHIP PROCESS

COMMONWEALTH SECRETARIAT Commonwealth Heads of Government Meeting

Colombo Declaration establishes the High-Level Working Group of Heads to identify 
Commonwealth perspectives/recommendations to be advanced by individua 
 member governments at UN GA 69th session (where this process ends)

Sustainable Development Solutions Network (UN SDSN) established 12 thematic groups of global experts; supports the HLP

Oct 2013 – released report
(recommendations) to the SG

Global Commission on the Economy & Climate established operational in Oct 2013

To release report in Sep 2014

Other reports released in 2012, 2013, 2014 and 2015 World Bank, MDBs, WEF, NGOs, Think tanks

ERD 2013 / ERD 2015

Feb 2012 - June 2013 - Post-2015: global action 
for an inclusive and sustainable future

Oct 2013 - Dec 2014 
Financing in the post-
2015 context

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CHAPTER 1. Introduction  1.2  The policy challenges

and 

T he  global  policy  processes  for  designing 

implementing  an  ambitious  and 
transformative post-2015 agenda are taking place 
in  a  context  that  differs  significantly  from  when 
the  MDGs  were  agreed.  The  balance  of  global 
economic  and  political  power  is  shifting,  with 
new  state  and  non-state  actors  becoming  more 
prominent and better able to support international 
development, whereas traditional donor countries 
(largely  those  belonging  to  the  Organisation 
for  Economic  Co-operation  and  Development 
(OECD))  have  experienced  economic  setbacks. 
The  world  is  changing  rapidly:  forecasts  of 
economic,  demographic  and  environmental 
trends all point to the urgent need for coordinated 
and effective global collective action to tackle the 
economic,  social  and  environmental  aspects  of 
development (ERD 2013).

In relation to finance, despite progress in a number 
of areas, neither the financial system nor the policy 
environment remain fully fit for purpose, and even 
less so in relation to meeting future needs. By way 
of illustration (and these challenges are discussed 
further in the Report and/or in the commissioned 
Background Papers):

 Developing and emerging economies have been 
driving  global  growth  over  the  past  decade, 
but  the  world  economy  remains  vulnerable  to 
financial  shocks,  with  the  risk  of  volatile  and 
unpredictable  trading  conditions  and  financial 
flows.

  There has been modest progress in developing 
global  trade  and  climate  rules 
in  recent 
years,  but  calls  to  strengthen  global  financial 
governance,  including  regulation  of  banks 
and  governance  of  the  Multilateral  Financial 
Institutions  (MFIs)  mean  that  this  issue  is 
attracting greater attention at the global level. 

1.2

The  challenge  is  to  promote  a  global  financial 
system  that  encourages  the  mobilisation  and 
effective  use  of  global  savings  to  support 
sustainable development.

 Private  capital,  which  often  appears  to  be  in 
abundant  supply  –  as  suggested,  for  example, 
by  the  $70  trillion  (tr)  (Kaminker  and  Steward, 
2012) held by institutional investors worldwide – 
is highly selective in where it flows, what it funds 
and on what terms. It favours financial markets 
in developed countries, fast-growing emerging 
economies, the extractive sectors and the formal 
economy,  including  larger,  established  firms. 
It  requires  large  lending  margins,  and  often 
bypasses  small  and  medium-sized  enterprises 
(SMEs) in productive sectors, and people living in 
poverty, of which 2.5 billion do not use banking 
services.  Achieving  the  SDGs  will  require  the 
mobilisation  of  resources  from  private  sources 
including  foreign  direct  investment  (FDI),  bank 
loans,  bond  issuance,  equity  and  other  risk 
capital  and  private  transfers.  Leveraging  more 
private resources will entail creating a supportive 
investment climate as well as exploring ways to 
use public funds in order to combine public and 
private  finance  through  mechanisms  such  as 
blended loans or guarantees schemes.

 Concessional  loans  and  grants  are  stagnating 
(although ODA reached a record high in 2013) 
and are also selective in where they flow. They 
do  not  systematically  prioritise  the  poorest 
economies,  can  be  unpredictable  and  are 
not  always  as  effective  as  they  might  be.  The 
challenge is how to make use of ODA in a more 
transformative way.

 While  domestic  tax  revenues  are  growing 
income  groupings,  systems 
in  all  country 
of  domestic  revenue  mobilisation  (DRM)  in 
developing  countries  are  immature,  leading  to 
low or inefficient tax collection, high levels of tax 
evasion, and capital flight. The challenge is how 
to raise domestic tax revenues in a way that can 
best support sustainable development.

  Although  the  global  community  is  placing  the 
spotlight  on  international  tax  regimes,  these 
remain poorly  regulated,  with too much scope 
for  tax  avoidance,  tax  evasion  and  transfer 
pricing, which permits the extensive use of tax 
havens. The challenge is to promote collective 
action on global tax rules.

  An  increasing  share  of  global  trade  takes  place 
in  Global  Value  Chains  (GVCs)  coordinated  by 
transnational corporations (TNCs). This is beneficial 
for those who participate in GVCs, but may make 
it  harder  for  small  businesses  from  developing 
countries to integrate easily and expand trade. 

regulatory 

 With  some  notable  exceptions,  poor  policy, 
frameworks,  weak 
inappropriate 
institutions and/or low absorptive capacities often 
restrict the ability of poor countries to attract and 
make effective use of development finance. 

In  the  post-2015  context,  therefore,  mobilising 
additional  financial  resources  to  pursue  specific 
development  goals  will  not  suffice.  Such  efforts 
need  to  be  complemented  with  an  improved 
regulatory and policy framework, both national and 
international,  along  with  investments  in  absorptive 
capacity in order to make more effective use of FFD. 
Indeed,  finance  and  policy  are  synergistic:  better 
policy-making is needed to make the most effective 
use of finance but also to attract and channel new 
financial resources to where they are most needed. 

In  order  to  formulate  actions  to  overcome 
such  challenges,  the  main  research  question 
addressed in this Report is: ‘How can financial 
resources  be  effectively  mobilised  and 
channelled and how can they be combined with 
selected  policies  to  enable  a  transformative 
post-2015 agenda?’ Further research questions 
are set out in Box 1.2 below.

Box 1.2 | Further research questions

1      What does the current literature say about the gaps in finance for achieving specific development objectives, 
what are its underlying assumptions, and how do complementary policies affect projections and estimates?

Chapter 2

2      What financial flows and instruments are available to different types or groups of developing countries to 
best  tackle  the  domestic  and  international  post-2015  development  agenda,  and  what  selected  policies 
might support their efforts in this direction?

Chapter 3 / 4

3      How  have  financial  flows  generated  by  or  channelled  to  developing  countries  evolved  and  how 
is  it  anticipated  that  they  will  change  in  the  future?  What  are  their  main  differences  (e.g.  public 
or  private,  volatile  or  sustainable,  short  or  long  term,  channelled  via  bilateral  or  multilateral 
institutions,  grants,  loans  or  guarantees,  budget  support  or  sector-specific)?  And  what  are  the 
advantages  and  disadvantages  associated  with  the  principal  changes?  How  are  financial  flows 
expected to evolve? 

Chapter 3

4      How can different countries and partners (e.g. donors of ODA or providers of South–South Cooperation 

Chapter 4 / 6

(SSC)) mobilise finance?

5     How  can  financial  flows  and  instruments  be  effectively  used  to  promote  a  transformative  post-2015 
development agenda? How can complementary policies make different financial flows more effective? 

Chapter 4 / 6

6      What are the options for the international community (at the global and national level) to adopt an enabling 

Chapter 7

financial and policy environment for the post-2015 development goals?

7    What does this mean for the post-2015 FFD framework? And which institutions should do what? 

Chapter 7

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Combining finance and policies to implement a transformative post-2015 development agenda | 53

CHAPTER 1. Introduction 
 
 
 
 
 
 
 
A  principal  aim  of  this  Report  is  to  determine 
under which circumstances policies have made an 
important impact on mobilising finance and using it 
more effectively – as well as cases where this has not 
been achieved – through the use of commissioned 
Country Illustrations (see Section 1.4) and lessons 
to be drawn from the global picture.

  1.3  What the Report aims to contribute

S everal academic studies and policy documents 

have discussed the role of finance in different 
dimensions  of  sustainable  development  (e.g. 
ERD commissioned Background Paper Cadot, et 
al.,  2015;  Hansen  and  Tarp,  2001;  Galiani  et  al., 
2014;  Manning,  2009;  Beck,  2013;  IMF,  2012; 
UNCTAD,  2014;  OECD  DAC  DCR,  2014;  World 
Bank,  2013;  ICESDF,  2014).  Most  policy  reports 
(e.g. OECD DAC DCR, 2014; World Bank, 2013; 
ICESDF, 2014) examine these questions from the 
starting point of finance. By contrast, this Report 
starts  from  development  objectives  (focusing  on 
the enablers of development) and then presents 
a  framework  on  how  finance  and  policies  can 
contribute to achieving them. The Report focuses 
specifically  on  evidence  on  the  links  between 
finance and policies and aims to encourage joint 
discussions on them. This approach leads to three 
contributions  to  the  literature:  first,  the  Report 
considers  a  range  of  financial  flows  rather  than 
focusing on ODA alone; second, it examines the 
role  of  selected  enablers  or  long-term  drivers  of 
sustainable  development;  and  third,  it  provides 
further evidence on the way in which finance and 
policy are interlinked in contributing to sustainable 
development via the enablers. We briefly discuss 
these in turn. 

First,  debates  on  the  post-2015  context  are 
moving away from projecting future financial needs 
or focusing exclusively on ODA to meet identified 
needs  that  characterised  the  implementation  of 
the MDGs. While ODA can play a useful catalytic 

role, it is important to consider all financial flows 
and  to  emphasise  other  types  of  FFD,  including 
DRM,  international  and  domestic  private  capital 
flows and SSC.

focus  on 

Second,  the  Report  emphasises  that  action  to 
achieve  a  transformative  vision  of  sustainable 
development  must 
the  enablers 
of  change,  and  not  merely  on  the  intended 
outcomes.  Enablers  are  defined  as  the  key 
drivers  that  contribute  to  a  transformative  post-
2015  development  agenda.  For  example, 
technology 
(2014a)  highlighted 
the  OWG 
and  infrastructure  as  ‘enablers’  of  sustainable 
development.  Developing  infrastructure  is  an 
important  foundation  for  achieving  other  goals. 
Similarly, the OECD lists access to technology and 
governance as important enablers for sustainable 
development (OECD 2014b, 2014c).

Third, there is to date insufficient evidence on the 
link between finance and policy in contributing to 
a transformative post-2015 development agenda. 
This  Report  suggests  how  these  are  linked  to 
selected  ‘enablers’  in  different  country  contexts, 
particularly  focused  on  findings  from  low-income 
and  middle-income  countries  (LICs  and  MICs), 
and  offers  evidence  on  how  best  to  promote 
a  conducive  global  environment  for  poverty 
eradication  and  sustainable  development. 
In 
presenting this evidence the Report aims to answer 
the main research question presented above.

  1.4  Evidence used to inform the Report 

Key evidence used in this Report centres on:

 The  lessons  from  the  MDGs  with  regard  to 
FFD,  including  the  importance  of  the  policy 
context in relation to a range of financial flows.

 A review of financial flows to different country 
income  groupings  from  1990  and  innovative 

sources  of  FFD,  emphasising  the  need  to 
consider  a  range  of  flows,  of  which  ODA  is 
only one.

 A  review  of  the  role  of  domestic  and 
international policy in mobilising and making 
more  effective  use  of  finance  in  six  areas 
(i.e.  local  governance,  infrastructure,  human 
capital, biodiversity, green energy technology 
and trade).

We analyse the above issues in detail and present 
a  unified  framework  within  which  to  consider 
them,  drawing  on  examples  to  illustrate  how 
finance  and  policies  work  together  to  develop 
selected enablers of sustainable development.

We  examine 
the  definition,  evolution  and 
challenges  in  domestic  and  international,  public 
and  private  financial  flows  for  different  country 
income  groupings.  We  present  a  number  of 
graphics, some based on standard techniques and 
others on more complex, quantitative displays.

We  review  the  empirical  evidence  on  the  link 
between  finance  and  policy,  by  type  of  flow 
and  selected  enablers.  We  distinguish  between 
domestic  and  international  policies  to  mobilise 
finance  and  policies  to  ensure  its  effective  use. 
In practice, however, policies for the mobilisation 
and  effective  use  of  finance  often  overlap  and 
both  domestic  and  international  policies  can 
support the enablers.

The  literature  forms  the  basis  for  our  selection  of 
six  crucial  enablers  across  the  three  dimensions  of 
sustainable  development  on  which  to  focus:  local 
governance, infrastructure, human capital, biodiversity, 
green energy technology and trade. We then present 
a framework in which different types of finance flows 
and policies contribute to these enablers.

A set of ERD commissioned papers form a crucial 
part  of  the  evidence  gathered  for  this  Report: 
Country Illustrations (CIs), Background Papers and 
Modelling Studies.

Commissioned Country IIlustrations 

ERD Country Illustrations (CIs) were commissioned 
on  Bangladesh  (Khatun,  2015),  Ecuador  (Borja 
and  Ordóñez,  2015),  Indonesia  (Damuri  et  al., 
2015),  Mauritius 
(Treebhoohun  and  Jutliah, 
2015),  Moldova  (Ghedrovici,  2015)  and  Tanzania 
(Lunogelo  et  al.,  2015).  These  provide  evidence 
on links between finance and policy for selected 
enablers  of  sustainable  development,  and  how 
these  affect  social,  economic  and  environmental 
dimensions in a transformative vision of sustainable 
development, and so provide illustrative examples 
of the main issues discussed in this Report.

The  CIs  provide  country-level  evidence  on  the 
types  of  finance  and  policies  from  1990  to  the 
present  that  have  helped  to  achieve  national 
development  objectives.  The  evidence  includes 
descriptive  observations  on  finance  and  policies 
as  well  as  on  development  achievements.  The 
CIs  are  not  intended  to  give  a  comprehensive 
overview  of  links  between  finance  and  policies 
for  sustainable  development,  but  rather  to  offer 
country-specific examples of finance and policies 
that have worked or failed in the chosen countries. 
These  include  LICs  and  MICs  from  the  EU,  Asia, 
Africa  and  Latin  America.  The  countries  were 
also  selected for  the  insights  they  could provide 
into  the  economic,  social  and  environmental 
dimensions  of  sustainable  development, 
for 
instance  where  they  have  achieved  particularly 
remarkable  structural  transformation  or  social 
development. 

The CI synthesis (Bhattacharya, 2015) summarises 
the key findings on the role of different financial 
flows  in  the  six  countries.  In  general,  their 
evolution  follows  an  upward  trajectory  from 
international  public  finance  to  domestic  public 
finance  and  domestic  and  international  private 
finance.  Bhattacharya  (2015)  discusses  how  tax 
revenues  help  to  finance  infrastructure,  social 
development  and  green  energy  technology. 
Although ODA is declining in relative importance, 
contributing  only  a  part  of  the  finance  flows  in 

1.3 - 1.4

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Combining finance and policies to implement a transformative post-2015 development agenda | 55

CHAPTER 1. Introduction 
 
 
the six countries, it can be particularly important 
in  providing  government  budgetary  support 
for  small-scale  and  strategic  projects.  There  is 
also  a  positive  trend  in  domestic  credit  for  the 
private  sector  across  these  countries,  which  is  a 
good  indicator  of  economic  development.  On 
the  other  hand,  FDI  inflows  have  declined  and 
become  more  volatile  following  the  2007–2009 
global  financial  crisis,  and  infrastructure  gaps, 
low  investment  security  and  political  instability 
are  among  the  major  deterrents  of  FDI  flows  to 
these countries. In general, Bangladesh, Ecuador, 
Indonesia,  Moldova,  Tanzania  –  and  to  some 
extent  Mauritius  –  are  characterised  by  a  lack  of 
financial innovation and underdeveloped financial 
markets, which can be attributed to low demand 
(e.g.  for  their  industry  and  services  sectors)  and 
difficulties with monitoring and regulation.

Bhattacharya (2015) notes that for the LDCs and 
LMICs  (Bangladesh,  Indonesia,  Moldova  and 
Tanzania)  there  are  opportunities  to  increase  tax 
revenues, which is the most sustainable source of 
finance  for  critical  infrastructure,  climate-resilient 
and  social  development.  Pursuing  more  public–
private partnerships (PPPs) is a promising option 
for these countries in order to meet infrastructure 
needs  that  exceed  government  budgets.  To 
differing degrees, ODA could continue to play a 
catalytic role in all six countries, since it is largely 
directed  towards  small  and  strategic  projects 
pertaining  to  climate  resilience,  trade  finance, 
health, education and infrastructure. Remittances 
from  overseas  migrant  workers  will  continue  to 
be  important  for  Moldova  and  Bangladesh,  and 
policies  to  promote  this  potential  could  include 
training programmes for aspiring migrant workers 
and  re-integration  programmes  for  those  who 
return,  as  well  as  more  available  credit  for  both 
groups.  Improving  and  supporting  FDI  is  a 
priority  for  all  six  countries  and  the  currently 
weak  inflows  indicate  the  need  for  improved 
infrastructure, accountability and transparency, as 
well as investment security and political stability. 
Finally, financial innovation and the development 
of financial institutions are critical, assuming that 

these  are  tailored  to  local  conditions.  Despite 
these common financial trends and ways forward, 
each country pursues policies suited to its unique 
context  in  order  to  mobilise  and  make  effective 
use of the different sources of FFD.

Commissioned Background Papers 

ERD  Background  Papers  were  commissioned  to 
provide further evidence on issues such as taxation 
and  development,  the  roles  of  development 
finance, climate finance, the role of MDGs in LICs, 
SSC,  and  finance  for  agriculture.  These  inform 
Chapters  2–6,  and  each  Background  Paper  is 
discussed below.

Brun and Chambas (2015) provide an overview of 
tax  transition  in  developing  countries,  finding  a 
sharp increase in government revenues between 
1980  and  2012  –  ‘by  reducing  the  contribution 
of  taxes  that  were  causing  the  most  important 
distortions  (tariffs),  tax  reforms  broadened  the 
fiscal  space  and  increased  the  optimal  level  of 
tax  revenues’.  They  also  explore  the  types  of  tax 
pursued 
(including 
in  developing  economies 
direct  and  indirect  taxation),  and  comment  that 
opportunities  opened  up  by  the  post-2015 
development agenda include the potential for tax 
law and building the capacity of tax administrations.

Büge  et  al.  (2015)  find  that  when  international 
instruments  are 
biodiversity  programmes  and 
carefully  aligned  with  broader  development 
objectives, 
synergies  between  biodiversity 
conservation  and  economic  development  can 
be  achieved  and  trade-offs  minimised.  Efficient 
use  of  finance  relies  on  a  sound  and  coherent 
policy framework, with financing also required for 
creating and implementing appropriate supporting 
policies. Current biodiversity financing is aimed at 
about $50 billion (bn) per year (of which less than 
half  is  spent  in  developing  countries),  but  the 
finance needed to halt biodiversity loss is esimated 
to  be  six  to  eight  times  higher  than  this.  Beyond 
financing,  a  better  understanding  of  the  cycle  of 
biodiversity  conservation  financing  can  help  in 

addressing country- or region-specific bottlenecks 
and in designing adequate supporting policies.

transparent dialogue among financial institutions, 
regulators, policy-makers and other stakeholders 
on financing sustainable development.

Cadot et al. (2015) test whether ODA is targeted 
at  sectors  which  are  bottlenecks  to  productivity 
elsewhere in the economy. Controlling for various 
factors,  they  find  evidence  of  weak  targeting  of 
ODA  to  such  sectors,  with  effects  dependent 
on  the  type  of  donor,  mode  of  delivery  and 
the  income  level  of  the  recipient  country.  They 
conclude  that  focusing  ODA  on  weak  links  in 
order to remove obstacles to productivity growth 
would  not  involve  a  radical  rethinking  of  donor 
policies  but  would  require  stronger  and  more 
explicit targeting of spending.

FS-UNEP  (2015)  find  that  new  investment  in 
renewable energy has waned since 2011, since it 
has been negatively affected by policy uncertainty 
and  retroactive  reductions  in  public  support. 
In  2013,  almost  75%  of  total  investment  was 
in  the  country  of  origin,  indicating  a  preference 
for  familiar  projects  as  they  are  perceived  to  be 
less  risky.  They  conclude  that  domestic  policy 
frameworks  are  important  for  unlocking  greater 
climate  finance  flows.  They  further  note  the  key 
role  for  the  public  sector  in  mitigating  the  risks 
associated  with  providing  low-cost  capital  for 
investors and setting up national climate finance 
institutions.

Griffith-Jones et al. (2015) discuss the challenge of 
encouraging the financial sector to serve the real 
economy, by enhancing its role in intermediating 
savings for funding enterprises and households in 
a sustainable way.  It  discusses  the role  of  strong 
and effective regulation in (i) raising the solvency 
and liquidity of banks, (ii) reducing the amount of 
financial activity of a more ‘speculative’ kind, such 
as many of the activities of unregulated ‘shadow 
banking’,  and 
(iii)  encouraging  sustainable 
financing  for  the  real  economy.  It  argues  that  a 
greater  involvement  of  the  users  of  finance  (e.g. 
trade 
non-financial  corporations,  consumers, 
unions)  in  designing  such  rules  may  be  a  useful 
way  forward.  This  can  be  achieved  by  open  and 

Rahman  et  al.  (2015)  argue  that  LICs’  national 
policies and public expenditure, as well as ODA, 
have  responded  to  the  MDGs.  This  degree  of 
response  varies  across  countries  and  sectors. 
There  is  a  growing  tendency  in  LICs’  policy 
documents  to  deal  with  MDG-related  areas  and 
address these in a more comprehensive manner. 
In  the  key  social  sectors  (such  as  education, 
health  and  social  protection)  public  expenditure 
in  LICs  overall  increased  significantly  as  a  share 
of GDP compared with the pre-MDG period. The 
absolute amount of ODA received doubled in the 
post-2000  period  compared  with  the  previous 
decade.  A  key  constraint  the  authors  found  in 
preparing the paper is the need for more reliable 
data, which needs to be addressed as part of the 
post-2015 agenda.

Sarris (2015) finds that agricultural transformation 
entails  considerable  financial  needs  due  to  the 
demands to improve productivity, requiring capital 
upgrading and short-term financing for production 
inputs. The lack of financing could potentially be 
a  constraint  on  agricultural  development  and 
poverty reduction. Government expenditure and 
other  investments  in  agriculture  are  inadequate 
in  most  developing  countries.  The  bulk  of 
financial  flows  to  the  sector  are  private,  while 
public flows are at very small levels and there are 
considerable  fluctuations  in  ODA  commitments. 
The  paper  recommends  that  most  agricultural 
transformation  and  poverty  reduction  should  be 
based  on  smallholder  models  of  development, 
and  explores  five  alternative  growth  pathways 
through different models of rural financing.

Uneze  (2015)  examines  SSC,  including  ODA, 
trade,  FDI  and  remittances.  In  many  instances, 
most  official  assistance  either  goes  to  countries 
within  the  donors’  or  providers’  region  and 
is  focused  on  economic  infrastructure  or  is 
concentrated  in  resource-rich  countries,  as  well 

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Combining finance and policies to implement a transformative post-2015 development agenda | 57

CHAPTER 1. IntroductionUsing  the  MAMS  model,  Levin  (2015b)  finds 
that  the  financial  needs  to  achieve  the  MDGs 
in  Bangladesh  are  not  overwhelming,  and 
that  these  could  be  achieved  by  2021  with  a 
combination  of  reforms  such  as  deepening  of 
tax reforms and reallocation of public spending 
towards  primary  education,  as  well  as  foreign 
including  terms 
borrowing.  External  shocks, 

of  trade,  FDI  and  remittances  have  potentially 
strong  and  significant  macroeconomic  effects, 
and  so  could  be  detrimental  to  achieving  the 
MDGs,  particularly  when  they  are  combined. 
On the other hand, a combination of favourable 
shocks  would  make  significant  contributions 
towards achieving the MDGs.

as  being  used  to  promote  trade  and  investment 
among  recipient  countries.  SSC  has  increased 
the  financial  investment  in  MDG-related  sectors, 
although  the  impact  of  such  flows  remains  low. 
SSC does, however, promote domestic ownership 
and  the  adoption  of  new  technology  and  helps 
to  reduce  aid  uncertainty.  It  will  be  important 
that SSC becomes more coordinated in order to 
improve its effectiveness, with more standardised 
and transparent data recording, good governance 
and improved engagement with the private sector.

sectors  in  reaction  to  different  policy  changes  – 
for  example,  industry  does  not  seem  to  depend 
on  transport  infrastructure  as  much  as  primary 
production.  Increased  FDI  and  improved  access 
to  finance  are  more  important  constraints  for 
primary production and services than for industrial 
production,  for  which  external  demand  is  most 
important. For infrastructure, it is more beneficial 
to obtain foreign sources of investment (assuming 
the  necessary  administrative  and  absorptive 
capacity to handle a surge in external resources).

Commissioned Modelling Papers 

Two types of modelling studies were commissioned 
in  order  to  explore  some  of  the  relationships 
between  finance  and  policies  for  the  enablers 
(e.g.  infrastructure)  in  greater  depth:  modelling 
on Bangladesh (Kinnunen, 2015), Moldova (Levin, 
2015a)  and  Tanzania  (Levin,  2015b)  and  other 
modelling exercises (see Table 1.1) 

Fic (2015) models the impact of global economic 
policies, including the withdrawal of  quantitative 
easing  (QE),  implementation  of  Basel  III  and 
tackling tax evasion in developed and developing 
countries  and  across  different  regions.  The 
NiGEM modelling indicates that QE withdrawal is 
accompanied by a substantial rise in bond yields 
and interest rates, and substantial macroeconomic 
impacts  in  developed  countries  compared  to 
developing countries. Implementation of Basel III 
rules show the associated GDP costs are several 
times less than the benefits of higher capital and 
liquidity. Policies to tackle tax evasion and transfer 
pricing  would  increase  output  in  developing 
countries.

Kinnunen (2015) uses the MAMS model to explore 
the potential evolution of the Moldovan economy 
until  2030  using  a  set  of  external  and  domestic 
shocks  and  policy  changes.  The  study  finds  that 
market-related reforms are beneficial but do not 
necessarily  benefit  the  whole  population  in  the 
absence of government measures to redistribute 
the gains of growth. There are differences across 

Lenhardt  (2015)  finds  that  baseline  projections 
using  the  International  Futures  (IF)  model  would 
not be sufficient to eradicate extreme poverty in 
LICs by 2030 – with a different mix of finance and 
governance reforms necessary in different country 
contexts.  There  are,  however,  some  common 
trends.  For  example,  if  OECD  countries  met  the 
0.7% ODA target this would reduce the proportion 
of people living below $1.25 per day by a further 
8%  from  the  baseline,  which  if  combined  with 
increased  LIC  government  effectiveness  would 
decrease poverty by a further 3%. Combined with 
increased government effectiveness, FDI resulted 
in a decline in extreme poverty in lower middle-
income countries (LMICs) by 7% (compared with 
10% in the baseline) and was nearly eliminated in 
upper middle-income countries (UMICs) by 2030 
(using a rate of change of FDI to GDP of 1.4%).

Levin  (2015a)  MAMS  modelling  finds  that  fewer 
financial  resources  are  required  to  meet  the 
MDGs in Tanzania by 2015 than in 2025, requiring 
an  average  of  8%  GDP  in  ODA  disbursements 
(2005–2025),  which  is  lower  than  current  levels. 
Higher  productivity  growth  has  a  higher  impact 
on  MDG1  (to  eradicate  extreme  poverty  and 
hunger). The study also finds a trade-off between 
spending on infrastructure and on sectors relating 
to  human  development,  such  as  education  and 
health. Further GDP growth, FDI and total factor 
productivity  growth  could  make  it  easier  to 
achieve the MDGs.

58 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 59

CHAPTER 1. IntroductionAn overview of all the commissioned papers is presented in Table 1.1.

Table 1.1 | Overview of commissioned papers

COMMISSIONED PAPERS

OUTLINE

Country Illustrations

Borja, I. and Ordóñez, A. (2015) Ecuador

Damuri, Y., Setiati, I., Atje, R. and Santoso, B. (2015) Indonesia 

Ghedrovici, O. (2015) Moldova 

Khatun, F. (2015) Bangladesh 

Lunogelo, H. et al. (2015) Tanzania 

Treebhoohun, N. and Jutliah, R. (2015) Mauritius 

Background Papers

Finance and policies for enablers of sustainable 
development transformation in respective 
country contexts.

Bhattacharya, D. (2015) Synthesis of the Country Illustrations 
to the European Report on Development 2015

Synthesises the findings of the CIs.

Büge, M., Meijer, K. and Wittmer, H. (2015) International financial 
instruments for biodiversity conservation in developing countries 
 - constraints and success stories

Examines international programmes and financial instruments 
for biodiversity conservation.

Brun, J.-F. and Chambas, G. (2015) How do tax systems evolve 
as countries achieve structural transformation?

Focuses on the transition of tax systems with income growth, 
and opportunities for the post-2015 agenda to promote DRM.

Cadot, O., Engel, J., Jouanjean, M-A., Ugarte, C. and Vijil, M. 
(2015) Is ODA targeted at weak links?

Explores the correlation of ODA targeting to upstream productive 
services sectors with productivity in downstream sectors.

Griffith-Jones, S., Katseli, L. and te Velde, D.W. (2015) 
A world financial network - bringing financial institutions 
into the development debate

Explores opportunities for dialogue between financial institutions 
and policy-makers on financing sustainable development.

Frankfurt School-UNEP Centre (2015) Financing for sustainable 
energy systems in developing countries and emerging economies

Examines sustainable energy finance global trends 
and developing country case studies and instruments.

Rahman, M., Khan, T.I. and Sadique, Z. (2015) Impact of MDGs 
on public expenditures in LICS in the context of post-MDGs

Provides an overview of the impact of MDGs on LICs national 
policy and public expenditure (including ODA flows).

Sarris, A. (2015) Financial tools for agricultural development 
and transformation pertinent to low-income and low-middle-
income countries

Examines the process, financial needs, 
and financial tools for agricultural transformation.

Uneze, E. (2015) Impact of South–South Cooperation 
in achieving MDGs in LICs

Reviews trends, impacts and future 
prospects for SSC.

Modelling studies

Fic, T. (2015) Global economic policies and developing countries: 
NiGEM scenarios for the post 2015 Agenda

Models global Basel III implementation, 
quantitative easing and tackling tax-evasion shocks.

Kinnunen, J. (2015) The role infrastructure, finance and FDI 
in boosting growth of Moldova - MAMS-based analysis

Models infrastructure investment, 
financial sector performance and FDI shocks in Moldova.

Lenhardt, A. (2015) Scenario modelling of improved financial 
and non-financial MOI of a post-2015 agreement

Models the impact of FDI and ODA shocks in country income 
groupings, and scenarios for Mauritius to escape the MIC trap by 2030.

Levin, J. (2015a) MDG achievement in Tanzania 
- is it possible? MAMS-based analysis

Levin, J. (2015b) Policy options beyond 2015 
- achieving the MDGs in Bangladesh

Models scenarios for achieving 
the MDGs in Tanzania by 2025.

Models scenarios for achieving 
the MDGs in Bangladesh by 2021.

  1.5  Structure of the Report 

The Report comprises seven chapters. 

Following this introduction, Chapter 2 presents a critical review of the literature 
on development finance needs. In particular, it reviews the FFD agenda following 
the conclusion of the MDG period. The review points to the importance of moving 
from a focus on gaps in financing needs to understanding the role of finance in 
a  transformative  agenda,  and  to  the  role  of  policies  in  mobilising  finance  and 
making it more effective.

Chapter 3 presents developments in financial flows since the 1990s for different 
country  income  groupings.  It  identifies  the  distinctive  roles  of  different  finance 
flows in each grouping, while highlighting the need to look at a range of finance 
flows,  including  ODA,  but  also  at  domestic  public  flows  and  domestic  and 
international private flows.

Chapter  4  reviews  the  empirical  evidence  on  the  role  of  policies  that  can  help 
to mobilise and use financial flows effectively. This underlines the crucial role of 
policies in a Finance and Policy Framework for Development (FPFD).

Chapter  5  presents  the  Report’s  methodological  framework,  linking  financial 
flows,  policies  and  selected  enablers  for  achieving  sustainable  development.  It 
then explains the selection of six enablers that are used in Chapter 6 to analyse 
the role of finance and policies.

Chapter  6  examines  how  finance  and  policies  contribute  to  the  enablers 
(infrastructure,  trade,  green  energy  technology,  biodiversity,  human  capital  and 
local governance), including reviews and new evidence based on the background 
and modelling papers, as a means to answer the main research question.

Chapter 7 summarises the main conclusions from Chapters 2–4 and synthesises 
the  links  between  finance  and  policy  set  out  in  Chapter  6.  It  argues  that  two 
main pieces of evidence are crucial to the post-2015 development agenda. First, 
sources  of  finance  evolve  by  level  of  income  and  vary  by  the  various  enablers, 
and  it  is  important  to  think  about  the  ways  in  which  the  range  of  finance  flows 
in different contexts and to be alert to how the flows interact, e.g. the role that 
international  public  finance  can  play  in  being  more  catalytic.  Second,  there  is  a 
crucial role for policy, which includes national policy and finance frameworks and 
the global system.

1.5

60 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 61

CHAPTER 1. IntroductionCHAPTER 2.

Main lessons from studies 
on MDG finance needs

Main messages 

2.1 

 Reviewing the basis of the studies 
on MDG finance needs 

2.2    The scale of finance required: 

comparing MDG and post-2015 contexts 

2.3 

 Finance needs studies:  
achievements and lessons for financing 
post-2015 development goals

63

64 

71 

77 

2.

Main Messages

The  lessons  learned  from  the  implementation  of 

the MDGs suggest that we need a completely new 

approach  towards  finance  for  development.  This 

chapter  draws  three  main  messages  from  a  review  of 

the studies on MDG finance needs:

 A range of studies on finance needs supported the 

implementation  of  the  MDGs.  They  emphasised 
financial  gaps  to  be  filled  with  aid,  but  this 
represented only a partial vision of how needs could 

best  be  met.  Furthermore,  the  financing  context 

has  since  changed  with  other  flows,  private  and 

domestic public, becoming much more important. 

We need to move from aid as a ‘silver bullet’ to 

considering all available sources of finance. 

 The  focus  on  finance  needs  associated  with  the 
MDGs  often  ignored  the  role  of  policy,  which  is 
crucial.  There  is  therefore  a  need  to  think  beyond 

either  ’only  policies‘  or  ‘only  finance’  and  instead 

promote discussions that can foster joint thinking 

on appropriate policies and finance.

 The  MDGs  successfully  attracted  ODA  for  specific 

social  sectors,  but  in  a  post-2015  context  with  an 

agenda that seeks to be more comprehensive and 

transformative,  it  is  important  to  consider  long-
term  enablers  for  such  an  agenda.  This  requires  a 
new way of thinking about the role of different 

finance  sources  and  a  better  understanding  of 

structural transformation.

Combining finance and policies to implement a transformative post-2015 development agenda | 63

 
 
 
T he  way  in  which  the  role  of  finance  for 

development  is  conceptualised  matters  a 
great deal – and there is a need to think about 
it  in  a  different  way  in  the  post-2015  context 
than was the case for the MDGs. The adoption 
of  the  MDGs  in  2000  was  followed  by  various 
studies to estimate the financial needs required to 
reach  them.  It  was  often  implicitly  assumed  that 
ODA would fill the gap between the available and 
necessary  finance  –  and  this  was  the  prevailing 
view  on  how  to  finance  development.  Certainly, 
more ODA was directed towards the social sectors 
and progress was achieved. Other financial flows 
(e.g. domestic resources) received less attention, 
as  did  the  context  within  which  finance  affects 
development. This must not be ignored again in 
the post-2015 context. 

This  chapter  reviews  the  lessons  drawn  from 
studies  on  finance  needs  that  were  intended 
to  support  the  implementation  of  the  MDGs. 
Reviewing  the  finance  needs  and  understanding 
their lessons underpins this Report’s approach to 
finance and policies for development.

The  chapter  is  structured  as  follows.  Section 
2.1  reviews  a  range  of  studies  on  financial 
needs,  looking  at  the  intellectual  origins  of  the 
framework  that  defined  the  MDG  approach  in 
which  a  shortage  of  savings  and  investment  was 
viewed  as  the  main  barrier  to  progress,  which 
ODA  was  supposed  to  overcome.  The  section 
also  summarises  different  approaches  to  finance 
needs  studies.  Section  2.2  discusses  estimates 
made  in  selected  studies.  This  section  does  not 
aim to be comprehensive (other accounts include, 
for example, the ICESDF report and background 
paper and supporting UNTT reports), but rather to 
show how the scope of the studies has changed 
from considering mainly social goals (e.g. health 
and  education)  that  characterised  the  MDGs 
to  issues  such  as  infrastructure  or  limiting  the 
increase  in  global  temperature,  currently  under 
discussion. Section 2.3 relates the lessons learned 
from past studies that inform the approach taken 
in this Report.

2.1

  2.1 

 Reviewing the basis of the studies 
on MDG finance needs

in 

in  order 

the  MDG  context  and 

This section reviews the intellectual underpinning 
of  the  studies  on  finance  needs  that  were 
undertaken 
the 
to  calculate 
methodologies  used 
them.  The  review  reveals  a  range  of  unrealistic 
assumptions that often underpinned these studies 
that  were  largely  ignored  in  making  the  case  to 
scale  up  ODA  in  order  to  meet  the  MDGs.  One 
assumption that we consider critically throughout 
the Report is that finance - and ODA in particular 
-  will  automatically  (with  fixed  multipliers)  lead 
to  development  outcomes  without  considering 
other finance flows, policies, or required structural 
changes. This chapter also discusses cases where 
modelling studies have improved upon or learned 
from the past.

2.1.1 

 The intellectual underpinning 
of the MDG approach to finance needs studies

The  studies  on  finance  needs  tended  to  regard 
ODA as a means to fill a finance gap similar to the 
‘take-off’ and ‘big push’ literature  developed by 
economists such as Arthur Lewis (1954), Walt Rostow 
(1960)  and  Paul  Rosentein-Rodan  (1943,  1961), 
with  the  underlying  idea  that  ODA  could  help  to 
‘unlock’ growth in developing countries. In this vein, 
the Harrod–Domar model was extensively used to 
calculate the finance required to achieve the MDGs, 
in particular the eradication of extreme poverty. In 
this line of thinking, the lack of capital accumulation 
and  investment  is  a  key  constraint  to  economic 
growth.  External  finance,  in  particular  ODA,  can 
launch a ‘take-off in self-sustained growth’. 

Drawing  on  this,  Chenery  and  Strout  (1966) 
developed  the  two-gap  model  used  to  justify 
ODA  and  still  widely  used  in  estimating  finance 
needs.  This  model  identifies  two  constraints  to 
economic development that could be addressed 
by ODA: the first is between import requirements 

for  a  given  level  of  production  and  foreign-
exchange  earnings  and  the  second,  the  most 
important gap in the finance needs literature, is the 
amount of investment necessary to attain a certain 
rate  of  growth,  taking  into  account  available 
domestic  resources.  One  important  feature  of 
this model is the ‘incremental capital-output ratio 
(ICOR)’, describing the additional capital required 
to obtain one unit of output. Various features and 
assumptions  of  this  model  have  been  criticised, 
particularly  within  the  literature  on  endogenous 
growth.  The  important  characteristic  of  the  two-
gap  model  is  that  ODA  (or  concessional  finance 
more  broadly)  is  seen  as  the  way  to  fill  the  gap. 
The underlying logic is that ODA should increase 
investment that in turn should increase growth.

William  Easterly  (2001)  challenged  the  empirical 
validity  of  the  model  by  testing  the  impact  of 
ODA on investment and the impact of investment 
on  growth  in  88  countries.  He  found  evidence 
of  a  correlation  between  ODA  and  investment 
in  only  six  countries.  Among  them,  Hong  Kong 
and China have only a small share of ODA in the 
economy with respectively on average 0.07% and 
0.2%  of  GDP  over  the  period  1965–1995.  Only 
four  countries  passed  the  second  step  of  the 
impact of investment on growth, and only Tunisia 
passed both. The model is still, however, used in 
many  studies  on  finance  needs  both  because  of 
its simplicity and because it has not been replaced 
by any other model linking ODA and growth.

Such  models  do  not  take  into  consideration 
why  there  is  a  shortage  of  finance  in  the  first 
place. Indeed, if there is too little investment due 
to a capital market imperfection in a situation that 
otherwise  has  an  enabling  investment  climate, 
it  is  reasonable  to  consider  that  ODA  could 
potentially overcome this. But if the constraint is a 
poor investment climate (governance failure) that 
offers little incentive to invest in the economy, in 
particular in fragile states, Easterly (2003) argues 
that  ODA  may  not  necessarily  result  in  more 
investment  since  it  would  not  alleviate  the  main 
constraint on incentives to invest, but would rather 

tend to finance consumption. In such a case, there 
is no link between ODA and growth because aid 
does not alleviate the constraint on investment. 

The  importance  of  considering  policies  and 
governance  became  central  to  the  discussions 
on  ODA  that  surrounded  the  2002  Monterrey 
Conference  on  Development  Finance,  with 
politicians and the media making use of results of a 
body of research highlighting their relevance to aid 
effectiveness. Burnside and Dollar (2000) argue that 
aid has a positive impact on growth in developing 
countries that have good fiscal, monetary, and trade 
policies, but has little effect in the presence of poor 
policies. Many other studies made variations of this 
analysis, some confirming and others rejecting their 
results (e.g. Hansen and Tarp, 2001; Dalgaard and 
Hansen,  2001;  Guillaumont  and  Chauvet,  2001; 
Collier and Dehn, 2001; Lensink and White 2001; 
Collier and Dollar, 2002; Jensen and Paldam, 2003; 
Brumm,  2003).  Mavrotas  (2003)  further  argues 
that the effects depend on the type of aid. Recent 
assessments of ODA are more positive: in 1994, an 
article in The Economist concluded that ‘Aid [goes] 
Down the Rat hole’, but 20 years later it published 
an  article  ‘Aid  to  the  Rescue’,  citing  a  World 
Bank  study  (Galiani  et  al.,  2014)  and  Brückner 
(2013),  both  of  which  find  strongly  positive  and 
significant effects of ODA on growth. In general, 
the  relationship 
is  sensitive  to  econometric 
specification  estimation  methods  as  well  as 
to  the  definitions  of  what  constitutes  ‘aid’  and 
‘good policy’: without a strong theoretical model 
underpinning  such  analyses,  each  specification 
is  ad  hoc.  Nonetheless,  ‘taking  into  account  the 
policy  environment,  [Burnside  and  Dollar,  2000] 
seemed to have found the missing link between 
the  micro-success  and  the  macro-failure  of 
aid’  (Harms  and  Lutz,  2005:  18).  Although  the 
discussions  on  aid  effectiveness  have  taken  into 
account the policy and institutional context within 
which ODA is provided, and while the estimates 
made  in  some  studies  are  contingent  on  certain 
scenarios  or  contexts,  most  studies  on  finance 
needs still ignore the policy context. 

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Combining finance and policies to implement a transformative post-2015 development agenda | 65

CHAPTER 2. Main lessons from studies on MDG finance needsfinancial  need  offers  more  flexibility  regarding  the 
sources that could fill the gap.

According to the UNTT a finance gap represents 
the  ‘difference  between  the  current  situation 
and  a  desired  situation’  in  relation  to  a  goal  or 
target,  or  the  difference  between  the  available 
and required finance to meet a specific objective 
(UNTT,  2013a:  33).  The  definition  of  a  gap  also 
depends  on  what  is  assumed  to  be  available. 
Some consider that available resources refer only 
to  domestic  resources  while  others  (e.g.  OECD, 
2011) include external financing – another source 
of inconsistency across studies.

take 

Studies  on  finance  needs 
important 
methodological  steps  in  five  areas:  choosing 
a  target:  mapping  the  means  by  which  it  can 
be  reached;  choosing  a  scenario;  choosing  an 
estimation  method;  and  other  considerations. 
While  the  resulting  approach  can  lead  to  new 
insights,  each  step  also  comes  with  a  set  of 
problems  that  need  to  be  addressed  if  the 
underlying  assumptions  are  unrealistic.  It  further 
explains  why  these  studies  are  not  strictly 
comparable.

A  major  objective  of  the  MDGs  was  to  broaden 
the  development  discourse  beyond  the  focus 
on  economic  growth.  Consequently,  they  served 
to  push  ODA  away  from  the  broader  emphasis 
on  economic  growth  even  though  the  overall 
approach was still aid-centred. The debate on aid 
effectiveness became a lively issue, as embodied 
by two economists: Jeffrey Sachs supporting the 
argument  for  increased  aid  based  on  the  ‘big 
push’ argument, and William Easterly criticising 
the MDGs’ ‘one-size fits-all’ and comprehensive 
approach to development, in particular the over-
reliance  on  ODA.  Debates  on  the  MDGs  have 
too often been caricatured as opposing ‘growth’, 
‘aid’  and  ‘governance’  (Vandemoortele,  2011), 
although  all  three  seemed  to  be  components  of 
the same package.

2.1.2 

 Methodological steps needed 
in finance needs studies

Many  studies  estimate  finance  needs  and  gaps 
either  by  ‘sector’  (e.g.  health,  education  or  the 
environment)  and/or  by  objectives  (such  as  the 
MDGs  whether  globally  or  at  the  country  level). 
We  have  reviewed  these  and  there  has  been 
a  proliferation  of  global  estimates.  As  Box  2.1 
describes,  there  have  also  been  different  types 
of  country-level  studies  to  estimate  the  cost  of 
achieving  the  MDGs.  We  refer  to  these  studies 
throughout  the  chapter  and  in  particular  to 
country-based  MAMS  modelling  commissioned 
for this Report.

Estimates of finance needs and gaps are based on 
underlying assumptions and vary widely according 
to the context and definition of a target. They also 
depend on the policy context and on how efficiently 
existing  financial  resources  are  used.  The  term 
‘cost’  refers  to  the  volume  of  finance  as  opposed 
to  ‘needs’.  This  suggests  that  those  supplying 
the  finance  make  interventions,  with  the  implicit 
assumption that they will be involved in seeking and 
providing resources to achieve a target. Embedded 
in the literature on the finance gap for the MDGs is 
the  assumption  that  ODA  will  fill  it.  Talking  about 

Box 2.1 | Approaches to costing the MDGs at the country level

There have been three approaches to costing the MDGs at the country level:

UNDP  country  studies:  In  the  early  2000s  the  United  Nations  Development  Programme  (UNDP)  piloted  country-level  costing 
exercises in Cameroon, Malawi, Uganda, Tanzania and the Philippines. The models focused on six MDGs: income poverty, primary 
education, child mortality, maternal health, HIV/AIDS and water. The methodology used differed across targets and countries and 
identified key interventions for each objective.

The Millennium Project: In 2005, the Millennium Project (directed by Jeffrey Sachs for the United Nations) published Investing in 
Development: A Practical Plan to Achieve the Millennium Development Goals. It was based on a number of country case studies 
to identify major ‘interventions’ required to achieve all eight MDGs in each of these countries. Expert task forces developed ‘MDG 
needs assessments’, compiling lists of technical interventions and associated investment plans to attain the MDGs. In education, for 
example, the list includes providing more schools and teachers, ending tuition fees, and providing books and uniforms. Countries 
included Bangladesh, Bolivia, Cambodia, Ghana, Malawi, Tanzania and Uganda. Local counterparts collected information on the unit 
costs of the interventions. The linear ‘scale up’ of interventions and investments in each sector was summed in order to estimate 
resource requirements and develop a financing strategy. The study did not consider policy or institutional reforms.

World Bank: In the early 2000s, a World Bank project focused on the following countries: Benin, Burkina Faso, Ethiopia, Madagascar, 
Mali, Mauritania, Tanzania and Uganda; Bangladesh, India, Indonesia, Pakistan and Vietnam; Bolivia, Honduras; Albania and Kyrgyz 
Republic. Its approach gave priority to the macroeconomic policy objectives (such as the containment of inflation, budget deficits 
and current account deficits) emphasised in the respective Poverty Reduction Strategy Papers (PRSPs), and asked how, given these 
priorities, the MDGs could best be achieved. 

The World Bank also developed a CGE modelling approach. The MAMS models (MAquettes for MDG Simulations) developed by 
World Bank researchers (Bourguignon et al., 2008) and since used extensively by UNDESA, provide a general equilibrium framework 
for countries to simulate the effect of different financing sources (e.g. ODA grants, foreign borrowing, and domestic taxation) on 
different MDGs. The models also take into account the effects of progress in one MDG on progress in others and include issues of 
absorptive capacity related to large finance inflows.

Sources: Bourguignon et al. (2008); Millennium Project (2005); Reddy and Heuty (2006); Sánchez et al. (2013)

2.1.2.1 | Choice of target 

The  first  step  is  to  identify  a  relevant  target,  e.g. 
specific  MDG  targets  such  as  food  security  or 
access  to  safe  water.  While  it  is  important  to  use 
appropriate, common descriptions of a target, this is 
often not the case. Moreover, different studies may 
cover a similar target but include different countries, 
again making most of them not strictly comparable.

2.1.2.2 |  The choice of means 

by which to reach a target

strategies  and  means  available.  Depending  on 
country  characteristics,  there  could  be  various 
options  for  how  to  attain  the  same  target,  each 
with  a  different  cost.  For  example,  some  might 
emphasise  the  potential  of  organic  agriculture 
to  reduce  poverty,  while  others  highlight  the 
advantages  of  investing  in  chemical  inputs  or 
domestic  seed  banks.  Some  suggest  promoting 
school  enrolment  by  providing  mid-day  meals, 
others  by  reducing  the  distance  pupils  have  to 
travel  to  school.  Often  such  strategies  could  be 
complementary. 

A second step is to identify the means by which 
to  reach  the  target.  Often,  there  are  several 

As described in Box 2.1, the ‘Millennium Project’ 
(2005)  mapped  out  the  major  policy  steps  and 

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CHAPTER 2. Main lessons from studies on MDG finance needsinvestments  necessary  to  achieve  the  MDGs  in 
selected  countries.  Researchers  identified  a  set 
of  key  interventions  to  support  the  achievement 
of  the  targets.  For  each  target  and  country  the 
methodology  was  to  first  examine  the  existing 
gap and its geographical distribution, in particular 
distinguishing  between  urban  and  rural  areas. 
This  made  it  possible  to  identify  the  investment 
needs and costs of the interventions by which to 
reach the target.

Unfortunately,  many  models  of  MDG  finance 
needs  offer  only  one  option,  even  if  is  not  the 
most  efficient,  rather  than  considering  a  range 
of  alternative  means  and  approaches.  This  is 
particularly  the  case  for  global  studies  that 
examine the achievement of MDG1, where ODA 
is  linked  to  aggregate  investment,  aggregated 
growth and then aggregated poverty, thus losing 
valuable  detail  on  different  and  more  efficient 
ways  to  reduce  poverty.  There  are  exceptions, 
as  we  shall  discuss  in  this  Report,  most  notably 
those  studies  that  use  MAMS  CGE  modelling 
(see e.g. Box 2.4, Box 2.5 and Box 2.6), and also 
some  global  estimates  that  differentiate  among 
different sectors (IFPRI, 2008).

2.1.2.3 |  Choosing a scenario 

Most  early  analyses  are  based  on  status  quo  or 
‘all other things being equal’ scenarios. This can 
be  unrealistic,  however,  and  shocks  can  have  a 
large impact. Reddy and Heuty (2006) point to the 
impact  of  the  AIDS  epidemic  on  health  targets, 
which  severely  affected  estimates  of  finance 
needs.  Further,  the  literature  on  climate  change 
highlights  the  fact  that  various  projections  and 
sensitivity  analyses  yield  very  different  finance 
needs.  For  example,  infrastructural  needs  differ 
markedly depending on whether climate change 
is included in the scenarios. 

The choice of scenarios relates to the assumptions 
the  chosen  methodology.  For 
underpinning 
example,  estimates  based  on  the  ‘back  of  an 
envelope’  and  descriptive  econometric  models 

use  past  experience  to  define  indicators  or 
multipliers  in  order  to  predict  the  future.  This 
means  that  they  might  not  take  account  of 
dynamics  over  time.  Other  models,  such  as 
CGEs,  allow  for  building  dynamic  scenarios  to 
account  for  degrees  of  shock  on  various  trends. 
An example of this is the World Bank’s application 
of  CGE  models,  initially  designed  to  evaluate 
the  distance  to  be  travelled  in  order  to  reach 
the  MDGs  (Bourguignon  et  al.,  2008).  While 
CGE  models  are  calibrated  according  to  past 
experience,  they  can  introduce  new  parameters, 
although the estimates rely on an accurate choice 
of parameters and assumptions. 

The  IPCC-SRES  (IPCC-SRES,  2000:  23)  defines 
scenarios as follows:

Scenarios  are  images  of  the  future,  or  alternative 
futures.  They  are  neither  predictions  nor  forecasts. 
Rather, each scenario is one alternative image of how 
the future might unfold. A set of scenarios assists in 
the understanding of possible future developments of 
complex systems. Some systems, those that are well 
understood  and  for  which  complete  information  is 
available, can be modelled with some certainty, as is 
frequently the case in the physical sciences, and their 
future states predicted. However, many physical and 
social systems are poorly understood, and information 
on  the  relevant  variables  is  so  incomplete  that  they 
can  be  appreciated  only  through  intuition  and  are 
best communicated by images and stories. Prediction 
is not possible in such cases. (IPCC-SRES, 2000:23)

2.1.2.4 |  Choosing an estimation method

Three main methods have been used to estimate 
the finance necessary to reach the MDGs:

1

Unit-cost-based  analyses  or 
‘back  of  an 
envelope’  estimates:  An  average  unit  cost 
of  action  is  identified  in  relation  to  the  means 
selected to reach the target. It is then multiplied 
to reach the size of the targeted population. Most 
such  studies  are  country-specific  and  sector-
specific and rely on the availability of micro-data. 
An  example  of  using  unit  costs  is  Delamonica 

(2001),  who  divide  countries’  current 
et  al. 
expenditure on primary education by the number 
of pupils in order to obtain a cost per pupil. This 
‘unit  cost’  is  then  multiplied  by  the  incremental 
number  of  children  who  need  to  attend  primary 
school  in  order  to  meet  MDG2  by  2015.  The 
Millennium  Project  (2005)  uses  this  approach, 
producing  an  aggregate  estimate  of  the  cost  of 
meeting  the  MDGs  at  the  country  level,  based 
on the preliminary needs assessments carried out 
in  Bangladesh,  Cambodia,  Ghana,  Tanzania  and 
Uganda. 

 Reddy  and  Heuty  (2006)  highlight  the  lack  of 
consistency  regarding  the  concept  of  unit  cost 
in  the  financial  estimates  for  reaching  MDGs. 
Unit  costs  may  change,  for  example,  in  relation 
to potential economies or diseconomies of scale 
over  time  and  across  countries.  Marginal  costs 
can  change  and  exogenous  factors  such  as  the 
development  of  new  technology  or  institutions 
can  also  have  a  major  influence  on  the  cost  of 
achieving  the  objective.  Unit  costs  also  vary 
by  location,  casting  doubt  on  the  possibility 
of  aggregating  detailed  unit  costs  for  certain 
locations  into  national  or  regional,  let  alone 
global, unit costs.

 The problem posed by using unit costs can also be 
seen by comparing them across a range of studies 
for the same country. In the case of education, this 
shows that a major source of variation in estimates 
of  finance  needs  lies  in  the  estimated  cost  per 
pupil, which could differ by a factor of five even in 
the same country (Uganda) at a similar time: $13 
(UNICEF,  1998),  $27.50  (World  Bank,  2003),  $46 
(EPRC, 2001) and $63 (Millennium Project, 2005). 
2
  Growth models, most of which are backed by the 
standard Harrod–Domar model, estimate a target 
(e.g.  growth  rates)  and,  by  making  assumptions 
about  several  macro  trends  based  on  historical 
evidence, calculate the finance need ‘backwards’. 
A  number  of  studies  use 
theoretical 
framework  to  assess  the  resources  needed  to 

this 

achieve the level of growth that would, in theory, 
make it possible to achieve the MDGs. One of the 
most  cited  examples  is  Devarajan  et  al.  (2002), 
but more recent analyses such as Atisophon et al. 
(2011) and OECD (2011) also adopt this approach. 
Section 2.1.1 sets out a critique of this two-gap 
model.  In  addition,  each  individual  link  can  be 
criticised. For example, Reddy and Heuty (2006) 
highlight  the  implausibility  of  using  the  same 
growth to poverty elasticity’s across all countries, 
given that the poverty elasticity of growth varies 
by country and over time, depending in part on 
economic  structures,  complementary  policies 
and institutions.

3
CGEs  such  as  the  MAMS  models  (see  Box 
2.1)  developed  by  World  Bank  researchers 
(Bourguignon et al., 2008), and used extensively 
(Sánchez  et  al.,  2013),  are 
by  UNDESA 
macro  models  that  include  a  cost-minimising 
government as the main agent acting on different 
sectors (health, education etc.). CGE models aim 
to  reconcile  the  standard  micro-based  needs 
assessment with macroeconomic modelling. They 
capture  micro–macro  spillovers  via  fluctuations 
in wages. Moreover, by introducing intermediate 
goods  that  can  be  bought  on  foreign  markets, 
these  models  allow  for  the  effects  of  exchange-
rate  fluctuations.  An  important  feature  is  the 
inclusion  of  decreasing  marginal  returns  on 
to 
additional  government  spending,  meant 
capture  the  ‘absorptive  capacity’  threshold  in 
a  more  satisfactory  way  than  in  other  costing 
methodologies. 
The  MAMS  methodology 
focuses  primarily  on  the  education  and  health-
related MDGs. It also takes into account the fact 
that  there  may  be  cross-sectoral  spillovers,  on 
which the effectiveness of government spending 
depends:  for  example,  spending  on  education 
becomes more effective if at the same time there 
is an improvement in health conditions, because 
absenteeism 
infrastructure 
improves,  and  vice  versa.  This  ‘joint  production’ 
of MDGs is not incorporated in the global sectoral 
estimates that use unit-cost approaches based on 

is  reduced,  or 

if 

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Combining finance and policies to implement a transformative post-2015 development agenda | 69

CHAPTER 2. Main lessons from studies on MDG finance needssimply adding up separate sector estimates. This 
suggests  that  the  country-level  MAMS  models 
improve  on  the  earlier  estimates  and  constitute 
an important point of learning. 

2.1.2.5 |  Other conceptual issues 
across all models

While  models  have  become  more  sophisticated, 
the  estimates  share  common  conceptual  and 
implementation  limitations.  One  issue  relates 
to  data  reliability  and  robustness  of  estimations, 
especially in data-intensive models such as MAMS, 
but also in more straightforward calculations such 
as ICOR growth models. All these methodologies 
rely on estimates of unit costs, which are sensitive 
the  models’ 
to  data-collection 
predictive  capacity  relies  on  the  relative  fit  of 
existing  data  to  reality.  This  may  be  problematic 
in  the  context  of  countries  where  the  accuracy 
of  data,  especially  at  the  aggregate  economic 
level, may be far from comprehensive or reliable. 
Nonetheless, estimates at the country level tend 
to be sounder than estimates at the global level.

issues,  and 

Another  issue  relates  to  aggregation,  double 
counting,  and  the  consideration  of  spillover 
effects  across  the  targets. 
Interdependency 
among  targets,  double  counting,  and  trade-offs 
are  only  partially  addressed  by  the  most  recent 
models,  such  as  CGEs.  The  literature  on  cost 
includes various scales of analysis, from one target 
in  a  sub-sector  in  a  single  country  to  multiple 
global  targets.  As  highlighted  by  Devarajan  et 
al.  (2002),  the  estimated  finance  gap  to  achieve 
MDG1 should not be added to sectoral estimates 
of  other  MDGs  but  should  be  compared,  since 
they  are  two  estimates  of  the  additional  global 
ODA  necessary  to  achieve  the  MDGs,  based  on 
the  underlying  assumption  that  achieving  MDGs 
2–7 is one way to achieve MDG1. 

In  addition  to  these  concerns,  the  existing 
models  have  not  really  taken  into  account  the 
role of ‘soft’ skills, such as good governance and 
institutions, in defining the relative effectiveness 

of finance, which is crucial to costing. Widespread 
corruption,  for  example,  may  jeopardise  the 
effectiveness  of  additional  ODA,  and  limit  the 
country’s ability to mobilise domestic resources or 
to undertake fiscal reform. These variables, which 
authors as Devarajan et al. (2002) stress are crucial 
to  the  achievement  of  development  goals,  are 
not taken into account by existing models, other 
than  through  relative  ‘productivity’  parameters 
or residuals in econometric estimations. This key 
criticism  is  developed  in  this  Report  and  relates 
to  the  importance  of  complementary  policies 
(addressed in Chapter 5).

Those issues, and particularly the issue of double 
counting, spillovers and institutional environment, 
are  often  mentioned  in  relation  to  the  scale  of 
the  cost  estimates.  There  is  general  consensus 
on  the  limits  of  costing  methodologies  at  the 
global level, with a call for more country-focused 
analyses  because  these  address  some  of  the 
shortcomings.  A  more  disaggregated  level  of 
analysis makes it possible to tackle concerns about 
country-specific  capacity  and  needs,  although  it 
is  still  subject  to  many  other  caveats.  A  country-
level  approach  does,  however,  make  it  easier  to 
identify  accurate  targets  and  pathways  to  reach 
them, and makes it possible to take into account 
the institutional environment, thus providing more 
refined estimates of unit and marginal costs and 
benefits  of  action.  Recently,  a  number  of  MAMS 
applications have built country-level models (e.g. 
Sánchez et al., 2010).

researchers  sometimes 

In  conclusion, 
(have 
to)  make  unrealistic  assumptions  and  follow 
methodologies  that  may  be  subject  to  criticism, 
but could still be improved upon by examining the 
issues in greater depth and giving more detailed 
consideration  to  the  role  of  context  for  the 
effective use of finance. There has been learning 
in  the  development  of  country-level  MAMS 
modelling,  which  offers  some  advances  over 
global  estimations.  In  particular  MAMS  models 
can  take  into  account  country-level  specificities; 
address the linkages across individual MDGs; and 

compare different types of financing for the same 
objective, e.g. domestic versus foreign. Although 
MAMS  models  offer  a  promising  route,  they 
have  not  to  date  fully  assessed  the  importance 
of context (Box 2.4 describes two commissioned 
MAMS  studies  that  aim  to  do  this:  Levin  2015a, 
2015b).  Better  data  and  more  disaggregation 
might  solve  some  of  the  problems  associated 
with  the  finance  needs  studies,  but  would  not 
address  the  need  for  an  alternative  FFD  vision 
that  explicitly  considers  the  policy  context  and 
the role of finance for the enablers of sustainable 
development  transformation  –  a  Finance  and 
Policy Framework for Development (FPFD).

2021 

(2025 

papers: 

infrastructural 

Three  MAMS  modelling 
studies  were 
commissioned  for  this  Report  to  consider  the 
role  of  finance  and  policy  in  the  context  of 
the  MDGs.  MAMS  modelling  for  Tanzania  and 
Bangladesh  simulates  whether 
it  would  be 
possible  to  achieve  the  MDGs  in  an  extended 
respectively) 
timeframe 
and 
(commissioned  modelling 
Levin, 
2015a,  2015b;  Box  2.5).  MAMS  modelling  for 
Moldova  simulates 
investment 
(commissioned  modelling  paper;  Kinnunen, 
2015).  It  finds  that  market-related  reforms  will 
lead  to  greater  benefits  for  the  population  and 
inclusive growth when public measures are taken 
to  redistribute  the  gains  of  growth  (see  Chapter 
6). Modelling was also undertaken on the impacts 
of  Basel  III  implementation,  quantitative  easing 
and tackling tax evasion, using the NiGEM Model 
(commissioned background paper; Fic, 2015) and 
on the beneficial interaction between government 
effectiveness  and  the  effectiveness  of  ODA  and 
FDI  flows,  using  the  International  Futures  Model 
(see  Box  4.3;  commissioned  modelling  paper, 
Lenhardt,  2015).  The  results  clearly  demonstrate 
the  importance  of  the  policy  context  and  are 
further explored below and in Chapter 4.

  2.2 

 The scale of finance required: 
comparing MDG and post-2015 
contexts

Many  studies  have  followed  the  methodological 
steps identified in the previous section to calculate 
the scale of finance needed to achieve MDGs. This 
section presents a few examples for the MDGs that 
are  frequently  covered  in  these  studies.  The  aim 
is  to  provide  some  order  of  magnitude,  bearing 
in  mind  the  questionable  assumptions  on  which 
some  of  the  estimates  are  based.  In  the  context 
of the post-2015 development agenda, the SDGs 
under discussion are more comprehensive than the 
MDGs  and  include  environmental  and  economic 
objectives. The scale of finance required to meet a 
wider set of post-2015 goals is therefore likely to be 
far greater than for the MDGs. Given the difficulties 
to  be  overcome  in order  to make  cost estimates, 
which  depend  on  many  assumptions  such  as  the 
policy context, we do not offer new estimates since 
these would risk reviving the outdated belief that 
finance alone could solve all the problems. Rather, 
we focus on examining different finance flows and 
the link between finance and policies in enabling 
development goals.

2.2.1 

 Finance needs to meet objectives 
in the MDG context

The  studies  on  MDG  finance  needs  focused  on 
estimating  what  would  be  required  to  meet  a 
range  of  mainly  social  development  goals.  The 
estimates  varied  for  the  reasons  summarised  in 
Section 2.1. Of the many studies we reviewed, we 
select those that have been most frequently cited 
in relation to halving global poverty and reaching 
health  and  education  targets  (for  other  reviews 
see,  for  instance,  Reddy  and  Heuty,  2006,  and 
Reddy  and  Heuty,  2008).  The  review  illustrates 
many of the points raised in the previous section, 
e.g.  that  these  studies  are  based  on  simplistic 
assumptions  without  considering  the  policy  and 
institutional context.

2.2

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CHAPTER 2. Main lessons from studies on MDG finance needsThe  finance  gap  that  needed  to  be  bridged  in 
order  to  halve  global  poverty  by  2015  ranges 
from an additional $20 bn (Zedillo, 2001) to $62 
bn  (Devarajan  et  al.,  2002)  each  year.  Zedillo 
(2001) calculates the cost of achieving the MDGs, 
of which MDG1 is one. The calculations are based 
on the costs of achieving individual goals already 
identified and ad hoc estimates when there are no 
available costings. Further, the sectoral estimates 
(based  on  unrealistic  assumptions,  as  discussed 
above)  did  not  refer  to  a  common  cost  concept 
(e.g. total cost, total public cost, or total cost to 
donors)  and  excluded  goals  for  which  were  no 
readily available estimates. The figures presented 
by  Zedillo  (2001)  therefore  represent  only  ‘the 
order  of  magnitude’  of  the  additional  finance 
required to achieve the MDGs (Reddy and Heuty, 
2006).  The  estimate  of  the  financing  gap  for 
halving  poverty  was  based  on  UNCTAD  (2000) 
and Collier and Dollar (2000) studies. The former 
suggested  that  halving  poverty  would  require 
additional ODA of about $10 bn a year to increase 
economic  growth  in  Africa  to  6%  a  year,  which 
Zedillo (2001) doubled to allow for a parallel effort 
in the lower-income countries outside Africa.

The more detailed study by Devarajan et al. (2002) 
(and most other studies examining poverty goals) 
uses the Harrod–Domar growth model. To estimate 
the  additional  ODA  needed  to  halve  poverty 
between 1990 and 2015, the authors use a ‘two-
gap’ growth model where growth depends on the 
level  and  efficiency  (measured  through  ICOR)  of 
investment. The rate of poverty reduction depends 
on the level, growth and distribution of per capita 
GDP. Working backwards from the existing poverty 
level  and  distribution  of  income,  the  average 
rate  of  growth  required  to  reach  MDG1  by  2015 
determines  the  additional  investment  needed.  In 
principle, the need can be met by ODA, domestic 
savings or non-aid flows, but for poor countries it is 
assumed to be met by ODA. 

The range of estimates within studies, let alone 
across them, is quite large. Some studies, such as 
Zedillo  (2001)  and  Pettifor  and  Greenhill  (2002) 

produce rather different estimates of the finance 
gaps (varying between $20 bn to $46 bn a year). 
Other studies, such as the much-cited Devarajan 
et al. (2002), suggest a smaller range ($54–62 bn), 
which  is  of  the  same  order  as  the  more  recent 
estimates by Atisophon et al. (2011), who suggest 
that the upper range of the distribution between 
Zedillo (2001) and Deverajan et al. (2002) is more 
likely – they estimate an additional $37 bn to $62 
bn  a  year  is  needed  to  halve  global  poverty  by 
2015  in  LICs  (an  MDG  cost  estimate  for  those 
countries where a financing gap exists).

IFPRI 

Some  studies  consider 
in  more  detail  than 
aggregated  growth  the  means  and  pathways 
through  which  poverty  can  be  reduced.  For 
(2008)  estimates  the  finance 
example, 
required to achieve the MDG1 through agricultural 
growth by first calculating the required agricultural 
growth  rates  using  country-specific  elasticities  of 
poverty reduction with respect to agriculture, and 
then  estimating  the  necessary  financial  resources 
using growth with respect to expenditure elasticity. 
Because growth in the non-agricultural sector also 
contributes to poverty reduction, either directly or 
indirectly through growth linkages with agriculture, 
it  also  considers  the  additional  poverty-reduction 
effects from that sector. IFPRI (2008) estimates an 
annual financing gap for 30 SSA countries of $33–
39 bn from 2005 to 2015.

There  is  also  a  large  range  of  estimates  for  the 
finance  gap  in  relation  to  meeting  education 
(MDG2) and health (MDG4–6) objectives. There 
are  two  important  features  of  these  estimates. 
First,  is  the  link  between  MDG1,  MDG2  and 
MDG4–6.  While  Deverajan  et  al.  (2002)  provide 
separate estimates for MDG2 and MDG4–6, they 
argue  that  poverty  reduction  (MDG1)  achieved 
increased  growth  could  sufficiently 
through 
increase  the  demand  and  supply  of  health  and 
education  services  to  ensure  the  achievement 
of  the  respective  MDGs.  A  separate  calculation 
in  Devarajan  et  al.  (2002)  focuses  on  the  costs 
of  achieving  the  health  and  education  goals 
in  human 
separately.  A 

resulting 

increase 

development  could  then  affect  incomes,  thus 
ensuring the achievement of the income-poverty 
goal.  The  second  feature  is  that  most  of  these 
studies use the unit-cost approach.

Estimates  of  the  finance  gap  to  achieve  MDG2 
range from about $7 bn a year (Delamonica et al., 
2001)  to  $27  bn  a  year  (Devarajan  et  al.,  2002). 
Delamonica  et  al.  (2001)  and  Atisophon  et  al. 
(2011)  estimate  the  cost  of  achieving  universal 
primary  education (UPE) based on  an  estimation 
of  the  country-specific  unit  cost  of  reaching  a 
100%  net  primary  enrolment  ratio  by  2015.  The 
additional expenditure required to achieve UPE is 
the total number of additional children multiplied 
by the unit costs. 

Estimates  of  the  finance  gap  to  meet  MDG4–6 
(the  health-related  goals)  are  also  based  on  unit 
costs. In general terms studies such as Devarajan 
et al. (2002) or Atisophon et al. (2011) estimate the 
total per capita costs required for health treatment 
(e.g. the World Health Organization (WHO) argues 
that ensuring access to the types of interventions 
and  treatments  needed  to  address  MDG4–6 
requires  on  average  a  little  more  than  $60  per 
capita  annually  by  2015).  Health-related  costs  in 
the best-case scenario are estimated at around $6 
bn  (Atisophon  et  al.,  2011)  and  between  $20  bn 
and $25 bn by Devarajan et al. (2002). Other recent 
estimates,  such  as  WHO  (2010),  are  much  higher 
even when focused only on LICs. The comparability 
of these estimates is clearly limited since they focus 
on  different  geographical  areas  and  sectors,  and 
should not be interpreted as precise estimates.

2.2.2 

 Finance needs to meet economic and 
environmental objectives in the post-2015 
development agenda

While  the 
literature  on  the  finance  needs 
related  to  the  MDGs  focused  on  reaching  social 
development goals, the post-2015 context would 
require taking into account estimates of financial 
needs  that  relate  to  economic  (infrastructure, 
trade  finance)  and  environmental  objectives. 

Examining  these  more  comprehensive  goals 
suggests two main issues: (a) finance needs vary 
greatly depending on the underlying assumptions 
and  scenarios,  as  suggested  in  Section  2.1; 
and  (b)  finance  needs  appear  far  greater  in  the 
economic and environmental spheres than in the 
social  context.  A  further  feature  is  that  the  new 
studies  do  not  assume  that  ODA  should  fill  the 
entire finance needs. 

The  global  scale  of  infrastructure  investment 
needs  is  immense,  with  a  shortfall  of  $1  trillion 
(tr)  for  the  2008–2015  period  for  developing 
countries  (Yepes,  2008)  and  $2.5  tr  annually  up 
to  2030  for  global  investment  (McKinsey,  2013). 
Other studies, such as the IEA (2013) estimate that 
an  additional  $2–2.5  tr  a  year  is  needed  simply 
to  maintain  and  upgrade  the  transport  sector, 
depending on different climate-change scenarios. 
The  Global  Commission  on  the  Economy  and 
Climate estimates that a low-carbon pathway has 
incremental  infrastructure  requirements  (across 
all  sectors)  of  $4  tr  between  2015  and  2030, 
an  increase  of  5%  from  baseline  levels.  Box  2.2 
provides  further  details  on  finance  needs  in  the 
case  of  infrastructure  and  shows  how  different 
scenarios,  in  particular  the  need  to  include 
the  effects  of  climate  change,  might  affect  the 
estimates.

In addition to the studies on the infrastructure gap, 
there  have  been  similar  studies  on  finance  for 
SMEs  and  trade.  According  to  the  World  Bank’s 
enterprise  surveys,  some  24%  of  firms  in  SSA 
(and 17% across all LICs and MICs) cite access to 
finance as the biggest obstacle to doing business, 
and  43%  in  SSA  (31%  in  all  LICs  and  MICs)  cite 
it  as  a  major  constraint.  The  IFC  (2014)  finds  that 
SMEs  in  developing  countries  find  it  difficult  to 
obtain  credit,  which  makes  it  harder  to  achieve 
economic  development.  In  LICs  and  MICs  as  a 
whole, there are between 360–440 million formal 
and informal micro, small and medium enterprises 
(MSMEs). Around a half (45–55%) of the 200–245 
million MSMEs in developing economies are either 
underserved or not served at all. 

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Combining finance and policies to implement a transformative post-2015 development agenda | 73

CHAPTER 2. Main lessons from studies on MDG finance needsThis  represents  a  gap  in  credit  finance  for  such 
MSMEs  of  $2.1–2.6  tr.  A  survey  by  the  Asian 
Development Bank (2013) found an unmet global 

demand for trade finance of $1.6 tr, with the need 
for  additional  trade  finance  in  Asia  alone  to  be 
around $425 bn.

Box 2.2 | Estimating infrastructure finance needs

The McKinsey Global Institute (2013) projects a global need for investment in infrastructure of around $57–67 tr by 2030, depending 
on estimations. This amounts to around 3.5–3.8% of global GDP. Most of these investments are needed in road infrastructure ($16 tr), 
energy ($12 tr), water ($11.7 tr), and telecommunications ($9.5 tr). These are conservative estimates since they depict only the money 
needed to maintain current expenditure trends: there are large infrastructural shortfalls, especially in LICs and MICs, indicating that 
the scale of the investment challenge is potentially much greater than these estimates suggest. Developing countries face the largest 
needs for investment in infrastructure, especially where many have little access to basic facilities. 

ODI (2013) reports that, globally, 768 million people lack access to safe drinking water and that 2.5 billion have no access to improved 
sanitation facilities; the authors also report that in a business-as-usual (BAU) scenario, about 30% of the world’s population will lack 
access to cooking fuels by 2030, and that 12% have no electricity. These are all relevant to planning development finance in the post-
2015 context. The bulk of the costs in infrastructure in the next 40 years will be for transport, particularly road transport, as estimated 
by McKinsey (2013) and Yepes (2008). The 2013 IEA report predicts that by 2050, non-OECD regions will account for nearly 90% 
of the increase in travel at the global level, and 85% of additional projected infrastructure, including 90% of new roads worldwide. 

As UNTT (2013a) reports, most of the costing methodologies regarding infrastructure rely on engineers’ assessments, which vary by 
country and sector. This raises comparability issues as it is hard to obtain precise global estimates of the overall costs and benefits 
of developing infrastructure. Although global estimates rely mostly on standard growth projections (McKinsey, 2013) or econometric 
methodologies (World Bank, 2005), which exhibit the same limitations discussed in the context of the MDGs costing strategies (e.g. 
relying on historical data and linear predictions), some sector-specific models use scenarios, e.g. in relation to climate change.

An example is the 2013 IEA report, which examines road infrastructure needs by 2050. It looks at different climate-change scenarios 
associated with different estimations of the necessary maintenance and building costs. For this, the report uses the IEA Mobility 
Model  (MoMo),  a  global  transport  model  that  contains  detailed  historical  data  and  projections  for  the  transport  sector  to  2050, 
including energy and greenhouse gas (GHG) emissions. Two possible scenarios are considered: a 4ºC rise in temperature (where 
the world is heading now, assuming that policies in the pipeline are successfully implemented); and a more optimistic 2ºC rise in 
temperature by 2050 (assuming the implementation of additional policies). The authors emphasise the limitations of their model, 
particularly data constraints and the fact that it is impossible to introduce the feedback effects of transport infrastructure, such as 
increased travel. Nevertheless, the scenario-based estimates provide a range of cost estimations to build road infrastructure that is 
sensitive not only to growth in population and needs, but also to climate change and exogenous shocks based on assumptions about 
the effect on infrastructural needs in developing countries. 

For example, the construction of roads needed in non-OECD economies by 2050 is estimated to require about $46 tr in the 4ºC 
scenario and $37 tr in the 2ºC scenario. This large difference cannot be captured in methodologies that do not use scenarios to 
introduce flexibility in setting targets. The costing methodology itself depends on average cost assumptions (i.e. dollars per kilometre 
of road), specific to broad heterogeneous geographical areas (e.g. ‘Middle East’, ‘Latin America’). The methodology seems close to a 
standard ‘back of an envelope’ calculation, with estimations inferred from multiplying a unit cost by projected infrastructural needs.

Sources: as cited

Various  estimates  have  also  been  produced 
for  biodiversity  finance  needs,  sometimes 
overlapping  with  climate-change  needs,  for 
example in the case of forests. To implement the 
Convention  on  Biological  Diversity  (CBD),  the 
CBD  Secretariat  (2012)  estimates  that  between 
$74  bn  and  $192  bn  per  year  is  needed,  while 
the  High-Level  Panel  on  Global  Assessment  of 
Resources for Implementing the (CBD) Strategic 
Plan  for  Biodiversity  2011–2020  estimates  $153 
bn  to  $436  bn  per  year.  The  United  Nations 
Forest Forum (2012) estimates that global finance 
forestry  management 
needs 
alone would be from $70 bn to $160 bn per year. 
The  UNDP  Global  Environment  Facility  (2012) 
estimates  the  finance  need  for  oceans  at  $35 
bn  per  year,  including  reducing  nutrient  over-
enrichment  of  coastal  areas,  making  shipping 
more energy-efficient, protecting coastal carbon 
sinks,  reducing  unsustainable  fishing  practices 
and  reducing  aquatic  species  transfer  through 
fouling of ships' hulls.

for  sustainable 

Estimates  of  the  finance  needs  for  a  green 
transition  vary,  depending  on  scenarios,  but 
generally  point  to  the  need  for  significant 
additional  financing.  The  International  Energy 
Agency  (IEA)  (2012)  estimates  that  a  green 
transition would require cumulative investment in 
green  infrastructure  of  about  $36–42  tr  between 
2012 and 2030, which is approximately $2 tr per 
year (compared to current annual investment of $1 
tr). For the coming years, and focusing only on the 
power sector, the IEA projects that $6.35 tr in total 
investment  will  be  required  from  2010  to  2020 
in  order  to  halve  energy-related  CO2  emissions 
by  2050  compared  to  2005  levels;  and  that  by 
2020 about $24 tr investment would be required. 
The  World  Economic  Forum  (WEF,  2013)  refers 
to  additional,  incremental  investment  needs  in 
clean-energy infrastructure, low-carbon transport, 
energy  efficiency,  and  forestry  of  at  least  $0.7 
tr  per  year  to  limit  global  warming  to  2°C.  The 
World  Resources  Institute  (WRI,  2013)  indicates 
that in order to reach the 2°C target developing 
countries  will  need  $531  bn  yearly  until  2050 
for  additional  investments  in  energy  supply  and 
demand  technologies.  The  most  recent  IPCC 
(2014)  report  indicates  annual  investment  needs 
in  low-carbon  energy  (such  as  solar,  wind  and 
nuclear  power)  of  $147  bn  per  year  until  2030 
in  order  to  meet  the  2°C  target,  but  would  also 
require investment in fossil-fuel energy to be cut 
by  $30  bn  per  year  –  resulting  in  a  $117  bn  per 
year  net  increase  in  energy  investment.  Box  2.3 
shows  how  different  assumptions  and  different 
scenarios  can  lead  to  different  estimates  of 
finance needs for sustainable energy. In particular, 
it  shows  that  assumed  future  energy  demand 
can  result  in  major  variations  in  finance  needs. 
This  suggests  the  need  for  current  modelling 
estimates to become more sensitive to the need 
to  incorporate  different  scenarios  and  different 
contexts (e.g. reduced fossil-fuel subsidies free up 
resources and also reduce the finance needs).

74 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 75

CHAPTER 2. Main lessons from studies on MDG finance needsBox 2.3 | Estimating sustainable energy finance needs in different scenarios

In  projecting  future  sustainable  energy  finance  needs,  model  outputs  will  produce  varying  estimates  based  on  the  assumptions, 
parameters and scenarios adopted. Estimates are based on Integrated Assessment Models (IAM) for energy and emissions scenarios, 
which  typically  adopt  process-based  approaches,  focusing  on  the  detailed  physical  processes  that  cause  climate  change  (van 
Vuuren, 2007). A range of IAMs, called LIMITS (Low climate Impact scenarios and the implications of required Tight emission control 
Strategies) models, assess energy investment needs in two scenarios: 

•	 RefPol,	which	uses	current	and	planned	climate	policies	

•	 RefPol-450,	which	adopts	climate	policies	consistent	with	a	2°C	climate	target

The  energy-investment  needs  produced  by  the  various  LIMITS  models  (including  IMAGE,  MESSAGE,  REMIND,  TIAM-ECN  and 
WITCH) over the 2010–2050 period are presented below (see McCollum et al., 2013). The bars indicate the variation across models 
(maximum and minimum investment needs). The bar on the left is the sum of the four bars on the right.

Figures 2.3B1 & 2.3B2 |  Energy investment needs produced by the various LIMITS 

models over the time period 2010–2050

RefPol

)
r
a
e
y
/
s
n
o

i
l
l
i

b

(

D
S
U

3000

2500

2000

1500

1000

500

0

RefPol-450

)
r
a
e
y
/
s
n
o

i
l
l
i

b

(

D
S
U

3000

2500

2000

1500

1000

500

0

on

w carb
  energy

Lo

  efficiency
End-use

Nuclear

Renewables

  infrastructure
Electricity

on

w carb
  energy

Lo

  efficiency
End-use

Nuclear

Renewables

  infrastructure
Electricity

Source: McCollum et al. (2013)

These  models  are  based  on  different  assumptions  about  resources,  future  energy  demand,  the  substitution  of  elasticity,  and 
technological parameters – including unit investment costs, efficiencies, growth rates and learning rates. In generating projections 
they  adopt  either  linear  programming  algorithms  with  perfect  foresight  (i.e.  based  on  a  specified  policy  pathway),  a  recursive-
dynamic framework, or a decision-making algorithm based on agent-based approaches (with assumptions about how agents will 
react). The use of different assumptions and scenarios leads to large differences in projected energy-investment needs.

For example, low-carbon energy needs is estimated at $250–600 bn a year in the RefPol scenario and at $700–1900 bn a year in 
RefPol-450. Estimates of annual end-use efficiency finance needs range from $30 bn to $115 bn (RefPol) or from $225 bn to $700 
bn (RefPol-450). The lowest projections produced across RefPol and RefPol-450 arise from models that build in greater reductions 
in energy demand in response to increases in energy prices – with the introduction of policies increasing the share of renewables in 
energy portfolios, which increases the cost of energy and hence reduces demand and therefore supply-side investment needs. There 
is also a substantial inter-regional variation in investment needs, projected according to future energy demand and climate policy 
scenario (RefPol and RefPol-450), based on current infrastructure and the macroeconomic environment. 

Sources: McCollum et al. (2013); van Vuuren (2007)

  2.3 

 Finance needs studies: achievements 
and lessons for financing post-2015 
development goals

Studies on finance needs served a clear purpose 
in  relation  to  efforts  to  achieve  the  MDGs,  but 
new thinking is required in order to make a more 
effective contribution to the debate on finance and 
implementation  in  the  post-2015  context.  Here, 
we  set  out  what  is  needed  and  how  this  Report 
engages  with  this  debate.  First  we  discuss  the 
success of the finance needs studies. The MDGs 
successfully  catalysed  development  efforts  in 
MDG-related sectors, but they were also linked to 
the increased mobilisation of ODA for developing 
countries and the allocation of public expenditure 
to  MDG-related  sectors.  Although  it  remains 
difficult to establish causality, we explore positive 
correlations  below  (commissioned  background 
paper, Rahman et al., 2015).

2.3.1 

 The MDG achievement: mobilising aid 
and influencing public expenditure

The  finance  needs  studies  for  the  MDGs  largely 
met their aims, which were to estimate the scale 
of the financial constraints facing many countries 
and to encourage an increase in ODA and assist 
negotiators  in  the  process  (see  also  Sánchez  et 
al.,  2010).  The  first  major  success  was  the  2002 
Monterrey  Consensus  on  the  financing  of  the 
MDGs,  with  the  UN  declaring  that  ‘a  substantial 
increase  in  ODA  and  other  resources  will  be 
required  if  developing  countries  are  to  achieve 
the  internationally  agreed  development  goals’ 
(UN, 2002). 

There  is  some  evidence  that  the  MDGs  helped 
to  mobilise  an  increase  in  ODA  for  the  social 
sectors,  as  the  global  level  and  composition  of 
aid has changed dramatically since the early 1990s 
(commissioned background paper; Rahman et al., 
2015;  Chapter  3).  There  was  a  sharp  increase  in 
ODA  from  2000  and  a  higher  share  devoted  to 

to  Fukuda-Parr, 

the social sector, in particular social infrastructure 
and services (more spending on education, health 
and  population  programmes,  although  not  on 
water and sanitation) (ERD, 2013). Rahman et al. 
(commissioned background paper, 2015) recorded 
a doubling of ODA disbursed to LICs (in absolute 
terms)  between  1990–2000  and  2000–2010. 
Some  MDGs,  notably  in  relation  to  HIV/AIDS, 
have  shaped  the  allocation  of  ODA  (although, 
according 
the  global  HIV 
movement  had  a  prior  and  independent  effect). 
The  increase  is  not  observable  in  sectors  less 
directly connected to the MDGs. In fact, Fukuda-
Parr  et  al.  (2013)  find  evidence  that  the  MDGs 
led  to  distorted  priorities.  Nonetheless,  finance 
needs studies in relation to the MDGs may have 
contributed to a rise in ODA for the social sectors 
overall.  Bilateral  ODA  allocated  to  these  sectors 
doubled in the 2000–2008 period from about $20 
bn a year to over $40 bn a year, while spending on 
productive sectors remained static. At its peak in 
2009, social spending accounted for 43% of total 
ODA commitments ($45 bn). Although this is not 
evidence of causation, authors on the topic tend 
to agree that the MDGs and related cost studies 
contributed to raising ODA for the social sectors.

Many  analyses  that  examine  aggregate  ODA 
(e.g. Alesina and Dollar, 2000; Berthélemy, 2006; 
Dollar  and  Levin,  2006)  find  that  aid  allocation 
and  effectiveness  vary  according  to  the  needs 
of  recipient  countries  as  well  as  donor  interests. 
Thiele  et  al.  (2007)  test  whether  bilateral  and 
multilateral  donors  prioritised  ODA  in  line  with 
the MDGs, finding that most donors’ sectoral aid 
composition appears to follow a multidimensional 
objective  rather  than  narrowly 
focusing  on 
economic  growth.  There  are  some  noticeable 
trends  towards  greater  expenditure  per  capita 
on  MDG  priority  sectors,  such  as  health  and 
education (Kenny and Sumner, 2011). The share of 
government spending on education in developing 
countries has also increased significantly. 

2.3

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Combining finance and policies to implement a transformative post-2015 development agenda | 77

CHAPTER 2. Main lessons from studies on MDG finance needs 
 
share of education expenditure was 2.9% of GDP 
but increased to 4.2% of GDP in 2010; for health, 
the  average  share  for  1996–2000  was  1.5%  of 
GDP, rising to 2% of GDP in 2001–2012. There was 
also  acceleration  of  public  expenditure  in  these 
sectors  in  most  LICs,  although  the  overarching 
trends  conceal  significant  differences.  There  was 
also  evidence  of  increased  share  of  expenditure 
in  LICs  on  social  and  environmental  protection, 
albeit based on very small sample sizes due to a 
lack  of  data  (commissioned  background  paper; 
Rahman et al., 2015).

Although  there  has  been  less  discussion  on 
implementation  of  the  MDGs  has 
how  the 
affected  national  spending 
(although  ODA 
obviously tends to be much smaller than national 
spending),  some  insights  can  be  obtained  from 
examining  the  impact  of  debt  relief,  which  was 
a fundamental part of the MDG debate (MDG8). 
The  evidence  suggests  that  debt  relief  allowed 
some increased expenditure on reducing poverty. 
Debt relief under the combined heavily-indebted 
poor  country  (HIPC)  and  multilateral  debt  relief 
initiatives (MDRI) and from the Paris Club lowered 
debt-service requirements, which in turn enabled 
an  increase  in  poverty-oriented  expenditure  (as 
mandated  by  the  HIPC  framework).  For  the  36 
post-decision point countries, spending on efforts 
to  reduce  poverty  increased  between  2001  and 
2012,  while  debt-service  payments  declined 
(Figure  2.1).  Figure  2.2  further  suggests  that  the 
debt  relief  associated  with  the  MDGs  may  have 
helped to increase the proportion of government 
spending  on  tackling  poverty  (as  defined  in  the 
PRSPs).  We  have  also  commissioned  a  paper  on 
the  impact  of  MDGs  on  public  expenditure  in 
developing countries (see Rahman et al., 2015).

That having been said, the MDGs appear to have 
influenced  the  political  discourse  more  than  the 
actual allocation of domestic resources. Manning 
(2009)  examines  (a)  whether  the  MDG  paradigm 
has  led  to  increased  attention  to  those  areas  it 
covers (he suggests: variable, but donors increased 
aid  to  basic  education);  (b)  whether  increased 
attention has led to any observable changes in the 
allocation of resources or the policy framework (he 
finds that the HIPC framework freed up resources 
for poverty reduction); and (c) whether increased 
allocation  of  resources  or  changes  in  the  policy 
framework  have  led  to  any  observable  changes 
in  results  (he  argues  for  a  broad  interpretation 
of  the  MDGs  following  Wood  (2004,  2007)). 
Wood (2007), in a talk entitled ‘Taking the MDGs 
Seriously  but  not  Literally’,  argues  that,  while 
the  MDGs  themselves  are  desirable,  the  time-
bound  targets  risk  setting  up  distortions,  and 
that  ‘to  avoid  bad  and/or  inefficient  outcomes, 
don’t  tie  individual  incentives  to  the  numerical 
targets  –  and  ensure  people  never  lose  sight  of 
the broader goals’. Fukuda-Parr et al. (2013) hold 
that  the  application  of  the  targets  to  country-
level  planning  is  problematic  from  a  technical 
standpoint and that ‘the ability to estimate costs 
and  policies  necessary  to  meet  the  targets  was 
probably overstated from the start’. Rahman et al. 
(commissioned  background  paper,  2015)  argue 
that LICs’ adoption of the MDGs was reflected in 
a  growing  tendency  to  deal  with  these  issues  in 
policy  documents  in  a  more  comprehensive  and 
targeted  manner,  although  many  of  them  were 
already being addressed before the MDGs were 
adopted.

There is less evidence on whether finance needs 
studies  and  MDGs  have  affected  domestic 
budget  allocation  and  domestic  policies 
(although  as  Chapter  6  argues  public  resources 
for education and health have increased). Rahman 
et  al.  (commissioned  background  paper,  2015) 
find  that  public  expenditure  in  LICs  in  MDG-
related sectors, such as education and health, has 
increased significantly as a share of GDP compared 
to the pre-MDG period. For example, in 2000 the 

Figure 2.1 |  Shifts in government spending 

in post-HIPC countries 
(percentage of GDP) 2000–2018

Figure 2.2 |  Poverty spending in post-HIPC countries as 
a percentage of total government spending 
(percentage of GDP) 2001–2018,

12

10

8

6

4

2

0

58

56

54

52

50

48

46

2001 2003

2005 2007 2009 2011 2013 2015 2017

2001 2003 2005 2007 2009 2011 2013 2015 2017

Poverty spending

Debt-service costs

Poverty spending

Source: IMF (2013). Data refer to government spending in 36 post-HIPC decision-point countries, debt-service costs refer to costs 
paid up to 2012, and costs due afterwards. Poverty spending is defined in the PRSPs (it includes health and education plus additional 
items that vary by country, and follows the IMF categorisation used in its regular update: changes over time in the definition affected 
the 2001–2003 period), and refers to the average over the past three years (so 2010–2012 for data shown in 2012), actuals up to 2012 
and thereafter IMF forecasts.

in 

Despite 
the 
the  considerable  problems 
underpinning assumptions, finance needs studies 
have  steadily  improved.  For  example,  experts 
suggest  a  difference  between  finance  needs 
studies  (e.g.  by  the  UN  Millennium  Project, 
described 
in  Box  2.1)  that  established  aid 
requirements by simply adding up estimates per 
sector, and those studies that modelled different 
policy  options  to  achieve  different  outcomes, 
identifying  trade-offs  and  synergies  among  the 
MDGs  (e.g.  based  on  MAMS  models,  discussed 
above,  and  in  Chapter  4).  In  estimating  finance 
needs,  the  former  studies  may  have  supported 
negotiations with donors and multilateral financial 
institutions  in  order  to  ensure  adequate  DRM 
(Sánchez  et  al.,  2010),  but  the  latter  were  better 
integrated in national policy debates and able to 
influence the debate on trade-offs and spending 

priorities. Further, these studies took into account 
synergies  across  the  MDGs,  and  non-linearities 
in  the  effectiveness  of  policy  interventions  and 
finance 
macroeconomic 
needs  studies  for  reaching  infrastructure  goals, 
for  example,  are  more  sophisticated  and  take 
different scenarios and assumptions into account.

trade-offs.  Recent 

The  discussion  in  this  section  suggests  two 
important  lessons  for  the  future.  First,  effective 
policy  signalling  or  policy  coordination  attached 
to the attainment of specific targets can produce 
tangible  effects;  the  MDGs’  clear  focus  on 
poverty  reduction  has  had  some  impact  on 
budget  allocations  and  channelling  of  finance 
to  MDG  targets.  This  suggests  that  a  post-2015 
development  agreement  may  have  important 
signalling effects. 

78 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 79

CHAPTER 2. Main lessons from studies on MDG finance needsSecond, despite the conceptual challenges, recent 
modelling  studies  tend  to  be  more  useful  either 
by  providing  country-level  detail  (e.g.  MAMS 
modelling, described in Box 2.4) or incorporating 
details  relating  to  scenarios  (infrastructure  needs 
with and without climate change).

2.3.2 

 Three implications for the post-2015 discussions 
on finance for development

As stated, although the finance needs studies met 
the function of mobilising more ODA, while some 
important  lessons  have  been  learned,  others 
been  assimilated  only  partly  or  not  at  all.  The 
discussions  on  post-2015  FFD  will  benefit  from 
three intellectual shifts that follow from the review 
of these studies and are reflected in the approach 
outlined  in  Chapter  5.  We  also  discuss  how  the 
rest of this Report addresses this new thinking.

(i)  From aid as a ‘silver bullet’ to considering all 

available sources of finance

While  the  earlier  models  on  finance  needs 
assumed that ODA would fill any gaps in reaching 
the MDGs, various recent modelling studies have 
moved on from the reliance on ODA and provide 
evidence of the potential of better managed and 
increased domestic tax revenues as well as private 
capital flows to contribute to the achievement of 
the  MDGs  and  their  post-2015  successors,  the 
SDGs.  While  the  original  MDG  needs  estimates 
sought an increase in ODA, more recent analyses 
emphasise  the  importance  of  other  means,  from 
increased  DRM,  following  the  Accra  Agenda  for 
Action (2008), to private capital flows. The OECD 
(2011) replicates Devarajan et al. (2002) in order to 
stress  the  importance  and  potential  of  domestic 
resources and redistributive policies in achieving 
the MDGs. It acknowledges the simplicity of the 
approach  linking  public  expenditure  to  service 
delivery  and  social  outcomes,  but  highlights  the 
relative  importance  of  and  capacity  to  mobilise 
domestic  resources  as  a  sustainable  way  to 
achieve the MDGs. Recent modelling studies also 
analyse the potential impact of different scenarios 

and  policy  choices  on  various  outcomes,  from 
poverty  reduction  to  climate-change  mitigation 
(see e.g. Boxes 2.2 and 2.3).

Hence, finance needs studies should highlight how 
the contribution of a combination of stakeholders 
selected according to their comparative advantage 
could  reduce  the  average  unit  cost  of  supplying 
an additional unit of demand. Does each type of 
finance – DFIs, FDI, private sector, ODA etc. – have 
a different impact on structural transformation? Is 
one type of financing more efficient than another 
in  achieving  development  targets?  While  the 
public sector needs to coordinate the provision of 
public goods, the private sector may play a role in 
their sustainable use and financing. A combination 
of  stakeholders  might  be  better  able  to  identify 
targets,  with  a  view  to  switching  from  a  supply-
driven to a demand-driven approach to FFD.

(ODA, 

MAMS  modelling  for  Moldova  finds  that  the 
type  of  finance  used  does  affect  development 
outcomes 
(commissioned  modelling  paper, 
Kinnunen,  2015;  see  Box  6.7).  Box  2.4  shows  a 
number  of  simulations  using  MAMS  for  a  range 
of  developing  countries,  examining  how  much 
public  finance  would  be  needed  to  reach  the 
MDGs  and  how  this  varies  depending  on  the 
source 
foreign  borrowing,  domestic 
borrowing and taxation). It thus considers a range 
of  public-finance  strategies  and  examines  which 
flow  is  more  effective  rather  than  just  assuming 
that ODA or other sources of international public 
finance  must  and  will  fill  the  gap.  While  these 
models have the major advantage of attempting 
to think ‘beyond aid’, the disadvantages are that 
they tend not to give adequate consideration to 
the  role  of  private  finance  options  or  policies. 
Recognising the importance of the need to think 
‘beyond aid’, this Report considers a wide variety 
of finance sources (see Chapter 3). 

Box 2.4 | Different finance options for reaching the MDGs

For  some  years,  the  Development  Policy  and  Analysis  Division  of  the  Department  of  Economic  and  Social  Affairs  of  the  United 
Nations  (UN-DESA)  has  coordinated  a  range  of  country  analyses  in  an  integrated  macro–micro  modelling  framework  including 
three  analytical  elements.  At  its  core  lies  the  Maquette  for  MDG  Simulations  (MAMS),  a  dynamic  recursive  computable  general 
equilibrium (CGE) model (see Technical Appendix for a more detailed explanatory note). MAMS was developed from a standard 
CGE framework and has been improved in various country-specific analyses. Its salient feature is an additional module, which covers 
the main determinants of MDG achievement through the impact of public expenditure on MDG-related infrastructure and services. 
MAMS accounts for specific targets for the achievement of UPE (MDG2), the reduction of under-five and maternal mortality (MDG4–
5)  and  increased  access  to  safe  water  and  basic  sanitation  (MDG7a  and  7b).  While  MAMS  constitutes  the  integral  part  of  the 
macro–micro  modelling  framework,  the  second  analytical  pillar  comprises  microeconomic  and  sectoral  analyses  of  determinants 
of MDGs’ outcomes in the country context, providing an adequate calibration of the MAMS MDG module. The third part of the 
framework entails micro-simulations for poverty and inequality indicators that allow for an assessment of the poverty-reduction target 
(MDG1). Therefore, labour-market outcomes of MAMS simulations are imposed on household and survey data to represent the entire 
distribution of income in the country in question, since economy-wide CGE models such as MAMS usually cover a certain number 
of representative households.

Taking as a reference the achievement of the MDGs by 2015, the analyses for nine countries from Africa, Asia and the Middle East 
examine among other things the question of the cost of different financing scenarios to meet the targets. To that end, a baseline (or 
BAU) scenario serves as a benchmark for each country. The BAU scenario replicates the actual economic performance and the impact 
of policies implemented during the period between the base year, usually 2005, and 2010, and projects the overall trends until 2015. 
Although the assumptions underlying the reference scenario necessarily vary by country, the impact of the global financial crisis on 
GDP growth has been accounted for in most cases. 

Building on MAMS estimates for the full achievement of MDGs in 2015, the comparative study provides an assessment of ‘additional 
MDG-related  public  spending’.  The  differences  between  the  estimates  for  total  spending  on  MDG-related  public  services  under 
the  respective  financing  strategy  scenario  and  the  estimate  for  total  spending  on  MDG-related  public  services  under  the  BAU 
baseline scenario are reported in columns 5–8. For the MDG-financing scenarios it is assumed that government spending becomes 
endogenous,  and  thus  expenditures  are  increased  to  meet  the  defined  targets,  if  they  are  not  already  met  under  the  baseline 
scenario. The resulting fiscal deficits can be financed by through seeking more ODA (column 5), increased domestic or foreign public 
borrowing (columns 6 and 7) and increased taxation (column 8). For the majority of the countries analysed, the estimates indicate 
that the additional MDG-related public spending ranges between 5% and 10% of annual GDP. Although countries that would make 
steady progress on the path towards achieving the MDGs under the BAU scenario, such as Kyrgyzstan or the Philippines, while the 
former would have completely achieved MDG1 and to a large extent MDG 2 and 7a, they would also need to considerably increase 
public spending to achieve the entire set of targets.

The  financing  strategy  is  of  significance  for  the  estimates  of  required  MDG-related  spending.  Using  domestic  resources  through 
borrowing or taxation tends to increase the total cost of the respective strategy because of crowding out private spending, although 
tax  financing  appears  less  costly  compared  to  domestic  borrowing  (except  for  the  Philippines  and  Egypt,  with  a  pronounced 
‘consumption-compression’ effect of increased taxation). Naturally, not all financing strategies will be universally feasible and the 
cost implications of different scenarios cannot be the only criterion. Rather, debt sustainability and the feasibility of raising taxation 
need  to  be  accounted  for  in  addition  to  cost.  By  taking  a  broad  view  in  terms  of  the  feasibility  of  different  financing  scenarios, 
many country studies recommended domestic financing (increasing tax revenues) to avoid debt-sustainability issues (in the case of 
domestic borrowing) or exchange-rate appreciation (in the case of external borrowing). In some countries, however, domestic taxes 
cannot be increased rapidly, while in others the large increase in ODA required can pose a great challenge. 

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Combining finance and policies to implement a transformative post-2015 development agenda | 81

CHAPTER 2. Main lessons from studies on MDG finance needsand business environment, investment might be 
constrained simply by market failures (e.g. in the 
case  of  externalities,  public  goods,  asymmetric 
information, moral hazard and transaction costs). 
In  such  cases,  finance  might  be  an  appropriate 
solution.  In  other  cases,  however,  there  is  a 
lack  of  investment  because  of  weak  policies 
and  a  weak  institutional  environment.  Recent 
decades  have  seen  efforts  to  identify  the  most 
binding  constraints  to  growth  at  the  country 
level – whether finance or other constraints. The 
growth diagnostics framework (Hausmann et al., 
2005) focuses on two key factors behind growth: 
investment and the cost of financing it.

Table 2.4B | MDG related public spending as a percentage of annual GDP

PERCENTAGE ANNUAL GDP (%)

Base year

BAU scenario

Additional spending under different financing scenarios

Foreign aid

Foreign 
borrowing

Domestic 
borrowing

Taxation

Egypt

Kyrgyzstan

Philippines

Senegal

South Africa

Tunisia

Uganda

Uzbekistan

Yemen

1.48

5.58

2.21

6.66

5.91

5.28

3.89

5.94

5.37

1.50

4.88

2.00

7.18

3.07

5.09

4.24

6.28

0.26

7.83

6.30

8.04

n.a.

5.56

6.73

n.a.

0.26

7.83

6.30

8.04

n.a.

5.56

6.73

4.76

0.27

n.a.

7.17

n.a.

n.a.

6.10

9.47

4.81

0.28

8.21

7.41

n.a.

9.08

6.09

9.21

4.62

16.04

10.39

10.39

18.76

17.39

1    MDG-related public spending is defined in Sánchez and Vos (2013). For most countries, the year of the simulation 
is on or around 2005 (2004 for Yemen, 2006 for Kyrgyzstan and the Philippines, and 2007 for Egypt and Uganda).

2    Lack of detailed information on all MDG-related public spending in the corresponding sectors as required 

for the Social Accounting Matrix used, MAMS, may have caused the base-year MDG-related public spending 
to appear low in some countries, notably Egypt and the Philippines.

3    Annual average of the period from base year to 2015, unless otherwise indicated.
4    Results are not available (n.a.) for financing scenarios considered unfeasible in the country studies.

Source: Sánchez and Vos (2013)

(ii)  Promote  joint  thinking  and  implementation 

of finance and policies

The post-2015 discussions on implementation will 
need  to  address  finance  and  policies  together. 
Finance needs studies are weak at including policy 
considerations,  although  some  MAMS  models 
have included efficiency of spending or productivity 
increases. Although model-based discussions have 
tentatively begun to address the link with policies, 
the  post-2015  framework  will  need  to  strengthen 
the  shift  in  focus  from  mobilising  more  finance, 
to  the  quality  of  investment  and  effective  use  of 
existing  finance.  MAMS  modelling  commissioned 
for  this  Report  represents  an  important  step  for 
modelling  the  role  of  policies  (commissioned 
modelling papers: Levin 2015a, 2015b; Kinnunen, 

2015). Box 2.5 below provides an overview of two 
of  these  modelling  exercises  for  Tanzania  and 
Bangladesh,  and  Box  6.7  includes  some  findings 
from the Moldova exercise.

There is a danger that the SDGs in the post-2015 
finance  context  will  be  considered  in  isolation 
from  policies,  in  much  the  same  way  as  in  the 
follow-up  to  the  2002  Monterrey  Conference  on 
Financing  for  Development.  This  finance-based, 
supply-driven  approach  is  increasingly  out  of 
date;  indeed,  several  authors  stress  the  harmful 
effects of too much finance, pointing to crises and 
misallocation  of  resources  (e.g.  IMF,  2012;  Beck, 
2013) or the ‘Dutch disease’ effects of ODA (Rajan 
and Subramanian, 2009). In some cases, finance is 
the (main) answer. For example, in a good policy 

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Combining finance and policies to implement a transformative post-2015 development agenda | 83

CHAPTER 2. Main lessons from studies on MDG finance needsBox 2.5 | Analysing development goals in Bangladesh and Tanzania using a scenarios analysis of public finance and other policy options

Both Bangladesh and Tanzania are largely on track to meet most MDGs by 2015 apart from MDG2 (100% primary completion rate). 
Two commissioned modelling studies use the MAMS model to examine how all MDG targets could be reached within an extended 
time  period  (2021  and  2025  respectively)  (commissioned  modelling  papers:  Levin,  2015a,  2015b).  They  examine  different  public 
finance  options  and  other  policy  options  and  find  that  additional  public  financing  required  to  meet  development  goals  are  not 
particularly  large  (in  part  because  of  the  assumed  growth  rates)  and  extended  targets  could  be  achieved  through  domestic  tax, 
increased  foreign  borrowing  (in  the  case  of  Bangladesh),  ODA,  or  a  reallocation  of  public  spending  towards  education  targets. 
Moreover,  the  studies  simulate  scenarios  that  go  beyond  public  finance  and  include  more  remittances  (especially  important  in 
Bangladesh), different trade prices, increased FDI, or productivity increases. They show that these non-public finance scenarios could 
also help to attain development targets, including MDG2. 

For Bangladesh, the analysis provides a comparison of the base scenario and alternative financing scenarios for foreign borrowing 
and tax revenue that increase average expenditure as a share of GDP by approximately one percentage point annually (commissioned 
modelling paper, Levin, 2015b). In the foreign borrowing scenario this implies that external debt rises from 27% of GDP in 2005 
to 37% of GDP in 2021. The alternative tax-financing scenario assumes that the tax-to-GDP ratio is increasing on average by one 
percentage point annually, with roughly half of the increase from higher income taxes and half due to higher indirect taxes such 
as value-added tax (VAT). In a third scenario it is assumed that government expenditure is halved and transferred to the primary 
education sector, while the rest of the public sector retains the same level of spending as a share of GDP. Overall, a combination 
of  reforms  including  further  deepening  of  tax  reforms  and  reallocation  of  public  spending  towards  primary  education  would  be 
important components for a policy strategy towards achievement of development targets in 2021. 

The  study  on  Bangladesh  also  analyses  whether  additional  non-financial  shocks  (e.g.  policy  changes)  could  reduce  the  revenue 
requirements identified in the tax-financing scenario in order to achieve MDG2. The impact of an annual productivity increase of 
1.5% compared to the baseline scenario across the private sectors (agricultural, industry and the services sector) leads to achieving 
all MDGs in 2021. Moreover, the financing requirements would be 1.7 percentage points (as a share of GDP) lower than the tax-
financing scenario. Thus adding total factor productivity growth to the finance scenarios leads to accelerated progress towards the 
targets and a further reduction in the resource requirements to achieve MDG2. In fact, the resource requirements would be even less 
compared to the baseline scenario and are close to the current (2005) spending, which further underlines the importance of policies 
that complement finance. 

In the case of Tanzania the MAMS modelling study uses the end of the country’s long-term strategy ‘Vision 2025’ as the target date 
for achieving the MDGs (commissioned modelling paper; Levin, 2015a). Comparing the baseline scenario with scenarios that assume 
ODA  and  tax  financing,  additional  resources  are  needed  to  achieve  the  MDGs.  On  average  over  the  whole  period  (2005–2025) 
annual ODA disbursements of around 8% of GDP would be required, which is less than actual disbursements. Within an extended 
timeframe, and a less ambitious agenda, i.e. keeping the same targets, the aid-financing gap would be cleared by a 25% increase in 
finance compared to the baseline scenario. In addition, the macroeconomic impacts of a tax-financed scenario would lead to slightly 
lower  average  growth  and  hence  slower  poverty  reduction  and  higher  unemployment.  This  study  also  analyses  whether  private-
sector productivity increases in agriculture, industry and services could lead to a more ambitious agenda to achieve the MDGs before 
2025.  Such  productivity  increases  can  be  induced  by  complementary  policies  and  involve  government  intervention  to  overcome 
market failures. The simulations assume a 1% annual growth of total factor productivity. The productivity shocks have a stronger 
impact on overall GDP for larger sectors in terms of GDP share, i.e. for the agriculture and services sector in the case of Tanzania. 
The study finds that in an agenda that does not necessarily include additional ODA but involves reforms to enhance private-sector 
productivity, the achievement of the MDGs can be brought significantly closer than in the baseline scenario. The re-allocation of 
public spending across different categories is another important determinant for achieving the MDGs.

The modelling studies on Bangladesh and Tanzania thus highlight that non-public financing can also contribute to achieving the 
MDGs within an extended timeframe. Supporting policies that lead to productivity increases in the private sector, attract FDI and 
remittances and increase export revenues help to reduce additional financing needs and could be a key part of a more ambitious 
agenda to meet the MDGs. 

Sources: commissioned modelling papers by Levin (2015a, 2015b)

impacts,  but 

But  even  when  finance  is  a  constraining  factor, 
a  country  may  not  be  able  to  absorb  significant 
increases.  Weak  absorptive  capacity  will  lead 
to  diminishing  returns  to  ODA,  for  instance, 
and  declining  marginal  impacts  of  additional 
finance  (e.g.  more  ODA).  The  efficiency  of 
interventions depends on the institutional and 
policy  framework,  specific  to  each  country. 
increases  have 
large  ODA 
Not  only  might 
negative  macroeconomic 
they 
can  also  be  a  disincentive  to  building  strong 
domestic institutions to mobilise resources. There 
is  important  literature  on  the  ‘Dutch  disease’ 
effects  of  ODA,  (e.g.  Rajan  and  Subramanian, 
2009),  although  the  effects  tend  to  be  lower 
than  for  natural  resource  revenues.  Moreover, 
as  Easterly  (2003)  has  highlighted,  without  the 
proper  capacity,  additional  ODA  might  serve  to 
increase  consumption  and  reallocation  of  public 
resources rather than bring about a real increase 
in  public  investment.  Non-productive  use  of 
financial  inflows  can  lead  to  price  distortions 
and indebtedness without any long-term welfare 
benefits.  Weak  institutional  and  policy  structures 
might result in waste, leakage and corruption due 
to poor planning, and poor resource-management 
systems,  as  well  as  weak  transparency  and 
accountability. 

In  many  instances,  therefore,  in  order  to  be 
effective,  ODA  depends  on  reforms  of  the 
framework.  Reforms 
institutional  and  policy 
can  increase  the  absorptive  capacity  and  the 
ability  to  reduce  the  amount  needed  to  reach  a 
development  target  by  improving  the  efficiency 
of  each  dollar  spent.  There  is  ample  evidence 
confirming  the  importance  of  context  for 
effective  finance.  For  instance,  the  impact  of 
Aid  for  Trade  (AfT)  is  greater  in  the  presence  of 
effective  governance  and  trade  strategies  in  the 
recipient  country  and/or  an  open  regime  on  the 
part  of  trading  partners  (Basnett  et  al.,  2012). 
Climate  finance  is  less  efficient  but  needed 
more when countries continue to subsidise fossil 
fuels and  so distort prices. Less  expensive  water 
infrastructure  is  needed  when  virtual  water  that 

is  embodied  in  agricultural  products  is  imported 
(ERD,  2011/2012).  Bruns  et  al.  (2003)  find  that 
finance is not a sufficient condition for improving 
completion  rates  since  other  factors  are  also 
important,  such  as  low  unit  costs  (e.g.  teachers’ 
salaries) and the efficacy of education systems.

The  World  Bank  (2013)  argues  that  the  cost  of 
achieving  any  development  goal  depends  on 
how  efficiently  it  is  pursued,  taking  into  account 
the  quality  of  underlying  policies  and  practices. 
For  example,  the  shortfall  in  infrastructure  in 
developing  economies  was  estimated  at  $1  tr 
per  year  until  2020,  with  an  additional  $200  bn 
to  $300  bn  per  year  required  to  ensure  green 
infrastructure.  These  costs  could  be  reduced 
by  making  more  efficient  use  of  existing 
infrastructure  and  by  improving  project  quality 
and management. A range of practical steps can 
often  boost  the  productivity  of  infrastructure  by 
60%,  thereby  lowering  necessary  spending  by 
40% (World Bank 2013). The importance of policy 
context of financing infrastructure is discussed in 
detail in Chapter 6.

considering  policy 

While these issues have begun to influence the 
post-2015  discussions  on  FFD,  more  work  is 
required. For example, the World Bank (2013: 17) 
cites post-2015 UN proceedings which underline 
‘the  pitfalls  of  trying  to  assess  financing  at  the 
recipient country level from a “needs” approach 
changes, 
without  also 
institutional improvements, and other parts of the 
development  strategy.  Instead,  financing  must 
be  understood  as  one  component  of  a  strategy 
that includes private sector efficiency and public 
sector  efficiency  and  public  sector  productivity 
improvements’.  Efforts  to  achieve  the  MDGs 
focused  on  public  finance  on  the  assumption 
follow.  The 
investment  would 
that  private 
successors to the MDGs are likely to focus more 
on  public–private  interaction  (e.g.  Public–Private 
Partnerships (PPPs)), domestic and global policies 
institutions, 
to  stimulate  private 
capacity, and so forth, in addition to considering 
the  role  of  ODA.  The  World  Bank  (2013)  and 

investment, 

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Combining finance and policies to implement a transformative post-2015 development agenda | 85

CHAPTER 2. Main lessons from studies on MDG finance needsin  a  range  of  sources  of  finance  available  to 
countries  and  Chapter  4  includes  a  general 
review  of  the  link  between  policies  and  finance 
on the basis of econometric studies, contributing 
to  the  intellectual  shift  towards  considering 
policies  (beyond  finance).  Chapter  5  provides 
a  conceptual  framework  for  thinking  about  the 
links  between  finance  and  policies  aimed  at  the 
enablers  of  sustainable  development.  Chapter 
6  provides  new  evidence  on  the  links  between 
policies  and  finance 
for  different  enablers, 
seeking  to  provide  as  much  detail  as  possible 
while  still  drawing  out  general  lessons.  The  aim 
is  to  construct  an  alternative  vision  of  post-2015 
finance for development to the earlier studies on 
the costs of and finance needs for achieving the 
MDGs.

UNTT (2013b) have begun to focus on new ways 
to mobilise the private sector. The recent ICESDF 
report lists a range of principles for the effective 
use of finance.

(iii) Understanding the links between structural 
transformation and poverty reduction

The  focus  of  the  MDGs  on  social  development 
supported a move towards achieving development 
outcomes beyond economic growth or long-term 
development efforts. This led to difficulties when 
it  was  assumed  that  ODA  could  address  current 
poverty by providing finance to the social sector 
and failed to take into account the challenges in 
linking ODA to the attainment of social objectives. 
Moreover,  achieving  social  progress  in  the  long 
run  is  dependent  on  structural  transformation, 
includes  a  combination  of  economic 
which 
transformation 
IMF,  2014), 
(UNECA,  2014; 
reductions  in  carbon  intensity  and  preserving 
natural  capital,  the  eradication  of  poverty  and  a 
reduction in inequality.

While there have been some changes in thinking 
(e.g.  on  finance  needs)  achieved  by  seeing 
the  issue  through  the  lens  of  the  aid-growth-
governance nexus, almost all existing models on 
the  MDGs  (regardless  of  whether  they  include 
policies) are based on static economies in which 
the  technological  parameters  of  the  underlying 
economic  models  are  fixed.  This  begs  the 
question of their relevance to achieving structural 
transformation, which is based on the assumption 
of  the  need  for  technological  progress  and 
hence  a  change  in  the  parameters.  The  UNTT 
(2012, Annex 2) acknowledges that ‘in the global 
debate,  the  MDGs  led  to  overemphasising 
financial  resource  gaps  to  the  detriment 
of  attention  for  institutional  building  and 
structural  transformation’,  which  are  longer-
term challenges. 

the construction of schools), and for which it was 
possible  to  conduct  a  cost  analysis  (taking  into 
account the caveats previously mentioned). How 
could  the  same  models  inform  environmental 
sustainability and structural transformation, which 
are  essentially  dynamic  processes?  Structural 
transformation  calls  for  changes  in  technology 
and  in  resource  allocation,  with  consequent 
for 
spillovers  throughout  the  economy,  not 
static  technologies  and  structures.  But  such 
developments  are  not  immediate  and  depend 
on capacity-building and fundamental changes in 
the way the economy, institutions and society are 
organised.  Finance  could  facilitate  these  long-
term changes. 

Here we might learn from the modelling exercises 
that  examine  what  it  takes  to  achieve  a  green-
energy  shift.  Cost  estimates  for  the  adoption 
of  green  energy  depend  on  the  cost  reduction 
associated  with  specific  technological  learning 
curves as well as other savings (e.g. lower energy 
consumption;  see  Box  2.3  for  a  description  of 
modelling  studies  and  their  findings).  Thus,  the 
investment  requirement  for  a  low-carbon  energy 
transition  should  not  be  equated  with  its  costs 
(German  Advisory  Council  on  Global  Change, 
2011:  158).  Additional  investments  can  also  be 
offset  by  savings  on  fossil  fuels.  Furthermore, 
when  climate  models  are  linked  with  economic 
models 
assessment  models’), 
global  GDP  can  be  estimated  with  and  without 
climate-related  policies,  the  difference  reflecting 
the  cost  of  mitigation  policies.  The  results  of 
integrated  assessment  models  depend  strongly 
on  the  underlying  assumptions  with  regard  to 
technological  development,  with  endogenous 
technological  change  leading  to  lower  cost. 
This  does  not  take  into  account  any  potential 
co-benefits  through  employment  creation  and 
poverty reduction, which can possibly be reflected 
in appropriately designed models.

(‘integrated 

Previous  models  were  designed  to  assess  the 
finance  needed  to  meet  the  MDGs,  some  of 
which  were  expressed  in  tangible  targets  (e.g. 

This  Report  contributes  to  the  intellectual  shift 
required  for  the  implementation  of  a  post-2015 
development agenda. Chapter 3 discusses trends 

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Combining finance and policies to implement a transformative post-2015 development agenda | 87

CHAPTER 2. Main lessons from studies on MDG finance needsCHAPTER 3.

Financing trends 
and challenges beyond 2015

Main messages 

3.1  Classifying flows of finance 

3.2  Historical trends in sources of finance 

3.3 

 Future trends and proposals 
for mobilising finance 

3.4  Conclusions 

89

90

96

119 

127

3.

Main Messages

Since  the  2002  Monterrey  Consensus,  FFD  options  have 

changed dramatically by country income grouping, by income 

levels and over time. The main messages arising from the review 

of the financing trends and challenges over the past decade are: 

 Domestic  public  resources  have  grown  rapidly  and  are  the 

largest  source  of  finance  for  all  country  income  groupings. 

Given their significant volumes and public goods orientation, 

expanding domestic public resources further will be critical to 

achieve the SDGs. A particular focus needs to be placed on the 

challenges facing low income countries (LICs) and some lower 

middle-income  countries  (LMICs)  ,  with  action  also  required 

internationally  to  ensure  the  international  financial  system  is 

effectively supporting these efforts. 

  International public finance has also increased but is declining 

in  relative  importance.  ODA  and  other  forms  of  international 

public  finance  such  as  SSC  remain  important  sources  of 

financing for most LICs and some LMICs, and can play a critical 

role.  It  is  therefore  important  to  maintain  high  ambitions 

regarding these sources in the post-2015 FFD agenda in terms 

of their quantity, effectiveness and strategic focus.

 Domestic private finance has shown the fastest growth, but is 
still much lower (as a percentage of GDP) in LICs than in lower 

middle-income  countries  (LMICs)  and  upper  middle-income 

countries  (UMICs),  with  rapid  transformations  continuing. 

International  private  finance  has  been  highly  volatile 

compared to the other flows. There are significant opportunities 

to expand private sources of finance, given their importance 

to  promoting  investment,  job  creation,  infrastructure  and 

technological development. Again, the poorest countries face 

the most significant challenges, including how to attract such 

finance and in managing volatility.

Combining finance and policies to implement a transformative post-2015 development agenda | 89

 
 
 
T his chapter describes the changes in finance options in real (volume) terms relative to income, by 

country income group, level of income and over time (2000–2011). It is structured as follows. Section 
3.1 classifies the main financial flows in four categories: domestic and international, public and private. It 
reviews the basic characteristics of each in order to understand its role in supporting development, and 
suggests that flows are not substitutable, as Griffith et al. (2014) also conclude. Section 3.2 describes the 
main historical trends by flow and by country income group (and by individual country, shown in Annex 
2). It provides data suggesting that non-ODA flows have grown in relative terms. Section 3.3 examines 
the future prospects of these flows and Section 3.4 draws out the conclusions. 

trends 

 Domestic  private  finance  –  our  analysis 
examines 
in  gross  fixed  capital 
formation by the private sector, excluding FDI, 
but we do not know whether this investment 
was  financed  domestically  or  whether 
domestic finance was used for FDI. Hence, we 
also discuss private-sector access to domestic 
credit and stock-market capitalisation, both of 
which are stock (not flow) variables.

in 

  International private finance – remittances are 
thought  to  be  significantly  under-reported 
worldwide  in  view  of  the  large  volume  of 
informal  transactions  that  are  not  captured 
by  existing  reporting  systems  and  analysis; 
in  addition,  major  discrepancies 
the 
reporting of remittances between source and 
destination  countries  affect  the  accuracy  of 
current  estimates.  Remittance  outflows  from 
LICs  are  very  small.  Data  on  FDI  inflows  are 
widely  reported,  but  FDI  outflows  are  under-
reported,  although  tend  to  be  small  at  low-
income levels. Private development assistance 
(PDA)  includes  financial  support  from  private 
agencies  such  as  NGOs,  foundations  and 
corporations;  but  due 
in 
official  reporting  (especially  with  regard  to 
geographical coverage) it is difficult to assess 
the full extent of PDA and to distinguish what 
additional  resources  are  mobilised  beyond 
channelling ODA. For this reason, the section 
on  ODA  only  offers  a  basic  and  tentative 
summary of PDA.

limitations 

to 

  3.1  Classifying flows of finance

This Report uses a broad definition of finance in 
relation  to  the  post-2015  development  agenda, 
beyond finance for which achieving development 
goals  is  the  main  explicit  purpose,  in  order  to 
analyse trends across all public and private sources 
of financing relevant to developing countries. This 
approach is consistent with the shift of the post-
2015  FFD  agenda  identified  in  Chapter  2,  away 
from  a  focus  on  ODA  for  achieving  the  MDGs, 
towards  a  broader  approach  that  recognises  the 
contribution that all forms of financing can make 
to the enablers of sustainable development. 

Table 3.1 | Categories of financial flows

CATEGORY

SOURCES

Domestic public finance

Tax and other public revenues, 
Domestic debt 

International public finance

ODA, Other Official Flows (OOF) and SSC

Domestic private finance

International private finance

Gross fixed capital formation (excluding FDI) 
by private sector, private credit provided by 
domestic banks, market capitalisation

International, private transfers (private 
development assistance (PDA), remittances), 
FDI and other international private capital 
flows (bank lending and equity and bond 
portfolio flows)

Table  3.1  sets  out  the  four  main  categories  of 
finance  covered  in  this  Report,  although  they 
do  not  represent  the  full  range  of  sources  of 
financing  that  are  relevant  to  each  category. 
Where appropriate, we identify relevant financing 
sources  that  are  not  addressed  in  this  chapter 
and  the  limitations  this  implies  for  the  analysis. 
Note that these flows refer to financial flows (e.g. 
tax  revenues  in  a  given  year)  and  not  the  stock, 
or accumulation of flows (e.g. the level of public 
debt). 

There are recognised limitations to the analysis of 
these sources:

 Domestic  public  finance  –  lack  of  sufficient 
cross-country  data  to  explore  trends  in  tax 
revenues before 2002 and some notable gaps 
in reporting even for the 2002–2011 period. 

  International  public  finance  –  focuses  on 
flows  reported  to  the  OECD  Development 
Assistance  Committee  (DAC),  which  includes 
ODA  reported  by  OECD  DAC  members 
and  an  increasing  number  of  non-OECD 
donors.  However,  it  excludes  Brazil,  China 
and  India,  which  provide  the  vast  majority  of 
ODA-equivalent  finance  in  the  form  of  SSC. 
The  analysis  of  OOF  also  focuses  on  trends 
reported  to  the  OECD  DAC,  which  excludes 
most South–South OOF, on which there is little 
detailed reporting.

3.1

The  four  categories  of  flows  have  different 
characteristics. This means that they are unlikely to 
be perfect substitutes for each other, but may have 
elements of substitution and complementarity. It 
is important to understand such characteristics in 
order to appreciate the role that each source can 
play in assisting countries to develop sustainable 
development enablers, and how they can be best 
mobilised and managed in order to make the most 
effective use of finance in the post-2015 context. 
These  empirical  characteristics  do  not  prescribe 
specific roles for public or private actors.

We  describe  the  following  characteristics  of 
finance flows:

  Basic identifying characteristics – main actors 
involved  and  who  manages  the  finance 
(demand and supply)

 Purpose  characteristics  –  motivations  for  the 
finance and sectors in which it is focused 

 Resourcing  characteristics  –  concessionality 
and servicing costs, volatility and cyclicality

effectiveness 

  Broader 
– 
channels  of  development  impact;  ownership, 
transparency and accountability 

characteristics 

We  summarise  these  characteristics  in  Table  3.2 
and describe them further below. 

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CHAPTER 3. Financing trends and challenges beyond 2015 
 
 
 
 
 
 
 
Table 3.2 | Selected characteristics of different sources of finance

MAIN ACTORS INvOLvED 
WHO MANAGES

MOTIvATIONS 

SECTOR FOCUS

Domestic public flows

Tax and other 
public revenues

Raised mainly from domestic 
transactions (income and 
consumption), but also from 
corporate tax, international trade 
taxes and royalties from resource 
extraction 

Strong focus on public goods and 
welfare, but also other drivers of 
resource use (equity, efficiency, 
growth)

For most developing countries 
public revenues are the most 
significant resource for funding 
national development priorities

Domestic debt

Government borrowing from 
international and domestic sources

Strong focus on public goods

Mainly used for investments in 
infrastructure and other economic-
related sectors

International public sources

ODA

OOF

SSC

Provided mainly by governments and 
government-owned development 
finance institutions)

Managed by a variety of actors 
(in order of significance) including 
governments, private contractors 
and NGOs

OECD/DAC regulations require ODA 
to be focused on ‘the promotion 
of the economic development 
and welfare’ (OECD, 2014b)

Provided by a range of bodies, 
including export credit agencies, 
government-owned/-directed 
development finance institutions, 
multilateral development banks, DFIs 
Managed largely by private sector, 
but also by governments 

Provided mainly by governments 
and government-owned/-directed 
institutions (e.g. development banks) 
Managed largely by governments, 
but also by private sector and NGOs

Export credits largely motivated by 
providers’ economic interests; in 
general OOF more commercially 
oriented, but with public good/
development characteristics

‘South-South cooperation is based 
on the central idea of solidarity and 
engaging the countries involved in 
a mutually-beneficial relationship 
that promotes self-reliance’ (RIS/
UNDESA/MEA-I, 2013)

Social and administrative 
infrastructure (e.g. health, 
education, water) 37.7%; economic 
infrastructure 17.2%; humanitarian 
8.9%; production 7.6% (OECD, 
2014b – % of total bilateral ODA 
commitments 2011); around 20% of 
ODA is concessional loans, which are 
predominantly focused on productive 
(<50%) and social (30%) sectors (DI, 
2013b)

Infrastructure (32.1%), banking and 
business (14%), industry and trade 
(13.1%), governance and security 
(6.6%), water and sanitation (5.8%); 
Education (3.5%), Health (3.2%) (DI, 
2013a – % of total 2011)

Focused more than ODA on 
infrastructure and productive sectors 
(UNDESA, 2008)

Domestic private finance

Investment 
by private 
enterprises

Private enterprises, investing retained 
profits or finance from other sources

Profit-oriented; often investment 
for the long run

Varies significantly across countries

Domestic 
bank lending

Provided by domestic financial 
institutions to domestic private sector

Profit-oriented, if not development-
oriented in case of domestic 
development banks

Varies significantly across countries

Stock markets

Financing from individuals and 
institutional investors channelled 
to listed companies

Profit-oriented

Varies significantly across countries

International private finance

FDI

Provided and managed mainly by 
private companies with the aim of 
acquiring a long-term stake in a 
company in another country

Profit-oriented; often long-term 
investment 

Portfolio 
equity flows

Commercial 
loans

PDA

Provided mainly by institutional 
investors and investment funds, 
but also banks.

Managed by the private sector 

Profit-oriented; often of a short-term 
nature

Provided by banks 75% of long-term 
loans to developing countries taken 
on by private institutions (DI, 2013a)

Profit-oriented, short or long term 
(but maturity in LICs often under 5 
years)

Provided by NGOs, foundations, 
faith-based organisations and 
corporations

Charitable aims (e.g. welfare, social 
services and rights issues, but also 
some sector development)

Managed mainly by non-state actors, 
e.g. NGOs and private sector

Remittances

Provided by family members

To support families in home country 
(e.g. through financing health, 
education, housing or business)

Varies significantly across countries. 
Infrastructure (30.1%), other industry 
and trade (20.9%), metals, chemicals 
and other physical sciences (17.3%), 
agriculture (5.8%), healthcare and life 
sciences (1.5%) (DI, 2013a – % of FDI 
to developing countries, 2011)

Varies significantly across countries

Varies significantly across countries

For corporate assistance 
humanitarian, health and education 
dominate; for foundations health is 
by the largest sector (around 66% of 
total); for NGOs it is health and social 
services (DI, 2013a – data for 2011)

Used for a wide range of household 
consumption and investment 
activities (OECD, 2005 – are 
remittances aiding development)

Actors  and  purpose  characteristics:  Table  3.2 
suggests,  first,  that  government  revenues,  PDA 
and ODA are focused more directly on the social 
sectors  than  are  other  sources  and  therefore 
contribute  more  directly  to  social  development. 
Commercially  oriented  flows  focus  more  on 
certain  types  of  infrastructure,  the  productive 
sector,  financial  sector  and  cooperation  with  the 
private  sector,  and  so  are  more  directly  relevant 
to economic development. In principle, different 
flows are often intended to make a distinct direct 
contribution.

Concessionality and servicing costs: The finance 
flows  differ  in  their  levels  of  concessionality  and 
therefore their servicing costs. In addition to public 
finance, the most concessional forms of financing 
are  ODA  grants,  which  by  definition  incur  no 
servicing  costs  (although  there  are  significant 
implementation costs). Over 80% of gross ODA is 
provided in the form of grants (although this has 
fallen moderately in recent years), as is most PDA.

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CHAPTER 3. Financing trends and challenges beyond 2015Various  other  financing  sources  are  considered 
concessional but incur some servicing costs. These 
are predominantly loans provided at below market 
rates of interest, and with longer maturities. Other 
financial assistance provided at concessional rates 
includes  ODA  loans,  a  significant  proportion  of 
OOF and some elements of PDA.

Commercial finance – domestic credit and foreign 
lending – is non-concessional and incurs the most 
significant  servicing  costs.  Given  their  levels  of 
revenue and growth, developing countries have to 
be especially careful about the commercial debt or 
financial  obligations  they  incur  in  order  to  ensure 
these are sustainable. Inward FDI can also lead to 
outflows  when  it  finances  projects  that  produce 
large sales and profits that can be repatriated. 

impact:  A 

Channels  of  development 
full 
assessment  of  the  development  impact  and 
significance  of  these  sources  of  financing  is 
beyond the scope of this chapter. Here we discuss 
broad ways in which these flows tend to have an 
impact on development. First, due to their more 
intensive focus on social sectors – such as health 
and education – as well as their stronger welfare 
and  public-good  orientation,  sources  such  as 
public revenues, ODA and PDA are likely to have 
a  greater  direct  impact  on  these  priorities  and 
their  associated  impacts.  Such  outcomes  are  by 
no  means  guaranteed,  however,  as  a  range  of 
complementary  factors  need  to  be  in  place  to 
ensure  that  they  achieve  maximum  impact.  This 
is  discussed  in  more  detail  in  Chapter  4,  but 
these  factors  include  accountability  relating  to 
the use of resources and the effectiveness of their 
management. 

It  is  also  important  to  recognise  that  more 
sources  of  finance 
commercially  oriented 
can  contribute 
to  social  development  and 
welfare  outcomes,  both  directly  and  indirectly. 
These  sources  are  important  for  developing 
infrastructure, helping to strengthen the financial 
sector,  creating 
improving  productivity, 
increasing  economic  growth  and  mobilising 

jobs, 

tax  revenues,  all  of  which  are  vital  to  sustaining 
development progress. 

There is no guarantee of such impacts, however. 
these  flows 
The  commercial  orientation  of 
means that they can bypass those with the least 
disposable  income  unless  they  are  mobilised, 
used  and  managed  well  and  market  failures 
are  addressed.  These  flows  can  also  in  some 
circumstances  bypass 
(e.g. 
investments in enclave sectors or economic zones) 
or  lead  to  the  exploitation  of  a  country’s  natural 
and financial resources (e.g. by causing pollution 
and via illicit financial flows).

local  economies 

volatility  and  cyclicality:  Among  the  most 
significant  challenges  relating  to  the  ability  of 
developing  countries  to  use  finance  relate  to  its 
volatility  and  cyclicality.  Volatility  refers  to  the 
degree  to  which  financial  flows  change  over 
time. Cyclicality refers to patterns by which these 
flows rise and fall and relate to economic cycles. 
Flows  are  pro-cyclical  when  they  are  positively 
correlated  with  economic  growth  cycles  in  the 
source  country, 4  and  counter-cyclical  when  they 
are  negatively  correlated  with  economic  growth 
cycles in the source country.

flows 

financial 

The volatility of finance has important implications 
for its effectiveness in contributing to sustainable 
development.  Volatile 
to 
developing countries can contribute to a range of 
difficulties,  including  macroeconomic  disruptions 
in relation to trade, exchange rates and inflation, 
as  well  as  financial  and  economic  instability  and 
crises (Massa, 2013; Griffith-Jones, 2013), all which 
can undermine growth prospects. In addition, the 
volatility  of  finance  that  is  focused  on  the  social 
sector, such as domestic revenues and ODA, pose 
challenges for effectively planning and disbursing 
government  budgets  and  can  also  undermine 
their impact on economic growth (Kharas, 2008). 

The cyclicality of finance flows also plays a role in 
influencing economic stability and growth. Where 
flows of finance are counter-cyclical, they can help 

to protect countries from the effects of economic 
downturns and crises. In contrast, where they are 
pro-cyclical, they can either exacerbate the effects 
of  economic  downturns  and  crises,  or  dampen 
those of economic upturns and booms. 

Volatility is relevant in some way to all sources of 
finance, but as Table 3.3 shows it is most relevant 
to private sources, especially portfolio equity and 
commercial  loans,  while  FDI  is  less  volatile  as  it 
is  generally  a  longer-term  form  of  investment 

(Tyson  et  al.,  2014).  Table  3.3  also  suggests  that 
domestic  private  capital  sources  are  subject  to 
higher  levels  of  volatility  than  public  sources, 
but that these are less volatile than international 
private  sources.  Among  forms  of  public  finance, 
international public sources are more volatile than 
domestic public sources. The volatility of ODA has 
significantly reduced its real value (Kharas, 2008). 

Table 3.3 | Volatility by flow (as a percentage of GDP) and by country income group (1995–2011)

DOMESTIC PRIvATE

DOMESTIC PUBLIC

INTERNATIONAL 
PRIvATE

INTERNATIONAL 
PUBLIC

LIC

LMIC

UMIC

0.03

0.06

0.15

Source: data used in this chapter.

0.06

0.05

0.05

0.13

0.22

0.22

0.10

0.30

0.26

Note: annual volatility measured by coefficient of variation (the ratio of the standard deviation to the mean) based on flow levels as a percentage of GDP.

All forms financing are pro-cyclical to some degree 
since they cannot be sustained indefinitely in the 
face  of  economic  contraction.  Private  financing 
sources (especially portfolio flows and commercial 
loans)  are  the  most  pro-cyclical,  as  was  seen 
during  the  2007–2008  global  financial  crisis. 
International  public  sources  of  finance  are  also 
subject  to  notable  levels  of  cyclicality,  although 
in  both  cases  this  effect  tends  to  be  felt  after  a 
time lag (Hallet, 2009; te Velde et al., 2011), and 
recent  trends  suggest  that  it  is  more  relevant 
to  ODA  grants  than  to  loans  (OECD,  2013). 
Domestic public sources can also fluctuate quite 
significantly  and  have  counter-cyclical  effects, 
especially  for  countries  producing  commodities 
that  are  subject  to  price  fluctuations  (Guerineau 
and Erhart, 2011) and for economies more closely 
linked to the global economy.

Ownership,  transparency  and  accountability: 
Developing  countries  have  more  ownership  of 
their  domestic  revenues  than  of  other  sources 
of  finance,  but  it  is  not  always  clear  how  far  this 
stretches  beyond  the  government  to  citizens. 
Such  issues  relate  directly  to  questions  about 
the transparency of and accountability for public 
resources. The 2012 Open Budget Survey reports 
that while only 25 of the 100 countries surveyed 
were judged to have published significant budget 
information, a similar proportion provided little or 
none. It also found ‘that most countries currently 
provide few opportunities for public engagement’ 
in relation to budgets (IBP, 2012).

4  I n the case of public revenues the developing country is the source country.

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CHAPTER 3. Financing trends and challenges beyond 2015There  remain  several  challenges  relating  to  the 
ownership,  transparency  and  accountability  of 
international  public  resources,  such  as  ODA, 
SSC  and  PDA.  Since  2005,  efforts  to  reform 
aid  have  focused  on  strengthening  ownership 
by  the  recipient  government  following  intense 
criticism  of  practices  such  as  conditionality,  by 
which  donors  make  their  aid  conditional  on  the 
adoption  of  specific  policies  or  procedures. 
Although one review found there had been some 
progress  (OECD,  2011),  it  is  far  from  clear  that 
aid  relationships  have  undergone  fundamental 
change.  There  have  been  significant  efforts 
to  improve  transparency  of  ODA  through  the 
International  Aid  Transparency  Initiative  (IATI), 
to  which  the  vast  majority  of  donors  are  now 
signatories and are beginning to observe. 

Some of the most significant challenges relating to 
ownership, transparency and accountability apply 
to  private  finance.  Governments  in  developing 
countries have generally limited powers to direct 
and regulate such sources, which are by definition 
driven  by  private  interests.  Often  there  is  little 
official  reporting  and  monitoring  of  international 
private  flows  (although  the  IMF,  World  Bank, 
the  Bank  for  International  Settlements  and  the 
Institute  for  International  Finance  (IFF)  provide 
some data), and some relevant regulatory regimes 
are  voluntary  and  have  only  weak  enforcement 
mechanisms.  Recent 
research  on  20,000 
companies found that 75% report no data on their 
sustainability practices (STC, 2014).

It is thus clear that the four categories of finance 
(and  sub-categories)  used  in  this  Report  have 
different  characteristics: 
they  have  different 
motivations,  different  intended  effects,  different 
levels of volatility and sector focus, and different 
degrees  of  ownership  and  transparency.  We 
therefore  need  to  analyse  the  different  flows  in 
different ways. 

Before we describe the evolution of finance flows, 
we explain the country income groupings used in 
this Report:

$1,036), 

income  per  capita 
 World  Bank’s  country 
classifications  (defined  in  2012):  Low-income 
Countries  (LICs)  (annual  per  capita  income 
below 
Lower  Middle-income 
Countries  (LMICs)  (annual  income  per  capita 
between  $1,036  and  $4,085)  and  Upper 
Middle-income  Countries 
(annual 
income  per  capita  between  $4,086  and 
$12,615) 

(UMICs) 

  Fragile  states:  we  examine  development 
financing  trends  experienced  by  the  36 
countries  which  the  World  Bank  classifies  as 
experiencing  ‘fragile  and  conflict  affected 
situations’ (World Bank, 2014) 

 FDI:  we  disaggregate  the  data  for  resource-
rich and non-resource-rich countries, using the 
IMF listing (IMF, 2012a)

With  regard  to  ODA  and  OOF  we  distinguish 
between  static  membership  of  these  country 
groupings  over  time  (i.e.  looking  at  historical 
trends in the current membership) and a dynamic 
membership  (i.e.  looking  at  historical  trends  for 
countries  in  these  groupings  each  year).  The 
technicalities  of  and  justifications  for  using  both 
of these approaches for analysing ODA and OOF 
allocations are discussed in Box 3.4.

  3.2 

 Historical trends in sources 
of finance

This  section  explores  historical  trends  in  sources 
of  finance  across  the  country  income  groups 
commonly  used 
to  categorise  developing 
countries.  It  adds  to  similar  recent  research  (e.g. 
EC, 2013; OECD, 2013) by disaggregating sources 
of  finance,  looking  at  long-term  trends  over  the 
period  1995–2012  and  presenting  statistical 

analyses  illustrating  the  relationship  between 
individual categories of financial flow and country 
income levels. 

The analysis shows that there have been significant 
changes in finance flows since the 2002 Monterrey 
Conference,  including  some  positive  trends  but 
also some major challenges still to be addressed. 
Overall  resources  have  increased  substantially, 
with  domestic  tax  revenues  representing  the 
largest  category  and  domestic 
investment 
growing  the  fastest;  international  public  finance 
has  also  grown  significantly,  although  its  relative 
importance  in  volume  terms  is  declining.  Major 
challenges are also still apparent, with tax-to-GDP 
ratios  still  very  low  in  LICs,  while  private  finance 
is  volatile  and  selective,  often  bypassing  the 
poorest  countries,  as  does  international  public 
finance.  Section  3.2.1  presents  an  overview  of 
trends  in  the  finance  mobilised  by  developing 
countries  over  the  2002–2011  period. 5  Section 
3.2.2 examines finance by country groupings and 
levels  of  income  and  Section  3.2.3  by  category. 
Annex  2  illustrates  significant  variation  of  flows 
across individual countries. 

3.2.1  Overall finance trends 

Figure  3.1  presents  trends  in  domestic  public 
revenue,  net  ODA  and  OOF, 6  domestic  private 
investment, remittances and international private 
capital (expressed in 2011 US dollars) mobilised by 
developing  countries  between  2002  and  2011. 7  
It shows that in real terms (2011 prices) they have 
obtained significant levels of additional resources 
over this period: 8

 Domestic  public  revenues  (tax  and  non-tax) 
increased by 272%, from $1,484 bn in 2002 to 
$5,523 bn in 2011

  International  public  finance  (net  ODA  and 
OOF) increased by 114%, from $75 bn in 2002 
to $161 bn in 2011

 Domestic private finance (measured as Gross 
Fixed  Capital  Formation,  less  FDI)  increased 
by 415%, from $725 bn in 2002 to $3,734 bn 
in 2011

  International  private  finance  (net  FDI  inflows, 
portfolio equity and bonds, commercial loans 
and  remittances)  increased  by  297%,  from 
$320 bn in 2002 to $1,269 bn in 2011

Domestic  public  sources  of  finance  have  been 
the most significant and have grown rapidly over 
the period. The growth in tax and non-tax public 
revenues has outpaced that of international public 
finance  (ODA  and  OOF),  which  were  equivalent 
to 5% of domestic revenues across all developing 
countries  in  2002,  falling  to  3%  by  2011.  The 
OECD (2014c) reports that ODA reached a record 
level of $135 bn in 2013.

Private finance has also been a significant source 
for  developing  countries  over  the  period,  with 
domestic  finance  generally  more 
important 
than  international  finance.  In  2011  international 
private capital flows to developing countries were 
equivalent to 33% of domestic private investment. 
This  figure  had  fallen  from  just  over  60%  in  the 
period immediately before the 2007–2008 global 
financial crisis, during and immediately following 
which international capital flows fell sharply. 

For the most part, growth in the sources of finance 
obtained  by  developing  countries  was  only 
moderately affected by global financial crisis and 
recovered quickly. Domestic public finance fell in 
2009, before rising above 2008 levels by 2010 and 
continuing to grow. Inflows of international private 
capital fell sharply in 2008 and 2009, before rising 
again  to  exceed  2007  levels  by  2011.  Levels  of 
ODA  and  OOF  combined  continued  to  increase 
until 2010, but fell by around 10% between 2010 
and  2012,  followed  by  a  real  increase  of  6%  in 
2013. Domestic private finance rose steadily from 
2002 to 2011.

3.2

5   This period is chosen because there is sufficient data on domestic revenue; for the analysis of trends for each source of finance the period 1995–2012 

is generally covered.

6   Focusing only on flows attributable to individual developing countries.

7   There is insufficient data on PDA and SSC trends to include in this overview analysis.

8   The total volume for such sources has increased by 314%, from $2.6 bn in 1995 to $10.8 bn in 2011.

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CHAPTER 3. Financing trends and challenges beyond 2015 
 
 
 
 
 
 
 
 
 
 
 
Figure 3.1 |  Trends in development finance (domestic public, domestic private, international private, 

and international public sources) obtained by developing countries (2011 $ bn), 2002–2011

Figure 3.2 |  Trends in development finance 

Figure 3.3 |  Trends in development finance 

obtained by LICs (2011 $ bn), 2002–2011

obtained by LICs (% GDP), 2002–2011

6000

5000

4000

3000

2000

1000

0

Domestic public resources

Domestic
private resources

International private resources

International public resources

Sources:  ODA+OOF  –  OECD  DAC  CRS  Table  1; 
Remittances  and  international  private  capital,  GFCF  and 
FDI – World Development Indicators (WDI); public revenue 
– IMF FAD database. Note: For ODA, OOF, remittances and 
international private capital data drawn directly from relevant 
sources; for public revenues, authors’ calculation using IMF 
FAD data on tax revenue/GDP and WDI data for GDP.

2002 2003

2004 2005 2006 2007 2008 2009 2010 2011

3.2.2 

Finance trends by country income group 

This  section  discusses  the  evolution  of  finance 
flows  for  each  of  the  income  country  groupings, 
analysing their absolute levels in real terms (2011 
dollars)  and  their  levels  as  a  proportion  of  GDP. 
Domestic  public  resources  have  been  the  most 
significant  source  of  financing  for  all  the  country 
income  groups  (especially  LMICs  and  UMICs), 
immediately 
followed  by  domestic  private 
sources.  The  findings  also  show  the  impressive 
growth  in  international  private  sources,  with 
international  public  sources  being  the  most 
modest  but  still  of  major  significance  for  LICs. 
Finally, despite significant growth in development 
finance in LICs, it is dwarfed by the levels in MICs 
(especially UMICs). 

Figures 3.2 and 3.3 illustrate that for the current 
LICs,  in  absolute  terms  there  have  been  similar 
levels  of  strong  sustained  growth  across  all 
four  categories.  The  most  significant  source  of 
financing  for  LICs  throughout  the  period  2002–
2011  was  domestic  public  revenue,  which  more 
than doubled from an estimated $29 bn in 2002 
to $60 bn in 2011. This rise was achieved largely 
through economic expansion rather than improved 

tax efforts, as the average LIC increased its levels 
of  domestic  public  revenue  only  modestly  over 
the  period.  International  private  finance  grew  at 
the  fastest  rate  (from  a  low  base,  with  the  very 
significant  contribution  made  by  remittances), 
and reached levels equivalent to domestic private 
finance by 2011. International public finance saw 
the most modest growth, but more than doubled 
from $15bn in 2002 to $39bn in 2011, and remains 
a significant source for LICs.

For  the  current  group  of  LMICs  and  UMICs, 
Figures  3.4–3.7  illustrate  the  sharp  growth  in 
domestic  public  revenue  and  domestic  private 
investment  over  the  period  2002–2011.  These 
were by far the most significant source for these 
countries,  although  both  sources  remained  at 
similar levels in 2011 for LMICs (just over $8–900 
bn), whereas for UMICs domestic public resources 
were more dominant. International private capital 
grew significantly from relatively modest levels in 
the early 2000s, to reach $366 bn and $918 bn in 
LMICs and UMICs respectively in 2011. In contrast 
to the other sources, international public finance 
levels  were  very  modest  for  the  current  group 
of  LMICs  and  UMICs,  although  ODA  increased 
slightly in absolute levels in recent years. 

60

50

40

30

20

10

0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2002

2005

2008

2011

Public dom

Public int

Private dom

Private int

Public dom

Private int

Private dom

Public int

Figure 3.4 |  Trends in development finance 

Figure 3.5 |  Trends in development finance 

obtained by LMICs (2011 $ bn), 2002–2011

obtained by LMICs (% GDP), 2002–2011

1000

900

800

700

600

500

400

300

200

100

0

25.0

20.0

15.0

10.0

5.0

0.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2002

2005

2008

2011

Public dom

Public int

Private dom

Private int

Public dom

Private int

Private dom

Public int

Figure 3.6 |  Trends in development finance 

Figure 3.7 |  Trends in development finance 

obtained by LMICs (2011 $ bn), 2002–2011

obtained by LMICs (% GDP), 2002–2011

4500

4000

3500

3000

2500

2000

1500

1000

500

0

25.0

20.0

15.0

10.0

5.0

0.0

0,2

0,3

0,2

0,2

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2002

2005

2008

2011

Public dom

Public int

Private dom

Private int

Public dom

Private int

Private dom

Public int

Sources: ODA+OOF – OECD DAC CRS table 1; remittances and international private capital - World Development Indicators (WDI); tax revenue - IMF FAD database.

Note: Absolute data on remittances and tax revenue figures based on applying the weighted average ratio to GDP for countries with data to total GDP levels for 
each country income group (i.e. projecting data for countries not reporting) because of significant missing data across countries; for all variables share of GDP 
data is based on weighted averages.

98 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 99

CHAPTER 3. Financing trends and challenges beyond 2015LICs,  indicating  the  need  for  particular  focus  on 
meeting their FFD challenges. In terms of trends 
in  relation  to  sources  of  public  revenue,  non-tax 
revenues  are  notably  more  significant  to  MICs 
than to LICs. This indicates that developing such 
sources  may  be  important  for  future  prospects 
in  LICs,  although  non-tax  revenues  seem  to  be 
more  volatile  and  sensitive  to  economic  cycles. 
Figure  3.11  illustrates  trends  in  domestic  public 
revenue  as  a  share  of  GDP  (PR/GDP)  across 
developing-country income groups. It shows that 
higher-income  countries  mobilise  higher  levels 
of PR/GDP. It also shows that public revenue has 
been  sensitive  to  the  global  financial  crisis,  with 
notable  dips  experienced  by  LMICs  and  UMICs 
around this period. A major challenge is for LICs 
whose tax-to-GDP ratio has been low and broadly 
constant.

These  generally  positive  trends  in  PR/GDP  have 
enabled all country income groupings to mobilise 
increased  finance  to  support  their  development 
processes. Across all developing countries public 
revenues  increased  from  an  estimated  $1.5  tr  in 
2002  to $5.5  tr in 2011 –  an  increase  of 272% – 
the  largest  source  of  financing  for  developing 
countries, including for LICs. 

It  is  also  useful  to  examine  the  importance  of 
these flows by level of income. Figure 3.8 shows 
how the main types of finance flows to developing 
countries have varied by levels of income (based 
on annual data covering the period 1980–2012). 
It illustrates that ODA as a share of GNI begins to 
decrease sharply at very low levels of income, with 
tax revenues outstripping ODA by the time GDP 
per capita reaches $500. In addition, the decline 
in  the  ODA-to-GNI  ratio  as  income  increases 
is  sharper  than  the  increase  in  the  tax-to-GDP 
ratio. As a result developing countries experience 
falling levels of total public revenue as a share of 
GDP as incomes increase beyond low levels. This 
means that some countries at very modest levels 
of GDP per capita may struggle to increase their 
absolute levels of public financing. 

Figure  3.8  also  illustrates  how  private  finance 
generally  becomes  more  significant  as  country 
incomes rise. Domestic private finance (measured 
by  gross  fixed  capital  formation  by  the  private 
sector minus FDI) increases as incomes rise, and 
exceeds  ODA  at  income  per  capita  of  $1,000–
$2,000.  Remittances  and  FDI  exceed  ODA  at 
income  per  capita  of  $2,000–$3,000,  albeit  at 
more  modest  levels  as  a  share  of  GDP  than 
domestic private investment. 

A  similar  analysis  for  debt-to-GDP  ratios  (using 
data  after  2007  -  see  figure  3.9)  suggests  it  is 
increasing  for  countries  from  the  LIC  to  MIC 
graduation  point  so  that  some  public  spending 
is  financed  through  (external)  debt  around  this 
point. This can pose challenges when debt is not 
managed well.

Figure 3.10 plots trends in tax revenues plus ODA 
alongside those for capital formation by the private 
sector.  It  illustrates  that  public  finance  dominates 
private  finance  in  developing  countries  at  nearly 
all levels of income. These trends have important 
implications  for  the  post-2015  debate  on  FFD. 
Public flows (including ODA at low levels of income 
– see Figure 3.8) are critical sources of finance for 
all  developing  countries,  but  private  investment 
assumes  more  importance  at  higher  levels  of 
income. This is a key finding of this chapter.

Figure 3.8 |  Financial flows (percentage of GDP) 

by income level

Figure 3.10 |  Public and private flows 
(% GDP) by income level

25

20

P
D
G

f

o
%

15

10

5

0

1036

4086

12615

ODA

Tax Revenues

Domestic private finance

FDI

Remittances

LIC

LMIC

UMIC

HIC

Income per capita (US$ 2005 prices)

Source: WDI data (FDI, ODA, remittances and tax re-
venues) for all WDI countries, 1980-2012, log scale but 
labels converted from logs

Figure 3.9 |  External debt (percentage of GDP) 
by country income level

P
D
G

f

o
%
s
a

t
b
e
d

l

a
n
r
e
t
x
E

50

48

46

44

42

40

5

6

1096
7

2980
8

9

income per capita (US$ 2005 prices)

Source: WDI data (external debt) for all WDI countries, 
2007-, log scale with labels also for $

P
D
G

f

o
%

40

30

20

10

0

1036

4086

12615

income per capita (US$ 2005 prices)

Total finance (public + private)

Public finance (taxes and ODA)

Private finance (capital formation by private sector)

Source: WDI. Note: private finance = GFCF by private 
sector as % of GDP; public finance = ODA plus tax re-
venues as % of GDP (based on WDI data)

3.2.3 

Trends by category of finance 

This section presents trends in finance by category 
over  the  period  2002–2011  in  view  of  the  lack 
of  data  on  public  revenues  before  2002  and  for 
2012. 9 It brings out the major achievements and 
challenges by flow.

3.2.3.1 | Domestic public finance 

The focus on total domestic revenues distinguishes 
between  tax  and  non-tax  revenue.  Over  this 
period  all  country  income  groups  achieved  very 
significantly increased levels of public revenue in 
absolute terms, although the global financial crisis 
returned  LMIC  revenues  as  a  share  of  GDP  to 
their 2002 levels in 2011 and their average levels 
remained modest. There is significant variation in 
the  levels  of  public  revenue  mobilised  in  MICs, 
several of which have levels more comparable with 

100 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 101

9   Before 2002 data was available for only around a third of countries in each income group. 

CHAPTER 3. Financing trends and challenges beyond 2015 
 
 
 
 
 
 
 
 
Figure 3.11 |  Total domestic public revenues 
across country income groups 
(percentage of GDP) 2002–2011

Figure 3.12 |  PR/GDP for resource-rich (RR) 

and non-resource-rich (NRR) 
developing countries

28

26

24

22

20

18

16

14

12

0

27

25

23

21

19

17

15

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2002 2003

2004 2005 2006 2007 2008 2009 2010 2011

LIC

LMIC

UMIC

RR

NRR

Source:  TR/GDP  -  IMF  FAD  database;  GDP  –  WDI; 
Note:  Weighted  average,  authors’  calculation  based 
on  countries  for  which  data  is  available,  which  has 
some annual variations

Sources:  GDP  –  WDI;  public  revenue  –  IMF  FAD  da-
tabase.  Note:  Authors’  calculation,  using  IMF  (2012a) 
RR and NRR categories.

Interestingly,  the  broadest  variation  in  PR/GDP 
levels is in the UMICs (from 13.9% for Costa Rica 
to  57%  for  Libya),  followed  by  the  LMICs  (from 
11.2%  for  Guatemala  to  42.8%  for  Ukraine)  and 
then  the  LICs  grouping.  (See  Annex  2  for  an 
illustration of intra-group variation.) This suggests 
that  there  are  a  number  of  LMICs  and  UMICs 
whose domestic revenues are still modest and are 
even  comparable  to  those  of  LICs  (as  a  share  of 
GDP).  These  countries  therefore  face  significant 
FFD  challenges  and  there  may  be  a  case  for 
from 
providing  continued  support  to  them 
international public sources. 

It  is  also  noteworthy  that  across  all  developing 
countries over the period 2002–2011 the average 
levels  of  PR/GDP  for  resource-rich  (RR)  countries 
are  generally  marginally  higher 
those 
mobilised  by  non-resource-rich  countries  (NRR) 
(see  Figure  3.12).  Following  the  global  financial 
crisis,  the  revenues  of  RR  countries  have  fallen 
sharply  and  the  gap  shrank,  and  even  reversed, 

than 

in 2010. This suggests that revenues from natural 
resources are exposed to greater volatility, which 
presents challenges for RR countries. 

Figures  3.13  and  3.14  compare  trends  in  tax 
revenue (TR/GDP) and non-tax revenue (NTR/GDP) 
– the two main categories of total public revenue 
–  as  a  share  of  GDP  respectively  across  country 
income  groupings  for  the  period  2002–2011. 
Consistent  with  much  of  the  literature  on  factors 
pushing up tax revenues (IMF, 2007, 2012b); Figure 
3.13  illustrates  that  levels  of  TR/GDP  increase  by 
country income groups. Across the period TR/GDP 
rose modestly in LICs (from 10% to 12%) and only 
very slightly in LMICs (edging a little over 15%, with 
a  peak  of  17%  in  2005),  but  more  significantly  in 
UMICs, from 16% to 20%.

As is also clear from Figure 3.13, LICs have faced 
the  most  significant  challenges  in  mobilising 
tax  revenues,  which  is  not  only  a  function  of 
their  income  and  economic  structure  (with  large 

agricultural  and  informal  sectors)  but  a  range  of 
other factors. These include tax incentives offered 
to  the  private  sector;  tax  evasion  by  TNCs)  (see 
Box  3.1);  the  under-taxation  of  the  wealthy, 
and  of  resources  such  as  land  and  property 
and  sectors  such  as  mining;  and  weaknesses 
in  tax  administration.  These  challenges  affect 
all  developing  countries  in  some  way,  but  are 
particularly critical for LICs given their low revenue-
generation levels. Addressing these issues poses 

significant  political  challenges,  which  suggests  it 
will  take  time  to  achieve  significant  tax  revenue 
increases (Moore, 2013).

In  terms  of  NTR/GDP  it  is  clear  from  Figure  3.14 
that in most years between 2002 and 2011 this has 
been  much  more  significant  for  MICs  (on  average 
roughly one third of tax revenues) compared to LICs 
(on average around one sixth of tax revenues in most 
years), with NTR/GDP being especially low for LICs.

Box 3.1 | Iillicit financial flows and their implications for public domestic revenue mobilisation (DRM) in developing countries

Illicit  financial  outflows  (a  form  of  capital  flight  when  money  is  illegally  earned,  transferred,  or  spent),  from  developing  countries 
amounted to approximately $542 bn per year on average during the 2002–2011 period. Around 80% of these flows are due to trade 
mis-invoicing, a practice which undermines government efforts to tax companies. As an illustration of the implications for public 
DRM, between 2002 and 2011 $60.8 bn moved illegally into or out of Ghana, Kenya, Mozambique, Tanzania, and Uganda using 
trade mis-invoicing. This translates into losses in tax revenue estimated at between 7% and 12% of total government revenue for 
each of these countries over this period (GFI/ADB, 2014). There has been growing international attention paid to these issues in 
recent years – especially in the G8 and G20 – although steps still need to be taken to address them. 

Figure 3.13 |  Tax revenues across country 

Figure 3.14 |  Non-tax revenues across country 

income groups (% GDP) 2002–2011

income groups (% GDP) 2002–2011

20

19

18

17

16

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1

0

2002 2003

2004 2005 2006 2007 2008 2009 2010 2011

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

LIC

LMIC

UMIC

LIC

LMIC

UMIC

Source: TR/GDP - IMF FAD database; GDP – WDI. Note: Weighted average, authors’ calculation based on countries for which data is available, 
which has some variations from year to year

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Combining finance and policies to implement a transformative post-2015 development agenda | 103

CHAPTER 3. Financing trends and challenges beyond 2015ratio  but  large  swings  in  the  underlying  types  of 
taxation. For example, the amount of tax revenues 
collected  through  VAT  increases  with  income 
levels (see ERD commissioned paper by Brun and 
Chambas, 2015). Efforts to raise tax-to-GDP ratios 
need to take these shifts into account.

The main sources of tax revenue vary by level of 
income. Figure 3.15 shows that as income levels 
rise there is a corresponding increase in the share 
of  tax  from  incomes  and  profits  and  from  goods 
and services, compensating for a rapidly declining 
share  of  trade  tax  revenues.  This  suggests  that 
as  countries  undergo  economic  transformation, 
they  experience  gradual  increases  in  tax-to-GDP 

Figure 3.15 |  Revenues for selected taxes 

(percentage of GDP) at different 
country income levels

P
D
G

f

o
%

30

25

20

15

10

income per capita (US$ 2005 prices)

Corporate and personal income tax and services

Trade taxes

Indirect taxes on goods and services

Source: WDI. Note: Taxes on international trade include import 
duties,  export  duties,  profits  of  export  or  import  monopolies, 
exchange profits, and exchange taxes. Taxes on income, profits, 
and  capital  gains  are  levied  on  the  actual  or  presumptive  net 
income  of  individuals,  on  the  profits  of  corporations  and 
enterprises,  and  on  capital  gains,  whether  realised  or  not,  on 
land, securities, and other assets. Taxes on goods and services 
include general sales and turnover or VAT, selective excises on 
goods, selective taxes on services, taxes on the use of goods or 
property, on extraction and production of minerals, and profits 
of fiscal monopolies. Other taxes are not shown.

further 

illustrated 

in  Section  3.2.3.4  on 
As 
international  private  finance,  one  of 
the 
channels  through  which  developing  countries 
are  increasingly  mobilising  resources  for  public 
investment is international private capital markets. 
The programmes to cancel or reduce debt in the 
2000s  and  improving  levels  of  economic  growth 
have  given  many  developing  countries  the  fiscal 
space  to  use  these  sources  of  financing  without 
significantly  undermining  the  sustainability  of 
their  debt.  Their  debt  levels  are  rising,  however, 
and developing countries will need to assess their 
ability  to  take  on  additional  debt  in  the  coming 
years. These issues are most relevant for countries 

that have recently progressed to MIC status and 
for  which  concessional  funding  sources  are  less 
readily available (Prizzon and Mustapha, 2014). 

3.2.3.2 | International public finance 

This  section  presents  trends  across  sources 
international  public  finance  obtained  by 
of 
developing  countries  between  1995  and  2012. 
It  illustrates  that  ODA  has  increased  across  all 
country  income  groups,  although  OOF  levels 
seem  to  have  remained  relatively  modest.  It 
suggests  that  despite  some  improvements  in 
allocations  of  ODA  to  LICs  (for  which  per  capita 

As  noted  earlier,  our  analysis  includes  ODA 
reported to the OECD DAC from a range of non-
OECD  countries, 10  which  in  2012  contributed 
around  5%  (equivalent  to  $6.5  bn)  of  total 
reported  ODA. 11  BRICs,  or  more  accurately  the 
BASIC countries – Brazil, India, China and South 
Africa  (since  2010  Russia  reported  on  its  ODA 
and  country  allocations  to  the  OECD  DAC)  – 
do  not  systematically  report  on  the  levels  and 
geographical  focus  of  their  aid.  Moreover,  the 
data come from a range of country-level sources 
with  diverse  reporting  standards,  making  it 
impossible  to  draw  accurate  comparisons.  For 
this  reason  SSC  is  not  included  in  this  detailed 
analysis. However, Box 3.2 presents an overview 
of the latest research on SSC trends from BASIC 
countries  and  an  analysis  of  its  characteristics. 
An  important  finding  from  the  available  data 
reported  in  Box  3.2  is  that  SSC  is  increasingly 
rapidly.  The  trends  also  illustrate  that  SSC  is  an 
increasingly  important  source  of  financing  for 
regions such as SSA. 

ODA has increased rapidly over the last decade) 
there  remain  questions  about  the  suitability 
of  allocations  of  international  public  finance. 
Concerns about a weak relationship between the 
volume of ODA and the income levels of recipient 
countries  remain  and  are  reinforced  by  recent 
increases in ODA to MICs. In addition, OOF levels 
have  been  very  modest  beyond  UMICs,  raising 
concerns  about  whether  these  less  concessional 
but still important flows could be better aimed at 
LMICs,  many  of  which  have  less  access  to  ODA 
(Galiani  et  al.,  2014).  The  rapid  growth  of  SSC 
points  to  it  becoming  an  increasingly  significant 
form of international public financing, although to 
date there has been limited detailed analysis of its 
allocation patterns. 

Official Development Assistance (ODA)

ODA  is  currently  defined  as  flows  to  countries 
and  territories  on  the  Development  Assistance 
Committee (DAC) List of ODA Recipients (OECD-
DAC,  n.d.)  and  to  multilateral  development 
agencies 
institutions  provided  by  official 
(including  state  and  local  governments,  or  their 
executive agencies) and for which the promotion 
of  the  economic  development  and  welfare  of 
developing  countries  is  the  main  objective  and 
which  is  concessional  in  character  and  convey  a 
grant element of at least 25% at a 10% discount 
rate. There is extensive debate in the OECD DAC 
about the application of this definition, especially 
with  regard  to  defining  the  required  levels  and 
approaches  to  calculating  concessionality. 
In 
December 2014 OECD DAC members agreed to 
adopt  some  important  changes  to  the  definition 
of  ODA,  which  will  be  introduced  in  the  coming 
years (see Box 3.4). Our analysis is based on data 
reflecting the definition currently in use. 

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Combining finance and policies to implement a transformative post-2015 development agenda | 105

10  These  countries  include  Bulgaria,  Chinese  Taipei,  Cyprus,  Estonia,  Hungary,  Israel,  Kuwait,  Latvia,  Liechtenstein,  Malta,  Romania,  Russia,  Saudi  Arabia, 
Slovenia, Thailand, Turkey, United Arab Emirates; amongst these providers the largest by some way is Saudi Arabia, with Turkey United Arab Emirates, Russia 
and Poland also significant providers (DI, 2013a).

11  Non-DAC donors, including those reporting to the OECD DAC, do not apply the ODA criteria to their reporting in the same way as the OECD-DAC members, 

but use an approximation of the ODA definition. 

CHAPTER 3. Financing trends and challenges beyond 2015 
 
Box 3.2 | Recent trends and characteristics of development assistance from the BASIC and other developing countries

Figure 3.2B below presents the OECD’s latest data on ODA-like flows from the original BRICs countries – Brazil, India, China and 
South Africa (now termed the BASIC countries). It excludes Russia, which has since 2010 reported on its ODA to the OECD DAC. The 
data are presented on a gross basis and draws on a range of different country-level sources, with diverse reporting standards, making 
it impossible to draw accurate comparisons.

Gross ODA-like flows from the BASIC countries were an estimated $3.2 bn in 2010, with China by far the largest provider (OECD-
DCR, 2013). Other studies suggest that development assistance from the BRICS is significantly higher, with total SSC (including from 
some countries already reporting in some way to the OECD-DAC) estimated at $16–19 bn in 2011 (UN-ESC, 2014), with the Chinese 
Government reporting its assistance to have been $5 bn per year in the 2010–2012 (Sun, 2014).

Uneze (2015) argues that flows from other countries, such as Turkey and United Arab Emirates, have also increased in the period 
2003–2012 to LICs in SSA; from $66 mn to $2.5 bn in Turkey and from $926 mn to $1 bn in the United Arab Emirates. Challenges 
relating to the categorisation and monitoring of these flows preclude efforts to generate firm and consistent figures on them.

The  BRICs  and  other  developing  countries  have  a  long  tradition  of  providing  development  assistance,  and  have  been  keen  to 
emphasise  that  their  support  is  driven  by  the  principles  of  ‘a  demand-driven  approach;  non-conditionality;  respect  for  national 
sovereignty; national ownership and independence; as well as mutual benefit’ (RIS/UNDESA/MEA-I, 2013).

Most SSC is to neighbouring countries, although China’s focus on SSA is one exception. Over the period 2010–2012, 52% of Chinese 
development assistance was provided to SSA, up from 46% in 2009 (Sun, 2014) and China is SSA’s largest international partner in 
relation to infrastructure development (OECD, 2012). Turkey and the United Arab Emirates (UAE) also seem to be providing growing 
assistance to SSA. These trends illustrate that SSC is an increasingly important source of financing for regions such as SSA. 

It is also thought that SSC is more focused than ODA on economic and productive sectors, and is more closely linked to trade and 
investment (UNDESA, 2008; Uneze, 2015). Moreover, most ODA from traditional donors is in the form of grants, while SSC providers 
tend to prefer concessional loans (Uneze, 2015). 

There is as yet limited collaboration and coordination among SSC providers (Uneze, 2015), but in recent discussions they identified a 
range of issues regarding efforts to improve the effectiveness of their programmes. These included the need to strengthen evidence 
on the nature of SSC, improve evaluation, establish platforms to address common agendas and to deepen engagement with regional 
and multilateral institutions (RIS/UNDESA/MEA-I, 2013).

3000

2500

Figure 3.2B |  Gross ODA-like flows from the BASIC countries to developing countries, 2007–2011 ($ bn)

2000

1500

1000

500

0

2007

2008

2009

2010

2011

China

India

Brazil

South Africa

3000

2500

2000

1500

1000

500

0

2007

2008

2009

2010

2011

China

India

Brazil

South Africa

Figure 3.16

Figure 3.16 |  Net ODA (as percentage of GDP, excluding debt relief) 

across country income groups (excluding China and India), 
1995–2012 (static membership)

12

12

10

8

6

4

2

0

10

8

6

4

2

0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

LIC

LMIC

UMIC

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

LIC

Source: Net ODA - OECD CRS Table 2a; GDP - WDI data.

LMIC

Note: Authors’ calculation, weighted average

UMIC

Figure 3.17 |  Net ODA per capita (excluding debt relief, 2012 $ rate) 

across country income groupings (dynamic membership) 
(excluding China and India), 1995–2012

12

60

50

40

30

20

10

0

10

8

6

4

2

0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

LIC

LMIC

UMIC

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

LIC

Source: Net ODA – OECD CRS table 2a; popul’ – WDI.

LMIC

UMIC

Note: Net ODA per capita based on authors’ calculation.

2010

2011

2012

2010

2011

2012

Figure  3.16  illustrates  trends  in  country-allocable 12 
net 13  ODA  (NODA),  excluding  debt  relief, 14  as  a 
share  of  GDP  (NODA/GDP)  across  country  income 
groupings over the period 1995–2012. The data on 
which Figure 3.16 is based excludes China and India 
because their very large economies mean that their 
NODA/GDP levels are very low and strongly shape 
trends  for  the  country  income  groupings  of  which 
they have been members.

As noted earlier, the OECD (2014c) reports that ODA 
levels hit a record of $135 bn in 2013. Figure 3.16 
illustrates that the current LICs have received by far 
the highest levels of NODA/GDP. These levels fell 
in the late 1990s, and then rose in the early 2000s, 
largely  reflecting  trends  in  global  ODA.  NODA/
GDP  levels  for  these  countries  then  stagnated 
between  2004  and  2009,  before  falling  from  an 
average of 10% to 8.7% of their GDP in 2012. This 
trend  is  largely  due  to  the  strong  levels  of  GDP 
growth keeping pace with and then outstripping the 
significant growth in ODA for these countries over 
the last decade. NODA/GDP levels for the current 
group of LMICs have fallen steadily since 1995 and 
been  below  2%  from  2006.  For  the  current  group 
of  UMICs  these  levels  were  below  0.5%  of  GDP 
throughout the period 1995 to 2012.

Another  perspective  on  trends  in  NODA  across 
country income groupings for the period 1995–2012 
is to analyse such trends on the basis of a dynamic 
country categorisation, an approach explained and 
contrasted with a static country analysis in Box 3.4. 

The most significant trends in NODA based on an 
analysis  of  a  dynamic  country  income  grouping 
emerge  in  relation  to  NODA  per  capita.  Figure 
3.17 illustrates such trends, again excluding China 
and  India,  and  shows  that  since  the  late  1990s 
LICs have received the largest and fastest growing 
levels  of  NODA  per  capita  ($47  in  2012),  with 
NODA per capita to the average LMIC and UMIC, 
excluding  China  and  India,  also  growing  but  to 
lower levels ($25 and $17 in 2012). 

12   This  analysis  excludes  ODA  that  is  not  attributed  to  specific  countries;  the  main  categories  of  such  ODA  include  allocations  to  regional  programmes, 

administration costs and spending on refugees and students from developing countries who are living in donor countries.

13   Net ODA (NODA) is the standard measure for international reporting of ODA, and is equivalent to total gross disbursements of ODA minus repayments on 

ODA loans; as well proceeds from selling equity stakes that had been purchased using ODA.

14   The current approach to recording debt relief as ODA tends to overstate the resource transfers to developing countries. This is because the total value of 
debt principle cancelled, as well as payment arrears and future interest payments forgone, are reported as ODA, even in contexts where there were no debt 
repayments being made or likely to be made in the future; in such contexts, which are widespread, debt relief does not enable the country to obtain access 
to increased resources to support its development.

106 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 107

CHAPTER 3. Financing trends and challenges beyond 2015Figure 3.17 also shows that over the period 2010–
2012  NODA  per  capita  to  LICs  stagnated,  and 
fell to LMICs, but rose to UMICs from 2005. This 
trend  compounds  concerns  that  despite  ODA 
allocations becoming more sensitive to a country’s 
development  characteristics,  such  as  income 
levels,  over  the  last  decade  (illustrated  in  Figure 
3.17; see also Claessens et al., 2009) donors still 
allocate  ODA  largely  on  the  basis  of  political 
factors  (Hoeffler  and  Outram,  2008),  albeit  that 
some donors are more responsive than others to 
a country’s development indicators (Clist, 2011). 

It appears that an increasing international focus on 
mitigating  climate  change  has  helped  to  propel 
increases  in  ODA  to  UMICs,  as  these  countries 
have  received  significant  increases  in  ODA  to 
address  such  challenges  over  the  last  decade 
(ODI, 2014). This trend highlights one of the key 
questions  in  current  discussions  on  the  future  of 
ODA – namely, the degree to which it should be 
focused  on  addressing  GPGs  and  issues  such  as 
climate  change,  rather  than  on  more  traditional 
development  and  poverty-reduction  objectives. 
Based  on  commitments  made  as  part  of  the 
United Nations Framework Convention on Climate 
Change  (UNFCCC),  developing  countries  have 
been  vocal  in  calling  for  assistance  on  climate 
change  to  be  additional  to  ODA  commitments. 
During  the  2010–2012  period,  an  average  of 
$13  bn  of  ODA  (around  10%  of  the  total)  was 

principally  focused  on  climate  change  (OECD, 
2012), especially on mitigation activities, for which 
the priority is often emerging economies. 

The  characteristics  of  ODA  flows  across  country 
groupings  have  also  changed  significantly  over 
the  period  1995–2012.  LICs  have  increasingly 
received  ODA  in  the  form  of  grants,  which 
constituted  83%  of  their  gross  ODA  in  2012,  up 
from  57%  in  1995.  At  the  same  time  LMICs  and 
UMICs  have  increasingly  received  ODA  in  the 
form  of  loans,  which  constituted  more  than  40% 
of their gross ODA in 2012, up from below 30% in 
the early 2000s.

For  UMICs  (and  to  some  degree  LMICs),  donors 
have provided a growing proportion of the ODA 
loans  received  in  recent  years  from  funds  raised 
on financial markets (OECD, 2013). 

In  terms  of  ODA  trends  in  country  income 
groupings,  in  terms  of  GDP  the  LICs  have  the 
largest  range  of  ODA  levels,  within  the  lowest 
received  by  Bangladesh  –  1.2%  in  2012  –  and 
the highest by Liberia – 54% in 2012. Most MICs 
receive very low levels of ODA as a share of GDP, 
with  Kosovo  being  the  largest  recipient  in  the 
case  of  LMICs  –  9.9%  in  2012  –  and  Bosnia  and 
Herzegovina  the  largest  of  the  UMICs  –  3.4%  in 
2012. (See Annex 2 for illustration of these intra-
group trends.) 

Box 3.3 | The rising share of ODA allocated to global public goods (GPGs))

Global Public Goods (GPGs) are goods for which the benefits of consumption cannot be restricted and transcend national boundaries. 
There  are  diverse  views  about  exactly  which  types  of  goods  and  related  interventions  belong  to  this  category.  This  has  led  to 
estimates of the share of ODA that is dedicated to GPGs varying significantly: estimates produced range from 3.7% (Anand, 2002) 
to 25% (Raffer, 1999). 

Using the most recent definitions, the share of ODA that supports GPGs and related interventions has been increasing over the last 
two decades. Based on a relatively narrow definition of GPGs te Velde et al. (2002) estimates that over the period 1980–1998 the 
share doubled to 9%. A 2009 study, which used three definitions of GPGs to estimate such trends across from 1995 to 2006, found 
that it rose gradually during from 10–14% to 12–15% (Cepparulo and Giuriato, 2009). The most recent extensive study of these trends 
distinguishes between bilateral and multilateral ODA and finds that the share of bilateral ODA focused on GPGs rose from just under 
4% in 2002 to 8% in 2011, and from 5% to 15% for multilateral ODA over the same period (Davies, 2015).

The 1990s saw environmental priorities resulting in an increase in ODA spending on GPGs (te Velde et al., 2002), with health and 
communicable diseases (and some notable increases in interventions relating to security and crime) driving these trends during much 
of 2000s (Cepparulo and Giuriato, 2009) and climate change becoming a significant factor in recent years (Davies, 2014). 

Box 3.4 | The OECD DAC’s review of its development finance monitoring systems

At its December 2012 High Level Meeting (HLM), the OECD DAC agreed to modernise the definition of ODA, and to develop a 
proposal for a new measure of development finance beyond ODA - Total Official Support for Development (TOSD). It embarked on 
this process in recognition of significant changes in the practice of development finance over recent years.

Following extensive technical work and dialogue, at its December 2014 HLM the OECD DAC agreed to reform rules on the reporting 
of loan concessionality:

•	 To	count	only	the	grant	element	of	concessional	loans	as	ODA	(as	opposed	to	the	net	cash-flow	value	of	the	loan	currently)

•	

•	

•	

	To	calculate	the	grant	element	of	a	loan	using	a	discount	rate	based	on	the	IMF’s	5%	plus	a	risk	adjustment	factor	of	1%	for	UMICs,	
2% for LMICs and 4% for LDCs/other LICs (currently a uniform discount rate of 10% is applied to loans to all countries) (note: the 
discount rate is not an interest rate)

	To	apply	a	minimum	grant	element	threshold	for	loans	to	count	as	ODA	of	45%	for	LDCs	and	other	LICs,	15%	for	LMICs	and	10%	
for UMICs (currently a uniform floor of 25% is applied to all)

	To	disqualify	as	ODA	any	loan	whose	terms	are	not	consistent	with	IMF	Debt	Limits	Policy	and/or	the	World	Bank’s	non-concessional	
borrowing policy

OECD DAC members also agreed to continue work on a range of other areas in order to modernise ODA reporting systems, including:

•	

•	

•	

	Support to the private sector - to better account for the public effort that goes into mobilising additional private sector resources 
for development.

	Security-related support - to further explore how support in the area of peace & security could be better reflected in the DAC 
statistics

	Total official support for development (TOSD) - to complement ODA with the introduction of a broader statistical aggregate of 
international public contributions to development (TOSD), which would provide a more comprehensive account of finance made 
available thanks to the official sector.

Sources: OECD DAC (2012, 2013, 2014)

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Combining finance and policies to implement a transformative post-2015 development agenda | 109

CHAPTER 3. Financing trends and challenges beyond 2015Other Official Flows (OOF)

OOF are defined as official financing provided by 
countries  in  the  OECD’s  ODA  eligibility  list  but 
which  does  not  qualify  as  ODA,  either  because 
it  is  not  aimed  primarily  at  development  or 
because  it  is  not  sufficiently  concessional.  The 
current discussions on redefining ODA may lead 
to  changes  in  the  distinction  between  ODA  and 
OOFs  (see  Box  3.4).  This  Report  uses  its  current 
definition and therefore treats OOFs separately. 

(CDC),  the  German 
(DEG),  SwedFund 

As  highlighted  in  Section  3.1,  this  analysis  is 
based  on  an  incomplete  picture  of  global  OOF 
given  that  these  are  reported  in  sufficient  detail 
by  only  a  limited  number  of  OECD  members 
(which  reported  $29  bn  net  in  country-allocable 
OOF  in  2012).  As  a  result  substantial  volumes 
of  OOF  provided  by  a  number  of  DFIs  and 
non-OECD  agencies 15  are  not  included  in  this 
analysis.  Kingombe  et  al.  (2011)  examine  DFIs 
that  aim  to  invest  in  sustainable  private-sector 
projects;  maximise  impacts  on  development, 
while  remaining  financially  viable  in  the  long 
term and mobilising private-sector capital. Many 
DFIs  are  solely  owned  by  the  public  sector.  For 
the  Commonwealth  Development 
instance, 
Investment 
Corporation 
Corporation 
in  Sweden, 
Norfund 
Industrial  Development 
Corporation  (IDC)  in  South  Africa,  and  the  US 
Overseas Private Investment Corporation (OPIC)). 
Proparco (France), FMO (Netherlands), COFIDES 
(Spain)  and  SIMEST  (Italy)  have  a  mixed  public–
private ownership structure. The  multilateral and 
regional  DFIs  have  multiple  shareholders  from 
various countries. DFIs provide finance (e.g. loans, 
guarantees, equity investment; often classified as 
OOF  but  not  always  ODA)  to  the  private  sector 
and this type of support has grown rapidly at the 
global level, from new annual gross commitments 
of  $15.4  bn  in  2003  to  $21.4  bn  in  2005  and 
$33  bn  in  2009.  This  represents  more  than  a 
doubling  in  over  six  years,  equivalent  to  25%  of 
ODA.  The  largest  DFIs  include  the  International 
Finance  Corporation  (IFC),  the  European  Bank 

in  Norway, 

for Reconstruction and Development (EBRD) and 
the European Investment Bank (EIB) followed by 
a number of large bilateral agencies (DEG, FMO, 
CDC and Proparco) and a long tail of small DFIs. 
DFIs  tend  to  use  loan  instruments  more  than 
equity instruments, but with large variability across 
institutions. In terms of geographical distribution, 
IFC  invested  13%  in  SSA  (2010),  while  in  2009, 
52%  of  CDC’s  portfolio  was  invested  in  Africa 
(45% in SSA), 17% for DEG and 29% for FMO. It 
seems that most DFIs avoid the poorest countries, 
perhaps in part because they need to invest on a 
commercial basis and ensure repayment. 

Figure 3.18 presents trends in country-allocable 16 
net 17 OOF as share of GDP (NOOF/GDP) reported 
to the OECD across country income groups over 
the  period  1995–2012.  It  illustrates  that  NOOF/
GDP to all developing countries over this period 
has been very modest and has fluctuated sharply 
from  year  to  year.  The  current  group  of  UMICs 
has  generally  experienced  the  highest  levels  of 
net  OOF/GDP,  although  these  have  generally 
not increased above 0.5% of GDP. For all country 
groupings  there  was  a  spike  in  NOOF/GDP  in 
2008–2009, during which additional funding was 
provided  through  DFIs  to  support  developing 
countries  to  deal  with  the  effects  of  the  global 
financial  crisis.  The  spike  was  short-lived  and 
all  country  groupings  have  experienced  a  fall  in 
NOOF/GDP  since  2010,  and  LICs  experienced 
net outflows of OOF in 2011. 

As  with  ODA,  another  perspective  on  trends 
in  net  OOF  across  country  income  groupings 
is  gained  by  looking  at  such  trends  using  a 
dynamic  grouping  analysis,  which  provides  an 
opportunity  to  explore  how  (if  at  all)  patterns  in 
such  financing  have  changed  in  response  to  the 
changing  membership  of  these  groupings  (see 
Box 3.4 for more background on this approach). 
Figure  3.18  presents  trends  for  net  OOF  per 
capita (again excluding China and India). It shows 
that  LICs  generally  received  negligible  levels  of 
NOOF  per  capita  in  the  period  1995–2012.  For 
LMICs and UMICs net OOF per capita has been 

more significant, especially during two noticeable 
peaks  in  these  flows,  during  the  late  1990s 
(possibly in response to the East Asian crisis) and 
the late 2000s (in response to the global financial 
crisis),  although  disbursements  to  LMICs  in  the 
latter period were modest. These trends illustrate 
the role that OOF may have played as a counter-
cyclical form of funding for UMICs and (to a lesser 
degree) LMICs for a short time following episodes 
of global financial instability.

Despite their relatively modest overall levels, OOF 
provided  by  the  DFIs  have  played  a  significant 
role  in  supporting  efforts  to  respond  to  climate 
change. DFIs have channelled approximately one-
third  of  total  climate  financing  (CPI,  2013),  most 
of which has been in the form of loans that qualify 
as OOF. 

3.2.3.3 | Domestic private finance

Of  the  four  categories  of  financing,  domestic 
private  finance 
is  the  most  challenging  to 
measure empirically. This is because measures are 
often mingled with some of the other categories 
(especially  international  private  finance).  This 
section therefore provides some indication of the 
evolution  of  domestic  private  finance  available 
to developing countries using three measures to 
illustrate  its  different  facets.  In  terms  of  share  of 
GDP,  the  current  group  of  UMICs  has  mobilised 
the highest levels of domestic credit to the private 
sector,  and  the  current  group  of  LMICs  has  the 
highest  levels  of  domestically  financed  capital 
formation and both groups achieved similar levels 
of  market  capitalisation.  LICs  have  generally 
mobilised much lower levels of domestic private 
finance,  and  growth  in  these  sources  has  been 
more modest than in MICs. Private finance is also 
volatile and concentrated. 

Figure 3.18 |  Net OOF per capita (current $) across 

country groupings (dynamic membership) 
(excluding China and India) 1995–2012

35

30

35

30

25

20

15

10

5

0

-5

-10

-15

25

20

15

10

5

0

-5

-10

-15

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

LIC

LMIC

UMIC

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

LIC

LMIC

UMIC

Sources: Net OOF – OECD CRS table 2b; Country pop’ - WDI. 
Note: Net OOF/OOF per capita across country group, authors’ 
calculation; phases of negative net OOF emerge when recipient 
repayments  on  OOF  loans  /  returns  to  providers  from  OOF 
investments exceed new provision of finance from OOF sources.

Capital Formation

We  first  focus  on  gross  fixed  capital  formation 
by the private sector less FDI as a percentage of 
GDP (GFC-FDI/GDP), a measure that attempts to 
proxy the portion of capital formation financed by 
domestic sources. Figure 3.19 presents trends in 
GFC-FDI/GDP  across  country  groupings  for  the 
period  1995–2012.  It  illustrates  that  the  highest 
levels of GFC-FDI/GDP were achieved by LMICs, 
following their growth from 13% of GDP in 1995 
to 18% in 2012. Over the period 2009–2012 GFC-
FDI/GDP  levels  to  UMICs  were  comparable  to 
those of LMICs following an even sharper increase 
in  their  levels,  from  8%  in  1999  to  18%  in  2012. 
GFC-FDI/GDP levels for LICs fell in the late 1990s, 
before starting a generally increasing trend from 
1999, reaching 13% by 2012.

15  There is very limited information available on OOF from non-OECD development finance agencies, as these do not currently report such flows to official 
bodies such as the OECD nor do they apply the same type of distinctions between forms of development finance; these volumes are thought to be very 
significant but growing fast – for example, recent research estimated that China’s total official financing to Africa during 2001–2011 was equivalent to around 
$10 bn a year, most of which would be currently categorised as OOF (CGD, 2013).

16 See footnote 9.

17 See footnote 10.

18  Gross  fixed  capital  formation  of  the  private  sector  minus  FDI,  domestic  credit  as  a  percentage  of  GDP  and  market  capitalisation  as  a  share  of  GDP. 

Gross domestic savings as percentage of GDP was also considered, but this variable does distinguish between public and private sources of savings.

110 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 111

CHAPTER 3. Financing trends and challenges beyond 2015Figure 3.19 |  Gross fixed capital formation by 

Figure 3.20 |  Levels of domestic credit to the 

Figure 3.21 |  Market capitalisation of listed 

the private sector less FDI (as 
percentage of GDP) across country 
groupings, 1995–2012

private sector (percentage of GDP) 
across country income groups, 
1995–2012

companies (as percentage of GDP) 
across country income groups, 
1995–2012

20

18

16

14

12

10

8

6

100

90

80

70

60

50

40

30

20

10

0

120

100

80

60

40

20

0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

LIC

LMIC

UMIC

LIC

LMIC

UMIC

LIC

LMIC

UMIC

Sources: Gross fixed capital formation, private sector % 
of GDP and FD % of GDP – WDI measures.

Note: weighted country average 

Source: Domestic credit as percentage of GDP – WDI

Source: Market capitalisation of listed companies 
as percentage of GDP WDI.

Note: The ratio for LICs is based on data for Bangladesh, 
Kenya, Malawi, Nepal, Tanzania and Uganda

An  estimated  81%  of  climate  change-related 
investments  in  developing  countries  come  from 
domestic  actors,  most  funded  by  the  private 
sector (CPI, 2013). 

Other measures of domestic private finance

An  analysis  of  World  Bank  enterprise  surveys 
provides  further  insights  into  domestic  private 
finance.  The  previous  measures  (banking  sector, 
equity markets) relate to formal finance involving 
some  intermediation.  Table  3.4  below  suggests 
that most investments in developing countries are 
financed internally. Since there are no systematic 
data  on  this  mode  of  financing,  the  outcome  is 
measured by capital formation. 

Other  measures  would  include  private  equity 
funds  and  corporate  bonds,  and 
some 
illustrative examples are included in the ICESDF 
background  materials.  Much  private  finance 
is  present  even  in  LICs,  but  is  concentrated  in 
the  countries  with  more  developed  financial 
markets,  which  are  subject  to  volatility.  These 
challenges need to be addressed in a post-2015 
Global Partnership. 

Domestic bank credit 

in  developing 
institutions 
Private  financial 
countries  play  an  important  role  in  generating 
financial  resources  to  support  development. 
Domestic  banks  are  one  of  the  most  significant 
of  this  group  of  institutions,  and  Figure  3.20 
illustrates trends in the credit they provided as a 
percentage of GDP. In general the higher income 
country  groups  have  experienced  greater  levels 
of  and  increases  in  domestic  credit  over  time. 
These flows have also been volatile for all country 
groupings,  and  especially  UMICs.  The  ratio  in 
LICs has doubled since 1995 but is still very low, 
suggesting  the  need  for  major  changes  in  the 
banking sector.

Stock market capitalisation

Stock markets help to mobilise and allocate private 
finance from individuals and institutional investors 

towards  listed  companies.  Stock  markets  are 
tightly regulated. They are very thin in LICs, with 
a  few  companies  listed  and  traded  infrequently, 
but there is a growing number of stock markets in 
developing countries overall. 

Figure  3.21  illustrates  trends  in  stock  market 
capitalisation  as  a  share  of  GDP  (not  an  annual 
flow)  across  country  income  groups  over  the 
period  1995–2012.  It  shows  that  capitalisation  is 
much higher in the 2000s than in the 1990s, but 
that  the  ratios  are  quite  variable  over  time  (and 
affected by the global financial crisis). The ratios 
for  LMICs  and  UMICs  broadly  track  each  other; 
the  ratio  for  LICs  is  the  lowest  but  is  growing 
rapidly and was least affected by the crisis.

The  significance  of  domestic  private  finance  to 
developing countries is illustrated by the role this 
form  of  financing  has  played  in  addressing  the 
challenges posed by climate change. 

Table 3.4 | How is investment financed?

Proportion 
of investment 
financed 
internally (%)

Proportion of 
investment 
financed by 
banks (%)

ALL 
COUNTRIES

EAST ASIA 
& PACIFIC

EASTERN 
EUROPE & 
CENTRAL ASIA

LATIN 
AMERICA & 
CARIBBEAN

MIDDLE EAST 
& NORTH 
AFRICA

SOUTH ASIA

SUB-
SAHARAN 
AFRICA

69.2

71.7

63.7

63.2

80.0

66.8

78.3

16.3

15.0

20.4

20.3

supplier 
credit (%)

5.1

equity or 
stock sales (%) 5.0

2.5

5.2

5.3

7.5

7.5

4.3

Source: World Bank (2014), based on enterprise surveys 

3.2

8.2

2.8

20.4

1.3

6.8

9.9

3.9

3.7

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CHAPTER 3. Financing trends and challenges beyond 20153.2.3.4 | International private finance

International  private  finance  has  grown  rapidly 
across  all  country 
income  groups,  but  the 
allocation is concentrated and volatile. The trends 
for  LICs  are  perhaps  most  noticeable,  given 
that  they  have  achieved  the  highest  and  fastest 
growing levels of remittances and FDI as a share 
of GDP. This FDI is still predominantly focused on 
the extractive sectors, which poses challenges for 
linking them to the broader economy. In contrast, 
flows from private capital markets (portfolio equity 
and  bonds  and  commercial  loans)  have  been 
focused  on  MICs  (with  similar  trends  for  LMICs 
and UMICs). These flows have also been the most 
volatile  across  all  financing  sources,  and  as  LICs 
begin to obtain access to them they will need to 
manage such volatility very carefully. A post-2015 
Global  Partnership  should  also  seek  solutions  to 
the  challenges  posed  by  volatility  and  the  focus 
on the extractive sectors in LICs.

are  important  distinctions  between  NGOs  and 
foundations.  The  largest  recipients  of  PDA  from 
NGOs  are  generally  LICs,  of  which  seven  of 
the  ten  largest  recipients  in  2011  were  in  this 
group  (Haiti,  DRC,  Somalia,  Afghanistan,  Kenya, 
Ethiopia and South Sudan – in order of scale), and 
two  of  the  ten  having  recently  graduated  from 
LIC status (Pakistan, the largest recipient overall, 
and  Sudan).  In  contrast,  in  2011  five  of  the  six 
largest  recipients  of  PDA  from  foundations  were 
India and UMICs (China, South Africa, Mexico and 
Brazil – in order of scale), with only one LIC among 
their  ten  largest  recipients  that  year  (Kenya,  in 
third position) (DI, 2013a). 

Local donations reportedly dominate international 
private  philanthropy  in  countries  beyond  the 
OECD  DAC,  and  it  is  estimated  that  such 
assistance  was  equivalent  to  $35  bn  in  Brazil, 
China, India, Saudi Arabia and South Africa. There 
is also some South–South PDA (DI, 2013a).

Private development assistance (PDA)

Remittances

PDA  comes  from  private  philanthropic  actors, 
including  NGOs  (which  provided  around  58% 
of  the  total  from  OECD  countries  in  2011), 
foundations  (16%)  and  corporations  (18%)  (DI, 
2013a).  Due  to  weaknesses  in  official  reporting 
and difficulties in disentangling these flows from 
ODA, the full extent of PDA is difficult to assess 
and  therefore  this  section  provides  only  a  basic 
summary.

Estimates suggest that total PDA may have been 
as high as $45 bn in 2011 (DI, 2013a), or possibly 
an annual average of $56 bn between 2008 and 
2010 (Kharas, 2012). These levels are reported to 
have grown rapidly, possibly more than doubling 
since  2004  (Kharas,  2012).  By  far  the  largest 
source of PDA is the USA (two-thirds of the total), 
followed  by  the  UK  (around  5%)  and  Germany 
(1.3%) (DI, 2013a).

In  terms  of  destinations,  the  most  detailed 
recent  research  (DI,  2013a)  suggests  that  there 

Figure  3.22  presents  trends  in  remittances  as  a 
proportion  of  GDP  (REM/GDP)  across  country 
income  groupings.  It  illustrates  that,  despite 
modest  absolute  levels,  remittances  have  been 
particularly important and grown fastest for LICs, 
from 2.2% in 1995 to 7.4% in 2012. Remittances 
have  also  been  important  for  LMICs,  although 
these  may  have  peaked  at  around  5%  and  have 
fallen  slightly  in  recent  years.  Despite  their  very 
large  levels  of  remittances  in  absolute  terms, 
these flows have largely been below 1% of GDP 
for UMICs. Outward remittances (recorded in the 
WDI)  are  too  small  to  report  (less  than  0.5%  of 
GDP for all country groups since 2000). 

It  is  estimated  that  between  9%  and  30%  of 
total  remittance  flows  are  between  developing 
countries  (World  Bank,  2007).  This  may  be 
an  underestimate,  given 
that  South–South 
remittances are more informal than North–South 
and  North–North  remittances,  so  are  more  likely 
informal 
to  be  under-reported. 

In  addition, 

Figure 3.22 |  Remittances (as percentage of GDP) 

Figure 3.23 |  FDI (as a percentage of GDP) 

across country income groups, 
1995–2012

across country income groups, 
1995–2012

8

7

6

5

4

3

2

1

0

5

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

LIC

LMIC

UMIC

LIC

LMIC

UMIC

Sources: WDI data on remittances and GDP.

Sources: WDI data on FDI as % of GDP and GDP.

Note: Authors’ calculation - weighted and averaged, 
based on countries for which data available

Note: Simple weighted average (authors’ calculation) 

channels may be more significant for lower-income 
countries, as it is harder for their citizens to gain 
work in developed countries due to immigration 
policies and other obstacles (Phelps, 2014).

In terms of variations in REM/GDP within country 
income groupings, the broadest range is in LICs, 
followed  by  LMICs  and  then  UMICs.  Average 
annual REM/GDP during 2010–2012 ranged from 
a high of 46.6% for Tajikistan to a low of 0.3% for 
the DRC in LICs; from a high of 24.6% of GDP for 
Macedonia  to  a  low  of  0.4%  of  GDP  for  Ghana 
in  LMICs;  and  from  a  high  of  17.3%  of  GDP  for 
Lebanon to a low of 0.01% of GDP for Angola in 
UMICs. (See Annex 2 for illustration of these intra-
group trends.)

from  developing  countries. 

According  to  Uneze  (commissioned  background 
paper,  2015),  17%  of  remittances  to  LICs  in  SSA 
originated 
India, 
China, Brazil and Saudi Arabia accounted for 30–
50% of remittance flows to LICs in their regions. 
The figures are likely to be under-reported given 
the  prevalence  of  informal  channels,  particularly 

for  South–South  remittances,  in  part  because 
of  low  competition  between  transfer  operators. 
Uneze  (commissioned  background  paper,  2015) 
argues  that  informal  channels  could  account  for 
as  much  as  45–65%  of  remittance  flows  to  LICs 
in SSA.

Foreign Direct Investment

The  period  1995–2012  has  seen  a  dramatic 
change  in  FDI  flows  to  developing  countries, 
with  their  FDI  overtaking  that  to  developed 
countries  for  the  first  time  in  2012  (UNCTAD, 
2013).  Although  increased  FDI  was  seen  in  all 
country income groupings, its scale and character 
(in terms of sectors and types of FDI) has varied 
significantly across and within them, with potential 
implications for development. 

Figure  3.23  presents  trends  in  net  FDI  inflows 
as  a  percentage  of  GDP  (FDI/GDP)  for  each  of 
the  country  income  groupings  across  the  period 
1995–2012,  and  shows  quite  a  diverse  picture. 
The current group of LICs started out with among 

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Combining finance and policies to implement a transformative post-2015 development agenda | 115

CHAPTER 3. Financing trends and challenges beyond 2015the  lowest  levels  of  FDI/GDP  (below  1%)  but 
following rapid growth, only briefly interrupted by 
the global financial crisis, ended with the highest 
levels,  at  4.5%  of  GDP.  For  LMICs  and  UMICs 
much  of  the  impressive  growth  in  FDI/GDP  they 
experienced before 2008 has since been eroded 
by the impact of the global financial crisis on FDI. 
By 2012 LICs had higher levels of FDI/GDP than 
LMICs and UMICs.

The  significance  of  these  trends  for  LICs  (and 
LDCs) is that FDI in the extractive sectors may be 
less  growth-enhancing  and  have  fewer  spillovers 
to the broader economy than FDI in other sectors 
(Sachs  and  Warner,  1995;  Morrissey,  2012),  and 
may even crowd out FDI to other sectors (Asiedu, 
2013).  In  addition,  the  concentration  of  FDI  in  a 
narrow range of sectors limits its ability to support 
these countries to diversify their economies.

It is also worth noting that the growth of South–
South  FDI  has  been  an  important  factor  in 
increased  FDI  to  developing  countries  and  in 
promoting  the  relative  resilience  of  FDI  flows  to 
developing countries during and since the global 
financial crisis. It is estimated that the contribution 
of  South–South  FDI  to  total  FDI  to  developing 
countries  increased  from  25%  in  2007  to  34% 

in  2010,  and  is  mainly  focused  on  greenfield 
investments (World Bank, 2011). Brazil, India and 
China  have  been  the  main  providers  of  South–
South  FDI.  In  addition,  the  continued  growth  of 
FDI to LDCs in recent years has been supported by 
increasing  FDI  from  other  developing  countries, 
especially India and China (UNCTAD, 2013). Box 
3.5 discusses outward FDI flows.

In absolute terms, FDI increased significantly to each 
of  the  country  income  groupings  across  the  period 
1995–2012,  although  the  level  in  LICs  was  very 
modest compared to MICs. In real terms (2011 dollars) 
FDI increased from $1.8 bn to $23.8 bn for LICs, from 
$22 bn to $113 bn for LMICs and from $108 bn to 
$477 bn for MICs, which therefore received around 
97%  of  total  FDI  to  developing  countries  in  2012, 
with UMICs receiving around 80% of this total. 

Within  country  income  groupings  there  are  also 
significant variations. The broadest range of FDI/
GDP levels is in LMICs, followed by LICs and then 
UMICs.  Average  annual  FDI/GDP  during  2010–
2012 ranged from a high of 41.4% for Mongolia 
to  a  low  of  -0.5% 19  for  Yemen  in  LMICs;  from  a 
high of 24.3% of GDP for Mozambique to a low 
of  0.1%  of  GDP  for  Burundi  in  LICs;  and  from  a 
high of 12.3% of GDP for Turkmenistan to a low of 
-4.2% of GDP for Angola in UMICs. (See Annex 2 
for illustration of these intra-group trends.) There 
is no discernible trend of RR countries consistently 
attracting  higher  levels  of  FDI/GDP  than  other 
countries (Figure 3.24). 

The character and types of FDI by country income 
groupings  have  differed  quite  significantly, 
especially  for  the  lower-income  countries.  There 
is a strong concentration of FDI flows in LICs (and 
LDCs) in the extractive sectors (mining, quarrying 
and  petroleum)  and 
related  manufacturing 
sectors, although the dominance of these sectors 
in  LDCs  is  reported  to  have  fallen  over  the  last 
decade  (UNCTAD,  2013).  In  contrast,  FDI  to 
most  MICs  is  much  more  diversified  in  terms  of 
countries and sectors. 

Figure 3.24 |  FDI/GDP for resource-rich and non-
resource-rich developing countries

Box 3.5 | Outward FDI flows

4.5

4

3.5

3

2.5

2

1.5

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

RR

NRR

Sources: FDI and GDP – WDI.

Note: Authors’ calculation, using IMF 2012 RR and NRR 
categories

One  of  the  challenges  for  LICs  (and  LDCs)  in 
diversifying  and  expanding  FDI  is  to  create  the 
right conditions for attracting it in the first place. 
A  wide  range  of  factors  is  thought  to  determine 
FDI flows to developing countries. In addition to 
market size and income levels, which are somewhat 
beyond the control of policy, these include policy-
relevant factors such as macroeconomic stability, 
trade openness, institutional quality, infrastructure 
and  supply  of  skilled  labour  (Asiedu,  2002).  FDI 
to  the  secondary  and  tertiary  sectors  may  be 
especially  sensitive  to  these  and  other  factors 
(IMF, 2010). 

Outward  FDI  is  poorly  reported  in  the  WDI,  but  can  be  an  important  means  to  secure  resources,  technology  and  continued 
profitability. FDI outflows are normally seen as a sign of a healthy economy. Figure 3.5B shows outward FDI flows are insignificant for 
LICs and much lower than outward FDI for LMICs. UMICs tend to export more capital than they attract, which can be seen as a sign 
of economic strength. The figures show that inward FDI is much greater than outward FDI for the poorest countries. 

The contribution of FDI from emerging economies remains low, but is on the rise. For example, outflows to LICs from China and India 
have increased 19-fold and four-fold respectively over the period 2003–2009, and it is estimated that 8.4% of FDI to Africa comes 
from developing economies (commissioned background paper; Uneze, 2015).

FDI outflows need to be distinguished from repatriated profits, although some studies suggest that these are outflows in the same 
way as FDI inflows. For example, Griffith et al. (2014) claim that developing countries have seen repatriated profits on FDI worth $420 
bn and that such outflows were equivalent to almost 90% of new FDI in 2011. Of course, such profits could have been used to finance 
investment in the domestic economy. However, while FDI inflows can be used for investment, this could be in projects that generate 
sales that lead to profits – some or all of which might be repatriated – so this is not a balance of payment (BoP) capital flow category. 
The same can happen for ODA, of course – it can lead to projects that make large profits, some of which can be repatriated, even if 
the projects are highly beneficial to the recipient country.

6

Figure 3.5B | Inward and outward FDI (percentage of GDP) by per capita income levels

4

P
D
G

f

o
%

2

0

500

1000

3000

income per capita (US$ 2005 prices)

Inward FDI flows

Outward FDI flows

P
D
G

f

o
%

6

4

2

0

500

1000

3000

income per capita (US$ 2005 prices)

Inward FDI flows

Outward FDI flows

Source: WDI

19 This negative net FDI figure illustrates a circumstance in Yemen where disinvestment was greater than investment over this period.

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Combining finance and policies to implement a transformative post-2015 development agenda | 117

CHAPTER 3. Financing trends and challenges beyond 2015 
 
 
 
Figure 3.25 |  Net portfolio equity and bond flows 

Figure 3.26 |  Bond issuances in SSA (excluding 

Figure 3.27 |  Commercial banking loans (as 

3.3.1 

Future trends in financing

(as percentage of GDP) across country 
income groupings, 1995–2012

South Africa) 2007–2013, $ mn

percentage of GDP) across country 
income groupings, 1995–2012

Domestic public finance

2.5

2

1.5

1

0.5

0

-0.5

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

5000

4500

4000

3500

3000

2500

2000

1500

1000

500

0.0

Gabon
Ghana

Senegal

Gabon
Mozambique
Ghana
Nigeria
Rwanda
Tanzania

Namibia
Nigeria
Senegal

Zambia
Angola

2007

2008

2009

2010

2011

2012

2013

1.5

1

0.5

0

0.5

-1

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

LIC

LMIC

UMIC

LIC

LMIC

UMIC

Sources: WDI – portfolio equity + bond and GDP.

Source: Hou et al. (2014)

Note: Authors’ calculation, simple weighted average

Sources: WDI - commercial loans, GDP.

Note: Authors’ calculation, weighted average

Net portfolio flows

International commercial loans

(PORT/GDP) 

(equity  and  bond) 

Figure  3.25  presents  the  trends  in  net  portfolio 
to 
inflows 
developing  countries  and  across  country  groups 
for  the  period  1995–2012.  It  illustrates  that  such 
flows have been of significance only to MICs, with 
their  levels  fluctuating  between  0.5%  and  2%  of 
GDP. During the East Asian crisis in the late 1990s 
these flows fell sharply, and they turned negative 
during the global financial crisis, illustrating their 
strong pro-cyclical nature. 

A relatively new way for LICs and SSA countries to 
raise public funds is by issuing sovereign bonds. 
Countries in SSA issued a record $4.6 bn in 2013 
in  sovereign  bonds  (5%  of  issues  by  developing 
countries),  up  from  zero  in  2010  and  around  $1 
bn in 2001. Figure 3.26 charts progress from 2007 
to  2013,  excluding  South  Africa  Sovereign-bond 
inflows  in  SSA  were  equivalent  to  12%  of  FDI 
inflows and 20% of ODA in 2013. 

Figure  3.27  below  illustrates  such  trends  in 
commercial banking loans as a share of GDP (CL/
GDP) across country groupings. It shows that CL/
GDP  has  experienced  very  significant  volatility 
across all of them, with net outflows also a feature 
of  the  late  1990s  and  early  2000s.  CL/GDP  for 
UMICs  has  been  generally  positive  since  2003, 
although  below  1%  of  GDP.  CL/GDP  has  also 
been positive for LMICs since 2004 – during which 
it fluctuated at 0.5% (1.5% of GDP) – and higher 
than  levels  for  UMICs  in  recent  years.  CL/GDP 
has  also  been  positive  for  LICs,  since  2007  and 
reached 0.5% of GDP in 2012. 

  3.3 

 Future trends and proposals 
for mobilising finance

Establishing  a  post-2015  Global  Partnership 
requires an understanding of the evolving nature 
of  finance  needs  and  sources,  as  well  as  likely 
scenarios for and challenges related to mobilising 
such  financing.  This  section  synthesises  existing 
and new analysis of possible trends in finance. It 
begins  by  addressing  the  likely  scenarios  across 
finance  flows,  and  then  explores  a  range  of 
innovative  proposals  to  mobilise  more  finance. 
It  argues  that  private  finance  sources  are  likely 
to  increase  faster  than  public  sources  (especially 
for  international  flows).  The  innovative  finance 
mechanisms  remain  small  in  scale  but  could 
increase significantly in the future.

The  IMF’s  latest  projections  for  government 
revenues  across  developing  countries  cover  the 
period up to 2019 and suggest that government 
revenue  for  LICs 20  will  remain  stable  at  roughly 
21%  of  GDP.  They  also  suggest  that  ‘emerging 
economies’ 21 will see their revenue-to-GDP ratios 
fall from 27.3% of GDP in 2013 to 25.8% of GDP 
in  2019  (IMF,  2014).  These  projections  point 
towards  a  tough  period  for  revenue-generation 
and expenditure across all developing countries, 
although the value of revenues will still increase. 

Such  an  outlook  is  based  on  assumptions  about 
the  policy  environment  surrounding  revenue-
generation  by  developing  countries  where, 
given that current tax capacity is often below its 
potential,  it  is  possible  to  improve  performance 
by  introducing  revenue-enhancing  policies  and 
practices  (IMF,  2013).  The  experience  of  LICs  in 
SSA  suggests  that  it  is  possible  even  for  such 
countries  to  increase  tax  revenues  by  0.5–2%  in 
one to three years and by 2–3.5% over periods of 
five to ten years (IMF, 2011). Hence it is possible 
for  tax  revenues  to  increase  in  the  coming  years 
in  value  terms  and  as  a  share  of  GDP,  although 
this requires significant reform to domestic public 
finance and international taxation.

International public finance 

Following  a  slowdown  in  the  growth  of  ODA  in 
the  late  2000s  (OECD,  2013),  total  ODA  fell  by 
6%  in  real  terms  during  the  period  2010–2012, 
before recovering to 2010 levels in 2013 (OECD, 
2014a).  There  are,  however,  significant  concerns 
about  the  prospects  for  ODA  levels.  The  OECD 
projects  that  global  ODA  levels  will  stagnate 
over  the  period  2014–2016,  suggesting  both 
that substantive increases are unlikely and that as 
percentage of GDP ODA will decline significantly 
for  all  country  groupings.  The  OECD’s  analysis 
also  suggests  that  an  increasing  proportion  of 

118 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 119

20 The IMF’s LIC category does not correspond exactly to that of the World Bank, although most of them overlap.

21 Which correspond roughly to the World Bank’s MICs group.

3.3

CHAPTER 3. Financing trends and challenges beyond 2015ODA  will  be  directed  towards  MICs  (largely  due 
to increased ODA loans to these countries), with 
SSA likely to receive only small increases (OECD, 
2013).  It  is  therefore  clear  that  changing  these 
projections  will  require  an  increase  in  political 
commitment from donor governments, which the 
post-2015  process  and  the  2015  Addis  Ababa 
conference  on  FFD  provide  an  opportunity  to 
mobilise.  Aid  from  non-traditional  and  non-DAC 
donors  is,  however,  likely  to  increase  given  the 
significant  growth  of  emerging  economies  and 
rising  levels  of  aid  from  these  countries.  Uneze 
(commissioned  background  paper,  2015)  notes 
a 1.5–4.5-fold increase from certain BRICS in the 
2003–2012  period.  Further  the  establishment  of 
SSC  initiatives  will  enhance  coordination  among 
SSC  partners.  For  example,  the  India-Brazil-
South  Africa  (IBSA)  Fund,  where  each  country 
contributes $1 mn a year to help LDCs to achieve 
the MDGs, mobilised $20 mn and allocated $8.6 
mn  from  2004  to  2011.  Others  include  the  New 
Development  Bank  and  the  Asian  Infrastructure 
Investment Bank, which started in 2014.

With regard to OOF, there have been significant 
challenges in maintaining the significant increases 
that  were  mobilised  to  support  developing 
countries (largely MICs) to respond to challenges 
posed  by  the  global  financial  crisis.  The  World 
Bank 
large 
led  such  efforts  by  mobilising 
increases  in  outflows  from  its  International  Bank 
for  Reconstruction  and  Development  (IBRD)  and 
IFC  (IEG,  2010).  Since  2010,  however,  the  levels 
of  OOFs  have  fallen  significantly  and  there  are 
concerns  about  the  future  of  this  source,  which 
can  be  so  important  for  MICs,  especially  those 
whose  access  to  the  most  concessional  forms 
of financing are low or falling (Kharas, 2014). An 
important development in this regard is the recent 
announcement  by  the  World  Bank  of  an  extra 
$100 bn in lending to MICs over the next decade, 
to  be  achieved  largely  by  changing  borrowing 
and internal lending rules (NYT, 2014). 

Domestic private finance

rates 

In  terms  of  the  outlook  for  domestic  private 
finance,  one  of  the  best  indicators  is  projected 
gross  investment,  which  is  driven  largely  by 
domestic  savings  rates  in  developing  countries. 
High  domestic  savings 
in  developing 
countries  (due  to  demographic  and  structural 
trends)  are  expected  to  help  drive  significant 
increases 
these  countries, 
outpacing investment in HICs – see Figure 3.28. As 
a result, sources of private capital will increasingly 
come from developing countries, especially China, 
and  by  2030  half  of  the  global  stock  of  capital  is 
expected  to  be  in  developing  countries  (up  from 
around 30% in 2010) (World Bank, 2013).

investment 

in 

in 

funds  and 

insurance  companies 

Finance  provided  by  banks  and  pension  funds 
located  in  developing  countries  is  expected  to 
increase further. Private resources from domestic 
in 
pension 
developing  countries  grew  tenfold  from  2002 
to 2012 to reach US$5.5 tr in 2012 (World Bank, 
2013).  They  are  expected  to  increase  to  US$50 
tr  by  2050.  Reaping  the  benefits  from  increased 
banking credit, more corporate bonds and stock 
markets  will  depend  upon  making  fundamental 
changes  to  domestic  financial  markets  in  the 
poorest economies.

 International private capital

The  outlook 
for  remittances  to  developing 
countries is largely positive, with recent projections 
suggesting that these will reach $540 bn in 2016, 
an  increase  of  more  than  50%  over  2012  levels. 
Remittance flows are also expected to continue to 
rise in all regions (World Bank, 2013). 

UNCTAD’s  most  recent  projections  for  FDI  to 
developing  countries  suggest  that  there  will 
be  no  growth  in  2014  and  only  modest  growth 
in  2015  and  2016.  These  projections  are  based 
on  concerns  about  growth  levels  in  developing 
countries, as well as on the effects of the ending of 
quantitative easing in the USA (UNCTAD, 2014). 

The long-term prospects for international capital 
flows to developing countries are, however, much 
more positive, as is illustrated by projected flows 
to  SSA  shown  in  Figure  3.29.  It  suggests  that 
capital flows to SSA are expected to increase from 

Figure 3.28 |  Gross investment 

(share of global GDP) 1965–2010

$62 bn in 2012 to $254 bn in 2030, owing to better 
growth  prospects,  demography,  and  improved 
investment  climate.  SSA’s  share  in  total  capital 
flows to developing countries is also expected to 
increase over this period. 

30%

25%

20%

Regime change

Gradual scenario

15%

10%

5%

0%

30%

25%

20%

15%

10%

5%

0%

Regime change

Gradual scenario

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

World

High income

Developing

Developing without China

Source: World Bank (2013)

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

World

High income

Developing

Figure 3.29 |  Gross capital inflows to SSA 
Developing without China

as a share of developing country inflows

s
n
o

i
l
l
i

b
$

0
1
0
2

300

250

200

150

100

50

0

10

9

8

7

6

5

4

3

2

1

0

t
n
e
c
r
e
P

Source: World Bank (2013)

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Volume of inflows to Sub-Saharan Africa (left axis)

Inflows to Sub-Saharan Africa as a share of total inflows to developing countries (right axis)

120 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 121

CHAPTER 3. Financing trends and challenges beyond 2015 
 
Another  trend  relating  to  international  private 
finance is that new and more diverse sources are 
expected  to  play  an  increasingly  important  role 
in the coming decades. For instance, institutional 
investors, such as pension funds, sovereign wealth 
funds  (SWFs)  or  insurance  companies,  manage 
more  than  $70  tr  (Kaminker  and  Steward,  2012). 
Philanthropic  groups  and  foundations  (including 
family  offices  and  wealthy  individuals)  are  also 
becoming  more 
impact 
interested 
investing,  which  includes  investments  for  social 
or environmental purposes (Lindenberg and Pöll, 
unpublished).  Recently,  the  Norwegian  pension 
fund announced it would invest more in developing 
countries.  Chinese  SWFs  are  also  interested  in 
investing  in  developing  countries.  A  significant 
share  of  SWFs  or  institutional  investment  never 
reaches  developing  countries,  however,  and 
a  significant  effort,  such  as  in  the  post-2015  (or 
G20) context, would be needed to mobilise and 
channel  institutional  investment  towards  poorer 
countries and infrastructure sectors. 

in  social 

suggests  that  only  $8.4  bn  has  been  raised 
by  IFD  initiatives  since  2002  (UNDESA,  2012). 
There is, therefore, significant potential to further 
pursue  these  and  other  IFD  proposals,  the  most 
significant of which are presented in Table 3.5. 

It  should  be  noted,  however,  that  there  are  very 
challenging  political  (and  other)  obstacles  to  be 
addressed  in  taking  forward  the  most  significant 
IFD  proposals  (especially  global  taxes),  which 
face  strong  resistance  from  financial  centres  and 
energy industries, for instance. It is also not clear 
to what degree some of the measures proposed 
will  provide  resources  for  developing  countries, 
given that developed countries will want to retain 
some of the revenues they generate to meet their 
own needs.

This  results  in  a  great  deal  of  uncertainty  about 
the degree to which IFD measures can be relied 
upon to address the financing gap for sustainable 
development in developing countries. 

3.3.2 

 Proposals and instruments 
for scaling up development finance

The  above  analysis  shows  that  challenges  could 
remain  in  maintaining  or  mobilising  finance. 
International  public  sources  are  likely  to  be 
affected  for  some  time  by  weak  growth  in  HICs; 
international private flows to developing countries 
look positive in the medium term but may remain 
volatile  as  long  as  global  economic  conditions 
remain  uncertain;  and  domestic  public  revenues 
are likely to increase steadily but not significantly 
by  2019.  Private  sources  are  likely  to  increase 
faster than public sources.

In response to concerns about this, and evolving 
ideas  for  making  better  use  of  existing  financial 
resources to support developing countries, there 
has been increasing attention paid to identifying 
innovative  sources  of  financing  for  development 
(IFD). 22  A  number  of  proposals  have  been  taken 
forward to pursue this goal, although the results 
so  far  are  relatively  modest;  recent  UN  analysis 

Table 3.5 | Existing and emerging innovative financing for development (IFD) proposals and mechanisms

INITIATIvE

DESCRIPTION

RESOURCES RAISED TO 
DATE ($)

APPROXIMATE 
POTENTIAL REvENUE ($)

OPPORTUNITIES, 
CHALLENGES, IMPACTS

a. DOMESTIC PUBLIC MECHANISMS

(i) Diaspora 
Bonds

(ii) GDP-
linked Bonds

A debt instrument issued 
by a country or a sovereign 
entity aiming to raise 
funds through its overseas 
diaspora, who usually 
accept a ‘patriotic discount’

Bonds on which the interest 
rate in any given year is 
adjusted according to the 
issuing country’s rate of 
economic growth in that 
year

b. INTERNATIONAL PUBLIC MECHANISMS

b1. PUBLIC REvENUE

India and Israel have raised 
over $11 bn and $25 bn 
respectively since issuance; 
Nigeria has raised $100 m

Ethiopia can potentially 
raise $310 m; Kenya 
and Uganda considering

Investments from the 
diaspora may have 
longer time horizon and 
are investments direct 
to government; debt 
implications

Additional funding direct 
to government; quite new, 
so their impact is difficult 
to assess; debt implications 
helped by index linking to 
GDP

(iii) EU

Emission 
Trading

Scheme 
(proceeds 
from

initial alloca-
tions)

(iv) Share 
of Certified 
Emissions 
Reductions 
(CERs) from 
the Clean 
Develop-
ment Mecha-
nism (CDM)

(v) Solidarity 
levy on 
airline taxes

(vi) Global 
Solidarity 
Tobacco 
Levy

Portion of revenues from EU 
Gov sales of CO2 emission 
permits

Germany agrees to allocate 
15% of proceeds to 
international climate finance 
and raised $0.8 bn

$20-35 bn

Carbon mission trading 
under Kyoto protocol is 
estimated $ 28 bn

Finland’s contribution for 
2013 is estimated $0.08 bn

Although financing is 
additional to existing ODA 
it is still counted as ODA 
by DAC members, so 
additionality may be limited

Under the Kyoto Protocol 
a 2% levy on CERs (earned 
through low carbon project) 
is directed to Adaptation 
Fund

Funded 12 projects worth 
$0.07 bn since 2010

$0.06-0.75 bn

Typically levied as a small, 
fixed contribution charged 
to airline passengers; 
initiated in 2006 by UK, 
France, Norway, Brazil, 
Chile: 14 countries now 
members; funding to HIV/
AIDs, TB and malaria

Participating countries 
commit to initiate small 
increases to national 
tobacco tax to support 
global priorities in 
developing countries

$1 bn since 2006

$1-10 bn

$1.35 bn since 2006;

$0.20 bn in 2014 (est)

May raise $9 bn/year 
for health;

An increase of 0.05/pack 
sold in G20 would raise $3 
bn for health.

22  There are competing definitions of IFD. An OECD review identifies three categories: (a) new approaches for pooling private and public revenue streams to 
scale up or develop activities for the benefit of partner countries; (b) new revenue streams (e.g. a new tax, charge, fee, bond raising, sale proceed or voluntary 
contribution scheme) earmarked to development activities on a multi-year basis; and (c) new incentives (financial guarantees, corporate social responsibility 
or other rewards or recognition) to address market failures or scale up existing development activities (OECD, 2009)

122 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 123

CHAPTER 3. Financing trends and challenges beyond 2015Small tax on financial and 
currency transactions

(vii) Financial 
and 
Currency 
Transactions 
Tax

(proposed)

$15-75 bn

Coordinated 0.005% tax on 
all major currencies could 
raise $33 bn/year. A low-
rate tax with large tax-base 
could raise:

-  Euro 200 bn/year at EU 

level and

-  $650 bn/year at global level

Would raise additional 
revenue; how contributes 
to ODA / efforts to raise 
additional finance will 
depend on policy of 
implementers

Very significant political 
challenges to introduce, 
although some limited 
progress of EU FTT 11

(viii) Carbon 
Tax

A tax on CO2 emissions by 
developed countries.

(proposed)

$50-250 bn

Norway already taxing 
emissions from aviation

A $2 a ton tax on CO2 
would raise $41-$52 bn/year

(Hof et al., 2011))

A $2/ton tax on all CO2 
emissions would raise $48 
bn/year;

Carbon taxes on aviation 
and ships in developed 
economies would raise $250 
bn in 2020;

In France Euros 0.6 bn are 
estimated for 2013

b2. LOANS and INSURANCE MECHANISMS

(ix) 
Catastrophe 
Risk Draw 
Down 
Option

Currently provided by the 
IBRD, Contingent loans 
provided by the IBRD that 
offer immediate liquidity to 
IBRD-eligible countries after 
a natural disaster.

At least 12 Catastrophe 
DDOs have been approved 
since 2008, mainly in Latin 
America and the Caribbean; 
amount drawn during 2009-
10 $259 mn.

b3. OTHER RESOURCES INvOLvING INTERNATIONAL FINANCIAL INSTITUTIONS

$160-270 bn

$100 bn

(x) New 
Special 
Drawing 
Rights 
Issuance 
(SDRs)

(xi) 
Leveraging 
idle SDRs

Regular annual allocations 
in favour of developing 
countries

Idle SDR holdings of 
reserve-rich countries are 
leveraged for investment 
in development

b4. BONDS & DEBT-BASED INSTRUMENTS

Issued by international 
and regional development 
banks to raise additional 
finance for climate change 
adaptation and mitigation 
projects, to which 
developing countries may 
apply.

To date been issued by the 
World Bank more than $3 
bn since 2008;

EIB ($1.8 bn since 2007), 
the ADB ($0.9 bn), and 
AfDB ($0.4 bn)

Current estimated market of 
$9 bn in 2013 (GIIN, 2013)

Private investments for 
social (Social Impact Bonds), 
or development impact 
(Development Impacts 
Bonds) alongside financial 
returns

(xii) 
Sustainable 
Impact 
Investing 
Bonds 
(e.g. Green 
Bonds, WB 
Eco Bonds, 
WB Cool 
Bonds, etc.)

(xiii) Social 
Impact 
investing 
(e.g. SIBs, 
DIBs, Global 
Health 
Investment 
Fund, etc.)

$1 bn is estimated for 2014

Additional finance direct 
to countries; current 
projects are underway in 
13 countries; possible debt 
implications

Additional finance; 
not always clear how 
investments differ from 
traditional investments

Additional, beyond ODA 
eligible portion; finance 
when countries need it the 
most; debt implications

Although not a form of 
development financing, 
would free up domestic 
resources for development

$5.1 bn in 2013 (est)

(xiv) Debt-
Conversions 
(Debt 
SWAPs)

(e.g. D2E, 
D2H, D2N, 
C2D, etc.)

A % of the creditor's country 
foreign debt is exchanged 
for the debtor country's 
investments on social (Debt 
to Education), health (Debt 
to Health) or environmental 
projects (Debt to Nature), 
involving a two-country 
partnership.

Debt-2-education: since 
1998, 18 swaps in 14 
countries, mostly Latin 
America, Indonesia

Debt-2-health: Australia/
Indonesia, Germany/
Indonesia, Pakistan, Ivory 
Coast and Global Fund (for 
AIDS, TB and malaria)

Dept-2-nature: USA/
Peru, France/Madagascar, 
Cameroon and WWF

IDA buy-downs: 
Pakistan & Nigeria

c. INTERNATIONAL PRIvATE MECHANISMS

xv) Crowd 
funding

Funding local projects 
by appealing to citizens’ 
contributions through 
dedicated websites; provide 
either grants, loans or 
equity funding)

(xvi) 
Solidarity 
contributions

Contributions through 
transactions (e.g. credit 
card payments, water bills, 
branded purchases)

d. PUBLIC-PRIvATE MECHANISMS

Few robust estimates for 
development focused 
funding, but certainly 
hundreds of millions

$2.7 bn funded more than 
a million projects in 2012;

Product RED raised $180 m 
since 2006

(xvii)
Advance 
market com-
mitments

Donors commit funds 
to guarantee the price 
of a product (e.g. a 
vaccine) hence motivating 
manufacturers to invest and 
develop products

Used to fund vaccines 
emerging from Global 
Alliance on Vaccines and 
Immunisation (GAVI)

Funded $1.5 bn

(xviii) Front 
loaded 
securitised 
finance aid

Bond issued in international 
market and repaid using 
ODA – ‘buy now and pay 
later’

International Facility for 
Immunisation (IFFIM) funds 
GAVI, raised $6.2 bn to date

(xix) Loan 
guarantees 
and 
other risk 
mitigation 
tools

A public body guarantees 
private sector loans and 
other activities, creating 
incentives for private sector 
to invest in more risky 
development-oriented 
sectors and countries

Already widely in use by 
MDBs and DFIs; being 
explored for the Climate 
PPP

Sources: UNDP (2012); Massolution (2013) unless otherwise stated

Swaps are ‘one-off’ 
mechanisms that provide for 
short-term debt solutions 
but not for long term ones

As countries become over-
indebted, new opportunities 
for swaps arise.

Those not eligible for HIPC/
MDRI (multilateral debt 
relief facility) could consider 
swaps under certain 
eligibility criteria (during 
on-going wider debt-
restructuring).

If credit swaps managed 
inappropriately, countries' 
credit rating may be 
affected, increasing 
cost of sovereign bonds 
dramatically.

Additional finance; faces 
potential challenge of 
fragmentation

Additional finance; often 
requires official sector 
facilitation; have been slow 
to develop

GAVI helped avert 1.3–2 
million deaths by the end 
2011

Allows prioritising current 
spending, albeit with no 
long-term additionality; GAVI 
helped avert 1.3–2 million 
deaths by the end 2011

Potential to tap into very 
significant resources of the 
private sector; challenge 
for selecting suitable 
investments and possible 
issues of moral hazard 

124 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 125

CHAPTER 3. Financing trends and challenges beyond 2015Figure 3.30 summarises the scale of financing that could be raised from different IFD instruments from 
Table 3.5, split across the four categories of finance addressed in this Report.

Figure 3.30 |  Finance raised by different 
IFD instruments

)
s
n
o

i
l
l
i

b

(

D
S
U

40

35

30

25

20

15

10

5

0

Public domestic
mechanisms

Public 
international
mechanisms

International
private
mechanisms

Public-private
mechanisms

Source: Table 3.5

As  can  be  seen  in  Table  3.5,  international  taxes 
relating  to  carbon  emissions  and  financial/
currency  transactions  are  being  explored  and 
represent  the  most  significant  potential  sources 
of financing among these mechanisms. A carbon 
tax is foreseen as a way to mobilise financing to 
address  climate  change,  and  financial/currency 
taxes  as  a  means  to  mobilise  more  general 
development financing. 

facilitating 

include  mechanisms 

Mechanisms 
the  contribution  of 
private individuals towards projects and initiatives 
in  developing  countries  have  been  growing 
rapidly  and  are  receiving  significant  attention. 
These 
for  providing 
donations  (following  the  traditional  approach  of 
many  NGOs),  micro  loans  (e.g.  Kiva)  and  equity 
investment (e.g. Symbid and Crowdcube). These 
mechanisms  have  the  benefit  of 
facilitating 
direct  access  to  development-related  support 
and  by-passing  bureaucracy  that  can  undermine 
traditional  forms  of  aid.  However,  they  generally 
involve relatively small amounts of funding across 
fragmented activities, and so are inappropriate for 

addressing  challenges  requiring  large-scale  and 
sustained funding (Gadia and Walton, 2013). 

Developing  countries  have  been  exploring 
diaspora  and  GDP-indexed  bonds  –  including 
in  partnership  with  international  development 
agencies  –  for  mobilising  financing  for  public 
investment.  Diaspora  bonds  – 
funded  by 
members of a country’s diaspora – have been used 
successfully  by  India  and  Israel,  and  are  being 
actively pursued by Kenya, Nigeria and Uganda. 
GDP-indexed bonds are a relatively new proposal, 
but would have the benefit of addressing some of 
the  debt  and  sustainability  questions  the  use  of 
bonds  raise  by  adjusting  returns  to  investors  on 
the basis of growth levels. 

As identified previously, there are also important 
FFD opportunities from leveraging and attracting 
the significant volumes of resources managed by 
institutional  investors.  To  attract  such  investors, 
governments and DFIs need to provide an enabling 
framework through the use of finance instruments 
or  relevant  policy  interventions.  A  range  of 

mechanisms has been proposed to promote such 
investments, including risk-mitigation mechanisms 
such  as  guarantees,  first-loss  agreements  and 
advance market commitments (as used by IFFIM 
for  funding  vaccinations).  Donors  can  also  use 
concessional financing to cover set-up costs and 
make investments viable (Mustapha et al., 2014). 
An  increasing  number  of  development  agencies 
(especially  the  MDBs)  are  scaling  up  their  use 
of  such  tools  and  exploring  opportunities  for 
widening their use further.

In  conclusion,  while  some  IFDs  have  already 
been  applied,  the  scale  is  still  low,  but  there  is 
significant  scope  for  expansion  in  the  near  to 
medium  future.  (Annex  3  provides  more  details 
on the effectiveness of IFDs.)

This chapter has illustrated the rapidly expanding 
volume  and  range  of  financing  –  domestic  and 
international  public,  as  well  as  domestic  and 
international  private  sources  –  available  to 
developing  countries  in  order  to  pursue  their 
development goals. The sources of financing for 
developing countries have been transformed over 
the last 10–15 years. 

  3.4 

 Conclusion

Since the 2002 Monterrey Consensus, in real terms 
(2011  dollars)  developing  countries  have  had 
access to an added $0.9 tr in international private 
finance,  $3  tr  in  domestic  private  finance  and 
$4  tr  in  domestic  public  revenues.  International 
public  finance  increased  by  just  under  $0.1  tr. 
Such  figures  clearly  demonstrate  the  need  to 
focus greater attention in the FFD discussions on 
the  role  of  other  flows  of  finance  in  addition  to 
ODA, as was argued in Chapter 2. These sources 
of  finance  have  unique  characteristics  in  terms 
of their welfare and public good orientation and 
motivation, and can therefore play a unique role 
in enabling countries to pursue economic, social 

and environmental goals, both on their own and 
in combination with other types of development 
finance.

Domestic  public  resources  have  become  the 
largest source of finance for all country groups. With 
economic  growth  continuing  across  developing 
countries this trend will be reinforced even if the 
tax take as % of GDP remains constant. However, 
there are significant challenges to be addressed. 
The  tax-to-GDP  ratios  are  either  stagnant  or 
increasing only very slightly in LICs and LMICs, so 
the  poorest  countries  face  major  tax  and  public 
finance  difficulties.  For  example,  tax  evasion 
and avoidance affects the tax base. International 
public finance has risen but is declining rapidly in 
relative  importance  and  is  sometimes  allocated 
to  richer  developing  countries.  Although  SSC  is 
increasing,  without  a  concerted  effort  the  post-
2015 period will start with subdued international 
public flows. 

For  a  number  of  developing  countries,  despite 
its  reduced  importance  in  relative  terms,  ODA 
and  other  international  public  sources  remain 
critical. For LICs, international public finance was 
equivalent  to  some  80%  of  the  domestic  public 
finance  mobilised  between  2002  and  2011. 
ODA is also important in supporting those MICs 
whose  levels  of  domestic  public  finance  remain 
modest.  LMICs  have  often  experienced  more 
rapid declines in access to ODA and other forms 
of  international  public  finance  than  the  pace  of 
increases  in  domestic  public  revenue  (Kharas  et 
al., 2014). This indicates the potential benefits of 
reallocating  ODA  and  OOF  from  UMICs  (whose 
finance  from  these  sources  has  been  increasing) 
towards LICs and LMICs. 

Private  sources  of  finance  become  more 
important  as  incomes  rise.  Domestic  private 
finance 
increases  consistently  as  a  country’s 
income  grows,  and  this  category  of  finance  has 
been the second most significant in volume terms 
for  developing  countries  over  the  last  decade. 
This  does  not  mean,  however,  that  more  private 

3.4

126 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 127

CHAPTER 3. Financing trends and challenges beyond 2015 
and  managing  debt  sustainably  (Tyson,  2015). 
Scaling  up  ambitions  in  this  area  will  require 
reforms  to  the  international  financial  system. 
Innovative  finance  mechanisms  are  still  small  in 
scale  but  could  increase  in  the  future,  especially 
if the significant political obstacles to taking them 
forward can be addressed.

Our  analysis  suggests  that  it  is  not  an  overall 
shortage  of  funds  that  will  be  the  constraining 
factor  in  achieving  a  transformative  post-2015 
development agenda. Rather, it is the way in which 
finance is mobilised and used that will determine 
success  in  achieving  the  goals  enshrined  in  this 
agenda.  This  in  turn  will  require  efforts  both  to 
improve  the  effectiveness  of  each  category  of 
financing in drawing on its unique characteristics 
in  support  of 
the  enablers  of  sustainable 
development,  and  also  to  explore  how  they  can 
more  effectively  work  together.  This  will  call  for 
reform  of  national  finance,  international  public 
finance  (especially  concessional  aid)  and  the 
international system.

Finally,  the  evidence  presented  in  this  chapter 
suggests considerable variation across and within 
country income groups in terms of the importance 
of different finance options (see also Annex 2). It 
is therefore important to understand how specific 
countries  can  mobilise  different  finance  flows. 
Chapter  4  addresses  policies  that  can  help  to 
mobilise and use finance for development.

finance is necessarily available. Much needs to be 
done on developing the financial sector, such as 
the banking sector, equity markets and corporate 
bond  markets.  Private  capital  also  brings  a 
new  source  of  volatility,  which  requires  proper 
management. 

Other 
international  private  sources  such  as 
remittances and FDI become more important than 
ODA in volume terms at modest levels of income, 
but  international  private  finance  is  concentrated 
in  certain  countries  and  sectors  and  is  the  most 
volatile category of finance. A considerable effort 
is  needed  to  ensure  these  flows  are  mobilised, 
channelled and used well.

The chapter has also discussed a number of issues 
cutting  across  flows.  South–South  flows  have 
increased rapidly over the past decade relative to 
ODA, and become a very significant resource for 
investments in infrastructure in sub-Saharan Africa 
and  elsewhere.  Climate  finance  has  grown  fast, 
with  private  (predominantly  domestic)  finance 
playing the most significant role and an increasing 
share  of 
international  public  finance  being 
focused  on  such  issues.  Financial  outflows  are 
also an important factor, with illicit financial flows 
from developing countries undermining domestic 
public  revenue  generation  and  FDI  outflows 
providing  opportunities  for  productivity  gains 
and  technology  transfer  while  also  presenting 
challenges. 

towards 

Looking 
trends,  projected 
future 
improvements in growth and tax efforts mean that 
domestic  public  finances  are  likely  to  increase 
relative to international public finance in developing 
countries,  although  much  depends  on  domestic 
public  finance  reform.  Private  finance  sources 
are  likely  to  increase  faster  than  public  sources 
(especially  international  flows).  New  sources  of 
private  finance  (e.g.  international  portfolio  bond 
and equity flows, FDI) are also expected to play an 
increasingly important role in LICs in the coming 
decades, providing investment opportunities, but 
also posing challenges in relation to their volatility 

128 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 129

CHAPTER 3. Financing trends and challenges beyond 2015CHAPTER 4.

The role of policies in mobilising 
and using finance effectively

Main messages 

4.1  Mobilising finance 

4.2  Making finance more effective 

4.3 

 Linkages among flows: 
a catalytic role for ODA and DFIs 

4.4 

 Conclusions and implications 
for the global system 

131

132

143

154 

156 

4.

Main Messages

This  chapter  shows  that  finance  seldom  reaches  the 

intended  objectives  unless  it  is  accompanied  by 

complementary policies. Its two messages are:

  Although  there  is  considerable  finance  available 

at  the  global  level,  it  does  not  follow  that  it  is 

used  appropriately. FDI does not reach the most 

vulnerable and poorer segments of society; tax-to-

GDP  ratios  have  changed  very  little  in  many  LICs; 

SMEs and infrastructure are starved of capital; and 

much  international  public  finance  does  not  go  to 

the  poorest  countries.  Indeed,  there  is  a  need  to 

overcome a number of market, governance and 

coordination  problems  in  order  to  mobilise  and 

channel  financial  resources  to  their  most  effective 

use. 

  Policy is crucial alongside finance to implement a 

transformative  post-2015  development  agenda. 

Poor  or  adverse  policy  can  stop  the  potential 

of finance, but appropriate policy can: generate, 

attract  and  steer  finance;  unleash  more  public 

and  private  finance; 

increase  the  stability  of 

international  private  finance;  pull  finance  from 

less  productive  to  more  productive  uses;  lead  to 

more results with the same amount of finance; and 

reduce the need for finance. 

Combining finance and policies to implement a transformative post-2015 development agenda | 131

 
 
T his  chapter  examines  the  role  of  policies  in  mobilising  and  making  finance  more  effective.  It 

presents empirical evidence comprising ERD-commissioned econometric and modelling studies. It 
is structured as follows: Section 4.1 discusses the role of policies affecting the mobilisation of finance, 
and Section 4.2 examines the role of policies that shape its effective use. In both cases, policies are 
classified as national or international. Section 4.3 discusses the linkages among finance flows. Section 
4.4 summarises the issues and presents a Table that can be used to examine in more detail the linkages 
between  specific  finance  flows  and  policies.  (Chapter  6  builds  on  this  in  relation  to  the  examples  of 
enablers.) The chapter focuses in particular on international policies and the global system to show the 
importance of policy for each flow while the focus of Chapter 6 is largely on national policies.

  4.1  Mobilising finance 

This section examines the importance of policies 
in  mobilising  the  financial  flows  identified  in 
Chapter  3,  based  on  a  review  of  the  literature 
on  the  determinants  of  different  types  of  capital 
flows. We focus on commonalities and differences 
among  policies  that  interact  with  finance  flows. 
The review shows that finance often fails to achieve 
its  intended  objectives  unless  it  is  accompanied 
by  complementary  policy.  This  is  an  important 
observation  as  it  means  that  governments  have 
the means to address the perceived lack of finance 
and  the  policy  challenges  identified  in  Chapter 
1.  While  the  chapter  covers  both  domestic  and 
international  policies,  it  focuses  in  particular  on 
international policies.

4.1.1 Mobilising domestic public finance 

The  IMF  (2007)  finds  that  there  is  a  range  of 
structural  factors  behind  an  economy’s  revenue 
performance (or tax-to-GDP ratio). These include 
per  capita  GDP,  the  share  of  agriculture  in  GDP, 
trade openness, foreign aid and political stability. 
The  tax  base,  which  underpins  any  sustained 
increase  in  the  tax-to-GDP  ratio,  is  driven  by 
employment and earnings in the formal economy 
(income-tax  base)  and  private  spending  (indirect 
tax base) (Morrissey, 2013). 

With  some  exceptions,  long-term  changes  in 
LICs’  revenue  performance  have  been  modest. 

4.1

Fragile states are less able to expand tax revenue 
as a percentage of GDP and any gains are more 
difficult to sustain (IMF, 2012). Some post-conflict 
economies  have,  however,  made  good  progress 
in  developing  effective  tax  systems,  e.g.  Liberia 
(taxes grew from 10.6% of GDP in 2003 to 21.3% 
in 2011) and Mozambique (taxes grew from 10.5% 
of  GDP  in  1994  to  17.7%  in  2011)  (IMF,  2011). 
Some developing countries have achieved marked 
improvements:  Peru,  for  example,  increased  its 
tax ratio from 6% to 13% during the 1990s and to 
around 17% currently.

A range of specific policies can help to mobilise 
tax revenues. It is not easy – but nor is it impossible 
– to achieve short-term changes in the tax-to-GDP 
ratio. About 16 of 28 LICs in SSA raised revenue 
ratios by five percentage points of GDP or more 
in  at  least  one  three-year  period  in  the  last  20 
years.  Many  developing  countries  could  raise  a 
significant level of additional revenue (IMF, 2012; 
CIs)  by  adopting  some  or  all  of  the  following 
policies:

that 

limit 

  Building  administrations 
rent-
seeking, make strategic use of tax exemptions 
(these can be considerable, representing 3.9% 
of GDP between 2005 and 2007 in Tanzania; 
Mauritius  is  one  of  only  a  few  countries  that 
have  used  tax  exemptions  strategically),  and 
eliminate  those  that  forgo  revenue  to  little 

effect, and improve compliance to extend the 
tax base

   Automating the customs-clearing process, 
which was credited with achieving a major 
increase in tax-to-GDP ratios in Bangladesh

   Making effective laws and regulations 
to protect taxpayers 

  Adopting a broad-based value-added tax 
(VAT) with a fairly high threshold 

   Establishing a broad-based corporate income 
tax at internationally competitive rates 

   Extending the base for personal income tax

   Establishing simple and coherent tax regimes 
for smaller businesses 

   Strengthening real-estate tax (with potential 
to transform local government finance) 

   Levying excises on a few key items that 
are appropriate to revenue needs and 
wider social concerns 

  Developing capacity for tax expenditure 
and wider policy analysis 

Administrations in LICs are often under-resourced, 
resources  are  not  focused  on  areas  of  greatest 
impact,  and  middle-level  management  is  weak. 
Domestic and customs coordination is also poor, 
which  is  especially  important  for  VAT.  Weak 
administration,  poor  governance  and  corruption 
tend to be associated with low revenue collection 
(IMF, 2011). 

The CIs show that some countries have successfully 
mobilised  more  tax  revenue  (as  a  percentage  of 
GDP) by undertaking a range of capacity reforms 
in tax authorities and adopting better tax policies. 
For example, Tanzania’s tax-to-GDP ratio increased 
from 9.8% in FY 2002/03 to 17.1% in FY 2011/12, 

while  in  Bangladesh  the  increase  was  from  7.9% 
in  FY  1995  to  11.3%  in  FY  2013.  The  post-2015 
FPFD framework therefore needs to signal strong 
support for actions that can raise revenues in ways 
that  are  conducive  to  sustainable  development 
transformation. The commissioned CI on Tanzania 
describes  how  a  Tax  Modernisation  Programme 
and  a  Tax  Revenue  Authority  (TRA)  Corporate 
Plan is focusing on (a) broadening the tax base; (b) 
strengthening TRA to increase the efficiency and 
effectiveness of Tax Administration; (c) improving 
tax  administrative  infrastructure;  and  (d)  curbing 
tax evasion and minimising revenue loss through 
tackling  tax  exemptions  (CI,  Lunogelo  et  al., 
2015). As a result, the tax-to-GDP ratio rose from 
less than 10% in 2001 to more than 14% in 2010. 
We discuss this topic further in Chapter 6.

A  specific  issue  applies  to  mobilising  revenues 
from  the  extractive  industries  (EIs),  such  as 
mining  and  petroleum.  When  mineral  prices  are 
high and with the discovery of several new mineral 
resources  in  recent  years,  there  are  significant 
potential  benefits  to  be  obtained  from  EIs.  The 
share  of  government  revenues  varies  markedly 
across countries. The taxation of EIs is affected by 
a number of specific factors. Rents may be large, 
but the circumstances are highly volatile (e.g. due 
to  fluctuating  prices)  and  are  difficult  to  predict. 
The extraction and operation of mineral resources 
require  large  initial  investments,  or  sunk  costs, 
while  revenues  accrue  over  time.  This  means 
there are higher risks for a private investor whose 
returns will depend on government policies over 
a  long  period.  This  problem  can  lead  to  ‘hold-
up’  or  low  levels  of  investment.  Furthermore, 
EIs  often  depend  on  a  few  institutions  and  are 
characterised  by  asymmetric  information  issues, 
in  addition  to  operating  in  the  context  of  weak 
state  capacities  and  dispersed  market  power,  all 
of which can make for challenging state–business 
relationships. This situation tends to involve TNCs 
that can use international operations to shift their 
tax base. Finally, such natural resources are scarce 
and non-renewable.

132 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 133

CHAPTER 4. The role of policies in mobilising and using finance effectively 
 
 
 
 
 
 
 
 
 
The  European  Report  on  Development 
2011/2012  discussed  the  fact  that  subsidies  for 
natural  resources  such  as  fossil  fuels  are  often 
poorly applied and affect those living in  poverty 
most severely, are economically inefficient and are 
bad for the environment. Through public subsidy 
reform,  public  resources  can  be  mobilised  and 
spent  more  effectively  (see  also  World  Bank, 
2013). Global subsidies on fossil fuels are twice the 
level  of  investment  in  renewable  energy  and  six 
times the level of subsidies on renewable energy. 
If governments removed fossil-fuel subsidies and 
spent the same money on renewable energy, they 
could broadly meet the finance required to keep 
the increase in global temperature below 2ºC (see 
Figure  4.1).  Chapter  6  discusses  these  issues  in 
more detail.

face  a  range  of 

Tax  administrators 
further 
challenges  such  as  transfer-pricing  abuse, 
reported  value  of  production,  debt  payments 
and hedging. For example, when TNCs calculate 
taxable  income  for  their  operations  in  each 
country,  they  need  to  put  a  price  on  goods 
and  services  traded  among  units  of  the  same 
company. But what is the right price? Many TNCs 
use a transfer-pricing mechanism to transfer value 
to  low-tax  jurisdictions.  Some  studies  suggest 
the  price  differentials  are  often  more  than  10% 
(Bernard  et  al.,  2006).  A  model  simulation  of  an 
increase of export prices rising by 10% shows that 
national incomes in SSA would rise by some $3.5 
bn annually (commissioned modelling paper; Fic, 
2015). Thus, better global tax policies that lead to 
fairer  pricing  strategies  could  significantly  boost 
the GDP of countries in SSA (by around a quarter 
of a percentage point of GDP).

The abuse of transfer prices can also significantly 
reduce  tax  revenues.  Each  country  should  have 
detailed requirements for how companies should 
deal  with  transfer  pricing,  but  monitoring  is 
problematic.  Global  discussions  could  help  with 
transfer-pricing 
implementing 
designing  and 
principles.  For  example,  with  external  support, 
transfer-pricing adjustments made as a result of 

Figure 4.1 |  Subsidies on fossil fuels, green 

finance needs, and subsidies and 
investment in renewable energy

)
s
n
o

i
l
l
i

b

(

D
S
U

800

700

600

500

400

300

200

100

0

Fossil 
fuel
subsidies

Investment 
(Renewable 
Energy)

Subsidies 
(Renewable 
energy)

Additional finance 
needed to keep 
temperature 
rises below 2 
degrees by 2050 
(max)

Sources: IEA (2012); FS-UNEP (2014)

audits on TNCs have increased tax revenues in 
Colombia by 76%, from $3.3 mn in 2011 to $5.83 
mn in 2012. Donors also provide assistance, such 
as through the Extractive Industries Transparency 
Initiative (EITI), to improve transparency regarding 
taxes paid by EI-registered companies.

Tax evasion and tax avoidance are global issues 
governed  by  laws  that  date  back  to  the  1920s. 
OECD  countries  do  not  always  tax  TNCs  where 
production  takes  place,  enabling  them  to  shift 
profits  to  low-tax  jurisdictions  and  legally  avoid 
taxes.  Some  companies  also  evade  taxes  by 
hiding  large  sums  in  offshore  locations  (which  is 
illegal). The OECD is currently discussing reforms 
in the global tax systems (namely Base Erosion and 
Profit Sharing); although it is unclear how quickly 
new  systems  would  be  adopted.  Developing 
countries need to be involved in such discussions 
as reforms could affect them in a major way. The 
modelling  and  case-study  evidence  on  transfer 
pricing  suggests  that  it  is  not  difficult  to  change 
such  regimes.  At  the  same  time,  there  is  a  risk 

that  addressing  international  tax  issues  such  as 
transfer  pricing  might  divert  scarce  capacities 
from  dealing  with  domestic  tax  issues.  Hence 
this  Report  emphasises  the  need  for  increased 
domestic  tax  efforts  as  well  as  global  action, 
both of which can be supported by international 
public finance as argued in Chapter 6.

4.1.2  Mobilising international public finance

The  determinants  of  ODA  and  OOF  include 
poverty  and  per  capita  income,  vulnerability, 
policy factors (targets), cultural factors (e.g. the 
relationship  between  countries  and  the  former 
colonial  powers)  and  other  characteristics  of 
specific  donors  and  recipients.  A  range  of 
studies  (e.g.  Nunnenkamp  and  Thiele,  2006; 
Dollar  and  Levin,  2005;  Cohen  and  Katseli, 
2006)  has  examined  whether  aid  is  allocated 
on  the  basis  of  needs  in  the  recipient  country, 
as measured by GDP per capita. Most find that 
ODA,  especially  bilateral  aid,  is  only  weakly 
based  on  such  needs,  but  that  there  is  great 
variety among donors. 

Cadot  et  al.  (ERD  commissioned  paper,  2015) 
suggest  that  what  determines  the  allocation  of 
ODA  is  poorly  understood.  They  highlight  that 
previous  studies  often  relied  on  cross-sectional 
analysis  of  the  determinants  of  ODA  receipts 
at  the  country  level  (e.g.  Maizels  and  Nissanke, 
1984; Dowling and Heimenz, 1985; Mosley, 1985; 
Gillis et al., 1992; Wall, 1992). Trumbull and Wall 
(1994)  pointed  out  that  heterogeneity  across 
countries was likely to confound their results and 
revisited  the  issue  using  a  panel  with  recipient 
fixed  effects.  They  found  that  ODA  allocation 
seemed to react to variations in infant mortality 
and civil rights in recipient countries. This means 
that  domestic  conditions,  including  policies  in 
developing  countries,  also  make  a  difference  in 
attracting ODA.

There  seems  to  be  a  difference  between 
allocations  made  by  multilateral  and  bilateral 
agencies.  The  former  appear  to  provide  more 

assistance 

(including 
general  programme 
budget  support)  and  commodity  aid,  and  thus 
actively  support  efforts  to  align  ODA  to  the 
priorities of the recipient country and to smooth 
income variability arising from commodity price 
fluctuations.  According  to  Cohen  and  Katseli 
(2006),  they  also  seem  to  specialise  in  basic 
infrastructure, 
transport,  water 
supply  and  sanitation,  and  productive  sectors, 
most notably agriculture and financial services.

in  particular 

By 
contrast,  bilateral  donors  are  more 
‘politicised’  than  multilateral  agencies  in  their 
sectoral  allocations,  and  seem  to  cater  to  the 
preferences  of  their  domestic  constituency, 
including  NGO  support,  emergency  assistance 
and debt cancellation (Cohen and Katseli, 2006). 
Ultimately,  the  allocation  of  ODA  is  a  policy 
choice, and is also highly political. Some donors 
have long-standing commitments to concentrate 
on  the  poorest  countries  (e.g.  DFID’s  target  of 
90%  to  LICs).  The  OECD  Development  Co-
operation  Report  (2014)  suggests  that  50%  of 
ODA  should  be  allocated  to  LDCs.  While  the 
allocation  of  ODA  across  country  groups  is 
ultimately a political decision it could be argued 
that poorer and more fragile countries need aid 
more  as  they  lack  sufficient  income  to  use  and 
distribute it.

A  further  finding  is  that  aid  allocations  based 
on  the  adoption  of  specific  policies  have  not 
become  stronger,  although  Alesina  and  Weder 
(2002)  suggest  that  Nordic  donors  tend  to  give 
less support to countries in which corruption runs 
high.  Some  donors  do  not  seem  to  base  their 
ODA  primarily  on  the  poverty  of  the  recipient 
country.  Berthélemy  and  Tichit  (2004)  examine 
18 donors and find that infant mortality is a better 
explanatory  predictor  than  income.  Berthélemy 
(2006) examines trade as an explanatory variable 
for ODA, and Alesina and Dollar (2000) suggest 
the  importance  of  single  factors  in  influencing 
ODA  allocations,  e.g.  Israel/Egypt  for  the  USA, 
former colonies for France and the UK, and UN 
voting records in the case of Japan.

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CHAPTER 4. The role of policies in mobilising and using finance effectively 
Gamberoni and Newfarmer (2011) assess whether 
aid  for  trade  (AFT)  goes  to  the  countries  most 
in  need  of  it,  using  gravity-based  indicators  of 
needs  and  comparing  the  observed  allocation 
with a simple allocation rule. They find substantial 
dispersion  of  flows  around  estimated  needs, 
although  the  correlation  between  the  two  is 
positive across the countries examined.

In addition, as discussed in Chapter 2, international 
targets  such  as  the  MDGs  have  contributed  to 
raising ODA levels especially for the social sectors 
(such as education and certain aspects of health). 
It  can  be  anticipated  that  future  specific  global 
actions could contribute to increasing the amount 
of ODA still further.

Uneze (ERD commissioned paper, 2015) provides 
insights  into  how  SSC  is  allocated.  The  past 
decade has witnessed the emergence of Southern 
donors,  which  do  not  refer  financial  assistance 
to  other  developing  countries  as  aid,  but  rather 
an  expression  of  solidarity  (UNCTAD,  2010).  All 
countries  in  the  Global  South  are  considered 
equals  and  partners,  and  therefore  national 
sovereignty  and  mutual  respect  are  key  to  their 
relationships. This partly explains the absence of 
policy  conditionality  on  Southern  aid,  although 
there is some non-policy conditionality. 

There is also a difference in the sectoral allocation 
between  Northern  and  Southern  donors. 
Development cooperation from Southern donors 
shows  that  while  allocations  from  Brazil,  Saudi 
Arabia and South Africa are concentrated in social 
infrastructure, similar to traditional donors, China, 
India and UAE prioritise economic infrastructure. 
China and India also assist the productive sector, 
suggesting that they deploy aid to facilitate trade 
and  investment  in  other  developing  countries. 
The  aid  from  Arab  countries  and  Brazil  tends  to 
go to countries facing humanitarian crises.

4.1.3  Mobilising domestic private finance

different terms in different countries and sectors. 
It  is  available  in  abundance  in  some  countries 
whilst bypassing others. There are many reasons 
for  this  but  the  most  important  for  this  review  is 
the  crucial  role  of  policies  in  mobilising  and 
steering private finance.

There are many factors behind the level and depth 
of financial-sector development (see Beck (2013) 
for a recent review of the literature). Low-income 
countries tend to have little financial sector depth, 
which may be hampered by low population density 
(in  SSA),  weak  savings  institutions,  the  absence 
of  pension  systems,  inefficient  (development) 
banks, small stock markets with low liquidity, and 
financial  illiteracy.  All  such  (non-financial)  issues, 
many of which are associated with market failures, 
affect financing for development. 

(2000) 

Loayza  et  al. 
review  a  number  of 
determinants  of  private  savings  (and  hence 
domestic  private  finance),  which 
include: 
persistence, 
income,  growth,  demographics 
and  uncertainty.  There  are  two  major  views  on 
savings:  the  permanent-income  hypothesis  that 
private savings react only to permanent changes 
in  income;  and  the  life-cycle  hypothesis  that 
consumption  and  savings  are  spread  over  an 
individual’s  lifetime.  Whichever  is  the  correct 
hypothesis,  private  savings  tend  to  react  to 
changes  in  determinants  only  after  a  time  lag 
(persistence). Moreover, evidence across a range 
of countries suggests that higher income per capita 
(and higher growth) raises savings. In developing 
countries, other things being equal, a doubling of 
income per capita is estimated to raise the long-
run private saving rate by 10 percentage points of 
disposable  income.  Further,  Loayza  et  al.  (2000) 
argue  that  microeconomic  and  macroeconomic 
evidence,  both  at  the  international  and  country 
level,  confirms  that  a  rise  in  dependency  ratios 
(i.e.  young  or  old  dependants)  tends  to  lower 
private saving rates.

Private finance is available in different quantities at 

Policy  can  influence  these  aspects  and  hence 
could affect the mobilisation of domestic private 

finance.  The  broad  development  of  a  financial 
infrastructure  is  important,  such  as  developing 
a  good  regulatory  framework  for  pension  funds, 
insurance  funds,  and  stock  markets,  all  of  which 
have  the  potential  to  grow  fast  in  LICs.  Better 
policies  for  developing  collateral,  such  as  land-
titling  and  credit  bureaux,  will  also  develop 
domestic  finance.  Loayza  et  al.  (2000)  find  that 
fiscal  policy  and  public  savings  affect  private 
savings.  The  effects  of  tax  incentives  on  savings 
are found to be more ambiguous. Pension reform, 
on  the  other  hand,  can  have  major  effects  on 
private  savings  especially  through  mandatory 
saving  requirements.  Liberalisation  of  interest 
rates, elimination of credit ceilings, easing of entry 
for  foreign  financial  institutions,  development 
of  capital  markets,  and  enhanced  prudential 
regulation and supervision are also important.

Barajas et al. (2012) discuss a number of policies 
that would increase the availability and stability 
(a)  market-
of  domestic  private  finance: 
developing  policies; 
(b)  market-enabling 
policies; and (c) market-harnessing policies. 

Market-developing policies include legal changes 
and  substantial  upgrading  of  macroeconomic 
performance and stability. These policies help to 
overcome  constraints  posed  by  a  small  financial 
sector  and  can  help  to  expand  the  frontier  of 
the  financial  sector  (on  the  demand  side).  For 
example, small and undiversified economies can 
benefit from access to international capital markets 
and attract private finance by using them as risk-
pooling  and  diversification  mechanisms.  Such 
integration requires appropriate macro-prudential 
policies  to  dampen  the  potentially  negative 
effect  of  volatile  capital  flows.  Informational  and 
contractual  frameworks  can  also  help  to  attract 
finance, especially in the long term.

Market-enabling  policies  address  weaknesses  in 
regulatory  barriers  or  lack  of  competition.  They 
help a financial system move towards the frontier. 
They include more short- to medium-term policy 
and  regulatory  reforms,  e.g.  policies  aimed  at 

in  micro-  and 
fostering  greater  competition 
consumer lending. Such policies can also include 
removing regulatory impediments and reforming 
tax policies, which can raise market contestability, 
as  well  opening  up  new  payment  systems  and 
credit  registries.  Such  policies  could  help  to 
expand financial markets. 

Market-harnessing  or  market-stabilising  policies 
help  to  prevent  a  financial  system  from  moving 
beyond  the  frontier.  Such  policies  include  the 
regulatory 
framework,  macroeconomic  and 
including  the 
macro-prudential  management, 
mitigation  of  risks  associated  with  non-bank 
providers  of  financial  services  and  consumer-
protection schemes. 

In  conclusion,  a  range  of  policies  influences  the 
financial  market  and  hence  the  availability  and 
stability  of  private  finance.  Barajas  et  al.  (2012) 
measure the development of the financial market 
by  the  ratio  of  private-sector  credit  to  GDP 
according to the policy factor and suggest there 
is a level of financial deepening that is neither too 
low nor too high but just right. Too much credit can 
lead to ‘boom–bust’ cycles in the financial sector, 
and too little leads to drying up of private finance 
and  lack  of  investment  opportunities.  There  is  a 
crucial  role  for  policy  to  obtain  an  appropriate 
level of financial deepening.

4.1.4  Mobilising international private finance

FDI

As  discussed  in  Chapter  3,  the  distribution  of 
private  capital  flows  is  uneven  across  countries. 
There  are  often  straightforward  reasons  for  this. 
Several factors can help to attract FDI: (a) general 
policy factors (e.g. political stability, governance, 
investment  climate);  (b)  specific  FDI  policies 
(incentives  packaged  in  a  strategy,  investment 
promotion  to  address  imperfect  information, 
international  trade  and  investment  treaties,  or 
home-country  measures); 
(c)  macroeconomic 
factors  (human  resources,  infrastructure,  market 

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Combining finance and policies to implement a transformative post-2015 development agenda | 137

CHAPTER 4. The role of policies in mobilising and using finance effectivelysize  and  growth);  and  (d)  firm-specific  factors 
(e.g. technology) and one-off factors such as the 
availability  of  natural  resources  or  large-scale 
privatisation  (Dunning,  1993;  UNCTAD,  1999;  te 
Velde, 2006). 

There  are  also  various  specific  national  and 
international  policies  to  mobilise  international 
private  finance.  There  are  too  many  to  discuss  in 
detail, but we identify four as relevant to the post-
2015  debate:  (a)  FDI  incentives;  (b)  trade  and 
investment global and regional policies; (c) global 
financial rules that can help to reduce the incidence 
of crises; and (d) global environmental rules.

literature  suggests 

that  specific  FDI 
The 
incentives  are  less  effective  in  attracting  FDI 
than  so-called  general  economic  fundamentals, 
such  as  good  quality  and  appropriate  education 
and  infrastructure.  Incentives  do  tend  to  have 
an effect on the choice of location at the margin 
(examples  include  Ireland  and  Singapore  over 
the  1970–1990  period)  (te  Velde,  2002),  and  tax 
lawyers take tax treaties into consideration when 
advising their clients. Incentives are most effective 
in  determining  in  which  of  a  number  of  similar 
locations  footloose  export-oriented  investment 
will  focus.  Morrisset  (2003)  also  argues  that 
time-series analysis and surveys indicate that tax 
incentives  are  a  poor  means  to  compensate  for 
negative factors in a country’s investment climate, 
but that incentives do affect the decisions of some 
investors  some  of  the  time.  Since  incentives  are 
costly in terms of forgone revenues, the question 
is  how  to  minimise  wasteful  tax  incentives  and 
avoid a ‘race to the bottom’ for tax incentives (and 
tax  levels  generally,  as  expressed  in  the  OECD’s 
work on base erosion and profit-sharing).

Global  and  regional  trade  and  bilateral 
investment agreements may help to mobilise FDI. 
Although  causalities  are  difficult  to  disentangle, 
multilateral  trade  liberalisation  in  the  framework 
of  the  General  Agreement  on  Tariffs  and  Trade 
(GATT)/World  Trade  Organization  (WTO)  has 
probably  contributed  to  the  massive  increase 

in  vertical  FDI  over  the  last  20  years.  While  the 
impact  of  bilateral  investment  agreements  on 
FDI  flows  remains  controversial  (Sauvant  and 
Sachs, 2009; UNCTAD, 2009; Berger et al., 2011), 
empirical studies on the impact of regional trade 
agreements (RTAs) on FDI tend to suggest that they 
encourage extra-regional FDI flows and for some 
regions intra-regional FDI (te Velde and Bezemer, 
2004; Büthe and Milner, 2008; Büge, 2012). Other 
studies  also  show  that  different  countries  within 
a region experience different effects with respect 
to attracting FDI. This difference reflects variations 
in  the  relative  size  of  the  industrial  sector,  but 
also  the  degree  to  which  economic  integration, 
directly  or  indirectly,  increases  the  geographical 
advantage  of  a  country  relative  to  others  in  the 
region. 

In addition to trade-related provisions of RTAs the 
strength of investment provisions also matters for 
promoting FDI. The examination by Dee and Gali 
(2003) of older RTAs suggests that FDI responds 
significantly  to  their  non-trade  provisions.  Te 
Velde and Bezemer (2006) find that membership 
of a region (including ACP and non-ACP regions) 
as such is not significantly related to inward FDI, 
but  that  if  a  country  belongs  to  a  region  with  a 
sufficient  number  and  level  of  provisions  on 
trade  and  investment  (e.g.  describing  treatment 
of  foreign  firms,  large  trade  preferences),  this 
helps  to  attract  more  inward  FDI  to  the  region. 
More  recently  concluded  RTAs  usually  include 
comprehensive  investment  chapters,  although 
their contents vary considerably (Kotschwar, 2009). 
Opening  up  the  ‘black  box’  of  RTAs’  investment 
chapters – accounting for variations with regard to 
their commitments – recent studies find that the 
significant  positive  effects  of  RTAs  on  FDI  flows 
can  be  attributed  to  the  extensiveness  of  the 
provisions (Lesher and Miroudot, 2007; Miroudot, 
2009) and in particular on the inclusion of clauses 
on market access in the form of pre-establishment 
national treatment (Berger et al., 2013). 

Box  4.1  gives  an  example  of  the  role  of  global 
(international  mitigation  agreements) 
policies 

that  could  help  to  mobilise  climate  finance.  The 
presence  of  a  strict  global  emission-reduction 
target  would  mobilise  around  $100  bn  from  a 
bunkers’  fuel  tax,  reducing  the  need  to  mobilise 
climate-related finance from other sources.

Portfolio flows

inflows, 

A  range  of  national  and  international  factors 
drives  short-term  capital 
including 
economic  growth  potential,  commodity  exports 
and prices, inflation and exchange rates, deficits 
on  current  account  and  government  balances, 
capital  account  convertibility,  financial-market 
development,  marketing  drive,  appropriate 
pricing  and  size  of  (sovereign)  bond  transaction, 
and  global  monetary  conditions  (see  Hou  et  al., 
2014).

Global  economic  policies  are  crucial  for  the 
to  developing 
prospects  of  portfolio  flows 
countries.  The  global  financial  crisis  of  2007–
2008  and  its  severe  economic  consequences 
–  a  significant  slowdown  in  global  economic 
activity,  a  collapse  in  global  trade,  debt-  and 
unemployment-related  problems  in  a  number  of 
advanced economies – have not only encouraged 
a  re-evaluation  of  the  prospects  of  global 
economic  growth  but  have  also  prompted  a  re-
design of global regulatory and economic policy 
frameworks. The effects on developing countries 
have  been  severe  (e.g.  te  Velde  et  al.,  2010). 
Increased  volatility  in  capital  flows  has  made 
macroeconomic management difficult worldwide. 
Moreover,  global  economic  policies  (monetary, 
financial,  and  fiscal)  that  address  the  volatility 
of  finance  flows  can  have  major  impacts  on 
developing countries.

Take, for example, the effects of monetary policy 
in  developed  countries.  Faced  with  a  major 
crisis and lack of effective conventional monetary 
measures,  with  interest  rates  reaching  the  zero 
bound,  central  banks  turned  to  unconventional 
monetary  policies  by  making 
large-scale 
including  government 
purchases  of  assets, 

bonds  and  asset  securities.  This  significantly 
affected bond and equity markets, and the wider 
economy,  across  developed  and  developing 
countries.  Ending  these  unconventional  policies 
will also affect developing countries. A modelling 
study  undertaken  for  this  Report  (commissioned 
modelling  paper;  Fic,  2015)  suggests  that  the 
(announcement  of  a)  withdrawal  of  the  US 
monetary  stimulus  in  2013  led  to  an  increase  by 
80  basis  points  in  the  USA  and  some  100–300 
basis points in emerging economies’ bond yields. 
Using  a  global  econometric  model,  the  tapering 
of US monetary stimulus is expected to take 0.8% 
off the GDP of countries in SSA. In Latin America 
and  the  Commonwealth  of  Independent  States 
(CIS),  the  more  restrictive  monetary  policy  taken 
by  the  US  Federal  Reserve  (‘the  Fed’)  may  have 
spillovers  amounting  up  to  0.25%  of  their  GDP. 
The Middle East and the Far East are likely to be 
least  affected.  Overall,  higher  bond  yields  result 
in a decrease in the US GDP of about 1%, and of 
about 0.5% in developing countries. This suggests 
that  global  coordination  of  monetary  policies,  a 
global  public  good,  can  have  major  impacts  on 
the stability of financial flows.

A further example (commissioned modelling paper; 
Fic,  2015)  is  the  attempt  to  create  stable  global 
banking rules aimed at preventing costly financial 
crises.  Basel  III  rules  require  banks  to  implement 
stricter  capital  requirements.  This  leads  to  an 
increase  in  borrowing  costs.  Modelled  through 
an  increase  in  the  investment  premium  reflecting 
tighter  regulation  in  the  area  of  bank  capital  and 
liquidity,  GDP  in  all  of  the  major  developed  and 
emerging  economies  would  be  reduced  by  up 
to  0.25  basis  points.  In  SSA,  higher  capital  and 
liquidity  effects  would  also  lead  to  a  decrease  in 
GDP  of  up  to  0.1%.  These  costs  are,  however, 
much  smaller  than  the  benefits  associated  with 
averting  financial  crises  by  adopting  more  stable 
banking  rules.  In  SSA,  the  impacts  of  a  crisis  are 
more than ten times greater than the introduction 
of  tighter  capital  requirements,  which  means  that 
the  region  as  a  whole  would  ultimately  benefit 
from more stable global financial rules. 

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CHAPTER 4. The role of policies in mobilising and using finance effectivelyGriffith-Jones  et  al.  (commissioned  background 
paper, 2015) argue that a major global challenge 
is  to  focus  on  ensuring  that  the  financial  sector 
serves  the  real  economy,  by  enhancing  its  role 
in intermediating savings for funding enterprises 
and  households  in  a  sustainable  way.  This  can 
be  helped  by  strong  and  effective  regulation, 
which both increases the solvency and liquidity of 
banks, reduces and/or separates financial activity 
of a more ‘speculative’ kind, such as many of the 
activities  of  unregulated  ‘shadow  banking’,  and 
encourages  sustainable  financing  for  the  real 
economy.

Such regulation should, for example, ensure that 
banks  are  safer,  by  being  sufficiently  capitalised 
and not having excessive leverage. In this sense, 
although Basel III represents progress, its aims may 
be  too  modest  at  least  for  developed  countries. 

For example, there is much consensus that capital 
adequacy and agreed leverage requirements are 
too  low  for  developed  countries,  and  that  they 
need  to  be  gradually  increased.  The  scale  and 
pace of such increase must be done in ways that 
facilitate increased lending, for example to SMEs, 
at  reasonable  cost.  The  challenge  is  to  design 
rules  to  ensure  that  banks  and  other  financial 
institutions  assume  less  financial  risk  but  more 
economic risk.

A  greater  involvement  of  the  users  of  finance 
(e.g. non-financial corporations, consumers, trade 
unions)  in  designing  such  rules  may  be  a  useful 
way  forward.  This  can  be  achieved  by  open  and 
transparent dialogue among financial institutions, 
regulators, policy-makers and other stakeholders 
on  financing  sustainable  development. 
In  a 
second  stage,  the  users  of  finance  could  be 

Box 4.1 | The impact of different CO2 policy scenarios on mobilising climate finance

The adoption of an international climate agreement (a non-financial MOI) will influence international carbon prices, and hence how 
much climate finance can be mobilised. Data from Hof et al. (2011) offers insights into the scale of the impact of climate-related 
agreements on the mobilisation of climate finance according to three different emissions scenarios – one that is compatible with a 
2°C climate scenario, and unconditional and conditional Copenhagen pledges scenarios. The study uses the FAIR model (analysing 
environmental and cost implications of climate regimes) to analyse four climate finance proposals in relation to these scenarios (see 
also the discussion in Chapter 3):

•	 Norwegian	proposal	–	withholding	and	auctioning	2%	of	Annex	I	countries’	emissions	allocations 
•	

	Swiss	proposal	-	a	global	carbon	tax	on	energy-related	CO2	emissions	of	$2	per	tCO2 
(with a basic exemption of $1.5 per tCO2 per capita)
	IET	levy	–	levy	of	international	emissions	trading,	including	the	Clean	Development	Mechanisms	(CDM)	and	Joint	
Implementation

•	

•	 Bunker	fuel	emissions	tax	-	on	international	travel	and	shipping

The carbon price is determined endogenously by the FAIR model, and provides an approximate carbon price of $15 per tCO2 for the 
unconditional pledges scenario and $50 per tCO2 for the 2°C scenario. The study finds the scale of climate finance mobilised under 
the different proposals to be dependent on the mitigation scenario, and the scenarios have different effects on revenue according to 
the proposal. These findings are summarised below.

In all of the scenarios the predictability of climate finance would be greatly increased by the presence of an international binding 
mitigation  agreement,  however  stringent.  The  scale  of  revenue  generated  in  each  scenario  is  determined  by  both  the  chosen 
proposal and the stringency of the international agreement adopted. The impact of scenarios is especially marked on the proposal 
to tax bunker fuel emissions, which has the potential to raise the largest revenue of all proposals under a conditional pledges or 2°C 
scenario.

Table 4.1B | Climate finance mobilised under different proposals

PROPOSAL

REvENUE MOBILISED ($ BN)

IMPACT OF SCENARIOS AND CARBON PRICE

Unconditional 
pledges

Conditional 
pledges

Norwegian 
proposal

3

Swiss 
proposal

IET levy

Bunker fuel 
emissions tax

52

2

17

15

46

<1

65

2°C

26

41

1

111

The high volume of emission allowances auctioned under the 
unconditional pledges does not compensate for the low prices, 
which means that the conditional pledge scenario mobilises more 
funds (the price effect is greater than the volume effect). The most 
stringent C02 scenario (2°C) mobilises the greatest revenue.

The higher revenue under the pledges scenarios is caused by the 
higher emissions in these scenarios. The carbon price has less effect 
on revenue than the scale of emissions.

The revenue is low, and influenced by level of emissions more 
than by carbon price.

In all three scenarios significant revenue is mobilised. 
The tax level was set at the global carbon price - this could be more 
predictable by making taxation levels independent of the carbon 
price. The carbon price (or scenario), however, has a strong impact 
on revenue.

directly involved in the broad design of rules and 
regulations to govern the financial sector, to help 
make  it  both  more  stable  and  better  serve  the 
needs of the real economy.

resilience.  For  example,  they  can  insure  against 
shocks (e.g. build up reserves, private insurance, 
capital markets) or simply cope with a shock when 
it occurs. As a last resort, countries can use donor-
funded shock facilities.

As global conditions change, it will be important 
to monitor the ways in which financial institutions 
contribute  to  meeting  the  interests  of  society, 
particularly  its  poorest  members.  We  discuss 
elements  of  an  effective  international  financial 
architecture  for  the  poorest  countries  in  Box 
4.2.  As  policies  both  at  the  global  level  and  in 
HICs  have  an  impact  on  poorer  countries,  it  is 
important  to  ensure  that  the  views  of  the  latter 
are heard, including in support for their coalitions. 
Te  Velde  (2011)  has  argued  that  vulnerability  to 
a  shock  equals  the  exposure  minus  resilience, 
which  means  that  the  way  to  reduce  exposure 
is  to  avoid  financial  crises  or  the  adoption  of 
distortionary  policies  in  developed  countries. 
While  poor  countries  cannot  directly  affect  such 
policies,  they  can  still  mitigate  the  negative 
consequences  of  shocks  by  increasing  domestic 

Remittances

There  are  many  macro  determinants  of 
remittances,  such  as  the  number  of  migrants 
working abroad, and their relative length of stay, 
relative  wage  rates  and  economic  conditions 
between  sending  and  destination  countries, 
relative exchange rates and interest rates, political 
risk, and financial market development/facilities to 
transfer funds (i.e. institutions) (Katseli et al., 2006). 
including  altruism, 
Micro-level  determinants, 
insurance,  loan  repayments  and  bequests  also 
appear  to  be  important  determinants  (see,  for 
example,  El-Sakka  and  McNabb  (1999);  Gupta 
et  al.  (2009);  Singh  et  al.  (2009)).  Many  of  these 
determinants can be influenced by policy, e.g. the 
availability of financial facilities. 

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CHAPTER 4. The role of policies in mobilising and using finance effectivelySingh  et  al.  (2009)  find  remittance  inflows  to  be 
counter-cyclical,  acting  as  a  shock  absorber.  The 
CIs provide conflicting evidence. Remittances are 
a  major  contributor  to  the  Moldovan  economy 
(CI,  Ghedrovici,  2015),  but  declined  significantly 
from 2007 to 2009 as the global and EU financial 
crisis  forced  many  Moldovan  migrant  workers 
to  return  home.  In  contrast,  Bangladesh  did  not 

experience  the  mass  return  of  migrant  workers, 
and  remittances  remained  high,  rising  annually 
and steadily between 2006 and 2009, comprising 
9.6% of GDP in 2007, 11.2% in 2008, and 11.8% in 
2009. Unlike Moldova, the EU is not a significant 
source  of  remittances  for  Bangladesh,  so  it  was 
spared the effects of the EU financial crisis.

Box 4.2 | A coherent international financial architecture for more and better capital flows to low-income countries

Private capital flows have the potential to provide essential financing for sustainable development, but are subject to risks (as well 
as opportunities) that have been highlighted by the global financial crisis. Post-crisis trends in flows to LICs are positive but relatively 
small in absolute terms and relative to GDP. In particular, FDI has expanded steadily and portfolio flows, which fell to negligible levels 
during the crisis, recovered in 2013 with strong sovereign bond issuances for certain LICs. There remain risks to these positive trends. 
Tyson et al. (2014) suggest four elements of a coherent policy on the international financial architecture as it affects LICs. 

•	

•	

•	

•	

	Promoting  positive  impacts  of  policies  in  developed  countries,  including  greater  international  coordination  on  monetary 
policy, such as monetary easing and its tapering. A G20 agenda regarding finance for the SDGs could be more effective if there 
were a new partnership between the G20 and developing countries. It could, for example, set explicit objectives to leverage G20 
investment for the benefit of the G20 and LICs, coordinate capital management between recipient and donor countries to their 
mutual benefit, and coordinate spillover issues, such as monetary policy, tax-base erosion, illicit capital flows and profit-shifting.

	Promoting  a  more  effective  voice  for  LICs in reforming the global economic and financial architecture (e.g. in the Financial 
Stability Board (FSB)). For example, of the 27 nations whose central banks are represented on the Basel Committee, and of the 24 
nations represented on FSB, there are only seven MICs and no LICs.

	Using aid and shock facilities to leverage capital for addressing long-term gaps and supporting flows in times of crises, especially 
in the poorest and most vulnerable economies.

	Supporting capacity-building in LICs for regulatory and institutional development. It is important for financial systems in a 
country receiving private capital flows to be sufficiently robust and stable. Many LICs are experiencing rapid growth in the financial 
sector, including private-sector credit relative to GDP and expansion of financial access (Beck et al., 2011) and increasing early-
stage integration into global financial markets. Stable development and integration of the financial sector have good potential, 
but the quality and pace need to be appropriate, especially as the deepening of domestic financial systems amplifies exposure 
to the transmission of global financial shocks. Where financial systems are weak, large and rapid outflows can cause liquidity and 
asset-market problems. Conversely, large capital inflows may foster asset-price bubbles and an excessively rapid expansion of 
credit. Some LICs have had less benign experiences. For example, banking institutions have increased leverage and liquidity risks, 
and asset quality remains vulnerable to deterioration in domestic economies (IMF, 2013b). There is also evidence of excessive 
domestic credit growth in some sectors and asset bubbles driven by speculative flows. For instance, in 2012 and early 2013 stock-
price rallies occurred in a number of African LICs such as Kenya, Tanzania and Uganda, linked to international capital inflows (IMF, 
2013a). Such issues can lead to boom–bust cycles in consumption and asset markets, deteriorating banking asset quality, and 
diverting scarce capital from pro-development investment in agriculture, industry and infrastructure.

Source: Tyson et al. (2014) 

  4.2  Making finance more effective 

This section examines the importance of policies 
and other factors behind the effective use of each 
of the finance flows identified in Chapter 3. 

4.2.1 

Effective use of domestic public finance

There  is  a  large  econometric  literature  on  the 
effective use of public expenditure in developing 
countries,  only  a  selected  sample  of  which  this 
Report  can  summarise.  The  general  debate  now 
centres on the level and composition of spending, 
while  the  earlier  literature  focused  mainly  on 
composition.  Barro  (1991)  used  cross-country 
analysis of 98 developing countries for the period 
1960–1985  and  found  that  public  consumption 
was  negatively  correlated  with  growth,  while 
public  investment  had  no  significant  impact  on 
economic  development.  In  contrast,  Levine  and 
Renelt (1992) found that for 119 countries during 
the  1974–1989  period  there  was  a  negative 
relationship  between  government  consumption 
and  growth,  but  a  positive  link  between  public 
investment and growth.

More recent studies emphasise the importance of 
complementary policy. Gupta et al. (2005) show 
that  the  capital  part  of  government  expenditure 
in LICs has a positive impact on growth when it is 
combined with a lower budget deficit, and Baldacci 
et al. (2008) suggest that better governance can 
help to make spending on education and health 
useful  for  growth  in  developing  countries.  This 
role of governance could help explain why some 
earlier studies found a generally weak relationship 
between social spending and social indicators.

Collier  (2011)  discusses  the  importance  of  the 
concept  of  investing  in  investing.  It  is  not  just 
that investment itself is low, but the productivity of 
that investment is also often low in SSA. Countries 
in SSA therefore need to improve the process of 

in 

both public and private investments. This requires 
capacity 
institutional 
the  country’s  main 
arrangements,  including  the  necessary  capacity 
to be (or become) capable of designing, selecting 
and implementing projects.

in 

The  process  of 
investing  can 
investing 
be  enhanced  by  adopting  Medium  Term 
Expenditure  Frameworks  (MTEFs).  Grigoli  et 
al.  (2012)  examine  the  impact  of  MTEFs  which 
have been adopted by more than 120 countries. 
Such  budgetary  institutions  can  help  central 
governments  to  make  credible  multi-year  fiscal 
commitments. Grigoli et al. (2012) find that MTEFs 
improve fiscal discipline (measured as the central 
government’s  budget  balance  as  a  percentage 
of GDP), with a larger impact for more advanced 
MTEFs. Advanced MTEFs also improve allocative 
(measured  as  the  volatility  in  per  capita  health 
spending  in  dollar  PPP)  and  technical  efficiency 
measured  as  efficiency  scores  from  a  stochastic 
frontier model of the provision of health services. 
More  generally,  their  review  of  the  econometric 
literature  finds  that  numerical  constraints  have 
limited  effectiveness  because 
they  can  be 
circumvented,  that  the  effect  of  reduced  social 
discretion on macroeconomic volatility remains an 
open question, and that the political environment 
makes  a  difference  to  the  effectiveness  of 
budgetary institutions.

4.2.2 

Effective use of international public finance

We  surveyed  the  substantial  literature  on  aid 
and  growth  in  Chapter  2.  A  major  finding  is 
that  aid  works  better  in  environments  that  are 
better  governed  or  where  governments  have 
adopted  better  policies  (e.g.  countries  with  a 
higher  absorptive  capacity).  In  this  section  we 
explore  some  further  examples  and  discuss  two 
studies commissioned by the ERD focusing on the 
effectiveness of aid in particular.

that  aid 
One  commissioned  paper  argues 
targeting is important in promoting transformative 
effects. Thus, the targeting of sectors makes a 

4.2

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CHAPTER 4. The role of policies in mobilising and using finance effectivelydifference to aid effectiveness. If ODA is to be 
effective and have a transformative role, it makes 
sense  to  focus  on  those  productivity  bottleneck 
activities (‘weak links 23’) to remove impediments to 
productivity  growth.  Cadot  et  al.  (commissioned 
background  paper,  2015)  argue  that  in  the 
presence  of  industrial  complementarities,  ‘weak 
links’ can hold back an entire industrial structure. 
Such  weak  links  can  be  sectors  that  produce 
goods  but  more  often  they  are  services  sectors 
such  as  energy,  finance,  and  transport.  In  other 
words,  low  efficiency  of  those  services  sectors 
might reduce the productivity of other sectors to 
which they supply and thereby reduce productivity 
throughout the value chain. 

is 

there 

is  no  direct 
that 
One  constraint 
measurement of the productivity of those services 
that would allow identifying them as weak links in 
a  given  country.  However,  input–output  matrices 
make  it  possible  to  indirectly  identify  weak-link 
clusters  on  the  basis  of  observed  productivity  in 
the  sectors  to  which  they  supply,  correcting  for 
their  importance  as  the  share  of  inputs  in  this 
sector.  The  paper  examines  empirically  whether 
aid  is  directed  towards  weak-link  clusters,  with 
the  idea  that  such  targeting  would  have  greater 
transformational  effects.  Indeed,  if  aid  were 
focused  on  removing  bottlenecks  or  binding 
constraints  in  the  weak  link  sectors,  this  could 
have  positive  implications  for  industrial  output 
by  improving  the  productivity  of  the  sectors 
supported by the ‘weak link’ service sectors. Such 
implications could be transformational. The paper 
finds that sector-allocable aid is targeted at low-
productivity clusters, although this effect depends 
on donor type and the form that ODA takes (loan 
or  grant).  Controlling  for  various  factors,  they 
thus find evidence of weak targeting, with effects 
depending on the type of donor, mode of delivery 
and the income level of the recipient country. 

finance.  Box  4.3  highlights  the  importance  of 
effective  government 
in  accompanying  and 
making specific finance flows (i.e. FDI and ODA) 
more  effective,  using  the  International  Futures 
(IF)  model.  Government  effectiveness  in  the  IF 
model  is  measured  using  World  Governance 
Indicators (or Kaufmann indicators) and depends 
on income levels and average years of education 
(commissioned modelling paper; Lenhardt, 2015). 
Government  effectiveness  is  an  important  factor 
in  the  IF  model,  affecting  a  range  of  equations, 
so a change in that indicator will have a number 
results 
of  knock-on  effects.  The 
linking  flows  with  governance  use  measures 
of  institutional  quality  based  on  the  Kaufmann 
indicators.  The  modelling  study  shows  that  for 
LICs an improvement in governance alone leads 
to  a  decline  in  poverty  of  2.71%  and  the  FDI 
shock alone to a 3.07% decline, but a combined 
governance and FDI simulation leads to a 5.92% 
shock.  Hence  it  is  important  to  think  about  the 
policy context within which finance is mobilised. In 
this case improved governance greatly enhances 
the effects of FDI and ODA.

regression 

Box 4.3 | Modelling the interaction between finance and policies

Lenhardt (2015) uses the International Futures (IF) model, which covers 186 countries, to gauge the importance of non-financial MOI 
in combination with ODA and FDI. The model is unique in integrating a comprehensive set of global systems across a broad range 
of  countries.  It  also  facilitates  the  development  of  scenarios  based  on  user-generated  assumptions  about  the  drivers  of  a  future 
condition,  producing  structure-based,  agent-class-driven  dynamic  projections  (Hughes,  2004).  The  ‘shocks’  to  the  model  explore 
different scenarios of how changes in future financial and non-financial flows could affect poverty, inequality, GDP per capita and 
CO2 emissions in LICs, LMICs and UMICs. 

These scenarios are:

1.  Increasing ODA from OECD countries to 0.7% of GDP (over ten years)

 ODA from donor countries as a percentage of GDP has fluctuated significantly. Although a commitment to contribute 0.7% of 
GDP was made in the 1970s, hardly any countries have met this target. We therefore apply a positive shock, which sees ODA as 
a proportion of GDP of OECD countries reach 0.7%. This also assumes that the distribution of aid across countries remains the 
same.

2.   A 40% increase of inward FDI in the relevant countries or country income group (over ten years)

 Until 2007, all country income groupings were steadily increasing their proportion of FDI to GDP. From 1997 to 2007 LICs made 
some of the largest gains on average, starting from low levels of FDI relative to GDP in 1997, to meeting the range of other 
country categories at 3.2% FDI to GDP by 2007. Lower-middle-income countries also increased on average from 1.6% FDI to 
GDP in 1997 to 3.4% in 2007. Upper-middle-income countries maintained some of the highest proportions of FDI to GDP over 
this period, and increased from 3.3% in 1997 to 4.7% by 2007. We use the rate of change of FDI to GDP for UMICs of 1.4% over 
this period as a realistic positive shock.

3.  A 60% increase in government effectiveness (over ten years)

 Looking at past trends, there have been no significant changes in government effectiveness across country categories, though 
individual  countries  have  undergone  various  changes.  Each  country  category  has  remained  relatively  stable  since  1996  when 
these statistics were first collected, although there is a distinct relationship between country categories and levels of government 
effectiveness. High-income countries have maintained a level of government effectiveness of around 4/5, UMICs around 2.4/5, 
LMICs  around  2/5  and  LICs  around  1.6/5.  The  positive  shock  for  government  effectiveness  introduced  for  each  country  and 
country category reflect what UMICs would need to achieve in order to reach the HICs’ level of government effectiveness, i.e. an 
increase of 60% on current trends.

Table  4.3B1  provides  the  summary  results  for  the  alternative  scenarios  (absolute  difference  from  base)  of  two  financial  flows  for 
development:

•	

•	

•	

	The	 increased	 ODA	 scenario	 has	 the	 highest	 positive	 impact	 on	 poverty	 reduction	 across	 LICXs,	 with	 a	 further	 decline	 of	 8.3	
percentage points on the $1.25/day definition of poverty from the baseline scenario.

	Increased	FDI	is	projected	to	have	a	significant	impact	on	per	capita	incomes	in	LMICs,	but	also	sees	the	Gini	coefficient	(inequality)	
rise slightly. 

	Some	of	the	largest	absolute	GDP	gains	to	be	made	from	increased	FDI	are	in	UMICs	(although	in	relative	GDP	terms	the	gains	
are smallest). 

It  is  not  only  the  targeting  of  aid  that  matters 
for  effectiveness.  The  policy  context  is  crucial. 
The  Report  commissioned  a  modelling  study 
examining  the  link  between  governance  and 

23  A weak link is a sector whose activities have low productivity, which affects the productivity of sectors to which it is providing inputs and which cannot be easily 

substituted by imports, implying that a weak link is a real bottleneck.

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CHAPTER 4. The role of policies in mobilising and using finance effectively 
 
 
Table 4.3B1 | Simulating increases in FDI and ODA to 2030 (absolute difference from base)

Table 4.3B2 | Improved governance scenarios in combination with increased financial means

BASELINE PROJECTIONS TO 2030

GOvERNMENT EFFECTIvENESS INCREASE (60%)

Poverty (% pop)

GDP per capita

Inequality (Gini)

CO2 (million tons)

FDI INCREASE (40%)

Poverty

∆ from base

GDP pc

∆ from base

Inequality

∆ from base

CO2

∆ from base

LICs

34.55

982

0.408

191.6

31.48

-3.07

1,096

114

0.482

0.074

202.2

10.6

AID INCREASE (OECD TO 0.7% GDP)

Poverty

∆ from base

GDP pc

∆ from base

Inequality

∆ from base

CO2

∆ from base

26.23

-8.32

1,124

142

0.419

0.011

205.6

14

LMICs

10.41

2779

0.377

1874

9.42

-0.99

2,981

202

0.391

0.014

1,934

60

9.951

-0.459

2,813

34

0.378

0.001

1,887

13

UMICs

0.832

11890

0.45

5140

0.813

-0.019

12,150

260

0.454

0.004

5,190

50

0.82

-0.012

11,900

10

0.45

0

5,151

11

Table  4.3B2  presents  the  summary  results  of  the  alternative  scenarios  of  improved  government  effectiveness  alone  as  well  as 
improved  government  effectiveness  in  combination  with  increased  financial  means  for  development.  From  these  results  we  can 
make the following observations:

•	

•	

•	

•	

	Improved	government	effectiveness	has	projected	positive	gains	across	country	income	categories,	particularly	in	terms	of	GDP	
per  capita.  The  greatest  (absolute)  gains  are  in  UMICs,  with  nearly  $2,000  additional  per  capita  income  than  in  the  baseline 
scenario.

	By	combining	improved	government	effectiveness	with	increased	financial	means,	the	effect	of	each	financing	flow	is	enhanced.	
The largest GDP per capita gains are to be made in LICs and HICs from combining improved governance, with increased financial 
resources and firm tax rates. In LMICs the largest gains are by combining improved governance with increased ODA. 

	Improved	governance	in	combination	with	increased	ODA	is	forecast	to	lead	to	a	further	11	percentage	point	reduction	in	poverty	
rates in LICs – the largest decline across scenarios. 

	Improved	governance	and	increased	financial	means	is	forecast	to	have	a	very	significant	impact	on	CO2	emissions,	especially	
when improved governance is combined with increased FDI.

Poverty

∆ from base

GDP pc

∆ from base

Inequality

∆ from base

CO2

∆ from base

FDI + GOv INCREASE

Poverty

∆ from base

GDP pc

∆ from base

Inequality

∆ from base

CO2

∆ from base

AID + GOv INCREASE 

Poverty

∆ from base

GDP pc

∆ from base

Inequality

∆ from base

CO2

∆ from base

LICs

31.84

-2.71

1,096

114

0.41

0.002

203.5

11.9

28.63

-5.92

1,222

240

0.43

0.022

215

23.4

23.72

-10.83

1258

276

0.421

0.013

219

27.4

LMICs

8.154

-2.256

3,214

435

0.379

0.002

1,987

113

7.216

-3.194

3,441

662

0.393

0.016

2,050

176

7.706

-0.448

3255

476

0.38

0.003

2,002

128

UMICs

0.583

-0.249

13,830

1940

0.449

-0.001

5,415

275

0.562

-0.27

14,100

2,210

0.453

0.003

5,456

316

0.575

-0.008

13,830

1,940

0.449

-0.001

5,416

276

A comparison of Tables 4.3B1 and 4.3B2 shows that a combined governance plus financial flow shock yields much greater income 
and  poverty-reduction  effects  than  either  governance  or  financial  flow  shock  individually  or  the  sum  of  them.  The  governance 
simulation leads to a decline in poverty of 2.71%, the FDI shock to a 3.07% decline, but a combined governance and FDI simulation 
leads to a 5.92% shock. Hence it is important to think about the context within which finance is mobilised. In this case improved 
governance greatly enhances the effects of FDI and ODA.

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CHAPTER 4. The role of policies in mobilising and using finance effectively 
 
As  discussed  in  Chapter  2,  a  large  empirical 
literature  has  examined  the  impact  of  aid  in 
the  context  of  different  governance  regimes. 
There  has  also  been  a  general  literature  on 
aid  effectiveness,  which 
includes  the  Paris 
Declaration, and principles such as harmonisation, 
alignment,  and  ownership  (including  capacity-
building).

Different  aid  instruments  (e.g.  grants  or  loans) 
are  attracted  to  different  contexts.  There  are 
advantages and disadvantages to grants and loans 
from  a  macroeconomic,  strategic,  institutional/
political,  financial  and  operational  perspective. 
Loans  carry  a  debt-sustainability  risk,  but  can 
encourage  fiscal  discipline  in  recipient  countries 
improving 
(Odedokun,  2003),  contribute 
LICs’  debt-management  capabilities  (Bulow  and 
Rogoff,  2005),  and  allow  for  the  provision  of 
larger volumes of finance over longer periods of 
time. Grants may help to finance heavily indebted 
countries  without  the  risk  of  exacerbating  debt 
overhang, and may provide incentives to recipient 
countries  to  undertake  projects  that  are  not 

to 

financially  viable  but  potentially  have  significant 
positive  externalities.  Grants  may,  however, 
introduce  issues  of  moral  hazard  in  recipient 
countries (Radelet, 2005; Cohen et al., 2007), and 
are less responsive to specific project needs.

There has been increased emphasis on blended 
finance  (combining  loans  and  grants),  which 
depends  on  the  availability  of  specific  facilities 
and  institutional  development  in  donor  and 
recipient  countries.  Blending  mechanisms  are  a 
response  to  the  need  to  increase  the  volume  of 
finance in a context of constrained resources and 
rising  needs,  to  speed  up  ODA  disbursement, 
and to make it sufficiently flexible to adapt to the 
changing environment. Table 4.1 summarises the 
benefits of blended finance compared to grants or 
loans alone and although the ratios for grants and 
loans to leverage other resources look impressive 
for  several  blending  schemes 
(including  EU 
schemes),  no  studies  to  date  have  put  this  to  a 
robust statistical test.

Table 4.1 | Potential benefits of blended finance, compared to loans or grants

BENEFITS OF BLENDED FINANCE

POTENTIAL CHALLENGES

Compared 
to grants 

Compared 
to loans

Financing more and bigger projects 
Achieving macroeconomic sustainability 
Reducing moral hazard issues 
Exerting influence on recipient countries’ policies

Making transfers to heavily indebted countries without 
exacerbating debt-overhang problems 
Correcting externalities, thus making it possible to 
fund operations with a high socioeconomic and/or 
environmental impact 
Improving the quality of funded projects 
Exerting influence on recipient countries’ policies

Donors lose visibility and control 
Potential delay in decision-making

Donors lose visibility 
Potential delay in decision-making 
Crowding-out effects 
Market distortions

An  ETTG  report  (2011)  suggests  that  in  order  to 
guarantee an efficient allocation and implementation 
of blended finance it is important to:

the 

  reduce 
blending 
complexity 
mechanisms, for instance by clearly assigning 
responsibilities  (accountability)  in  order  to 
avoid transparency issues 

of 

    carefully assess the impact that mixing a loan 
with a grant element could have on a recipient 
country in order to avoid crowding-out other 
potential sources of funding 

  define the percentage of the grant element in 
such a way as to deter recipient countries from 
imprudent borrowing 

agreement 

  reach 
among  donors  on 
requirements  to  provide  funds  in  a  timely 
fashion  and  avoid  delaying  decision-making 
processes 

There  is  comparatively  little  systematic  evidence 
on the effects of DFIs: although there are several 
micro-level  evaluations  (albeit  imperfect),  few 
studies  assess  the  DFIs’  macro-level  impact  on 
productivity  (see,  for  example,  Jouanjean  and 
te  Velde,  2013).  The  role  of  DFIs  is  examined  in 
Chapter 6.

4.2.3 

Effective use of domestic private finance

An efficient financial system helps (a) an efficient 
exchange of goods and services; (b) the pooling 
of  savings  from  many  individual  savers  and 
overcoming  investment  indivisibilities;  and  (c) 
a  reduction  in  screening  and  monitoring  costs, 
agency  problems,  and  liquidity  risk.  There  is  a 
large  literature  on  the  link  between  domestic 
private finance and growth. The early evidence 
suggested  that  an  expansion  of  the  (domestic) 
financial  sector  is  correlated  to  growth  (King 
and Levine, 1993); and that the effect is through 
productivity  rather  than  capital  accumulation 
(see  Beck  et  al.,  2000).  Recent  research  shows, 

however,  that  this  may  not  hold  for  high  levels 
of  financial-sector  development  because  if  it  is 
too  large  or  expands  too  quickly  it  may  lead  to 
crises,  which  undermine  growth  (Arcand  et  al., 
2012). Aghion et al. (2005) argue that the impact 
of  finance  on  growth  is  strongest  among  LICs 
and  MICs  but  fades  as  countries  approach  the 
global  productivity  frontier.  These  are  important 
empirical  observations  as  they  illuminate  the 
relationship  between  finance  and  development, 
which is not simply that more finance will lead to 
more growth.

Much  research  has  focused  on  the  relative 
importance  for  growth  of  financial  institutions 
(banks,  insurance  companies,  non-bank  financial 
institutions) and financial markets (bonds, stocks, 
and  financial  derivatives),  concluding  that  both 
are significant and have independent effects (see 
Levine and Zervos, 1998; Beck and Levine, 2004). 
When a LIC graduates to MIC status, there tends 
to be an expansion in the depth and complexity 
of  the  financial  sector.  Financial  sectors  lead 
to  growth  by  providing  various  functions,  and 
different  structures  may  provide  a  different  mix 
of 
for  various  stages 
of  economic  development  and  types  of  firm. 
Evidence  indicates  that,  as  economies  develop, 
the  financial  structure  changes  and  financial 
markets play a larger role (see Demirguc-Kunt et 
al.,  2012).  But  there  are  contested  issues  about 
the  appropriate  number,  size  and  ownership 
of  banks  (see,  for  example,  Claessens  and  Van 
Horen,  2013).  In  conclusion,  a  range  of  general 
factors  determines  whether  and  how  finance 
systems affect development.

functions,  appropriate 

There  are  several  ways  to  ensure  better  use  of 
domestic private finance. The broad development 
of  the  financial  infrastructure  is  important,  e.g. 
developing  a  good  regulatory  framework  for 
pension funds, insurance funds and stock markets. 
A  further  major  challenge  can  be  the  cost  of 
financial intermediation, which depends on factors 
such as (a) individual bank-specific factors such as 
operating or administrative costs, non-performing 

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CHAPTER 4. The role of policies in mobilising and using finance effectively 
 
 
 
loans (NPLs), bank size, liquidity ratio; (b) banking 
sector-specific  factors  such  as  the  degree  of 
competition  or  regulatory  requirements;  and  (c) 
macroeconomic  factors  such  as  GDP  or  fiscal 
policy. Bank profits are also included in the costs 
of  intermediation.  Unfortunately,  the  lack  of  an 
effective competition regime and of incentives to 
innovate  prevents  banks  in  LICs  from  engaging 
innovation  and  becoming  more  efficient. 
in 
Inefficiency  is  often  expressed  as  a  high  interest 
rate spread, which drives up intermediation costs 
–  a  short-term  gap  between  the  central  bank 
rates and the lending rate. A high spread means 
higher  costs  of  credit,  which  stifle  investment 
and  according  to  Beck  et  al.  (2011)  has  direct 
negative repercussions for the depth and breadth 
of financial systems. Higher market power results 
in higher interest rate spreads and, ultimately, in 
lower levels of bank lending. 

A  high  interest  rate  is  evident,  for  example,  in 
Ghana’s banking sector; where lack of competition, 
inefficiency and a high interest rate spread are clear 
(Ackah,  2013).  Despite  the  recent  reforms  of  the 
financial sector and the global financial crisis, rather 
than narrowing, the spread has been either stagnant 
or  has  grown.  There  has  been  some  progress  in 
Kenya, where the financial sector has become more 
efficient (and bankers’ salary increases have been 
moderated), although additional solutions such as 
improving the collateral process, credit information 
and other targeted interventions could help further 
(Mwega, 2013). 

Figure  4.2  suggests  that  interest  rate  spreads 
in  SSA  have  consistently  been  two  percentage 
points higher than the average in LICs and MICs. 
Given that access to credit for the private sector 
stood  at  61%  of  GDP  across  the  region  in  2012 
(representing  around  $759  bn),  this  means  that 
private  investors  in  Africa  face  an  additional 
costs  of  around  $15  bn  (2%  of  credit  extended) 
compared  to  the  average  interest  rate  spread 
in  developing  countries,  simply  in  order  to 
access  finance.  Non-financial  policies,  such  as 
competition and innovation policies (or those that 

Figure 4.2 | Interest rate spread by region, 1995–2011

16

14

12

10

8

6

4

2

0

1995 1997

1999 2001 2003 2005 2007 2009 2011

Sub-Saharan Africa

Low and middle income countries

East Asia and Pacific

High income OECD countries

Source: WDI data: the interest rate spread is the interest 
rate  charged  by  banks  on  loans  to  private-sector 
customers minus the interest rate paid by commercial 
or similar banks for demand, time, or savings deposits. 
The terms and conditions attached to these rates differ 
by country, which limits their comparability.

reduce  NPLs),  that  would  lower  the  SSA  interest 
rate  spread  to  the  LIC  and  MIC  average  could, 
therefore,  increase  the  availability  of  finance  by 
more than 1.2% of GDP and increase investment 
by 6%.

The effects of bank lending depend on financial 
regulations  and  the  areas  in  which  loans  are 
made. The size of the financial sector also matters 
since if it is too large it is a drag on growth. The 
incentives  and  regulations  for  the  formal  sector 
to  lend  to  productive  sectors  (e.g.  development 
banks for agriculture) or to the small-scale sector 
affect  social  and  economic  outcomes  (te  Velde 
and Griffith-Jones, 2013).

4.2.4 

Effective use of international private finance 

The policy context is also crucial for the effective 
use  of  international  private  finance.  Here  we 
international  private 
discuss  three  types  of 
finance: remittances, FDI and portfolio flows. 

Remittances

There  is  a  large  literature  on  the  impact  of 
remittances.  Gupta  et  al.  (2009)  find  that  they 
lead  to  an  increased  income  in  the  host  country 
and  help  to  reduce  poverty.  Remittances  can 
smooth  access  to  credit  in  countries  with  poorly 
developed  financial  services.  Woodruff  and 
Zenteno  (2007)  further  suggest  that,  in  the  case 
of Mexico, remittances alleviate a credit constraint 
for  investors.  Dustmann  and  Kirkchamp  (2002) 
find  that  savings  made  by  migrants  returning 
from  Germany  to  Turkey  are  an 
important 
source  of  start-up  capital  for  microenterprises. 
The  Nepal  case  study  commissioned  for  the 
2012/2013 European Development Report found 
that  remittances  had  contributed  to  improving 
household expenditure in social areas (education, 
health,  nutrition),  and  the  World  Bank  attributed 
20% of the Nepal’s progress towards reaching the 
MDGs to remittances.

Importantly for this Report, several researchers (e.g. 
Fajnzylber and López, 2007), find that the impact 
of remittances on economic growth depends on 
the context, including governance and the depth 
of the financial sector. They explain real per capita 
growth in Latin America by remittances and other 
variables and include an interaction term between 
remittances  and  either  human  capital,  institutions 
or  financial  depth.  The  findings  suggest  that  the 
accumulation of human capital or an improvement 
in  institutional  quality  complements  the  positive 
role of remittances in relation to economic growth, 
but that financial depth substitutes for remittances 
in promoting economic growth. 

The  effects  of  remittances  depend  on  whether 
they  are  used  for  consumption  or  investment 

and  whether  they  stimulate  entrepreneurship. 
Ratha  (2013)  finds  that  remittances  have  an 
insurance and consumption-smoothing effect. He 
also  argues  that  policy-makers  can  do  more  to 
optimise the impact of remittances by making less 
costly and more productive investment in human 
and  physical  capital,  e.g.  by  using  diaspora 
bonds, remittance-linked loans and securitisation 
of remittance flows.

The  costs  of  sending  remittances  can  be 
significant:  the  more  it  costs  to  send  it,  the  less 
money  will  be  transferred.  Watkins  and  Quattri 
(2014) suggest that SSA countries in particular face 
high costs in sending remittances. With respect to 
institutional quality and economic policies in the 
migrant-sending  country,  Freund  and  Spatafora 
(2005)  find  that  high  transaction  costs  have  a 
significantly  negative  effect  on  remittances,  as 
they  lead  to  increased  use  of  informal  channels 
and reduced flows.

FDI

The general means through which FDI can affect 
development are listed in Table 4.2. The literature 
on FDI and spillovers emphasises a specific role for 
local institutions, absorptive capacity (Blomström 
et al., 1999), human resources (Borensztein et al., 
1998;	Xu,	2000),	trade	regimes	(Balasubramanyam	
et  al.,  1996),  financial-sector  development,  and 
industrial  policy  (clustering).  Environmental  and 
social policies also contribute to determining the 
effects.  Hence,  a  range  of  policies  can  help  to 
make FDI work for development. 

Portfolio flows

The  literature  on  the  impact  of  FDI  (long-term 
capital flows) on development paints a generally 
positive  picture.  The  reverse  seems  true  for  the 
impact  of  short-term  capital  flows,  at  least 
in  LICs.  Hou  et  al.  (2014)  review  the  academic 
literature  on  the  effects  of  short-term  capital 
inflows,  finding  that  portfolio  bond  flows  in  LICs 
overall  and  SSA  countries  in  particular  have  had 

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Combining finance and policies to implement a transformative post-2015 development agenda | 151

CHAPTER 4. The role of policies in mobilising and using finance effectivelya neutral or even negative effect on growth. For 
example,  in  a  review  of  44  countries  between 
1986  and  1997,  Reisen  and  Soto  (2001)  find 
that FDI and portfolio equity flows affect growth 
significantly,  while  bonds  and  official  flows  have 
little or no effect. Some studies stress that policies 

and  country  characteristics  can  make  the  impact 
positive.  The  effects  might  be  negative  in  LICs 
because bond flows have been small or because 
complementary  policies  have  been  weak  –  both 
factors that are subject to change.

Table 4.2 | Inward FDI and development

IMPACT AREA

STATIC EFFECTS

DYNAMIC EFFECTS

Indicators

Differences between 
foreign and local firms

Potential dynamic 
benefits of FDI

Potential dynamic 
costs of FDI

Employment 
and income

Employment-generation 
in foreign firms.

Wage levels for staff 
with given characteristics.

Foreign firms are larger 
and pay higher wages 
(especially for skilled 
employees) than local 
firms.

Provides employment 
and incomes directly.

May indirectly crowd-
out other employment 
by replacing existing 
employment or pushing 
up factor prices; may 
lead to increased wage 
inequality.

Physical capital

Fixed capital formation.

Financial transfers.

Foreign firms tend to be 
more capital-intensive.

Stable source of external 
finance, improving the 
balance of payments, 
and potentially raising 
fixed capital formation.

May pre-empt 
investment and 
opportunities of 
domestic firms.

Market access

Share of inputs imported.

Share of output 
exported.

Foreign firms tend to be 
more trade-intensive.

Firms can gain access to 
export markets by using 
global networks of TNCs. 

TNCs can maintain 
tight controls of export 
channels.

Structure of factor 
and product markets

Concentration in product 
and factor markets.

Profit margins.

Foreign firms can often 
be found in sectors with 
‘barriers to entry’.

Entry by foreign firms 
may lead to more 
competition, which could 
reduce product prices.

Technology, skills 
and management 
techniques

Skill level of employees.

Training budgets.

Output per employee.

R&D budgets.

Types of technology 
used.

Foreign firms are more 
skill intensive, tend to 
use more up-to-date 
technologies offer more 
training.

Fiscal revenues

Fiscal payments 

Grants to foreign firms

Tax holidays or grants 
are sometimes offered 
to foreign firms. 

Provides up-to-date 
techniques, skilled 
personnel and advanced 
management systems, 
raising the return to 
skills offering additional 
incentives for education. 

Positive spillover effects 
on domestic firms 
through backward 
and forward linkages, 
demonstration effects 
and human resource 
development. 

TNCs can raise fiscal 
revenues for the 
domestic government 
through the payment 
of taxes in case of new 
economic activities 
with more value-added. 

The entry of foreign 
firms can lead to further 
concentration and 
market power. This may 
raise prices of own and 
other products.

Spillovers are not 
automatic or free.

Reliance on foreign 
technology and skills 
may inhibit development 
of local capabilities.

Increased linkages raise 
dependency of domestic 
firms on TNCs.

If TNCs crowd-out 
domestic firms, fiscal 
revenues may actually be 
lower through the use of 
special tax concessions, 
eventually leading to an 
erosion of the tax base

Special tax concessions 
are an implicit subsidy 
and without full 
transparency can lead 
to rent-seeking.

Source: Developed from UNCTAD (1999) and te Velde (2006)

152 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 153

CHAPTER 4. The role of policies in mobilising and using finance effectivelyEncouraging stability 
in international private finance 

Capitals flows can be highly volatile. The effects of 
short-term equity and bond inflows depend on 
the use of a number of specific policies including 
(a) macroeconomic policies (fiscal, monetary and 
exchange  rate  policies)  to  smooth  the  potential 
impact of increased inflows on inflation, exchange-
rate appreciation, fiscal expansion and heightened 
volatility;  (b)  financial-sector  policies  to  manage, 
regulate and maximise the potential of short-term 
equity and private-bond flows; (c) effectiveness of 
programmes to spend sovereign bonds receipts; 
and  (d)  capital-account  management  measures 
(see  IMF  Regional  Economic  Outlook  for  Africa, 
2013c; Hou et al., 2014). Box 4.2 discusses a range 
of  national  and  international  policies  comprising 
an  international  financial  architecture  for  more 
and better capital flows to developing countries.

While  better  banking  rules  and  global  monetary 
coordination  can  help  to  avoid  financial  crises, 
other  global  mechanisms  such  as  shock 
facilities  and  domestic  complementary  policies 
(macro-stabilisation policies) can help to stabilise 
economies  once  they  are  hit,  affecting  all  types 
of  capital  flows.  Sudden  external  shocks  can 
involve  sudden  net  capital  outflows,  a  fall  in 
export revenues, and increased costs of essential 
imports such as food and oil products, or a drop 
in  remittances.  The  CIs  suggest  that  countries 
have  been  affected  differently  by  a  range  of 
effects,  e.g.  food  price  inflation  in  Bangladesh 
in 2007–2008, the global financial and European 
economic  crisis  resulted  in  lower  remittances 
in  Moldova  during  2007–2009  because  many 
migrant  workers  returned  home,  while  Ecuador 
and  Indonesia  experienced  a  sharp  drop  in 
exports during the global financial crisis with slow 
or  incomplete  recovery  since  then  (CIs:  Khatun, 
2015;  Ghedrovici,  2015;  Borja  and  Ordóñez, 
2015; Damuri et al., 2015). 

Such  shocks  affect  growth  and  government 
revenue.  This  can  lead  to  increased  poverty  in 
the  short  term,  as  well  as  a  reduction  in  critical 
expenditures, which can have long-lasting negative 
development  effects.  Evidence  shows  that  the 
problem  in  poor  countries  is  not  just  a  failure 
to  record  periods  of  positive  economic  growth 
but  also  the  frequency  of  downturns  (Winters 
et  al.,  2010).  Countries  classified  as  low-income 
in  2008  increased  their  per  capita  GDP  by  only 
11% between 1960 and 2007 (or 0.23% annually). 
This is not only because growth rates have been 
low each year, but also because there have been 
many years of negative as well as positive growth. 
Indeed,  if  periods  of  negative  growth  rates  had 
been eliminated altogether, GDP per capita would 
have  more  than  doubled  and  average  annual 
growth  would  have  increased  to  over  2%  (rather 
than  0.23%).  Donors  and  international  financial 
institutions (IFIs) have designed shock facilities 24 
to  cushion  the  impact  of  shocks  on  the  poor 
and protect critical spending categories in order 
to  sustain  growth.  Te  Velde  et  al.  (2011)  review 
the  experience  of  shock  facilities  and  argue  that 
scale, speed and coordination are important and 
that  the  EU  and  IMF  facilities  helped,  but  there 
are questions about whether the current facilities 
(including  international  organisations)  will  be 
sufficient to deal with future shocks. 

  4.3 

  Linkages among flows: 
a catalytic role for ODA and DFIs

There  are  several  relationships  among  financial 
flows, e.g. between tax revenues and FDI (OECD, 
2008), or between ODA and FDI (te Velde, 2007), 
or  exposure  by  DFIs  and  investment.  Here  we 
focus on the catalytic role of ODA and DFIs:

    Links  between  ODA  and 
revenues. 
Morrissey  (2013)  argues  that  it  may  appear 
that  ODA  reduces  efforts  to  raise  taxes  since 

tax 

countries  with  higher  ODA-to-GDP  ratios 
tend to have lower tax-to-GDP ratios, but this 
is  because  poorer  countries  have  lower  tax 
revenues  and  receive  more  ODA.  Indeed,  he 
argues  that  ODA  has  no  systematic  effect  on 
tax efforts. Some countries may be discouraged 
from  raising  taxes  because  they  expect  to 
receive ODA, but in general, ODA can support 
better  public  financial  management  and  tax-
collection systems that may eventually increase 
tax  revenues.  There  are  impressive  examples 
of where ODA has helped tax administrations 
to  become  more  effective  (e.g.  Rwanda  and 
Burundi,  see  Granger,  2013).  The  African 
Development Bank (African Economic Outlook, 
2010)  finds  that  the  benefit–cost  ratio  of  a 
dollar spent on tax administration is close to 6:1 
in Sierra Leone and Ethiopia and 3:1 in Rwanda 
and Tanzania.

  Catalysing  effect  of  DFIs  on  private-sector 
finance. Additionality and catalytic effects can 
be  described  as  a  situation  in  which  there  is 
more public and private investment in a country 
than  there  would  have  been  without  DFI 
investment. In general, DFIs provide different 
types  of  evidence.  First,  DFIs  suggest  that 
their  presence  catalyses  other  investments, 
citing  descriptions  and  historical  accounts. 
Second,  they  provide  so-called 
leverage 
ratios, 
indicating  how  much  the  private 
sector  or  other  DFIs  have  also  invested. 25 
Third,  DFIs  point  to  the  distribution  of  their 
portfolio. By allocating funds to countries that 
have  little  access  to  private  capital  markets, 
DFI  investment  is  by  definition  additional. 
Similarly,  when  DFIs  allocate  more  resources 
to  frontier  sectors  or  financial  products  (e.g. 
first-loss  guarantees)  than  would  otherwise 
have been the case, they are additional. This 
Report examines in more detail how DFIs can 
leverage more flows.

 Although  the  data  provide  useful  insights, 
they  are  also  unsatisfactory  for  a  number 
of  reasons.  First,  for  every  good  example  of 

catalytic effects there could be a negative one. 
Leverage  ratios  could  be  a  sign  of  catalytic 
effects and additionality, or they could suggest 
the  opposite,  such  as  when  DFIs  invest  in 
locations that already attract other funds. No 
DFI  provides  macroeconomic  evidence  of 
additionality  or  catalytic  effects  in  a  dynamic 
sense (e.g. spillovers and indirect effects), so it 
is hard to say conclusively how effective DFIs 
are, although individual accounts suggest that 
they  give  an  important  stamp  of  approval 
and  have  a  special  role  in  projects’  financial 
closure. The effects of DFIs could be measured 
at  an  aggregated  level  (sector  or  national 
measures),  e.g.  te  Velde  (2011)  estimates  a 
simple equation that explains domestic gross 
fixed capital formation as a percentage of GDP. 
A specific way in which DFIs can catalyse other 
investment is by financing project-preparation 
costs,  which  are  generally  estimated  to  be 
10%  of  total  investment.  Without  business 
plans,  impact  assessments,  or  regulatory/
sector reform, a project is unlikely to go ahead. 
Such costs can be paid back once the project 
is profitable. 

    ODA  and  remittances  are  linked  in  various 
ways.  Some  aid-supported  schemes  can 
boost remittances, while Kpodar and Le Goff 
(2011)  find  that  remittances  lead  to  lower 
aid  dependency  when  they  are  invested  in 
human  and  physical  capital  rather  than  in 
consumption. 

   ODA and investment. The link between ODA 
and investment is complex. It can be used to 
push  investment  into  developing  countries 
(e.g.  investment  missions,  or  reducing  the 
costs of investment by offering insurance not 
provided by the market) or it can be used to 
pull  investment  into  developing  countries 
(e.g.  when  it  finances  education,  skills  and 
the business environment generally). Te Velde 
(2007) argues on the basis of econometric tests 
for FDI from the UK that it is more effective to 
pull than to push FDI.

4.3

24  Shock facilities are donor funded financial mechansisms that provide funds for developing countries when they are faced with 
certain macro-economic shocks. For example, countries could face sudden balance of paymemts (BoP) shocks and then the IMF 
can provide BoP support in the form of interest-free / low-interest loans. Other donors such as the EU provide grant based shock 
financing	through	FLEX	and	V-FLEX	mechansisms,	which	pay	out	based	on	some	trigger	a	large	decline	in	export	revenues;	or	an	
expected financing gap.

25  Kingombe et al. (2011) estimate that every dollar of CDC investment coincides with $5 of other investment. Since 2004, CDC has committed more than $5 bn 
to 65 fund managers, and other investors have committed a total of $24.3 bn. The IFC (2011) argues that every $1 of its investment leverages about $3 from 
others. For EBRD, it is around $1: it suggests that, alongside €7.9 bn investment in 2009, it attracted additional co-financing worth €5.1 bn. Of this, €2.3 bn 
came from private and €2.8 bn from public co-financiers, of which €2.7 bn was from the IFIs (2008: €0.4 bn).

154 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 155

CHAPTER 4. The role of policies in mobilising and using finance effectively 
 
 
 
 
 
 
 
 
 
increase  national  incomes  in  LDCs  on  average 
by 0.5% of GDP, which is a similar amount to the 
$30–40 bn of AfT provided annually. The benefits 
to  accrue  from  full  implementation  of  the  WTO 
agreement on trade facilitation are even greater. 
Curbing  illicit  capital  outflows  would  support 
financial  capacity,  economic  development  and 
revenue  collection  in  poor  countries.  Reforming 
banking  rules  would  reduce  the  likelihood  of 
financial  crises,  which  in  turn  reduces  the  need 
for  shock  facilities.  The  cost  of  avoiding  a  crisis 
is ten times less than what a financial crisis costs 
SSA countries. Hence reforming the international 
system  through  the  provision  of  governance 
GPGs  (see  Table  4.4)  is  a  crucial  element  in  the 
post-2015 development agenda, by making more 
effective  use  of  existing  finance  and  mobilising 
additional  finance  as  well  as  ultimately  reducing 
the need for other finance. We consider reform of 
the global system is an essential part of the FFD 
discussions.

In  the  above  examples,  ODA  plays  a  specific 
role 
in  addressing  market,  coordination  or 
governance  failures:  it  can  be  catalytic  in  the 
case  of  tax  administrations,  or  if  channelled 
through  DFIs  it  can  reduce  the  uncertainty  and 
challenges associated with large upfront costs for 
infrastructure projects, or address missing markets 
and  develop  financial  instruments  for  mobilising 
remittances or insurance projects for development 
investment. Some argue that ODA should finance 
the social sector because this is what it has done 
since the adoption of the MDGs. Others maintain 
that  ODA  can  play  a  catalytic  role  in  mobilising 
and channelling other flows that will be essential 
for financing the post-2015 development agenda. 
As we argue throughout this Report, it is not the 
general availability of finance that is the problem, 
but rather its mobilisation and allocation towards 
the most important goals.

  4.4 

 Conclusions and implications 
for the global system

The  reviews  presented  in  Sections  4.1  and  4.2 
suggest the policy context is crucial for mobilising 
and  making  more  effective  use  of  finance 
flows.  The  policy  context  includes  economic 
fundamentals  (e.g.  skills  development,  private-
sector  development)  and  good  governance  (e.g. 
effective  public–private  dialogue  for  FDI)  as  well 
as  national  (e.g.  capacity  of  tax  authorities)  and 
international (e.g. international treaties on FDI or tax 
regimes) policies for mobilising flows and national 
policies for managing flows more effectively, such 
as  domestic  cyclical  policies 
(macroeconomic 
management to manage short-term capital flows) 
or  specific  institutional  set-ups  (public  financial 
management (PFM) systems for aid).

Policies help to manage the characteristics of different 
finance flows (see Chapter 3). Table 4.3 summarises 
selected  links  between  financial  and  policies.  It 
distinguishes  between  national  and  international 
dimensions and serves as a guide for Chapter 6. 

4.4

There is  a range of  general findings on  the  links 
between policies and finance:

Table 4.3 suggests three important reform areas:

  Good governance is a key factor in mobilising 
and  using  all  forms  of  finance  effectively; 
in  some  cases,  national  governance  is  of 
major  importance,  in  others  regional  and 
international  governance  also  matter  (e.g.  in 
the case of GPGs).

  A  range  of 
international  policies  affects 
international private finance (e.g. RTAs, global 
financial  rules,  global  environmental  policies) 
and  to  a  degree  domestic  public  finance. 
International  polices  do  not  seem  to  affect 
ODA,  which  is,  however,  affected  by  specific 
development targets and other issues, such as 
domestic policies in developing countries.

  Some  policies,  such  as  domestic  financial 
regulation  and  development  of  dedicated 
local  institutions  and  instruments,  will  have  a 
predominant  effect  on  local  private  finance 
but  less  so  on  other  flows.  Although  they 
might reduce the demand for remittances and 
increase the development effect of FDI.

  Some  policies  are  designed  to  avert  crises 
and volatility and promote stable finance (e.g. 
macro-prudential policies; Basel III), others at 
filling gaps (e.g. shock facilities; AfT).

   One-off  factors  such  as  the  availability  of 
natural 
resources  affect  mobilisation  of 
public  (e.g.  national  SWFs)  and  international 
finance (e.g. FDI), but also highlight the need 
for  appropriate  policies  to  use  these  flows 
effectively.

This  chapter  has  emphasised  that  a  Global 
Partnership  needs  to  take  into  account  national 
and  international  policies  that  could  reduce  the 
need  for  further  finance  and/or  make  better  use 
of existing finance. 

    Reforming  domestic  policy  and  finance 
frameworks: a range of factors can increase tax 
revenues  and  make  domestic  private  finance 
work  more  effectively.  Both  domestic  public 
and private finance needs much improvement 
in the poorest countries.

    Reforming  international  public  finance:  aid 
effectiveness  principles  and  smarter,  more 
catalytic  use  of  ODA  can  help  to  improve 
impact (see also Section 4.3).

  Reforming the international system.

Chapter  6  focuses  on  the  first  two  areas.  Table 
4.3  below  summarises  the  key  elements  of  a 
reformed  international  policy  environment.  We 
have  reviewed  existing  policies  and  provided 
new  evidence.  Developing  countries  have  been 
hit  by  the  global  financial  crisis  through  real  and 
financial channels. Global financial rules could help 
to prevent such banking crises. The CIs show the 
importance of trade access in promoting economic 
development (see also Chapter 6) and hence more 
and better trade access through global trade rules 
(e.g.  on  trade  facilitation  or  reduction  in  trade-
distorting subsidies) will help. Global tax rules will 
assist  DRM  by  reducing  illicit  capital  flight,  which 
is  currently  reducing  tax  revenue  in  developing 
countries.  Finally,  climate  change  will  affect  the 
poorest  countries  most  severely  although  they 
contributed least to causing it. 

While  finance  is  often  used  as  a  second-best 
solution to address the negative consequences of 
international shocks on developing countries (e.g. 
through shock facilities, AfT and climate finance), 
reforms to the global rules are often more effective 
approaches  and  may  also  reduce  the  need  for 
additional finance. For example, reforming trade 
policies  has  a  greater  effect  than  AfT  resources. 
Duty-Free  Quota-Free  (DFQF)  access  for  LDCs 
to the markets of the G20 countries (beyond the 
EU,  which  already  provides  such  access)  could 

156 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 157

CHAPTER 4. The role of policies in mobilising and using finance effectively 
 
 
 
 
 
 
 
 
 
 
 
 
Table 4.3 | The role of policies in the mobilisation and effective use of finance: illustrative examples

Table 4.4 | Reforming the international system

POLICIES FOR MOBILISATION

POLICIES FOR EFFECTIvE USE

GLOBAL TAX RULES

TRADE RULES

FINANCIAL RULES

CLIMATE RULES

SHOCK FACILITIES

Domestic 
public finance 
(tax revenues, 
and SWFs, 
sovereign 
bonds)

International 
public finance 
(ODA, OOF, 
blended 
finance) 

Domestic 
private 
finance 
(banking, 
pension funds, 
corporate 
bonds etc.)

International 
private 
finance 
(FDI, bank 
lending, 
portfolio)

Domestic 

International 
(regional/global)

Domestic 

Tax authority capacity 
Introduction of VAT, 
property taxes

International agreements on 
tax cooperation/capacity and 
transfer pricing

International cooperation 
to promote liquidity on 
bond markets

Natural resource 
subsidy reform

Governance

Policies for formal-sector 
employment and earnings 
(the income tax base) 
and private spending 
(the indirect tax base)

MTEF, PFM systems, 
managing tax revenues

Well governed SWFs and 
development banks to 
channel natural resource 
revenues

Public-sector governance 
(accountability, consistency)

Fragility, poverty, crises, 
political ties

Blending schemes for ODA 
grants to leverage OOF

MTEF

PFM systems

Graduation

Global development 
targets

ODA definition

Develop pension fund, 
and stock markets

Land-titling, collateral 
and credit bureaux

Business climate policies

Attitude toward 
 private sector

Financial literary

Shock facilities to address 
shocks and crises

National level governance 
and absorptive capacity

Regional stock markets

Regional DFIs

Competition and 
innovation to reduce 
intermediation costs

Well-governed 
development institutions

Financial regulatory 
governance

Financial literacy

FDI strategies (capped 
incentives, EPZs)

Regional/global agreements 
for trade and investment

Debt management 
strategies

Business climate policies

Market size, national and 
international governance, 
economic fundamentals

Macro-prudential policies 
to manage volatility

Capital controls ‘after-care’ 
investment services

Importance 
for mobili-
sation and 
effective use 
of finance

Illustrative 
evidence 
provided in 
Report

What should 
be done?

Better tax rules 
reduce illicit capital 
outflows and increase 
domestic resources. 
Better transfer pricing 
rules will lead to more 
tax resources in LICs.

Annual losses in out-
flows are greater than 
ODA to SSA

NIESR/NIGEM model 
estimates in Chapter 
4 (commissioned 
modelling paper; 
Fic, 2015)

Change OECD tax 
rules (follow OECD 
BEPS and other 
plans), implement 
better transfer-pricing 
rules and consider 
impact of tax rules on 
developing countries

Stable environment 
increases trade access 
which attracts finance 
and makes it more 
effective

Annual gains for 
developing countries 
are greater than the 
value of AfT

Country Illustrations 
(Bangladesh Mauri-
tius) and Chapter 6

Change WTO rules 
and implement a 
trade facilitation 
agreement 

Less volatility in-
creases the quantity 
and quality of finance

Reduces the need 
for shock finance, 
although some will 
still be required

Stricter commitments 
on CO2 emissions 
incentivise green 
investment 

Reduces the need 
for additional green 
finance 

A more stable eco-
nomy is better for 
long-term growth, 
which can attract 
more finance.

NIESR/NIGEM model 
estimates (commis-
sioned modelling 
paper; Fic, 2015) on 
costs of crises versus 
costs of avoiding 
them (see Chapter 4)

Improve voice of 
poorest countries in 
international financial 
architecture; include 
banking sector (see 
Box 4.2 on coherent 
financial architecture)

Box 4.1 based on 
climate modelling 
literature and 
Chapter 6

Evidence on impor-
tance of shocks and 
lessons on effective 
shock facilities

Increasing com-
mitments to the 
reduction of CO2 
emissions, where 
developed countries 
and BRICS need to 
take responsibility

Maintain shock archi-
tecture that is fit for 
purpose (e.g. scale, 
speed, coordination). 

Build on good exa-
mples	of	EU	V-FLEX	
and IMF. 

International 
(regional/global)

International cooperation 
(e.g. IMF article IV; tax 
assessments) EITI

Realising synergies ODA, 
OOF and technical 
cooperation (‘smart aid’)

Reducing transaction 
costs and improving 
coordination

Appropriate financial rules 
to avoid systemic risks

Global compact/CSR 
strategies (social and 
environmental standards) 
for TNCs, e.g. EITI

Technology transfer 
(IPR regimes)

Global financial rules 
to avoid systemic risks

Internatio-
nal private 
finance (re-
mittances and 
philanthropy)

Innovative instruments 
(e.g. diaspora bonds)

Level of development 
(differentials between 
home and host)

158 | EUROPEAN REPORT ON DEVELOPMENT 2015

Financial systems to make 
sound use of remittances

Governance 
(esp. household level)

Foundations’ strategies

Combining finance and policies to implement a transformative post-2015 development agenda | 159

Basel III, trade finance, 
monetary conditions and 
other finance rules for stable 
finance

CO2 emissions reduction for 
green investment

Natural resource subsidies

Project preparation funds and 
guarantees (equity, loans, 
guarantees etc.)

DFIs for mobilising 
institutional investors

Absorptive capacity 
(education, infrastructure and 
financial-sector development)

Responsible investment 
strategies

Migration policies

Remittance costs

Anti-money laundering 
regulation

CHAPTER 4. The role of policies in mobilising and using finance effectivelyCHAPTER 5.

A framework for assessing the role 
of finance and policies in enabling 
a transformative post-2015 agenda

Main messages 

5.1 

 An integrated conceptual framework 
for the role of finance and policies 
in enabling a transformative post-2015 
development agenda 

5.2 

 A focus on selected enablers 
of sustainable development 

5.3  Conclusions 

161

162 

166 

184 

5.

Main Messages

The framework presented in this chapter is intended to 

encourage a joint discussion of finance and policies 

together rather than in a disconnected fashion. This 

finance and policy framework represents a leap that is 

critical to the success of a future Global Partnership. 

The main messages arising from this chapter are: 

    The role of finance in promoting poverty eradication 

and sustainable development needs to be seen in 

the  policy  context.  Finance  does  not  operate  in 

a  vacuum  and  it  is  the  combination  of  finance 

and  policies  that  permits  the  development  of 

enablers.

  Action should focus on these drivers or enablers 

of  change.  Poverty  eradication  and  sustainable 

development 

cannot  be 

achieved  without 

improving  and  financing  longer  term  enablers 

such as: local governance; infrastructure; human 

capital;  biodiversity;  green  energy  technology; 

and  trade.  This  focus  on  the  enablers  contrasts 

starkly with outdated views that ODA or finance 

alone can suffice.

Combining finance and policies to implement a transformative post-2015 development agenda | 161

 
 
C hapter 1 looked at the discussions on the proposed SDGs that are pointing towards the need for 

a transformative development agenda. This chapter presents the Report’s conceptual framework 
for examining the role of finance and policies in enabling this agenda. Without radical transformation, 
there  are  unlikely  to  be  rapid  increases  in  productivity,  more  jobs,  low-carbon  energy,  protected 
biodiversity, zero poverty and egalitarian societies, or that it will be possible to promote a universal, 
sustainable and inclusive development agenda. Experience suggests that earlier transformations have 
had unique characteristics. Different paths have been followed and different choices have been made 
in the process. These have varied across countries and time periods and have been shaped by history, 
resource  endowments,  political,  social  and  cultural  institutions,  and  policy  choices.  A  transformative 
post-2015 agenda will need to be very different from what has been seen in the past in order to secure a 
sustainable future – specifically, it will need to encourage developed and developing countries to adopt 
a radical strategy to achieve transformative green growth and inclusive development.

This chapter introduces the Report’s framework for examining the role of finance and policies in supporting 
such a transformative agenda. Achieving it will require adequate consideration of the social, economic 
and environmental dimensions. A key issue is that promoting sustainable development requires long-
term  perspectives,  which  depends  on  having  the  means  to  make  these  possible  –  what  this  Report 
refers to as enablers. Section 5.1 presents an integrated conceptual framework that links financial flows, 
complementary policies and enablers of sustainable development and Section 5.2 presents the Report’s 
selection of enablers for sustainable development to which the framework will be applied in Chapter 6, 
placing this in the context of existing literature and empirical approaches. 

  5.1 

 An integrated conceptual framework for the role of finance and 
policies in enabling a transformative post-2015 development agenda

Finance  is  a  crucial  Means  of  Implementation 
(MOI) for a transformative post-2015 development 
agenda  and  it  has  been  flowing  in  different 
quantities and on different terms to different types 
of  country  (discussed  further  in  Chapter  3).  It  is 
important, however, to consider the national and 
international policy context of finance (Chapter 4). 

It  is  a  major  challenge  to  establish  a  framework 
within which to consider the links between finance 
and  policies.  By  drawing  on  the  literature  we 
suggests  ways  (financial,  regulatory  and  other) 
in  which  various  actors  can  promote  and  guide 
finance so that it flows to the right areas. Chapter 
6 examines the link between finance and policies 
in  developing  selected  enablers  for  sustainable 
development. 

It 

Figure  5.1  sets  out  the  integrated  conceptual 
framework  central  to  this  Report.  It  describes  the 
role of financial flows (domestic and international, 
public  and  private,  see  Chapter  3)  in  promoting 
illustrates  how 
sustainable  development. 
finance  flows  that  are  mobilised  with  the  help  of 
policies,  can  promote  the  enablers  of  sustainable 
development, again in the context of policies. One 
of the key messages is that the role of finance in 
promoting  sustainable  development  needs  to 
be  seen  in  the  policy  context.  This  framework  is 
intended to promote the joint discussion of policies 
and  finance  (through  the  illustrative  examples  of 
sustainable development enablers whose selection 
is explained in Section 5.2).

Figure 5.1 | Integrated conceptual framework for finance and policies in enabling a transformative post-2015 development agenda

National and international
policies for effective use
of finance

Financial flows

Public and Private
Domestic and International

National and international
policies to mobilise finance

Selected enablers for
sustainable development
Local Governance
Infrastructure
Human Capital
Biodiversity
Green Energy Technology
Trade

Traditional thinking on finance needs often made 
a direct link between finance (in particular ODA) 
and  the  achievement  of  the  MDGs,  although 
in  practice  finance  was  used  in  conjunction 
with  policies.  Finance  was  used  to  fund  the 
achievement  of  (largely)  social  goals  without 
considering fully the economic and environmental 
dimensions  of  sustainable  development,  and  in 
particular  without  taking  into  account  the  need 
for  an  integrated  approach  that  considered  the 
importance of enablers (see Chapter 2).

Our  framework  builds  on  the  lessons  to  be 
drawn  from  the  implementation  of  MDGs  and 
envisages a more restricted but also more realistic 
role  for  finance  in  a  transformative  post-2015 

context  than  the  predominant 
interpretation 
and  implementation  of  the  2002  Monterrey 
Conference.  Rather,  we  see  the  role  of  policies, 
alongside finance, as crucial. On the mobilisation 
side,  an  appropriate  policy 
framework  can 
generate  and  attract  more  finance  and  a  small 
policy  change  can  sometimes  tap  into  more 
finance. On the effectiveness side, better policies 
can pull finance from unproductive to productive 
uses, better policies can achieve more results with 
the same amount of finance, they can improve the 
stability of finance and better policies reduce the 
need for additional finance.

The  enablers  are  particularly  relevant  areas  of 
action through which the Report aims to illustrate 

5.1

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Combining finance and policies to implement a transformative post-2015 development agenda | 163

CHAPTER 5. A framework for assessing the role of finance and policies in enabling a transformative post-2015 agendainterplay  between  finance  and  policies. 
the 
Thus  policies  can  help  finance  to  develop  the 
enablers  of  sustainable  development.  There  is 
no  automatically  positive  link  between  the  two, 
however.  What  often  appears  to  be  a  financial 
constraint might be the outcome of a general or 
specific policy or of market failures and conditions. 
For example, excessive budget deficits or a debt 
overhang  will  limit  the  availability  of  finance  at 
reasonable  costs  to  viable  exporting  firms  and 
hamper  new  investment  activity  in  productive 
sectors.  Similarly,  the  absence  of  land  titles  or 
clear property rights will prevent the unlocking of 
private investment for the enablers of agriculture. 
It would be ineffective to increase financial flows 
to agriculture without first resolving the regulatory 
and  legal  framework.  Correspondingly,  there  are 
several ways in which policies can influence finance 
and have an impact on the enablers of sustainable 
development. How policies and finance are linked 
to the enablers is illustrated by six examples that 
are presented in Chapter 6.

There  are  several  reasons  why  policies  play  a 
role,  e.g.  why  leaving  finance  flows  entirely  to 
market forces will not lead to their socially optimal 
allocation  and  use.  Market  coordination  and/or 
governance  failures 26  that  negatively  affect  the 
mobilisation of finance and typically include:

  Incorrect pricing that fails to reflect the true 
cost of a resource, e.g. when the externalities 
of  energy  use  are  not  included  in  the  price 
of  energy,  affecting  both  the  profitability  of 
finance and investment in renewables and the 
willingness of private firms to invest (see ERD, 
2011/12).

  Limited  (i.e.  imperfect)  information,  e.g. 
in  the  process  of  channelling  finance  to 
opportunities.  Investors  may  be  unaware  of 
potentially  profitable  projects,  which  may 
especially be true for foreign investors looking 
for local opportunities. 

  Insufficient  coordination,  e.g.  when  the 
effectiveness  of  finance  in  one  sector  raises 
the  profitability  of  finance  in  another  sector 
or  activity,  for  instance  when  investment  in 
agriculture is profitable only when there is also 
investment  in  infrastructure  or  when  donors 
fail to coordinate their actions on the ground.

 Hold-up,  e.g.  when  investment  and  finance 
become too risky due to large upfront capital 
investments  and 
long  payback  periods 
influenced by government policy and practice. 
This  often  leads  the  private  sector  to  refrain 
from  investing  until  more  information  and 
assurances are available.

  Imperfect  capital  markets,  e.g.  when  the 
market  is  associated  with  credit  constraints, 
caused by uncertainty surrounding the (future) 
profitability of projects on which basis lenders 
determine the probability of loan repayments. 
High transaction costs arising from screening, 
monitoring,  and  enforcement  in  the  credit 
market create obstacles to lending. The use of 
collateral might reduce such needs and reduce 
transaction costs. Poor people, informal firms, 
small  firms  and  start-ups  may  not,  however, 
be  able  to  pledge  capital  or  formal  rights  to 
land  and  houses  as  collateral.  This  prevents 
them from financing what could be profitable 
projects.

  Insufficient  provision  of  national  and 
global  public  goods,  e.g.  when  investment 
is  hindered  because  of  shortages  in  relevant 
skills,  inadequate  education  or  infrastructure 
or unclear property titles, poor governance or 
uncertain rules and regulations.

There are also market coordination or governance 
failures in the incentive structure that are associated 
more closely with project implementation and the 
effective use of finance. These include:

 Regulatory and governance inadequacies in 
project  implementation,  e.g.  long  delays  or 
high transaction costs in licensing procedures 
for  doing  business,  delays  in  legal,  dispute 
or  arbitration  settlements,  unclear  property 
rights, barriers to entry in product markets.

  Other  policy  problems,  e.g.  overvaluation 
of  exchange  rates,  price  distortions,  tax  rate 
uncertainty.

  Inadequate  skills  and  capacities,  e.g. 
infrastructure, education or skill shortages, low 
administrative capacity.

  Poor  coordination  and/or  high  transaction 
costs  in  the  provision  and  allocation  of 
financing, e.g. failure of donors to coordinate 
in aid allocation and avoid project duplication. 

in 

problems 

 Principal–agent 
the 
implementation  of  projects,  e.g.  when  the 
public (or aid) sector lacks perfect information 
about  how  the  private  sector  implements 
projects  (which  may  lead  to  moral  hazard  or 
conflict of interest).

  Negative  externalities 
from  excessive 
volatility (inflows and outflows) of short-term 
private capital flows, with destabilising effects 
on investment and the economy.

  Imperfect  competition,  e.g.  when  firms 
collude  and  set  prices  in  a  monopolistic  way 
thereby  appropriating  monopoly  rents  (this 
may  affect  the  banking  sector,  for  instance, 
when  banks  collectively  decide  not 
to 
innovate and provide the same level of service 
at a high cost, using high barriers to block new 
entrants).

A range of supportive policies can address these 
market  and  coordination 
inadequacies  and 
enhance  the  effective  use  and  mobilisation  of 
finance (see Chapter 4). Evaluating the importance 
of  certain  supporting  policies  is  a  key  research 
question for this Report and is explored in relation 
to  selected  critical  enablers  in  Chapter  6.  Such 
policies can in principle include a wide variety of 
different types (a policy is excluded only by choice 
and relevance) including:

 Capacity-building  (e.g.  regulatory,  legal  and 
administrative capacity)

 Tax  policies  (e.g.  tax  rates,  transfer  pricing 
regimes) 

  Trade  policies  (e.g.  protectionism,  export 
restrictions,  agricultural  subsidies, 
trade-
facilitation measures)

  Financial  policies  (e.g.  international  banking 
rules, financial market policies)

  Science,  technology,  innovation  policies  (e.g. 
technology institutions) 

  Industrial  policies  (e.g.  SME  development 
policies;  competition  policies  and  market 
surveillance; 
incentives, 
investment 
procurement policies and standards)

  Macroeconomic 
financial 
policies 
regulation (e.g. fiscal, monetary and exchange 
policies; banking supervision)

and 

  Private-sector  development  and  corporate 
governance (e.g. regulation)

  Education and health policies (e.g. education, 
training,  migration  policies,  primary  health 
care)

  Social-protection policies (e.g. social security, 
unemployment  and  other  benefits,  active 
employment schemes)

26  In  economics,  ‘market  failure’  means  that  the  market  alone  cannot  allocate  resources  efficiently  and  in  a  way  that  maximises  sustainable  development. 
Goverrnance and policy failures mean that policies that do not aim or fail to overcome market failures also hinder the achievement of sustainable development.

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CHAPTER 5. A framework for assessing the role of finance and policies in enabling a transformative post-2015 agenda 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Environmental  and  energy  policies 
appropriate  pricing  of  carbon; 
subsidies)

(e.g. 
fossil-fuel 

  5.2 

 A focus on selected enablers 
of sustainable development

  Legal  policies  on  rights,  the  rule  of  law, 
transparency, accountability and redress

These  policies  may  be  local,  national,  regional 
or  global  (e.g.  they  can  refer  to  global  climate 
policies  on  CO2  emissions,  which  can  lead  to 
appropriate pricing of natural capital, or they can 
be local capacity-building initiatives). We classify 
some of the above policies in two broad groups 
in  terms  of  their  relation  to  finance:  policies  for 
the  effective  use  of  finance,  and  policies  for  its 
mobilisation. 

Sometimes  these  two  categories  overlap,  since 
some policies such as reduced protectionism, can 
make  FDI  more  effective  and  also  attract  more 
FDI, as discussed in Chapter 4.

While  the  framework  introduced  in  this  section 
may be regarded as lacking in detail, it introduces 
one  further  level  of  reality  –  the  interaction 
between policies and finance for enablers – that 
is  essential  in  considering  the  role  of  finance  for 
sustainable development.

Figure  5.2  presents  the  six  selected  enablers  – 
local  governance,  human  capital,  infrastructure, 
biodiversity,  green  energy  technology  and  trade 
– that are crucial to overcoming the constraints to 
sustainable  development.  This  section  provides 
the analytical underpinning of these enablers and 
explains  why  sustainable  development  depends 
on  them.  The  enablers  have  in  common  that 
they  describe  the  state  of  the  economy  (e.g. 
level  of  human  resources,  technology,  quality  of 
governance, degree of integration and linkages). 
They  are  not  flow  variables  (how  many  changes 
are  recorded  in  a  given  year).  They  are  also 
different from supporting policies or an enabling 
policy  environment,  which  together  with  finance 
can help to change the availability and quality of 
the enablers.

Figure 5.2 | Selected enablers for sustainable development

We discuss the following enablers in turn below:

5.2.1 

Local Governance

  Local  Governance.  Governance  generally  is 
the most fundamental enabler of development, 
and we focus on local governance because of 
its importance in the provision of many critical 
functions and because few other reports focus 
on the financing aspects at this level. We draw 
on  the  CIs  and  a  commissioned  modelling 
study  on 
impacts  of  government 
effectiveness  on  ODA  and  shocks  affecting 
FDI (see Box 4.3) to provide further insights.

the 

  Infrastructure,  which  econometric  studies 
show  is  important  for  all  dimensions  of 
sustainable  development, 
conclusion 
supported by a commissioned study modelling 
infrastructure  scenarios  in  Moldova  (see  Box 
6.7), and by the CIs.

a 

capital,  whose 

  Human 
in 
development is also supported by a range of 
empirical studies, also has a direct link with the 
eradication of poverty.

importance 

important 

 Biodiversity,  which 
for  all 
is 
dimensions  and  for  environmental  progress 
most  directly.  Here,  the  Report  yields  new 
insights  with  respect  to  financing  because 
biodiversity  is  often  referred  to  as  a  public 
good. 

Energy 

  Green 
its 
dissemination lie at the heart of a move from a 
high-carbon to a low-carbon economy.

technology 

and 

taboos, 

Governance refers to the complex of institutions 
in  the  broadest  sense.  North  (1991:  97)  defines 
‘humanly  devised  constraints 
institutions  as 
that  structure  political,  economic  and  social 
informal 
interaction.  They  consist  of  both 
constraints 
customs, 
(sanctions, 
traditions, and codes of conduct) and formal rules 
(constitutions, laws, property rights)’. They include 
economic  institutions  (e.g.  property  rights)  and 
political institutions (the way power is distributed 
and managed) or political settlements (the social 
contract  established  between  elites  and  other 
groups in society). Institutions affect all dimensions 
of development, whether incremental or radical. It 
has  been  argued  that  what  matters  most  in  why 
some  countries  have  failed  to  achieve  advances 
in development and others have succeeded is not 
geography,  culture,  or  value  systems  but  rather 
the  country’s  political  and  economic  institutions 
(Acemoglu  and  Robinson,  2012;  Levy,  2014).  It 
is often the interplay between formal institutions 
(anchored  in  the  constitution,  codified  in  laws 
etc.) and informal rules (based on social, cultural, 
ethnic,  religious  norms  and  beliefs)  that  shape 
both  the  distribution  of  power,  the  nature  of 
competition  and  the  functioning  of  markets  and 
also  countries’  potential  to  promote  successful 
transformative agendas (ERD, 2013: 35). 

In many countries, the lack of political leadership 
to  reform  institutions,  coupled  with  unevenly 
distributed  power  and  poor  governance,  have 
been  critical  binding  constraints  to  sustainable 
development. The CIs show that leadership and a 
shared vision, especially between the government 
and the business sector, are crucial to long-term 
and  sustainable  policy  changes.  Poor  countries 
often  lack  sufficient  government  capacity  to 
design,  plan  and  implement  a  transformative 
agenda.  Countries  that  have  been  relatively 
successful  in  promoting  economic  development, 
such  as  Mauritius  and  most  of  the  East  Asian 
countries,  adopted  a  long-term  and  market-
based vision and used far-reaching and coherent 

Local Governance

Infrastructure

Trade

A TRANSFORMATIVE
POST-2015 AGENDA

Human
Capital

(Sustainable
Development)

Biodiversity

Green energy
technology

5.2

 Trade, whose importance as an enabler comes 
out  very  strongly  from  the  CIs  and  yields 
differential insights, especially with respect to 
the role of private-sector finance.

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CHAPTER 5. A framework for assessing the role of finance and policies in enabling a transformative post-2015 agenda 
 
 
 
 
 
 
 
industrial  policies,  most  notably  export-oriented 
industrialisation, to reward success, e.g. in exports, 
trade-investment  interlinkages  and  integration 
in  value  chains.  In  many  other  instances,  most 
notably in Latin America and the Caribbean (LAC) 
and  sub-Saharan  Africa  (SSA),  incentives  and 
policies often ended up supporting unproductive 
firms and/or rent-extracting practices. 

inappropriate 

Extractive  or 
institutions  and 
governance  tend  to  produce  systemic  policy 
inertia or even detrimental structural or industrial 
policies.  Some  analysts  have  suggested  ‘that 
policy  passivity  and  “markets  only”  strategies 
of  the  1980s  and  1990s,  as  promoted  by  the 
Washington  Consensus,  successfully  enhanced 
failed  by  and 
macroeconomic  stability,  but 
large  to  promote  structural  transformation  and 

sustained  growth’  (Breisinger  and  Diao,  2008:1). 
On  the  contrary,  it  is  now  widely  accepted  that 
‘the  countries  that  managed  to  catch  up  with 
the  old  industrialised  and  high-income  countries 
are  the  ones  whose  governments  proactively 
promoted  structural  change,  encouraging  the 
search for new business models and markets, and 
channelling resources into promising and socially 
desirable new activities’ (Altenburg, 2011:1). The 
recent  literature  on  economic  development  and 
diversification  also  suggests  that  an  appropriate 
institutional setting and vision for industrial policy 
is  crucial  (see,  for  example,  IMF,  2014;  Page, 
2012b; Hausmann et al., 2014; Lin et al., 2011). Te 
Velde  (2013)  argues  that  such  proactive  policies 
can be pursued successfully only in the presence 
of effective state–business relations. 

Box 5.1 | The importance of governance and effective state–business relations

The quality of governance and effective and transparent state–business relations have been shown to be important across economic, 
social  and  environmental  development.  Mauritius  is  a  good  illustration  of  how  good-quality  institutions  drove  transformative 
changes. The CI suggests that effective state–business relations facilitated the building of a consensus around the country’s economic 
direction, which helped to direct finance (the public sector in the lead and the private sector following) by investing sugar rents in 
the garment-manufacture and tourist sectors (CI, Treebhoohun and Jutliah, 2015). The approach identified those who benefited and 
those who stood to lose out from such changes, and involved retraining the latter. This consensus-seeking model has supported the 
country’s social development to date and is guiding current and future policy on environmental development via the implementation 

of the Mauritius Ile Durable Strategy. 

Source: CI, Treebhoohun and Jutliah (2015) 

sustainable  development  and 

The OWG report (2014: paragraph 10) states that 
good governance and the rule of law are essential 
for  sustained,  inclusive  and  equitable  economic 
the 
growth, 
eradication of poverty and hunger. For example, 
governance  is  important  for  social  development 
and  a  post-2015  development  agenda  which 
‘leaves  no  one  behind’,  as  certain  segments  of 
the population are frequently excluded by politics 
intermediate 
and  social  norms; 

inadequate 

political and institutional arrangements at the local 
level;  lack  of  voice,  poor  accountability  systems 
and  space  for  organised  demand;  or  simply  by 
the  lack  of  good  public  and  social  services  with 
the  necessary  human  resources,  capabilities  and 
infrastructure. The process of social development 
is  inherently  long  term  and  expensive,  requiring 
sustained  government  investment.  This  is  clearly 
a major constraint for poor countries, but beyond 
the  budgetary  question  the  binding  constraints 

are  often  political.  They  relate  to  institutions 
such  as  the  nature  of  political  settlements  and 
social  contracts  between  elites  and  other  social 
sectors,  and  how  these  affect  the  prioritisation 
of  social  policies  in  government  spending.  A 
‘political  settlement’  refers  to  the  way  social 
actors  operate  in  pursuit  of  their  interests,  and 
organise and exercise power (DFID, 2010). Power 
and  politics  influence  the  nature  of  the  state 
bureaucracy, its relationship to elected politicians, 
the  composition  of  elite  groups,  the  incentives 
and  motives  of  politicians  and  political  leaders 
to  undertake  certain  actions  or  favour  particular 
policies,  and  the  ways  in  which  citizens  engage 
with  the  state  and  exercise  oversight  over 
power  holders.  The  political  settlement  shapes 
the  governance  and  domestic  accountability 
landscape, the way in which rights and resources 
are  distributed  in  a  given  country  (ODI,  2010) 
and  the  prospects  for  development  and  the 
adoption  of  pro-poor  policies.  Brautigam  et  al. 
(2008) further argue that governments’ authority, 
effectiveness,  accountability  and  responsiveness 
are  closely  related  to  how  they  are  financed.  It 
matters, for example, that governments tax their 
citizens rather than relying on resource revenues 
and ODA, and it also matters how they tax them. 

(or 

Achieving  environmental  progress 
low-
carbon  development)  also  depends  on  good 
governance  and  strong  leadership  in  order  to 
develop  coherent  policies  across  sectors  and  to 
create  space  for  behavioural  shifts  in  multi-level 
and  multi-phase  processes.  In  this  perspective, 
radically 
improved  environmental  outcomes 
depend  upon  traditional  forms  of  leadership  as 
well as the promotion of institutional change from 
below, facilitating knowledge and vision-building 
and  developing  social  networks  (Westley,  2013). 
Stable governance and the rule of law are critical 
foundations  of  sustainable  development  (TST, 
2014).  For  example,  UNEP  (2014)  claims  that  at 
least 40% of all violent conflicts in the last 60 years 
have been broadly linked to natural resources. 

Chapter  6  examines  local  governance  in  more 

detail. Most countries are involved in some form 
of  decentralisation  as  certain  services  such  as 
health and education are provided either by local 
governments  or  by  a  ‘deconcentrated’  central 
government  unit  and/or  para-statal  bodies. 
Many similar issues arise at the national and local 
levels  but  there  are  also  differences  between 
them.  Local  institutions  are  often  weaker,  their 
capacities are more limited, and financing is more 
precarious since they have less access to external 
funding.  At  the  same  time  local  government 
should be closer to citizens and the accountability 
links  are  potentially  more  immediate,  and  social 
organisation  and  voice  are  often  stronger.  This 
can be an asset, for instance with regard to local 
taxation (commissioned background paper; Brun 
and  Chambas,  2015).  Decentralisation  is  likely 
to increase in the coming years. Over half of the 
global  population  lives  in  urban  areas  and  this 
proportion  is  rising,  and  poor  populations  are 
also increasingly urban. As these trends continue 
and perhaps even accelerate, local authorities in 
large  towns  and  cities  will  be  at  the  forefront  in 
providing  services  and  infrastructure.  Financing 
local  government  for  social  transformation  is 
therefore  an 
international 
issue  of  growing 
importance. 

Decentralisation 27  has  been  high  on 
the 
development  agenda  since  the  1990s  and  can 
be  conducive  to  local  development  contributing 
to  the  reduction  of  poverty.  It  is  expected  to 
enhance  the  quality,  efficiency  and  effectiveness 
of local infrastructure and services, improve local 
environmental management (e.g. implementation 
of  Agenda  21),  promote  local  employment, 
collect  and  increase  local  revenue,  and  hence 
improve 
livelihoods.  Decentralisation  reforms 
are  also  expected  to  improve  governance  by 
allowing the emergence of effective local political 
representation,  an  accountable  and  responsive 
local  administration,  an  active  local  citizenship 
able  to  participate  in  local  political  decision-
making,  and  strategic  alliances  between  the 
public and private sectors and local communities 
(EC, 2007; Steffensen, 2010; Romeo, 2012; CI by 

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Combining finance and policies to implement a transformative post-2015 development agenda | 169

27  Decentralisation is a complex political process that involves many levels and actors and three interdependent dimensions: political, administrative and fiscal. 

Arrangements to provide services vary widely depending on how power and resources are transferred, i.e. devolution, delegation or deconcentration.

CHAPTER 5. A framework for assessing the role of finance and policies in enabling a transformative post-2015 agendaDamuri  et  al.,  2015).  In  reality,  the  relationship 
between poverty reduction and decentralisation is 
far more complex. The impact of decentralisation 
on public services, corruption, fiscal management 
and growth in developing countries and emerging 
economies  is  poorly  documented  and  evidence 
is  in  many  cases  inconclusive  (Martinez-Vazquez, 
2011). The effectiveness of decentralisation seems 
to  be  dependent  on  whether  local  authorities, 
over  and  above  a  legal  mandate,  have  sufficient 
autonomy, financial resources and independence 
of higher tiers of government (Romeo, 2012; LDI-
LLC, 2013; UCLG, 2010). 

There  is  some  consensus  that  certain  poverty-
reduction efforts are better carried out at the local 
level: this is true of targeting, since in principle local 
authorities  have  better  knowledge  of  legitimate 
beneficiaries,  whether  these  are  communities 
or  individuals.  There  is  still  a  need  for  centrally 
designed systems to encourage correct targeting, 
in the absence of which local politicians may opt 
to divert resources to other priorities. Ideally, the 
design  of  anti-poverty  programmes  should  be 
integrated into the decentralisation process, while 
retaining  strong  coordination  between  central 
and  local  government  (see  Section  6.6).  The  CIs 
on Bangladesh and Indonesia identify one of the 
main  difficulties  in  implementing  local  public–
private  partnerships  (PPPs)  as  lack  of  capacity  at 
the local government level. 28 In conclusion, local 
governance is important for all the dimensions of 
development, but has not received the same level 
of attention as national governance.

5.2.2 

Infrastructure

Infrastructure  refers  to  transport,  water,  energy 
and  information  and  communication  technology 
(ICT).  Poor  infrastructure  is  a  major  impediment 
to  sustainable  development.  It  needs  to  keep 
pace with population growth as well as economic 
development  as  it  becomes  more  intensively 
used, grids are expanded and more maintenance 
is  required.  It  has  been  estimated  that  SSA  as 
a  whole  loses  one  percentage  point  a  year  in 

economic  growth  per  capita  owing  to  poor 
infrastructure 
(UNCTAD,  2011).  Self-reported 
losses associated with power outages can amount 
to  more  than  10%  of  sales  in  some  countries 
(Gelb et al., 2014). Thus, average economic rates 
of return for World Bank projects evaluated over 
the  1983–1992  period  were  estimated  at  11% 
for electricity projects and 29% for road building 
(Lin  and  Wang,  2013).  Recent  developments  in 
ICT  and  broadband  networks  show  a  significant 
impact  on  expanded  productive  activity.  It  is 
estimated  that  a  10%  increase  in  broadband 
penetration  led  to  an  average  increase  of  1.4% 
GDP growth in developing countries overall (UN 
TST Issues Brief, 2013).

roads 

telecommunications 
or 
Improved 
infrastructure  can  lower  transport  and  logistics 
costs as well as the costs of communication and 
information  exchange.  Investments  in  water  or 
energy grids can reduce the cost of inputs to all 
productive  activities,  enhance  factor  productivity 
and  release  labour  to  engage  in  productive 
activities.  Provided  the  costs  are  sufficiently  low, 
the  poor  can  also  obtain  access  to  these  assets. 
At  the  same  time,  improved  infrastructure  can 
promote market integration for trade, employment 
and  production  processes.  Better  connectivity 
through  investments  in  infrastructure  enhances 
labour  mobility  and  promotes  employment. 
It 
fosters  urbanisation,  diversification  and 
industrialisation,  all  of  which  go  hand  in  hand 
with  structural  transformation  (McMillan  et  al., 
2014). Finally, investment in infrastructure enables 
better access to health and educational services, 
provided that care is taken to ensure that poorer 
groups are included, thus improving standards of 
living  and  environmental  conditions.  Investment 
in  infrastructure  has  to  be  appropriate,  however, 
in  order  to  enable  sustainable  development. 
For  example,  in  order  for  a  railway  project  to 
realise  its  optimal  benefits  there  needs  to  be 
complementary  investment  in  feeder  roads  and 
storage  facilities  at  the  linking  nodes  (see,  for 
example, CI by Lunogelo et al., 2015).

Improved  infrastructure  also  leads  to  job  creation. 
‘[An] increase in infrastructure investment of one per 
cent of GDP would translate into an additional 3.4 
million direct and indirect jobs in India, 1.5 million in 
the US, 1.3 million in Brazil and 700,000 in Indonesia’, 
and so could potentially increase productivity levels, 
if jobs are created in the right sectors (Page, 2012a). 
It is also important to boost productivity by scaling 
up good practice and making better use of existing 
infrastructure.  Doing  this  could  enable  countries 
to  reach  a  60%  improvement  in  infrastructure 
productivity, which amounts to a total annual saving 
of $1 tr (McKinsey, 2013).

immense.  Studies  suggest  that 

Infrastructure  deficits  are  large  in  all  country 
income groupings, yet the transformative potential 
of  more  and  better  (physical)  infrastructure  (e.g. 
transport,  energy,  water  or  communications) 
is 
improved 
infrastructure  allows  countries  to  move  up  the 
value-added  ladder,  increase  productivity  and 
transform  the  economy,  and  also  contribute 
to  job  creation  at  all  skill  levels.  When  green 
technologies  are  adopted  and  social  standards 
are  included  in  project  design  and/or  contract 
provisions,  infrastructural  development  can  also 
be 
in  promoting  environmental 
and  social  development.  The  commissioned 

instrumental 

MAMS model simulations for Moldova (see Table 
1.1)  show  that  financing  the  development  of 
infrastructure  expands  growth  and  employment 
and  reduces  poverty  (see  Box  6.7).  At  the  same 
time,  however,  it  may  not  reduce  inequality  in 
the absence of appropriate redistributive policies 
and transfer schemes to specific groups that have 
low-factor  market  participation  (commissioned 
modelling paper; Kinnunen, 2015)

5.2.3  Human capital

A lack of human capital can be a major constraint on 
sustainable development. Lack of skills and training 
appropriate to the jobs available, lack of economic 
opportunities and employment and of decent work 
in  particular,  lack  of  access  to  productive  assets 
including natural assets and resources, and lack of 
access to public services particularly in health and 
education,  can  all  hold  back  social  development. 
Governments  need  to  ensure  universal  access  to 
the  trio  of  policies  (education,  health  and  social 
protection)  generally  accepted  as  comprising 
(Bachelet,  2011). 
a 
Equally,  governments  need  to  achieve  a  ‘political 
settlement’  or  national  political  consensus  on  the 
objectives of social development. 

‘social  protection  floor’ 

Box 5.2 | Social policies in Mauritius

Mauritius has long sought to maintain a welfare state to protect the most vulnerable. This has included free access to education, 
health services, subsidised housing and subsidies on food staples (rice and flour). The Education for All policy has led to a reduction 
in inequality overall and particularly for women. Income inequality improved in the 1990s but over the past decade it has increased 
(Gini coefficient rising from 0.371 to 0.413 for period 2002–2012) while the economy grew more slowly and unemployment rose. 

Source: CI, Treebhoohun and Jutliah (2015) 

28  Other reasons identified in the CIs include problems in acquiring land, an unsupportive business environment and poor governance.

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Combining finance and policies to implement a transformative post-2015 development agenda | 171

CHAPTER 5. A framework for assessing the role of finance and policies in enabling a transformative post-2015 agendaCHAPTER 5. A framework for assessing the role of finance and policies in enabling 
a transformative post-2015 agenda

Human  capital  and  education  underpin  human 
development and poverty reduction (Sen, 1999). 
Measuring  human  capital  by  the  percentage 
of  the  working-age  population  with  secondary 
education, Mankiw et al. (1992) find that it raised 
output  in  around  100  developing  countries.  In 
LICs, limited access to basic education was found 
to be the most important constraint on economic 
growth (Mankiw et al. 1992). As a country develops, 
it  is  important  to  extend  and  upgrade  inclusive 
education  systems  and  address 
inadequate 
vocational training and retraining. Skills are often 
eroded by long-term unemployment, the lack of jobs 

and social protection, skill mismatches or extensive 
brain  drain.  This  not  only  renders  investments 
inefficient  but  may  also  hamper  economic  and 
social  development.  Access  to  education  and 
skills training for the poor, and not only for elites, 
is  crucial  to  ensure  that  investments  in  human 
capital  do  indeed  promote  social  development 
and  do  not  exacerbate  existing  inequalities.  The 
enhancement  of  human  capital  emphasises  the 
importance of an appropriately skilled and healthy 
workforce for moving economies higher up global 
value chains (GVCs). This is illustrated by several of 
the CIs, notably on Ecuador and Mauritius. 

Box 5.3 | Human capital policies in Ecuador

From 2007, the Ecuadorean government has invested heavily in enhancing the country’s human capital and thus achieved major 
social transformation. Both urban and rural poverty have decreased substantially (urban poverty gap fell from 8.5% to 6.8% over the 
2006–2011 period, and agricultural poverty fell from 59.57% to 50.09%). Nationwide, inequality has also declined (the Gini coefficient 
went down from 0.505 to 0.441) including among the most vulnerable groups (Afro-Ecuadorean, women and unemployed). 

This has been achieved by a combination of universal distributive policies including direct transfers and subsidies. In particular, there 
is now universal education up to 10th grade, health coverage is universal, social security covers 55% of full-time employees (53% of 
the workforce) and the national Conditional Cash Transfer programme coverage increased from 1.1 to 1.8 million people between 
2006 and 2011. The latter, the Bono de Desarrollo Humano, provides $35 per month conditional on 75% school attendance and 
monthly health check-ups for the children of beneficiaries. The programme is available to the two poorest quintiles, which comprise 
45% of households, and is intended to ensure that the poor receive at least the minimal level of consumption and to strengthen 
investment in human capital via education and health.

Source: CI by Borja and Ordóñez (2015)

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Combining finance and policies to implement a transformative post-2015 development agenda | 173

CHAPTER 5. A framework for assessing the role of finance and policies in enabling 
a transformative post-2015 agenda

Financing and enabling social development

FINANCING DEvELOPMENT

INCOME TAXES RISING TO 4.5% OF GDP     

SUBSTANTIAL IMPROVEMENT IN TAX COLLECTION     

VAT INCREASED TO 12% AND COVERAGE EXTENDED     

CAREFUL MANAGEMENT OF EXTERNAL DEBT AND RESERVES     

EXTERNAL SOURCES INCL. ODA (0.5% OF GDP), REMITTANCES AND FDI     

DRIvERS OF DEvELOPMENT

  IMPROVED QUALITY OF PUBLIC INSTITUTIONS

  THE OVERALL STABILITY OF THE UNITED STATES ECONOMY

  STRONG LASTING POLITICAL SETTLEMENT AROUND PRESIDENT CORREA

  A CLEAR VISION AND INCLUSIVE DEVELOPMENT PHILOSOPHY (‘BUEN VIVIR’)

  TRADE INCLUDING THE SUSTAINED RISE IN INTERNATIONAL OIL PRICES REVENUES

  ENHANCED HUMAN CAPITAL THROUGH BETTER EDUCATION & HEALTH POLICY COVERAGE

‘Dollarisation’

Using the US dollar as national 
currency since 1999 was a key policy 
for the effective use of finance.

Infographic 1 | Ecuador Country Illustration

ECUADOR COUNTRY ILLUSTRATION

Human capital policies boost Ecuador

Since 2007, the government has invested heavily 
in enhancing human capital and achieved 
a major social transformation.

CHILD LABOUR

30% 

17% 

EXTREME POvERTY

17% 

13% 

INEqUALITY

0.505% 

Gini coeffi cient

0.441% 

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Combining finance and policies to implement a transformative post-2015 development agenda | 175

20112006HOW WAS THIS ACHIEVED?Universal health coverage  -  Social spending = 9.7% of GNP  Universal basic educationSocial security for 55% of fully employed workersSocial services = 27% of budgetECONOMYSTABILISED INFLATIONCONTROLLED5.2.4  Biodiversity

Natural  capital,  defined  as  the  quality  of  land, 
water,  air  and  other  environmental  assets,  is  an 
important  enabler  of  sustainable  development. 
The World Bank (2011) report on green growth and 
the Organisation for Economic Co-operation and 
Development  (OECD,  2011)  argue  that  valuing 
natural  capital  is  crucial  for  both  environmental 
sustainability 
and  economic  development. 
The  concept  of  ‘natural  capital’  (also  called 
environmental  or  ecological  capital)  emerged 
in  the  1970s  in  the  context  of  the  limits-to-
growth  discourse,  with  its  focus  on  sustainability 
(Hinterberger  et  al.,  1997).  Climate  control, 
drinking-water  supply,  pollination,  recycling  of 
nutrients,  provision  of  food,  wood  and  other 
resources,  the  disposition  of  a  genetic  library, 
nature’s bequest and existence values, 29 to name 
only a few (Folke et al., 1994; Hinterberger et al., 
1997),  are  recognised  as  environmental  services 
flowing from a stock of environmental wealth. 

that  neo-
Ecological  economists  emphasise 
classical concepts of capital had to be extended 
by  considering  nature  and  the  wide  range  of  its 
ecosystem processes and functions (Hinterberger 
et  al.,  1997).  Natural  capital  provides  four  main 
functions (De Groot et al., 2002; Chiesura and de 
Groot,  2003;  Ekins  et  al.,  2003:  169):  regulation 
(e.g. 
(e.g. 
life-support  systems),  production 
raw  materials),  habitat  (e.g.  for  wild  plants  and 
animals), and information (e.g. cultural) functions.

The  poorest  are  most  dependent  on  natural 
capital  for  their  livelihoods  and  therefore  bear 
disproportionate effects of resource degradation. 
This  has  implications  for  the  importance  of 
natural  capital  for  social  development,  and  for 
the  need  to  consider  the  interactions  between 
the  environment  and  poverty.  Access  to  safe 
water and sanitation is a prerequisite for a decent, 
dignified,  secure  and  healthy  life  and  to  avoid 
water-related illnesses. In many countries, women 
and girls are responsible for fetching and carrying 
water, a chore that is time-consuming, hazardous 

and  can  have  high  opportunity  costs  in  terms  of 
girls’ education and women’s participation in the 
economy. Between 30% and 60% of existing rural 
water-supply  schemes  are  dysfunctional  (Brikké 
and Bredero, 2003) and the poorest people end 
up paying the most for inferior water services. It is 
also  the  poor  who  settle  in  fragile  environments 
(such  as  flood  plains  and  deforested  watersheds 
that are subject to landslides), and who are most 
vulnerable to water-related risks.

that 

The  ERD  2011/12  showed 
large-scale 
(foreign)  land  acquisitions  tend  to  disadvantage 
the  poor  because  they  have  little  or  no  voice  in 
such  deals,  even  though  they  may  be  intensive 
users of the land. This is often a source of tension 
and  conflict.  Poorly  regulated,  high-cost  land-
tenure systems that lack transparency and sound 
redress  systems  tend  to  disadvantage  the  poor, 
increase  their  insecurity  and  make  it  harder  for 
them to use their land as collateral for credit. For 
instance, the rapid expansion of palm-oil farming, 
such as in Indonesia, in order to meet the demand 
for  biomass  for  energy  production  can  create 
economic  opportunities  for  smallholders,  but 
the  benefits  are  skewed  in  such  a  way  that  the 
poor  local  farmers  are  being  pushed  onto  more 
marginal  land  and  at  the  same  time  valuable 
mangrove  ecosystems  are  lost.  Hence,  avoiding 
resource  degradation  and  restoring  biodiversity 
are important for sustainable development. 

There can be complex links between physical and 
natural capital. To be sustainable, the current use of 
natural resources and services should not deplete 
the stock that is endowed to future generations. 
‘Green  accounting’  methods  make  it  possible  to 
quantify  this.  There  are  two  ways  to  approach 
intergenerational transfer. The first is referred to as 
‘weak sustainability’, which means that the legacy 
for  future  generations  must  be  at  least  equal  to 
the  amount  of  total  existing  capital,  regardless 
of  the  type,  assuming  that  the  different  types  of 
capital  are  mutually  substitutable.  The  depletion 
of  natural  capital  is  sustainable  only  if  the  rents 
from exploiting natural resources are reinvested in 

other  types  of  capital  (national  or  international), 
for  example 
infrastructure 
in  education  or 
(Hartwick,  1977).  More  recently,  however,  it  has 
been  argued  that  ‘strong’  sustainability  means 
that  there  is  only  limited  potential  to  substitute 
different types of capital, and that it is not enough 
to  maintain  the  total  stock  of  capital  for  future 
generations  because  some  forms  of  natural 
capital are irreplaceable. This is also emphasised 
by Rockström et al. (2009) in their nine planetary 
boundaries:  climate  change,  ocean  acidification, 
stratospheric ozone, global phosphate and nitrate 
cycles,  atmospheric  aerosol  loading,  freshwater 
use,  land  use  change,  biodiversity  loss  and 
chemical  pollution.  They  state  that  beyond  a 
critical threshold these systems cannot recover to 
the previous (or current) state. 

Most  of  the  ecosystem  services  provided  by 
biodiversity  have  public  or  common-good 
characteristics  in  the  sense  that  they  can  be 
consumed  and  depleted  without  adequate 
payment  for  their  use  and  regeneration.  In 
addition, many of the benefits of biodiversity do 
not  lend  themselves  to  quantification.  While  the 
valuation  and  pricing  of  benefits  in  the  form  of 
consumables such as timber, bush meat, tourism, 
or  genetic  information  is  technically  feasible 
(though not always practical), this holds to a lesser 
extent or not at all for other benefits of, say, forest 
biodiversity. These involve non-consumables such 
as  water  purification,  erosion  regulation,  flood 
protection or spiritual and cultural values; option 
values  such  as  the  future  benefits  of  genetic 
information; bequest values; and existence values 
(OECD, 2013: 26). Thus, many of the benefits of 
biodiversity  are  invisible  to  market  transactions 
and,  given  the  complex  and  sometimes  fragile 
interplay  of  ecosystem  factors,  an  unsustainable 
in  high 
forest  resources  can  result 
use  of 
environmental, economic and social costs that the 
market does not capture. This makes biodiversity 
a very illuminating example of a public good that 
needs to be incorporated into FFD discussions.

5.2.5  Green Energy Technology 

Technology  and  green  energy  technology  (GET) 
specifically,  is  a  crucial  enabler  of  sustainable 
development.  Technology  generally  is  a  key 
component of structural transformation to support 
upgrading  within  or  between  sectors.  In  LICs, 
ensuring  high  and  sustained  economic  growth 
combined with high levels of social development 
is  unlikely  to  be  achieved  without  productivity 
changes  based  on  widespread  economic 
diversification and structural transformation – led 
by technological change and innovation (Hall and 
Jones, 1999; Lin et al., 2011; UNECA, 2011). 

Innovation  and  the  spread  of  technology  are 
at  the  heart  of  radical  transformations  (e.g. 
the  role  of  breakthrough  technologies  such 
as  computerisation).  Their  absence  makes  it 
increasingly  difficult  for  firms  to  compete  in 
the  global  economy  and  for  countries  to  retain 
and  enhance  their  comparative  advantages. 
Technological backwardness is one of the critical 
bottlenecks that prevents transformation in many 
developing  countries  as  firms  and  companies, 
too  small  in  size  and  informal  in  their  modes 
of  operation,  do  not  adopt  new  production 
processes,  lack  access  to  or  do  not  use  more 
advanced products and blueprints, including ICTs, 
or do not have the ability to absorb and use them. 
Dutz et al. (2011), Ugur et al. (2012) and Katz and 
Margo  (2013)  discuss  the  positive  links  between 
innovation, productivity and employment growth. 
Technological  change  and  innovation  are  thus 
major drivers of total factor productivity increases 
that the early social scientists identified as major 
drivers  of  sustainable  growth  (e.g.  Solow,  1956; 
WEF, 2013).

Complementary  skills  and  capital  goods  are 
needed in order  to adopt  technology,  especially 
in  the  case  of  systemic  or  general-purpose 
technologies such as electricity and ICT (Hall and 
Khan, 2002). The same applies to political, cultural, 
institutional and regulatory constraints that often 
hamper  necessary  changes  in  productive  or 

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Combining finance and policies to implement a transformative post-2015 development agenda | 177

29  A bequest value is the non-use value of preserving the environment for future generations. Existence value refers to the non-use value that is derived from 

the fact the asset exists (e.g. the value that people attach simply to knowing that tropical rain forests exist).

CHAPTER 5. A framework for assessing the role of finance and policies in enabling a transformative post-2015 agendaorganisational  processes.  Differences  in  these 
barriers account for important disparities in income 
across countries, while the sustained reduction of 
these barriers can ‘induce development miracles’ 
(Parente  and  Prescott,  1994:  299).  For  example, 
in  many  LICs,  agricultural  transformations  have 
been  stalled  for  a  variety  of  reasons:  farmers 
lacked the necessary information and knowledge 
or the wish to adopt new production techniques; 
organisations in charge of transferring technology 
to farmers or providing support services to them 
did not do their job effectively; farmers adopted 
the  technology  only  partially  or  managed  it 
incorrectly,  so  that  potential  productivity  gains 
were  not  realised  or  when  they  gains  did  occur 
there  was  no  market  for  the  increased  output 
(Crawford, 1993). As countries have proceeded to 
industrialise,  technological  constraints  appear  to 
be aggravated by inadequate market integration 
and lack of participation in supply chains as well as 
limited skills and affordability (World Bank, 2008).

Research and development (R&D) is important in 
improving technological readiness. Other factors 
such  as  the  depth  of  domestic  credit  markets, 
educational  variables,  the  extent  of  protection 
offered  to  intellectual  property  rights  (IPRs),  the 
ability to mobilise government resources, and the 
quality  of  complementary  academic  institutions 
also  appear  to  be  important  in  explaining  a 
country’s technological readiness (Lederman and 
Maloney, 2003).

Chapter  6  focuses  on  green  energy  technology, 
whose  dissemination  lies  at  the  heart  of  a  move 
from  a  high-carbon  to  a  low-carbon  economy, 
making  possible  (green)  growth  by  de-coupling 
economic growth and resource use. Green growth 
cannot be achieved without radical technological 
change  for  producers  and  consumers  –  while 
the  past  30  years  have  seen  an  improvement  in 
energy  efficiency  of  around  2%  annually,  this 
needs to be tripled in order to keep temperature 
rises  to  a  maximum  of  2ºC  by  2050.  Achieving 
this  will  be  dependent  on  the  diffusion  of  green 
energy  technology.  While  Kenya  has  invested 

in  renewable  energy  (hydro,  geothermal,  wind) 
Tanzania  has  taken  longer  than  expected  to 
exploit its identified renewable energy potential, 
other than traditional hydro sources (CI, Lunogelo 
et  al.,  2015).  The  difference  in  the  use  of  green 
energy technology is responsible for the disparity 
of  the  renewable  energy  share  between  the  two 
countries.  This  Report  will  examine  in  greater 
detail how finance and policies work together to 
explain  these  differences.  The  consequences  of 
better technologies to address climate change will 
also help the poorest who are the most vulnerable 
to it (Stern Report, 2006; WGBU, 2011). 

5.2.6 

Trade

Trade constitutes the last of the enablers discussed 
in this Report. Trade helps to connect people and 
firms  across  borders.  Societies  and  economies 
that  are  not  well  connected  tend  to  stagnate, 
hence the importance of networks generally as an 
enabler of sustainable development.

(2001)  reviews  the 

literature  on  trade 
Rauch 
networks. He finds that numerous statistical and case 
studies show that transnational corporations (TNCs) 
and social networks promote international trade by 
alleviating  problems  of  contract  enforcement  and 
providing information about trading opportunities. 
Openness to trade is conducive to growth, provided 
there  are  appropriate  domestic  policies  and 
institutions (Rodrik, 1999) and ‘an export orientation 
imposes  a  discipline  and  set  of  constraints  on  all 
economic  policies  that  prevent  the  adoption  of 
very many measures severely antithetical to growth’ 
(Krueger, 1990: 110). 

A range of recent econometric studies have found 
positive links between trade and growth. 

Wacziarg  and  Welch 
(2008)  examined  141 
liberalisation  episodes,  comparing  growth  before 
and after liberalisation and found that the impact of 
trade liberalisation on growth was substantial, even 
after controlling for several other determinants of 
growth. Per capita growth of liberalising countries 

was  around  1.5  percentage  points  higher  than 
before 
liberalisation.  Brückner  and  Lederman 
(2012)  suggested  that  trade  openness  causes 
economic  growth  in  Sub  Saharan  Africa:  a  1 
percentage point increase in the ratio of trade to 
GDP is associated with an annual increase of 0.5% 
in  growth  in  the  short-run  and  an  annual  0.8% 
growth increase in the long-run. Le Goff and Singh 
(2013) use a panel of 30 African countries over the 
period  1981-2010  and  find  that  trade  openness 
tends  to  reduce  poverty  especially  in  countries 
where financial sectors are deep, education levels 
high and governance strong.

Limited  trade  openness  and 
integration  of 
domestic  productive  activities  into  regional  and 
global supply chains are important factors in low 
productivity growth. Developing countries in Asia 
have consistently benefited from market linkages 
and openness as a means to enhance productivity 
growth  as  compared  to  African  and  especially 
LAC  countries,  which  also  lag  behind  in  their 
integration into GVCs. East Asia in particular has 
been characterised by such value chains, driven by 
FDI and trade activity; these have allowed firms in 
the area to upgrade their technological base and 
to  restructure,  first  by  attracting  labour-seeking 
or  resource-based  investment  and  subsequently 
by  component-outsourcing  or  service-related 
investment in the context of regional integration. 

Insufficient market size and integration, however, 
negatively affect the net return expected on any 
productive  investment.  Fragmented  markets  are 
a powerful entry barrier for new businesses and a 
binding constraint on new investment activity and 
competition.  Thus,  weak  linkages  of  agriculture 
to  the  rest  of  the  economy,  including  lack  of 
participation  in  agricultural  value  chains,  have 
hampered agricultural transformation. 

structural  change  contributes  to  growth.  It  is  no 
coincidence that in SSA, where productivity levels 
are low, fuels comprise 40% of total merchandise 
exports and ores and metals another 26%. 

Improvements 

There is a positive correlation between productivity 
growth  and  backwards  GVC  participation  across 
countries  in  Africa  (African  Economic  Outlook; 
in  trade 
AfDB  et  al.,  2014). 
openness and supply-chain participation in Africa 
reflect  the  dominance  of  the  mineral-exporting 
sector as well as the large contribution of primary-
goods exports in much of the continent. In many 
cases,  these  result  in  limited  contributions  of 
value-added  and  employment  generation 
in 
other  sectors,  especially  compared  to  the  Asian 
countries.  Exports  of  primary  commodities  or 
mineral products may contribute to within-sector 
productivity  growth,  but  unless  they  contribute 
to  productivity  growth  in  other  sectors,  the 
resulting  growth  is  not  transformative  (African 
Economic Outlook; AfDB et al., 2014). Resource-
driven  economies  that  have  failed  to  diversify 
their productive base have remained at a distinct 
disadvantage,  as  diversification  and  structural 
change  have  been  slowed  down  and  the  export 
sectors have been unable to absorb much labour 
even when productivity was enhanced (McMillan 
et al., 2014). In addition, not all firms and workers 
benefit to the same extent from GVCs, suggesting 
that  not  all  trade  reaches  the  range  of  firms 
and  workers  in  ways  that  contribute  to  social 
development. 

Trade  also  enables  the  diffusion  of  green 
technologies  –  e.g.  for  renewable  energy  –  that 
can  render  domestic  production  cheaper  and 
more  efficient.  Linkages  to  regional  and  global 
carbon  markets  or  emissions-trading  platforms 
can facilitate the adjustment of incentives for low-
carbon investments.

Similarly, due to the absence of linkages with the 
rest  of  the  economy,  a  very  strong  and  negative 
association has been recorded between a country’s 
reliance  on  primary  products  or  raw  materials, 
even if these are exported, and the rate at which 

The importance of trade is clear from the CIs. The 
Bangladesh and Mauritius CIs show that the use of 
preferential access to markets in the EU and USA for 
garments and sugar exports helped diversification 

178 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 179

CHAPTER 5. A framework for assessing the role of finance and policies in enabling a transformative post-2015 agendaInfographic 2 | Mauritius Country Illustration

MAURITIUS COUNTRY ILLUSTRATION

CHAPTER 5. A framework for assessing the role of finance and policies in enabling 
a transformative post-2015 agenda

High quality governance enables effective state–business relations

The ICT Authority was set up in 2001. The contribution of ICT to GDP grew from 4.1% in 2000 to 6.5% in 2010 creating 8,000 new jobs.

Mauritius shows how high-quality 
institutions can drive positive change.

Effective state–business relations helped building consensus 

around the country’s economic direction and directed finance 

(public sector first, then private sector) to diversify the island’s 

economy from agriculture to garment-manufacture and tourism.

Trade is a key enabler

Since independence in 1968 Mauritius has undergone rapid economic development. New growth 

sectors: export-oriented textile and garment sector (1980–1992), tourism industry and dynamic financial 

and business services. It is a regional business and financial platform.

Agriculture (sugar) represented 90% of total exports and 25% of 

Per capita GDP (2005 prices) rose from 

GDP. Today, the economy is diversified and service-oriented with 

$200 in 1968 to over $7,700 today.

agriculture accounting for only 3.5% of GDP.

Total
Exports

GDP

GDP

90% 

25% 

3.5% 

The share of manufacturing of GDP 

doubled between 1970 and 1998.

The establishment of an Export Processing Zone (EPZ) created a 

50-fold increase in merchandise exports between 1971 and 1990.

4.1%

6.5%

Key to Mauritius’ change is its 
export-oriented industrialisation strategy.

Facilitated by

  The strategic outward-oriented vision pursued 

by its political leaders

   Inclusive institutions

  Ethnic diversity and extensive diaspora networks

  Dynamic indigenous entrepreneurs

  A well-structured private sector engaged 

in regular dialogue with the government.

2008 saw the launch of the ‘Maurice Ile Durable’ 
strategy investing in technology, including renewable 
energy. The Blue and Green growth strategy: 
a cyber island in a 2 million km2 maritime zone!

Mauritius’ policies 
mobilise trade finance

Social policies: 
Mauritius protects the vulnerable

As the economy of Mauritius 

  FDI as a proportion of GDP 

For its most vulnerable citizens Mauritius provides free access 

diversified, the sources of 

remained below 2% 

to education, health services, subsidised housing schemes and 

financing shifted from an 

over the period 1990–2005. 

subsidies on staples foods. The Education for All policy led to a 

exclusive reliance on import 

  Net FDI inflows have 

reduction in inequality overall and particularly for women.

and export duties on sugar 

(1972–1980) to domestic 

taxation and private flows.

increased by 96% to $361 

mn in 2012 compared to 

2004 levels.

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Combining finance and policies to implement a transformative post-2015 development agenda | 181

TODAYTODAY19681968X 50+ 8000 NEW JOBSPER CAPITA GDP$200$7,70019901971AGRICULTUREmanufacturingExport procEssing ZonE ICT AuThorITy1968X 21998197020102000Evidence at the country level further suggests that 
trade can be helpful for green energy technology 
and  social  development.  China  has  used  market 
access  to  become  the  world’s  leading  solar-panel 
producer  and  exporter.  Bangladesh  promoted 
women’s  employment  by  gaining  preferential 
access in the ready-made garments (RMG) sector 
by  adopting  the  EU’s  Generalised  System  of 
Preferences  (GSP)  and  the  Everything  But  Arms 
(EBA)  initiative.  Ecuador’s  links  with  the  global 
oil  market  allowed  it  to  gain  oil  revenues  that 
underpinned its Buen Vivir strategy and to sustain 
social development (CI, Borja and Ordóñez, 2015). 
Without such trade these countries would not have 
been able to engage in transformative changes.

To  summarise,  Table  5.1  provides  illustrative 
examples behind the importance of enablers for 
the three dimensions of sustainable development.

both  directly  and  indirectly  (see  Chapter  6;  CIs: 
Khatun,  2015;  Treebhoohun  and  Jutliah,  2015). 
Although  a  Least  Developed  Country  (LDC), 
Bangladesh is now the second-largest exporter of 
garments after China (CI, Khatun, 2015). Mauritius 
provided powerful incentives to its private sector, 
e.g.  tax  and  financial  incentives,  creation  of  an 
Export  Processing  Zone,  to  continue  diversifying 
the  productive  base  towards  services,  including 
tourism,  financial  services  and  ICT  and  more 
recently to promote green and blue growth (see 
Chapter  6;  CI,  Treebhoohun  and  Jutliah,  2015). 
Regional  trade  and  participation  in  regional 
and  global  value  chains  are  also  important  as 
countries increasingly opt to be part of organised 
geographical  or  market  networks  as  a  major 
strategy for private-sector development.

the 

As  the  experience  of  Bangladesh  and  Moldova 
demonstrates, 
creation  of  domestic 
productive clusters across SMEs, most notably in 
the agri-food, textile and clothing sectors, and the 
integration  of  such  clusters  in  regional  or  global 
value  chains,  can  spur  transformative  changes 
and provide incentives for supply-chain financing 
especially by the development finance institutions 
(DFIs) and multilateral development banks (MDBs) 
(CIs:  Khatun,  2015;  Ghedrovici,  2015).  The 
integration of national extractive industries, e.g. in 
the petrochemical sector, is an important but not a 
sufficient condition for sustainable development. 

CHAPTER 5. A framework for assessing the role of finance and policies in enabling 
a transformative post-2015 agenda

Table 5.1 | Enablers for sustainable development: some illustrative examples

ENABLERS (CATEGORIES)

ECONOMIC DIMENSION 
OF SUSTAINABLE 
DEvELOPMENT

ENvIRONMENTAL 
DIMENSION 
OF SUSTAINABLE 
DEvELOPMENT

SOCIAL DIMENSION 
OF SUSTAINABLE 
DEvELOPMENT

Local governance

Infrastructure

Human capital

Biodiversity

Transformative vision, good 
governance, transparency and 
accountability key to investment 
promotion and productivity-led 
growth; Effective state–business 
relations create consensus 
around which strategic actors 
can mobilise

Appropriate infrastructure 
helps all firms to buy and sell 
goods and services and raise 
productivity

High-quality and inclusive 
institutions can lead to green 
approaches (e.g. national 
consensus on need to preserve 
environment) and create 
conditions for cross-sectoral 
policy coherence as well as 
space for change agents to 
promote behavioural and 
institutional change

Renewable energy plants are 
key for level of CO2 emissions

Education, health and skills 
are important for labour 
productivity

Skills important for green jobs

Land and natural resources are 
important for agriculture and 
resource-intensive activities

Preserving natural capital (land, 
biodiversity)

Green Energy Technology 

Technology drives total factor 
productivity

Development of green energy 
technology and complementary 
infrastructure to make them 
cost-competitive and widely 
available

Trade

Linkages across firms and 
participation in value chains 
expand effective market size 
and depth and increase demand

Market size for environmental 
goods and services (e.g. ability 
to access new markets for solar 
panels)

High-quality and inclusive 
institutions are essential to 
provide health, education 
and social protection services 
to tackle poverty and reduce 
inequality. The way they are run 
can be more or less inclusive 
(e.g. national consensus on 
redistributive policies)

Infrastructure needs to be 
accessible (location and price) 
to the poorest. Water, roads 
and energy are all essential 
for production purposes, 
to reach markets or jobs, 
for SME development, 
household activities)

Skills and good health are 
important for obtaining and 
retaining employment, they 
drive SME development, and 
farm and non-farm activities

Possession of and/or access 
to land good quality water and 
biodiversity are important assets 
for the poorest who are often 
first and most affected 
by environmental degradation

Mobile phone technology helps 
poor farmers to market their 
produce. Low cost innovation 
can also make informal 
production and enterprise 
more efficient.

Networks foster labour 
migration; enable poorest 
to move to more productive 
employment. Linkages 
between informal rural activities 
and urban markets expand 
opportunities and can alleviate 
poverty; Knowledge-sharing 
affects social standards

182 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 183

  5.3  Conclusions

a 

Focusing 

This  Chapter  has  presented  a  framework  which 
considers the joint role of finance and policies in 
enabling a transformative post-2015 development 
transformative 
on 
agenda. 
development  agenda 
to 
developing  critical  enablers  without  which  any 
type  of  transformation  is  hard  to  achieve.  We 
discussed the importance of six selected enablers 
to  promote  sustainable  development  (including 
local  governance,  infrastructure,  human  capital, 
biodiversity, green energy technology and trade). 

requires  attention 

Crucially,  finance  does  not  operate  in  a  vacuum 
but  it  is  the  combination  of  finance  and  policies 
that is important for the development of enablers. 
The integrated conceptual framework for finance 
and  policies  in  enabling  a  transformative  post-
2015  development  agenda  presented  in  section 
5.1 allows us to consider the effects of policies on 
the mobilisation and effective use of finance. The 
next  Chapter  will  examine  how  this  framework 
works in practice for the selected enablers.

5.3

184 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 185

CHAPTER 5. A framework for assessing the role of finance and policies in enabling a transformative post-2015 agendaCHAPTER 6.

The link between finance 
and policies for selected enablers

Main messages 

6.1 

 The role of finance and policies 
for local governance 

6.2 

 The role of finance and policies 
in infrastructure development 

6.3 

 The role of finance and policies 
in the development of human capital 

6.4 

 The role of finance and policies 
for biodiversity conservation 

6.5 

 The role of finance and policies 
in the diffusion of green energy technology

187

188 

201 

221 

242 

259 

6.6  The role of finance and policies for trade 

277

6.

Main Messages

This chapter offers concrete examples of how finance 

and policies can be combined to enable sustainable 

transformations,  based  on  existing  evidence  and 

specific country experiences. The main messages are:

  The  composition  of  finance  differs  markedly  by 

enabler.  Finance  for  institutions  and  governance 

seems  to  be  largely  public.  Patterns  of  finance  for 

human  capital  vary  across  education,  health  and 

social  protection,  although  all  depend  heavily  on 

domestic public finance. A broad range of financial 

instruments is used to finance biodiversity and the 

appropriate  mix  is  highly  situation-specific.  Finance 

for  infrastructure  and  green  technology  tends  to 

come from a mixture of public and private sources, 

although  national  government  expenditure  is  the 

principal  source  for  infrastructure.  Trade  finance 

is  largely  provided  by  private  banks  through  the 

extension of Commercial Letters of Credit, although 

this  is  changing  rapidly  in  the  wake  of  the  global 

financial crisis. 

 Changes  to  domestic  and  international  policies 
and  systems  work  together  by  mobilising  and 
using tax revenues more effectively, or by creating 

financial  rules  that  reduce  the  volatility  in  capital 

flows.

  DFIs  are  playing  an  increasing  role  in  leading 

transformations  in  key  areas  such  as  infrastructure, 

green energy and trade, by leveraging private finance, 

supporting the selection of appropriate projects and 

policies,  and  providing  technical  assistance,  credit 

and risk-mitigation instruments and blended finance.

Combining finance and policies to implement a transformative post-2015 development agenda | 187

 
 
 
 
T his  chapter  examines  the  links  between 

finance and policies for six selected enablers: 
Local  Governance  (Section  6.1),  Infrastructure 
(Section  6.2),  Human  Capital 
(Section  6.3), 
(Section  6.4),  Green  Energy 
Biodiversity 
Technology (Section 6.5) and Trade (Section 6.6). 
Each  of  the  sections  contains  an  introduction, 
describes the financial flows for the enablers and 
then  focuses  on  how  policies  can  mobilise  and 
make finance more effective for the development 
of that enabler before drawing conclusions.

The  chapter  examines  selected  policies  for  the 
effective  mobilisation  and  use  of  finance.  It 
focuses on: 

  building capacity and developing strategies 

  implementing standards 
and promoting transparency 

  establishing regulatory frameworks 
and reforming incentives 

  developing financial-sector instruments 

  promoting DFIs and specialised 
funds relating to enablers 

  supporting global rules on trade, 
tax, climate and finance 

investment  in  green  energy  technology.  At  the 
international  level  they  include  using  standards 
to  upgrade  GVCs,  and  using  special  funds  for 
social  protection,  infrastructure  or  biodiversity. 

  6.1 

 The role of finance and policies 
for local governance

the 

level  of 

focuses  on  governance  and 
This  section 
institutional  enablers  at 
local 
government. Most countries are involved in some 
form  of  decentralisation,  albeit  with  different 
degrees  of  success  (Europe  Aid,  2007).  Basic 
social  services,  such  as  health,  education,  and 
water and sanitation, are provided either by local 
governments  or  by  a  ‘deconcentrated’  central 
government  unit  and/or  para-statal  bodies.  This 
means that most public policies with strong impact 
on  poverty  reduction  and  redistribution  depend 
on local dynamics. The impact of decentralisation 
on  poverty  is  not  straightforward,  however,  and 
depends  on  the  national  government’s  capacity 
to  fulfil  its  basic  functions  and  its  commitment 
to  devolving  power  to  local  tiers  (Jütting  et  al., 
2004).  Similar  issues  arise  at  the  national  and 
local levels but there are also differences between 
them.  Local  institutions  are  often  weaker,  their 
capacities more limited and their financing more 
precarious,  in  addition  to  having  less  access  to 
external funding. 

These  policies  are  selected  on  the  basis  of 
where  the  empirical  evidence,  CIs  or  other 
commissioned  background  papers  suggest  they 
are  crucial.  The  policies  for  the  mobilisation 
and  effective  use  of  finance  discussed  in  this 
chapter  are  chosen  to 
illustrate  the  above 
categories, e.g. national policies such as building 
capacities  to  undertake  infrastructure  projects, 
or  developing  strategies  for  AfT  or  universal 
health  coverage  (UHC),  the  development  of 
micro-insurance or financial instruments for PPPs, 
the  reform  of  fossil-fuel  subsidies  and  other 
regulatory  issues  for  green  energy  technology, 
or  the  use  of  DFIs  for  mitigating  the  risk  of 

local  governments  have 
At  the  same  time 
comparative  advantages 
(Brugmann,  1994), 
such  as  the  use  of  participatory  planning  or  the 
potential  to  leverage  additional  resources  for 
local development (Romeo, 2012). Local taxation 
arrangements can also be an asset (commissioned 
background paper, Brun and Chambas, 2015). Over 
half of the global population lives in urban areas 
and this proportion is rising, while at the same time 
poverty  is  increasingly  an  urban  phenomenon. 
As  rural–urban  migration  trends  continue  and 
perhaps even accelerate local authorities in large 
towns and cities will bear the brunt of managing 

6.1

Figure 6.1 | The role of policy for mobilisation and effective use of finance for local institutions

Policies for effective use
NATIONAL
Clear mandates from central government
Capacity building programmes
Programme budgeting
Regulatory framework from
local government finance
Effective political settlement

INTERNATIONAL
Transparency initiatives
Support for fiscal and debt management
Support for legal system
and governance reforms
and capacity development

Financial flows

Public and Private
Domestic and International

Local institutions
for sustainable
development

Policies to mobilise finance
NATIONAL
Tax revenue capacity
Regulatory and judicial system reforms
Supportive national policy
 on role of local government
Well functioning accountability system
Durable political settlements

INTERNATIONAL
ODA for capacity building
and improving coordination
and administrative capacity

the  resulting  challenges, 
including  providing 
social services and infrastructure. Financing local 
government  for  social  development  is  therefore 
an issue of growing international importance. 

This  section  discusses  the  sources  of  finance  for 
local  governance;  the  link  between  finance  and 
policies for effective local governance and future 
implications.  Figure  6.1  summarises  the  main 
policy issues addressed in this section. 

6.1.1 

 Local financial resources: municipal finance 
for infrastructure and services

According to United Cities and Local Government 
(2010),  ‘local  government  finance  is  prospering 

in  much  of  Europe,  North  America,  and  parts  of 
East  Asia  and  the  Pacific  […].  It  remains  at  an 
early  stage  in  some  regions,  such  as  the  Middle 
East  and  Western  Asia,  where  most 
[local] 
governments  are  deconcentrated  units  of  the 
central  government  with  limited  autonomy  […] 
In  Latin  America  and  Eurasia,  local  finances  are 
generally  improving,  but  still  face  challenges 
associated  with  past  centralised 
traditions 
[…]  African  local  governments  are  rarely  well 
empowered,  but  there  are  hopeful  advances, 
especially 
in  some  Anglophone  countries’. 
According to Alm (2010), however, ‘it seems very 
unlikely  that  municipal  governments,  especially 
in  the  poorer  countries,  will  be  able  soon  to 
generate the funds needed to build facilities: they 

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Combining finance and policies to implement a transformative post-2015 development agenda | 189

CHAPTER 6. The link between finance and policies for selected enablers 
 
 
 
 
 
 
 
 
 
do  not  have  access  to  capital  markets,  and  they 
seldom  generate  significant  revenues  on  their 
own  (e.g.  the  property  tax  is  unproductive,  cost 
recovery  is  poor,  access  to  productive  revenue 
sources is limited)’. This suggests that progress in 
local government finance is slow and patchy, with 
wealthier countries understandably doing better. 

On  the  revenue  side  of  fiscal  decentralisation, 
there  are  three  main  means  of  financing  local 
government: (a) intergovernmental fiscal transfers 
(IGFTs);  (b)  local  revenues,  including  taxes  (e.g. 
property  tax),  fees  (e.g.  for  licenses  and  fees) 

and  user  fees  (e.g.  market  fees);  and  (c)  local 
government  borrowing  and  access  to  financial 
markets.  Some  of  these  are  better  suited  to  the 
initial financing of new infrastructure and others to 
the operation and maintenance (O&M) of existing 
infrastructure (Alm, 2010) and services (see Table 
6.1). The analysis of municipal finance is hampered 
by  important  data  gaps  on  municipal  borrowing 
for and spending on infrastructure. It is therefore 
important to redouble efforts to develop reliable 
data  on  the  various  dimensions  of  infrastructure 
finance and the administrative capacities of local 
governments (Alm, 2010). 30 

Table 6.1 | Suitability of different municipal funding sources

IGFT

Capital grants are well suited to finance lumpy capital investments, offset different infrastructure 
endowments, address externalities across sub-national governments and pursue national sectoral 
objectives.

IGFT should be used to finance services that generate spillovers to nearby jurisdictions, 
since strictly local finance will lead to inefficient provision. 

Local revenues

User fees are the ideal source for O&M expenses, particularly to finance goods that provide 
measurable benefits to identifiable individuals within a single jurisdiction.

Municipal tax revenues should be used to finance local services for which it is difficult to identify 
individual beneficiaries and to measure individual costs and benefits.

Particularly suited to finance long-term capital investments in infrastructure; allows local governments 
to shift some of the burden of finance to future generations that will benefit from durable and long-
lived projects.

Local government borrowing

Source: Alm (2010)

transfers 

Intergovernmental  fiscal 
(IGFTs) 
constitute on average more than 60% of all local 
government  revenues  in  developing  countries, 
in  countries  such  as  Cambodia, 
although 
Indonesia,  Nepal, 
the  Philippines,  Tanzania 
and  Uganda,  and  many  others,  such  transfers 
constitute  more  than  80%  of  the  total  income 
of  local  governments  (Steffensen,  2010).  This 
is  because  the  ‘expenditure  tasks  devolved  to 
subnational  governments  substantially  exceed 
their  capacity  to  raise  revenues  from  sources 
under their own control’ (Steffensen, 2010). 

In most countries, local revenue collection is not a 
significant source of income for local governments, 
accounting for less than 4% in developing countries 
as  a  whole  and  less  than  15%  in  Bangladesh, 
Bhutan, Cambodia, Nepal, Tanzania and Uganda. 
These are important elements in the overall funding 
arrangements,  and  they  can  promote  downwards 
accountability  (Steffensen,  2010).  Other  sources 
of  subnational  revenue,  such  as  royalties  from 
the  extraction  of  non-renewable  resources  or 
access  to  financial  markets,  are  significant  in  only 
a small number of developing countries (Faust and 
Haldenwang, 2010).

30 For a comprehensive analysis of municipal finances, including different instruments and experiences, see Farvacque-Vikovic and Kopanyi (2014). 

6.1.2 

 The role of policies and finance 
for local governance

Policies to mobilise finance for local governance

Improve the regulation and management 
of intergovernmental transfers

There  are  no  ideal  systems  for  financing  local 
government  and  local  infrastructure,  but  it  is 
crucial  to  consider  the  political  economy  and 
context.  Typically,  a  fiscal  imbalance  will  result 
when transfers lag behind the decentralisation of 
expenditure  to  local  government.  Usually  there 
is  some  combination  of  local  revenue-raising 
and IGFTs to resolve this. The Tanzania CI shows, 
however,  that  when  local  governments  have 
limited  sources  of  local  revenue  they  depend 
largely  on  transfers  from  central  government 
in  six  areas  (education,  health,  local  roads, 
agriculture,  water  and  administration)  (Lunogelo 
et  al.,  2015).  Where  there  are  significant  inter-
regional  disparities,  there  is  a  greater  need  for 
IGFTs  to  offset  the  horizontal  fiscal  unevenness 
that would otherwise occur. The existence of such 
imbalances means that it is impossible to design 
an  appropriate  system  of  sub-national  taxation 
without simultaneously designing an appropriate 
system of intergovernmental transfers (Bird, 2011), 
as discussed below. 

High  levels  of  transfers  as  a  proportion  of  local 
government revenue can undermine their autonomy, 
especially when these are conditional, although Bird 
(2011)  argues  that  IGFTs  are  not  inherently  good 
or  bad,  ‘what  matters  are  their  effects  on  policy 
outcomes such as allocative efficiency, distributional 
equity, and macro-economic stability’.

Improve local autonomy through 
local revenue mobilisation

‘Fiscal  decentralisation  lies  at  the  heart  of  any 
local  government  system  as  its  rules  define  the 
generation  and  distribution  of  resources  (both 
between and within different government levels) 

that are utilised to fulfil citizen’s demands’ (Yilmaz, 
2010).  At  the  macro  level,  well-designed  fiscal 
decentralisation  can  encourage  growth,  revenue 
generation  and  fiscally  responsible  behaviour, 
which  are  key  elements  in  reducing  poverty. 
Conversely,  poorly  designed  frameworks  can 
have  wider  negative  impacts.  They  can,  for 
instance,  fail  to  create  additional  value,  boost 
economic  performance  or  generate  revenue. 
In  the  worst  case,  irresponsible  fiscal  practices 
and  negative  incentives  at  various  levels  can 
jeopardise  macroeconomic  stability.  Yet  fiscal 
decentralisation  is  also  vital  in  order  to  ensure 
‘funded  mandates’  for  the  provision  of  services 
and, therefore, local government financing.

Local  governments  are  thought  to  be  more 
accountable  to  citizens  when  they  rely  on  their 
own tax bases (Steiner, 2005), but they can raise 
tax  revenues  only  when  the  central  government 
allows  a  sufficient  level  of  fiscal  decentralisation 
and there are significant challenges to overcome. 
Equally,  subnational  taxation  works  only  if  IGFTs 
provide the right incentives to local governments 
to raise their own taxes (Yilmaz et al., 2008). 

Low  collection  of  local  revenue  is  explained  by 
several  factors,  including  the  small  tax  base  in 
poor districts; a critical lack of tax administration 
capacity  at  local  and  intermediate  levels;  and 
limited  fiscal  competences  owing 
to  high 
degrees of centralisation and economies of scale 
achieved by more centralised tax collection (Faust 
and  von  Haldenwang,  2010).  The  relationship 
between  government  and  citizens  is  not  driven 
by  improvements  in  (local)  public  services.  Since 
paying  local  taxes  is  not  always  rewarded  by 
better  local  services,  people  may  tend  to  avoid 
payment, especially if they already pay para-fiscal 
contributions (Diawara, 2006). Local taxation can 
thus  be  undermined  by  para-fiscal  contributions 
requested  by  local  administrations  in  order  to 
provide a service or by voluntary contributions to 
supplement inadequate local budgets (for a local 
event, for example). Furthermore, formal taxation 
is often regressive (Alm, 2010).

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Combining finance and policies to implement a transformative post-2015 development agenda | 191

CHAPTER 6. The link between finance and policies for selected enablersthat 

fact,  many  central  governments 

impose 
In 
restrictions  on 
(or  even  prohibit)  borrowing 
by  local  authorities  to  prevent  ‘moral  hazard’ 
problems,  such  as  local  governments  borrowing 
more  than  is  economically  justified  or  lenders 
making  excessive  loans  to  local  governments, 
assuming 
the  central  government  will 
assume responsibility for any unpaid debts (Alm, 
2010).  These  restrictions  limit  local  discretion  in 
addressing investment needs (Yilmaz et al., 2008), 
although 
local  government  borrowing  could 
usefully be developed further in many contexts as 
long  as  appropriate  restrictions  and  safeguards, 
as  well  as  good  accountability  systems,  are  in 
place (Yilmaz, 2010). 

infrastructure 

Subnational  borrowing  can  be  used  mainly 
to  attract  external  funds  to  finance  or  part-
finance  high  initial  costs,  reducing  finance  gaps 
for 
investment,  and  to  spread 
investment  costs over  periods of time  that more 
or  less  match  the  lifespan  of  the  infrastructure 
being financed. Long-term debt repayments can 
then be serviced from continuing streams of local 
income,  ensuring  inter-generational  equity.  Such 
lending is not without risk: excessive debt burdens 
can  endanger  macroeconomic  stability,  limit  the 
scope of political action, threaten the solvency of 

local governments and produce inter-generational 
inequities. GIZ has made an extensive analysis of 
the  prerequisites  for  sub-sovereign  lending  and 
the  main  factors  that  tend  to  limit  or  preclude 
access  to  local  financial  markets,  which  include 
inadequate  legal  and  institutional  frameworks, 
a  gap  between  local  governments’  financial 
resources  and  fiscal  competencies  and  assigned 
responsibilities,  the  lack  of  capacity  to  use 
resources,  and  the  lack  of  effective  internal  and 
external controls and oversight. This points to the 
need  to  develop  capacity  on  both  the  demand 
and the supply sides (GIZ, 2012).

There are two main sources for local government 
borrowing:  private  capital  markets  via  bond 
issuances  and  specialised  financial  institutions/
intermediaries (including municipal development 
funds,  social  investment  funds  and  community-
driven development programmes). In developing 
countries, the absence of capital markets to which 
local  governments  can  have  meaningful  access 
limits  the  option  of  bond  issuances.  The  use  of 
financial intermediaries can enhance the capacity 
of  local  governments  to  obtain  access  to  debt 
markets. 31 

In  addition  to  transfers  of  revenue  from  central 
government, 
local  authorities  have  recourse 
to  three  sources  from  which  they  can  generate 
their ‘own’ revenue – taxes, non-tax revenue and 
royalties.  Local  revenues  are  the  most  effective 
way  to  secure  local  discretion  in  how  they  are 
used, but there is no universal definition of what 
constitutes a ‘good’ local tax. Local taxation does 
not happen in a vacuum but in the context of the 
IGFT. There are some broad theoretical principles 
that link the distribution of taxes to stabilisation, 
redistribution  and  allocation  functions,  but  tax 
revenue  is  context-specific  and  always  entails 
trade-offs  between  efficiency  and  equity  and 
between  political  and  economic  criteria.  Local 
taxation  policies  may  also  benefit  from  local 
government’s  proximity  to  the  local  population 
and  the  greater  accountability  this  may  permit 
(commissioned  background  paper,  Brun  and 
Chambas,  2015).  Thus  while  ‘local  governments 
should  have  the  discretion  to  raise  their  own 
revenue’ (Yilmaz, 2010) there is no ‘one right way’ 
to do so. 

According  to  Alm  (2010),  ‘a  “good”  municipal 
tax  system  should  not  unduly  distort  individual 
and  firm  decisions,  should  generate  sufficient 
revenues  to  allow  the  government  to  finance  at 
the margin their expenditure and should burden 
only  local  residents’.  In  his  analysis  of  municipal 
finance  for  urban  infrastructure,  Alm  warns  local 
governments against mobile tax bases, especially 
capital, and on imposing progressive income tax, 
as  they  ‘will  lead  to  the  out-migration  of  more 
mobile, higher income individuals, thereby leaving 
more immobile, lower income individuals to bear 
the  burden  of  the  taxes  […]  by  the  same  token, 
attempts to induce in-migration of mobile factors 
can  lead  to  […]  local  governments  compete  […] 
to  attract  and  hold  and  hold  those  factors  by 
extending  tax  breaks  and  other  fiscal  incentives’ 
(Alm, 2010). 

Local  taxation  systems  can  be  regressive  and 
impoverishing,  as  they  were  in  Uganda  in  the 
early 2000s, stifling local business and agricultural 
production  without  providing  a  strong  financial 

from 

base  for  local  governments  (Bahiigwa,  2004). 
There  can  be  perverse  results  when 
local 
governments are required by law to raise revenue, 
but  are  not  required  to  stimulate  economic 
growth  or  reduce  poverty:  if  they  were,  at  least 
start-up  businesses  and  very  small  businesses 
might  be  exempted 
tax.  Generally, 
subnational  taxation  is  likely  to  work  better  in  a 
more  equal  setting  since  in  countries  with  high 
levels  of  inequality  local  governments  are  likely 
to  have  very  unequal  tax  bases.  Some  of  these 
inequalities  can  be  offset  by  carefully  designing 
financial transfers, as has been the case in Brazil, 
Colombia and Peru (Litschig and Morrison, 2013; 
Canavire-Bacarreza et al., 2012). Property tax can 
play a critical role in financing local governments, 
especially  when  the  latter  are  supposed  to  take 
increasing  responsibility 
for  providing  major 
public  goods  and  services  linked  to  health  and 
education.  Property  provides  a  tax  base  that  is 
both  locally  specific  as  well  as  relatively  slow  to 
change,  and  properties  cannot  be  moved  in 
response  to  tax  rates.  Even  a  well-administered 
local property tax is not, however, likely to provide 
sufficient  revenue  to  finance  major  social  and 
infrastructure  expenditure  (Bird,  2011),  so  it  can 
be only one component in the mix used to fund 
local expenditure. Moreover, given that it is local 
elites  who  own  most  property,  it  can  be  difficult 
to convince them to pay tax and update property 
values;  on  the  other  hand,  property  is  visible 
wealth that can be justifiably taxed if the political 
leadership is minded to do so (Bird et al., 2010).

Local government borrowing 
and access to financial markets 

In most countries, municipal governments cannot 
finance  initial  capital  investments  from  current 
savings  (Alm,  2010)  and  borrowing  is  therefore 
an important means by which ‘to reduce shortfalls 
in the financing of local infrastructure and a vital 
tool  with  which  to  meet  rising  investment  needs 
by  attracting  external  finance’  (DeLoG,  2013). 
However, according to UCLG (2010), borrowing is 
‘the  most  neglected  aspect  of  local  government 
finance in many regions of the world’.

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31  For a comprehensive discussion on the advantages and disadvantages of borrowing from commercial banks, bond banks, development banks, financial 

institution, and municipal development funds, see Farvacque-Vitkovic and Kopanyi, 2014. 

CHAPTER 6. The link between finance and policies for selected enablersBox 6.1 | Municipal Development Funds: a mixed experience

Municipal Development Funds (MDFs) are used to build domestic municipal credit markets, strengthen local governments’ technical 
capacity (e.g. project design, appraisal, and execution of investment programmes, financial management) and to channel external 
finance to subnational entities. In many countries, central governments have established MDFs to provide municipalities with longer-
term credit at lower interest rates than those available in the domestic market. MDFs are pooled financial arrangements that combine 
resources from private lenders, central governments and donor agencies; they provide local governments with finance for investment 
purposes. Local governments can obtain funds on the basis of their capacity to repay the loans. One advantage of MDFs is that they 
reduce the cost of borrowing for smaller local governments by spreading the risks across many countries. 

More than 60 countries have established MDFs, with support from international donors, particularly the World Bank and the Inter-
American Development Bank (IADB). The results are mixed. MDFs have been relatively successful in helping municipalities to gain 
experience in debt financing and the design and implementation of large projects, but they have been less successful in helping 
municipalities  to  gain  access  to  local  financial  and  capital  markets.  Some  reasons  for  the  limited  success  of  MDFs  include  over-
estimating municipal revenues and underestimating the difficulties of local authorities to repay the loans; withdrawal of commercial 
banks because the risks are too high for them; and political biases, abuses and corruption. 

Four examples of successful MDFs are: 

•		The	 Bangladesh	 Municipal	 Development	 Fund	 -	 local	 governments	 have	 improved	 their	 asset-management	 systems	 and	

accounting procedures, and have experienced a general increase in own-source revenues. 

•		The	Parana	State	Urban	Development	Fund	in	Brazil	-	contributed	to	educating	Brazilian	municipalities	to	enter	the	credit	market	

and improve project selection and supervision. 

•		The	Tamil	Nadu	Urban	Development	Fund	in	India	-	facilitated	the	access	of	creditworthy	municipalities	to	the	private	capital	

market. 

•		Senegal’s	Fund	of	Local	Communities	-	a	key	piece	in	consolidating	the	decentralisation	process	and	played	a	major	role	in	
strengthening the capacity of local authorities to manage investment resources, raise revenues, observe borrowing constraints 
and prioritise expenditures.

Source: Alm (2010); Farvacque-Vitkovic and Kopanyi (2014)

The role of international aid agencies

ODA can play a significant role in providing direct 
support  for  local  authorities,  especially  in  poorer 
regions with weaker capacities, in the form of financial 
and technical co-operation. To be effective, external 
support  for  local  governance  and  decentralisation 
must respect the legal, institutional, regulatory and 
statutory  framework,  recognise  local  authorities’ 
discretionary  powers  and  autonomy,  and  allow 
financial modalities that support local governments’ 
budgets  directly 32  (ECDPM,  unpublished).  The 
Tanzania CI reports that local authorities have access 
to Local Government Capital Development Grants 

(LGCDG), which are part-funded by ODA, and are 
held  accountable  for  the  quality  and  transparency 
of  development  plans,  financial  management 
and  procurement  (see  Box  6.2).  Although  donors 
increasingly rely on programme-based approaches 
to  support  decentralisation  and  local  governance 
(DeLoG,  2011),  the  project  approach  remains 
dominant (DeLoG, 2006; 2011). In particular, donors 
should  seek  to  use  and  support  existing  transfer 
mechanisms  to  channel  ODA  directly  to  local 
governments  or  use  ad  hoc  performance-based 
grants  when  transfer  mechanisms  are  very  weak. 
They  should  also  seek  to  support  local  revenue-
generation capacities.

32  This work was commissioned by DG DEVCO as part of its PPCM Methodological Support and Training for Project and Programme Management to feed 

into the drafting of a guidance document on ‘Support to decentralisation processes using the project approach’.

to 

donor 

agencies, 

improve  their 

recipient 
International 
governments  and  implementing  partners  are 
paying  growing  attention 
results-based 
management systems and the use of Performance 
Based Grant Systems (PBGS). These are intended 
to  be  integrated  into  national  IGFT  systems  and 
to provide local governments with real incentives 
to 
institutional,  organisational 
and  functional  performance,  thereby  reducing 
the  risks  associated  with  IGFTs  and  making 
decentralisation  more  effective,  efficient  and 
responsive  as  a  strategy  for  providing  public 
goods  and  services.  Based  on  evidence  from  15 
countries,  the  PBGS  approach  has  been  found 
to  lead  to  better  local  government  performance 
in 
functioning, 
local  resource 
public  financial  management, 
mobilisation,  transparency  and  accountability, 
cross-cutting 
inclusion, 
poverty targeting and the environment), capacity-
building, coordination with development partners, 
infrastructure and service delivery (UNCDF, 2011). 

the  areas  of  administrative 

(gender,  social 

issues 

Finally,  international  donors  need  to  be  alert 
to  and  help  to  address  any  service-provision 
bottlenecks  caused  by  fiscal  decentralisation  by 
entering into policy dialogue and multi-actor and 
multi-level  dialogue  (e.g.  involving  associations 
of  local  authorities).  This  can  also  lead  into 
supporting  the  capacity  of  local  authorities  to 
formulate local policies, engage in dialogue at the 
national level, take on core functional areas (PFM, 
revenue mobilisation etc.), and provide services.

Policies for effective use of finance 
for local governance

infrastructure 

Local  governments  are  seen  by  many  central 
governments  as  key  partners 
in  providing 
more  efficient  and  equitable  social  services, 
and 
supports  economic 
that 
development  and  enhances  the  quality  of  life 
(UCLG,  2010).  However,  their  performance  and 
capacity to carry out both their specific mandate 
in implementation and their general mandate as 
policy-makers  are  closely  dependent  on  fiscal 

decentralisation. Ideally, the capacity to generate 
revenue  should  match  spending  responsibilities, 
but  in  practice  decentralisation  seldom  achieves 
such  perfect  equilibrium.  Fiscal  imbalances  and 
unfunded mandates are frequent and undermine 
local  government  autonomy  and  capacity.  The 
reason  is  that  most  national  governments  have 
moved faster in decentralising expenditures than 
revenues.  ‘If  local  governments  are  denied  the 
fiscal  instruments  and  funding  to  make  real  use 
of  their  political  autonomy,  decentralisation  is 
doomed’ (Yilmaz et al., 2008). 

Intergovernmental (central–local) transfers enhance 
intergovernmental  coordination  and  ensure  a 
consistent  framework  of  fiscal  decentralisation. 
They are intended to achieve numerous objectives, 
including to: (a) reduce horizontal fiscal imbalances 
by ensuring  that  local governments with different 
fiscal  capacities  are  equally  equipped  to  provide 
public  services  at  some  desired  level;  (b)  achieve 
(i.e.  reduce 
individual/household  redistribution 
income 
regional 
inequality);  and 
disparities  in  average  income  level  and  other 
indicators,  and  promote  regional  development. 
While the first is a legitimate objective that can be 
achieved  to  some  degree,  IGFTs  are  inadequate 
instruments for achieving the other two (Bird, 2011, 
2012; Alm, 2010). 

reduce 

(c) 

Financing arrangements make a major difference 
to outcomes. For example, the failure to provide 
for  O&M  in  poorer  communities  may  result  in 
wasted  capital  expenditure  (Mansuri  and  Rao, 
2013). It is also important to establish mechanisms 
of  good  governance  for  transfers  in  order  to 
promote  the  transparency,  predictability  and 
stability  of  local  revenues  that  will  enable  local 
planning and service delivery.

the 

(2010) 

to  Alm 

According 
impact  and 
effectiveness of different types of IGFTs is poorly 
understood,  particularly  in  developing  countries, 
given  the  lack  of  reliable  data,  although  the 
Indonesia  CI  shows  how  both  general  and 
earmarked allocation grants are used successfully. 

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CHAPTER 6. The link between finance and policies for selected enablers	
	
	
	
Table  6.2  summarises  the  main  advantages  and  disadvantages  of  conditional  grants  (for  specific 
purposes) versus unconditional grants (for general purposes).

Table 6.2 | Conditional grants versus unconditional grants

TYPE OF 
GRANT

Unconditional 

ADvANTAGES

DISADvANTAGES

Support local autonomy and efficiency, 
local planning and budgeting

May lead to inefficient spending without local capacity 
to plan and prioritise

Easy to administer, reduce transaction costs

May lead to crowding-out of local services

Strengthen downward accountability

Useful for devolved services

Conditional

Support national minimum service standards 

Stimulate services in core areas

Useful for agency functions and functions 
with externalities

Source: Steffensen (2010)

May lead to too much control and lack of clear 
accountability

Hard to measure and control - many transaction costs

May distort local priorities

May reduce overall efficiency in allocating resources 
according to local needs and priorities

2011).  At 

Fiscal  decentralisation  has  a  significant  effect  in 
determining  income  inequalities,  but  whether 
the  effect  is  positive  or  negative  depends  on 
the  overall  size  of  the  government  sector  in  the 
economy.  Where  this  is  relatively  low  (around 
20%  of  GDP  or  lower),  greater  decentralisation 
might  result  in  a  diversion  of  scarce  funds  from 
redistributive  central  government  programmes, 
and  thus  lead  to  greater  inequality  (Sepúlveda 
and  Martinez-Vazquez, 
higher 
government  share  levels,  fiscal  decentralisation 
works  to  decrease  income  inequality,  perhaps 
due to the type of expenditure that can be made 
at  the  subnational  level,  in  combination  with 
the  fact  that  central  government  budgets  are 
large enough to implement sizable redistributive 
programmes  (Sepúlveda  and  Martinez-Vazquez, 
2011).  A  useful  comparative  study  of  centralised 
Mexico  and  decentralised  China  found  both 
systems to be reaching their limits (Ahmad, 2009), 
suggesting  that  both  approaches  may  be  valid 
and that there is no ideal solution. Another study 

(Sepúlveda  and  Martinez  Vazquez,  2011)  using 
a  panel  of  56  countries  at  different  stages  of 
development in the 1971–2000 period, found that 
fiscal decentralisation at lower levels, as measured 
by the share of subnational expenditures in total 
public expenditure, reduces poverty, but at higher 
levels of decentralisation it can increase poverty. 
The  optimal  point  was  found  at  subnational 
expenditure  representing  around  30%  of  total 
government expenditure. 

Even  when  equalising  transfers  exist  and  work 
well,  as  in  Brazil  and  South  Africa  (see  Box 
6.3;  Watkins  and  Alemayehu,  2012)  or  in  Peru 
(Canavire-Bacarreza et al., 2012), they may have a 
limited impact on regional disparities where these 
are significant, as in Southeast Asia (Hofman and 
Cordeira  Guerra,  2004).  This  is  partly  because 
the  transfer  of  adequate  resources  does  not 
guarantee  that  the  local  government  will  use 
them appropriately and provide efficient services 
if it lacks the capacities or the incentives to do so. 

This  means  that  complementary  policies  should 
include  incorporating  capacities  and  incentives 
into the transfers. 

South  Africa’s  formula  (see  Box  6.3)  has  been 
criticised for not matching transfers to the varied 
costs of providing an agreed standard of services. 
Other countries – Ethiopia, Nepal and Rwanda, for 
example – have formulas that recognise that costs 
will vary (Watkins and Alemayu, 2012). In Nigeria, 
the overdependence on uncertain IGFTs leads to 
evasion  of  responsibility  by  local  authorities  that 
claim fiscal powerlessness (Yilmaz et al., 2008).

While  devolving  the  provision  of  responsibility  for 
infrastructure can work for rich regions, in the case 
of  remote,  small,  and  very  poor  communities  with 
limited economic activities, the investments required 
to provide the necessary local infrastructure for basic 
public services must either be provided directly by 
a higher-tier government or at least financed (with 
perhaps  some  in-kind  or  other  local  cost-sharing) 
by a regional structure, whether a county, a second-
tier municipality, or special district. In other words, 
there is a need to develop an approach to suit each 
circumstance  (Bahl  and  Bird,  2014).  Conditional 
non-matching  grants  have  been  successfully  used 
for this (see Box 6.4).

Box 6.2 | Insights from the Tanzania CI on the use of formula-based allocations and ODA

Since 2004, the Tanzanian government has provided formula-based allocations to local government authorities (LGAs) for recurrent 
expenditures  in  six  key  sectors  –  education,  health,  local  roads,  agriculture,  water  and  administration.  At  the  same  time,  a  new 
joint  donor/government-funded  block  grant  for  development,  the  Local  Government  Capital  Development  Grant  (LGCDG),  was 
introduced. In this arrangement, all LGAs receive a discretionary development grant of approximately $1.5 per person if they fulfil 
minimum conditions regarding the quality and transparency of their development plans, financial management and procurement 
systems (REPOA, 2011). One of the challenges facing LGAs is the pace of budget execution in any given fiscal year due to delays 
in disbursements from the central government. Further, and perhaps more critically, most of the LGAs have very narrow sources of 
local revenue to finance development and social services. The country has also introduced innovations in resource mobilisation, by 
creating a Developmental Fund from oil and natural gas proceeds, some of which to be used for stimulating development at local 
government levels.

Source: CI by Lunogelo et al. (2015)

Box 6.3 | South Africa’s Provincial Equitable Share budget

The  Provincial  Equitable  Share  budget  is  at  the  heart  of  the  devolved  financing  system  in  South  Africa.  Allocated  by  the  central 
government,  this  accounts  for  over  80%  of  provincial  government  revenue.  The  transfer  is  based  on  a  formula  that  is  updated 
annually. For the 2008 budget, the distribution was that education indicators accounted for 51% of the weighting, health indicators 
26% and population 14%.

Some elements of the formula are overtly redistributive. Provinces such as Eastern Cape, Limpopo and KwaZulu-Natal receive larger 
shares of the anti-poverty, health and education budgets over and above their basic share, while more prosperous provinces with 
better indicators receive less.

Source: Alm and Martinez-Vasquez (2009)

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CHAPTER 6. The link between finance and policies for selected enablersBox 6.4 | Conditional non-matching grants

Conditional non-matching grants, with conditions imposed on attainment of standards in quality, access and lower level of services, 
can be used to improve equity and efficiency in the provision of essential services at the sub regional level, without creating perverse 
incentives for substandard provision. These are rarely used in developing or transitional economies. Brazil is a case in point. It has 
two national minimum standards grant programmes for primary education and health care. Under the 14th amendment to the federal 
constitution,  state  and  municipal  governments  must  contribute  15%  of  their  two  principal  revenue  sources  (state  VAT  and  state 
share of the federal revenue-sharing transfers for states, services tax, and the municipal share of the state revenue-sharing transfers 
for municipalities) to the special fund for primary education (FUNDEF). If the sum of the state and municipal required contributions 
divided by the number of primary-school pupils is less than the national standard, the federal government makes up the difference. 
FUNDEF funds are distributed among state and municipal providers on the basis of school enrolments. A possible reason for the 
success of Brazil’s reforms is that a range of reforms aiming to achieve greater equality and redistribute power at local levels were 
implemented across the public sector at the same time, so they supported each other.

Source: Shah (2006)

Infographic 3 | Enabler: Local Governance

ENABLER: LOCAL GOVERNANCE

Finance and the role of Local Government

Conducive political settlements are essential for good governance 

at both local and national level. The record of local government 

involvement in providing services is mixed, especially in low 

income nations.

It is essential to ensure that domestic policies on the roles of 

local government are fully worked out and ensure that local 

governments are properly equipped to meet their roles.

Central government funding (including elements of international 

and domestic public finance) are the principal source of finance, 

but there are also positive examples of local governments raising 

revenue locally provided adequate regulatory frameworks and 

public finance management systems are in place.

The financial policy needs to be carefully 
adjusted to the country context

1   The role played by local 

government must be clear

2   Financial support be 

provided primarily via 

intergovernmental fiscal 

transfers (IGFTs) 

1

3   Expectations that revenue 

can be raised locally 

should not be exaggerated

3

2

1

3

4

2

5

LICs

MICs

Formula-based allocations in Tanzania

Since 2004, the Tanzanian government has provided formula-

based allocations to local government authorities (LGAs) for 

recurrent expenditures in six key sectors: education, health, roads, 

agriculture, water, administration.

The Local Government Capital Development Grant (LGCDG), 

a joint donor/government-funded block discretionary grant for 

development, was also introduced with funding of ~ $1.5 per 

person to all LGAs. The grant is made subject to conditions 

regarding the quality and transparency of LGA development plans, 

financial management and procurement systems.

In addition, Tanzania has introduced an innovative Developmental 

Fund utilising oil and natural gas proceeds that are partially 

disbursed to stimulate development at LGA level.

1   Local governments can 
be brought into broader 

processes of public-sector 

reform

2   This can enhance their 

contributions to eradicating 

poverty

3   It may be possible 
to increase IGFTs

4   More can be expected in 

terms of local taxation and 

user fees

5   As financial management 

capacities increase, 
options to borrow increase

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  6.2 

 The role of finance and policies 
in infrastructure development

The enabling role of infrastructure for sustainable 
development  is  widely  accepted.  According  to 
the  IMF’s  most  recent  review  of  the  evidence 
increased  investment  in  public  infrastructure  is 
associated  with  positive  output  multipliers,  both 
short- and long-term, in almost all countries (IMF, 
2014). These effects vary widely, however, across 
countries  and  time,  depending  on  economic 
conditions, the efficiency of such investment and 
the  way  in  which  it  is  financed.  When  there  is 
economic  slack  and  monetary  accommodation, 
demand  effects  are  stronger  and  the  ratio  of 
public debt to GDP tends to decline. If the public 
investment process is relatively inefficient (e.g. due 
to  poor  project  selection  and  implementation), 
the  long-term  gains  are  more  limited  (IMF, 
2014:77). Albino-War et al. (in IMF 2014) find that 
on average emerging economies and developing 
countries are 10–20% less efficient than HICs. 33 

The 
in 
importance  of  policies  and  finance 
infrastructure  development  is  also  reflected  in 
the  CIs.  In  Bangladesh,  infrastructure  has  been 
instrumental  for  productivity-enhancing  growth 
and  job  creation,  but  considerable  additional 
finance  is  needed  to  meet  growing  needs.  This 
cannot be mobilised in the absence of supportive 
national  and  global  policies  to  ensure  greater 
investment  efficiency  and  the  effective  use  of 
financial resources (see Box 6.5). 

This  section  discusses  the  various  sources  of 
their  differential 
infrastructure  finance  and 
impact  on  sustainable  development 
(Section 
6.2.1) and the links between finance and policies 
for  infrastructure  development  (Section  6.2.2), 
drawing out some key implications (Section 6.2.3). 
Figure  6.2  below  summarises  the  main  policy 
issues in this section. 

Policies  thus  influence  both  the  macroeconomic 
environment  and  the  efficiency  of  investment. 

While  spending  by  local  government  can  be 
seen  as  one  route  to  reach  development  goals, 
it  is  important  to  recognise  from  the  outset 
that  equalising  local  government  expenditure 
by  providing  grants  and  transfers  from  central 
government  cannot  be  expected  to  correct 
regional  imbalances  in  highly  unequal  societies. 
Addressing  such  inequalities  requires  special 
investments and mechanisms rather than formulas 
to  standardise  expenditure  across  all 
local 
authorities.

the  question  of  how 

local 
In  conclusion, 
institutions  are  financed  is  paramount,  but  the 
record of local government performance is mixed, 
particularly when finance levels are low and there 
are  competing  needs.  It  is  therefore  essential  to 
ensure that domestic policies regarding the roles 
of local government are fully worked out and take 
adequate steps to ensure that local governments 
are properly equipped to meet their mandates in 
terms  of  capacities  and  regulatory  frameworks. 
Allocations 
from  central  government,  which 
may  include  an  element  of  international  as  well 
as  domestic  public  finance,  remain  the  principal 
source  of  finance,  but  there  are  also  positive 
examples  of  local  governments  raising  revenue 
regulatory 
locally,  provided 
frameworks  and  public  finance  management 
systems  are  in  place.  The  scope  for  raising  local 
revenue  should  not  be  exaggerated,  however. 
Finally, at the local level there is perhaps also more 
scope for private funding through collective user-
fee solutions, although their ability to raise funds 
depends  heavily  on  the  levels  and  distribution 
of  local  wealth  and  ensuring  that  disadvantaged 
groups have full access to services is an important 
criterion of success.

that  adequate 

6.1.3 

 Conclusions and implications 
of finance for local government

Conducive  political  settlements  are 
just  as 
essential  for  governance  at  the  local  as  at  the 
national  level.  The  record  of  local  government 
involvement in providing services is, however, very 
mixed, especially at low levels of national income, 
when  local  government  spending  may  compete 
with  social  and  other  central  poverty-reducing 
expenditure. As countries become wealthier, and 
where  overall  public  expenditure  is  also  greater, 
there may be less of a zero-sum game. 

Financing policy needs, therefore, to be carefully 
adjusted to context. 

it 

is 

  In  LICs,  once  it  is  clear  what  roles  local 
governments  should  play, 
important 
to  provide  financial  support  primarily  using 
IGFTs  that  increase  the  autonomy  of  local 
governments.  Expectations  that  revenue  can 
be  raised  locally  should  not  be  exaggerated 
(or  excessively  rewarded)  as  this  may  lead  to 
regressive  taxes  and  charges  and  revenue-
raising capacities are likely to be low. 

  In MICs, local governments can be progressively 
brought  into  broader  processes  of  public-
sector reform to enhance their contributions to 
eradicating poverty, and these contributions can 
be significant. In such cases, it may be possible 
to increase IGFTs and more can be expected in 
terms of local taxation and user fees for certain 
services.  As  financial  management  capacities 
increase, it becomes an option to borrow as a 
partial solution for financing infrastructure.

  In both cases central governments need to be 
careful  in  how  they  structure  and  incentivise 
the roles of local governments in terms of their 
capacities and political capabilities in order to 
avoid  adversely  affecting  the  poorer  sectors. 
This means that building the capacity of local 
government to provide pro-poor services is a 
key supporting policy. 

200 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 201

33  To be efficient, public investment must meet two conditions: it must be allocated to projects with the highest ratio of benefits to 
costs and its aggregate level must align with fiscal sustainability. Efficiency entails both the proper allocation of investment and the 
production of public assets at the lowest possible cost.

6.2

CHAPTER 6. The link between finance and policies for selected enablers 
 
 
Figure 6.2 | The role of policy for mobilisation and effective use of finance for Infrastructure

Figure 6.5B |  Investment in infrastructure in Bangladesh ($ mn, current prices) from local, ODA and FDI sources 2002–2011

Policies for effective use
NATIONAL
Capacity building for cost-effective
implementation, budgeting,
monitoring and evaluation
Transparent and stable regulatory
framework and governance
Specialised facilities and economic zones

INTERNATIONAL
Monitoring and evaluation of DFIs
investment in infrastructure
(see policies for mobilisation)

Policies to mobilise finance
NATIONAL
Guidance and capacity building
for project appraisal,
selection and budgeting
Appropriate and transparent regulatory
framework and governance
Capacity building for transparent
and effective PPPs

INTERNATIONAL
Assistance in project preparation,
blended finance and other instruments
to de-risk investment for infrastructure
development (a catalytic role
for DFIs and MDBs)

Financial flows

Public and Private
Domestic and International

Infrastructure
for sustainable
development

Box 6.5 | Finance and policies in enabling infrastructure investment in Bangladesh

A least developed country (LDC), Bangladesh has undergone significant economic and social development in the last 20 years. Per 
capita income increased from $90 in 1973 to $1,044 in 2013. Improved telecommunications and rural roads, power generation and 
distribution networks, as well as investment in health and education, and in technology and information, have been vital enablers in the 
country’s development. The improvement of rural road networks, facilitated by larger budgetary and ODA allocations, has created local 
employment and income opportunities. Poor and landless women and men have found work in road construction and maintenance. 
Better roads have reduced travel time, increased access to non-rural employment and to social services. As a result, women have been 
better able to seek employment and to benefit from maternal and child health (MCH) programmes, and school attendance in rural 
areas has also improved. Better infrastructure has encouraged the development of rural markets through private investment in services 
such as shops, restaurants, pharmacies, tea stalls and salons. These have created rural employment opportunities. Moreover, greater 
rural–urban connections have led to a rise in the value of land. By 2011, Bangladesh ranked third among eight countries in the region 
concerning access to improved sanitation, sixth in telecommunications access and seventh in access to electricity and improved water. 
Transport remains a major challenge. Bangladesh has only 0.1 km of roads per 1,000 people, the lowest in the region, and only 10% 
of them are paved. A comparison with South Asian countries and LMICs more widely indicates that Bangladesh still lags behind other 
countries in the region in most infrastructural indicators, making the development of infrastructure a top policy priority.

Political  uncertainty,  weak  institutions,  lack  of  skilled  workers,  unreliable  energy  supply  and  a  cumbersome  and  opaque  regulatory 
framework  have  been  binding  constraints  to  investment  in  infrastructure,  deterring  potential  investors.  In  addition,  the  availability 
of suitable land is an acute problem for investment in infrastructure. This is due to the shortage of land and unclear property rights. 
There are no computerised records of land titles and disputes are common. As a result, acquiring land for investment is a slow and 
lengthy process. Between 1990 and 2012, Bangladesh attracted only $10.1 bn from the private sector in the telecommunications and 
energy sectors, representing 1.1% of GDP (2007–2012) and 2.8% of all private investment in infrastructure. Due to insufficient private 
investment in transport, water supply and sanitation to meet rising needs, government and public resources had to be mobilised and 
have risen relatively rapidly in recent years (see Figure 6.5B).

)
s
e
c
i
r
p
t
n
e
r
r
u
c

,
n
o

i
l
l
i

m
D
S
U

(

n
o
i
t
a
c
o

l
l

A

t
e
g
d
u
B

700

600

500

400

300

200

100

0

Local
Local

Aid (and FDI)

02 03 04 05 06 07 08 09 10 11

02 03 04 05 06 07 08 09 10 11

Transport

Oil Gas

Transport, Storage & Communication

Power

Communication

Power, Gaz & Petroleum

Source: Khatun (2015)

According to Andrés et al. (2013) Bangladesh will need to spend between $7.4 bn and $10 bn a year between 2011 and 2020 (i.e. 
7–10% of annual GDP) to improve its infrastructure and to bring its power grids, roads and water-supply systems up to the standards 
required to serve a growing population. For the transport sector alone, total investment needs up to 2020 are estimated to range 
between  $36  bn  and  $45  bn  (Andrés  et  al.,  2012)  and  for  the  power  sector  between  $11  bn  and  $17  bn,  given  that  half  of  the 
population is not connected to the national grid. To improve water supply and sanitation will require between $12 bn and $8 bn and 
estimates for improving solid waste management, telecommunications and irrigation are between $2.1 bn and $4.2 bn, $5 bn, and 
from $7.7 to $11.6 bn respectively (Andrés et al., 2012).

More  investment  in  infrastructure  is  needed  to  respond  to  the  impact  of  climate  change.  With  very  high  population  density, 
Bangladesh is also extremely vulnerable to floods, droughts and cyclones. The impact of global warming, manifested in sea-level rise 
that threatens to flood the country’s coastal regions, requires investments in infrastructure and technology to reduce this vulnerability. 

The government has taken a number of initiatives to promote investment in infrastructure. Three important bodies have been created 
to finance and facilitate infrastructure projects: the Infrastructure Investment Facilitation Centre (IIFC), the Infrastructure Investment 
Development Company Limited (IDCOL) and the Bangladesh Infrastructure Finance Fund Limited (BIFFL). The IIFC, set up in 2000, 
identifies infrastructure projects to be undertaken by the private sector and helps relevant ministries to identify potential investors 
(IIFC, n.d.). Established in 1997, IDCOL is expected to bridge the financing gap for developing medium- to large-scale infrastructure 
and renewable energy projects (IDCOL, n.d.). It extends long-term loans of up to 40% of capital costs provided the project sponsor 
bears at least 20% of investment costs through equity financing. BIFFL is a public limited company that aims to provide mainly long-
term financing for PPP projects through the issuance of bonds, debt instruments and equity offerings (BIFFL, n.d.).

With the support of the World Bank, the government also created the Investment Promotion and Financing Facility (IPFF) in 2006 
as a separate unit of the Bangladesh Bank, mainly to finance infrastructure projects to be undertaken by the private sector that the 
government decides are in the public interest (Bangladesh Bank, 2013). The IPFF provides loans to participating financial institutions 
at  the  request  of  the  private  investor.  Eligible  sectors/projects  include  power  generation,  transmission,  distribution  and  services; 
port development; and environmental, industrial and solid-waste management; highway and expressway development, including 
mass-transit, bridges, tunnels, flyovers, city roads, bus terminals, commercial car parking, etc; airport terminals and related aviation 
facilities;  water  supply  and  distribution,  sewage  and  drainage;  industrial  estates  and  parks;  social-sector  investments,  including 
infrastructure in health and education; and information technology. 

SSC investment in infrastructure is relatively new. China helped in the construction of the China-Bangladesh Centre in Dhaka with a 
loan of $25 mn. A Chinese company won the contract for the Dhaka-Chittagong Highway expansion project to improve connections 
between the capital and the port city. China has also submitted the lowest bid for the Padma Bridge River Training Project as part of 
the proposed Padma Multipurpose Bridge project to connect the south-western region with the rest of the country and facilitate the 
transmission of natural gas, telecommunications and electricity. This 6.15km bridge will cost $3 bn (BBA, n.d.). The Chinese company 
has offered to carry out the training work for $0.78 bn, but allegations of questionable work ethics and quality of work have hampered 
progress (Khan and Azad, 2014).

Source: (unless otherwise stated): Khatun (2015)

202 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 203

CHAPTER 6. The link between finance and policies for selected enablers 
 
 
 
 
6.2.1 

 Financing infrastructure: 
different sources, different effects 

Sources of infrastructure finance

finance 

infrastructure 

(2013a)  estimates 

the 
The  World  Bank 
undersupply  of 
in 
developing economies at around $1 tr per year 
through  to  2020,  with  an  additional  $200  bn 
to  $300  bn  required  per  year  to  ensure  that 
infrastructure is low carbon-emitting and climate-
resilient. The financing needs vary across different 
infrastructure  and  across  regions. 
types  of 
McKinsey (2013) estimates a funding gap of $ 57 
tr  until  2030  simply  to  keep  up  with  projected 
global  GDP  growth.  This  is  60%  more  than  the 
$36  tr  spent  globally  over  the  last  18  years  on 
transport  infrastructure  (road,  rail,  ports,  and 
airports), power, water and telecommunications. 
Foster  and  Briceño-Garmendia  (2010)  estimate 
that SSA’s infrastructure needs to be around $93 
bn  a  year,  subject  to  the  constraints  discussed 
in Chapter 2. Importantly, finance needs depend 
on  the  policy  context.  The  costs  of  building 
infrastructure could be reduced by using existing 

infrastructure  more  efficiently  and  improving 
the  quality  and  management  of  such  projects. 
A  range  of  practical  steps  can  often  boost  the 
productivity  of  infrastructure  by  60%,  thereby 
lowering  necessary  spending  by  40%  (World 
Bank 2013a).

Despite  these  unmet  needs,  only  about  3%  of 
global FDI has financed infrastructure in SSA while 
donors  have  devoted  insufficient  attention  or 
resources to infrastructure and skills (Page, 2012). 
Table  6.3  estimates  the  importance  of  financial 
flows  to  infrastructure  development  by  source. 
Across  the  regions  shown,  national  government 
spending has been the principal source of finance 
for investment in infrastructure, ranging from 47% 
annually  in  Africa  in  2012,  to  66%  in  SSA  over 
the  2001–2006  period.  Finance  for  infrastructure 
from  emerging  and  advanced  economies  to 
SSA  and  to  developing  countries  more  generally 
has  been  considerably  lower.  Differences  are 
more  pronounced  in  the  case  of  private-sector 
participation, which has financed 20–30% of total 
infrastructure  investment  in  developing  countries, 
but only a small share in Africa (9%). 

Table 6.3 | Annual investments in infrastructure in developing countries, by source

AFRICA, 2012 (ICC DATA)

SSA, 2001–2006 (AICD DATA 
FROM FOSTER AND BRICEñO-GARMENDIA)

DEvELOPING WORLD,  
2008 (BHATTACHARYA 
ET AL.)

Finance for infrastructure in developing countries 
provided  via  bilateral  ODA  and  MDBs  grew 
substantially after 2003, from less than $30 bn to 
approaching  $90  bn  in  2011  (Figure  6.3).  MDB 
finance  has  been  a  large  and  growing  source, 
while  bilateral  ODA  for  infrastructure  peaked  in 
2008 and remained stagnant thereafter. SSC has 
also increased considerably (UN ECOSOC, 2008). 
An  increasing  number  of  Southern  countries 
(e.g.  China,  India,  Kuwait  and  Saudi  Arabia)  and 
multilateral  development  organisations 
(e.g. 
The  Islamic  Development  Bank,  Arab  Bank  for 
Economic Development in Africa and Organisation 
of  the  Petroleum  Exporting  Countries  (OPEC) 
Fund) have largely focused on infrastructure (UN 
ECOSOC, 2008).

In  the  case  of  China,  economic  infrastructure 
accounts for 61% provided through concessional 
loans  and  19%  of  development-related  projects, 
while the industrial sector takes 16% in the former 
and 31% in the latter (commissioned background 
paper;  Uneze,  2015).  UNCTAD  (2010)  further 
notes  that  half  of  China’s  SSC  contribution  to 
infrastructure is in the form of concessional loans 
and 1% through grants, while Arab countries as a 
whole  disburse  only  10.5%  of  their  SSC  through 
grants.  This  is  in  contrast  to  the  OECD  DAC 
donors, in which grants account for 91% of ODA 
disbursements. Another distinct feature of SSC is 
that  it  is  mainly  bilateral  and  delivered  through 

national  banks.  For  example,  China  and  India 
use  their  respective  Export-Import  Banks  (Ex-
Im  Banks)  to  transfer  financial  assistance.  In  the 
case  of  DAC  donors,  multilateral  institutions  (for 
example, the World Bank) are used, with bilateral 
aid  accounting  for  a  modest  share.  This  pattern 
highlights  two  important  issues  regarding  SSC. 
One is that there is currently limited collaboration 
and  coordination  among  Southern  donors,  or 
interfacing with traditional donors and multilateral 
institutions, thereby fragmenting the aid process. 
Second,  bilateral  aid  is  used  because  it  can  be 
more  closely  linked  to  trade  and  investment. 
While  tying  trade  and  investment  activities  with 
the  provision  of  ODA  or  SSC  provides  mutually 
beneficial cooperation, the drawback is that LICs 
could  be  left  behind  as  investment  and  trade 
potential  with  the  emerging  economies  is  still 
evolving.  Currently  only  two  LICs  (Liberia  and 
Ethiopia) ranked among the top ten recipients of 
non-DAC  aid  in  African  countries,  both  of  which 
are resource-rich countries. 

At  the  same  time,  private-sector  participation 
has  increased  rapidly  (Figure  6.4),  peaking  at 
approximately $190 bn in 2010. Most of this was 
in  LAC  with  SSA  and  MENA  receiving  relatively 
small amounts. In sectoral terms, infrastructure for 
transport  and  energy  absorbed  the  larger  share 
of financing from primarily public sources in SSA.

CAPITAL ONLY

CAPITAL + O&M

CAPITAL ONLY

Figure 6.3 | Infrastructure funding from bilateral ODA and MDBs ($ bn), 2000–2011source

National 
government

Developed 
countries

Emerging 
economies

Private 
sector

Total

$ bn

42.2

18.3

21.4

7.9

89.3

%

47

20

24

9

%

38

14

10

38

$ bn

9.4

3.6

2.5

9.4

24.9

%

66

8

6

21

$ bn

29.8

3.6

2.5

9.4

45.3

$ bn

%

500–600

60–70

40–60

5–8

20

3

150–250

20–30

800–900

Sources: UNTT (2013), based on data from ICC (2012); Foster and Briceño-Garmendia (2010); Bhattacharya et al. (2012)

$100

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

2010 2011

Source: UNTT (2013)

European Bank Reconstruction and Development

African Developpement Bank

Inter-American Development Bank

Asian Development Bank

European Investment Bank

World Bank Group

Bilateral ODA 

204 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 205

CHAPTER 6. The link between finance and policies for selected enablersBox 6.6 | The IBSA Dialogue Forum

One of the most recent and interesting experiments in collaboration among emerging economies is the creation of the ‘The India-
Brazil-South Africa (IBSA) Dialogue Forum’. While its initial mandate focused on fostering political and economic interests of the 
member countries, the creation of the IBSA Fund in 2004 has assisted LDCs in the Global South to achieve the MDGs. The Fund 
operates by identifying viable and scalable projects in the Global South. Each member country contributes $1 mn per annum to the 
IBSA Fund portfolio, which is managed by a special unit under the auspices of the United Nations Office on South-South Cooperation.

Between 2004 and 2011, the IBSA Fund mobilised more than $20 mn and about $8.6 mn has been directed to key development 
projects with almost 72% allocated to the core MDG sectors – agriculture, livelihoods, waste management, health and water. Existing 
technology in IBSA member countries was used in the projects thereby developing local capacity and transferring technology to the 
recipient countries. So far, LDCs in Africa have most benefited from the IBSA Fund (46% of the projects), followed by Latin America 
(22%), Asia (19%) and Arab countries (13%). An important IBSA initiative is the $3 mn waste-management system in Haiti that uses 
local capacity and labour-intensive technologies, thereby creating about 400 direct jobs, while also addressing prolonged communal 
clashes among the beneficiary communities (UNOSSC, 2013). 

Source: commissioned background paper by Uneze (2015)

Figure 6.4 | Private-sector investment in infrastructure by region, 1998–2012

200

180

160

140

120

100

80

60

40

10

0

1998 1999

2000

2001

2002 2002

2003 2005 2006 2007 2008 2009

2010 2011

2012

Source: UNTT (2013)

SSA

MENA

ECA

SA

LAC

EAP

Private  finance  for  infrastructure  has  traditionally 
been  in  the  form  of  loans  and  bond  financing, 
and  has  increased  rapidly  in  recent  years  with  a 
growing  number  of  developing  countries  now 
boasting  investment  ratings  and  issuing  bonds. 
The  number  of  African  nations  rated  by  at  least 
one  of  the  three  top  agencies  –  Moody’s,  Fitch 
and Standard & Poor’s – has risen to 26, up from 
15 a decade ago and just one in 1994 (Blas, 2014). 
Similarly,  countries  with  large  diasporas,  such  as 
Ethiopia,  Kenya  and  Nigeria,  are  experimenting 
with  the  issuance  of  diaspora  bonds  (albeit  with 
mixed  success,  see  below).  According  to  market 
analysts  (see  Fatuna,  n.d.),  the  benefits  of  such 
bonds  are  that  (a)  a  successful  issue,  along  with 
the  access  to  steady  new  funding,  may  help  to 
improve  a  country’s  sovereign  debt  rating;  (b) 
buyers  may  continue  to  purchase  bonds,  even 
when  markets  are  sceptical  about  a  nation’s 
economic  outlook  (e.g.  sales  of  Israeli  diaspora 
bonds  rose  during  the  Six-Day  War);  and  (c) 
countries in essence receive a ‘patriotic’ discount 
when they issue diaspora bonds, as investors are 
often  willing  to  accept  much  lower  returns  than 
they might on the open market. 

Despite  the  theoretical  arguments  in  favour  of 
diaspora bonds, their issue to date has been met 
with limited success. Part of the problem has been 
a lack of awareness of their existence among the 
diaspora, but also that diaspora communities have 
been reluctant to bear the risk of buying a product 
sold  by  their  country  of  origin.  DFIs  and  MDBs 
might  help  to  mobilise  resources  by  mitigating 
and diversifying such risks. African countries that 
have  explored  diaspora  bonds  might  consider 
pooling  their  efforts  and  launching  bonds  via  an 
institution such as the African Development Bank 
(see Fatuna, n.d. for further discussion). Moreover, 
as  Spratt  and  Ryan-Collins  (2012)  note,  while 
private  investment  in  infrastructure  is  significant, 
it is also volatile and unable to meet the needs. 

The effects differ by source of infrastructure 
finance: a modelling approach 

is 

infrastructure 

While  there  are  different  sources  of  finance,  the 
effects vary depending on the sources of finance. 
MAquette  for  MDG  (MAMS)  model  simulations 
in  Moldova  (see  Box  6.7)  show  that  investment 
in 
likely  to  expand  private 
consumption,  growth  and  employment  and  to 
create  positive  effects  on  household  welfare, 
including the reduction of poverty. As expected, 
due  to  the  difference  in  expenditure  multipliers 
and  tax  wedge  effects  on  final  prices,  the 
expansionary  effects  of  infrastructure  investment 
are  larger  when  such  investment  is  financed  by 
public  resources  relative  to  taxation.  It  should 
be  noted,  however,  that  large  foreign  transfer 
inflows  to  finance  investment  in  infrastructure 
could lead to a real appreciation of the exchange 
rate  hurting  exports  and  increasing  inequality 
through  negative  distributional  consequences 
for  particular 
(commissioned 
income  groups 
modelling paper Kinnunen, 2015). 

206 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 207

CHAPTER 6. The link between finance and policies for selected enablersBox 6.7 |  Economic and social implications of alternative financing sources 

for infrastructure development: insights from a modelling study on Moldova

Figure 6.7B1 |  Growth rate differences to baseline scenario by share of aid, percentage points

0.100

0.200

0.150

Between  2000  and  2004  annual  public  investment  in  Moldova  ranged  between  2%  and  3%  of  GDP  and  lacked  clear  priorities. 
While public capital spending between 2005 and 2010 increased from 5% to 8% of GDP (IMF, 2005, 2008, and 2012), investment in 
infrastructure was not a high priority. This is manifested in very poor road conditions and limited Internet access. 

The poor quality of Moldova’s infrastructure has become a critical binding constraint for promoting its economic transformation as 
well as for sustaining the social gains achieved through income-supporting transfers from remittances and ODA. The development 
of infrastructure offers high potential productivity gains. 

Assessing the economic and social effects of infrastructure investment and the role of different financial sources on key economic and 
social variables up to 2030 provides useful insights for Moldova’s policy options and trade-offs, especially in view of the recent signing 
of the Moldovan-EU Association Agreement. This is accomplished through the use of the MAquette for MDG Simulations, a CGE 
model developed at the World Bank to analyse strategies for medium- and long-run growth and poverty reduction in developing 
countries, adapted and applied to Moldova’s economy (commissioned modelling paper; Kinnunen, 2015).

Sources of finance for infrastructure

Exploring different scenarios, the study focuses on two sources of finance for infrastructure, namely foreign transfers and domestic tax 
revenues. For the scenario according to which government infrastructure investment is financed from foreign transfers (infra-ftr), it is 
assumed that foreign transfers grow, so that their share relative to baseline GDP grows by 1 percentage point. Increased transfers are 
assumed to finance public infrastructure, which in turn affects industrial productivity. It is further assumed that the largest productivity 
gains are recorded in agriculture, trade, transport and postal services, as well as telecommunications and IT services. However, all 
industries benefit from an additional total factor productivity (TFP) gain due to improved infrastructure. Moreover, the additional 
demand for labour and other inputs needed for infrastructure investment affects the whole economy, thus giving rise to supply and 
price responses. The source of financing for the additional investment is also relevant. 

The same assumptions are made under two alternative scenarios in which financing is provided by domestic taxation (infra-tax) and 
by a combination of tax-based financing and foreign transfers through a gradual increase of the latter (infra-tax20, infra-tax40, infra-
tax60, infra-tax80).1 The higher the share financed by increased taxation, the greater is the potential for crowding out other activities 
through increased tax wedges in product and factor markets (both direct and indirect taxes are raised) and for decreasing the amount 
of savings available for other private-sector investments. On the other hand, the larger the influx of foreign transfers, especially if the 
additional investment demand is directed mainly to domestically produced commodities, the higher is the risk of ‘Dutch disease’ 
effects, leading to increased domestic inflation, a loss of competitiveness and lower export growth (compared to the development 
implied by the base scenario). The final outcome thus depends on the relative strength of the different effects in each sector of the 
economy.

Financing sources matter for social and economic development outcomes

Comparing  simulation  results  of  the  increased  infrastructure  investment  scenario  relative  to  the  base  one  which  reproduces  the 
medium- to long-run trends in the structure of the Moldovan economy (base), GDP growth, exports and private consumption grow 
significantly as expected. The higher the share of foreign transfers in financing infrastructure investment, relative to financing through 
tax increases, the higher the growth rate of private consumption and the positive effects on welfare at the household level.

0.200

0.150

0.100

0.050

0.000

-0.050

-0.100

0.050

0.000

-0.050

-0.100

Note: Lines show deviations of the average growth rates 2015–
2030 from base scenario for the six infrastructure scenarios, with 
the  x  axis  showing  the  share  of  ODA  transfers  in  investment 
financing  whereby  0  depicts  the  infra-tax  scenario  and  100  in-
0
fra-ftr. 

100

20

40

60

80

GDP at factor cost

Exports

Private consumption

Real exchange rate (index)

0

20

40

60

80

100

GDP at factor cost

Exports

Private consumption

Real exchange rate (index)

Figure  6.7B1  shows  the  growth  rate  differences  relative  to  the  base  scenario  of  the  Moldovan  economy  for  the  varying  share  of 
foreign transfers in financing additional infrastructure investments. An increase in infrastructure investment by 1 percentage point 
(compared to the base scenario), financed through foreign transfers, leads to an increase of 0.15 percentage points in GDP growth 
(compared to the base scenario with an average GDP growth of 4.27%). While increased foreign transfers lead to higher private 
consumption and improved household welfare, Moldova’s price competitiveness is hampered by domestic prices rising more quickly 
than foreign prices. This is reflected in an appreciation of the real exchange rate (shown as a decrease of the real exchange rate index, 
defined as the ratio of local currency units (MDL) and foreign currency units ($) and smaller export growth rates.

Increasing  infrastructure  spending  under  different  financing  schemes  has  different  implications  for  different  sectors  of  economic 
activity especially in terms of real export growth (see Figure 6.7B2). The higher the share of foreign transfers in financing infrastructure, 
the higher the exports of the industrial and agricultural sectors. In other words, the productivity effect dominates in these sectors. The 
international competitiveness of the service sector, however, is expected to deteriorate due to its high labour share, which results in 
high wage growth that exceeds productivity as the share of transfer financing increases. 

4.5

3.5
Figure 6.7B2 | Exports volume growth by sector relative to base in final year (in percentage terms)
3

4

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0

2.5

2

1.5

1

0.5

0

Note:  Lines  show  percentage  differences  in  2030  relative  to 
base scenario for the six infrastructure scenarios, with the x axis 
showing  the  share  of  transfers  in  investment  financing,  with  0 
60
depicting the infra-tax scenario and 100 the infra-ftr scenario.

100

20

40

80

0

Agriculture and other primary

Industry

Services

Total

0

20

40

60

80

100

Agriculture and other primary

Industry

Services

Total

1  It is assumed that the same infrastructure investments are made but that the growth of foreign transfers amounts to 20%, 40%, 60% and 80% respectively of 
total financial transfers in the infra-ftr scenario). It is also assumed that the efficiency of foreign transfers does not depend on their size and that the Moldovan 
economy fully absorbs the inflows without leakages due to mismanagement or corruption.

208 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 209

CHAPTER 6. The link between finance and policies for selected enablersInfrastructural investments, irrespective of the source of financing, have an overall positive effect on household welfare as indicated 
by private consumption growth in Figure 6.7B1. The poverty rate and the poverty gap decrease as shown in Figure 6.7B3. However, 
inequality increases in all the analysed scenarios. The worst-off household groups are typically less attached to the labour market, 
and thus do not automatically benefit from the reforms that increase factor income (either from labour or capital). Given that the 
analysis assumes that government transfers are kept at base scenario levels, the result of increased inequality is partly an artefact of 
assumptions. 

Thus, this analysis highlights the need to complement growth-inducing investments with appropriate transfer schemes across income 
groups so that higher growth and absorption does not end up benefiting primarily those who are already better off. 

Figure 6.7B3 | Poverty and inequality in 2030 (percentage point deviation from base)

0.2

0.15

0.1

0.05

0

-0.05

-0.1

-0.15

-0.2

infra-tax

infra-tax20

infra-tax40

infra-tax60

infra-tax80

infra-ftr

Note: The three indicators are scaled to the range 
0-100.  The  figure  depicts  the  deviations  from 
2030 base values (not the relative changes) for the 
indicators.  (For  example  for  the  poverty  rate,  the 
change is measured in percentage points of poverty 
rate).  The  poverty  gap  index  (P1)  measures  the 
extent  to  which  individuals  fall  below  the  poverty 
line as a proportion of the poverty line.

Headcount 
poverty (P Zero)

Poverty
gap (P1)

Gini

Source: commissioned modelling paper Kinnunen (2015); IMF (2005, 2008, 2010, 2012)

6.2.2 

 Links between finance and policies 
for infrastructure development

A range of supporting policies is essential for the 
mobilisation  of  finance  for  infrastructure  and  for 
its effective use.

Mobilising finance for infrastructure

Part of the mismatch between resources and needs 
relates  to  the  specific  nature  of  infrastructure 
investment.  One  element  is  the  large  scale  of 
the  upfront  financing  needs  and  the  difficulty  of 
identifying and/or capturing returns over a longer 
period. Although there are mechanisms to recover 
costs for public or private investors, these rely on 
sufficient  use  in  order  to  make  the  investment 
commercially  viable.  Infrastructure  investments 

long  gestation  periods 

are  also  characterised  by  lumpiness,  high  sunk 
costs and relatively low returns over long periods. 
These 
imply  greater 
financial and political risks. Mobile telephony and 
IT  investments  may  be  exceptions  here  because 
of the specific nature of the goods and markets, as 
evidenced by the large inflows of private finance 
(in this sector, it is possible to make large financial 
returns  relatively  quickly,  unlike,  for  example,  in 
water  infrastructure)  There  is  therefore  a  role  for 
domestic and international policies to de-risk and 
direct finance for infrastructure, the most important 
of which are (a) strategic guidance and capacity-
building for improved project appraisal, selection 
and budgeting; (b) an appropriate and transparent 
regulatory  framework  and  governance;  and  (c) 
capacity-building  for  transparent  and  effective 
PPPs. International policies can also play a catalytic 

role to expand infrastructure investment through 
(a)  technical  assistance  for  improved  project 
appraisal,  selection  and  preparation;  (b)  the 
provision  of  blended  finance  instruments  (grants 
and  concessional  loans);  and  (c)  the  provision  of 
incentives and innovative financial instruments for 
enhanced leverage and de-risking private finance 
for infrastructure investment.

Strategic guidance and capacity-building 
for improved project appraisal, selection 
and budgeting

Policy  can  address  economic  and  political 
risks  specific  to  investments  in  infrastructure. 
Most 
infrastructure  projects  require  sizeable 
frontloaded and irreversible commitments. There 
is  a  need  to  develop  the  capacity,  especially 
in  LICs,  to  enable  projects  to  be  commercially 
viable.  Small,  idiosyncratic  infrastructure  projects 
as  opposed  to  grid  development  are  not  only 
costly  to  prepare,  but  also  hard  to  value  (Collier 
and  Mayer,  2014),  creating  difficulties  even  at 
the  initial  phases  of  attracting  investment.  The 
construction  phase  of  large  infrastructure  can 
be  very  protracted,  interrupted  and/or  costly 
due  to  regulatory  or  administrative  delays, 
ineffective  quality-control  processes,  inadequate 
coordination or political opposition by those who 
are  negatively  affected  by  the  project.  Political 
interference has also been shown to alter the risk 
and  commercial  profile  of  investments  (Collier 
and Mayer, 2014). Such risks dissuade investment 
in  infrastructure  development,  especially  in  the 
transport and energy sectors, where projects have 
long gestation periods.

In countries with inefficient investment and public-
management  processes,  many 
infrastructure 
investment  initiatives  end  up  producing  few 
measurable  benefits  (IMF,  2014).  Well-designed 
institutional arrangements for project selection and 
appraisal that are embedded in an overall medium-
term strategy for infrastructure development and 
accompanied  by  solid  budgeting  of  costs  and 
evaluation  of  risks  can  play  a  catalytic  role  not 

only  in  improving  investment  efficiency  but  also 
in  mobilising  financial  resources.  The  need  to 
build capacity in project appraisal, selection and 
budgeting  has  led  many  developing  countries, 
such  as  Bangladesh  and  Mauritius,  to  create 
special  bodies  or 
infrastructure 
facilities 
development.  Transparent  governance  of  these 
bodies  and  international  technical  assistance 
could  help  to  improve  decision-making  quality, 
with positive effects on resource mobilisation. 

for 

Appropriate and transparent regulatory 
framework and governance 

While  sources  of  finance  for  infrastructure  vary 
across  countries  and  sectors,  the  large  shortfall 
in  relation  to  infrastructure  needs  in  the  lowest-
income countries, particularly in Africa, highlights 
underlying  policy  and  institutional  bottlenecks. 
In  most  LICs  and  in  the  presence  of  widespread 
informality,  public  investment  in  infrastructure  is 
constrained  by  a  limited  tax  base  and  weak  tax- 
and  custom-administration  systems.  Regulatory 
impediments 
remain  powerful 
bottlenecks 
for  private  finance.  According  to  Collier  and 
Mayer  (2014),  ‘the  inability  of  Africa  to  finance 
its  infrastructure  requirements  is  not  therefore 
a  capacity  constraint.  It  is  an  institutional  and 
organizational one’. As shown in Box 6.1, the same 
holds  true  in  Bangladesh  and  in  other  countries 
where  unclear  property  rights  and  cumbersome 
land-titling  procedures  have  hampered  private 
investment  in  land  and  in  infrastructure.  Long 
delays, lack of transparency in resolving disputes 
through the legal system and widespread alleged 
corruption  in  customs,  tax  and  legal  authorities 
have  also  been  cited  as  major  obstacles  for 
mobilising  finance  for  infrastructure  in  countries 
such  as  Bangladesh  (CI,  Khatun,  2015)  and 
Moldova (CI, Ghedrovici, 2015).

Institutional  and 
tax 
regulatory 
administration, customs and legal systems made 
at early stages of development can go a long way 
towards helping to mobilise financial resources. 

reforms  of 

210 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 211

CHAPTER 6. The link between finance and policies for selected enablersinvestment  climate  -  or  even  credible 
The 
commitments  to  make  the  necessary  reforms  - 
influence  both  expected  net  returns  and  risks 
on  investment  and  the  size,  composition  and 
impact of infrastructure finance. Thus, low-income 
agricultural  countries  such  as  Moldova  have 
relied  on  ODA,  remittances  and  domestic  taxes 
to  provide  for  basic  infrastructure  (roads,  water 
provision  or  electricity  grids).  Once  Moldova 
undertook to make far-reaching reforms in order to 
remove institutional rigidities and distortions and 
improve  governance  under  the  EU-Association 
Agreement  and  the  Deep  and  Comprehensive 
Free  Trade  Agreement  (DCFTA),  international 
investors,  including  DFIs,  entered  the  Moldovan 
market  and  have  shown  greater  interest  in 
participating in international bids (CI, Ghedrovici, 
2015). The experience of Peru is also telling: the 
introduction  of  transparent  land-titling  and  clear 
property  rights  helped  create  local  markets  that 
gave  a  boost  to  investment  in  infrastructure  and 
project financing from the private sector (Panaritis, 

2008). According to the IFC, infrastructure tends 
to  matter  more  in  poorer  countries,  whose 
institutions  are  weaker  (e.g.  more  corruption, 
fewer  skills)  and  a  less  competitive  environment 
attains lower growth (IFC, 2012).

Building capacity for transparent  
and effective PPPs

The  need  to  cover  M&O  costs  throughout  a 
project’s lifetime and to develop whole life-cycle 
approaches to finance for infrastructure have led 
to a rise in the number of PPPs in the last 20 years 
(Figure  6.5).  Although  PPPs  have  higher  upfront 
costs  than  public  finance,  due  to  the  need  to 
secure  a  return  for  the  private  investors,  their 
advantages can make them the preferred means 
of financing infrastructure in developed countries 
(e.g.  Germany  and  the  UK).  Risk  is  shared  with 
or  borne  by  the  private  sector,  which  results  in 
substantial  public  savings. 34  The  participation  of 
the private sector can also lead to better project 

Figure 6.5 | PPPs in infrastructure project finance

a.  PPP infrastructure investment,  in selected 

 b.  Global PPP infrastructure projects, 

developing countries, 2000–2010

by sector, 1984–2010

200

160

120

80

40

0

s
n
o

i
l
l
i

b
$
5
0
0
2

70

60

50

40

30

20

10

0

.

o
n

,
s
e
i
r
t
n
u
o
C

170

150

130

110

90

70

50

30

10

-10

s
n
o

i
l
l
i

b
$

2000

2002

2004

2006

2008

2010

1984 1987 1990 2000

1996

1999

2002 2005 2008

Turkey

Russian Federation

Countries with new 
projects (right axis)

India

China

Brazil

Other developing
Source: World Bank (2013b) 

Water

Transport

Telecommunications

Energy

cost-effective 

construction 
selection,  more 
processes,  savings  in  building  materials  and 
equipment,  and 
improved  governance  –  all 
tending  to  reduce  the  project’s  lifetime  costs. 
Even  in  developed  countries,  however,  there 
are  many  instances  where  outsourcing  or  PPP 
arrangements  have  been  associated  either  with 
problematic  quality  of  service  or  very  expensive 
services that limit access to those on low incomes. 
These  negative  repercussions  are  even  more 
likely  in  countries  whose  departments  of  public 
works have only limited capacity to manage such 
projects or where governance structures are weak 
(Mantzoufas, 2014). In order to reap benefits from 
PPPs,  governments  need  the  capacity  and  the 
skills to engage with, evaluate and manage such 
contracts. This suggests that PPPs may be a more 
useful potential source of finance for infrastructure 
in MICs and HICs than in LICs. In countries where 
public investment management is poor or where 
political capture by private interests is prevalent, 
PPPs  could  have  deleterious  effects  since  they 
can  easily  be  used  to  bypass  spending  controls, 
with  the  result  that  governments  and  taxpayers 
ultimately bear most of the risk. 

Assistance in project preparation, blended 
finance and other instruments to de-risk 
investment in infrastructure: a catalytic role 
for DFIs and MDBs

The mobilisation of finance for infrastructure can 
be  enhanced  if  projects  are  carefully  designed 
and  bankable  and  if  transaction  structures  are 
informed  by  appropriate  legal  advice  (Kefalas, 
2014).  Broad  consensus-building  concerning  the 
choice of project, credible political commitments 
and  solid  legal  expertise  in  bidding  processes 
–  including  contract  preparation,  concessions 
and  contract  provisions  –  can  lower  perceived 
risks.  Introducing  international  benchmarks  for 
transaction structures, as currently exist in the UK 
for  instance,  and  developing  adapted  insurance 
mechanisms  and  guarantees  across  different 
capital  sources  and  stakeholders,  could  help  to 
mitigate risks (Kefalas, 2014). 

risks 

DFIs and MDBs can play a leading role in mobilising 
the  necessary  finance  for  infrastructure  projects. 
They are well suited to pooling resources, providing 
long-term  finance,  mitigating 
through 
appropriate blending and insurance mechanisms 
and  guarantees,  providing  technical  assistance 
and  introducing  innovative  financial  instruments 
and forms of support. Their size and reach enable 
them  to  promote  large  or  regional  infrastructure 
projects  and  to  be  credible  partners  for  national 
governments  in  supporting  their  development. 
Ryan-Collins and Spratt (2013) identify four types 
of DFI impact ‘additionality’: (a) financial, through 
enhanced  leverage  of  additional  private  finance 
for  infrastructure;  (b)  design,  through  influencing 
project design in order to enhance the impact on 
growth and/or poverty; (c) policy, through shaping 
the policy context in order to enhance the impact 
on  growth  and  poverty;  and,  (d)  demonstration, 
since the success of a DFI-supported project may 
stimulate subsequent private-sector projects that 
do not involve DFIs. 

(EBRD) 

spearheaded 

Investment  Bank 

(EIB)  and 
The  European 
for  Reconstruction  and 
the  European  Bank 
Development 
such 
initiatives  through  the  EU-Africa  Infrastructure 
Trust Fund (EU-AITF), established in 2007, and the 
Neighbourhood Investment Facility (NIF) launched 
in 2008. According to WEF (2014, Section 2), the 
‘EBRD has taken a gradual approach to financing 
municipal  infrastructure  and  services,  bringing 
clients  to  the  point  of  being  able  to  access 
commercial funds in the market. It has successfully 
achieved  this  by  offering  a  broad  range  of 
financing instruments while supporting financing, 
where  appropriate,  through  the  use  of  technical 
cooperation and investment grants’. Since 2007, a 
number of similar facilities have been set up. The 
Asian  Development  Bank  (ADB)  has  promoted 
the  ‘Cities  Development  Initiative  for  Asia’  and 
the ‘Project Design and Monitoring Facility’ in the 
Philippines. The IFC has focused on addressing the 
dearth of bankable infrastructure projects and the 
lack of adequate funding for project preparation 
in  emerging  economies  and  in  LDCs  via  the 

34  In the case of the construction of seven fire stations in Greece, the costs from unforeseen delays that were borne entirely by the private investor saved the 

government €5.7 mn of a €26 mn project (Mantzoufas, 2014).

212 | EUROPEAN REPORT ON DEVELOPMENT 2015

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CHAPTER 6. The link between finance and policies for selected enablers 
 
 
 
‘Global Infrastructure Project Development Fund’ 
(‘IFC  InfraVentures’),  established  in  2008.  Since 
its  creation,  IFC  InfraVentures  has  committed 
$54.1  mn  to  support  the  development  of  25 
infrastructure projects including a number of solar, 
wind  power,  hydropower  and  water-purification 
and  distribution  projects  in  Georgia,  Haiti,  Laos 
PDR,  Moldova,  Nepal,  Pakistan  and  countries  in 
SSA.

Blended finance is another option. In the EU this 
involves a combination of grants (usually from the 
European Commission (EC)) with loans from public 
financial institutions (e.g. the EIB) and commercial 
lenders to provide investment grants, subsidised 
interest  rates,  risk  capital  (equity  and  quasi-
equity),  guarantee  mechanisms  and  technical 
assistance.  Since  the  EU-AITF  was  established, 
92  grants  have  been  approved  for  69  African 
infrastructure  projects,  worth  over  €497  mn. 
They  are  expected  to  generate  investments  that 
are  14  times  greater  than  the  value  of  the  grant 
funding (EIB, 2014). The bulk of investment is in 
the  energy  sector  (61.5%)  and  transport  (26%), 
followed  by  water  (8.5%),  ICT  (3.8%)  and  multi-
sector projects (0.3%). Key to the success of  the 
EU-AITF  is  its  regional  focus,  flexibility  and  pre-
investment  support  and  the  cooperation  among 
financing institutions (EIB, 2014). 

The  evidence  on  the  impact  of  DFI-supported 
infrastructure investments on growth and poverty 
is still mixed. On the positive side, in a systematic 
evaluation  of  the  impact  of  such  investment  by 
DFIs  and  MDBs,  Spratt  and  Ryan-Collins  (2012) 
find  that  they  generate  positive  development 
impacts mainly due to financial additionality, the 
provision  of  long-term  finance,  the  mitigation 
of  early-stage  project  risk  and  the  leveraging  of 
additional finance. They also find that DFI-backed 
loans  are  less  risky  than  commercial  loans  as 
borrowers are reluctant to default because doing 
so could damage their relationship with the donor. 
According to the World Bank (2013c), apart from 
their  capacity  to  leverage  additional  funds  from 
the private sector, MDBs’ preferred creditor status, 

technical  expertise,  prudent  risk-management 
policies,  adherence  to  clear  standards  in  project 
design, 
standards, 
execution,  and  corporate  governance  help 
to  build  the  confidence  necessary  to  attract 
commercial funding from a wide range of sources. 

including  environmental 

There is also increasing evidence of the concrete 
positive  impacts  of  DFIs’  innovative  approaches 
to infrastructure finance. For example, according 
to  the  World  Economic  Forum,  the  EBRD  has 
achieved notable successes in the water and urban 
transport sectors in emerging economies through 
its extension of sub-sovereign direct lending, solid 
funding arrangements and innovative contractual 
schemes (WEF, 2014). In particular, its practice of 
combining  a  public-service  contract  (PSC)  with  a 
project-support  agreement  (PSA)  in  the  case  of 
water, or a municipal support agreement (MSA) in 
the case of urban transport, has made it possible 
to reduce project cycles from almost 50 months to 
below 36 months and also to increase revenues. In 
Romania, for example, the EBRD’s loans to water 
utilities of Brasov, Iasi and Timisoara under a PSC 
plus PSA contractual scheme increased revenues 
over an 18-year period by 480% in real terms. 

Spratt and Ryan-Collins (2012) argue, however, that 
while DFIs influence project design and the policy 
context to boost growth, they seem to have less 
impact on alleviating poverty unless investments 
are  part-funded  by  concessional  finance.  This 
suggests the need for public concessional finance 
and government involvement in order to achieve 
social outcomes beyond the economic returns on 
infrastructure  projects  that  are  designed  solely 
on  a  commercial  basis,  thus  providing  a  strong 
argument in favour of blended finance to promote 
sustainable development (Ryan-Collins and Spratt, 
2013). Thillairajan et al. (2013) also point to trade-
offs  between  enhanced  access  to  infrastructure 
and project quality. They argue that to protect the 
public interest, national governments must retain 
the  upper  hand  over  private-sector  finance  and 
favour the continuation of public subsidies.

Box 6.8 | The Role and Impact of the African Development Bank

The  African  Development  Bank  (AfDB)  was  established  in  1964  to  accelerate  African  development  through  the  provision  of 
technical advice and financial assistance especially to LICs. It also promotes African economic integration by financing cross-border 
infrastructure.  The  Bank  is  supported  by  the  African  Development  Fund  and  the  Nigeria  Trust  Fund.  The  former  receives  funds 
from  African  and  other  member  countries,  of  which  the  largest  are  the  USA,  Germany  and  Canada  (AfDB,  2007).  The  Nigeria 
Trust Fund was established in 1976 by the Nigerian government to enable the AfDB to assist LDCs in Africa by using appropriate 
and non-stringent criteria such as low interest rates and longer maturity periods. This funding arrangement appears to place the 
AfDB between triangular cooperation and SSC, although an important difference is that African member countries jointly have 60% 
ownership and voting rights on the Bank’s decisions. The main financial instruments used by the AfDB include project loans, policy-
based lending, grants, debt relief, guarantees and equity finance. 

The AfDB has a triple-A rating on its long-term senior debt and double-A-Plus on its subordinate debt. There is some evidence that 
it has expedited the swift release of funds as the time between approval and disbursement was 13 months in 2013, down from 21 
months in 2007 (AfDB, 2013). Predictability of disbursement has also improved since it adopted simplified conditions and streamlined 
procedures. In relation to the quality of aid, the Bank is ahead of most South-South initiatives based on indicators developed from the 
Paris Declaration on Aid Effectiveness. More progress could be made by relaxing some of the policy conditionalities, which would 
improve LICs’ access to loans and grants and increase support to MDG-related social sectors. The financing portfolio will need to 
expand in order for the AfDB to remain relevant beyond 2015 since its assistance is less than that provided to the region by the 
World Bank.

Since 2000, AfDB funding has focused on sectors and projects that promote the MDGs, such as water, education, health, agriculture, 
food  security  and  infrastructure.  For  instance,  its  Programme  for  Infrastructure  Development  in  Africa  (PIDA)  mobilises  funds  for 
continental  and  trans-border  infrastructure  and  other  sector-specific  interventions  and  represents  the  largest  proportion  of  its 
portfolio. Between 1974 and 2012, infrastructure received 42% of grant and loan approvals, followed by multi-sector (21%), and 
agriculture and rural development (19%).

Of the infrastructure programmes, water has received top priority and the AfDB manages two complementary initiatives: the Rural 
Water Supply and Sanitation Initiative (RWSSI) and the African Water Facility (AWF). The former supports rural water and sanitation 
programmes with funding for investment in operation, infrastructure, advocacy and knowledge-building. The AWF provides financial 
and  technical  assistance  to  governments  and  private  investors  in  investment  planning,  feasibility  studies  and  collaborating  on 
regional and trans-boundary water projects. The Bank also supports the New Partnership for Africa’s Development (NEPAD) Water 
and Sanitation Programme and the Multi-donor Water Partnership Programme (MDWPP).

In  total,  the  AfDB  has  committed  about  $700  mn  to  the  RWSSI  and  $876  mn  to  the  AWF.  At  the  regional  level,  however,  its 
initiatives have not significantly improved access to water in Africa: the percentage of the population with access to water improved 
from 64% in 2005 to 69% in 2012. A recent assessment of its operations suggests the various water initiatives have had a positive 
impact. According to the AfDB Annual Development Review (2010 and 2012), the water programmes have led to the construction 
of 36,393 boreholes, and 4,109 transmission and distribution pipes, as well as the training of 39,721 individuals in water drilling 
and maintenance of water facilities. These initiatives were estimated to provide access to drinking water to 22.3 million households 
between 2008 and 2012 (AfDB, 2010 and 2012).

The  Bank’s  main  strategy  is  to  provide  an  enabling  environment  for  private-led  growth  through  improved  access  to  finance  and 
infrastructure. Its microfinance scheme has been the main pillar of this strategy and between 2008 and 2012, more than 123,000 
microenterprises were created and 477,000 microcredits granted (AfDB, 2010 and 2012). This has created 341,000 jobs, while the 
indirect benefits reached over 25.7 million people.

Source: commissioned background paper; Uneze (2015)

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Combining finance and policies to implement a transformative post-2015 development agenda | 215

CHAPTER 6. The link between finance and policies for selected enablersOn  the  negative  side,  the  ICA  (2012)  finds  that 
there  are  considerable  delays  in  disbursement 
either  because  of  a  lack  of  capacity  in  DFIs  or 
because of blockages in the project pipeline due to 
a mix of complicated partner arrangements, cross-
conditionality  and  financial  planning.  Evidence 
also suggests that complex and especially regional 
projects are more likely to be delayed than smaller 
ones  (ICA,  2012:  27).  Finally,  donors’  evaluation 
reports  have  shown  that  63%  of  IFC  and  35%  of 
EIB  concessions  go  to  OECD-based  companies 
(Ellmers  et  al.,  2010).  In  providing  infrastructure 
finance  to  developing  countries,  it  is  therefore 
important that DFIs seek to maximise development 
outcomes by supporting capacity-building as well 
as local companies and stakeholders. There is also 
a need to pay attention to revenue declaration and 
taxation given that a significant share of investments 
(25%  in  the  case  of  the  extractive  industries)  has 
a  beneficial  owner  based  in  a  secrecy  jurisdiction 
(Ruiz and Romero, 2011). 

To pursue these objectives, there will be a need 
for better policy cooperation among IFIs, MDBs, 
national  governments  and  donors  to  expand 
activities,  make  up  the  regional  and  national 
deficits  in  finance  for  large-scale  infrastructure 
or  national-grid  development,  and  safeguard 
development outcomes (Thillairajan et al., 2013). 
Such partnerships would release domestic public 
resources  so  that  national  governments,  with 
the  support  of  bilateral  donors  and  potentially 
diaspora  communities,  could  concentrate  on 
smaller-scale  and/or 
infrastructure 
projects  to  support  employment  creation  and/
In  addition, 
or  environmental  sustainability. 
such  partnerships  would 
facilitate  structural 
change  by  implementing  a  coherent,  strategy 
for 
infrastructure  development,  with  aligned 
incentives, pricing and regulations across relevant 
parties (World Bank, 2013a). 

regional 

development of infrastructure (Collier and Mayer, 
2014). They would be more likely to do so if they 
could invest in a well-run Facility Fund managed 
by a DFI rather than by the government of a LIC. 
Given the recent decline in returns, infrastructure 
finance  can  ‘help  institutional  investors  deal 
with  the  current  low  interest  rate  environment 
and  provide  them  with  a  predictable  –  inflation 
adjusted  –  cash  flow  and  a  low  correlation  to 
existing investment returns’ (Inderst and Stewart, 
2014).  The  Dutch  DFI,  FMO,  manages  €500  mn 
from  an  institutional  investor  and  other  DFIs  are 
also thinking of pursuing this option.

Depending  on  the  country  in  question,  the 
issuance  of  infrastructure  project  bonds  (also 
known  as  revenue  bonds  or  specific  purpose 
bonds),  which  could  securitise  future  cash  flows 
from  the  project,  could  provide  an  additional 
means  to  raise  international  private  finance  for 
infrastructure (Mbeng and Achille, 2012). Such an 
option, which is critically dependent on the state 
of the domestic bond market and the credibility of 
the issuer, appears to be more relevant for higher-
income countries. 

Effective use of infrastructure finance

that 

from 

the  CIs  suggests 

Evidence 
the 
availability  and  the  effectiveness  of  financial 
flows are largely dependent on the nature of the 
policy  environment  and  the  binding  constraints 
in  each  country.  We  focus  on  three  policy  areas 
that  influence  the  effectiveness  of  infrastructure 
finance:  (a)  capacity  building;  (b)  the  quality  of 
the regulatory framework and (c) the existence of 
special economic zones (SEZs).

Capacity-building for cost-effective 
implementation, budgeting, 
and monitoring and evaluation

Promoting partnerships by further engaging DFIs 
in financing infrastructure will also create incentives 
for other institutions to invest. Pension funds, for 
example,  could  be  encouraged  to  finance  the 

Vast resources have been wasted due to inadequate 
maintenance,  poor  construction  or  rent-seeking 
activities related to infrastructure. As these costs 
are usually covered through the public-investment 

budget, multi-annual programme budgeting and 
effective  monitoring  and  evaluation  (M&E)  of 
project implementation can dramatically enhance 
the  efficient  and  effective  use  of  resources. 
The  use  of  public  funding,  including  ODA,  to 
strengthen  planning  and  budgeting  processes 
and  improve  the  quality  and  standards  of  public 
expenditure  and  planning  frameworks  in  each 
sector  (Foster  and  Briceño-Garmendia,  2010) 
can  help  to  reduce  costs  and  improve  efficiency 
and effectiveness. There is also a need for better 
coordination  among  donors  in  order  to  avoid 
duplication, create synergies, fill gaps and reduce 
costs.  Proper  M&E  of  infrastructure  investment, 
the  removal  of  regulatory  obstacles,  including 
lengthy  and  costly  expropriation  and 
legal 
procedures, and greater capacity of public works 
departments  and  national  or  local  governments 
to  coordinate  and  manage  projects,  monitor 
outcomes  and  provide  quality  services  all  serve 
to  reduce  construction  and  maintenance  costs 
and  to  make  more  efficient  and  effective  use  of 
finance.  The  existence  of  specialised  bodies, 
facilities  or  funds  for  investment  in  infrastructure 
facilitates  capacity-building  efforts  as  well  as  the 
pooling  of  resources  and  the  effectiveness  of 
technical assistance. 

Transparent and stable regulatory 
framework and governance

in 

Regulatory  and  governance  reforms  are  often 
needed  in  order  to  make  more  effective  use  of 
private-sector  finance  for  infrastructure.  In  their 
systematic  review  of  studies  on  the  impact  of 
infrastructure, 
private-sector  participation 
Thillairajan  et  al.  (2013)  find  that  the  outcomes 
are  ambiguous  unless  they  are  accompanied  by 
corresponding  changes  in  market,  institutional 
and  governance  structures.  Similarly,  Cadot 
et  al.  (2013)  in  their  review  of  AfT  evaluations 
point  out  that  while  there  is  some  support  for 
the  argument  that  trade  costs  are  reduced 
via  investments  in  hard  and  soft  infrastructure 
(e.g.  ports  and  roads  or  customs),  the  failure  to 
make  complementary  reforms  –  especially  the 

introduction  of  competition  in  transport  services 
–  may  erode  the  benefit  of  these  investments. 
Nonetheless, they conclude that ‘when all country 
controls are included, the quality of infrastructure 
is  significantly  and  positively  correlated  with  aid 
to infrastructure’ (Cadot et al., 2013). In Moldova, 
long  queues  of  trucks  at  customs,  delays  in  the 
provision  of  transport  documents  and  lack  of 
transparency in bidding or procurement processes 
eroded confidence and reduced the development 
impact and effectiveness of infrastructure finance 
(CI by Ghedrovici, 2015).

Large  gaps  in  infrastructure  reflect  market  and 
governance  failures  and  involve  complex  political 
economy issues. Participation in bids to undertake 
infrastructural  projects,  especially  in  the  risky 
environment  of  LICs,  is  usually  limited  to  a  very 
small number of domestic and foreign companies 
with  close  ties  to  governments  and  ruling  elites. 
Lack  of  transparency  in  concession  awards  and 
contract  structures,  or  in  pricing  and  taxation 
policies,  or  allegations  of  preferential  treatment, 
capture  or  corruption  can  delay  or  even  cancel 
project implementation. Whitfield and Therkildsen 
(2012) find that relationships between ruling elites 
and  entrepreneurs  shape  economic  outcomes 
through  the  creation  of  bureaucratic  mechanisms 
and administrative capabilities that, depending on 
political incentives, can either expedite or stall the 
implementation of particular policies. This finding is 
especially relevant to investments in infrastructure. 
Canning  and  Bennathan  (2000),  for  example, 
find  that  in  1985,  the  estimated  rate  of  return  to 
electricity-generating  capacity  ranged  from  100% 
a year in Bangladesh, Bolivia, China and Kenya to 
10% or even negative returns in some countries (Lin 
and Wang, 2014). Harrison et al. (2012) also note 
that SSA firms are no less productive than firms in 
other countries, once allowances are made for the 
quality of the business climate. Hence, the quality 
of  the  business  climate  and  the  nature  of  state–
business  relations  are  crucial  to  the  efficient  use 
of investment in infrastructure. This view was also 
widely shared by the participants in the workshops 
conducted in Bangladesh, Mauritius and Moldova. 

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Combining finance and policies to implement a transformative post-2015 development agenda | 217

CHAPTER 6. The link between finance and policies for selected enablersInfographic 4 | Enabler: Infrastructure

CHAPTER 6. The link between finance and policies for selected enablers

ENABLER: INFRASTRUCTURE

Infrastructure investment: 
Bangladesh

Investment in infrastructure

Infrastructure is a key enabler for sustainable 

development. There are large, long-term finance 

needs for infrastructure in developing countries. 

Long-term finance requires:

  the mobilisation of domestic resources

  the active support of DFIs and MDBs in 

employing appropriate financial instruments

Blending facilities can help to:

  pool financial resources

  mobilise additional private finance

  enhance the impact and efficiency 

of finance for infrastructure

Bangladesh has undergone significant 

economic and social development with per 

capita income increasing from $90 in 1973 

to $1,044 in 2013. 

TRANSPORT
$36 - $45 bn

IRRIGATION 
$7.7 - $11.6 bn

POWER
$11 - $17 bn

2011-2020
$7.4 bn - $10 bn / year

TELECOMMUNICATIONS 
$5 bn

WATER & SANITATION
$12 - $8 bn

WASTE MANAGEMENT 
$2.1 - $4.2 bn

Role of policy for mobilisation and 
effective use of finance for infrastructure

Alternative financing: 
Moldova

National policies for effective use

capacity building for cost-effective 
implementation, budgeting, 
monitoring and evaluation

transparent and stable 
regulatory framework 
and governance

specialised facilities  
and economic zones

International policies for effective use

monitoring and evaluation of DFI 
investments in infrastructure

National policies to mobilise finance

guidance and capacity building  
for project appraisal,  
selection and budgeting

appropriate and transparent 
regulatory framework and 
governance

capacity building for transparent  
and effective PPPs

International policies to mobilise finance

assistance in project preparation, 
blended finance and other 
instrument to de-risk investment

The poor quality of Moldova’s infrastructure is a critical 

binding constraint for promoting its economic development. 

An ERD modelling study focused on two sources of finance 

for infrastructure improvements: foreign transfers and domestic 

tax revenues. 

INCREASED INVESTMENT IN INFRASTRUCTURE

Foreign transfers  
> tax increases
Higher growth rate  
of private consumption 

Exports from industrial  
and agricultural sectors

Poverty rate  
and poverty gap 

GDP, exports and  
private consumption

Bangladesh needs to spend between $7.4 bn and $10 bn a year between 2011  

and 2020 (7–10% of annual GDP) to improve its infrastructure. 

Between 1990 and 2012,  
Bangladesh attracted only $10.1 bn  
from the private sector  
in the telecommunications and energy  
sectors, representing 1.1% of GDP  
(2007–2012) and 2.8%  
of all private investment in infrastructure. 

IIFC

IDCOL

BIFFL

IPFF

This has resulted in a rapid rise in 

government and public spending to meet 

demand. Four bodies have been created 

to finance and facilitate new infrastructure 

projects: 

  The Infrastructure Investment Facilitation 

Centre (IIFC) identifies infrastructure 

projects and potential private investors

  The Infrastructure Investment Development 

Company Limited (IDCOL) bridges the 

financing gap for medium- to large-scale 

infrastructure (inc renewable energy) 

through equity financing

  The Bangladesh Infrastructure Finance 

Fund Limited (BIFFL) provides long-term 

financing for PPP projects

   The Investment Promotion and Financing 

Facility (IPFF), supported by the World 

Bank as a separate unit of the Bangladesh 

Bank, finances private sector infrastructure 

projects

218 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 219

20131973GDP$90$1,044Specialised facilities and economic zones

6.2.3 

 Conclusions and implications regarding 
investment in infrastructure

(2006)  finds 

In  view  of  growing  infrastructural  needs  and 
limited financial resources, exploiting economies 
of  scale  by  pooling  resources,  accumulating 
experience and/or the geographical concentration 
of  productive  activities  have  also  proved  an 
effective means to reduce the costs of developing 
‘the 
infrastructure.  Hurlin 
productivity of infrastructure investment generally 
exhibits some network effects. In particular, he finds 
that the productivity of investment in infrastructure 
relative  to  non-infrastructure  investment  rises 
with  the  available  stock  of  infrastructure.  When 
a  minimum  network  is  available,  the  marginal 
productivity  of 
is 
infrastructure 
generally largely greater than the productivity of 
other investments.

investment 

that 

In  most  LICs  and  LMICs,  including  Bangladesh, 
Mauritius  and  Moldova,  the  creation  of  SEZs 
and/or  Industrial  Parks  has  contributed  to  more 
intensive  and  cost-effective  use  of  investment  in 
infrastructure. It has also facilitated investment in 
energy-saving  and  green  infrastructure.  Similarly, 
investment  in  infrastructure  to  create  transport 
and growth corridors in order to improve regional 
connectivity  or  link  land-locked  countries  to  sea 
ports can have high economic and social returns. 
In Bangladesh, for example, several mega-projects 
in the transport, communications, and power and 
energy  sectors  have  improved  connectivity  and 
reduced  inter-regional  disparities.  For  example, 
the  Jamuna  Multipurpose  Bridge  connects 
the  eastern  and  western  parts  of  the  country. 
By  facilitating  the  transport  of  passengers  and 
freight, as well as the transmission of natural gas, 
telecommunications  and  electricity,  the  Bridge 
has  contributed  both  to  economic  growth  and 
also  to  employment  and  social  development  in 
previously deprived regions (CI, Khatun, 2015).

There  are  large,  long-term  finance  needs  for 
infrastructure,  a  key  enabler  for  sustainable 
development.  Despite  the  greater  volume  of 
ODA and private finance in developing countries, 
it  is  not  nearly  enough  and  is  not  always  spent 
well.  Long-term  finance  in  developing  countries, 
especially  for  infrastructure,  requires  both  the 
mobilisation  of  domestic  resources  and  also  the 
active  support  of  DFIs  and  MDBs  in  employing 
instruments.  Blending 
appropriate  financial 
facilities such as the EU-Africa Infrastructure Trust 
Fund  or  the  Neighbourhood  Investment  Facility 
can help in pooling financial resources, mobilising 
additional  private  finance  and  enhancing  the 
impact and efficiency of finance for infrastructure. 
DFIs and MDBs have played and could continue 
to play a leading role in promoting the greening 
of infrastructure investments and in providing the 
necessary technical assistance and risk-mitigation 
instruments.  Governments,  in  close  cooperation 
with DFIs and MDBs, can mobilise domestic and 
international public resources, including ODA and 
remittances, to finance smaller-scale infrastructure 
projects (especially in rural areas) that can facilitate 
structural  change,  employment  creation  and 
poverty  reduction  while  preserving  biodiversity 
and  environmental  sustainability.  Better  delivery 
systems,  as  well  as  transparent  mechanisms 
and  appropriate  M&E  procedures,  can  improve 
development  outcomes  especially  if  they  are 
supported by appropriate policies and regulatory 
frameworks to reduce transaction costs and risks. 
The  development  of  infrastructure,  especially 
in  LICs  and  LMICs,  cannot  be  left  solely  to  the 
market. Sustainable development that adequately 
addresses the social, economic and environmental 
considerations of development can be achieved if 
national and international stakeholders join forces 
to  produce  guiding  principles  for  sustainable 
finance for infrastructure.

  6.3 

 The role of finance and policies 
in the development of human capital

Human capital – basically a healthy and educated 
workforce  –  is  central  to  all  dimensions  of 
sustainable  development.  Governments  play  a 
crucial role in developing human capital since the 
main  effort  has  to  be  at  the  national  level.  They 
need to take relevant policy measures (such as on 
job creation, decent work, social assistance, land 
tenure and inheritance) over an extended period 
of  time  (since  such  change  is  never  immediate) 
and take budgetary decisions that ensure that the 
maximum level and share of government budgets 
efficiently reach those who are poor and vulnerable 
(World Bank, 2013b). Equally, governments need 
to  achieve  a  ‘political  settlement’  or  national 
political  consensus  on  the  objectives  of  social 
development. 35  Other  actors  thus  also  have 
important  roles  to  play:  national  elites  (e.g.  on 
taxation),  CSOs  and  social  movements  (e.g.  on 
articulating  popular  voice,  land  tenure,  gender 
equality,  transparency),  the  private  sector  (e.g. 
on  labour  standards,  education  and  vocational 
training,  providing  employment  opportunities 
for  the  poorest),  local  authorities  and  external 
actors  such  as  donors  (e.g.  by  taking  long-term 
perspectives in their support) or the international 
community  (e.g.  by  increasing  transparency  of 
financial flows).

The policies required to eradicate poverty and to 
reduce  inequality  are  in  many  ways  very  similar. 
Essentially  they  revolve  around  three  objectives 
(a)  tackling  chronic  poverty;  (b)  supporting  the 
means  to  overcome  poverty;  and  (c)  stopping 
impoverishment.  In  line  with  economic  policies 
to  create  productive  opportunities 
designed 
and  decent  employment,  they  lead  to  a  focus 

principally  on  three  components  of  human  capital 
development:  education,  health  and 
social 
protection (CPAN, 2014b). This trio of social policies 
is  critical  to  the  eradication  of  poverty  and  the 
reduction  of  inequality,  and  has  been  identified  by 
the  ILO  as  a  ‘social  protection  floor’  (ILO,  2008; 
ILO,  2011a,  2011b) 36,  and  by  the  World  Bank  as 
a  set  of  integrated  services  (World  Bank,  2008). 
Sound  post-primary  and  technical  education  are 
important  because  they  create  links  for  the  poor 
into  the  labour  market;  universal  health  coverage 
(UHC) prevents some of the most common causes of 
impoverishment; and social protection 37 is needed to 
tackle chronic poverty and prevent impoverishment, 
which will safeguard productive assets. 

Education  is  a  particularly  important  asset  in 
overcoming poverty: it builds resilience, capabilities 
and  networks;  it  can  improve  earnings  from  self-
increase  access  to  salaried 
employment  and 
work.  ‘The  economic  and  nation-building  projects 
of  successful  MICs  are  almost  always  supported 
by  substantial  investments  in  education’  (CPAN, 
2014a). 38  While  creating  productive  opportunities 
will largely rely on domestic and international private 
finance, financing health and education services as 
well  as  social  protection  requires  substantial  and 
stable national budgets. Taxation is thus of central 
importance, but ODA can also be used for focused 
inputs, as can other types of financing (e.g. private-
sector investment, especially with respect to labour 
markets;  or  migrant  remittances,  which  are  often 
used to support education or out-of-pocket (OOP) 
expenses on health).

This section discusses the sources of human capital 
finance  and  the  different  effects  the  different 
sources might create; the link between finance and 
policies for human capital development and future 
implications. Figure 6.6 summarises the main policy 
issues in this section. 

35 See Chapter 2 for an explanation of the term ‘political settlement’.

36  The ILO’s ‘social protection floor’ approach advocates an integrated set of social policies designed to guarantee basic income 
security (in the form of various social transfers) and access to essential and affordable social services for all (in the areas of health, 
water and sanitation, education, food security, housing etc.) (Bachelet, 2011). 

37  The ERD 2010 on ‘Social Protection for Inclusive Development’ defines social protection as ‘… a specific set of actions to address 
the vulnerability of people’s life through social insurance, offering protection against risk and adversity throughout life; through 
social  assistance,  offering  payments  and  in  kind  transfers  to  support  and  enable  the  poor;  and  through  inclusion  efforts  that 
enhance the capability of the marginalized to access social insurance and assistance.’

38  The  successful  East  Asian  countries  all  invested  heavily  and  at  an  early  stage  in  education,  including  early  childhood,  primary 
and post-primary schooling. The Latin American ‘third way’ successes were also built on massive public investment in education 
(CPAN, 2014a).

6.3

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Combining finance and policies to implement a transformative post-2015 development agenda | 221

CHAPTER 6. The link between finance and policies for selected enablersFigure 6.6 | The role of policy for mobilisation and effective finance for human

Policies for effective use
NATIONAL
Policies on universal coverage
for education, health, social protection
Political consensus
Effective fee waivers
Capacity for health & education
TVETs and PEPs

INTERNATIONAL
Less aid fragmentation
Global financial stability
Decent work agenda
Using GVCs & DFIs to upgrade
production & promote decent work
Knowledge sharing incl. by SSC providers

Financial flows

Public and Private
Domestic and International

Human capital
Health, education
& social protection
for sustainable
development

Policies to mobilise finance
NATIONAL
DRM (tax capacity,
tax reform and extend tax base)
User fees, OOP expenses
Incentives for private sector contributions

INTERNATIONAL
Global ODA targets for education
and social protection
ODA to improve tax systems
International tax agreements

6.3.1 

 Financing human capital: 
different sources, different effects

In  discussing  the  financing  of  the  enhancement 
of  human  capital,  and  particularly  the  access  of 
the  poorest  to  the  conditions  for  obtaining  and 
retaining the employment they need to overcome 
and stay out of poverty, we examine three areas: 
universal  health  coverage,  education  and  skills 
systems, and social protection. 

National-level  education  and  health  sectors 
require  large  expenditures,  beyond  what  the 
governments  of  most  developing  countries 
currently invest, if they wish to ensure that poorer 

members  of  society  can  obtain  the  employment 
they  need  to  overcome  poverty.  The  Chronic 
Poverty  Report  (CPAN,  2014b:128-131)  shows 
that  although  public  spending  in  developing 
countries overall tripled between 2000 and 2011 
this  rise  conceals  huge  variations.  Thus  around 
2.5 billion people live in multidimensional poverty 
in  countries  where  governments  spend 
less 
than $1,000 per person per annum and of these 
around 540 million live in 44 countries where the 
governments  spend  less  than  $500  per  person 
per annum, mainly in SSA and South Asia. Levels 
of  public  expenditure  in  these  44  countries  are 
not  projected  to  increase  adequately  by  2030. 
Looking  towards  2030  the  Chronic  Poverty 

International  discussion  and  initiatives  on  health 
financing have focused very strongly on inclusion 
by  reducing  the  informal  and  formal  payments 
needed  to  obtain  access  to  health  services.  In 
contrast  education  financing  has  only  recently 
begun to adopt such an approach. At the political 
level,  education  has  in  many  countries  been 
a  priority  sector,  part  of  the  leading  political 
development ‘project’ of national elites. Countries 
that  succeeded 
in  tackling  chronic  poverty, 
for  example,  invariably  gave  a  high  priority  to 
education early in their development trajectories. 
Many  of  the  same  countries  are  only  recently 
giving  priority  to  massive  public  expenditure 
on  health,  and  this  too  has  sometimes  been  in 
response  to  actual  or  potential  social  conflict. 
This is especially true in East and Southeast Asia 
(CPAN,  2014a).  Interestingly,  in  the  EU’s  own 
development cooperation programmes, health is 
rarely a top priority (Particip et al., 2012).

Report  suggests  that  some  countries  with  large 
populations, such as India and Indonesia, will by 
then  see a  doubling  of  government  expenditure 
per  person  and  will  face  major  challenges  in 
scaling  up  services.  For  others,  and  particularly 
for  countries  in  SSA  with  large  numbers  of  poor 
inhabitants,  government  spending  is  likely  to 
remain severely constrained over the period. For 
such countries external support will be particularly 
important.

The main implications are, first, that it is paramount 
to improve tax efficiency. Second, that improving 
tax  incidence  equity  is  also  important  in  more 
unequal societies. Lastly, if the finance is available, 
it will also be vital to increase know-how to operate 
on  a  large  scale.  Among  the  CIs  commissioned 
for  this  Report,  Mauritius  invested  early  (1976) 
in universal secondary education, which enabled 
those  from  poor  families  to  obtain  work  in  the 
manufacturing  and  services  industries  in  the 
1980s  and  1990s,  showing  that  is  possible  for  a 
LIC/LDC to make such investments for the future 
(CI,  Treebhoohun  and  Jutliah,  2015).  Ecuador’s 
social  development  (see  Box  6.9)  also  involved 
major  investment  in  universal  education  up  to 
tenth  grade,  well  beyond  the  primary  level,  as 
well as in free health care (CI, Borja and Ordóñez, 
2015).  Education  has  enormous  potential  to 
contribute  to  tackling  chronic  poverty,  stopping 
impoverishment  and  sustaining  emergence  from 
poverty  (CPAN,  2014b).  Improved  access  by  the 
poor and vulnerable to good health services is the 
main universal means to prevent impoverishment. 
Health-related  expenses 
the  most 
important reason why households fall back below 
the poverty line, even in some of the fast-growing 
Asian economies, such as Bangladesh, China and 
Vietnam (Van Doorslaer, 2006).

remain 

222 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 223

CHAPTER 6. The link between finance and policies for selected enablersBox 6.9 | Financing social development – lessons from the Ecuador Country Illustration

Ecuador underwent a major experiment in social development under the leadership of President Rafael Correa, who has been in 
office since 2007. 

The CI identifies a number of enablers including (a) a strong and lasting political settlement around the person of the president, 
backed  up  by  a  clear  vision  and  development  philosophy  entitled  ‘Buen  Vivir’  or  ‘Sumak  Kawsay’,  which  critically  includes  the 
country’s large indigenous population; (b) the enhancement of human capital through better education and health policy coverage; 
(c) improved quality of public institutions, in particular the tax revenue system and organisations implementing health, education and 
social-protection policies; and (d) trade, in particular the sustained rise in international oil prices and revenues (apart from a dip in 
2009) and the overall stability of the US economy.

The results of this effort have been substantial. Inequality has dropped in both urban and rural areas (Gini index down from 0.505 to 
0.487 between 2006 and 2010). Poverty and extreme poverty have also declined (from 60% to 53% and 17% to 13% respectively in 
the same period). There is also greater equality and fewer pockets of poverty. The coverage of the national Conditional Cash Transfer 
programme (the Bono de Desarrollo Humano, which provides $35 per month, conditional on 75% school attendance and monthly 
health check-ups of the beneficiaries’ children) has increased from 1.1 to 1.8 million of the country’s 13 million inhabitants. Social 
security has been extended to 55% of workers employed in the formal economy, which is about half of all employment. Primary and 
middle education (grades 1–10) is now free of charge and access barriers (fees, uniforms, etc.) have been eliminated. As a result 
education up to 10th grade is now universal. The employment of children aged between five and 17 years has fallen from 30% to 
17% of the labour force. Health care is also offered free to all citizens.

The financing of this major effort in social development has been achieved largely by a substantial improvement in tax collection, 
the careful management of external debt and the use of reserves (international monetary reserves and sovereign stabilisation funds). 
External sources, including ODA (0.5% of GDP), remittances (going mainly to better-off families) and FDI (although foreign investors 
have been reticent following the renegotiation or nationalisation of the oil-extraction industry and mobile telephone companies) have 
been negligible in providing finance for development, although China has provided up to $6 bn partly in loans and partly through 
oil purchases. Following the national financial crisis in 1999, value-added tax (VAT) was increased (from 10% to 12%) and coverage 
substantially  extended,  and  income  tax  rose  from  around  1.5%  to  4.5%  of  GDP  between  2000  and  2012.  These  improvements 
in tax revenues were helped by specific policies for DRM based on a thorough overhaul of the tax service in the 1990s and the 
renegotiation of licenses for oil extraction and for mobile telephony, giving the government a much greater share of the revenue 
in both sectors. Tax coverage has been greatly extended by improving efficiency, systematic enforcement, legal action against tax 
evasion and simplified processes for small traders and producers to bring more of the informal economy into the system. In terms 
of expenditure, social spending increased from 2.9% of GNP in 2000 to 9.7% in 2010 and, while in the first half of the decade the 
government devoted 19% of its budget to social services, in the latter half this figure rose to 27%.

A key policy for the effective use of finance was the decision to use the US dollar as the national currency following the 1999 crisis. 
This  stabilised  the  economy  and  controlled  inflation,  but  it  also  removed  the  government’s  ability  to  use  macroeconomic  policy 
instruments and increases the importance of fiscal instruments in managing the economy. The ‘dollarisation’ policy carries potential 
risks, as does the continued heavy dependence of the economy on oil extraction and the need to make loan repayments to China.

Source: CI by Borja and Ordóñez (2015)

Financing health care for human capital

As  Figure  6.7  shows,  there  are  huge  regional 
variations  in  the  patterns  of  public  and  private 
financing  of  health  care.  In  Western  Europe  and 
North  America  public  expenditure  on  health  is 
more  than  twice  as  high  as  private  expenditure, 
whereas in other regions the two are more even, 

and  in  Africa  and  in  Asia-Pacific  private  finance 
outstrips public spending. Within private finance 
OOP payments that undermine poverty-reduction 
efforts  and 
impoverishment,  are 
consistently more important than private pre-paid 
plans, but the difference is particularly marked in 
regions that have a larger number of developing 
countries.

increase 

Figure 6.7 | Sources of healthcare financing by region, 2011 (as a percentage of GDP)

P
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Western 
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Euro

orth
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the Pacific
the Carib
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Source: ILO (2014).

Note: Regional averages weighted by total population

dle
East
Mid

Africa

World

General government expenditure
on health except social security funds

Social security expenditure on health

OOP

Private prepaid plans

Other private health expenditure

The World Health Organization (WHO) has played 
a  strong  role  in  developing  the  international 
consensus  reached  in  2008  that  UHC  can  be 
achieved  only  with  a  massive  increase  in  public 
expenditure, whether into an insurance-risk pool to 
which both public and private providers contribute 
or into a publicly funded service. The 49 LICs need 
to  raise  public  expenditure  from  $32  to  $60  per 
person to achieve UHC. ‘The practical difficulties in 
collecting  tax  and  health  insurance  contributions, 
particularly in countries with a large informal sector, 

are  well  documented.  Improving  the  efficiency  of 
revenue collection will increase the funds that can 
be used to provide services or buy them on behalf 
of the population. Indonesia has totally revamped 
its  tax  system  with  substantial  benefits  for  overall 
government spending, and spending on health in 
particular’  (WHO,  2010).  The  importance  of  this 
is also stressed in the Indonesia CI, while the CIs 
on  Ecuador  and  Tanzania  underline  the  need  to 
reform  and  strengthen  taxation  in  order  to  raise 
domestic revenue.

224 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 225

CHAPTER 6. The link between finance and policies for selected enablers 
 
Financing education for human capital

Figure 6.8 |  Public spending on education in 

country income groups in 2000 and 2010

Most  governments  recognise  that  education  is 
critical  to  economic  success,  and  may  therefore 
be more inclined to invest public resources in this 
sector  rather  than  in  health  or  social  protection 
(CPAN, 2014b). Ecuador, Indonesia and Tanzania, 
for  instance,  have  explicitly  chosen  to  spend  tax 
revenue  on  education  and  health  in  order  to 
develop their national human capital. Despite the 
greater commitments made by many governments 
to  education  compared  to  health,  there  remains 
a  major  funding  deficit  for  education,  and  many 
children in countries that spend significantly less 
than UNESCO’s estimate of basic education costs 
are deprived of a decent education.

In general, countries raise revenues for education 
from  public,  private  and  international  sources 
(Vegas et al., 2011). The largest share comes from 
the public sector (central, regional, local) (Saavedra, 
2002; Figure 6.8). Public financing includes both 
direct  public  expenditure  on  education  and 
subsidies (e.g. scholarships, tax reductions, loans). 
According  to  the  Leading  Group  on  Innovative 
Funding  for  Development  (2010),  governments 
in  developing  countries  typically  spend  4%  of 
their  GDP  on  education.  Increasingly,  national 
governments are decentralising the responsibility 
for  raising  and  managing  education  funding  to 
subnational  levels  (Vegas  et  al.,  2011),  although 
‘without  central  government-led  equalization 
schemes to compensate for varying fiscal capacity 
across  jurisdictions,  fiscal  decentralization  can 
lead  to  wide  disparities  in  resources  available 
for  learning’  (Vegas  et  al.,  2011).  Furthermore, 
‘requiring  local  governments  to  raise  all  their 
own revenue for education is likely to result in an 
unacceptably  high  degree  of  inequality  in  pupil 
spending’  (Vegas  et  al.,  2011).  The  role  of  local 
government  in  social  spending  is  discussed  in 
more detail in the next section.

6

5

4

3

2

1

0

P
D
G
%

Low
income

Low middle
income

Upper middle
income

High
come

2000

2010

Source: Authors’ illustration based on WDI data, 
accessed June 2014

Private  sources  represent  close  to  20%  of  total 
national  educational  finance  (Saavedra,  2002). 
These sources include households, communities, 
CSOs  (including  some  that  are  faith-based),  and 
the private sector. 

Household expenditure is a crucial component of 
education finance. Households incur direct costs 
(e.g.  tuition  fees,  transport,  uniforms,  materials, 
student  loans)  and  indirect  costs  (such  as  the 
opportunity  cost  of  having  children  in  full-time 
education rather than in productive employment) 
(Saavedra,  2002).  While  fees  constitute  a  major 
source  of  revenues  for  the  education  system,  in 
many  LICs  they  also  represent  a  large  share  of 
total  household  spending,  particularly  for  the 
poor,  and  so  place  a  disproportionate  burden 
on them (Vegas et al., 2011). It has been argued, 
however, that abolishing school fees can result in 
a drastic decline in the quality of schooling in the 
absence  of  alternative  sources  of  funding  (Ladd 
and Fiske, 2008).

The private sector also plays a prominent role in 
providing  basic  education  in  many  developing 
countries,  although  it  seldom  helps  to  reduce 
poverty  or  inequalities  directly  (CPAN,  2013). 
Some private schools are fully or partially publicly 
funded  while  others  are  exclusively  privately 
funded.  In  LICs,  fragile  states  and  post-crisis 
countries,  domestic  financing  of  education  may 
be  limited  due  to  limited  fiscal  space  and  state 
capacity.  In  such  cases,  ODA  may  be  crucial 
(Vegas et al., 2011).

Aid to education represents 8.5% of gross bilateral 
ODA,  but  has  declined  recently  (Development 
Initiatives, 2013; Global Campaign for Education, 
2013).  The  proportion  allocated  through  public 
budgets  has  also  fallen  while  the  share  of  ODA 
that  is  channelled  via  general  or  sector  budget 
support,  the  most  effective  form  of  support,  has 
remained  below  5%  and  has  also  fallen  recently. 
Finally, ODA for the education sector is remarkably 
uneven among countries. Rose (2013) calculated 
that  the  cost  of  providing  primary  education  is 
around $130 per child, whereas LICs on average 
allocate $41 from their own budgets and receive 
$16  from  donors.  Even  around  this  low  average 
there are huge variations. ‘For instance, while aid 
to  basic  education  in  2011  was  $39  per  child  in 
Afghanistan,  it  was  only  $4  in  Chad,  which  has 
some  of  the  poorest  education  indicators  in  the 
world’  (Rose,  2013).  Support  for  basic  education 
in  LICs.  The 
is  also  plummeting, 
bulk  of  ODA  for  education  goes  to  secondary 
and  post-secondary  education,  although  this 
includes  scholarships  and  imputed  student  costs 
incurred by donor countries hosting them (Global 
Campaign for Education, 2013). 39 

including 

The level of decentralisation and source of public 
finance  affects  distributional  outcomes.  Part  of 
the challenge is that education financing is often 
decentralised.  In  both  Kenya  and  Thailand,  for 
instance,  this  helps  to  explain  why  education 
outcomes have been quite regressive. The typical 
policy  response  is  to  standardise  spending  per 
pupil.  However,  this  is  not  strong  enough  to 

counter  the  biases  against  children  from  poor 
backgrounds  or  in  poor  regions,  or  the  cost 
differences  between  different  school  areas,  as 
was found in the USA (Li and Wang, 2014). Equity 
can be defined as service provision that meets a 
minimum  absolute  standard,  where  educational 
resources and outcomes are within an acceptable 
range, or where they are not affected by an area’s 
wealth.

to  encourage  children 

The  focus  of  progressive  policy-making  has 
typically been on improving enrolment, improving 
gender  equity,  and,  linked  to  this,  providing 
conditional  or  (more  rarely)  unconditional  cash 
transfers 
from  poor 
families  to  remain  in  school  longer.  Although 
the  policy  focus  on  access  to  primary  education 
is  very  important  ‘the  sheer  act  of  enrolment 
does  not  by  itself  help  children  or  their  families 
emerge from poverty’ (CPAN, 2014b). To achieve 
upward  mobility,  several  years  of  post-primary 
education  and  the  acquisition  of  skills  that  are 
useful in the labour market are critical (Shepherd, 
2011).  In  many  countries,  however,  the  focus  on 
the  interventions  required  to  make  education 
a  real  motor  of  poverty  eradication  (access  by 
underprivileged children to pre-school education, 
helping  children  from  poor  families  to  complete 
primary and lower-secondary education and then 
into paid work) has been weak, with the exception 
of the above two issues. Moreover, ‘if education is 
of poor quality, it greatly constrains its utility [...]. 
Where demand for labour is low or labour markets 
are  discriminatory,  education  may  not  make  as 
much a difference as it could’ (Shepherd, 2011). 

introduced  universal  education 

Education  equity  is  a  relatively  recent  policy 
in  many  developing  countries. 
discussion 
Mauritius 
in 
1976,  but  in  Ecuador  this  choice  was  not  made 
until  2007.  Similarly,  China 
its 
first  education  equity  policy  only  in  2004/5  in 
response to growing disquiet over the excessive 
fees  charged  by  some  largely  urban  private 
educational  establishments,  the  under-funding 
of rural schools, and the inadequate educational 

formulated 

226 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 227

39 Largely because higher levels of education per student cost so much more than basic education.

CHAPTER 6. The link between finance and policies for selected enablers 
facilities  for  internal  migrants.  This  focused  on 
reducing  the  inequitable  allocation  of  resources 
within counties, including the quality of teachers, 
and on controlling switching between schools by 
those who were wealthier or better informed. By 
2010,  the  need  to  redistribute  resources  across 
wider  territories  (provinces)  was  recognised,  and 
grants  to  schools  from  central  and  provincial 
coffers  are  rising.  ‘By  2012,  a  full  system  of 
national  education  standards  had  been  put  in 
place to monitor the progress of education equity 
in  the  counties  and  provinces.  For  the  first  time, 
the  central  government  clearly  delineates  the 
required  education  equity  standard  based  on 
a  composite  measure  of  resources  for  schools 
within  a  county’,  and  equity  is  supported  by  a 
Fund Guarantee Mechanism (Li and Wang, 2014). 
Few other developing countries have such explicit 
policies on educational equity.

UNESCO  has  recently  begun  to  assume  the 
leadership on expanding access to and improving 
the  quality  of  education  that  WHO  has  already 
shown  in  the  field  of  health.  The  discussion  on 
education financing has generally focused little on 
equity, however, even in the context of the MDGs, 
but  rather  on  bridging  the  funding  gap,  mainly 
through  DRM.  There  is  relatively  little  analysis 
of  equity  in  financing,  and  where  this  has  been 
researched the results have not  been promising, 
for  example  in  Thailand  (Cuesta  and  Madrigal, 
2014) or Kenya (Watkins and Alemayu, 2012).

Financing social protection to maintain 
investment in human capital

2009). 

(OECD, 

Social  protection  ‘is  an  essential  investment 
that  contributes  to  economic  growth  and  makes 
growth  more  pro-poor  while  directly  reducing 
Social-protection 
poverty’ 
measures  reduce  vulnerability  to  poverty  and 
climate-related  hazards,  and  act  as  a  bridge 
between  humanitarianism  and  development  and 
a link between disaster risk reduction and climate 
change adaptation (World Bank, 2011). Since the 
long-term anti-poverty effects of social protection 

are substantially achieved by enabling those living 
in poverty to have access to health and education 
services, it is vital to avoid reducing the financial 
resources  allocated  to  those  sectors  in  times  of 
economic shocks. In fact, governments may have 
little scope to reallocate spending, particularly in 
LICs  where  ‘budgets  are  small,  needs  are  great, 
and competition for resources from other sectors 
is  intense’  (World  Bank,  2012).  This  means  that 
the  challenge  of  obtaining  finance  to  eradicate 
poverty  and  reduce  inequality  is  to  dramatically 
increase resources for all three – health, education 
and  social  protection.  The  main  sources  of 
financing for social protection which ideally need 
to  be  in  a  form  that  is  sustainable  over  time 
are:  (a)  domestic  public:  revenues  of  national 
governments 40; 
including  OOP 
(b)  private, 
payments, private insurance premiums or services 
provided by the corporate sector, community and 
NGO  financing  (including  full  privatisation  and 
PPPs), household savings and OOP expenditure; 
and  (c)  international  public  aid  (Bastagli,  2013; 
Hagen-Zanker et al., 2010). 

Although  domestic  resources  are  growing  in 
developing  countries  overall  they  remain  low 
in  many  countries.  The  Chronic  Poverty  Report 
(CPAN,  2014b)  calculates  that  86%  of  people 
who are multi-dimensionally poor live in countries 
where government spending per person per year 
is  less  than  $1,000.  South  Asia  and  sub-Saharan 
Africa  are  the  two  regions  with  both  the  highest 
number of poor (500 mn and 350 mn respectively 
in  $1.25  a  day  poverty)  and  the  lowest  levels  of 
government  spending.  For  instance  in  2011, 
government  spending  in  India  (with  269  mn 
extreme poor) was $860 per person per year while 
in Bangladesh (65 mn poor) it was $250. In Nigeria 
(88  mn  poor),  with  one  of  the  highest  levels  of 
government  spending  in  Africa,  it  was  at  $650, 
while  in  DRC  (50  mn  poor)  and  Ethiopia  (25  mn 
poor) it was $200 per person per year. Increasing 
domestic  public  resources  in  these  regions  is 
thus a key challenge for financing the post-2015 
agenda and while estimates suggest this is likely 
to  happen  in  South  Asia,  sub-Saharan  African 

countries,  with  the  largest  number  of  extreme 
poor and high projected population growth rates 
for  decades  to  come  (ERD  2013),  are  likely  to 
experience only slow growth in public expenditure 
up to 2030. At the same time, international public 
finance currently accounts for 65% of the resource 
inflows in countries with public expenditure levels 
of below $200 per person per year, so ODA will 
continue to be a vital source for them not least as 
a catalyst for improving the mobilisation and use 
of resources (CPAN, 2014b).

Despite  the  scale  of  this  challenge  the  ILO’s 
Advisory  Group  on  Social  Protection  points  out 
that  various  populous  middle  income  countries 
such as China, Indonesia, Brazil, India and Thailand 
have introduced and expanded large-scale social 
floor  programmes  in  the  last  15-20  years.  Even 
poorer countries such as Ethiopia have done so, 
albeit with external support (Box 6.14). Examining 
various  costing  studies  thus  leads  the  Group  to 
conclude  that  even  the  poorest  countries  can 
afford  to  implement  nationally  defined  social 
protection  ‘floors’  (Bachelet,  2011).  The  ILO’s 
costing  studies  on  a  basic  package  of  social 
protection  for  a  selected  set  of  LICs  and  MICs 
in  SSA  and  Asia  show  that  the  cost  of  a  cash-
benefit package, including old-age and disability 
pensions  and  family  allowances,  but  excluding 
health  care,  is  between  2.2%  and  5.7%  of  GDP 
(ILO, 2008). Even in the absence of high growth, it 
is possible to enhance fiscal space if the prevailing 
political settlement supports this. The debate on 
affordability  has  generated  significant  interest 
in  the  international  development  community. 
Affordability  is  not  an  absolute  but  rather  a 
question  of  political  preferences  and  trade-offs 
among  competing  goals  in  a  context  of  limited 
resources (Hagen-Zanker et al., 2010; World Bank, 
2012).

6.3.2 

 The role of policies and finance 
for human capital development

Sufficient  finance  for  human  capital  will  not  be 
mobilised  without  significant  complementary 

policies. We discuss the importance of tax policies, 
budget  targets  e.g.  for  health,  international 
support, micro-insurance and SSC. We then look 
at the effectiveness of finance for human capital, 
which  can  be  enhanced  through  various  policies 
including 
fee-waiver  systems 
for  OOP  payments  for  health  services;  less  aid 
fragmentation  and  more  long-term  investment; 
active  employment  and  training  policies;  public 
employment  programmes;  productive  safety 
nets; and the promotion of human capital through 
GVCs and TNCs.

following: 

the 

Policies to mobilise finance for human capital

Strengthen the tax base

Policies  to  mobilise  domestic  resources  and 
broaden fiscal space include: (a) freeing resources 
by  cancelling  debt;  (b)  using  revenues  from 
natural  resources  to  finance  social  programmes, 
and  reallocating  expenditure;  (c)  making  tax-
collection systems more efficient (Bachelet, 2011; 
commissioned  background  paper  by  Brun  and 
Chambas,  2015);  and  (d)  broadening  the  tax 
base and extending statutory social insurance by 
promoting  formal  employment  (Bastagli,  2013; 
commissioned  background  paper  by  Brun  and 
Chambas, 2015). Other policies open to countries 
where it is too difficult to extend the tax base in 
the  medium  term  include  (e)  applying  tariffs  on 
commodity  exports  (although  this  has  efficiency 
implications),  land  and  property  taxes,  urban 
property taxes and agricultural marketing boards 
(DiJohn,  2011); 
(f)  reducing  tax  exemptions 
(commissioned  background  paper,  Brun  and 
Chambas,  2015);  and  (g)  reallocating  resources 
away 
inefficient  social-protection 
interventions  such  as  general  price  subsidies  on 
food or fuel, which tend to be regressive and benefit 
the  non-poor  more  than  the  poor.  The  greatest 
challenge for many countries is to broaden the tax 
base, particularly in contexts with a high level of 
informal labour, weak institutional capacity for tax 
collection, and unclear social contracts – the lack 
of a political settlement including effective social-

from  more 

40  The African Union’s Social Policy Framework for Africa, agreed by Ministers in 2010, is clear that national budgets are the primary source for funding social 

development.

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Combining finance and policies to implement a transformative post-2015 development agenda | 229

CHAPTER 6. The link between finance and policies for selected enablersInternational support for social protection

Micro-insurance

protection coverage, lack of social support, limited 
middle-class  buy-in  to  a  pro-poor  development 
agenda, incomplete citizenship whereby users of 
public  services  see  themselves  as  beneficiaries 
with few rights (Laboratoire Citoyennetés, 2009). 
There  are  dangers,  for  example,  when  social 
spending  commitments  exceed  revenue-raising 
capacity,  perhaps  due  to  demographic  changes 
(commissioned  background  paper,  Brun  and 
Chambas,  2015)  or  when  the  design  of  social-
protection  schemes  fail  to  take  account  of 
additional needs when there are unpredicted co-
variant shocks against which the government has 
to protect the population. 

Box 6.10 | Global fund for social protection

International support for social protection can help 
to unlock these political or practical constraints in 
the short term. However, in addition to financing 
start-up costs, social protection requires sustained 
financial support over long periods of time, which 
can  be  very  difficult  for  donor  governments 
that  have  electoral  cycles  of  four  to  five  years. 
Developing  a  specific 
funding 
mechanism  for  social  protection  (see  Box  6.10) 
could even out these funding cycles and provide 
more continuity and predictability. 

international 

The United Nations Special Rapporteurs for the Right to Food and for Poverty and Human Rights, Olivier de Schutter and Magdalena 
Sepúlveda respectively, have proposed creating a Global Fund for Social Protection (GFSP) (Canavire-Bacarreza et al., 2012). The 
GFSP would stabilise and guarantee international support for poor countries to have the maximum available resources to implement 
rights-based social-protection systems. The GFSP would involve the establishment of:

A support fund to close the shortfall between what LDCs can reasonably pay and what it costs to provide a social-protection floor. 

A re-insurance mechanism to provide temporary funding if a crisis or shock causes an increase in the number of people in need of 
the social-protection support. 

Beneficiary countries would need to adopt a set of commitments such as including social protection for informal workers, extending 
coverage, devoting maximum available resources, taking steps to reduce the dependence on external funding for social protection, 
adopting policies to reduce the risk of shocks, and committing to the institutionalisation of social protection in national law.

The GFSP could also provide non-financial services (such as technical support) to assist LDCs in strengthening their basic commitments 
to providing social protection.

Source: Canavire-Bacarreza et al. (2012)

Health budget targets

Health  ministries  need 
to  develop  better 
relationships  with  ministries  of  finance,  and  to 
help ensure that health is allocated a significantly 
higher proportion of government expenditure. In 
April  2001,  African  Union  governments  pledged 
to  increase  funding  for  health  to  at  least  15% 
of  total  spending,  and  urged  bilateral  donors 
to  increase  support.  To  date,  only  one  African 

country  has  reached  that  target.  Overall,  26 
have  increased  the  proportion  of  government 
expenditure  on  health  since  2001,  but  11  have 
reduced  it.  In  another  nine,  there  is  no  obvious 
trend. Current ODA varies from $115 per person 
in  one  country  to  less  than  $5  per  person  in  12 
others (WHO, 2011). This illustrates the size of the 
gap to be bridged in order to bring the political 
commitment to health into line with that given to 
education.

Micro-insurance has been used in health care and 
social protection in a number of countries for well 
over  a  decade.  It  involves  small  user  payments 
but on a much more predictable basis than OOP 
expenditure.  It  also  offers  scope  to  involve  the 
private sector if managed carefully. The literature 
suggests,  however,  that  it  is  mainly  used  as  a 
mechanism to extend the coverage of government 
social-protection  schemes  where  these  do  not 
achieve universal coverage and specific attention 
needs to be given to making schemes pro-poor. 
Often  these  are  community-based  schemes  for 
specific  groups  and/or  areas  and,  particularly  if 
they  complement  a  government  scheme,  are 
usually  closely  regulated.  Thus,  although  micro-
insurance  schemes  can  extend  coverage  when 
governments  lack  resources  they  are  often  seen 
as a temporary approach until universal coverage 
can  be  established  (Wiechers,  2013;  Jacquier  et 
al., 2007).

South–South Cooperation 

SSC  will  continue  to  be  important  beyond  2015 
because of the extra options it offers developing 
countries,  although  perhaps  not  because  of  its 
scale  which,  in  grant  terms,  is  still  limited.  So 
far  there  is  little  information  on  whether  non-
DAC  donors  are  likely  to  channel  grants  or 
loans  into  social  spending  beyond  investment 
in  infrastructure.  Earmarked  loans  can  free  up 
budgets  for  social  expenditure.  Ecuador,  for 
instance,  borrowed  some  $6  bn  from  China  in 
the period 2005–2010, during which time around 
25%  of  the  budget  went  on  social  expenditure. 
On  the  other  hand,  there  is  solid  potential  for 
South–South  policy  learning  given  similarities  in 
implementation  conditions  and  constraints  and 
the fact that some major proponents of SSC such 
as Brazil, China and India have direct experience 
of running large-scale social-protection schemes, 
some  with  considerable  success  (e.g.  the  Bolsa 
Familia  in  Brazil  or  the  Chinese  Minimum  Living 
Standard Scheme; Bachelet, 2011).

Policies for effective use 
of finance for human capital

Fee-waiver systems for OOP 
payments for health services

In the absence of public funding, people have to 
pay for their own health care (as shown in Figure 
6.8),  which  can  be  a  major  burden  on  poorer 
members  of  society.  There  has  therefore  been 
serious  analysis  of  the  impoverishment  effects 
of  OOP  payments  –  payments  made  on  receipt 
of  a  service  –  which  represent  between  30% 
and  85%  of  all  health  spending  in  the  poorest 
countries.  Evidence  in  LICs  and  LMICs  suggests 
that direct OOP payments represent 50% or more 
of total health expenditure and even up to 86% of 
private expenditure on health (UNTT, 2013; WHO, 
2010).  Complementary  policies  to  ensure  the 
best  use  of  finance  and  reduce  OOP  payments 
have  received  considerable  attention.  Whereas 
public  funding  and  insurance  contributions  can 
be  progressive  in  terms  of  impact  –  although 
this  may  be  true  at  primary  school  level  but  not 
at  secondary  or  tertiary  levels  (Mtei  et  al.,  2012) 
–  OOP  payments  are  generally  regressive  since 
poorer  people  pay  proportionately  more  than 
richer people (O’Donnell et al., 2007; 2008) (see 
Box 6.11). In Tanzania this was partly because the 
fee-waiver  system  did  not  work  well  (Mtei  et  al., 
2012).  Reducing  or  eliminating  cost-sharing  and 
fees  are  therefore  important  UHC  objectives.  ‘It 
is  only  when  direct  payments  fall  to  15–20%  of 
total  health  expenditures  that  the  incidence  of 
financial  catastrophe  and  impoverishment  falls 
to negligible levels’ (WHO, 2010). This is a tough 
target.  ‘The  countries  in  the  WHO  South-East 
Asia  and  Western  Pacific  Regions  recently  set 
themselves  a  target  of  between  30%  and  40%’ 
(WHO, 2010).

Eight  case  studies  of  schemes  to  cut  OOPs 
demonstrate  this  results 
in  greater  use  of 
maternal  health  services,  with  the  exception 
of  the  community  health  insurance  scheme  in 
Guinea, although it is not possible to explain why 

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Combining finance and policies to implement a transformative post-2015 development agenda | 231

CHAPTER 6. The link between finance and policies for selected enablersbecause of limitations in the study design. Some 
schemes with good benefits had surprisingly low 
uptake, reflecting the importance of non-financial 
barriers  and  issues  relating  to  the  quality  of  the 
services.  At  best,  there  was  a  significant  drop  in 
costs  per  birth,  but  they  were  not  eliminated. 

None  of  the  programmes  had  demonstrable 
effects  on  achieving  greater  equity,  nor  was 
targeting  a  strong  element  in  six  of  them,  and 
few  improvements  in  health  outcomes  could  be 
attributed to them (Fabienne et al., 2010).

Box 6.11 | Out-of-pocket (OOP) payments: Ghana, Tanzania and South Africa

OOP payments are consistently regressive in OECD countries, but progressive in several Asian countries because poorer people 
simply cannot afford to use services. OOP payments are regressive in Tanzania and Ghana, where they still constitute a large share 
of total health expenditure. Levels of spending are so much greater in Ghana than in Tanzania and South Africa because of the long 
history of high user fees at public facilities. Ghana has generated the highest levels of user-fee revenue in Africa equivalent to 15% of 
total government recurrent expenditure in the 1980s. People who are not yet covered by national health insurance continue to bear 
the consequences of these high fees. In South Africa, most OOP payments are co-payments made by people with private insurance 
cover. Although these tend to be among richer groups, such payments can nonetheless be catastrophic and deserve attention. All 
countries have mechanisms for exempting vulnerable groups from user fees at public facilities, but household survey data suggest 
that not all eligible persons were exempt (11% in Tanzania and about 25% in Ghana and South Africa). A key factor was patients’ lack 
of awareness of their entitlements.

Source: Mtei et al. (2012)

There has been extensive research on extending 
skilled  attendance  at  childbirth  and  improving 
maternal  health,  with  many  different  approaches 
tested in a variety of settings. Some have sought 
to  address  financial  barriers  experienced  at  the 
household  level,  while  others  have  looked  at 
complementary  policies  such  as  incentives  to 
health  workers  or  aid  mechanisms  that  reward 
good performance of the health system as a whole. 
‘No  single  strategy  is  best  for  all  contexts,  but 
some important lessons for implementation have 
emerged from our case studies. The experience of 
countries that have seen sustained improvements 
in  maternal  health,  such  as  Malaysia  and  Sri 
Lanka, show that the key ingredients for the long 
term  are  local  commitment,  perseverance  and 
adaptability  over  time,  a  holistic  approach  that 
addresses demand- and supply-side barriers, and 
a  focus  on  universal  coverage  as  the  ultimate,  if 
not immediate, goal’ (Fabienne et al., 2010).

Remove discrimination 
in provision of health services 

In  addition  to  continuing  to  extend  coverage 
geographically  and  across  health  services,  a 
number  of  additional  measures  will  be  vital  to 
achieving UHC so that it meets the needs of the 
poorest.  In  particular,  inequalities  need  to  be 
addressed;  especially  the  discrimination  faced 
by  women  and  by  ethnic  and  other  minorities 
and  migrants  in  obtaining  access  to  and  using 
health  services.  Health  workers  may  need  to  be 
trained  to  behave  respectfully  towards  patients 
whom they may regard as inferior, and affirmative 
action  can  be  a  useful  means  to  recruit  health 
workers  from  these  groups.  Services  need  to  be 
located,  scheduled  and  organised  in  such  a  way 
that  people  feel  comfortable  using  them.  Issues 
of quality are also extremely important it is often 
critical  to  provide  a  ‘one-stop’  comprehensive 
service,  backed  by  good  and  accessible  referral 
services. If these aspects are not addressed poor 

people  will  continue  to  use  the  often  poor  and 
weakly regulated, but convenient, private services 
(Genberg et al., 2009; Nayar et al., 2014).

Less aid fragmentation 
and more long-term investment.

increase 

International  financing  has  radically  changed 
over  the  past  10–15  years  with  the  introduction 
of  vertical 
in 
funds  and  a  major 
philanthropic donations, much of this in response 
to the MDGs. Looking at the current landscape of 
health financing from a domestic angle, however, 
it is important to streamline ODA to avoid absurd 
reporting requirements: ‘Viet Nam reports that in 
2009  there  were  more  than  400  donor  missions 
to  review  health  projects  or  the  health  sector. 
Rwanda  has  to  report  annually  on  890  health 
indicators  to  various  donors,  595  relating  to 
human immunodeficiency virus (HIV) and malaria 
alone while new global initiatives with secretariats 
are being created’ (WHO, 2010). The proliferation 
of  vertical 
international  health  programmes 
focused  on  single  or  selected  diseases  has  not 
contributed to developing the capacity of health 
systems as a whole. For example, the investment 
in human resources made by the Global Alliance 
for Vaccines and Immunisation (GAVI), the Global 
Fund  and  the  World  Bank  was  almost  entirely 
in  short  in-service  training  and  supplementary 
allowances  rather  than  systemic  improvements. 

‘There is relatively little investment in expanding 
pre-service training capacity, despite large health 
worker  shortages  in  developing  countries...  the 
majority  of  GAVI  and  the  Global  Fund  grants 
largely 
finance  health  worker 
through  supplemental  allowances,  with 
little 
information  available  on  how  payment  rates 
are  determined,  how  the  potential  negative 
consequences are mitigated, and how payments 
are to be sustained at the end of the grant period’ 
(Vujicic et al., 2012)

remuneration, 

Active employment and training policies 

Obtaining and retaining employment can be critical 
to overcoming and staying out of poverty (Baulch, 
2011).  Unskilled  work  (often  casual,  intermittent, 
and performed in exploitative conditions) is often 
not  enough  to  take  a  household  out  of  poverty: 
having  greater  and  more  appropriate  skills  and 
qualifications will make a significant difference to 
the quality of paid work that a person can obtain. 
It  is  very  hard  for  poor,  uneducated  people  to 
acquire  skills  through  formal  channels:  formal 
TVET can be exclusive and expensive, as well as 
producing disappointing results unless employers 
are involved to ensure that the training is relevant. 
Examples  of  successful  TVET  schemes  in  China, 
Colombia and Tunisia are reviewed in Box 6.12 b.

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CHAPTER 6. The link between finance and policies for selected enablersBox 6.12 | Examples of programmes to enhance skills for employment

Box 6.13 | Financing TVET in Mauritius through a levy–grant system

In 2009, facing high graduate unemployment, the Tunisian government launched a graduate employment programme to foster self-
employment and entrepreneurship. Instead of writing an academic thesis, students could participate in an entrepreneurship track 
that required them to produce a professional business plan. In order to do so, they received business courses (Formation Création 
d’Entreprise et Formation des Entrepreneurs) at local employment offices and individual mentoring from their university professors. 
Finally, students had to defend their business plans before a panel and were invited to participate in a national competition. The 
best  plans  were  awarded  start-up  capital  of  between  $2,000  and  $10,000.  Results  suggest  that  some  of  the  beneficiaries  of  the 
programme became self-employed rather than seeking wage employment.

China systematically evaluated a retraining programme for workers who had been retrenched due to the reforms of state-owned 
enterprises (SOEs) in the cities of Shenyang and Wuhan. The results suggest that retraining can increase both employment and real 
wages, although there was variation between the two locations. In Shenyang, participation in the programme did not result in more 
employment, but did increase the earnings of those who found work. In Wuhan, participants were more likely to find employment 
but their earnings did not improve. The variation is explained not only by differences in programme design (with a more practical 
content in Wuhan), but also by the business environment in both cities. 

The government of Colombia subsidised vocational training (Jóvenes en Acción) for disadvantaged adolescents. Training consisted 
of three months of classroom training and provided the necessary skills for occupations in office administration, IT or trade. After 
completion of the course, participants obtained internships at local firms to acquire first-hand work experience. There was found to 
be a significant impact on formal employment and real wages, although women benefited significantly more than men.

Sources: CPAN (2014) based on Attanasio et al. (2011); 
Bidani et al. (2009); Premand et al. (2012)

The  financing  for  TVET  depends  on  cyclical  and 
structural  changes.  Social  expenditure  has  been 
under  pressure  from  austerity  policies  and  has 
been  focused  on  basic  social  services,  while  the 
quality  and  relevance  of  TVET  provision  have 
come into question. It is commonly believed that 
skills training should be financed (at least in part) 
by  the  individual  who  will  benefit.  The  limited 
funds  available  can  translate  into  a  stimulus  for 
the  involvement  of  the  private  sector,  and  the 
creation  of  more  relevant  training  institutions 
(Gomes, 2009).

The  big  change  in  the  financing  of  TVET  in 
recent years has been the development of PPPs, 
with  employers,  employers’  associations  and 
sometimes  also  NGOs  establishing  partnerships 
the  necessary 
with  governments, 
interface between the supply and  demand sides 
of  investing  in  a  more  highly  skilled  workforce 

reflecting 

(Kingombe,  2012;  Walther,  2009;  Jager  and 
Buhrer,  2000).  At  the  same  time,  the  risk  is  that 
private  or  NGO  providers  will  aim  for  complete 
(or  significant)  cost  recovery,  which  will  exclude 
poor people unless their full costs are met by the 
government.  Box  6.13  describes  the  experience 
of Mauritius in financing TVET.

It  is  also  important  to  understand  how  finance 
can  support  the  development  of  human  capital 
in  ways  that  are  relevant  for  creating  jobs.  This 
needs  to  be  done  through  better  coordination 
between the demand for and supply of education 
and  training.  In  the  coming  years,  new  jobs  will 
increasingly be ‘green’ or in  services underlining 
the  close  interlinkages  between  the  economic, 
environmental 
social  dimensions  of 
sustainable  development.  For  instance,  the  New 
Climate Economy report argues that the political 
viability of a low-carbon transition will depend on 

and 

In  the  early  1990s,  Mauritius  introduced  a  1%  training  levy  on  the  basic  wage  bills  of  all  private  companies.  This  was  meant  to 
complement the government’s financial contribution to TVET and to improve productivity. The levy was paid to the Ministry of Social 
Security,  whose  system  had  proven  effectiveness.  To  encourage  them  to  invest  in  training  their  employees  and  to  pay  the  levy, 
employers could obtain a grant refund of the training expenses incurred. The private sector was involved in all decisions related to 
the use of the levy and in the review of the grant system. The fact that the employers were paying the levy encouraged them to be 
interested in the outcomes (Dubois and Balgobin, 2010). 

The grant-refund formula was revised on a rolling basis in order to ensure that it continued to be effective. In 1996 the government 
decided to remove the 200% tax rebate on the training levy and to treat the training costs in the same way as other expenses. In 
order to maintain the incentives for employers, the ceiling of the grant refund was raised, and costs incurred to study overseas or 
to bring in external expertise were also eligible for a refund. The existence of the levy helped the Industrial and Vocational Training 
Board to secure loans from the World Bank and the Agence Française de Développement (French Development Agency), as it was 
seen to be a sustainable source of funds and served as a warranty for the secured loans. The levy–grant system has allowed over half 
of the Mauritian labour force to benefit from some form of training. Various factors have contributed to the success of the system: 
private-sector ownership, the method of collecting income, and constant M&E.

Source: Dubois and Balgobin (2010)

governments’ efforts to support and compensate 
retrenched workers and communities affected by 
the declining coal and energy-intensive industrial 
sectors.  These  measures  may  include  ‘direct 
financial assistance, retraining and reskilling, and 
investment in community economic development’ 
(Global Commission on the Economy and Climate, 
2014).  The  Indonesian  CI  identifies  the  need  to 
support the sustainability transition by improving 
the skills and capabilities of the labour force (CI, 
Damuri et al., 2015).

Atchoarena  (2009)  argues  that  the  ‘impact  of 
globalization  and  technological  change,  the 
concern for flexibility in the labour market and for 
employability,  the  ageing  of  the  population  and 
the  search  for  more  active  forms  of  citizenship 
are  contributing  to  a  growing  demand  for  youth 
and  adult  education  and  for  a  new  functioning 
of  education  systems’.  Ever  more  children  are 
attending school, but the links between education 
and the labour market, and the availability of jobs, 
have not kept pace. This mismatch risks creating 
a  backlash  against  education  and  suggests  that 

its provision is not always seen in a transformative 
context.

Public employment programmes (PEPs)

PEPs  are  key  elements  of  social-protection 
strategies and can contribute to building national 
social-protection  floors  by  providing  temporary 
employment  and  a  certain  level  of  income  for 
people of working age but who earn very little; they 
can also be used to upgrade or construct social-
service  infrastructure.  PEPs  involve  governments 
creating  employment  in  two  main  forms:  public-
works  programmes,  which  may  offer  cash  or 
for  food  for  work,  and  employment-guarantee 
schemes  or  long-term  rights-based  programmes 
that  offer  some  level  of  entitlement  to  work.  In 
India, for example, according to official statistics, 
the  National  Rural  Employment  Guarantee  Act 
(NREGA), a PEP established in 2006, has provided 
employment  to  about  50  million  of  the  poorest 
households  a  year.  Half  of  the  employees  are 
women,  and  it  has  greatly  increased  public 
awareness  of  the  national  minimum  wage,  the 

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CHAPTER 6. The link between finance and policies for selected enablersBox 6.14

Box 6.14 | Ethiopia’s Productive Safety Net Programme

The Productive Safety Net Programme (PSNP) is one of the world’s biggest social-protection initiatives (Save the Children, 2008). The 
World Bank (2013a) advocates the PSNP as an important example of a large-scale rural safety net in a low-income, drought-prone 
setting. With 80% of Ethiopia’s population dependent on rain-fed agriculture, the country is particularly vulnerable to weather-
related food shortages (World Bank, 2013a). The Government of Ethiopia introduced the PSNP in 2005 as part of the Food Security 
Programme to address food security in a proactive and sustainable manner, and overcome traditional ad-hoc responses to food 
crises. 

The PSNP operates from February to August when the rural population is not engaged in farming activities (HPN, 2012). Transfers are 
provided in the form of food or cash in food-insecure woredas (districts), either in exchange for employment in public works (schools, 
roads, soil and water conservation, water development, etc.) or as direct transfers for labour-scarce households comprising elderly or 
disabled people who are unable work (Gilligan et al., 2008).

The PSNP is managed almost entirely by the government, with the Ministry of Agriculture and Rural Development and Disaster 
Risk Management and Food Security Sector having oversight over the programme and the Ministry of Finance and Economic 
Development in charge of its financial management (World Bank, 2013a). Programme management and implementation are 
delegated to regional and local administrations, using community-level mechanisms to identify beneficiaries and promote local 
accountability and ownership (World Bank, 2010). Food-insecure woredas are identified by the lowest administrative levels in 
Ethiopia, with eligibility based on three years of continuous dependence on relief; the community also identifies the types of public 
works to engage in (Koohi-Kamali, 2010).

In financing the PSNP, the Government of Ethiopia aimed to direct funds that would otherwise be allocated to the annual emergency 
appeals (an average of $265 mn a year) while using the existing capacity and infrastructure of the system of emergency appeals to 
administer the PSNP (World Bank, 2013a). International public resources have been the dominant source of funding, mainly in the 
form of grants and a smaller number of concessional loans, alongside low levels of domestic public finance, primarily in the form 
of civil-servant costs, and these funds are provided through a World Bank-administered Multi-Donor Trust Fund (World Bank, 2010, 
2013a). 

Sources: as cited

indirect impact of which has gone far beyond the 
scheme itself. Perhaps inevitably for such a large 
scheme,  NREGA  has  been  subject  to  criticisms, 
chief among which is its inadequate accountability 
(Drèze  and  Sen,  2013).  As  the  ILO  points  out, 
however,  ‘Public  employment  programmes  will 
only  help  to  alleviate  poverty  in  the  long  term 
if  they  are  designed  to  provide  decent  work, 
including an adequate level of wages, an integral 
skills  development  component  and  full  respect 
for the occupational safety and health of workers, 
while  also  ensuring  beneficiaries  are  covered  by 
existing social security schemes’ (ILO, 2014). 

Productive safety nets

Despite the challenges, almost a billion people in 
developing  countries  are  now  covered  by  some 
form  of  social  assistance.  Progress  has  been 
especially rapid in Latin America and South Asia, 
with East and Southeast Asia catching up rapidly. 
Sub-Saharan  Africa  faces  the  biggest  challenge, 
although  Ethiopia’s  Productive  Safety  Net 
Programme (PSNP) is a bright spot (see Box 6.14). 
To  be  sustainable  in  the  medium  to  long  term 
governments  need  to  provide  the  main  funding 
for  social  protection,  but  the  substantial  start-up 
costs  could  be  supported  by  external  finance. 
Governments  in  LICs  may  be  persuaded  not  to 

educational achievement in developing countries 
is correlated with FDI inflows (Noorbakhsh et al., 
2001). 

Firms  can  also  enhance  their  human  capital  by 
engaging  more  with  GVCs  and  on  better  terms, 
and this policy is complementary to other sources 
of  finance.  The  GVC  literature  is  increasingly 
focused  on  social  upgrading,  understood  as 
‘the  process  of  improvement  in  the  rights  and 
entitlements of workers as social actors […] which 
includes  access  to  better  work,  which  might 
result  from  economic  upgrading  (and)  involves 
enhancing  working  conditions,  protection  and 
rights’ (Barrientos et al., 2010). GVCs can in some 
cases be used for social upgrading and promoting 
decent  work  (Bernhard  and  Milberg,  2011),  see 
Box 6.15. 

Firms could also be encouraged to adopt labour 
standards  (see  Box  6.16).  The  observance  of 
minimum labour standards allowed Cambodia to 
obtain access to the US market.

embark  on  major  social-protection  programmes 
because  of  the  long-term  nature  of  the  financial 
commitment:  donors  thus  need  to  be  willing  to 
make long-term financial commitments in order to 
unlock this constraint.

Promoting human capital 
through GvCs and TNCs

TNCs  can  contribute  to  the  development  of 
human capital, but the linkages between FDI and 
education are complex. They can be both direct 
and  indirect,  but  since  they  tend  to  be  aimed 
more at skilled than at unskilled workers they can 
potentially  increase  rather  reduce  inequalities. 
There  is  evidence  that  TNCs  provide  more 
training than their local counterparts (Iyanda and 
Bello, 1979; Gerschenberg, 1987). Tan and Batra 
(1995)  found  that  firms  are  more  likely  to  offer 
training for their employees when they are large, 
have a highly educated workforce, invest in R&D, 
are  export-oriented  and  use  quality  control.  All 
these  characteristics  are  associated  with  foreign 
ownership (see Dunning, 1993). 

FDI  also  has  indirect  effects  on  human  capital 
through  its  dynamic  effects  on  increased  growth 
and productivity. Higher growth can lead to more 
(private and fiscal) resources, some of which can be 
used to pay for providing education. It is generally 
acknowledged that FDI is associated with higher 
incomes  in  developing  countries,  provided  the 
appropriate policies are in place (e.g. education, 
infrastructure) (UNCTAD, 1999; Borensztein et al., 
1998;	 Xu,	 2000).	 Te	 Velde	 and	 Morrissey	 (2004)	
argue that inward FDI raised the relative demand 
for  skilled  workers  in  Thailand,  and  their  wages 
rose accordingly.

Countries with greater human capital and a skilled 
labour force benefit most from FDI and also see 
their  human  capital  improve  the  most  (Te  Velde 
and	 Xenogiani,	 2007).	 Supporting	 policies	 in	
education  can  enhance  the  impact  of  FDI  on 
growth and hence the resources needed to provide 
education.  Econometric  evidence  shows  that 

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Combining finance and policies to implement a transformative post-2015 development agenda | 237

CHAPTER 6. The link between finance and policies for selected enablersBox 6.15 | GVCs in Africa – capturing the social gains in economic development

Compliance with the horticultural standards set by international supermarkets is often a double-edged sword – especially in African 
countries (for a summary of the debates, see Jaffee and Masakure, 2005). On the one hand, it offers a substantial opportunity for 
producers  to  upgrade  to  higher  value-added  activities  (examples  of  products,  processes,  cold  chains,  and  functional  upgrading 
can be found in Kenya’s horticultural value chains), and in some cases, increased social protection for workers (examples of more 
permanent employment contracts, unionisation and collective bargaining can be found in Uganda’s cut-flower chains). On the other 
hand, it limits participation to producers who can make the investments required for compliance. The high costs associated with 
stringent European standards have been cited as a growing contributor to the expansion of the South–South horticultural trade and 
African  regional  horticultural  value  chains  (Bamber  and  Fernández-Stark,  2013;  Evers,  2014).  Compared  to  European  standards, 
the latter are less stringent, tend to cover far fewer elements and compliance thus tends to be less expensive and time-consuming 
(Barrientos and Visser, 2012). 

In both the Kenyan and Ugandan cut-flower markets, the sexual harassment of workers has become less prevalent thanks to (a) civil-
society campaigns that led to the appointment of gender committees, greater awareness among those working in flower farms, and 
unionisation; and (b) an increase in the number of permanent contracts, making it less likely that supervisors will demand the sexual 
favours associated with hiring casual workers.

Source: Goger et al. (2014)

Box 6.16 | ILO Better Factories Cambodia: A blueprint for promoting international labour rights?

The  ILO  launched  the  Better  Factories  Cambodia  (BFC)  project  in  2001  to  improve  working  conditions  in  garment  factories 
participating in global supply chains. The project combines third-party factory-level monitoring of working conditions with a vigorous 
outreach and education programme. There is sufficient evidence to say that the BFC has benefited all stakeholders – management, 
labour and buyers – by increasing transparency, fostering cooperation, and providing training and outreach, and providing credible 
documentation  of  gradual  factory-specific  and  industry-wide  improvements  in  labour  conditions  (Hall,  2010).  Compliance  with 
provisions regarding child labour and health and safety regulations has improved and is well documented. According to the Center 
for Global Development, ‘ten years on, the experience of BFC has shown that such an innovative and ambitious project, based on 
the principle of social dialogue among national and global stakeholders, can deliver significant improvements in industrial relations 
[…] and contribute to the creation of the institutional space for industrial relations to develop’ (Rossi and Robertson, 2011). Based on 
this experience, the ILO and the IFC jointly established the Better Work Initiative, a public–private programme to assess compliance 
with labour standards in selected economic sectors in Haiti, Indonesia, Jordan, Lesotho, Nicaragua and Vietnam. 

Other research suggests, however, that wages and basic job security have in fact declined for Cambodian garment workers, and 
that genuine collective bargaining remains elusive (Stanford Law School, 2013). The ‘Better Work/Better Factories’ approach lacks a 
specific enforcement capacity, and therefore makes any improvements fragile and probably temporary, particularly in contexts where 
the judicial system is deficient, and subject to corruption and political influence (Hall, 2010). 

Sources: Hall (2010); Rossi and Robertson (2011); Stanford Law School (2013)

The ILO (2006) detects a dramatic rise in private 
systems  for  assessing  the  labour  standards  of 
private 
(and  sometimes  public)  enterprises. 
Although voluntary codes can act as a catalyst to 
strengthen labour laws and their enforcement (ODI, 
2013), the ILO warns that ‘some private monitoring 
initiatives might undermine the public inspection 
function,  create  enclaves  of  good  practices  with 
few  linkages  to  the  rest  of  the  economy  and 
divert attention and resources from other sectors 
that do not necessarily produce for export’ (ILO, 
2011c).  DFIs  are  also  increasingly  recognised  as 
important  actors  in  the  Decent  Work  Agenda: 
their  investments  create  and  sustain  significant 
number  of  jobs  and  commitments  to  uphold 
labour rights – their clients are required to adhere 
to  ILO  core  labour  standards  and  occupational 
health and safety standards as a precondition of 
investment (Ergon, 2010). Unconventional labour 
inspections (e.g. CSO and media watchdogs) are 
therefore the subject of growing attention as they 
may be able to fill gaps in the formal inspection 
system (Deshingkar, 2009; CPAN, 2014a).

6.3.3 

 Conclusions and implications 
for investment in human capital

The section on the enhancement of human capital 
highlighted the vital role of adequate capacity in 
education  and  health  systems,  social  assistance, 
and  decent  work  that  are  required  in  order  to 
make  effective  use  of  finance  in  this  area.  The 
costs of implementing such policies are high and 
have to be sustained over a long period of time. 
As a result, domestic public finance is generally 
the main source even in poorer countries. Various 
options  were  identified  for  the  involvement  of 
domestic and international private finance, (such 
as  in  education  and  health  services),  but  while 
these  options  might  be  appropriate  for  richer 
sectors, the charges involved tend to exclude the 
poorest. One exception to this appears to be the 
growing interest in and scope for micro-insurance, 
where PPPs could be a viable solution to sharing 
costs and extending the coverage of government 
services.  International  public  finance  generally 

plays a minor role although it is still important in 
LICs where domestic public resources are limited. 
If well used and focused ODA can also be catalytic 
in  the  initial  stages  of  establishing  government 
services  in  these  areas,  but  cannot  provide  the 
sustainability  they  typically  require,  and  can 
continue  to  support  the  further  development  of 
social policies in LMICs. The  global  system  and 
policy  environment  also  affects  government 
revenue and spending capabilities both in terms 
of  being  able  to  ensure  global  financial  stability 
and in terms of its ability to regulate international 
finance flows and increase transparency.

While  the  political  commitment  to  education 
is  often  stronger  than  that  for  health  and  social 
protection all three are vital for the development 
of human capital and the eradication of poverty, 
and  each  country  needs  to  develop  its  own 
context-specific  balance.  The  health  sector  has 
developed a more sophisticated discourse on the 
inclusion of hard-to-reach population groups (e.g. 
on OOPs and on the manner in which services are 
provided)  that  could  usefully  be  applied  to  the 
education  sector.  There  is  also  an  incipient  but 
growing  consensus  concerning  publicly  funded 
UHC, and that governments must work out their 
own  context-specific  steps  towards  achieving  it; 
but  there  remains  little  consensus  in  relation  to 
how  to  include  the  poorest  in  education,  and 
how to use private sources of finance to achieve 
equitable  education  provision  as  economies 
develop. There is also broad agreement that it is 
not just the length of compulsory education that 
matters, but also its quality and appropriateness. 
The  quality  of  education  depends  on  the  focus 
of  support,  i.e.  beyond  primary  education,  and 
involving the private sector in making vocational 
training  programmes  more  effective  (e.g.  in 
Mauritius).  Apprenticeships  can  be  effective  in 
raising  employment  and  earnings  provided  that 
they are well targeted and supported by policies 
in relation to the business environment. As GNP 
rises,  it  becomes  more  feasible  to  include  poor 
people in formal training schemes. 

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CHAPTER 6. The link between finance and policies for selected enablersInfographic 5 | Enabler: Human capital

ENABLER: HUMAN CAPITAL

Investing in human capital

The development of human capital and 

Here ODA is:

the eradication of poverty requires political 

commitment to education,  health

and  social protection

Financing enhancement 

of human capital means: 

   the high costs of implementing 

appropriate policies must be sustained 

  domestic public finance is the main 
finance source (even in poorer countries)

    involving domestic and international 

private finance may involve higher 

charges

  however, in micro-insurance systems PPPs 

can help share costs and extend coverage

   International public finance plays a 
minor role but is important in LICs where 

domestic public resources are limited.  

  able to help with both investment 

and recurrent costs

  able to be catalytic in the initial stages 

of establishing government services 

in human capital

  not able to provide 

a sustainable solution

HEALTH

EDUCATION

CHAPTER 6. The link between finance and policies for selected enablers

Generating domestic resources to support human capital solutions

Domestic revenues are currently inadequate in many developing 

countries. But a range of supporting policies can mobilise more 

resources including:

   more efficient tax collection

   extending the tax base

   new taxes

   ODA that aims to boost tax revenues and provide start-up 

costs for social protection, and budget support for health 

and education

  Many donor agencies, official and non-government, enjoy 

substantial tax exemptions. Suspending these exemptions 

would help partner governments to enhance their tax revenue.

Role of policy for mobilisation and effective use of finance for human capital

SOCIAL PROTECTION

Health and Education – not the same solution 

There is a growing consensus that Universal Health Care should be:

There is no similar consensus in education,  

  publically funded

  achieved by governments working 

 through their own context-specific steps.

but there is broad agreement that:
A   what matters is not only the length of compulsory education, 

but also the quality and appropriateness

B   private finance may have a role in achieving equitable education 

provision as economies develop

C   involvement of the private sector can make vocational training 
programmes more effective, raising employment and earnings
D   as GNP rises, more people can be involved in formal training 

schemes

INCLUSIvE

EqUITABLE

EFFECTIvE

qUALITATIvE 

Policies for  

effective use

  Policies on universal 

coverage for education, 

health, social protection

  Political consensus

  Effective fee waivers

  Capacity for health 

& education

   TVETs and PEPs

  Less aid fragmentation

   Global financial stability

  Decent work agenda

  Using GVCs & DFIs 

to upgrade  

  production & promote 

decent work

  Knowledge sharing incl.  

by SSC providers

FINANCIAL

FLOWS

Policies to mobilise finance

  DRM (tax capacity, 
tax reform and extended 

tax base)

  User fees, OOP expenses
  Incentives for private sector 
contributions

  Global ODA targets 

for education and social protection
  ODA to improve tax systems

  International tax 

agreements

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EDUCATIONConsiderable  advances  have  also  been  made  to 
introduce  social  protection  in  many  developing 
countries, with the exception of SSA and LICs.

  6.4 

 The role of finance and policies 
for biodiversity conservation

Figure 6.9 | The role of policy for mobilisation and effective use of finance for biodiversity

In terms of obstacles encountered and solutions to 
them, domestic revenues are currently inadequate 
in many developing countries, but there is a range 
of supporting policies to mobilise more resources. 
include  more  efficient  tax  collection, 
These 
extending  the  tax  base,  new  taxes,  and  ODA 
that is aimed at boosting tax revenues as well as 
providing start-up costs for social protection, and 
budget support for health and education. Budget 
support  has  dwindled  as  a  result  of  austerity 
policies  in  donor  countries,  and  enthusiasm  for 
it  needs  to  be  rekindled.  ODA  can  help  with 
both  investment  and  recurrent  costs  especially, 
but  not  only,  in  LICs.  Equally  ODA  will  still  have 
a  substantial  role  to  play  in  LICs  by  supporting 
health,  education  and  social-protection  services 
in the long term until governments can generate 
sufficient revenues to pay for them. The same will 
be  true  in  some  LMICs.  On  a  more  critical  note 
Brun  and  Chambas  (commissioned  background 
paper, 2015) point out that many donor agencies, 
official  and  non-government,  enjoy  substantial 
tax  exemptions,  e.g.  on  VAT,  and  suspending 
these  would  be  another  way  for  donors  to  help 
partner  governments  enhance  their  tax  revenue. 
The  net  financial  gain  might  not  be  large  since 
effectively it would involve a transfer from project 
aid  to  budget  support,  but  it  would  enhance 
government  ownership  and  probably  help  to 
reduce possibilities for fraud. 

Financing  for  the  conservation  and  sustainable 
use  of  biodiversity  faces  constant  challenges 
and 
is  not  sufficient  to  meet  the  needs. 
Most  of  the  ecosystem  services  provided  by 
biodiverse  forests,  for  example,  have  public  or 
common-good  characteristics  in  that  they  can 
be  consumed  and  depleted  without  adequate 
payment  for  their  use  and  regeneration.  In 
addition,  many  of  the  benefits  of  biodiversity 
cannot be readily quantified. While the valuation 
and pricing of benefits in the form of consumables 
such  as  timber,  bush  meat,  tourism,  or  genetic 
information  is  technically  feasible  (though  not 
always practical), this holds to a lesser extent or 
not at all for other benefits of forest biodiversity. 
These  involve  non-consumables  such  as  water 
purification, erosion regulation, flood protection 
or spiritual and cultural values; option values such 
as  the  future  benefits  of  genetic  information; 
bequest  values  (the  value  of  biodiversity  and 
functioning  ecosystems  being  available 
to 
future  generations);  and  existence  values  (the 
value emanating from the knowledge that forest 
ecosystems exist) (OECD, 2013: 26). Thus, many 
of  the  benefits  of  biodiversity  are  invisible  to 
market  transactions  and  given  the  complex 
and  sometimes  fragile  interplay  of  ecosystem 
factors, an unsustainable use of forest resources 
can result in high environmental, economic and 
social  costs  that  are  not  captured  by  market 
mechanisms.

A range of national and international instruments 
has  been  designed  to  attract  both  public 
for  biodiversity.  These 
and  private  finance 
instruments require complementary policies to be 
implemented  effectively.  This  section  discusses 
the  sources  of  biodiversity  finance,  the  link 
between finance and policies for biodiversity and 
future  implications.  Figure  6.9  summarises  the 
main policy issues.

Policies for effective use
NATIONAL
Governance, capacity and implementation
arrangements around financial instruments
(PES, user fees, private conservation
concessions)

INTERNATIONAL
Trade and biodiversity agreements

Financial flows

Public and Private
Domestic and International

Policies to mobilise finance
NATIONAL
Regulation/property rights around financial
instruments (PES, user fees,
private conservation concessions)
Financial sector reform

INTERNATIONAL
Specialised funds, facilities, instruments
(e.g. GEF, REDD+, GCF), green bonds

Biodiversity
for sustainable
development

6.4.1 

 Financing biodiversity conservation: 
different sources and instruments 

Because current market prices are distorted, they 
are  a  poor  mechanism  to  mobilise  and  channel 
financing for biodiversity as they do not accurately 
reflect  the  value  of  public  benefits  stemming 
from  biodiversity,  or  the  social  opportunity  costs 
of  degradation  and  biodiversity  loss  (OECD, 
2013).  In  turn,  biodiversity  goods  and  services 
are  undersupplied  and  underfunded.  The  total 
costs of biodiversity loss are difficult to estimate, 
but  approximations  range  between  $2  tr  and 
$4.5  tr  annually  (OECD,  2013;  TEEB  2009).  The 
biodiversity  financing  gap  is  aggravated  by  the 
fact  that  the  world’s  most  biologically  diverse 
forests  and 
in 
developing countries, where population pressure 
may  be  high,  incomes  are  low,  and  governance 
capacity  and  regulatory  frameworks  are  often 

‘biodiversity  hotspots’ 41  are 

weak. While local populations have to bear much 
of the cost of biodiversity conservation, many of 
the  benefits  of  intact  ecosystems  are  global  in 
nature, climate regulation being an example that 
serves to underline the importance of international 
biodiversity-financing mechanisms. 

Total biodiversity funds are estimated to amount to 
$51–53 bn a year, of which only $21 bn is spent in 
developing countries (commissioned background 
paper, Büge et al., 2015). To put an end to the loss 
of biodiversity the level of finance needs to be six 
to  eight  times  higher  than  is  currently  available 
(commissioned  background  paper,  Büge  et  al., 
2015). It is not easy to obtain a complete picture 
of financing for biodiversity. Much of the finance 
flows  through  specialised  instruments.  Table  6.4 
summarises  national  public,  international  public, 
and other instruments that mobilise and channel 
finance for biodiversity conservation.

6.4

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CHAPTER 6. The link between finance and policies for selected enablers 
 
 
Table 6.4 | Instruments to mobilise and channel finance for biodiversity conservation

SHORT DESCRIPTION 
OF INSTRUMENTS

SCALE/IMPACT

National 
public or 
private

PES

EF

Environmental 
Fiscal Reform

Biodiversity 
offsets

Payment for ecosystem 
services 

Environmental funds are 
widespread mechanisms for 
funding biodiversity

Environmental fiscal 
reform refers in particular 
to taxation models and 
fiscal incentives to foster 
biodiversity

Biodiversity offsets 
compensate the destruction 
of natural capital

Entrance and use fees 
for national parks and 
protected areas

Fees according to the 
‘user and beneficiary pays’ 
principle

Private conservation 
concessions

GEF

International 
public or 
private

Market-based policy 
mechanism for private 
investments

Financial mechanism of the 
three UN Rio conventions

No assessment for 
developing countries 
available; but by 2011 the 
total value of transactions 
with regard to watershed 
PES was $8–10 bn

At least $800 mn has been 
invested in biodiversity 
projects in LAC, Africa and 
Asia via Environmental 
Funds (EFs)

No impact assessment 
available, but possibilities 
for strong effects on other 
development dimensions, 
e.g. poverty eradication

No assessment for 
developing countries 
available; but illustrative 
best cases in developed 
countries

Contribution to funding 
of PAs, which remain 
underfunded (e.g. LAC 
funding gap between $314 
mn and $700 mn

Case-based / no overall 
assessment available

RELEvANCE OF 
SUPPORTING 
POLICIES IN MAKING 
INSTRUMENTS 
EFFECTIvE

Property rights; governance 
policies; financial and 
physical Infrastructure

Property rights; governance 
policies; financial and 
physical Infrastructure

Tax policies; government 
capacities

Government capacities; 
anti-corruption rules; 
technical assistance; 
awareness

Government capacities; 
anti-corruption rules: 
technical assistance; 
awareness

Property rights; governance 
capacities; anti-corruption 
rules; PPPs

Total Investment of almost 
$3.5 bn, leverage of more 
than $10 bn in co-financing

All support policies that 
strengthen international 
public mechanisms

BIOFIN

REDD+

GCF

ODA

FDI

UNDP mechanism to unlock 
resources for meeting the 
Aichi targets

Budget: $8.5 mn, 12 partner 
countries

All support policies that 
strengthen international 
public mechanisms

Result-based payment 
mechanism to prevent 
deforestation and forest 
degradation to reduce 
emissions

Major fund for financing 
climate mitigation and 
adaption activities under 
the UNFCCC

Bilateral or multilateral 
assistance

In the absence of 
agreements no scale/impact 
yet, but strong potential

All support policies that 
strengthen international 
public mechanisms

$35 mn, strong potential

$6.1 bn annually

All support policies that 
strengthen international 
public mechanisms

All support policies that 
strengthen international 
public mechanisms

FDI, e.g. in eco-tourism

No total volumes/impact 
assessment available

Policies in infrastructure 
and governance

Sources: CBD (2012); UNDP (2012, 2014); GEF (2014); OECD/DAC (2014); GCF (2014)

National biodiversity financing instruments 

financed  through  user  fees  or  taxes  that  are 
earmarked	for	conservation	(Xiang	et	al.,	2007:3).

Payments for ecosystem services

Payments for ecosystem services (PES) are made 
to landowners whose land-management practices 
contribute  to  providing  environmental  services. 
PES  are  commonly  defined  as  (a)  a  voluntary 
transaction  where  (b)  a  well-defined  ecosystem 
service  (ES)  (or  a  land  use  likely  to  secure  that 
service)  (c)  is  being  ‘bought’  by  a  (minimum  of 
one)  ES  buyer  (d)  from  a  (minimum  of  one)  ES 
provider (e) provided the ES provider secures ES 
provision (conditionality) (Wunder, 2005:3). 

Very  few  PES  schemes  feature  all  five  of  these 
characteristics, but those that feature at least some 
could be defined as PES-like schemes (Southgate 
and Wunder, 2009). Wunder (2012) acknowledges 
the gap between theory and practice and argues 
that the most important characteristic of a PES is 
that payments are conditional on the provision of 
ecosystem services.

is  a  prominent  mechanism 

Today,  PES 
for 
conservation (Porras et al., 2011). Starting out as 
scattered  and  mainly  privately  funded  projects, 
many  focus  on  protection  of  watershed  services 
(e.g.  Nyangena  and  te  Velde,  2013),  and  PES 
is  part  of  many 
international  and  national 
conservation  policies  worldwide.  According  to 
Bennett  et  al.  (2012),  by  2011  the  total  value  of 
transactions  with  regard  to  watershed  PES  was 
$8–10 bn, and it is growing fast.

Environmental funds

Environmental  funds  (EF)  are  among  the  most 
popular mechanisms for funding the conservation 
of	 biodiversity	 and	 ecosystem	 services	 (Xiang	 et	
al.,  2007:2).  These  funds  may  be  public,  private 
or  arranged  through  PPPs.  Many  EFs  have  a 
permanent endowment that has been capitalised 
by grants provided by the national government or 
donors. EF may also manage sinking funds created 
through debt-for-nature swaps or revolving funds 

A survey of 36 conservation trust funds, 49% from 
LAC,  28%  from  Africa  and  25%  from  Asia  and 
other countries, indicated that they managed the 
equivalent of over $672 mn (CBD, 2012). An earlier 
survey  of  some  20  funds  observed  that  the  total 
amount  contributed  by  donors  probably  exceeds 
$1.2  bn,  of  which  around  $800  mn  had  been 
disbursed  as  grants  for  biodiversity  conservation, 
environmental 
sustainable 
development, mostly in LAC (CBD, 2012). 

protection 

and 

The  potential  of  water  funds  to  contribute 
to  biodiversity  conservation  is  of  paramount 
importance  in  relation  to  economic  efficiency. 
Water  funds  (watershed-oriented  PES  projects 
based  on  a  trust-fund  model)  have  acquired 
great momentum, especially in northern Andean 
countries  (Goldman-Benner  et  al.,  2012).  Similar 
to PES, water funds are often implemented with a 
lack of impact measures (Goldman et al., 2010:10) 

Some of these funds are supported by fees paid, 
for  example,  by  water  users,  and  it  is  therefore 
important to address how imposing such fees may 
affect poor communities.

Environmental fiscal reform

Environmental  fiscal  reform  refers  to  a  wide 
range of adjustments to a country’s fiscal system, 
particularly taxation and fiscal incentives, in order 
to  reflect  the  true  values  and  importance  of 
biodiversity  and  ecosystem  services  in  national 
economies (CBD, 2012). 

(World  Bank,  2005), 

According  to  the  report  developed  within  the 
scope  of  the  environmental  fiscal  reform  (EFR) 
work programme of the OECD-DAC ENVIRONET 
Forum 
following 
mechanisms are part of a fiscal reform for a better 
environment:  taxes  on  natural  resource  use  (e.g. 
forestry  and  fisheries),  user  charges  or  fees  and 
environment-related  taxes  to  make  polluters, 

the 

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CHAPTER 6. The link between finance and policies for selected enablerse.g.  industries,  motor  vehicles,  waste  generators 
pay  for  the  ‘external  costs’  of  their  activities.  An 
important  issue  regarding  environmental  taxes  is 
that  they  should  be  earmarked  for  investment  in 
conservation in the areas where they are levied. In 
addition, it is important to consider tax exemptions 
or  deductions  for  a  range  of  activities  that 
maintain or improve biodiversity (e.g. maintaining 
forests  on  private  lands,  adopting  technologies 
to  address  water  pollution  to  maintain  aquatic 
biodiversity).  In  addition,  good  fiscal  reform  will 
change  environmentally  harmful  subsidies 
in 
certain economic sectors (e.g. agriculture, fisheries, 
mining and energy) and can free up public funds to 
promote  conservation  and  the  sustainable  use  of 
natural resources (TEEB, 2011). 

A  recent  GIZ  report  (2013:1)  argues  that  well 
designed  environmental  fiscal  reform  helps  to 
reduce  poverty  by  generating  resources  for 
pro-poor  investments,  for  example  in  health 
and  education.  Where  regressive  impacts  are  a 
concern,  especially  in  environmental  taxation, 
flanking  measures  are  needed  to  protect  the 
socially  vulnerable  from  the  impact  of  higher 
energy or resource prices. It is therefore important 
to  ensure  that  environmental  fiscal  reforms  do 
not displace investment in health and education. 
Reducing corruption also needs to be addressed 
as part of fiscal reform. 

Biodiversity offsets 

(e.g. 

A  biodiversity  offset  is  a  mechanism  that  allows 
agents 
real-estate  developers  or  oil 
companies)  to  compensate  for  the  damage  they 
cause to a natural habitat, for example due to the 
construction  of  infrastructure,  either  by  creating 
a  new  natural  habitat  elsewhere  or  by  funding 
conservation projects in an existing natural habitat 
(e.g.  a  protected  area).  The  compensatory  work  is 
preferably undertaken by paying private developers, 
guided by environmental organisations. 

Most  information  on  biodiversity  offsets  comes 
the 
from  developed 

countries, 

although 

mechanism  is  increasingly  being  explored  in 
developing  countries  (Bull  et  al.,  2013).  The  US 
Wetland Banking and the Australian Bio Banking 
are  two  of  the  best-known  examples.  Wetland 
and  stream  offsets  in  the  USA  are  created 
via 
restoration,  enhancement,  creation,  and 
preservation in the same watershed (EPA, 2006); 
indirect  offsets  (e.g.  to  fund  research)  are  not 
allowed.  The  Environmental  Law  Institute  (ELI, 
2007) reports that in the USA private and public 
expenditure under this mechanism is around $3.8 
bn a year. 

Biodiversity  offsetting  has  been  criticised  by 
various conservation groups because there is only 
a narrow range of circumstances in which impacts 
on  biodiversity  can  be  offset  with  any  kind  of 
certainty (Gibbons, 2011; Robertson, 2006). 

Entrance and user fees 
for national parks and protected areas

Protected  areas  (PAs)  are  considered  to  help  to 
reduce biodiversity loss and to provide significant 
contributions 
to  conserve 
to  global  efforts 
biodiversity.  They  cover  about  13%  of  the  land 
surface,  up  from  8.8%  in  1990  (UNDP  2012).  In 
addition, PAs support the provision of a range of 
ecosystem  services,  such  as  water  purification, 
erosion  control,  reduced  flooding,  etc.,  increase 
adaptation capacity with regard to environmental 
risks  and  hazards,  and  sustain  health  and  food 
security  by  maintaining  species  diversity  (TEEB, 
2011).  Despite  the  growing  number  of  PAs,  the 
loss of biodiversity has not been curtailed. 

The  current  funding  mechanisms  for  PAs  are 
inadequate. Across LAC, for instance, the funding 
gap ranges from $314 mn to approximately $700 
mn per year (UNDP, 2011). Governments provide 
core  funding,  meeting  over  60%  of  the  costs 
(UNDP,  2010),  but  entrance  and  user  fees  are 
the most common means of generating revenue. 
Examples include entry fees to parks, recreational 
permit  fees,  surcharges  on  airports,  cruise  ships 
and  hotel  rooms,  and  fees  and  royalties  paid  by 

the extraction industries. Such fees are based on 
the  ‘user  or  beneficiary  pays’  principle  and  are 
widely viewed as a fair way to assign responsibility 
to  the  users  or  consumers  of  biodiversity  and 
ecosystem  services.  They  effectively  contribute 
to the conservation of biodiversity only if they are 
earmarked  for  PA  and  are  not  diverted  to  other 
purposes (Spergel, 2001), but these and other self-
generated  revenues  contribute  on  average  only 
11% of the necessary funds. Only very popular PA 
can  sustain  a  steady  income  from  fees  (e.g.  the 
Serengeti National Park in Tanzania) (Mansourian 
and  Dudley,  2008).  Furthermore,  there are  some 
risks to charging fees. Politically it can be difficult 
to introduce fees for the use of resources that were 
previously treated as public goods i.e. that were 
freely accessible. In addition, the income stream is 
not necessarily secure since, for instance, tourism 
may  decline  because  of  political  or  economic 
crises or because certain species or attractions are 
lost (Spergel, 2001).

Private conservation concessions

Private  conservation  concessions  are  a  market-
based  instrument  to  enable  private  investment 
in  biodiversity  conservation  and  climate-change 
mitigation. The first concessions were established 
in the 1990s in the USA and are also now found 
in Brazil, Chile, Guyana and Peru as well as Sierra 
Leone  and  Indonesia.  Conservation  concessions 
are  an  opportunity  to  lease  out  state  land, 
in  particular  forests,  to  private  entities.  The 
concession  holder  has  the  exclusive  right  to 
use  the  allocated  land  to  promote  biodiversity 
restrict  biodiversity-
conservation 
unfriendly use (Wolman, 2004: 860). Conservation 
concessions  are  time-bound  permits  that  range 
from  20  to  100  years.  This  implies  that  if  the 
permit expires the area might again be available 
for  resource  exploitation,  meaning  that  the  loss 
of  biodiversity  is  simply  postponed  (Rice,  2003). 
Setting areas aside for conservation on a temporary 
basis  may  make  it  easier  for  governments  to 
establish PAs in order to prevent the areas being 
re-opened  for  exploitation  (Nielsen  et  al.,  2004: 

and 

to 

139).  Furthermore,  conservation  activities,  e.g. 
in the case of logging concessions, may increase 
the  economic  value  of  the  trees  growing  in  the 
concession  area,  which  might  be  an  additional 
incentive  for  decision-makers  to  designate  only 
short-term permits. 

The basic concept is that conservation is defined 
in the same way as any other use of state-owned 
land  for  which  a  permit  is  required,  such  as 
logging,  agriculture  or  mining.  This  means  that 
private actors who are interested in conservation 
have  to  compete  with  commercial  entities  such 
as  logging  or  agribusiness  companies  (Ellison, 
2003; Wolman, 2004: 860). As is the case for other 
concession  types,  the  permit  must  be  obtained 
from  the  responsible  state  agency  or  current 
concession  holder,  and  its  issue  is  often  based 
on  the  opportunity  costs  of  competing  uses 
(Wolman, 2004: 860; Nielsen et al., 2004: 138). In 
principle, the cost of the concession should cover 
the forgone income from other commercial uses, 
although the price, especially if the concession is 
bought  from  a  state  agency,  should  also  reflect 
the  benefits  of  conservation.  These  may  include 
watershed-protection  services,  pollination  and 
regulatory  effects  on  local  climate  conditions 
(Wolman, 2004; Nielsen et al., 2004). 

The concession holder has to finance and manage 
the  planned  conservation  activities.  Concession 
holders  usually  seek  to  generate  funding  for 
conservation  activities  from  donations,  donor 
agencies,  philanthropists  and 
conservation 
NGOs, commercial investment in corporate social 
responsibility  (CSR),  ecosystem  service  markets 
(e.g. voluntary carbon market, PES, conservation 
banking), marketing of non-timber forest products, 
and eco-tourism. 

Conservation  concessions  aim  to  create  value  for 
conservation activities on areas of high conservation 
value  (Rice,  2003:  1).  Consequently,  ecosystem 
services  and  biodiversity  are  defined  as  specific 
tradable  and  non-tradable  commodities  produced 
by  the  concession  holder  (Merkl  et  al.,  2003:  3). 

246 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 247

CHAPTER 6. The link between finance and policies for selected enablersBox 6.17 | Private ecosystem restoration in Indonesia: a role model for private-sector engagement?

In 2004 the Indonesian Ministry of Forestry issued regulation 18/2004, which for the first time delegated authority for conservation 
activities to non-state actors (Walsh et al., 2012). The formulation and adoption of the regulation was largely the result of strong 
lobbying by the NGO Burung Indonesia (the Indonesian branch of Bird Life International) (Hein, 2013). Concession holders may apply 
for additional permits that allow the production of non-traditional forest products and transactions of ecosystem services. 

The first ecosystem-restoration concession was issued in 2008 for the Harapan Rainforest project, literally ‘Forest of Hope’, run by the 
conservation company Restorasi Ekosistem Indonesia (REKI). REKI was founded by the NGOs Burung Indonesia, the Royal Society for 
the Protection of Birds and Bird Life International. The project achieved a high international profile and received funding from Danida 
and the German Climate Initiative. The concession is now mostly funded by NGOs and a private trust fund, and future funding via a 
voluntary carbon market is envisaged. Despite continued land conflicts among rural migrants and indigenous groups regarding access 
to and control of the concession area (Hein and Faust, 2014), the ecosystem-restoration model is an increasingly popular means to 
promote conservation in Indonesia and has attracted domestic and international private investment. In 2013 the Ministry of Forestry 
issued seven concessions covering a total area of 268,353 hectares (ha) in seven provinces on Sumatra and Borneo, and has said it will 
issue ecosystem-restoration concessions covering 2.5 million ha up to 2015. This ambitious plan will probably not be achieved (Walsh et 
al., 2011) but at least three more permits more are being processed (Ministry of Forestry of the Republic of Indonesia, 2014). 

The  Indonesian-Singaporean  pulp  and  paper  company,  Asian  Pulp  and  Paper,  which  is  one  of  the  world’s  largest,  is  investing  in 
ecosystem-restoration activities. The company has recently received a 60-year concession covering 20,256 ha in Riau province and 
is investing $7 mn in conservation activities (Mongabay, 2013). Furthermore, the company recently announced a zero-deforestation 
policy (APP, 2013). On the island of Borneo, in the province of Central Kalimantan, Infinite Earth, a Hong Kong-based carbon-trading 
company, runs a voluntary REDD+ project using an ecosystem-restoration concession. The company received financial support from 
the oil giants Gasprom and Shell and sold voluntary carbon credits to the German insurer Allianz. 

The concept of ecosystem-restoration concessions has attracted private investment in conservation in Indonesia. Studies conducted 
by the Agricultural University of Bogor indicate that despite start-up investments of approximately $14–18 mn for the first six years, 
the concession model could become financially sustainable (Idris, 2010 cited in Walsh et al., 2011), although the business models 
of  the  companies  involved,  such  as  Shell  or  Asian  Pulp  and  Paper,  are  still  based  on  the  unsustainable  exploitation  of  natural 
resources. Unsustainable exploitation remains a major risk for conservation. In some cases ecosystem-restoration concessions overlap 
with  land  claimed  by  local  communities  and  indigenous  groups,  leading  to  conflicts  that  pose  a  major  obstacle  to  conservation 
activities. Unfortunately, the legal framework for ecosystem-restoration concessions offers no clear guidance on how to engage local 
communities in such projects. 

The  concept  can  be  viewed  as  an  attempt  by 
governments  and  environmentalists  to  mobilise 
new and additional private finance for biodiversity 
and  the  conservation  of  ecosystem  services 
(Jenkins et al., 2004). 

Major  problem  areas  are,  first,  that  conservation 
concessions are most appropriate in remote and 
relatively unpopulated areas that are not suitable 
for  commercial  purposes  (Nielsen  et  al.,  2004: 
140).  In  areas  with  high  economic  potential  or 
high  population  density  the  political  costs  of 

designating  additional  conservation  areas  might 
be too high. Second, conservation areas seldom 
offer local employment, and the restriction of non-
commercial  (and  illegal)  logging  activities  and 
other informal activities might reduce earnings for 
already  marginalised  frontier  communities  (Hein, 
2013).  The  payments  made  by  the  concession 
holder  accrue  to  the  government,  and  may  not 
benefit those who are negatively affected by the 
conservation  intervention.  To  pre-empt  this,  the 
concession  holder  should  consider  investing  in 
alternative income sources for local communities, 

30). 

is  what 

the  conservation  company 
which 
implementing  the  Harapan  Rainforest  project 
in  Indonesia  chose  to  do  (Walsh  et  al.,  2012; 
Hein,  2013)  (see  Box  6.17).  Third,  conservation 
concessions  do  not  address  the  wider  patterns 
of consumption that are the underlying cause of 
deforestation  and  biodiversity  loss  (McGregor 
2010: 
funding 
opportunities  such  as  markets  in  ecosystem 
services, marketing of non-timber forest products 
and eco-tourism may not raise sufficient finance to 
manage  larger  conservation  concessions.  Finally, 
private  conservation  concessions  as  a  means  to 
encourage  private  investments  in  biodiversity 
should  not  lead  to  the  reduction  of  public 
expenditure on conservation (Wolman, 2004).

commercial 

Fourth, 

International biodiversity financing instruments 

Global Environment Facility (GEF)

The GEF is the financial mechanism for the three 
Rio  conventions.  Biodiversity  projects  are  the 
largest  of  the  GEF  portfolios,  representing  36% 
of  the  total  (GEF,  2014).  Overall,  the  GEF  has 
invested $3.46 bn on biodiversity projects and has 
leveraged  co-funding  of  $10.04  bn.  More  than 
1,200  projects  in  over  155  countries  have  been 
funded and the GEF represents the largest source 
of finance for PAs: 3,277 PAs totalling 856 million 
ha have been protected thanks to $2.3 bn in GEF 
funds  and  an  additional  $6  bn  leveraged  (GEF, 
2014).  The  biodiversity  projects  are  conducted 
in  conjunction  with  ten  UN  specialised  agencies 
and  development  banks. 42  Its  Small  Grant  Fund 
(SGF) allows up to $50,000 to local communities, 
indigenous peoples, NGOs and community-based 
organisations for biodiversity and related projects 
(SGP,  2014b).  These  grants  have  totalled  over 
$240  mn  for  biodiversity  projects,  and  $190  mn 
for  the  protection,  rehabilitation  and  sustainable 
use of forest ecosystems (SGP, 2014a).

Biodiversity conservation has strong inter-linkages 
with  other  development  goals  such  as  the 
reduction  of  poverty,  community  development, 

the 

reduction 
climate  change  adaptation, 
of  desertification  and  other  environmental, 
economic  and  social  objectives.  At  the  same 
time,  however,  biodiversity-protection  measures 
may  have  adverse  social  or  economic  impacts 
on  local  communities.  For  example,  from  a 
policy  coherence  perspective  it  is  crucial  that 
biodiversity projects do not lead to the involuntary 
displacement of local communities or undermine 
their  livelihood  by  preventing  them  from  using 
forest  resources.  Thus,  in  addition  to  organising, 
financing  and  managing  biodiversity-protection 
projects,  it  is  possible  to  strengthen  biodiversity 
loss  by  establishing 
or 
complementary  policies 
in  other  fields  of 
development  cooperation,  and  measures  to 
protect biodiversity can (and should) be expanded 
to include wider development objectives. 

stem  biodiversity 

is 

the 

education, 

empowerment, 

‘Community  Action 

An  example  of  mainstreamed  development 
to 
cooperation 
Conserve  Biodiversity’  programme  that  receives 
local 
funding  from  the  SGF.  Together  with 
it 
community-based  biodiversity  enterprises, 
addresses  several  objectives  besides  ecosystem 
conservation.  It  aims  to  (a)  foster  additional 
livelihood  benefits  (e.g.  health,  gender  equity 
poverty 
and 
alleviation);  (b)  sustain  the  intervention  beyond 
the  project’s  principal  objective  (e.g.  enhancing 
awareness, 
legislation, 
improving  policy  and 
developing  institutional  and  technical  capacity; 
securing  financing  mechanisms  and  private-
sector  involvement);  (c)  improve  environmental 
management 
technological 
applications;  linkages  with  other  environmental 
goals); and (d) extend the approach to biodiversity 
conservation  (e.g.  mainstreaming  biodiversity  in 
production,  landscapes,  and  sectors;  catalysing 
the sustainability of PAs) (GEF, 2012). 

innovative 

(e.g. 

This  programme  has  financed,  for  example, 
community-based 
in 
Costa  Rica  and  Mexico  and  organic  produce 
in  Bolivia.  Overall,  it  is  estimated  that  it  has 
generated  more  than  500,000  jobs  through 

certification  projects 

248 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 249

42  Asian Development Bank (ADB), African Development Bank (AFDB), European Bank for Reconstruction and Development (EBRD), the Food and Agriculture 
Organization (FAO), Inter-American Development Bank (IADB), the International Fund for Agricultural Development (IFAD), the United Nations Development 
Programme (UNDP), the United Nations Environment Programme (UNEP), the United Nations Industrial Development Organization (UNIDO) and the World 
Bank.

CHAPTER 6. The link between finance and policies for selected enablers‘training  for  the  production,  implementation, 
and  commercialization  of  renewable  energy  and 
energy  efficient  technologies  and  systems  [...] 
management,  recycling,  composting,  and  safe 
disposal  of  solid  waste  in  rural  and  urban  areas; 
testing  and  application  of  innovative  methods 
of  managing  sustainable  fisheries  and  other 
natural  resources;  and  participation  in  the  co-
management of protected areas’ (GEF, 2012: 112). 
While  biodiversity  conservation  can  conflict  with 
other  short-term  economic  and  social  benefits, 
for instance when forests are cleared to make way 
for  agriculture,  the  SGF  programmes  show  that 
the different policy dimensions can be addressed 
coherently  and 
that  biodiversity-protection 
mechanisms  can  also  create  employment,  foster 
livelihoods,  finance  microcredit 
sustainable 
schemes,  provide  access 
to  markets  via 
certification  schemes  and  promote  security  of 
land and resource tenure (GEF, 2012: 112).

The Biodiversity Financing Initiative (BIOFIN)

REDD+

results-based  payment  mechanism 

Since  around  12%  of  global  GHG  emissions 
are  caused  by  deforestation,  REDD+ 45  was 
developed  under  the  umbrella  of  the  UNFCCC 
as  a 
to 
prevent  deforestation  and  forest  degradation 
in  developing  countries  (UNFCCC,  2008).  First 
proposed by a group of tropical countries headed 
by  Papua  New  Guinea  at  the  UNFCCC’s  11th 
Conference  of  the  Parties  in  2005,  the  idea  is 
to  increase  the  market  value  of  intact  forest 
ecosystems and to compensate for the economic 
opportunity  costs  of  deforestation.  The  Eliasch 
review (Office of Climate Change, 2008) estimates 
financial requirements for halving emissions from 
the  forest  sector  by  2030  to  be  in  the  order  of 
$17–33  bn  per  year,  but  there  are  also  different 
estimates.  REDD+  consists  of  three  stages: 
readiness  and  capacity-building,  development 
and implementation of policies and measures, and 
results-based payments to developing countries. 

UNDP’s biodiversity portfolio is the largest in the 
UN  system,  covering  more  than  500  projects. 
It  is  financed  by  the  GEF  ($1.5  bn)  and  other 
sources  ($3.5  bn).  In  2012,  in  partnership  with 
the  EU  and  the  governments  of  Germany  and 
Switzerland,  UNDP  launched  the  Biodiversity 
Financing  Initiative  (BIOFIN)  in  order  to  meet 
the  Aichi  targets. 43  BIOFIN  aims  ‘(i)  to  develop 
a  methodology  for  quantifying  the  biodiversity 
finance  gap  at  national  level,  (ii)  to  improve 
cost-effectiveness 
mainstreaming 
into  national  development 
of  biodiversity 
(iii)  to  develop 
and  sectoral  planning,  and 
comprehensive  national 
resource  mobilising 
strategies,  through  an  inclusive  process  led  by 
national stakeholders’ (UNDP, 2014). The initiative 
has a budget of $8.5 mn and an additional $3.1 
mm from GEF-funded UNDP projects (GEF, 2012). 
Twelve  countries 44 contribute  to  developing  and 
piloting this initiative.

through 

Some  observers  argue  that  REDD+  represents  a 
huge opportunity to protect forest cover, but to date 
there  are  no  agreements  regarding  the  trading  of 
REDD+ credits in international compliance markets. 
The main obstacles are difficulties with measuring, 
reporting  and  verification;  the  risk  of  leakage 
(deforestation elsewhere); the lack of permanence, 
which refers to the risk that carbon may simply be 
emitted  later  as  a  result  of  forest  fires  or  changed 
policies;  and  the  absence  of  binding  emission 
targets and hence the lack of international emission 
markets (Streck and Parker, 2012). Without a carbon 
market, the finance for results-based payments has 
to come from public funds. 

REDD+  aims  to  reduce  emissions  rather  than  to 
protect  biodiversity  protection  as  such.  In  the 
absence  of  coherent  strategies,  its  contribution 
to  biodiversity  protection  may  be  suboptimal 
in  social,  economic  and  environmental  terms. 

DAC members), compared to a little more than $3 
bn in the 2004–2006 period (Figure 6.10). 

ODA  includes  funds  channelled  via  multilateral 
agencies,  apart  from  core  contributions  to  the 
GEF, the World Bank or the RDBs. Major donors 
are  Japan,  Germany  and  the  EU,  which  provide 
together almost half of biodiversity-related ODA. 
There  are,  however,  large  differences  at  the 
national  level  –  less  than  3%  of  ODA  provided 
by  Austria,  Greece,  Luxembourg,  New  Zealand, 
the  Netherlands  and  South  Korea, 46  but  more 
than 10% of ODA from Australia, Finland, Iceland 
and  Norway;  there  is  no  information  on  the  US 
contribution. Africa, Asia and Latin America receive 
similar  levels  of  biodiversity  funding  and  major 
recipient  countries  include  Brazil,  China,  India, 
Indonesia  and  Vietnam.  The  three  key  sectors 
that  attract  the  highest  share  of  biodiversity-
related  ODA  –  a  combined  80%  –  are  general 
environmental  protection;  agriculture,  forestry, 
fishing and rural development; and water supply 
and  sanitation.  Forestry  receives  almost  half  of 
biodiversity-related  ODA  (Figure  6.11)  and  in 
2013 two-thirds of total ODA in the forestry sector 
was  dedicated  to  strengthening  biodiversity  and 
the sustainable use of forest ecosystem resources 
(OECD/DAC, 2013). As an overall trend, the OECD 
notes  that  donor  countries  are  ‘…increasingly 
exploiting  the  synergies  between  biodiversity 
and  climate  change  adaptation,  mitigation,  and 
desertification  and  integrating  biodiversity  into 
development  co-operation  portfolios  –  and  this 
nexus  may  be  driving  the  upward  trend  in  total 
biodiversity-related aid’ (OECD/DAC, 2014).

In  addition,  there  are  social  concerns  about 
local  communities  that  used  but  did  not  have 
formal  ownership  of  forest  ecosystems  being 
denied  access  in  the  name  of  forest  protection. 
Safeguards have been developed to ensure that 
all  these  issues  are  addressed  before  payments 
can  be  made,  but  their  application  remains 
imperfect.

Green Climate Fund

Under  the  auspices  of  the  UNFCCC,  the  Green 
Climate  Fund  (GCF)  was  established  to  finance 
climate  change  mitigation  and  adaptation 
activities. The GCF is meant to leverage private-
sector  funding  but  also  depends  on  substantial 
public  financing.  Pledged  support  from  several 
donor  countries  is  around  $35  mn  in  2014,  far 
short  of  the  UNFCCC’s  objective  of  $100  bn  by 
2020 (Climate Fund Update, 2014). The GCF aims 
to contribute to a transition to low emissions and 
resilience  to  adverse  climate  impacts.  Although 
the GCF does not have a biodiversity focus, it will 
potentially  lead  to  large  financial  flows  for  low-
carbon  development  (e.g.  hydropower  plants) 
and  climate  adaptation  (e.g.  coastal  protection), 
and therefore has the potential to make positive 
impacts  on  biodiversity  or  provide  opportunities 
for  biodiversity  co-benefits.  It  is  therefore  vital 
to  mainstream  biodiversity 
in  GCF-financed 
activities. 

Official Development Assistance (ODA)

Bilateral or multilateral ODA refers to grants and 
concessional  loans,  i.e.  with  a  grant  element  of 
at least 25% (at a 10% discount rate). It excludes 
most SSC from non-OECD members. Biodiversity-
related ODA steadily increased in the last decade 
(OECD/DAC,  2014)  and  now  represents  some 
$6.1  bn  annually  (5%  of  total  ODA  from  OECD 

43  In  2010,  the  10th  meeting  of  the  CBD’s  Convention  of  the  Parties  took  place  in  the  Japanese  city  of  Nagoya,  the  capital  of  the  Aichi  Prefecture.  At  the 
Convention, a Strategic Plan for 2011-2020 was presented, including the Aichi targets, the central goals of which are to: (i) Address the underlying causes 
of biodiversity loss by mainstreaming biodiversity across government and society; (ii) Reduce the direct pressures on biodiversity and promote sustainable 
use; (iii) Improve the status of biodiversity by safeguarding ecosystems, species and genetic diversity; (iv) Enhance the benefits to all from biodiversity and 
ecosystem services; and (v) Enhance implementation through participatory planning, knowledge management and capacity-building.

44  Botswana, Chile, Costa Rica, Ecuador, Indonesia, Kazakhstan, Malaysia, Peru, Philippines, Seychelles, South Africa and Uganda.

45  ‘Reducing Emissions from Deforestation and Forest Degradation, and the role of conservation, sustainable management of forest and enhancement of forest 

carbon stocks in developing countries’.

46  ODA that focuses on meeting the objectives of the Rio Conventions is monitored in the OECD/DAC’s Creditor Reporting System. This system uses ‘Rio 
markers’ to differentiate between aid for biodiversity, desertification, climate change mitigation, and/or climate change adaptation, defined by principal 
objectives, significant objectives and non-targeted objectives. 

250 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 251

CHAPTER 6. The link between finance and policies for selected enablersFigure 6.10 |  Trends in biodiversity-related bilateral ODA (three-year averages, 2004–2012, $ bn, constant 2011 prices)

7

6

5

4

3

2

1

0

n
o

i
l
l
i

b
D
S
U

5%

4%

3%

2%

1%

0%

s
t
n
e
m

t
i

m
m
o
c
A
D
O

l

a
t
o
t

f

o
e
r
a
h
S

Source: OECD/DAC (2014)

2004-2006

2007-2009

2010-2012

Principal

Significant

% of total ODA Commitments

Figure 6.11 |  Five main sectors receive 91% of biodiversity-related ODA  

(average 2010–2012, bilateral commitments, $ bn, constant 2011 prices)

2.5

2.0

1.5

1.0

0.5

0.0

n
o

i
l
l
i

b
D
S
U

General
Environmental
Protection

Agriculture, Forestry, 
Fishing and Rural 
Development

Water Supply 
and Sanitation

Government 
and Civil Society

Multisector

Principal

Significant

Source: OECD/DAC (2014)

49%

38%

7%

6%

Foresty

Agriculture

Rural Development

Fishing 

Other public, public–private, 
and private financing mechanisms

swaps, 

Other international biodiversity financing includes 
public,  public–private  and  private  mechanisms. 
Debt-for-nature 
for  example,  allow 
developing  countries  to  shift  their  foreign  debts 
into  funds  for  biodiversity  conservation  or  other 
environmental and ecological projects. Two types 
of swaps predominate (AGF, 2012: 72). Commercial 
debt-for-nature swaps (also known as three-party 
debt-for-nature swaps) are where public or private 
donors  –  often  NGOs  –  purchase  debt  titles  on 
financial markets. They transfer these titles to the 
debtor country, which in turn enacts legislation on 
protecting  biodiversity  or  endows  government 
bonds that finance biodiversity projects. Bilateral 
or  multilateral  swaps  are  where  one  or  more 
creditor governments agree to cancel or discount 
a portion of debt on condition that the indebted 
government  commits  to  finance  biodiversity 
conservation.  For  example,  a  recent  bilateral 
agreement  between  the  USA  and  Indonesia  will 
generate  approximately  $28.5  mn  a  year,  which 
will  finance  activities  to  conserve  Indonesian 
forests  (AGF,  2012).  Debt-for-nature  swaps  have 
also been used in conserving pristine ecosystems 
in  Bolivia,  Brazil  and  Costa  Rica.  In  Madagascar, 
an agreement with France resulted in tripling the 
size of the country’s protected areas (AGF, 2012). 
Fewer  debt-for-nature  swaps  are  taking  place 
at  present,  mainly  because  international  debt 
cancellation  and  debt-restructuring  programmes 
have  considerably  reduced  the  debts  owed  by 
developing countries (AGF, 2012). 

international 

(public–)  private 
National  and 
is  another  potential  source  of 
investment 
biodiversity  financing.  Commercial 
investors 
require  a  return  on  investments.  For  biodiversity 
such  returns  can  come  from  sustainable  forestry, 
organic farming, eco-tourism, commercial hunting 
or carbon sequestration. Investment funds include 
green  bonds,  commercial  loans,  private  equity, 
risk-mitigation 
instruments  and  conservation 
trust  funds.  Private  investment  in  commercial 

biodiversity  projects  can  yield  low  profits  and 
financial  returns,  but  high  economic  returns  and 
total value creation, e.g. by creating employment 
or  providing  public  goods.  They  represent  an 
example of PPPs or public subsidies to encourage 
private investment.

Büge  et  al.  (commissioned  background  paper, 
2015)  give  an  example  of  public  expenditure 
encouraging private investment flows in the case 
of Peru. The country is biodiversity-rich and hosts 
almost 10% of all floral species. Private co-financing 
of PAs is enabled via administration contracts and 
service  concessions  for  eco-tourism  and  private 
conservation  areas.  Agreements  between  Peru’s 
National Service for Protected Areas and private 
contractors  have  mobilised  $20  mn  for  ten  PAs 
compared  to  the  government’s  contribution  of 
$5  mn  (World  Bank,  2012).  FDI  also  increasingly 
targets the production of certified products and it 
is estimated that by 2020 certified products ‘could 
generate new and additional biodiversity finance 
of  around  $10.4–30  bn  annually  to  compensate 
implementing  more  sustainable 
farmers 
agricultural practices’ (Parker et al., 2012). Peru’s 
experience  serves  as  an  argument  for  PPPs  or 
public subsidies to encourage private investment. 

for 

6.4.2 

The role of policies and finance for biodiversity

to  finance 

Several  complementary  factors  determine  the 
international 
successful  use  of  national  and 
instruments 
the  preservation  of 
biodiversity.  They  include  regulatory  reform  and 
clear  property  rights,  the  presence  of  capacity 
and  appropriate  governance  arrangements  and 
financial and physical infrastructure. We highlight 
three  complementary  policies  for  mobilisation 
of  finance:  regulatory  and  governance  reforms, 
mainstreaming  biodiversity  issues,  and  financial-
sector  development,  and 
for 
the  effective  use  of  finance:  governance  and 
capacities and trade policy. 

two  policies 

47 Multi-sector projects include urban development and management, and multi-sector education, training and research.

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CHAPTER 6. The link between finance and policies for selected enablers 
 
 
 
 
 
Mobilising finance for biodiversity

Regulatory reforms (property rights)

The  effectiveness  of  financing  provided  to 
countries 
developing 
to  actually  protect 
biodiversity 
is  dependent  on  an  effective 
institutional setting, a sound policy framework at 
the national level and capacity within institutions. 
Forest policy directly impacts forest biodiversity 
and  can  be  supportive  or  destructive.  Ever 
since  the  Rio  declaration  of  1992  a  number  of 
UN  initiatives  have  promoted  sustainable  forest 
management  that  also  addresses  biodiversity 
concerns.  Many  countries  have  adjusted  their 
forest policies and laws to better protect forests 
and  control  deforestation.  In  2007  the  UN 
signed  a  non-legally  binding  instrument  on  all 
types of forests. The International Model Forest 
Network is an example of a worldwide initiative 
that  promotes  sustainable  forest  management 
via  networking  and  support  of  on  the  ground 
initiatives (IMFN, n.d.).

reforms 

that  can  contribute 

In  addition  to  the  policies  directed  at  forest 
management  there  are  a  number  of  broader 
regulatory 
to 
enhancing the effectiveness of – and might even 
contribute  to  increasing  –  biodiversity  financing. 
These  include  the  establishment  of  clear  and 
secure  property  rights 48.  Property  rights  are  a 
prerequisite for mid- and long-term investment in 
ecosystem  services;  they  are  a  means  to  protect 
indigenous populations from being displaced, for 
instance by illegal cut-and-burn and the expansion 
of  industrial  agriculture;  they  can  secure  capital 
from  international  funds  (e.g.  REDD+);  and  they 
can  enhance  the  engagement  of  traditional 
forest  owners  and  forest  resource  users  not  to 
revert to unsustainable use and over-exploitation 
of  forest  biosystems  (Oakes  et  al.  2012);  finally 
they  can  ensure  certain  types  of  activity  (e.g. 
logging,  hunting)  are  not  allowed  (background 
commissioned  paper,  Büge  et  al.,  2015).  The 
establishment  of 
forest-friendly  procurement 
rules  is  yet  another  policy  tool  for  governments 

(and  private  organizations)  to  contribute  to 
biodiversity  conservation  and  to  reward  and 
thus  facilitate  investment  in  the  sustainable  use 
of  forest  ecosystems.  National  Planning  and 
Co-ordination  can  be  a  strong  policy  device 
to  mainstream 
implementation, 
technology 
biodiversity conservation and other development 
objectives,  to  identify  financing  gaps  and  the 
need  for  technical  assistance,  and  to  reduce 
transaction costs of multiple project governance. 
By  bringing  together  government  agencies, 
private  sector  actors,  non-profit  organizations 
and  other  external  stakeholders,  transparency 
can  be  improved,  planning  horizons  for  green 
technology  or  biodiversity  projects  can  be 
reduced  and,  potentially,  synergies  with  other 
government  policies  can  be  exploited,  thereby 
reducing  financing  needs.  Finally, 
subsidy 
reform  represents  yet  another  avenue  to  reduce 
biodiversity-adverse 
to 
key  sectors  (i.e.  agriculture,  fisheries,  mining 
and  energy)  are  currently  running  at  around  one 
trillion  dollars  per  year.  Collectively,  subsidies 
represent  1%  of  global  GDP  yet  many  of  these 
contribute directly to biodiversity and ecosystem 
damage’ (TEEB 2011: 32). If subsidy reform results 
in redirecting funds towards the enhancement of 
biodiversity, the reform’s positive effect is twofold: 
First,  biodiversity  finance  is  directly  increased. 
Second, by reducing harm the need for financing 
is indirectly lowered.

incentives: 

’Subsidies 

Mainstreaming sustainability 
in infrastructure policy 

Infrastructure and economic development are key 
drivers of deforestation and the loss of biodiversity, 
but  the  adverse  effects  can  be  reduced  if  they 
are  carefully  managed  and  mainstreamed  with 
biodiversity-conservation objectives. Frameworks 
for  mainstreaming  biodiversity  conservation  into 
infrastructure  or  other  development  projects 
include  impact  assessment  and  mitigation  plans 
and the enhancement of ecosystem services. The 
former can reduce the harmful impacts of private 
and public investment. 

investors  apply 
Many  donors  and  private 
sustainability  rules  to  their  investment  decisions. 
Strategic  Environmental  Assessments 
and 
Environmental Impact Assessments serve to inform 
decision-makers – both public (e.g. development 
banks)  and  private  (e.g.  investment  funds)  –  of 
potential  negative  impacts  and  externalities  of 
their  investment  strategy  on  the  environment, 
such  as  in  commercial  or  development-oriented 
infrastructure  projects.  After  projects  have 
been  completed,  their  adverse  impacts  may 
be  reduced  or  compensated  via  environmental 
management  plans  and  biodiversity  offsets. 
A  different  approach  focuses  on  ecosystem 
services.  For  example,  pristine  mangrove  forests 
represent biodiversity reservoirs and carbon sinks, 
and  also  provide  flood  protection  and  prevent 
coastal  erosion  in  many  tropical  and  subtropical 
countries.  Enlarging  a  mangrove 
forest  can 
therefore  be  a  cost-efficient  and  biodiversity-
friendly  alternative  to  building  concrete  flood-
defence  walls.  This  type  of  ‘green  adaptation’ 
and  ‘green  infrastructure’  simultaneously  meets 
infrastructure  and  climate-
development  or 
adaptation  objectives,  while  also  providing 
ecosystem and biodiversity benefits.

Reform of the financial sector 

Domestic  and  international  public  bodies  have 
a  wide  array  of  tools  to  address  market  failures 
and  to  invigorate  the  financial  sector.  Private 
investment 
in  commercial  but  ecologically 
sustainable  forestry,  farming  or  tourism  can  be 
strengthened by public co-investment. Co-finance 
by  (national  or  international)  public  institutions 
in  the  form  of  concessional  loans  or  equity  can 
improve  the  return-to-risk  ratio  of  environment-
friendly  projects.  In  this  way  it  can  enhance  the 
returns  to  private  investors  or  absorb  possible 
losses,  making  the  project  more  attractive  in 
capital markets. In addition, the public institution 
can  provide  political  or  technical  expertise. 
Credit  guarantees  are  another  means  to  reduce 
the  commercial  risks  of  forest-friendly  projects, 
in  particular  improving  SMEs’  access  to  capital 

markets.  In  this  arrangement,  the  guarantor 
agrees to repay a creditor all or part of the debts 
against the risk of default. For example, USAID’s 
Development  Credit  Authority  has  issued  credit 
guarantees for SMEs in the forestry sector, thereby 
improving agricultural productivity by allowing for 
better  irrigation  systems  and  access  to  quality 
inputs (Oakes et al., 2012; USAID, 2012). Forward 
contracts  are  agreements  on  a  future  exchange 
between a vendor, e.g. of certified timber, and a 
buyer. Volumes, prices and transaction dates are 
agreed in advance, reducing the risks for investors. 
For example, the World Bank’s Bio Carbon Fund 
specialises in concluding forward contracts in the 
acquisition of forest carbon credits (Oakes et al., 
2012: 125). Forward contracts can also appeal to 
buyers from the private sector, for instance timber 
funds, since they reduce the risk of undersupply. 
More  generally,  policy  reform  can  encourage 
the private sector to take account of biodiversity 
through  financial  means  such  as  subsidies  for 
desired behaviour or taxes/sanctions on undesired 
behaviour 
(commissioned  background  paper, 
Büge et al., 2015).

Effective use of finance for biodiversity

Governance, capacity and implementation 
of financial instruments

National  and  international  financial  instruments 
cannot be deployed effectively without additional 
policies.  For  example,  some  PES  enabling 
conditions include: (a) an identified environmental 
problem related to an ecosystem service, for which 
its  users  are  willing  to  pay;  (b)  an  intermediary 
willing  to  bring  together  providers  and  buyers; 
(c)  a  clear  relationship  between  land  use  and 
ecosystem  changes  in  order  to  make  a  case  for 
PES; (d) governments should support less wealthy 
buyers;  and  (e)  governments  should  ensure  that 
PES  negotiations  do  not  affect  the  livelihood  of 
those providing the services. 

Although  PES  was  originally  conceived  as  a 
mechanism to address conservation issues, it has 

48  Property rights can be private or collective. As many aspects of biodiversity are common property or public goods, as outlined in Section 2, collective rights 

may often be more helpful than private rights.

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CHAPTER 6. The link between finance and policies for selected enablersInfographic 6 | Enabler: Biodiversity

ENABLER: BIODIVERSITY

Finance for biodiversity

Various national and international 

financial instruments are being used 

to finance the preservation 
of biodiversity. 

Supporting domestic and international 

policies are necessary to take 

a transformative approach 

to biodiversity.

THE APPROPRIATE FINANCING MIX
IS HIGHLY SPECIFIC TO EACH
COUNTRY AND CONTEXT.

The role of policy for mobilisation and 
effective use of finance for biodiversity

National policies  

for effective use

  governance, capacity 

and implementation 

arrangements around 

financial instruments 

(PES, user fees, private 

conservation concessions)

International policies 

for effective use

  trade and biodiversity 
agreements

International policies 

to mobilise finance

  specialised funds, facilities, 
instruments (e.g. GEF, REDD+, 

GCF), green bonds

CHAPTER 6. The link between finance and policies for selected enablers

Concessions in Indonesia

In 2004 the Indonesian Ministry of Forestry 

delegated authority for conservation 

activities to non-state actors. Forestry 

concession holders could apply for permits 

to allow the production of non-traditional 

forest products and the transaction of 

ecosystem services. 

2004

The first ecosystem-restoration concession 

was issued in 2008 for the Harapan (Forest 

of Hope) Rainforest. The project run by the 

conservation company Restorasi Ekosistem 

Indonesia (REKI) founded by the NGOs: 

Burung Indonesia, the Royal Society for 

the Protection of Birds (RSPB) and Bird Life 

International. 

Initial funding was from Danida and  

the German Climate Initiative. It is now 

mostly funded by the NGOs and a private 

NON-STATE

ACTORS

trust fund.

A role for the private sector?

In 2013 the Ministry of Forestry issued seven concessions covering a total 

area of 268 353 hectares (ha) in seven provinces on Sumatra and Borneo. 

It plans to issue ecosystem-restoration concessions covering 2.5 million ha 

up to 2015.

2013 - 2015

 2.5 MI   ION ha

R
E

S
N

STORATION  CONCESSIO

National policies to mobilise finance

  regulation / property rights around  

financial instruments (PES, user fees, 

private conservation concessions)

 financial sector reform

FINANCIAL FLOWS

Ecosystem-restoration concessions have 
attracted private investment in conservation 
in Indonesia. 

Asian Pulp and Paper is investing in ecosystem-restoration activities. 

The company has received a 60-year concession covering 20 256 ha 

in Riau province (Sumatra). It is investing $7 mn in conservation 

activities and recently announced a zero-deforestation policy.

In Borneo, Infinite Earth, a Hong Kong-based carbon-trading company, 

runs a voluntary REDD+ project that uses an ecosystem-restoration 

concession. It has financial support from Gasprom and Shell and has 

sold voluntary carbon credits to the German insurer Allianz.

DESPITE IMPORTANT START-UP 
INvESTMENTS, THE CONCESSION 
MODEL COULD BECOME FINANCIALLY 
SUSTAINABLE.

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Combining finance and policies to implement a transformative post-2015 development agenda | 257

  6.5 

 The role of finance and policies in the 
diffusion of green energy technology

fossil-fuel-intensive  energy  grids, 

The  development  and  adoption  of  green 
energy technologies is crucial to fostering green 
growth,  but  is  hampered  by  the  lack  of  finance, 
the  wrong  price  incentives  and  the  absence  of 
complementary  policies  and  institutions.  While 
developed countries use more energy per person 
in 
leading 
to  greenhouse  gas  (GHG)  emissions,  future 
economic  and  population  growth  in  developing 
countries  will  increase  their  demand  for  energy 
and  will  produce  the  largest  increases  in  GHG 
emissions in the coming decades. In the context 
of  rapidly  growing  economies,  governments 
and  public  bodies  may  come  under  pressure  to 
invest in low-risk and low-cost projects in order to 
meet the rising demand for energy, and give less 
priority to or even neglect long-term investments 
in  innovative  and  green-energy  technologies 
(see,  for  instance,  Bazilian  et  al.,  2013).  While 
limited  access  to  energy  is  a  key  constraint 
for  economic  development  in  most  LICs,  the 
failure  to  deploy  green  energy  sources  hinders 
sustainable development in all countries. 

been also viewed as a means to reduce poverty. 
PES  can  be  a  useful  income  source  for  people 
living in valuable ecosystems, provided that they 
perceive benefits for their efforts (FAO, 2011).

The  limited  monitoring  of  the  socio-economic 
impacts  of  PES  on  providers  (Bennett  et  al., 
2012) suggests that presenting PES as a win-win 
mechanism  is  more  of  an  assumption  than  an 
empirically proven fact. Indeed, a growing number 
of  studies  show  that  PES  can  be  problematic 
for  providers,  including  elite  capture  (Lee  and 
Mahanty,  2009);  that  poor  communities  are 
forced or tricked into participating in conservation 
projects  (Granda,  2005),  lose  control  over  their 
resource  base  (Rodríguez-de-Francisco  et  al., 
2013),  and  experience  increased  competition 
and  conflict  over  the  remaining  land  resources 
(e.g.  conservation  areas  for  carbon,  biodiversity 
or  water  protection)  (Hein  and  Faust,  2014);  or 
that socio-cultural practices and values that serve 
as  safety-nets  against  poverty  are  weakened 
(Boelens et al., 2014).

PES  is  not  a  ‘one-size-fits-all’  mechanism  and 
its  deployment  should  be  predicated  on  a  clear 
understanding of the context, and on its potential 
environmental,  social,  cultural,  economic  and 
equity impacts. Otherwise, it may backfire, creating 
or reinforcing inequity, or environmental and social 
degradation. This requires governance and policy 
coordination regarding the financial instruments. 

Similar  issues  need  to  be  addressed  in  order 
that entrance and user fees become an effective 
include 
conservation-financing 
establishing  the  fee  on  the  basis  of  willingness-
to-pay  studies,  ensuring  a  transparent  means  of 
collecting fees, earmarking the revenue generated 
by fees, and tackling corruption (UNDP, 2012).

tool.  These 

Trade policies and certification

As  Oakes  et  al.  (2012)  underline,  direct  or 
indirect trade laws and voluntary partnerships can 
play  an  important  role  in  tackling  illegal  forest 

commodities  by  increasing  the  price  of  legal 
and  sustainably  produced  ones.  For  example, 
the EU Timber Regulation (Regulation 995/2010) 
regulates  timber  imports  into  the  EU.  Since 
March  2013,  any  company  that  places  timber  or 
timber  products  on  the  EU  market  for  the  first 
time  must  ensure  that  they  have  been  legally 
produced.  The  Timber  Regulation  (a)  prohibits 
the  placing  of  illegally  harvested  timber  and 
products  derived  from  such  timber  on  the  EU 
market, whether they are of domestic or imported 
origin;  (b)  only  timber  accompanied  by  a  Forest 
Law  Enforcement,  Governance  and  Trade  or 
Convention on International Trade in Endangered 
Species  licence  is  accepted  as  legal.  In  all  other 
cases,  operators  must  exercise  ‘due  diligence’ 
when they sell imported and domestic timber or 
timber  products;  and  (c)  traders  (who  follow  the 
operators in the supply chain) must keep records 
of  their  suppliers  and  customers.  In  this  way  the 
operators  can  always  be  traced.  Thus,  the  EU’s 
trade  rules  represent  a  supporting  policy  for 
effective  use  of  biodiversity  financing  within  and 
beyond the EU. 

6.4.3 

 Conclusions and implications 
of environmental finance

Various  national  and 
international  financial 
instruments  are  being  used  to  finance  the 
preservation  of  biodiversity.  The  appropriate 
financing  mix  of  domestic  and  international 
sources  is  highly  specific  to  each  country  and 
context.  Newly  created  international  facilities 
have  still  to  be  adapted  to  the  practical 
challenges,  and  financial  instruments  require  a 
range  of  complementary  policies  to  make  them 
work.  The  preservation  of  biodiversity  can  be 
supported by policies such as regulatory reforms 
(property  rights)  and  governance,  infrastructure 
policies, reform of the financial sector, and trade 
policies in order to mobilise finance and facilitate 
its effective use. It is necessary to use supporting 
domestic  and  international  policies  in  order  to 
take  a  transformative  approach  to  biodiversity. 

the 

those 

includes 

including 

that  harness 

It 
transfer, 

This  section  defines  green  energy  technologies 
as 
renewable  energy 
resources,  such  as  solar,  wind,  hydropower 
focuses  on  green  energy 
and  biomass. 
role  of 
technology 
innovation,  finance  and  policies.  In  a  broad 
sense,  technology  encompasses  the  corporate 
capacity  to  operationalise,  apply  and  make 
effective  use  of  scientific  and  engineering 
knowledge  in  production  (see  Cantwell,  2009). 
It  therefore 
‘the  potentially  public 
element of technology, encompassing codifiable 
items  as  presented  in  scientific  publications 
and  engineering  blueprints  and  designs,  and 
the  tacit 
implicit  element  relating  to  firm-
specific  competence  in  production’  (Pueyo  and 
Linares,  2012:  7).  Green  energy  technologies 
exhibit  aspects  of  public  goods  (such  as  a 
reduction  in  GHG  emissions)  that  the  market 
cannot  adequately  provide.  Since  green  energy 
technologies  reduce  harmful  externalities  in 
the  form  of  GHG  emissions  and  support  the 
safeguarding of biodiversity, they warrant public 
support  and  domestic  and  international  public 
finance. 

This  section  discusses  the  sources  of  finance  for 
green energy technology and the relevance of each 
for  sustainable  development,  the  link  between 
finance and policies for green energy technologies 
and the future implications. Figure 6.12 summarises 
the main policy issues in this section.

6.5

258 | EUROPEAN REPORT ON DEVELOPMENT 2015

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CHAPTER 6. The link between finance and policies for selected enablersFigure 6.12 | The role of policy for the mobilisation and effective use of finance for green energy technology

Policies for effective use
NATIONAL
Financial sector development
(including environmental considerations)

Financial flows

Public and Private
Domestic and International

Policies to mobilise finance
NATIONAL
Green energy technology policy
Reform of fossil fuel subsidy
Financial market development

INTERNATIONAL
DFIs
Climate rules

Green Energy
Technology for
sustainable
development

6.5.1 

 Financing green energy technology: 
different sources 

Global finance

conventional  oil-fuelled  technology  in  emerging 
economies,  based  on  ‘pure  economics’,  i.e. 
without  subsidies,  demonstrating  its  increased 
commercial viability (Evans-Pritchard, 2014).

Globally,  over  $1,600  bn  was  invested  in  energy 
in  2013,  of  which  $250  bn  was  dedicated  to 
renewable resources (IEA, 2014). New investment 
in renewable energy, excluding large hydroelectric 
projects,  fell  by  14%  in  2013  to  $214  bn  (see 
Figure  6.13).  This  decline  reflects  the  reduction 
in  photovoltaic  (PV)  costs,  and  expectations  that 
investors  would  make  more  commitments  to 
green energy systems have not been met. Some 
observers  in  the  financial  sector  have  noted 
that  solar  technology  may  be  competing  with 

Despite  a  drop  in  2012  and  2013,  new  global 
investment  in  renewable  energy  in  current  US 
dollars rose substantially in the last decade (Figure 
6.13).  In  addition  to  the  main  macroeconomic 
factors  behind  this  investment  trend,  such  as 
global  economic  growth  and  the  rising  price 
of  fossil  fuels,  there  has  been  a  policy  response 
to  popular  demand  for  a  cleaner  environment. 
Furthermore,  the  reduced  costs  of  green  energy 
technologies  have  been  spurred  by  low  interest 
rates  and  R&D  expenditure  leading  to  further 

technological  progress.  For  example,  regarding 
solar panels the worldwide levelised cost of solar 
energy, which has fallen by 53% since 2009, means 
that  while  investment  declined  in  dollar  terms, 
increased.  This 
installed  generation  capacity 
development was especially pronounced in HICs, 
which  accounted  for  two  thirds  of  investment  in 
solar energy in 2013 (commissioned background 
paper, FS-UNEP, 2015; Figure 6.13).

International private finance

The  private  sector  is  increasingly  involved  in 
financing green energy technologies. A promising 
medium-term  signal  is  the  turnaround  of  clean 
energy  stocks,  which  rallied  in  2013  following  an 
almost  five-year  decline.  An  index  of  almost  100 
renewable  energy  stocks  gained  54%  over  the 
course of the year – indicating that many wind and 
solar  manufacturers  are  returning  to  profitability 
(commissioned  background  paper,  FS-UNEP, 
2015).  There  are  also  promising  signs  that  long-
term  institutional  investors  –  commercial  banks, 
pension  funds,  insurance  companies  and  major 
corporations – are increasingly financing wind and 
solar projects. There is also an ongoing deepening 
of  the  climate-themed  bond  market,  which  has 
seen  major  growth  of  new  issuances,  growing  by 
12%  in  2013  to  $95  bn.  Of  the  more  than  $500 
bn  in  outstanding  climate-themed  bonds,  about 
$75  bn  is  dedicated  to  the  low-carbon  energy 
sector, with wind and solar accounting for 18% and 
15%  respectively  (Climate  Bonds  Initiative,  2014). 
Despite  the  fall  in  investment  in  2012  and  2013, 
evidence  of  strong  demand  from  the  first  two 
quarters of 2014 suggests a broad upswing across 
sectors, markets and investment sources (see also 
commissioned background paper, FS-UNEP, 2015).

International public finance

In  order  to  leverage  funding  to  facilitate  green 
technology  transfer  (GTT)  to  and  in  developing 
range  of  opportunities  should 
countries  a 
be  explored.  Bilateral  ODA 
that  stresses 
‘climate-compatible  development’  as  set  out 

279

250

227

214

171

168

146

Figure 6.13 |  Global new investment in renewable 

energy ($ bn) by asset class, 2004–2013
65

100

40

171

168

146

100

65

40

279

250

227

214

2004 2005

2006

2007

2008

2009

2010

2011

2012 2013

Growth

63% 54% 47% 17% -2% 35% 23% -11% -14%

Corporate R&D

Government R&D

VC/PE

Public markets

Small distributed capacity

Asset finance*

2004 2005

2006

2007

2008

2009

2010

2011

2012 2013

Growth

63% 54% 47% 17% -2% 35% 23% -11% -14%

Corporate R&D

Government R&D

*Asset finance volume adjusts for re-invested equity. 
Total values include estimates for undisclosed deals

VC/PE

Public markets

Source: commissioned background paper by FS-UNEP (2015); 
Bloomberg New Energy Finance

Small distributed capacity

Asset finance*

in  the  UNFCCC  and  the  Kyoto  Protocol  can  be 
combined with Climate Innovation Centres (CICs). 
Renewable energy projects qualify for a plethora 
of multilateral financing sources (see Table 6.5 for 
an overview) ranging from regional infrastructure 
funds  to  UNFCCC  adaptation  programmes. 
While  the  amounts  pledged  and  allocated 
to  these  facilities  are  substantial  and  in  many 
instances  not  drawn,  the  capacity  of  absorbing 
the  available  funds,  i.e.  the  extent  to  which 
project  developments  are  capable  of  effectively 
and  efficiently  spending  allocated  means,  is 
considered  crucial.  Complementing  policies  that 
shape appropriate incentive structures for setting 
up feasible business cases are decisive factors.

In  addition  to  multilateral  and  global  funding 
sources, networks of CICs in developing countries 
could  coordinate  GTT  and  capacity-building 
activities  and  complement  short-term  hardware 
financing by identifying appropriate national and 
international opportunities.

49 HICs refer to OECD countries excluding Chile, Mexico and Turkey.

260 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 261

CHAPTER 6. The link between finance and policies for selected enablersTable 6.5 | Sources of multilateral finance for renewable energy

Fund

ASEAN In-
frastructure 
Fund (AIF)

Climate 
Technology 
Initiative 
(CTI) Private 
Financing 
Advisory 
Network 
(PFAN)

EIB Post-
2012 Carbon 
Credit Fund

EIB-KfW 
Carbon Pro-
gramme II

ClimDev-Afri-
ca Special 
Fund (CDSF)

Global 
Climate 
Partnership 
Fund

Global 
Energy Effi-
ciency and 
Renewable 
Energy Fund 
(GEEREF)

MDB Clean 
Technology 
Fund (CTF)

Total 
Amount

$485 mn in 
initial equity 
contribution

$140 mn 
(2010 total 
investment)

Fund assets 
of € 125 mn

€100 mn

$136 mn

$200 mn

€108 mn

$4.5 bn 
pledged by 
donors (Aus-
tralia, France, 
Germany, 
Japan, Spain, 
Sweden, UK, 
USA)

Financing 
Mechanisms

Loan

Risk 
management

Carbon 
finance

Carbon 
finance

Technical 
assistance

Co-financing

Co-financing

Co-financing

Co-financing

Grant

Other

Loan 

ODA

Risk 
management

Technical 
assistance

Equity

Grant Loan 

Technical 
assistance

ODA

MDB 
Scaling-Up 
Renewable 
Energy 
Program for 
Low-Income 
Countries 
(SREP)

$318 mn

MDB Forest 
Investment 
Program 
(FIP)

Multilate-
ral Carbon 
Credit Fund 
(MCCF)

The Global 
Environment 
Facility  
(GEF)

The Multila-
teral Invest-
ment Fund 
(MIF) of the 
IDB Group

$578 mn 
(Australia, 
Denmark, Ja-
pan, Norway, 
Spain, UK, 
USA)

€208.5 mn 
(Project Fund 
= €150 mn, 
Green Fund = 
€58.5 mn)

To date, $3 
bn has been 
allocated for 
mitigation 
and enabling 
activities and 
$400 mn for 
adaptation.

$600 mn 
(approx. $120 
mn per year)

UN-REDD 
Programme 
(Reduced 
Emissions 
from Defo-
restation 
and Forest 
Degradation)

$97 mn

UNEP 
Renewable 
Energy En-
terprise De-
velopment 
(REED)

Up to 
$250,000de-
pending on 
the project

UNFCCC 
Adaptation 
Fund

$300-500 mn 
by end-2012

Co-financing

Grant 

Equity

ODA

Grant Loan

Carbon 
finance

Co-financing

Equity

Grant

Grant

Technical 
assistance

Grant 

Loan

Technical 
assistance

Equity

Loan

Grant

qualifying 
Projects

Adaptation

Mitigation

Mitigation

Mitigation

Mitigation

Energy 

Carbon

Energy 
efficiency

Fugitive 
methane

Low-carbon

Renewable 
energy 

Transport 

Urban

Technology

Energy 
efficiency

Infrastructures 

Renewable 
energy

Transport 

Urban 

Waste 
management 

Water 

Water 
efficiency

Capture & 
Storage (CCS) 
Energy 

Energy 
efficiency

Forestry 

Fuel 
switching

Fugitive 
Methane 

Low-carbon 
renewable 
energy

Sustainable 
land 
management

Energy 

Energy 
efficiency

Fuel 
Switching

Fugitive 
Methane

Low-Carbon 

Renewable 
Energy 

Transport 

Waste 
Management

Adaptation 
Cacity- 
building 
Mitigation 

Agriculture 

Climate- 
resilient 
Energy

Forestry 

Low-carbon 

Natural 
resource ma-
nagement 

Population 
& Human 
Settlements 

Sustainable 
land 
management

Water

Mitigation

Mitigation

Mitigation

Energy 
Efficiency

Infrastructures 

Low-carbon 

Renewable 
energy

Energy 

Agriculture

Energy 
efficiency 

Renewable 
energy

Energy 

Energy 
Efficiency 

Fuel 
Switching

Industry

Infrastructure

Transport

Mitigation 
Energy 

Forestry 

Natural 
Resource 
Management

Renewable 
Energy 

Sustainable 
Land 
management

Capacity 
building

Mitigation

Forestry 

Natural 
resource 
management

Sustainable 
land 
management

Mitigation

Mitigation

Adaptation

Adaptation

Climate- 
Resilient

Forestry 

Energy 

Energy 
Efficiency

Low-Carbon

Forestry 

Sustainable 
Land 
Management

Fuel Swit-
ching

Fugitive 
Methane

Renewable 
Energy

Transport

Capacity

Building

Mitigation

Agriculture 

Mitigation

Energy 

Energy 
Efficiency 

Forestry 

Renewable 
Energy

Agriculture

Climate- 
Resilient

Energy 

Energy 
Efficiency 

Forestry 

Low-Carbon 
Renewable 
Energy

Sustainable 
Land 
Management 

Transport 

Water

Mitigation

Adaptation

Energy 
efficiency 
Infrastructure 

Agriculture

Climate- 
resilient

Low-carbon

Renewable 
energy

Coastal Zone

Management 
Disaster

Risk 
Reduction

Energy 
Efficiency

Fisheries

Forestry

Infrastructure

Low-carbon

Natural 
Resource 
Management

Populations 
& Human 
Settlements

Renewable 
energy

Services

Sustainable 
land 
management

Transport

Source: Compiled from climate-finance.org

262 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 263

CHAPTER 6. The link between finance and policies for selected enablersfund  under 

Pilot  CICs  are  being  developed  in  Ethiopia, 
India,  Kenya  and  Vietnam,  managed  by  the  UK 
Department for International Development (DFID) 
and  the  InfoDev  (Information  for  Development) 
the  World  Bank  Climate 
trust 
Technology  Programme  (InfoDev,  n.d.).  Other 
initiatives are being pursued under the UNFCCC 
Technology  Mechanism  and  implemented  by 
‘Nationally Designated Entities’ that are members 
of  a  ‘Climate  Technology  Center  and  Network’ 
in  a  consortium  led  by  the  United  Nations 
Environment Programme (UNEP) (AfDB, 2012).

The  provision  of  DFI  and  RDB  finance  for 
renewable  energy  and  the  diffusion  of  green 
energy  technologies  can  complement  domestic 
and  international  private  sources.  Backed  by 
sovereign  state  guarantees,  DFIs  and  RDBs  can 
provide loans at maturities and on conditions that 
the private sector, subject to market conditions, 
cannot.  The  finance  provided  by  DFIs  can  thus 
give  ‘additionality’  to  private  investments  (see 
discussion  on  Spratt  and  Ryan-Collins  (2012) 
in  the  section  on  infrastructure).  According  to 
figures  compiled  by  Bloomberg  New  Energy 
Finance,  MDBs  have  kept  up  investments  in 
renewable  energy,  even  during  the  economic 
downturns  following  the  global  financial  crises 
(see Figure 6.14).

National public finance 
(including support for R&D)

The  Climate  Policy  Initiative  found  that  76%  of 
climate  finance  originated  in  the  same  country 
in  which  it  is  spent,  with  94%  dedicated  to 
climate mitigation or investment in green energy 
technology and energy efficiency. This highlights 
the  importance  of  domestic  public  and  private 
funding  for  green  energy  technologies,  with  the 
latter further relying on an appropriate domestic 
incentives  and  regulations  to  unlock  private 
investment (CPI, 2013).

In terms of national financing, options to address 
the  specific  risks  and  uncertainties  of  GTT  may 

Figure 6.14 |  Finance from development banks 

for renewable energy projects ($ bn)

Figure 6.15 |  R&D investment in renewable 

energy, 2004–2012 ($ bn)

13.5

11.0

8.9

9.2

9.5

9.6

9.2

6.8

6.3

5.5

5.0

5.0

18

13,5

9

4.5

4,5

0

2007

2008

2009

2010

2004 2005

2006

2007

2008

2009

2010

2011

2012

Growth

Growth

142%

-19%

52%

0% 12% 13% 8% 36% 0.4% 3% 1%

*  Excludes debt and equity provided to renewable 
energy manufacturers, and debt and equity for 
energy efficiency

Source: UNEP and BNEF (2011); 
Bloomberg New Energy Finance

include rebates, long-term loan guarantees, R&D 
budgets and microfinance (see Section 6.5.2; AfDB 
2012). GTT and innovation therefore rely on long-
term  R&D  spending  that  fosters  technological 
progress  and 
innovation.  The  proportion  of 
(general technology) R&D spending in relation to 
GDP  varies  considerably  across  different  country 
groups  and  higher  shares  of  R&D  from  foreign 
sources are associated with lower country income 
levels.  While  the  share  of  R&D  expenditure  as  a 
percentage of GDP amounts to approximately 2.3 
in  HICs,  upper  and  lower  middle  income  spend 
less than 1% of their GDP on general technology 
R&D (WDI, 2014; figures reflect data from 2011).

to  be  cultivated. 
Innovation  capacity  has 
Technological  maturity  varies  across  renewable 
energy  technologies  and  includes  technology 
venturing,  commercial  scale-up,  and  adaption 
as  modes  of  innovation.  Successive  innovations 
reinforce each other over time and result in cost 
reductions  and  simultaneous  deployment  gains, 

Corporate R&D

Government R&D

Sources: FS-UNEP (2015); BNEF; IEA; IMF; 
various government agencies

as  has  been  the  case  for  silicon  PV  modules. 
Spending on R&D is supported by domestic public 
and private (corporate) sources (see Figure 6.15) 
and  supporting  policies  provide  a  key  element 
for  innovation,  deployment  of  technologies  and 
consequently GTT.

6.5.2 

 The role of policies and finance 
for green energy technology

Green energy technology projects usually require 
large-scale  upfront  investment  and  are  typically 
characterised  by  higher  capital  intensity  than 
fossil-fuel energy projects, but usually benefit from 
low and predictable operational costs. A change 
in  the  energy  sector  towards  green-generation 
assets will thus increase both the capital intensity 
and the capital used in the sector. It is therefore 
imperative  to  take  a  long-term  perspective  on 
the  development  of  the  energy  sector  (see  also 
commissioned  background  paper,  FS-UNEP, 
2015).  Different  policies,  actors  and  sources  of 

capital are important for the promotion of green 
energy technologies (see Whitley and Tumushabe 
(2014) on the Ugandan energy sector).

In  developing  countries  in  particular,  a  key 
challenge  in  funding  green  energy  technology 
stems  from  investment  risks  that  affect  the 
financing  cost  and  the  competitiveness  of  green 
technology. The aspect of risk can thus outweigh 
the problem of generating finance and be a major 
constraint on investment decisions. In response, a 
number of public de-risking measures have been 
suggested in an attempt to achieve a favourable 
risk/return profile that can attract private investors. 
These  public  de-risking 
instruments  can  be 
complemented by direct financial incentives, such 
as price incentives, tax breaks and carbon offsets. 

All  this  suggests  the  need  to  examine  the  role 
of  policies  to  mobilise  and  make  effective  use 
of  finance  for  the  diffusion  of  green  energy 
technology.

Mobilising finance for green energy technology

Green energy technology policy

for  mobilising  and 
Complementary  policies 
making effective use of national and international 
finance  comprise 
(a)  measures  to  stimulate 
demand  for  green  innovation,  i.e.  demand-side 
policies,  public  procurement  standards  and 
regulations  in  specific  markets,  market-based 
instruments for pricing externalities and enhancing 
incentives; (b) regulatory reform and competition 
policy  in  order  to  remove  barriers  for  new  firms; 
(c)  trade  and  investment  policies  for  facilitating 
international 
(horizontal)  GTT  via  economies 
of  scale;  (d)  protection  and  enforcement  of 
intellectual property rights (IPR); and (e) voluntary 
patent pools, innovation banks and collaborative 
mechanisms for GTT. 

in  developing 
In  this  context,  governments 
countries  have  adopted  many  of  the  following 
regulatory  policies,  fiscal  incentives  and  public 

264 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 265

CHAPTER 6. The link between finance and policies for selected enablersfinancing mechanisms to support and incentivise 
investment  in  renewable  generation  capacity 
and  energy-efficiency  projects 
(commissioned 
background paper, FS-UNEP, 2015):

(i)  Regulatory  policies:  preferential 
feed-in 
tariffs  (FITs),  renewable  portfolio  standards,  net 
metering, tradable renewable energy certificates, 
tendering  procedures  and  heat  and  biofuel 
mandates.

(ii)  Fiscal 
incentives:  capital  subsidies  and 
rebates,  investment  and  production  tax  credits 

and  reduction  in  sales,  energy,  CO2,  VAT  and 
other taxes.

financing  mechanisms: 

(iii) Public 
energy 
production  payments  and  public  investments, 
loans, guarantees and grants (REN21, 2014).

The  importance  of  complementary  regulatory 
policies  for  investment  in  green  technology 
is  shown  in  Box  6.18.  Even  when  there  is 
considerable interest in financing a green energy 
project,  its  implementation  depends  on  the 
adoption of appropriate regulatory policies.

Box 6.18 | The role of finance and policies in the diffusion of renewable energy technology in Kenya and Tanzania

The shift to a green energy system is crucial to sustainable development. The figure below shows the proportion of energy from 
renewable energy sources in Kenya and Tanzania from 1990 to 2011. In 2012, Kenya’s electricity-generation mix was mainly composed 
of hydro (761 MW) and fossil-based sources (525 MW + 120 MW of diesel-based emergency power capacity + 17MW of diesel-based 
isolated grid), but includes 198 MW of geothermal, 5.45 MW of wind and 26 MW from biomass in co-generation plants. To meet 
the 5% annual growth in electricity demand, a plant expansion will add 1,248 MW. In Tanzania, 55% of energy demand is met by 
the state-owned Tanzania Electric Supply Company Limited (TANESCO) and the remainder by independent power producers (IPPs) 
and imports from Uganda and Zambia. The absolute level of renewable energy production has been rising and making a far greater 
contribution to electricity generation (WDI, 2014). Despite this, the share of energy use from renewables is declining due to the more 
rapid development of generation assets based on fossil fuels (WDI, 2014).

Economic development in Kenya and Tanzania is hampered by the low level of access to modern energy, and a heavy reliance on 
traditional biomass. Frequent power outages and reliance on hydroelectricity are generating the drive to diversify energy sources 
(Kimuyu et al., 2011; CI by Lunogelo et al., 2015).

Figure 6.18B | Total energy use (percentage) from renewable energy sources

m
o
r
f

n
o
i
t
c
u
d
o
r
p
y
t
i
c
i
r
t
c
e
E

l

)

%

(

s
e
c
r
u
o
s
e
r

l

e
b
a
w
e
n
e
r

200

180

160

140

120

100

80

60

40

20

0

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Tanzania

Kenya

Source: Authors’ illustration, based on data from WDI (2014)

Africa  as  a  whole  has  achieved  the  largest  percentage  increase  in  investment  in  renewable  energy  among  developing  countries, 
excluding Brazil, China and India, except for the 2012–2013 period, when investment to the Middle East and Africa declined by 14% 
(Kimuyu  et  al.,  2011;  BNEF,  2014c).  Financing  for  renewable  energy  technologies  has  come  from  sources  including  governments, 
donors, the private sector, PPPs and individual households. Kenya has seen sharp increases in asset finance (for utility-scale projects 
such as wind farms), venture capital for young firms, and equity-raising on the public markets by renewable energy companies, while the 
private sector invests mainly from corporate savings and loans (Kimuyu et al., 2011). Total annual investment in renewable energy has 
risen from $190 mn in 2007/08 to $740 mn in 2011/12, as well as significant increases in government-funded R&D, which reached $1.3 
bn in 2010 (Kimuyu et al., 2011). The Tanzanian government has attached high importance to the need to diversify the mobilisation of 
finance. Sources include private-sector debt and equity, DFIs and domestic public investment (CI, Lunogelo et al., 2015).

There  are  several  examples  of  public–private  finance  instruments  in  renewable-energy  projects  in  Tanzania  and  Kenya.  In  Kenya, 
the EIB recently announced an investment of €200 mn in a €620 mn wind-power project in Lake Turkana, including an additional 
€25 mn from grant sources (preferred equity share), €110 mn from the AfDB, and loans and equity of €288 mn from European DFIs 
(ERD meeting, 3 June 2014, Athens). The Olkaria III geothermal plant was developed by OrPower 4 geothermal (a subsidiary of 
ORMAT International) in response to a government tender, with full refinancing during the expansion phases (from 13 MW to 48 MW 
capacity) to include various European DFIs (Dalberg, 2012). The initial equity investment by ORMAT International of $61.4 mn for 
phase I was increased by DFIs’ contribution of $121.2 mn – including almost equal contributions from the European DFIs, Deutsche 
Investitions-und  Entwicklungsgesellschaft,  KfW  Banking  Group,  PROPARCO,  FMO  Dutch  development  bank  and  the  Emerging 
Africa Infrastructure Fund (Dalberg, 2012). 

Various public and private institutions have committed to financing a $536.8 mn 100 MW geothermal project in Tanzania, including 
a CIF grant ($25 mn), the Tanzanian government ($1.5 mn), and loans from the AfDB ($45 mn), commercial banks ($317.5 mn), other 
development partners ($5.3 mn) and private-sector commitments ($142.5 mn) (CIF, n.d.). Private-sector investors are at an advanced 
stage in mobilising the financial resources required for a 100 MW Makambako wind farm in Tanzania (CI, Lunogelo et al., 2015). Initial 
phases were self-funded, but following feasibility demonstrations they received further finance from Chinese and Norwegian firms 
and the Norwegian Agency for Development Cooperation (NORAD), with further project development and financing in the pipeline 
(ERD meeting, 9 May 2014, Dar es Salaam). Implementation now hinges on the regulatory framework. A smaller-scale venture in 
Tanzania, the $29 mn 10 MW Mapenbasi hydropower plant, also has blended public and private finance. The private company (a 
Special Purpose Vehicle of Njombe Resources Development Company) financed the project with a debt-equity structure including 
investments from British and Sri Lankan companies and the Government of Tanzania (ERD meeting, 9 May 2014, Dar es Salaam).

Kenya and Tanzania have also adopted complementary policies to promote investment in their domestic renewable-energy sectors. 
Incentives in Kenya include zero-tax-rated solar panels, also exempt from excise tax, and investment allowances for larger firms for 
entire  construction  periods  (Kimuyu  et  al.,  2011).  A  stable  investment  environment  has  also  been  promoted  through  guarantees 
on  price  and  market  share  for  the  generation  of  renewable  energy,  while  companies  can  obtain  tradable  certificates  in  markets 
and bid competitively for renewable-energy concessions (Kimuyu et al., 2011). Such policy support contributed to Kenya’s having 
one of the most active renewable-energy markets in SSA, and, although far behind, the second largest investor after South Africa 
(commissioned  background  paper,  FS-UNEP,  2015).  Kenyan  government  energy  agencies  have  been  decentralised  and  split  up 
into  agencies  for  exploration,  generation  and  distribution.  According  to  some  experts,  the  lack  of  a  similar  process  in  Tanzania 
to  decentralise  generation,  transmission  and  distribution  has  added  to  bureaucratic  delays  and  acted  as  a  bottleneck  for  the 
development of renewable energy (ERD meeting, 9 May 2014, Dar es Salaam). Establishing similar incentives in Tanzania, including 
guarantees on market prices and shares, could help to encourage private-sector participation in its renewable-energy sector (ERD 
meeting, 9 May 2014, Dar es Salaam). The Tanzanian government has adopted policies to promote rural access and connection, and 
encourage private-sector participation, including the PPPs Policy 2009, and is also developing a renewable energy FIT programme 
and energy-subsidy policy (ERD meeting, 9 May 2014, Dar es Salaam). These will help to overcoming the non-financial barriers for 
investment and unlock private and other finance for a shift to green energy in Tanzania.

Sources: as cited

266 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 267

CHAPTER 6. The link between finance and policies for selected enablers 
 
 
 
investment 

instruments  are  vital 

in 
Public  de-risking 
overcoming 
risks  and  attracting 
private investment in green energy technologies. 
These  instruments  can  be  broadly  divided  into 
two categories (UNDP, 2013):

a.   Policy  de-risking  instruments  that  aim  to 
remove  the  fundamental  causes  of  risks. 
These instruments comprise support for policy 
design  for  renewable  energy,  institutional 
capacity-building, 
assessments, 
grid  connection  and  management,  and 
skills  development  for  local  operations  and 
maintenance.  These  can  act  as  supporting 
policies  for  mobilising  and  effectively  using 
finance for green energy technology transfer.

resource 

b.   Financial  de-risking  instruments  that  aim  to 
transfer investors’ risk to public actors. These 
instruments  may  include  loan  guarantees, 
political risk insurance (PRI) and public equity 
co-investments. 

instruments  can  also  be 
Public  de-risking 
complemented  by  direct  financial  incentives, 
for instance through price premiums, tax breaks 
and  carbon  offsets.  Options  to  account  for  the 
specific GTT risks and uncertainties may include 
(AfDB 2012): 

investments 

  Rebates  for 
in  green  energy 
technology  as  part  of  subsidies  for  project 
development.  Capital  investments  could  be 
supported  by  using  international  grants  to 
leverage finance. Involving MDBs and the SREP 
could  be  a  means  to  overcome  cost  barriers, 
in particular for vertical GTT, as could financing 
schemes initiated by multilateral agencies, such 
as the GEF (CIF, n.d.; GEF, n.d.). 

  Long-term, low-interest loan guarantees.

  R&D budgets.

  Context-specific  micro-finance  and  hire-
purchase facilities to assist farmers, households 
and  communities  to  pursue  green  energy 
technology initiatives. 

Many  developing  countries  emphasise  attaining 
the dual goals of energy access and sustainability, 
recognising the difficulties and costs of expanding 
grid  connections  to  rural  areas  and  focusing  on 
support  for  distributed  renewable  energy  at 
household  and  mini-grid  levels.  Governments 
have  employed  a  variety  of  incentives,  including 
capital  subsidies,  pre-paid  metering  allowances, 
grants to cover upfront costs, concessional loans 
and  preferential  tax  treatment.  Such  policies 
have  supported  a  proliferation  of  domestic 
solar  systems  in  Indonesia  and  more  than  9,000 
biogas units in Kenya. While such initiatives were 
previously  exclusively  within  the  purview  of  the 
international  development 
public  sector  and 
agencies,  in  recent  years  the  private  sector  has 
recognised the business opportunities and many 
companies are participating in innovative PPPs by 
financing distributed assets (GEF, n.d.).

Box 6.19 presents a macroeconomic perspective 
on  a  country’s  energy-generation  system,  but 
household  energy  practices  can  have  dramatic 
consequences  for  health,  the  environment  and 
socioeconomic development. Box 6.20 discusses 
the findings of a systematic review of the uptake 
of  cleaner  and  more  efficient  household  energy 
technologies  worldwide.  The  review  stresses 
the  importance  of  interactions  among  a  range 
of  factors,  and  which  factors  beyond  finance  are 
key for technology adoption. This offers valuable 
insights into complementary policies.

Box 6.19 | Policies for mobilising green energy technology finance: examples from Indonesia, Kenya and Tanzania

Indonesia, Kenya and Tanzania have adopted policies on renewable energy, with mixed degrees of success in attracting financing to 
new projects (commissioned background paper, FS-UNEP, 2015). Table 6.19B provides an overview of the measures these countries 
have applied in terms of regulatory policies, fiscal incentives and public financing. 51 

The government of Indonesia has set renewable energy generation targets for 2025: renewables should account for 15% of generation, 
with 13 GW of capacity composed of 9.5 GW of geothermal, 970 MW of wind and 870 MW of solar energy. By the end of 2013, 
Indonesia’s overall renewable generation capacity was estimated to be 3.3 GW. Biomass and small hydro are also expected to play an 
important role in achieving the overall target. In order to offer more incentives for investments in energy generation from renewable 
sources, Indonesia has adopted a 20-year FIT of $0.1-0.185/kilowatt hour (kWh) for geothermal projects, and FITs of $0.14-0.18/kWh 
for biomass and $0.07-0.16/kWh for other renewables, with a generation cap of 10 MW. Geothermal project developers also benefit 
from off-taker guarantees, an early-stage exploration/development fund, tax rebates, accelerated depreciation and exemption from 
VAT on imports. For energy generation from solar sources, the government established a tendering programme in 2013 in which 
the utility will gain $0.25/kWh maximum, with a small top-up for projects with 40% local content. Finally, the government supports 
renewable  projects  by  providing  a  viability  guarantee  for  the  utility  (BNEF,  2014a).  The  consequence  of  this  policy  support  has 
been that new investments in small hydro, biofuels and geothermal generation assets have dominated the overall mix since 2010, 
particularly the latter. This clearly matches the government’s policy to accelerate geothermal development, as the country has 40% 
of the world’s estimated geothermal resources (BNEF, 2014a). In 2012 and 2013, Indonesia saw $221 mn and $380 mn committed 
to its renewable generation sectors.

Much  like  Indonesia,  Kenya  has  ambitious  renewable  energy  targets,  aspiring  in  the  Least-Cost  Power  Development  Plan  2011–
31 to achieve almost 20 GW capacity by 2030, with renewables accounting for 51%. 52 To provide incentives for developers, the 
county  adopted  a  twice-revised  FIT,  which  provides  preferential  revenues,  differentiated  by  technology,  for  20  years.  Currently, 
technologies include wind, hydro, biomass, solar PV and geothermal, with differentiated rates for projects above and below 10 MW. 
The government has extended VAT and import-duty exemptions for renewable generation and geothermal exploration projects, 
and  the  latest  draft  of  the  country’s  Energy  Bill  proposes  a  net-metering  system  for  owners  of  generation  assets  under  20  kW 
(BNEF, 2014b). It has also introduced standardised power purchase agreement (PPA) templates, and guaranteed priority purchase, 
transmission and distribution of electricity generated by renewable sources of less than 10 MW (the terms for larger generation assets 
are negotiated as part of the PPA) (Kenya Ministry of Energy (2012). 

The  country  relies  on  renewable  generation  for  a  large  portion  of  its  capacity,  approximately  65%  in  2011  (REPP,  2012).  While 
hydropower  is  by  far  the  largest  generation  source,  solar,  wind  and  geothermal  generation  assets  are  being  developed  (see 
commissioned  background  paper,  FS-UNEP,  2015  for  detailed  data).  Such  rapidly  expanding  generation  capacity  bodes  well  for 
Kenya’s plan to greatly increase its overall electricity capacity by 2016, with 794 MW of hydro, 1,887 MW of geothermal, 635 MW of 
wind and 423 MW of solar PV (REN21, 2014).

Unlike Indonesia and Kenya, until recently, Tanzania had no specific targets for renewable energy generation in terms of capacity 
(MW) or proportion (percentage) (Heinrich Böll Foundation, 2013). In 2009, the Electricity Act opened the power sector to private-
sector  participation  and  IPPs.  The  government  has  introduced  non-technology-specific  FITs  based  on  an  avoided  cost  principle 
and  payable  over  15  years.  However,  in  practice  the  standard  PPA  is  infrequently  used  and  IPPs  negotiate  rates  with  the  utility. 
The government has also exempted imports of renewable energy from customs duties, which has dramatically reduced the cost of 
solar panels. These policies notwithstanding, few projects have materialised because the FITs are set too low – being based on the 
generating costs of 100 kW–10 MW small hydro plants – and the national utility is financially strained and cannot guarantee timely 
payment  to  IPPs.  Payments  are  denominated  in  Tanzanian  shillings,  exposing  international  developers  to  currency  risk.  Recently 
the government has stated its openness to a differentiated tariff structure and the utility has undergone management changes and 
posted surpluses, both positive steps for attracting more activity in the country’s renewable sector.

The result is that in Tanzania, renewable generation was only 30 MW in 2013, with another 60 MW commissioned. The overall annual 
expenditure relevant to climate change was $383 mn from 2009 to 2012, or approximately 5.5% of the national budget (ODI, 2014). 

50  Kenya’s investment volume of $249 mn in 2013 was only about 5% of South Africa’s $4.9 bn in the same year. Investment was up from 2012, but far below 

52  Of this, geothermal should account for 5.1 GW, wind for 2 GW and large and small hydro for 1 GW (the country’s total renewable generation capacity was 

the country’s peak of $1.7 bn in 2010. 50

approximately 400 MW in 2013).

51  Table 2 in the Renewables 2014 Global Status Report provides a comprehensive overview of the targets, policies, incentives and financing mechanisms the 
three countries had adopted by 2014 (REN21, 2014). The only revision among the three countries was in Indonesia, where the government recently expanded 
its FIT regime to include solar PV projects with a 40% local content requirement.

268 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 269

CHAPTER 6. The link between finance and policies for selected enablers 
 
 
Table 6.19B | Regulatory policies, fiscal incentives and public financing in Indonesia, Kenya and Tanzania

S
T
E
G
R
A
T

E
R

X

X

Y
R
T
N
U
O
C

Indonesia

Kenya

Tanzania

Source: REN21 (2014)

I

M
U
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/
T

I

F

T
N
E
M
Y
A
P

X

X

X

S
P
R

X

I

G
N
R
E
D
N
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T

X

X

S
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E
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O
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A
D
N
A
M

X

E
T
A
D
N
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Box 6.20 | Factors influencing the uptake of improved solid cooking stoves and clean fuels

Worldwide, almost 3 billion people rely on biomass fuels and coal burnt inefficiently on open fires or basic cooking stoves. Ensuring 
access to clean and efficient household energy is consequently a challenging policy area and relies on favourable conditions across 
multiple domains. Reviewing the factors for policies and programmes that succeeded in improving solid fuel stoves and/or clean 
fuels,  Puzollo  et  al.  (2013)  provide  a  systematic  overview  of  the  main  factors  for  success.  This  provides  valuable  lessons  for  the 
adoption of green energy technologies.

The review distinguishes between short-term adoption and longer-term sustained use and provides a framework of seven sets of 
factors that influence large-scale uptake of improved cooking stoves (ICS) and clean fuels such as liquefied petroleum (LPG), biogas, 
solar cookers and alcohol fuels: (1) fuel and technology characteristics; (2) household and contextual characteristics; (3) knowledge 
and perceptions; (4) financial, tax and subsidy aspects; (5) market development; (6) regulation, legislation and standards; and (7) 
programme and policy mechanisms.

The paper reviews 57 qualitative and quantitative studies from a broad range of settings. It summarises the critical factors for the 
adoption of ICS, of which finance is only one of several:

•	Meeting	users’	needs,	particularly	for	cooking	main	dishes	and	being	able	to	use	large	enough	pots 
•	Providing	valued	savings	on	fuel 
•	Offering	products	of	a	quality	that	meet	users’	expectations	and	are	durable 
•	Guaranteeing	support	(e.g.	loans)	for	businesses	producing	and	promoting	ICS 
•	Providing	financial	assistance	for	equitable	access	and/or	for	more	expensive	ICS 
•	Having	success	with	early	adopters,	in	particular	opinion	formers 
•	Ensuring	initial	support	for	users,	and	for	maintenance,	repair	and	replacements 
•	Developing	an	efficient	and	reliable	network	of	suppliers/retailers

The authors also review 44 qualitative and quantitative studies from a wide variety of settings on the adoption of cleaner fuels (e.g. 
solar cookers). A number of key factors are:

•  Biogas: Production and use is constrained by a set of conditions, including adequate head of livestock and suitable farming 
practices, water supply, climate (the technology does not function in low temperatures without costly enhancements) and 
labour to manage the digester. Biogas systems are expensive to install and substantial financial support seems the norm. 
Maintenance and repair services are also needed, which require finance.

•		Solar: Production and marketing of low-cost, high-quality cookers has been constrained by a piecemeal 

and poorly coordinated strategy.

•		LPG: Issues of safety (and associated regulation) and production versus imports, volatile oil prices, subsidy, demand 
and distribution/availability are critical determinants of the use of LPG that require strong policy and management.

•		Ethanol: Use of land for biofuels competes with agricultural production and excise (pricing) issues arising from the need to 
separate its use as a fuel from the legal and illegal alcohol markets present challenges, and should be priorities for strong 
and consistent policy.

The findings suggest that these factors are mutually reinforcing. None is sufficient on its own, although in order to ensure adoption 
and sustained use, factors such as meeting household needs, fuel savings, higher income levels, effective financing and supporting 
government action seem critical.

Reform of fossil-fuel subsidies 
and carbon taxes

The  effects  of  removing  fossil-fuel  subsidies  will 
in  general  be  transmitted  via  pricing  and  the 
public budget. In relation to the latter, Figure 6.16 
illustrates  the  relative  dominance  of  fossil-fuel 
subsidies  in  comparison  with  commitments  on 
climate  finance  and  pledges  in  UNFCCC  Annex 
2 countries. It highlights the potential to free up 
resources  by  removing  these  subsidies.  The  CI 
on  Indonesia  makes  the  point  clear.  The  energy 
subsidy  represented  24%  of  the  public  budget 

in  2013.  The  CI  argues  that  these  subsidies  are 
an inefficient use of resources, which need to be 
gradually  removed,  with  the  savings  allocated 
to  social  assistance  and  the  development  of 
renewable  energy  (CI,  Damuri  et  al.,  2015).  By 
the  end  of  2014  the  Indonesian  government 
has  removed  a  large  part  of  the  fuel  subsidies, 
seizing the opportunity given by low world market 
prices for oil. As a result, from 2015 it has gained 
considerable  additional  fiscal  space  for  social 
assistance as well as for infrastructure investments, 
including investments in renewable energy.

14,000

12,000

Figure 6.16 | Fossil-fuel subsidies vs. Fast Start Climate Finance in (UNFCCC) Annex 2 countries (in $ mn)

10,000

8,000

6,000

4,000

2,000

0

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

Australia
Austria
Belgium

Canada
Denmark
Finland

France
Greece
Germany

Iceland

Ireiand

New Zealand
Italy
Netherlands
Japan

orway

N

Switzerland
Sweden
Spain

o

d

m

United States

United King

Fast Start Finance Committed (avg 2010-2012)

Fast Start Finance Pledges (avg 2010-2012)

Fossil Fuel Subsidies (2011)

Australia
Austria
Belgium

Canada
Denmark
Finland

France
Greece
Germany

Iceland

Ireiand

New Zealand
Italy
Netherlands
Japan

orway

N

m
o
d

Switzerland
United States
Sweden
Spain
United King

Source: Oil Change International (2013)

Fast Start Finance Committed (avg 2010-2012)

Fast Start Finance Pledges (avg 2010-2012)

Fossil Fuel Subsidies (2011)

270 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 271

CHAPTER 6. The link between finance and policies for selected enablers 
 
 
 
 
 
 
 
 
 
 
 
 
 
	
	
	
	
	
	
	
	
	
	
	
	
for 

(i.e. 

incentives 

investment 

The  removal  of  fossil-fuel  subsidies  and  the 
introduction  of  a  general  carbon  tax  will  send 
appropriate  price  signals 
incorporating 
environmental  damage  in  the  price  of  using 
in  R&D 
energy),  mobilise  more 
and  offer  greater 
investment 
in  renewable  energy.  A  price  on  carbon,  for 
example, will also help to reduce the need to find 
additional investment in green energy, indicating 
investment towards green energy and away from 
fossil-fuel-intensive  energy.  Further,  according  to 
the IEA (2010) the world spends $557 bn a year 
on subsidies for fossil fuels compared to $33 bn 
for  low-carbon  sources  of  energy  (Stern,  2006), 
including biofuels and nuclear power.

The economic consequences of energy subsidies 
in  general  and  on  fossil  fuels  in  particular  can 
be  far-reaching.  While  they  are  often  aimed 
at  protecting  consumers  by  providing  energy 
security,  fossil-fuel  subsidies  can  hamper  GTT. 
Moreover, energy subsidies can help to aggravate 
fiscal  imbalances,  depress  private  investment 
and  promote  capital-intensive  industries  and  at 
the  same  time  reduce  incentives  for  renewable 
energy.  Furthermore,  since  wealthier  households 
tend to benefit most from subsidies, these might 
in fact reinforce inequality (IMF, 2013) and hinder 
social  development.  In  most  regions,  energy 
subsidies  are  pervasive  and  ossify  undesirable 
structures in the energy market. Removing fossil-
fuel  subsidies  could  therefore  lead  to  greater 
incentives  for  private  investment  in  R&D  for 
green energy technologies and act as a policy for 
leveraging finance for GTT.

Establishing  appropriate  pricing 
for  energy 
use  depends  upon  considerable  information, 
innovative  approaches,  good  communication, 
coordination,  coalition-building  and  leadership. 
It  is  related  to  social  development  since  higher 
prices further disadvantage the poor, who already 
lack  access  to  water,  energy  and  land,  while 
efficient  pricing  can  have  strong  distributional 
consequences,  which  have  hampered  previous 
attempts at reform (e.g. in India and Nigeria). Thus 

subsidy  reform  needs  to  be  carefully  managed 
and  communicated,  and  be  accompanied  by 
measures  to  protect  the  poorest  and  address 
affordability issues (ERD 2011/12).

DFIs and specialised funds for mobilising 
finance for green energy technologies

As  stated  earlier,  DFIs  can  provide  loans  at 
maturities  and  on  conditions  that  the  private 
sector  (subject  to  market  conditions)  cannot, 
and  so  can  finance  projects  that  private-sector 
investors would deem too risky. This can leverage 
additional  finance  by  reducing  a  project’s  risk 
profile. Furthermore, DFIs can back other private-
sector  investors  to  increase  their  engagement  in 
renewable energy projects.

Given  the  generally  higher  upfront  costs  and 
perceived  commercial  risks  that  are  associated 
with large-scale projects in developing countries, 
there is a major role for DFIs in the area of green 
energy  technologies.  In  addition  to  leveraging 
the  necessary  finance,  DFIs’  involvement  in  the 
green energy sector leads to scaling up R&D and 
the  application  of  green  energy  technologies 
and  hence  to  reducing  their  cost.  In  the  context 
of finance for green energy, which is segmented 
in  terms  of  the  type  of  debtor  and  the  size 
of  projects,  DFI  involvement  is  crucial  since 
traditional financial instruments are not applicable 
and  are  in  any  case  limited  in  the  commercial 
financial markets of developing countries. 

DFI  involvement  can  thus  be  an  effective  means 
to support green energy technologies given both 
the  supply-side  characteristics  and  constraints 
for  these  technologies  as  well  as  demand 
characteristics,  such  as  the  reluctance  of  power 
grid  operators  in  developing  countries  to  deal 
with decentralised energy-provision units and the 
low demand from investors due to high initial costs 
(KfW, 2005). DFI loans if a project faces a funding 
gap  or  a  commercial  lender  is  unwilling  to  bear 
the  entire  project  risk  can  therefore  significantly 
improve project implementation (UNEP, 2009).

DFIs need to have comprehensive and clear low-
carbon development strategies and to coordinate 
policies with the relevant national and international 
stakeholders.  By  developing  technical  support 
based  on  an  analysis  of  needs  and  capacities 
in  developing  countries,  and  helping  investors, 
commercial banks and users to absorb financing, 
they can play a more catalytic role.

Based on a comprehensive analysis of multilateral 
climate  funds,  and  the  information  these  funds 
provide  on  targeted  volumes  and  proposed 
financial  structure,  it  is  possible  to  gauge  the 
engagement  of  the  private  sector  via  private 
finance  interventions  (PFIs).  Averaged  across  all 
PFIs  mobilised  by  the  Clean  Technology  Fund 
(CTF),  the  Global  Environmental  Facility  (GEF), 
the Scaling Up Renewable Energy Programme for 
Low-Income Countries (SREP), the Global Energy 
Efficiency and Renewable Energy Fund (GEEREF) 
and  the  Pilot  Programme  for  Climate  Resilience 
(PPCR), Whitley et al. (2014) find that every dollar 
of  public  finance  aims  to  mobilise  80  cents  in 
private finance. PFIs that aim for significant levels 
of  private  investment  take  place  in  wealthier 
countries 
(BRICS,  OECD  and  EU  accession 
countries) and are primarily to support established 
energy-efficiency 
green 
projects.  It  is  too  early  to  evaluate  whether  the 
intended mobilisation has been achieved.

technologies 

and 

Financial  institutions  can  be  geared  towards 
promoting sustainable development financing. For 
example, DFI finance for small-scale hydropower 
could have positive social and economic impacts. 
Scott  et  al.  (2013)  provide  an  example  of  how 
transforming the national energy system towards 
renewable sources can improve a country’s general 
employment perspectives. Although employment 
growth  can  be  achieved  by  suitable  investments 
in  green  energy  technologies,  the  promotion  of 
renewable energy can lead to a substitution effect 
due  to  potential  job  losses  in  the  fossil-based 
energy  industry.  The  effect  can  be  outweighed 
by  additional  jobs  created  in  sectors  concerned 
with  energy  efficiency  and  in  the  manufacturing 

industry for green energy technologies. Assessing 
the net direct, indirect and induced employment 
effects of the Bugoye Hydro Power Project, a 13 
MW  run-of-river  hydro  plant  in  western  Uganda, 
based on a methodology developed by the IFC, 
Scott  et  al.  (2013)  document  a  total  increase 
of  about  1,270  jobs  during  the  construction 
and  operation  phases  and  between  8,434  and 
10,256 permanent jobs created by investment in 
more  and  better  power  supply.  The  project  thus 
demonstrates  that  investment  in  green  energy 
infrastructure  can  have  substantial  linkages  with 
social  and  economic  dimensions  and  lead  to 
positive outcomes in all three.

Policies for effective use of finance 
for green energy technology

Financial-sector development

Beyond  the  specific  policy  instruments  to  de-
risk  and  expand  investment  in  green  energy 
technologies,  policies  aimed  more  generally  at 
developing  the  domestic  financial  market  will 
help  to  mobilise  private  investment  (domestic 
and  international),  including  in  green  energy 
technologies,  and  make  finance 
in  green 
technology  more  efficient,  such  as  by  adhering 
to environmental standards. The development of 
financial markets in ways that promote sustainable 
development requires a shift in financial rules and 
the  ways  in  which  financial  institutions  operate, 
because  incentives  and  disincentives  are  not 
currently  geared  towards  long-term  sustainable 
development  financing.  Rather,  the  financial 
sector  is  characterised  by  short-term  investment 
with high rates of return and investment decisions 
that undervalue natural capital. This is particularly 
the  case  in  LICs.  There  is  a  need  to  change 
regulations  in  the  financial  sector  in  order  to 
promote the financing of green technologies and 
biodiversity  conservation.  Efforts  to  green  the 
financial  sector  would  probably  create  synergies 
with  economic  and  social  development.  For 
example,  domestic  policies  to  promote  a  robust 
domestic  financial  sector  would  improve  access 

272 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 273

CHAPTER 6. The link between finance and policies for selected enablersInfographic 7 | Enabler: Green Energy Technology

CHAPTER 6. The link between finance and policies for selected enablers

ENABLER: GREEN ENERGY TECHNOLOGY

Green technology transfer 

Significant upfront investment

Economic development  
is hampered by lack  
of access to energy. The shift  
to green energy is crucial  
for sustainable development. 

s
c
h
e
m
e
s
a
n
d
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n
i
t
i
e
s

P
o
l
i
c
i
e
s

t
h
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t
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v
i
d
e
fi
n
a
n
c
i
n
g

THE TRANSFER OF GREEN 
ENERGY TECHNOLOGY REQUIRES:

Policy initiatives that facilitate  
implementation

Africa has achieved  
the largest percentage 
increase in investment  
in renewable energy 
among developing 
countries (excluding 
Brazil, China and India). 
Total investment on the 
continent rose from $750 
million to $3.6 billion.

$3.6 bn 

Reform fossil-fuel subsidies  
and carbon taxes

Fossil-fuel subsidies are still much larger than 

commitments in climate finance and pledges in 

UNFCCC.

G
N
I
C
N
A
N
I
F

In Indonesia the energy subsidy represented 24% 

of the public budget in 2013, but a substantial 

reduction in the subsidy has now created funding 

for social assistance and infrastructure investments 

including renewable energy.

GOVERNMENTS

PRIVATE SECTOR
PPPs

DONORS

INDIVIDUAL 
HOUSEHOLDS

Kenya and Tanzania – a tale of two countries 

KENYA Investment in renewable 
energy has risen from $190 mn in 
2007/08 to $740 mn in 2011/12 
and more than $1.3 bn now. 

TANZANIA: The absolute level  
of renewable energy production  
has been rising, but the share 
is declining due to more rapid 
development of fossil-fuel generation 

s
m
s
i
n
a
h
c
e
m
n
o
i
t
a
g
i
t
i

m
-
k
s
i
R

Hydro 761 MW 

Fossil-based 
sources 662 MW 

Geothermal  
198 MW 

Wind  
5.45 MW 

Biomass  
co-generation 
26 MW 

 Public–private finance instruments in renewable-

energy projects are important. 

  A €620 mn wind-power project in Lake Turkana 
includes an investment of €200 mn by the EIB  

  The Olkaria III geothermal plant includes  
investments from various European DFIs

Public–private finance instruments in 

renewable-energy projects are important. 

  The private-sector is investing in  
the 100 MW Makambako wind farm

   Investment in a $536.8 mn 100 MW 
geothermal project includes a CIF grant 
($25 mn), loans from the AfDB ($45 mn), 
commercial banks ($317.5 mn) and 
private-sector commitments ($142.5 mn)

Public incentives

Both countries have adopted policies to promote  

renewable-energy investment. In Kenya these include:

  zero-tax-rated solar panels exempt from excise tax with 

investment allowances for larger firms for the entire construction 

period

   a stable investment environment for renewable energy  

with guarantees on price and market share

274 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 275

 
 
 
 
 
 
 
 
 
for  smaller  investors,  which  would  in  turn  boost 
the  role  of  SMEs  in  the  economy  and  increase 
investment  in  green  technologies  by  promoting 
new actors’ access to the market. 

in 

incentives  and  disincentives 

A  shift 
in 
the  financial  sector  needs  to  be  based  on 
domestic  and  international  policy  shifts  towards 
promoting  sustainable  development.  Creating 
an  international  enabling  environment  for  such 
financing,  as  part  of  a  global  partnership  for 
development,  will  be  essential  in  order  for 
countries  to  gear  the  domestic  financial  sector 
towards  sustainable  development.  For  example, 
TNCs  do  not  necessarily  comply  with  social 
and  environmental  regulations  in  their  overseas 
operations, and need to be adequately monitored. 
TNCs  could,  however,  contribute  to  conserving 
biodiversity and act as a GTT channel. In addition, 
Basel  III  rules  penalise  lending  to  riskier  actors, 
which  include  poorer  developing  countries  with 
undeveloped capital markets and thus reduce the 
funding  available  to  them  for  green  energy,  and 
development more broadly.

UNEP 

Finance 

Initiative 

The 
(2011) 
recommendations  on  how  to  promote  social 
in  financial 
and  environmental  responsibility 
institutions  towards  sustainable  development 
financing, include the following:

show 

 Governments  must 
establishing 
appropriate 
regulations and economic instruments.

in 
long-term  priorities,  with  an 
cost-efficient 
framework  of 

leadership 

  Financial  institutions’  interactions  with  other 
economic  sectors  and  consumers  (through 
financing,  investment  and  trading  activities) 
towards 
should 
sustainable development, i.e. good corporate 
citizenship and sound business practices.

responsibility 

exercise 

and society should be appropriately accounted 
for in risk assessments.

 Financial  institutions  must  comply  with  local, 
international  regulations  on 
national  and 
environmental and social issues, and integrate 
such  considerations 
into  operations  and 
business decisions in all markets.

institutions  should  adopt  best 
  Financial 
practices 
in  environmental  management, 
including  energy  and  water  efficiency,  and 
relations  with  customers, 
form  business 
partners,  suppliers  and  contractors 
that 
follow similarly high environmental standards. 
This  calls  for  efforts  to  keep  abreast  of  best 
practices in sustainability management. 

  The  financial  services  sector  needs 
to 
adapt  and  develop  products  and  services 
that  promote  the  principles  of  sustainable 
development.

  Financial  institutions  should  conduct  regular 
internal 
reviews  and  measure  progress 
against  sustainability  goals,  publishing  their 
sustainability policy and periodically reporting 
on  the  steps  they  have  taken  to  incorporate 
environmental  and  social  considerations  into 
their core business.

  Financial institutions should share information 
with consumers, as appropriate, to strengthen 
their  own  capacity  to  reduce  environmental 
and  social  risk  and  promote  sustainable 
development.

  Openness  and  dialogue  on  sustainability 
issues need to be fostered with shareholders, 
employees,  customers,  regulators,  policy-
makers and the general public.

a 
 Sustainability  management 
precautionary approach to environmental and 
social issues, and impacts on the environment 

requires 

The  UNEP  Finance  Initiative  approach  therefore 
encourages  relationships  and  the  sharing  of 
information  among  governments,  business 
and  society  at  large,  to  ensure  that  they  are  all 

in 

policy-makers 

committed to achieving sustainable development. 
A  key  role  is  highlighted  for  domestic  and 
international 
providing 
leadership and creating an enabling environment 
for sustainable development financing. Measuring 
the impact of financial institutions in the areas of 
social and environmental governance will also be 
essential  in  order  to  promote  sound  practices, 
and  social  and  environmental  awareness  would 
further contribute to the sustainability of financial 
operations (e.g. factoring in the impacts of climate 
change on capital assets).

6.5.3 

 Conclusions and implications 
of finance for green energy technologies

The  focus  of  the  domestic  agenda  on  economic 
growth  and  employment  creation  is  evident 
from  the  commissioned  CIs.  The  environmental 
dimension is not yet at the centre of the political 
agenda  in  most  developing  countries,  although 
environmental sustainability has been recognised 
as  an  important  GPG  and  environmental  issues 
are prominent in the discussions on the SDGs. 

technologies 

This section has focused on the diffusion of green 
energy 
for  sustainable  energy. 
The  transfer  of  green  energy  technology  to 
developing countries is still at an early stage and 
requires a degree of upfront investments and risk-
mitigation  mechanisms  to  provide  incentives  for 
their application and commercialisation. Similar to 
the financing of infrastructure in general, the right 
mix  of  public  financing  (through  ODA,  special 
funds  and  RDBs)  is  still  not  properly  adapted  to 
needs, particularly in the case of LICs. Apart from 
the  established  North–South  GTT  flows,  South–
South  flows  of  exports  of  solar  technology  from 
China as well as South–North exports from India 
and China are gaining importance.

issue can halt a green energy project, while support 
for early adopters can establish a virtuous circle. 
Leveraging funding to facilitate GTT is still at the 
pilot stage, and several new international facilities 
are being established. It is widely acknowledged 
that  funding  has  to  be  complemented  with 
support  for  technology  transfer  and  adaptation, 
e.g.  by  CICs,  which  are  being  trialled  in  several 
countries.  This  has  to  be  reinforced  by  a  range 
of  complementary  policies  on  the  demand  and 
supply  sides  that  are  key  for  mobilising  and 
effectively using finance and to creating markets 
of sufficient size for the commercialisation of green 
energy  technologies.  The  continuation  of  fossil-
fuel  subsidies  hampers  investment  in  renewable 
energy,  both  because  the  subsidies  provide  the 
wrong price incentives and because their removal 
could  free  up  substantial  financial  resources. 

  6.6 

 The role of finance 
and policies for trade

Trade  is  an  important  enabler  of  sustainable 
development.  Developing  backward  and  forward 
linkages  between  producers  and  consumers,  and 
the creation of trade and value chains across firms, 
have  reduced  costs,  improved  productivity  and 
increased competitiveness (AfDB, 2014). The means 
to  promote  trade  depends  on  the  country’s  stage 
of development and may include all or some of the 
following: investments in transport or basic energy, 
water  and  sanitation  systems,  telephone  and  ICT 
connectivity,  incentives  for  horizontal  and  vertical 
linkages across local firms, the formation of business 
clusters, an open trade regime, regional integration 
schemes,  integration  in  global  supply  and  value 
chains  and/or  international  PPPs.  Box  6.21  shows 
how  Mauritius  has  benefited  from  trade  and  the 
importance of policies and finance in this success.

The  distinctive  features  of  GTT  require  both 
policy  initiatives  and  interventions  that  facilitate 
the  transfer  and  deployment  of  green  energy 
technologies  and  the  provision  of  financing 
schemes  and  opportunities.  A  simple  regulatory 

Limited  or  lack  of  access  to  finance,  including 
trade  finance,  appears  to  hamper  private-sector 
development  and  structural  change 
in  many 
developing countries. 

6.6

276 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 277

CHAPTER 6. The link between finance and policies for selected enablers 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 6.17 | The role of policy for mobilisation and effective use of finance for trade

Box 6.21 | The enabling role of trade in Mauritius

Policies for effective use
NATIONAL
National Aid for Trade strategies
Financial sector development

INTERNATIONAL
Promotion of private sector development
by specialised agencies incl. DFIs

Financial flows

Public and Private
Domestic and International

Policies to mobilise finance
NATIONAL
Export strategy
Clustering
Financial sector development

INTERNATIONAL
DFIs to mitigate risks
in trade finance/AfT
Global and regional trade
and financial rules

Trade for
sustainable 
development

This  section  discusses  the  sources  of  trade 
finance,  the  link  between  finance  and  policies 
for  developing  trade  and  draws  conclusions  and 
policy  implications.  Figure  6.17  summarises  the 
main policy issues discussed in this section.

6.6.1 

Financing trade: different sources and effects 

Traders  in  LICs  find  it  very  difficult  to  obtain 
affordable  finance  for  international  transactions 
(Auboin  and  Engemann,  2012).  Adequate  trade 
finance  is  an  essential  ingredient  in  sustaining 
trade  flows  in  periods  of  economic  volatility  and 
downturn. It offers the liquidity required to expand 
trade in periods of growth, and is particularly crucial 
in  supporting  SMEs  in  the  tradable  goods  and 
services sectors in the poorest, smallest and most 
vulnerable countries (Hou and te Velde, 2013).

There  is  a  large  gap  in  trade  finance.  In 
developing economies, there exist an estimated 
360  million  to  440  million  formal  and  informal 
microenterprises  and  SMEs,  about  half  of 
which  have  little  or  no  access  to  finance.  Some 
24%  of  firms  in  SSA  and  17%  in  all  developing 
countries  cite  access  to  finance  as  the  biggest 
obstacle  to  doing  business  while  43%  in  SSA 
and  31%  in  all  developing  countries  cite  it  as  a 
major  constraint  (IFC,  2014).  The  value  of  the 
gap  in  credit  financing  for  informal  and  formal 
in  developing 
microenterprises  and  SMEs 
economies  is  estimated  at  between  $2.1  tr  and 
$2.6  tr.  For  trade  finance  in  particular,  an  ADB 
(2013a) survey found an unmet global demand of 
the order of $1.6 tr and in developing countries 
across Asia of around $425 bn.

Despite being a vulnerable, small island based on a monoculture economy characterised by high unemployment, low education and 
the absence of natural resources, Mauritius has undergone rapid economic development since independence in 1968. By 2013, it 
had moved from being an economy based on sugar (which provided 90% of total exports and agriculture represented 25% of GDP) 
to  become  a  diversified,  service-oriented  economy,  with  agriculture  accounting  for  3.5%  of  GDP.  After  breaking  its  dependence 
on sugar (1970–1979), it developed an export-oriented textile and garment sector (1980–1992), a flourishing tourism industry and 
dynamic  financial  and  business  services  (1990–2012)  that  enabled  it  to  become  a  regional  business  and  financial  platform.  Per 
capita GDP in constant 2005 prices rose from $200 in 1968 to over $7,700 today (World Bank, 2014). By 1990, most jobs were in 
the manufacturing sector and the unemployment rate was less than 2%. As agriculture’s contribution to GDP declined, the share of 
manufacturing GDP doubled between 1970 and 1998.

The  structural  transformation  in  Mauritius  can  be  largely  attributed  to  its  export-oriented  industrialisation  strategy,  facilitated  by 
(a) the strategic outward-oriented vision pursued by its political leaders; (b) inclusive institutions; (c) ethnic diversity and extensive 
diaspora  networks;  (d)  a  class  of  dynamic  indigenous  entrepreneurs;  and  (e)  a  well-structured  private  sector  engaged  in  regular 
dialogue with the government. 

Macroeconomic policies and regulatory policy reforms underpinned Mauritius’ trade strategy. The structural adjustment programmes of 
1979 and 1982 established fiscal and exchange-rate policies that increased the economy’s competitiveness, supported fiscal consolidation 
and trade expansion and provided the necessary stimulus to investment and savings. Continuous public–private policy dialogue was 
promoted in the Joint Economic Council. The active pursuit of FDI and trade-promotion policies, including the establishment of an 
Export Processing Zone (EPZ), created a 50-fold increase in merchandise exports between 1971 and 1990. In response to increased 
competition for its textile exports as a result of the dismantling of the Multi-Fibre Arrangement (MFA) and the establishment of the 
WTO, the government was quick to create the Export Processing Zones Development Authority (EPZDA) to provide financial incentives 
for productive restructuring, and the Mauritius Offshore Business Activities Authority, established in 1992, to promote the development 
of offshore financial services. In the early 1990s, the Mauritius Freeport Authority was established to promote trans-shipments, and the 
Telecommunications Advisory Council to enhance competitiveness and bring down connection costs. 

Since 2000, Mauritius has opened up its economy to foreign talents and skills, promoting ICT and financial services and pursuing 
a ‘blue and green growth strategy’ to take advantage of its 2 million km2 maritime zone. The ICT Authority was set up in 2001 to 
develop Mauritius’ prospects of becoming a ‘cyber island’. The contribution of ICT to GDP grew from 4.1% in 2000 to 6.5% in 2010, 
creating 8,000 new jobs. This agenda, including the launch in 2008 of the ‘Maurice Ile Durable’ strategy, aims to counter the intense 
global competition in traditional sectors from other low-cost economies through further diversification and productivity enhancement 
via trade expansion and investment in technology, including renewable energy. It also aspires to tackle pressing domestic challenges, 
most notably rising unemployment (8.7% in 2012) and growing inequality. 

Sources: Ramdoo (2014); CI by Treebhoohun and Jutliah (2015)

278 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 279

CHAPTER 6. The link between finance and policies for selected enablersBox 6.22 | Trade finance

Figure 6.18 | AfT flows (constant prices, 2011, US$ mn)

Trade finance at any level involves some combination of four elements: 

•	Facilitation	of	secure	and	timely	payment	across	borders	
•	Provision	of	financing	to	parties	in	a	supply	chain	or	trade	transaction	
•	Effective	mitigation	of	risk	
•	Facilitation	of	information	flow	

Table 6.22B | Elements of trade finance

PAYMENT

FINANCING

RISK MITIGATION

INFORMATION

•	Secure
•	Timely	and	prompt
•	Global
•	Low-cost
•	All	leading	currencies

•		Available	to	importer 

or exporter

•		Several	stages	in	the	

transaction

•		No	impact	in	Operating 

Line for exporters

•	Risk	transfer
•		Country,	bank	and	
commercial risk

•	Transport	insurance
•	Export	credit	insurance

•	Financial	flows
•	Shipment	status
•	Quality	of	shipment
•		Letters	of	Credit	systems	
include web- and desk-
based solutions

16000,00

14000,00

12000,00

10000,00

8000,00

6000,00

4000,00

2000,00

0,00

2006

2007

2008

2009

2010

2011

2012

16000,00

14000,00

12000,00

10000,00

8000,00

60000,00

6000,00

50000,00

4000,00

40000,00

2000,00

0,00

30000,00

20000,00

10000,00

0,00

2006

2007

2008

2009

2010

2011

2012

AfT disbursement

AfT commitment

LDC

OLIC

LMIC

UMIC

60000,00

50000,00

40000,00

30000,00

20000,00

10000,00

0,00

Notes: Disbursement by income group (left axis). Total AfT disbursement and commitment (right axis). OLIC = other low-income countries. 
The graph includes ODA but no other development flows (loans, grants and OOF. 

AfT commitment

OLIC

AfT disbursement

LDC

LMIC

Source: OPUS (n.d); OPUS and SWIFT (2013)

Sources: Calculation based on OECD Creditor Reporting System (CRS) disbursement data; Keane et al. (2014)

UMIC

supports 

Developing  financial  markets  to  underpin  trade 
finance 
economic  development. 
The  challenge  is  to  develop  a  financial  system 
and  instruments  that  are  compatible  with  the 
productive  needs  and  structures  of  developing 
economies and supportive to local entrepreneurs 
and  businesses,  many  of  which  do  not  meet 
banking  criteria  since  they  operate  in  conditions 
of  high  risk  and  without  credible  collateral  or 
guarantees.  Trade  finance  refers  to  innovative, 
custom-engineered 
and 
services  that  can  meet  a  country’s  import  and 
export needs (see Box 6.22).

financial  products 

Until recently, there has been limited trade finance 
in LICs and LMICs. Although aimed at building trade 
capacity  rather  than  trade  finance  as  such,  since 
2007 the EU and its Member States have expanded 
AfT financing, following the example of Japan and 
other  donors.  As  already  highlighted,  between 
60% and 70% of ODA is in the form of grants and 
between  20%  and  30%  in  the  form  of  loans.  Aid 
for Trade (including infrastructure and trade-related 

assistance) is mostly directed to countries in Africa 
followed  by  Asia.  According  to  UNCTAD  (2010), 
most  Chinese  assistance  to  developing  countries 
can  be  classified  as  AfT  since  it  has  elements  of 
trade and investment cooperation.

its 

Since 
inception,  AfT  commitments  have 
increased rapidly; reaching $48 bn in 2010, falling 
to $41.5 billion in 2011 but rising again in 2012 (see 
Figure  6.18).  A  growing  body  of  evidence  shows 
that AfT is effective in reducing the cost of trading 
and increasing trade capacity, income and growth 
in recipient countries. Its impact, however, tends to 
be determined by factors such as the type of AfT 
flow,  recipient-country-specific  factors  (including 
institutional quality and income level), the sectors 
receiving AfT, and by geographic region. 

There  is  growing  evidence  that  AfT  has  a 
significant  and  positive  correlation  with  exports 
(OECD/WTO,  2013)  as  it  reduces  trading  costs 
(Busse et.al, 2011) as well as the time of trading 
(Calì  and  te  Velde,  2011).  Aid  for  infrastructure, 

AfT for development and AfT for policy together 
have been estimated to reduce global trade costs 
by  0.2%  and  to  generate  a  total  welfare  gain  of 
$18.5 bn (Ivanic et. al, 2006).

In  terms  of  sectoral  allocation  trade-related 
infrastructure  helps  recipient  countries  increase 
exports. It is estimated that a 10% increase in aid 
for  infrastructure  leads  to  an  average  increase 
in  exports-to-GDP  ratio  in  a  developing  country 
of  2.34%  (Vijil  and  Wagner,  2010)).  Ferro  et  al. 
(2011)  suggest  that  aid  to  the  transport  and 
energy  sectors  is  the  most  effective  in  boosting 
exports.They  find  that  a  10%  increase  in  aid  to 
these  sectors  is  associated  with  a  2%  and  6.8% 
increase in manufacturing exports. AfT channelled 
to institution-building also appears to be effective 
in  fostering  exports,  especially  if  it  is  combined 
with good-quality institutions (Massa, 2013).

Effects  seem  to  differ  depending  on  the  sector 
and  the  country  income  level.  Thus,  aid  to  the 
transport  and  banking  services  appears  to  have 

a  positive  impact  and  is  significant  for  LICs  and 
LMICs,  but  is  negative  and  significant  in  the 
case  of  UMICs  (Ferro  et.  al,  2011).  Similarly,  the 
marginal effect of infrastructure improvements on 
exports decreases with country income, while the 
effectiveness  of  AfT  directed  to  ICT,  energy  and 
business services increases with the income level 
of  the  recipient  countries.  (Portugal-Perez  and 
Wilson, 2010)

In  terms  of  AfT  by  geographical  region,  AfT 
facilitation appears to have a larger cost-reducing 
impact  in  SSA  than  in  the  entire  sample  of 
developing  countries  (Cali  and  te  Velde,  2011). 
Aid to business appears to have a positive effect 
on  exports  in  LAC  and  MENA,  but  a  negative 
impact in South Asia (Ferro et. al, 2011) while aid to 
banking displays a negative relation with exports 
in LAC and MENA, but a positive impact in South 
Asia.  These  results  suggest  that  regions  with  a 
high percentage of UMICs (e.g. LAC and MENA) 
benefit more from aid to business than do regions 
with  several  LICs  and  LMICs  (e.g.  South  Asia). 

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Combining finance and policies to implement a transformative post-2015 development agenda | 281

CHAPTER 6. The link between finance and policies for selected enablersSeveral  trade  finance  banks  and  others  are 
increasingly seeking to meet the needs of dynamic 
and  emerging  commercial  customers  across 
selected  ‘trade  corridors’  in  Asia  and  the  Pacific, 
notably  in  China,  India,  Indonesia  and  Malaysia. 
Similarly, Africa has experienced growth driven by a 
combination of trade and inward (resource-focused) 
investment.  The  rise  of  the  Chinese  Renminbi 
(RMB) as a currency of international trade finance 
is expected to lower currency risks for transactions 
denominated in RMB and to enhance the demand 
for global trade banks to develop capabilities and 
facilities  linked  to  RMB-denominated  trade.  The 
RMB now plays a role in transactions that represent 
some 10% of China’s trade flows, and perhaps as 
much as 2–3% of global trade. Overall, LICs will be 
able to mobilise more resources for development 
if  the  emerging  economies  design  programmes 
to  build  their  trade  capacity.  Relevant  trade 
instruments  include  preferential  export  credits, 
market-rate export buyers’ credits, and the removal 
of  tariffs  and  non-tariff  barriers  (commissioned 
background paper, Uneze, 2015).

At  the  same  time,  ever  more  SMEs,  constrained 
by limited access to credit and trade finance, are 
bypassing  the  banking  system  by  developing 
and  directly  negotiating  on  ‘Open  Account’ 
terms  with  their  trading  counterparts.  They  are 
thus  abandoning  traditional  instruments  such 
as  Letters  of  Credit  –  which  many  importers 
and  exporters  find  complex  and  cumbersome, 
highly process-intensive, and prone to error, and 
which  are  therefore  unpopular.  Moreover,  most 
microenterprises  and  SMEs  in  LICs  and  LMICs 
lack  any  access  to  the  banking  system  and  rely 
on  family  and  social  networks  to  finance  their 
activities. 

The latter gain the most from aid to banking and 
the  development  of  their  financial  systems.  The 
disruption  and  redirection  of  trade  flows  due  to 
the 2008 global financial crisis and the application 
of  more  stringent  regulatory  requirements  for 
international  banks  have  changed  the  landscape 
of trade finance. 

Intra-regional trade flows across Asia, the Middle 
East  and  Africa  have  increased,  as  exporters 
have  actively  sought  alternatives  to  the  US 
and  European  markets.  Trade  among  Southern 
partners has been dominated by exports of natural 
resources and raw materials from LICs to emerging 
economies and imports of Chinese manufactured 
goods along the lines of conventional comparative 
advantage  (commissioned  background  paper; 
Uneze,  2015).  China  has  done  more  than  other 
Southern partners to develop LICs’ trade capacity, 
especially  in  Africa,  through  AfT  assistance  and 
trade facilitation measures. For example, in 2010, 
it launched an Accession Programme for LDCs and 
created a special fund to enable them to engage 
in  WTO  programmes.  It  has  also  provided  duty-
free  and  quota-free  (DFQF)  access  to  products 
from LDCs but it is not as comprehensive as e.g. 
the  EU’s  DFQF  scheme,  and  has  established 
free-trade  zones  in  some  LICs  (commissioned 
background paper; Uneze, 2015). 

Such  policies  have  resulted  in  growing  trade 
between  LICs  and  China,  especially  in  Africa. 
Thus, exports of natural resources from Africa to 
China  have  expanded  fast  and  so  have  imports 
of  cheap  manufactured  goods 
from  China 
into  African  LICs.  The  continuation  of  such  a 
pattern  of  trade  could  have  negative  long-term 
repercussions as it displaces local production and 
retards structural change. In Nigeria, for example, 
the  manufacturing  sector  has  been  weakened 
by  cheap  Chinese  imports.  This  is  the  reason 
why  according  to  some  authors  Chinese-African 
relations present both an opportunity as well as a 
threat and China’s assistance to Africa is a double-
edged  sword  (commissioned  background  paper 
by Uneze, 2015; Udeala, 2013).

Figure 6.19 | General picture of trade finance

Figure 6.20 | Trade finance offered by banks

19-22%

35-40%

38-45%

Cash in advance

Open account

Bank trade finance

44%
20%
10%
7%
19%

Commercial Letters of Credit

Collections and guarantees

Standby Letters

Open Account

Other

 Source: IMF (2011)

Source: ICC (2012) 

As  a  consequence  of  these  developments,  trade 
finance is engaged in an unprecedented effort to 
develop  mechanisms  and  solutions  better  suited 
to  the  evolving  needs  of  companies  of  various 
sizes.  Trade  finance  was  worth  $15.9  tr  in  2008 
(IMF, 2011), of which 19–22% was cash in advance, 
35–40% was bank trade finance, and 38–45% was 

Open  Account  (which  includes  guarantees  by 
ECAs, arm’s length and intra-firm) (see Figure 6.19). 
The  product  mix  offered  by  banks  differs  (ICC, 
2012), with 44% in the form of commercial Letters 
of Credit, 20% each for collections and guarantees, 
10% for standby letters and 7% for Open Account 
(the rest is ‘other’) (see Figure 6.20).

282 | EUROPEAN REPORT ON DEVELOPMENT 2015

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CHAPTER 6. The link between finance and policies for selected enablers6.6.2 

 Links between finance 
and policies for developing trade

In  mobilising  finance,  five  policy  areas  including 
capacity  building  and  enhancing  market  access, 
cluster  formation  and  integration  into  Regional 
and  Global  Value  Chains  (GVCs),  risk  mitigation 
through  an  enhanced  role  for  DFIs  and  MDBs, 
for  FDI 
transparent 
attraction as well as financial sector development 
appear  to  be  crucial.  In  making  more  effective 
use  of  finance  the  development  of  national  AfT 
trade 
strategies,  specialised 
finance  and  overall  financial-sector  development 
are priority areas.

institutional 

frameworks 

institutions 

for 

Mobilisation of finance for trade

Building export capacity 
and enhancing market access 

Despite  the  growing  needs  for  trade  finance 
and innovations in its provision, export capacity 
and  market  access  remains  extremely  limited 
especially  for  millions  of  SMEs  in  developing 
countries which need to grow and obtain access 
to  markets  and  trade.  For  example,  micro  and 
small  local  companies  and  entrepreneurs  lack 
information  and  capacity  to  penetrate  foreign 
markets;  domestic  products  do  not  meet 
phytosanitary  or  other  standards;  expanding 
and  restructuring  production  to  meet  quantity 
and  quality  requirements  for  exporting  requires 
investments  that  are  difficult  to  raise;  delays 
in  customs  and  bureaucratic  procedures  add 
to  costs;  inappropriate  exchange-rate  policies 
or  high  domestic  costs  damage  international 
competitiveness;  and  international  policies  to 
open up trade, lift tariff barriers, remove visible 
and  invisible  barriers  to  entry  and  promote 
competition  are  crucial  for  enhanced  access 
to  markets.  Evidence  from  Bangladesh  and 
Moldova  is  telling  in  this  regard  (Boxes  6.23 
and  6.24).  Finance  is  not  the  only  constraint  to 
developing trade.

to  enhance 

In  view  of  these  constraints,  the  promotion  of 
trade requires actions on three fronts: (a) domestic 
capacity-building 
local  export 
capacity;  (b)  the  pursuit  of  coherent  national 
trade,  macroeconomic  and  industrial  policies 
that  are  supported  by  governments  and  the 
private sector to foster export promotion, export 
diversification  and  overall  price  and  structural 
competitiveness; and (c) the establishment of an 
international  open-trade  regime  with  clear  and 
fair  rules  that  are  conducive  to  capacity-building 
and development.

According to the Swedish Board of Trade, four key 
elements  facilitate  trade:  (a)  strong  political  will; 
(b) a clear strategic plan; (c) close cooperation with 
the business community; and (d) a well-funded and 
long-term technical assistance programme. Trade 
facilitation  therefore  presupposes  governments’ 
political will to support private-sector development 
and  create  conditions  favourable  to  growth  and 
productive  investment,  especially  for  (informal) 
microentrprises  and  SMEs 
that  characterise 
industrial structures in most developing countries. 
Sustainable macroeconomic policies, including an 
appropriate  exchange-rate  policy  and  an  open 
trade  regime  that  support  the  expansion  of  the 
tradable  sector,  are  prerequisites  for  creating  a 
business environment that is conducive to trade. 

Last but not least industrial policies to facilitate the 
formation of sectoral clusters and the integration 
of individual firms or clusters into regional or global 
value  chains  (GVCs),  coupled  with  appropriate 
supply-chain management practices, can facilitate 
both trade promotion and trade finance (see, for 
example, Kren de Backer et al., 2013). 

Box 6.23 | Pro-trade policies: evidence from Bangladesh

Market-oriented reforms, the removal of trade-related quantitative restrictions, tariff liberalisation and the active pursuit of an export-
oriented growth strategy helped to integrate Bangladesh’s economy into the global economy. Trade openness increased from 13% 
in 1981 to 47% in 2013. International policies were vital to unlocking Bangladesh’s trade potential. Income and employment were 
created by preferential access in the ready-made garments (RMG) sector and the provision of back-to-back Letters of Credit in the 
fabrics sector. Similar trade advantages were realised through the Everything But Arms (EBA) initiative and the Generalised System of 
Preferences (GSP). Open-trade policies were thus conducive to a policy environment and global linkages that boosted human capital 
and capital investment in the tradable sectors. Despite this progress, poor infrastructure, weak productive capacity and technological 
readiness, low competitiveness and the lack of trade-related expertise still hamper the country’s trading potential.

Source: CI, Khatun (2015)

Box 6.24 | Surmounting barriers to trade promotion: evidence from Moldova

With the exception of a few in the agro-food and textile export sectors, most firms in Moldova are either micro or small-scale companies 
that cater to local markets. They face substantial difficulties in upgrading export capacities due to lack of information, know-how, 
appropriate financing and backward and forward networks. According to the preliminary results of a survey of approximately 40 firms 
conducted by the Ministry of Economy (Katseli, 2014), even firms with solid export experience face serious obstacles to entering 
foreign markets. The five most serious obstacles include exchange-rate volatility, excessive costs of obtaining finance, bureaucratic 
export  procedures,  lack  of  appropriate  contacts  with  potential  importers  and  the  entrenched  presence  of  competitors  in  foreign 
markets. To address these constraints they rank as their highest priority support for investments in new machinery and equipment, 
and assistance in locating partners in export markets; they also seek support in finding skilled labour, securing lower costs of energy 
and identifying strategic investors.

Representatives of firms with little or no export experience include among the five most important inhibiting factors exchange-rate 
volatility, the high costs of finance, high costs of entry into foreign markets, lack of information about the export potential in these 
markets and lack of appropriate contacts and networking. Their highest priorities are to locate suitable partners in export markets, 
and to meet quality standards; support for investment in new machinery and equipment; improvements in infrastructure; and help 
in finding strategic investors.

These responses reveal bottlenecks in both domestic cost and supply conditions (most notably the high cost of financing, exchange-
rate  risk,  high  energy  prices,  inadequate  infrastructure,  and  limited  investment  capacity)  and  to  demand  conditions  (inadequate 
information about export potential, lack of access to potential importers, greater competition in foreign markets, and high costs of 
entry into foreign markets). Thus, to enable firms to expand their productive capabilities and promote exports, supply and demand 
constraints need to be jointly addressed and progressively relaxed. 

Source: Katseli (2014)

284 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 285

CHAPTER 6. The link between finance and policies for selected enablersCluster formation, integration into GvCs 
and supply-chain management 

Export  promotion  and  market  access  is  highly 
dependent on market conditions. Unlike trade in 
the nineteenth century, which was largely in primary 
products  and  finished  manufactured  goods,  the 
late  twentieth  century  saw  a  dramatic  growth 
in  the  share  of  semi-processed  intermediate 
products  in  global  trade.  Trade  is  increasingly  in 
semi-finished  components  and  sub-assemblies 
rather  than 
is 
fragmented as lead firms outsource their non-core 
competences  to  suppliers  in  different  countries. 
Global  trade  is  thus  increasingly  conducted  by 
GVCs  led  by  TNCs,  which  spread  different  parts 
of  a  production  chain  (e.g.  materials,  parts, 
components)  across  countries  and  markets.  A 
major  European  importer  of  furniture  or  a  car-
manufacturing company is today buying materials 
and components from across the world.

in  final  products.  Production 

It  is  estimated  that  80%  of  global  trade  takes 
place  within  TNC-coordinated  GVCs,  which 
makes  it  increasingly  difficult  for  businesses  from 
developing countries to integrate if they are small 
and in the lower part of the value chain (UNCTAD, 
2013).  Based  on  international  experience  over 
the  past  decade  and  in  particular  on  the  insights 
gained  from  the  AfT  initiative,  ‘those  economies 
that are better integrated into global value chains 
have  been  best  positioned  to  gain  from  trade’ 
(ADB,  2013b).  Conversely,  countries  that  remain 
outside GVCs face serious market-access problems 
and difficulty in penetrating foreign markets. 

Especially  in  the  presence  of  many  micro,  small 
and  largely  informal  firms,  trade  promotion  can 
be  facilitated  if  policy-makers,  in  collaboration 
the 
with  producers’  associations, 
formation  of  sectoral  productive  clusters  that 
help  to  create  positive  spillovers  from  joint 
action,  i.e.  generate  ‘external  economies’  that 
develop skills or infrastructure, training activities, 
logistics,  warehouse  management  or  marketing. 
Cluster formation can be based on criteria such as 

support 

proximity of suppliers or of customers or inter-firm 
specialisation,  and  should  aim  to  build  on  what 
already  exists,  thus  taking  advantage  of  existing 
cooperatives,  regional  associations,  presence  in 
an EPZ or industrial parks (IP), etc. 

Cluster  formation  tends  to  create  incentives 
for  GVC  participation  as  it  enhances  productive 
capacity and lowers the transaction and operating 
costs  of  participation.  It  could  also  mobilise 
supply-chain  financing,  as  evidenced  by  recent 
initiatives of the EIB and EIF in Moldova in relation 
to the wine and horticulture industries. 

Aid  could  support  clustering  and  supply-chain 
management.  A  commissioned  background 
paper (Cadot et al, 2015) suggests that aid could 
be  focused  on  weak  links,  i.e.  sectors  that  hold 
back  productivity  improvements  downstream  in 
the  value  chain.  This  requires  better  targeting 
rather than a fundamental overhaul. 

Transparent, regulatory and institutional 
frameworks for FDI attraction 

There  are  diverse  approaches  to  preparing  an 
economy  to  integrate  into  value  chains,  but 
a  positive  business  environment  and  an  open 
economy are considered to be key to developing 
comparative  advantages  (ECDPM,  2014).  The 
Asian  experience,  in  particular,  suggests  that 
attracting  FDI  and  building  regional  trade  –
investment  interlinkages  have  been  instrumental 
in  fostering  regional  and  subsequently  global 
value chains and in so doing mobilising additional 
finance.  The  so–called  “flying-geese”  paradigm 
that  has  been  characteristic  of  integration  and 
development patterns in South East Asia (Katseli, 
1993)  has  been  spearheaded  by  such  trade–
interlinkages  while  the  formation 
investment 
of  inter-country  value  chains  has  been  one  of 
the  principal  drivers  of  structural  change  and 
economic transformation of the region.  

According  to  The  World 
Investment  Report 
countries with a greater presence of FDI relative 

to  the  size  of  their  economies  tend  to  have 
a  higher  level  of  participation  in  GVCs  and 
to  generate  relatively  more  domestic  value 
added  from  trade  (UNCTAD,  2013).  Thus,  the 
provision  of  appropriate  regulatory,  institutional 
and  infrastructural  frameworks  to  attract  green-
field  FDI  and  to  facilitate  participation  in  TNC-
managed  GVCs  promotes  linkages  that  enable 
economic  development.  Policies  to  promote 
export diversification and to develop capacity and 
skills through FDI attraction are vital components 
of a pro-trade agenda that can mobilise additional 
financial  resources.  Pursuing  such  an  agenda 
requires  a  shared  vision,  concerted  efforts  and 
substantial investment. Access to finance to spur 
the  adoption  of  such  an  agenda,  especially  in 
LICs,  is  critical  to  the  successful  participation  in 
GVCs (Nadeau, 2014). 

Risk mitigation through an enhanced 
role for DFIs and MDBs

Given  the  high  risks  associated  with  expanding 
trade  and  attracting  FDI  in  LICs  and  LMICs,  the 
development  and  provision  of  risk  mitigation 

instruments  needs  to  be  an  integral  component 
of a pro-trade and pro-investment strategy. Such 
provision is also essential in mobilising additional 
trade  finance,  the  need  to  mitigate  risks  in 
trade  finance,  especially  for  SMEs,  originating 
in  importers’  or  exporters’  failure  to  meet  their 
obligations,  has  given  rise  to  Export  Credit 
Guarantee Schemes. Since these have sovereign 
backing  they  expand  the  opportunities  available 
to  exporting  companies.  This  has  led  to  the 
evolution  of  Special  Purpose  Vehicles,  or  Export 
Credit  Agencies  (ECA),  which  provide  finance 
for  exporters  and  assume  the  associated  risks. 
Examples of such ECAs are the US Exim Bank, the 
UK Export Credits Guarantee Department, Nexim 
of  Nigeria  and  Koexim  of  South  Korea.  During 
the  2008  global  financial  crisis,  trade  financing 
needs  had  to  be  addressed  by  public  or  quasi-
public ECAs as well as DFIs, MDBs and RDBs (e.g. 
the  EBRD,  EIB,  the  ADB  and  the  Inter-American 
Development Bank (IADB)), the World Bank’s IFC 
and others. As with infrastructure, DFIs and MDBs 
have been major providers of finance for the trade 
and supply chains. Some illustrative examples are 
given in Table 6.6 below.

Table 6.6 | International Finance Institution (IFI) trade finance programmes

Programme 

Number 
of countries 

Date of 
commencement

20

1999

Number of transactions 
(by 31 December 2011)

11,600

EBRD

IFC

IADB

ADB

Trade Facilitation 
Programme

Global Trade 
Finance Programme

Trade Finance 
Facilitation Programme

Trade Finance 
Programme

91

2005

11,255

20

2005

1,066

16

2004

4,236

value of transactions 
since commencement

€7.2 bn equivalent 
to $9.5 bn

$15.8 bn

$1.96 bn

$8.8 bn ($3.5 bn 
of which in 2011)

800

800

2 claims, zero losses

zero

264

zero

112

Zero

Number 
of banks

Claims 
to date

Source: OPUS and SWIFT (2013)

286 | EUROPEAN REPORT ON DEVELOPMENT 2015

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CHAPTER 6. The link between finance and policies for selected enablersto  commodity-backed 

Increasingly DFIs are using supply-chain financing 
to  cover  the  ‘integrated  trade  finance  needs’  of 
participating companies, especially in agriculture, 
ranging from providing affordable working capital 
lending 
to  suppliers 
against  warehouse  receipts  or  other  collateral 
agreements,  to  structured  finance.  In  Moldova, 
for example, the EIB made a €75 mn loan to the 
wine  sector,  combining  a  €2  mn  grant  from  the 
Neighbourhood  Investment  Facility  Trust  Fund, 
which provided vital technical assistance. The wine 
industry  accounts  for  about  30%  of  Moldova’s 
exports and employs 15% of the labour force.

As with finance for infrastructure, DFIs and MDBs 
can  play  a  catalytic  role  in  trade  finance  and 
financial-sector  development.  Engaging  them 
further  in  the  provision  of  trade  finance  and  risk 
mitigation instruments appears to be an effective 
strategy for private sector development and trade 
promotion  that  helps  overcome  constraints  in 
credit  provision  from  underdeveloped  domestic 
financial markets.

It should be noted however that , in the absence of 
sustainable clusters or supply-chain financing , it is 
usually larger firms that would have access to such 
financing. More can be done to lower the cost of 
financing and enhance SMEs’ access to blended 
trade-finance 
risk-mitigation 
instruments  and 
mechanisms.  The  extension  of  such  instruments 
to  SMEs,  supported  by  appropriate  technical 
assistance  and  trade-facilitation  policies  (custom 
and  tax  policies,  upgrading  standards,  market 
surveillance  etc.),  can  enhance  trade  activities 
at  least  in  leading  sectors;  public  resources  and 
remittances  could  also  be  mobilised  further  to 
enhance supply capacities especially in local and 
rural  markets.  Moldova’s  PARES  programme, 
for  example,  whereby  the  government  matches 
remittances  channelled 
investment 
projects, is a good example (CI, Ghedrovici, 2015). 

local 

to 

AfT has similarly been instrumental in promoting 
SME  trade  capacity  in  many  LICs  and  LMICs. 
Technical  assistance  and  grants  provided  by 

the  IFIs  have  helped  SMEs  to  grow  in  many 
parts  of  the  world.  A  commitment  to  private-
sector  development  and 
the  adoption  of 
economic  and  regulatory  reforms  are  probably 
the  most  important  preconditions  for  mobilising 
international  public  funds  for  linkages  and  trade 
promotion. 

Financial-sector development 

In  most  LICs,  it  is  the  provision  of  microcredit, 
simple  guarantee  schemes  and  development 
finance, often supported by ODA or remittances, 
which  has  enabled  trade  through  the  promotion 
of  private-sector  development,  and  the  creation 
of linkages (AfDB and OECD, 2006).

tax 

rights, 

As  with  broader  economic  development,  trade 
tends  to  be  accompanied  by  the  development 
of  the  financial  and  private  sectors.  Private-
sector  development,  facilitated  and  supported 
by  economic  and  regulatory  reforms  (e.g.  more 
transparent  property 
incentives, 
appropriate  exchange-rate  policy,  and  capacity-
building  programmes)  involves  a  progressive 
shift from informal to formal economic activities, 
growth  of  company  size  and  capabilities, 
trade  promotion  and  linkages  across  firms  and 
consumers.  Development  of  the  financial  sector 
tends to follow. In most countries, however, even 
in  some  HICs,  the  availability  of  credit  to  the 
SME  sector  remains  limited  and  costly.  Creating 
financial  mechanisms  and 
instruments  suited 
to  SME  development,  especially  in  the  risky 
environment of LICs and LMICs, remains a major 
challenge. It requires government initiatives to set 
up specialised institutions, mechanisms or blended 
instruments  and  to  promote  supporting  policies 
so that resources are channelled directly to viable 
exporting  companies  and  SMEs  at  affordable 
rates.  Mauritius’  strategy  (CI,  Treebhoohun  and 
Jutliah,  2015)  in  securing  financial  resources  to 
promote 
its  economic  development  through 
trade is a good example (Box 6.25).

Box 6.25 | Mauritius’ policies to mobilise trade finance

As the economy of Mauritius diversified, the sources of financing shifted from an exclusive reliance on import and export duties on 
sugar (1972–1980), to domestic taxation and private flows. In the 1980s, the private sector invested sugar profits in the garment 
and tourism industries. Grants and ODA were used to compensate those who lost out in the process of change. As the garment 
and  tourism  sectors  developed,  domestic  and  foreign  loans  were  extended  by  a  rapidly  expanding  financial  sector  to  a  thriving 
private  sector  and  a  growing  market  economy.  Development  of  the  financial  sector  was  supported  by  liberalising  interest  rates 
and  the  creation  of  a  Stock  Exchange  in  1989.  Tax  incentives,  including  a  25%  corporate  tax  (down  from  35%),  were  used  to 
encourage companies to be listed. The Development Bank of Mauritius, the State Bank of Mauritius, the State Insurance Corporation 
of Mauritius, the State Investment Corporation and the Mauritius Leasing Corporation were created to mobilise financial resources. 
Mauritius has since become a regional financial centre.

FDI as a proportion of GDP remained at below 2% over the period 1990–2005. Since 2006 it has risen, mainly due to investments in 
real estate promoted by the government’s Integrated Resort Scheme, which offers foreign nationals a residence permit if they invest 
in a property worth at least $500,000. Net FDI inflows have increased by 96% to $361 mn in 2012 compared to 2004 levels (World 
Bank, 2014). Despite a growing financial sector, trade financing is still a critical binding constraint and there is a need for government 
policies to increase the level of equity, debt and mezzanine finance channelled to the real economy. The government is thus seeking 
to internationalise the Stock Exchange of Mauritius to make it a regional centre for raising capital, to develop PPPs and long-term 
bonds for developing infrastructure, to improve skills in the financial-service sector, and to attract FDI from global companies, which 
are not currently allowed to conduct business in Mauritius. 

Source: CI, Treebhoohun and Jutliah (2015)

Effective use of finance for trade

The  use  of  trade  finance  can  become  more 
effective  if  it  is  supported  by  policies  that 
enhance  effective  and  efficient  responses  to 
enhanced  market  access  on  the  part  of  private-
sector participants as well as greater transparency 
and  accountability  on  the  part  of  governments, 
financial institutions and intermediaries. Improved 
standards,  policies  on  competition  and  market 
surveillance,  regulatory  reforms  to  lower  the 
costs  of  doing  business  and  transaction  costs, 
appropriate  incentives  to  combat  informality, 
and  judicial  and  legal  reforms  can  all  support 
private-sector development and make the use of 
finance  more  effective.  Governance  reforms  and 
modernisation of tax-administration, customs and 
legal systems can facilitate trade, including better 
use of public funding. The following sections focus 
on  three  complementary  policies  for  effective 
use:  (a)  design  of  national  AfT  strategies;  (b) 

development  of  specialised  institutions  for  trade 
finance; and (c) effective oversight of the financial 
sector.

National AfT strategies 

identification  of  binding 

A  number  of  factors  specific  to  donors  and/or 
recipient  countries  influence  the  effectiveness 
of  AfT  (OECD/WTO,  2013;  Basnett  et  al.,  2012; 
OECD/WTO,  2011;  Keane  et  al.,  2014).  These 
include  (a)  determining  AfT  priorities,  including 
the 
trade-related 
constraints  to  growth,  needs  assessment,  the 
integration  of  needs  into  national  development 
plans;  and  how  donors  respond  to  trade-
related  needs  through  their  country  or  regional 
programmes; sound Diagnostic Trade Integration 
Studies; (b) structuring AfT on the basis of different 
delivery instruments, the benefits and drawbacks 
of  bilateral  and  multilateral  programmes  as 
well  as  pooled  funds  and  regional  approaches 

288 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 289

CHAPTER 6. The link between finance and policies for selected enablersInfographic 8 | Enabler: Trade

ENABLER: TRADE

Investing in Trade 

CHAPTER 6. The link between finance and policies for selected enablers

Policy for mobilisation and effective use of finance for trade

COUNTRIES CAN USE A RANGE 
OF POLICIES TO MOBILISE FINANCE 
FOR TRADE

special financial 
institutions and 
mechanisms

instruments that 
mitigate risks by 
providing trade 
finance, insurance and 
guarantee schemes

cluster formation 
and integration 
into supply chains

1   National policies 
for effective use 

   National Aid for 

Trade strategies

  Financial sector 

development

2   International policies 
for effective use 

  Promotion of private 

sector development by 

specialised agencies 

incl. DFIs

2

3

4

1

3   National policies 

to mobilise finance 

  Export strategy

  Clustering

  Financial sector 

development

3   International policies 
for effective use  

  DFIs to mitigate risks in 

trade finance / AfT

  Global and regional 

trade and financial rules

capacity - building  
activities

TRADE

Increased trade volumes, better market access and lower costs 

associated with trade and finance can boost growth, create 

employment and reduce poverty.

The creation of an OPEN, TRANSPARENT, 
RULE-BASED MULTILATERAL TRADING 
AND FINANCIAL SYSTEM is a Global 
Public Good of paramount importance 
for development.

INCREASED 

vOLUMES

LOWER COSTS

MARKET 
ACCESS

NO PROHIBITIvE TARIFFS, 
qUOTAS, SUBSIDIES

Three important, complementary policies for effective use of trade finance are:

  The design of national AfT strategies

  Development of specialised institutions for trade finance

   Oversight of the financial sector

Pro-trade policies: Bangladesh

Imports and exports increased from 13% of GDP in 1981 to 47% in 2013.

International policies were vital to unlocking 

Bangladesh’s trade potential:

Bangladesh’s economy integrated 

the global economy through:

1   Income and employment were 

created by preferential access in 

the ready-made garments (RMG) 

sector

2   The provision of back-to-back 
Letters of Credit in the fabrics 

sector

3   Trade advantages were realised 
through the Everything But 

Arms (EBA) initiative and the 

Generalised System 

of Preferences (GSP)

1

2

3

These initiatives boosted human capital and capital investment in these sectors.

1  Market-oriented reforms
2   The removal of trade-related 

quantitative restrictions

3  Tariff liberalisation
4   The active pursuit of an export-

oriented growth strategy

1

3

2

4

290 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 291

20131981 
 
 
 
 
 
 
 
and 

national 

entailing  multiple  recipients  (including  AfT  to 
RECs and transport corridors); (c) the design and 
implementation  of  projects  and  programmes, 
focused  on 
regional  AfT 
programmes,  donor  coordination,  integration  of 
country systems, inter-ministerial coordination on 
the recipient side and the linkages of programmes 
to  the  transnational  and  regional  level;  and  (d) 
M&E,  including  different  methodologies,  and 
how this informs existing and future programmes 
at the global, regional, national and project levels. 
Countries that have designed AfT strategies that 
combine  these  issues,  such  as  Cambodia,  have 
made good use of AfT. 

Specialised institutions 
for effective trade finance

Collaboration  with  regional  DFIs  and  MDBs 
to  develop  specialised 
facilities  to  support 
enterprise  development  has  had  positive  effects 
not only on trade promotion but also on effective 
management  of  resources.  The  EU/EBRD  SME 
for  example,  has  provided 
Finance  Facility, 
considerable  financing  to  SMEs  in  EU  Accession 
and  new  Member  States  in  central  and  eastern 
Europe  through  local  banks,  leasing  companies 
and equity funds. By the end of 2012, the EBRD 
had provided €1.2 bn in credit lines to 44 banks 
and  40  leasing  companies  supported  by  an  EU 
grant  of  €139  mn  for  incentive  payments  and 
technical  assistance  (EBRD,  2013).  Similarly,  the 
Western  Balkans  Enterprise  Development  and 
Innovation  Facility,  launched  in  December  2012 
by  the  European  Commission,  EIB,  European 
Investment Fund, EBRD and a number of bilateral 
donors to support SME financing and investments 
in infrastructure, private-sector development and 
energy  efficiency  as  well  as  to  provide  technical 
assistance to the public and private sector in the 
Western  Balkans,  is  a  promising  and  ambitious 
initiative that could be studied and introduced in 
other settings. 

Effective oversight of the financial sector

Finally,  there  is  a  need  for  effective  supervision 
of  the  banking  sector  to  prevent  oligopolistic 
practices  by  domestic  banks,  high  lending  rates 
or selective credit-extension policies, all of which 
can  limit  access  to  credit  and  prevent  the  most 
effective use of financial resources. 

Financing  trade  can  help  small  entrepreneurs 
and  small-scale  farmers  in  LICs  and  LMICs  to 
participate in activities and value chains that raise 
incomes and so help to reduce poverty. Women’s 
empowerment  can  also  be  promoted  through 
policies  on  financial  inclusion  connected  to  SME 
development (Box 6.26).

6.6.3 

 Conclusions and implications 
regarding investment in trade 

Trade  depends  on  the  availability  of  and  access 
to finance for trade promotion and private-sector 
development,  especially  for  SMEs  with  limited 
or no access to credit and finance, the so-called 
‘missing  middle’.  Initiatives  such  as  AfT  can  be 
effective,  but  their  impact  depends  on  factors 
such as purpose, country and provider. Countries 
can  use  a  range  of  policies  to  mobilise  finance 
for trade. Capacity-building activities need to be 
complemented  by  the  development  of  special 
supporting financial institutions, mechanisms and 
instruments  to  mitigate  risks  by  providing  trade 
finance,  and  insurance  and  guarantee  schemes. 
The  disruption  and  redirection  of  trade  flows 
due  to  the  2007–2008  global  financial  crisis  and 
the  application  of  more  stringent  regulatory 
requirements for international banks have changed 
the  landscape  of  trade  finance.  For  LICs  and 
LMICs in particular, the introduction of Specialised 
Facilities managed by DFIs could be important in 
supporting private-sector development and trade 
financing.  Cluster  formation  and  integration  into 
supply chains could be decisive steps towards the 
mobilisation of additional financial resources. 

Box 6.26 | Women’s empowerment through financial inclusion

Women’s access to finance can support their empowerment and economic and social development. Panellists at a recent Chatham 
House event (June 2014) highlighted that:

•		 	Women	face	far	more	financial	exclusion	than	men.	In	SSA,	only	about	20%	of	women	have	bank	accounts.	The	proportion	is	much	

lower in LICs but over 50% in MICs. 

•		 	Women	tend	to	be	more	risk-averse	than	men,	and	less	willing	to	borrow	from	financial	institutions.	In	any	case,	women	also	face	
a male bias in the provision of formal financial services (according to customary law or legal status, related to land and assets). 
Women therefore make greater use of community savings, for instance in table banking, where charges are near zero and returns 
are higher. 

•			 	A	 survey	 of	 200	 microfinance	 institutions	 and	 larger	 banks	 in	 emerging	 economies	 found	 that	 women	 outperformed	 men	 in	

portfolio quality and return on assets.

•			 	The	criteria	for	women’s	use	of	financial	services	emerged	as:	(a)	security	(e.g.	not	having	to	carry	a	lot	of	cash);	(b)	confidentiality	
(whether they control their own savings, or must share them with male relatives); and (c) convenience. Kenya is leading the way in 
mobile banking, which addresses these three criteria.

•		 	Increasing	women’s	share	in	financial	services	leads	to	more	investment	in	children’s	health	and	education;	allows	women	to	make	
savings; provides opportunities to network (important for business development); improves women’s credit scores, which makes 
it easier for them to obtain future loans; increases women’s voice in economic, business and policy decisions; leads to women’s 
economic empowerment, which can increase the level of respect they command and hence reduce their vulnerability.

•			 	There	remain	many	challenges	to	unlocking	women’s	financial	potential.	Simply	increasing	women’s	participation	is	not	enough,	
as women already make up the majority of the labour force in many settings. It is important to examine the underlying factors that 
hinder economic opportunity, e.g. level of education, legal barriers, and social or cultural factors including early marriage and high 
fertility rates.

The  creation  of  an  open,  transparent  and  rules-
based  multilateral  trading  and  financial  system 
is  of  paramount  importance  for  development. 
Increased  trade  volumes,  better  market  access 
and lower costs associated with trade and finance 
can significantly boost growth, create employment 
and  reduce  poverty.  The  abolition  of  prohibitive 
tariffs,  quotas  and  trade-distorting  subsidies  in 
developed  countries  would  be  a  major  impetus 
for growth and employment creation. 

This  section  also  provided  evidence  on  the 
importance  of  three  complementary  policies  for 
effective use of trade finance: design of national 
AfT  strategies,  development  of  specialised 
institutions for trade finance and oversight of the 
financial sector.

292 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 293

CHAPTER 6. The link between finance and policies for selected enablersCHAPTER 7.

Synthesis & Conclusions: 
Enabling a post-2015
development agenda

7.1  Setting the scene 

7.2 

 Composition of finance flows: 
What has been learned? 

7.3 

 The interaction between policies 
and finance: What has been learned? 

7.4 

 Steps towards a Global Partnership 
for the post-2015 development agenda 

7.5  Concluding remarks 

Final remarks 

296

298 

302 

310 

320

323

07.

This  concluding  chapter  synthesises 

the  main 

issues  discussed  in  this  Report  and  draws  out  the 

principal  policy  conclusions.  The  approach  and 

main  policy  conclusions  are  compatible  with  other 

recent  approaches  to  FFD  (notably  ICESDF,  2014; 

and  OECD  DAC  CDR,  2014).  This  Report’s  special 

contribution lies in offering concrete examples of how 

finance and policies combine to enable sustainable 

transformations,  based  on  existing  evidence 

and  specific  country  experiences.  In  particular  it 

(a)  encourages  a  discussion  of  finance  and  policies 

together  rather  than  in  an  artificially  disconnected 

fashion;  (b)  brings  new  evidence  (ERD  commissioned 

papers and CIs) to support key policy messages; and 

(c)  examines  concrete  areas  (or  enablers)  in  which 

policy  and  finance  together  can  support  sustainable 

development.

The structure of this chapter is as follows. Section 7.1 

sets the scene by recalling the main messages of the 

preceding Chapters. Sections 7.2 and 7.3 discuss issues 

related to the evolution of finance (Section 7.2) and the 

link between finance and policy (Section 7.3). Section 

7.4  examines  the  steps  needed  to  move  towards  a 

new FPFD for the post-2015 agenda, and Section 7.5 

presents some concluding remarks.

Combining finance and policies to implement a transformative post-2015 development agenda | 295

  7.1  Setting the scene

T his  Report  has  discussed  the  lessons  to 

be  drawn  from  the  MDGs.  The  debate  on 
financing  the  attainment  of  the  MDGs  following 
the 2002 Monterrey Consensus had a number of 
positive outcomes, such as an increased level of 
ODA commitments, but despite its broad scope, 
its  interpretation  and  implementation  also  led 
to  an  excessive  focus  on  financial  resource  gaps 
to  the  detriment  of  addressing  the  longer-term 
challenges  of  building  institutions,  improving 
policy and achieving structural transformation.

Chapter 2 draws three major conclusions from a 
review of the studies on MDG finance needs:

A range of studies on finance needs supported the 
implementation  of  the  MDGs.  They  emphasised 
financial  gaps  to  be  filled  with  aid,  but  this 
represented  only  a  partial  vision  of  how  needs 
could  best  be  met.  Furthermore,  the  context  has 
since changed so that we need to move from aid 
as  a  ‘silver  bullet’  to  considering  all  available 
sources of finance. 

    The focus on finance needs associated with the 
MDGs often ignored the role of policy, which 
is crucial. There is thus a need to think beyond 
only  policies  or  only  finance  and  promote 
discussions that can foster joint thinking on 
appropriate policies and finance.

    The  MDGs  successfully  attracted  ODA  for 
specific  social  sectors,  but  in  a  post-2015 
context  with  proposed  goals  that  seek  to  be 
more comprehensive and transformative, it is 
important  to  consider  long-term  enablers  for 
such  a  development  agenda.  This  requires  a 
new way of thinking about the role of different 
finance  sources  and  a  better  understanding 
of  structural  transformation  and  poverty 
eradication.

This  Report  stresses  that  the  post-2015  finance 
and policy framework should strengthen the shift 
in focus from mobilising more finance to effective 
mobilisation  of  finance  to  the  right  areas  and 
ensuring  the  quality  of  investment  and  effective 
use of existing finance. 

This  conclusion  is  supported  by  the  report  of  the 
UN  Intergovernmental  Committee  of  Experts 
on  Sustainable  Development  Financing 
(UN 
ICESDF,  2014),  which  argues  that  while  global 
public  and  private  savings  would  be  sufficient  to 
meet  needs,  the  current  financing  and  investment 
patterns  will  not  achieve  sustainable  development 
in  the  absence  of  public  policies  that  are  more 
effective in social and economic terms. Taking into 
account that all financing takes place in the context 
of  national  and  international  policy  environments, 
the report suggests ‘...a basket of policy measures 
[...]  encompassing  a  toolkit  of  policy  options, 
regulations, institutions, programs and instruments, 
from  which  governments  can  choose  appropriate 
policy  combinations’,  and  it  recommends  ‘…a 
cohesive  approach,  with  national  financing 
strategies as an integral part of national sustainable 
development strategies’ (UN ICESDF, 2014: 7).

The  report  also  points  to  the  fact  that  financing 
must  be  understood  as  one  component  of  a 
strategy  that  includes  improving  private-sector 
productivity  and  public-sector  efficiency.  The 
pursuit  of  the  MDGs  focused  on  public  finance 
on the assumption that private investment would 
follow. The successors to the MDGs are likely to 
focus more on public–private interaction, and on 
domestic and global policies required to stimulate 
private  investment,  institutions  and  capacity  as 
well as a broad range of sources of finance.

This Report further shows that FFD options have 
changed in real (volume) terms, by country income 
grouping, and over time. Chapter 3 shows that:

   Domestic  public  revenues  (tax  and  non-tax 
revenues)  rose  by  272%,  from  $1,484  bn  in 
2002 to $5,523 bn in 2011

  International  public  finance  (net  ODA  and 
OOF) rose by 114%, from $75 bn in 2002 to 
$161 bn in 2011

 Domestic private finance (measured as Gross 
Fixed  Capital  Formation,  less  FDI)  rose  by 
415%, from $725 bn in 2002 to $3,734 bn in 
2011

   International  private  finance  (net  FDI  inflows, 
portfolio equity and bonds, commercial loans 
and  remittances)  inflows  rose  by  297%,  from 
$320 bn in 2002 to $1,269 bn in 2011

Since  the  2002  Monterrey  Consensus,  in  real 
terms  (2011  dollars)  developing  countries  have 
had access to an additional $0.9 tr in international 
private  finance,  $3 
in  domestic  private 
tr 
finance  and  $4  tr  in  domestic  public  revenues. 
International  public  finance  increased  by  just 
under  $0.1  tr  (and  is  now  less  than  1.5%  of  the 
total resources available). 

The  data  therefore  show  that  domestic  public 
resources  have  grown  rapidly  and  are  the 
largest  source  of  finance  for  all  country  income 
groupings.  International  public  finance  has  also 
increased but is declining in relative importance. 
Domestic  private  finance  has  shown  the  fastest 
growth,  but  is  still  much  lower  (as  a  percentage 
of  GDP)  in  LICs  than  in  LMICs  and  UMICs,  with 
rapid  transformations  continuing.  International 
private finance has been highly volatile compared 
to  the  other  flows.  These  trends  set  the  context 
and  also  present  a  number  of  key  challenges 
that  need  to  be  addressed  in  the  post-2015 
development agenda and FPFD. For example, it 
is clear that there is a need to think more about 
public  resources  ‘beyond  aid’  and  to  consider 
new approaches to ODA.

Chapter  4  examines  the  role  of  policies  in 
mobilising  financial  flows  and 
in  making 
finance  more  effective  and  provides 
initial 
empirical  evidence  for  a  framework  within  which 
to consider the links between financial flows and 

policies. The review of the role of policies in the 
mobilisation of financial flows shows that finance 
seldom reaches the intended objectives unless it 
is  accompanied  by  complementary  policies.  The 
chapter illustrates several policies that can help to 
mobilise domestic public revenues and domestic 
private  finance. 
International  private  finance 
can  be  mobilised  through  a  range  of  policies 
including  trade  and  investment  policies,  new 
tax rules, and a domestic climate policy that will 
attract public and private climate finance. Chapter 
4  also  shows  that  the  effective  use  of  domestic 
and  international,  public  and  private  finance  is 
fostered  by  a  range  of  complementary  policies, 
taking into account that what often appears to be 
a financial constraint could in fact be the outcome 
of  a  general  or  specific  regulatory  distortion,  or 
of  a  policy  or  market  failure.  It  shows,  too,  that 
global  policies  –  trade  and  investment  regimes, 
a  global  climate  regime,  and  the  international 
financial  architecture  –  have  a  significant  impact 
on  the  mobilisation  and  effective  use  of  finance 
(see Table 4.3).

In Chapter  5 the Report proposes a  framework 
for  thinking  about  finance  and  policies  for 
sustainable  development.  It  has  four  elements: 
(a)  a  transformative  post-2015  development 
vision;  (b)  a  focus  on  long-term  enablers;  (c) 
recognition of the role of complementary policies; 
and (d) consideration of all types of finance. This 
framework contrasts sharply with the view that it 
is  possible  to  achieve  sustainable  development 
with finance, and ODA in particular, alone. These 
contributions  set  the  scene  for  an  analysis  of 
the  role  of  finance  and  policies  for  sustainable 
development.

Finally,  in  Chapter  6  the  report  applies  the 
framework  to  the  six  selected  enablers  of 
sustainable  development  (infrastructure,  trade, 
green  energy  technology,  biodiversity,  human 
capital and local governance) to illustrate the link 
between finance and policies for each of them. This 
chapter  addresses  domestic  public,  international 
public, domestic private, and international private 

7.1

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Combining finance and policies to implement a transformative post-2015 development agenda | 297

CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda 
 
 
 
 
 
financial  flows  for  the  selected  enablers.  These 
are easily identifiable sources that finance specific 
enablers (e.g. public spending on social protection 
or vertical public transfers to local government). In 
practice,  however,  different  types  of  finance  are 
often  combined  in  multidimensional  packages 
in  order  to  make  the  financing  of  enablers  both 
feasible and sustainable (e.g. when grants, loans 
and  private  finance  are  combined  to  finance  a 
renewable energy project).

  7.2 

 Composition of finance flows: 
What has been learned?

Three  key  messages  emerge  from  the  empirical 
evidence on the evolution of finance: (I) that the 
composition of finance differs across the selected 
enablers for sustainable development; (II) that the 
finance mix differs by level of income and (III) that 
financial sector development is vital for unlocking 
transformative potential.

7.2.1 

The finance mix varies by enabler

The first key finding is that the composition of 
finance differs markedly by enabler. Finance for 
institutions and governance seems to be largely 
public,  mainly  provided  through  tax  revenues, 
and  international  public  finance  can  play  a  part, 
particularly in LICs, as shown in the commissioned 
CIs.  Patterns  of  finance  for  human  capital  vary 
across  education,  health  and  social  protection, 
although  all  depend  heavily  on  domestic  public 
finance.  In  the  education  sector,  finance  varies 
by  level  of  education  although  most  comes 
from  public  sources,  including  ODA,  for  primary 
and  secondary  schooling.  Private  spending  by 
richer  households  and  migrants’  remittances  is 
also  important.  Formal  training,  such  as  TVET 
schemes, is financed mainly from private sources, 
although this approach can be regressive. There is 
also evidence of PPPs (as in Malaysia) or tax levies 
for training being allocated and used according to 

7.2

private-sector interests (as in Mauritius). Funding 
for  health  systems  comes  mainly  from  public 
sources, although private OOP expenses can also 
be  critical.  While  the  reliance  on  OOP  expenses 
tends  to  make  it  harder  for  poorer  people  to 
obtain access to health care, this could also create 
opportunities  for  private-sector  insurance  and 
micro-insurance  schemes  to  complement  public 
funding.  Well-designed,  publicly  funded  social-
protection  systems  are  essential  to  safeguard 
investment  in  human  capital,  especially  in  times 
of turbulence. 

is 

large 

source 

the  principal 

Finance for infrastructure and green technology 
tends  to  come  from  a  mixture  of  public  and 
private  sources,  although  national  government 
for 
expenditure 
infrastructure. There is a clear progression in the 
use  of private finance,  including  bond financing, 
as  country  income  levels  rise.  Due  to  the  large 
infrastructure  or 
upfront  requirements, 
renewable energy projects usually depend on the 
blending of private finance, ODA grants, technical 
assistance and OOF. Such blending has increased 
since the 2007–2008 global financial crisis in the 
context of the rising presence of DFIs and MDBs. 
Public funding has been used primarily to alleviate 
risks  and  attract  private  investment.  MDBs  from 
emerging  economies  also 
increasingly  use 
blended  instruments  (see  Chapter  6).  Although 
significant  ODA-backed  concessional  and  non-
concessional  loans  are  common  in  LICs,  public 
grants remain the main source of finance. 

in 

renewable  energy 

While  private  expenditure  on  R&D  for  green 
technology  is  rare  in  LICs,  there  is  often  private 
investment 
(generally 
supported  by  some  form  of  public  finance). 
Trade finance is largely provided by private banks 
through  the  extension  of  Commercial  Letters  of 
Credit,  although  this  is  changing  rapidly  in  the 
wake  of  the  global  financial  crisis.  This  was  seen 
in  the  Bangladesh  CI  in  relation  to  trade  finance 
for exports of ready-made garments. In this case, 
exporting  firms,  especially  SMEs,  are  starting  to 

Figure 7.1 |  Financial flows (percentage of GDP) 

by income 

P
D
G

f

o
%

25

20

15

10

5

0

1036

4086

12615

ODA

Tax Revenues

Domestic private finance

FDI

Remittances

LIC

LMIC

UMIC

HIC

Income per capita (US$ 2005 prices)

Source: WDI data (FDI, ODA, remittances and tax 
revenues) for all WDI countries, 1980–2012, log scale 
but labels converted from logs

form  of  finance  assumes 
As  any  particular 
dominance,  it  is  likely  to  be  more  pervasive; 
conversely, as it becomes less dominant it should 
be  more  carefully  focused  on  areas  in  which  its 
specific characteristics can be used to best effect.

bypass  the  banking  system  by  developing  and 
negotiating trade directly on ‘Open Account’ terms 
with their trading counterparts, and DFIs and MDBs 
are  creating  Special  Purpose  Vehicles  to  support 
private-sector development by pooling private and 
public  funds.  LICs  continue  to  have  very  limited 
access to trade finance and rely on AfT finance for 
trade-related capacity-building (Chapter 6). 

7.2.2 

The finance mix differs by level of income

The second key finding is that the appropriate 
composition of finance and the role for private 
finance  is  likely  to  vary  by  level  of  country 
income (as illustrated in Figure 7.1).

As  their  income  levels  rise,  countries  typically 
experience  sharply  declining  aid-to-GDP  ratios 
and modestly rising FDI inflows. At the same time 
tax-GDP  ratios  rise,  stabilising  as  they  approach 
LMIC levels, and the composition of tax revenue 
changes,  shifting  from  tax  on  trade  to  tax  on 
goods and services, and there is a modest shift in 
lower public investment-to-GDP and rising private 
investment-to-GDP.  There  are  also  generally 
increasing  private  flows  relative  to  GDP  and 
whereas public flows decline they remain greater 
than  private  flows  for  all  LICs  and  MICs.  Other 
changes  occur  as  well:  banking  credit  increases, 
there  is  more  private  finance  for  infrastructure, 
spending on R&D (both public and private) rises, 
and  there  are  more  effective  PPPs  and  better 
developed financial markets.

The evidence presented in the CIs also suggests the 
pattern of financing evolves as a country develops, 
as shown in the stylised pattern depicted in Figure 
7.2. At the lowest level the dominant form of finance 
may  be  international  public,  but  as  the  country 
develops  domestic  public  finance  becomes  more 
important and then also domestic and international 
private  finance.  As  a  result,  international  public 
finance becomes less dominant and ultimately fades 
away. Eventually, domestic and international private 
finance  assumes  dominance,  and  domestic  public 
sources decline. 

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda 
 
 
 
 
 
 
Figure 7.2 | The evolution in financing for development changes as country income levels rise

Box 7.1 | Development Finance Institutions: a new way to mobilise finance for transformation

Domestic private finance
International private
finance

Domestic private finance
International private
finance

Domestic public finance
Domestic private finance
International private

e
c
n
a
n

i
f

f
o

s
e
c
r
u
o
s

t
n
a
n
m
o
D

i

Domestic public finance
International public
finance

International public

Source: Bhattacharya (2015)

Level of income

7.2.3 

 Financial-sector development is key 
to unlocking transformative potential

A  third  key  finding  relates  to  the  importance 
and  maturity  of  financial-sector  development 
and  the  impact  of  the  quality  of  governance 
and  financial  services  during  a  country’s 
transformation to higher levels of income. The 
CIs  suggest  that  weak  financial  intermediation 
can  hinder  domestic  private  investment,  the 
flow  of  FDI  or  listing  in  capital  markets.  It  also 
affects  the  implementation  and  effectiveness  of 
PPPs.  In  fragile  states,  where  financial  markets 
are  underdeveloped  and  the  private  sector 
consists  of  very  small  and  mostly  informal 
enterprises,  often  co-existing  with  a  few  large 
companies  in  the  extraction  industries,  formal 

finance to the private sector (e.g. bank lending) 
is practically non-existent. In LICs and LMICs the 
level  of  SME  activity  depends  on  the  business 
environment.  Countries  such  as  Kenya  or 
Senegal,  which  have  introduced  incentives  to 
promote  access  to  financial  services,  such  as 
mobile  banking  and  support  of  microfinance 
institutions, have experienced much more rapid 
SME-sector  development  than  countries  such 
as  Nigeria,  which  have  relatively  poor  business 
environments  characterised  by  insecurity,  rent-
seeking  and  obsolete  infrastructure.  For  UMICs 
this is usually accompanied by a fast-developing 
financial  system,  active  stock  markets  and  the 
provision  of  a  wide  range  of  financial  services 
(e.g.  Mauritius,  South  Africa  and  several  North 
African countries).

Meeting the large finance gaps for the infrastructure needed for green economic and social development calls for a comprehensive 
response.  The  financing  of  such  projects  usually  requires  a  combination  of  domestic  public  commitments,  official  loans,  and 
commercial debt and guarantees from by private investors. ODA may also be provided. Bilateral and multilateral DFIs (e.g. IFC, EIB, 
DEG, PROPARCO) are government-backed institutions that provide loans, equity and guarantees to the private sector – they provide 
around $40 bn each year to infrastructure projects (a third of the total) and to the financial sector (also a third), both of which address 
impediments to structural transformation.

DFIs can address failures in the capital market and leverage other financial flows by reducing the risks for investors. These include 
both  financial  and  governance  risks.  They  often  help  to  reach  financial  closure  by  offering  a  stamp  of  approval.  One  unit  of  DFI 
finance supports other finance, with static ‘leverage ratios’ of sometimes more than 1:10, although this varies across the economic 
cycle, DFI, instrument etc. In addition, preliminary econometric evidence suggests that the increased financial exposure of the IFC, 
EBRD and EIB has led to higher investment rates in the recipient countries. Unlike ODA grants, DFIs tend to focus on areas that are 
likely to support productivity indirectly, e.g. better infrastructure or financial services (commissioned background paper, Cadot et 
al., 2015). DFIs provide a new means through which to channel ODA for a transformative post-2015 development agenda, although 
there is to date only limited evidence of their contribution to achieving identifiable development outcomes. 

DFIs  appear  to  be  quite  selective  in  their  investment  strategies  and  are  less  likely  to  invest  in  countries  with  very  low  GDP  per 
capita.  This  may  be  in  part  because  they  face  several  constraints  to  closing  deals  in  the  poorest  countries.  They  operate  under 
strict investment rules, setting out finance on market-like terms and abiding by social and environmental rules. Investment plans 
in such countries are seldom well thought out and projects are not routinely assessed for potentially adverse impacts, leading to 
a poor project pipeline. The challenge is to develop a solid and credible project pipeline, using public support to mobilise DFIs 
and associated finance. An additional challenge is to channel resources primarily to companies based in recipient countries and to 
monitor and evaluate development outcomes transparently.

Evidence of the impact of DFIs on growth, innovation and jobs is very limited. Most is at the micro-level, such as the number of jobs 
directly supported (e.g. 1.2 million in the case of CDC). A few studies suggest that DFIs lead to higher labour productivity (12% in one 
case) and indirectly to job creation, with significant transformative effects. Donors should consider pooling resources by providing 
more ODA via DFIs (finance) while at the same time developing infrastructure project pipelines (policy environment) and capacity.

Sources: commissioned background paper by Cadot et al. (2015); Frankfurt School-UNEP (2015); IFC (2013); 
Jouanjean and te Velde (2013); Kapstein et al. (2012); Kingombe et al. (2011); Massa (2011); te Velde (2011) 

including 

DFIs  and  MDBs  are  playing  an  increasing  role 
in  leading  transformations  in  key  areas  (see  also 
infrastructure  and  trade, 
Box  7.1), 
by  leveraging  private  finance,  supporting  the 
selection  of  appropriate  projects  and  policies, 
and  providing 
technical  assistance,  credit 
Infrastructure 
and  risk-mitigation 
facilities  managed  by  DFIs  are  likely  to  scale  up 
and  draw  commercial  lenders  into  co-financing 
schemes. They can do this because of their more 

instruments. 

transparent  and  inclusive  governance  structure. 
DFIs are also increasingly financing private-sector 
development initiatives, including the provision of 
trade finance (Chapter 6). Depending on the state 
of a country’s financial sector and the mobilisation 
of  DFIs,  the  composition  of  flows  to  enable 
structural  transformation  is  likely  to  change  from 
grants to other forms of finance, including loans, 
guarantees,  technical  assistance  and  blended 
instruments.

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda 
 
 
In  view  of  these  findings  I  –  III  and  the  specific 
evidence on enablers in Chapter 6, it is clear that 
any approach to financing development needs to 
take into account the following messages on the 
composition of finance:

to 

achieve 

resources  are  vital 

for 
  Domestic  public 
governments 
sustainable 
development, especially at low income levels 
(issue I). But the impact might be greater if they 
are focused on alleviating binding constraints 
(or the weakest links in a chain).

   International  public  financial 
resources, 
play  an  important  transformative  role  in  the 
finance  mix  for  some  enablers,  most  notably 
institutions  and  human  capital  in  the  poorest 
countries  where  domestic  public  spending 
levels are low, particularly in LICs. International 
public finance is especially important in fragile 
states and in SSA.

   For  enablers  where  private  finance  could 
potentially  be  significant,  most  notably 
large-scale  infrastructure,  trade  and  green 
technology, 
international  public  resources 
can  play  a  catalytic  role  by  financing  start-
up  schemes,  capacity-building,  reforms  of 
tax,  customs  or  legal  systems,  providing 
assistance, 
guarantees 
and  complementary 
in  blended 
instruments extended by DFIs and MDBs, etc. 
(see Box 7.1) for a transformative way of using 
international public finance).

technical 
funding 

and 

  Mechanisms  such  as  PPPs,  bond  financing 
and  user  fees  work  at  higher-income  levels 
but have equity implications that needs to be 
addressed. (Issue III).

7.3

  7.3    The interaction between policies 

and finance: What has been learned?

A key innovation in this Report is to consider 
finance and policies together in enabling a 
transformative development agenda. In this 
section we first discuss policies in the context of 
mobilising finance (I) and then for its effective 
use (II). There is a need for special coordination 
among various forms of finance and policies 
in order to achieve triple-win outcomes in the 
economic, social and environmental spheres. 
We discuss this briefly (III). We conclude by 
discussing the ways in which policies and finance 
interact (IV).

7.3.1 

 Policies are crucial 
for the mobilisation of finance

Chapter  6  demonstrates  that  policies  matter  in 
financing  for  development.  Although  there  is 
considerable  finance  available  for  development 
at  the  global  level,  it  does  not  follow  that  it  is 
used appropriately. FDI does not reach the most 
vulnerable and poorer segments of society, tax-to-
GDP ratios have changed very little in many LICs; 
SMEs and infrastructure are starved of capital; and 
much international public finance does not go to 
the poorest countries. Indeed, there is a need to 
overcome  a  number  of  market,  governance  and 
coordination  problems  in  order  to  mobilise  and 
channel financial resources to their most effective 
use.  The  good  news  illustrated  in  this  Report  is 
that  appropriate  actions  can  to  a  considerable 
degree  address  these  challenges.  Chapter  6 
discusses a range of factors and specific policies 
that can help to mobilise finance, making the case 
for  going  ‘beyond  finance’  and  paying  serious 
attention to policy coherence.

A range of policies can help to mobilise finance. 
Of course, there are one-off factors – for example, 
the  presence  of  oil  (or  natural  capital)  attracted 
FDI  to  Ecuador  (ERD  commissioned  CI,  Borja 

and  Ordóñez,  2015).  But  in  other  cases  there 
are  clear  policy  implications.  For  example,  the 
evidence  suggests  that  infrastructure,  human 
capital and governance can also mobilise finance. 
In Mauritius, better governance (e.g. good state–
business relationships) drew financial flows into the 
country. In Moldova, the signing of the Moldova-
EU  Association  Agreement  and  the  DCFTA 
has  mobilised  public  and  international  private 
financial flows. A good and appropriately trained 
labour  force  attracts  more  finance,  particularly 
from  private  sources.  Sound  infrastructure  might 
also act as a catalyst for further financing.

Our  framework  further  allows  for  discussions  on 
a  range  of  specific  policies  that  help  to  mobilise 
finance. For instance, regulatory reforms (e.g. clear 
property  rights,  land  titles  or  cutting  bureaucratic 
red  tape  for  licensing)  help  to  mobilise  resources 
for  the  private  sector  and  market  development 
as  well  as  for  investment  in  infrastructure,  human 
capital,  networks  or  technology  (Chapter  6).  The 
point here is not to discuss each and every potential 
policy,  but  to  show  that  individual  countries  have 
the  principal  opportunity  and  responsibility  to 
attract  finance  and  make  it  work  for  sustainable 
development.  The  Report  presents  evidence  on 
policies that help to mobilise different types of FFD 
by  helping  to  address  market,  coordination  and 
governance failures (or constraints) (see discussion 
in Chapter 2).

that  some  countries  have 
The  CIs  show 
successfully  mobilised  more  tax  revenues  (as 
a  percentage  of  GDP)  by  reforming  the  tax 
authorities and adopting better tax policies. The 
evidence  on  this  if  from  Bangladesh,  Mauritius 
and Tanzania (Chapter 4), all of which have raised 
tax-to-GDP ratios by building administrations that 
limit  rent-seeking  and  curtailing  the  use  of  tax 
exemptions, enhancing compliance, renegotiating 
contracts  with  companies,  computerising  the 
customs-clearing process, and adopting a broad-
based VAT with a reasonable threshold (although 
more  can  be  done).  In  such  ways,  countries  can 
use  policy  frameworks  to  raise  domestic  finance 

and  address  otherwise  low  and  stagnant  tax-to-
GDP ratios. Low levels of domestic public finance 
are  neither  predetermined  nor  insurmountable 
and  are  to  a  large  extent  a  question  of  public 
policy.

Countries can also use policy to attract FDI and 
use  it  for  development  objectives.  Indonesia 
is  one  example  of  a  country  where  changes  in 
investment  policy  helped  to  attract  FDI.  When 
it was hit by the Asian financial crisis, there were 
large  outflows  and  foreign  investment  became 
more  volatile;  when  countries  adopt  better 
macro-financial  policies,  the  volatility  in  foreign 
investment  flows  is  markedly  reduced  (e.g.  CIs 
for  Indonesia  and  Mauritius).  Sometimes,  very 
small  regulatory  changes  make  the  difference 
in  attracting  foreign  investment.  For  instance, 
Mauritius allowed the local use of foreign equity 
funds and Norway changed the rules of its pension 
funds  to  allow  investment  in  illiquid  investment 
(similar  to  what  the  ABP  pension  fund  did  for 
Dutch civil servants through FMO).

We  summarise  the  broad  policy  principles  that 
guide  the  effective  mobilisation  of  finance,  as 
follows:

   Finance can promote enablers (local governance, 
human  capital,  infrastructure,  green  energy 
technology  and  trade),  which  in  turn  can  also 
attract  more  private  finance.  This  creates  a 
virtuous circle between the enablers and finance 
– examples include mobile phone technology for 
mobile  banking  services,  and  human  capital  for 
FDI.

 An  appropriate  regulatory  framework  is 
of  critical  importance  in  order  to  attract 
private  finance.  For  example,  clear  property 
rights or land titles help to mobilise domestic 
private  finance  by  providing  collateral,  and 
an 
improved  and  more  transparent  and 
efficient investment climate can unleash more 
finance.  Enhanced  competition  in  transport 
services and benchmarks in contract provision 

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda 
 
 
 
 
 
for  and 

investment 

in 
promote  finance 
infrastructure. Rules that create incentives for 
institutional investors to finance infrastructure 
in developing countries or green technology, 
rather  than  in  liquid  assets,  help  to  channel 
international  private  finance  to  sustainable 
development purposes.

 Development of financial-sector instruments 
and  the  capacity  to  apply  them  can  mobilise 
private  resources.  Blending  instruments  or 
public-sector  guarantees  can  enhance  credit 
availability,  which  in  turn  leverages  more 
private-sector finance. 

   A conducive international policy environment 
can be critical in setting the right conditions, 
e.g.  transparent  global  financial  rules  and 
standards  for  global  finance,  appropriate 
trade  policies  for  investment  in  agriculture 
in  developing  countries  (abolishing  harmful 
subsidies),  tax  regulations  for  tax  havens,  or 
appropriate  climate-mitigation  deals  to  set  a 
carbon price that will mobilise climate finance.

A  post-2015  development  agenda  needs  to 
consider  policies  to  mobilise  domestic  and 
look  at  these 
international  finance  and  to 
policies in terms not only of the types of finance 
involved  but  also  in  terms  of  the  enablers  of 
structural transformation that they are intended to 
encourage. The further challenge is then to reach 
agreement on these policies and identify ways to 
encourage and monitor their implementation.

7.3.2  Policies are crucial for effective use of finance

We  can  deepen  our  understanding  of  the  role 
of  policy  by  analysing  the  supporting  policies 
needed  to  make  finance  more  effective  and 
thereby  reduce  how  much  finance  is  required. 
Some financial flows are managed directly by the 
public  sector  (e.g.  tax  revenues,  sovereign  bond 
flows,  ODA)  while  others  are  regulated  at  arm’s 
length  (e.g.  FDI,  domestic  private  finance),  but 
both are influenced by policies and capacities. 

While  the  effective  use  of  finance  differs  by 
enabler, the evidence so far suggests five general 
policy areas (or principles): 

(i)  The ability  to implement,  manage or facilitate 
finance  effectively  requires  the  presence  of 
sufficient national and local public capacities. In 
domestic public finance, this relates to identifying 
and  implementing  sound  investment  projects 
(including  those  with  co-benefits  across  the 
economic,  social  and  environmental  dimensions 
of sustainable development) and for ensuring that 
there  are  good  social  systems  (e.g.  health  and 
education)  supported  by  significant  expenditure 
on them. For instance, as reported in the Ecuador 
CI,  increased  government  investment  in  social 
programmes successfully increased the coverage 
of  its  Conditional  Cash  Transfer  programme. 
Education up to 10th grade is now universal and 
both  urban  and  rural  poverty  have  decreased 
markedly  in  the  same  five-year  period.  Equally 
important  is  the  capacity  to  manage  debt  given 
that  much  finance  is  non-concessional  in  nature. 
There is also a need to invest in supporting local-
level  capacities  to  ensure  that  decentralised 
spending works in practice.

accountability 

(ii)  The  design  and  implementation  of  public 
and  private  standards  facilitates  the  effective 
use  of  finance.  While  standards  need  to  be 
defined  nationally,  global  coordination  and 
benchmarking  can  help.  Standards  can  relate 
to  public  procurement, 
in 
public  revenues  from  natural  resources,  public 
financial  management,  and  standards  for  green 
technologies  or  resilience  to  climate  change. 
Global  standards  can  help  in  raising  standards 
at  the  country  level.  The  private  sector  has 
an  important  role  in  observing  international 
standards  such  as  the  ILO  definition  of  Decent 
Work. A lack of public coordination could lead to 
a plethora of incoherent standards that would be 
harmful for development. International trade and 
investment standards can help, provided that they 
do not restrict trade. 

required 

regulation 

regulatory 
(iii)  An  appropriate  and  clear 
framework  allows  competition  and  provides 
better  incentives  for  the  diffusion  of  technology 
in  addition  to  directed  finance.  Financial  and 
to  avoid 
is 
prudential 
financial crises at the global level, and especially 
in  developed  countries.  There  is  also  a  need  for 
better  regulatory  frameworks  and  supervision  of 
banks,  more  innovation  and  competition  in  the 
banking sector and better regulation of the non-
banking sector – such as corporate bonds, stock 
markets and pension funds – in order to improve 
the terms on which finance is made available. As 
argued  in  Chapter  4,  the  financial  sector  in  SSA 
needs to be reformed, including more competition 
to drive down interest rate spreads. It is estimated 
that private investors across Africa face additional 
costs  of  around  $15  bn  (2%  of  credit  extended) 
compared  to  the  average  interest  rate  spread, 
simply  to  obtain  finance.  More  competition  and 
innovation  aimed  at  lowering  the  interest  rate 
spread  in  SSA  to  the  average  of  LICs  and  MICs 
would increase the availability of finance by more 
than 1.2% of GDP and increase investment by 6%.

(iv)  Improving)  transparency,  information  and 
accountability  contributes  to  the  effective  use 
of  finance.  For  instance,  a  lack  of  transparency 
regarding  government  taxes  paid  by  investors 
investment. 
hampers 
Transparency 
large-scale 
acquisition  of  land  by  foreign  interests  could 
improve the governance of natural capital.

the  quality  of  public 
the 
concerning 

(v)  Finally,  policy  coherence  towards  specific 
development  objectives  is  vital  to  ensure  the 
effective use of finance. It is important to ensure 
that policies in different sectors do not undermine 
policies to promote sustainable development and 
to  take  an  integrated  approach.  Lack  of  policy 
coherence will lead to wasted finance. Investing in 
‘white-elephant’ projects or inefficient productive 
capacities behind closed borders will not promote 
transformation  in  the  long  run.  Financing  the 
development  of  technologies  without  building 
the  human  capital  required  to  employ  them  will 

be  a  half  measure.  Providing  more  capital  to 
DFIs  or  raising  credit  without  the  prospect  of 
projects in which to invest can lead to excessive 
‘financialisation’  and  indebtedness.  Improving 
access  to  credit  without  improving  the  terms  on 
which  it  is  available  can  still  be  prohibitive  for 
firms.  This  also  applies  to  global  rules  on  trade, 
finance, climate, migration and technology. 

The  Report  discusses  a  number  of  examples  of 
how finance can be more effective or where less 
additional finance may be needed in the context 
of  appropriate  policies.  Prominent  examples 
include:

 Efficient  management  of  public  finance. 
Measures  that  boost  the  productivity  of 
infrastructure by scaling up good practice and 
making  better  use  of  existing  infrastructure 
could help countries to improve infrastructure 
productivity  by  60%,  estimated  to  be  worth 
annual savings of $1 tr (McKinsey, 2013).

    Reforming  resource  subsidies.  The  finance 
gap for renewable energy is estimated to be 
between $400 bn and $900 bn. This is similar 
to  the  current  level  of  fossil-fuel  subsidies 
(more than $500 bn in 2010), which means that 
reducing such subsidies could free up finance 
for  other  purposes.  Lower  subsidies  are 
also  likely  to  reduce  the  need  for  additional 
green investment since there would be fewer 
incentives to use fossil fuels. 

   Policies  that  increase  remittances,  FDI  and 
export  revenues  (see  MAMS  commissioned 
papers)  can  reduce  the  need  for  additional 
finance. 

   Reforming  trade  policies.  Duty-Free  Quota-
Free  (DFQF)  access  to  the  markets  of  the 
G20  countries  (beyond  the  EU,  which  already 
provides  such  access)  could  increase  LDCs’ 
national incomes on average by 0.5% of GDP 
(World Bank, 2013). This is similar to the $30–40 
bn provided in AfT each year. 

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda 
 
 
 
 
 
Figure 7.3 | Summary of policies for effective mobilisation and use of finance

Policies for effective use
NATIONAL
National capacities
Standards, transparency
Regulatory framework
Policy coherence
(e.g. trade policy)

INTERNATIONAL
Global rules/standards
Donor co-ordination and DFIs

Policies to mobilise finance
NATIONAL
Regulatory framework
Financial sector instrument
Public sector capacity
(e.g. project preparation)

INTERNATIONAL
Development finance
instruments/special funds
International policy environment
(trade, tax, climate, finance)

Financial flows

Public and Private
Domestic and International

Enablers for
sustainable
development

The  benefits  of  full  implementation  of  a  WTO 
agreement  on  trade  facilitation  (changing  border 
procedures, better infrastructure etc.) are far greater 
(Chapter  6).  The  international  community  could 
also accelerate the liberalisation of environmental 
goods and services in order to disseminate energy-
efficient technologies. The presence of agricultural 
subsidies  in  developed  and  emerging  economies 
has a net negative effect on developing countries 
overall.

undermine 

 Curbing  illicit  flows  (Chapter  6).  Illicit  capital 
outflows 
capacity, 
economic development and revenue collection 
(GFI,  2014).  For  example,  between  2002  and 
2011, $60.8 bn was illegally moved into or out 

financial 

of  Ghana,  Kenya,  Mozambique,  Tanzania  and 
Uganda using trade mis-invoicing, with losses in 
tax revenue worth between 7% and 12% of total 
government revenue. A more appropriate and 
realistic approach to transfer pricing could free 
up $3.5 bn in African countries (commissioned 
modelling paper, Fic, 2015).

Annex  1  provides  a  comparative  analysis  of 
the  approach  taken  in  this  Report,  the  recent 
ICESDF  report  (2014)  and  OECD  Development 
Co-operation  Report  (OECD  DAC  DCR,  2014). 
This  Report  pays  particular  attention  to  the  split 
between  domestic  and  international  finance. 
Figure 7.3 summarises the main policy areas.

7.3.3 

 Coordinating policies and finance is crucial in 
achieving triple-win sustainable development 
outcomes

Selected  enablers  can  help  to  achieve  economic, 
social  and  environmental  outcomes.  In  practice, 
finance may flow to enablers with trade-offs among 
the  outcomes.  Policies  clearly  make  a  difference 
to  these  trade-offs.  For  example,  investment  in 
infrastructure  creates  jobs,  but  limited  access  or 
high tariff rates could lead to social exclusion and 
inequality. It is possible to overcome this and include 
targeted  subsidies  and  transfers  to  compensate 
those who lose out and facilitate access by people 
living  in  poverty  or  in  remote  areas,  as  can  the 
promotion  of  small  public-investment  projects  in 
underprivileged  areas  in  order  to  enhance  local 
employment,  introduce  green  or  social  standards 
in project design and implementation, or safeguard 
competition in service provision. 

Finance  for  infrastructure  can  help  growth  and 
poverty reduction, but it can also be associated with 
greater  inequality  when  factor  incomes  increase 
and  transfers  to  households  do  not  grow  at  the 
same pace. More generally, adequate capacity and 
public  funding  are  required  in  order  to  mobilise 
finance for green infrastructure. 

the  promotion  of  trade 
Although 
through 
participation in GVCs can make it even harder for 
small-scale  entrepreneurs  and  farmers  to  obtain 
access  to  markets,  women’s  empowerment  can 
be  promoted  through  financial-inclusion  policies 
linked to SME development. 

With  respect  to  investment  in  green  energy 
technology, the greater (energy) efficiency achieved 
can worsen income distribution depending on the 
skill  bias,  although  at  the  same  time  DFI  finance 
for  more  investment  in  (small-scale)  hydropower 
reduces CO2 emissions, transforms economies and 
creates jobs. Moreover, developing and greening 
the financial sectors by extending affordable credit 
for SME green projects combines job creation with 
environmental sustainability.

Financing  biodiversity  can  hinder  economic 
and  social  development  if  local  people  can  no 
longer  exploit  natural  resources,  but  this  can  be 
addressed by complementary policies to support 
them  through  other  means,  e.g.  the  restoration 
of  agricultural 
land  can  support  agricultural 
production or the preservation of coral reefs can 
support tourism.

In  relation  to  human  capital,  an  inadequately 
skilled  labour  force  can  hinder  investment  and 
economic  development.  Skills  can  be  good 
for  economic  growth  and  the  adoption  of 
green  technology.  A  triple-win  activity  could  be 
financing  Sustainable  Energy  for  All  (SE4ALL) 
and  thus  freeing  up  time  for  women  and  young 
adults to engage in economic activities while also 
improving the environment.

Finally,  local  governance  aimed  at  promoting 
social  development  can  support  local  economic 
development  and  the  adoption  of  green  energy 
for  the  effective 
technology  and 
is  crucial 
financing 
implementation  of 
mechanisms.  Triple-win  finance  brings  together 
stakeholders  that  could  support  sustainable 
development  strategies  such  as  enhancing 
natural resource management (NRM) and/or new 
financing schemes such as PES (ERD, 2012).

new  green 

Based  on  this  evidence  a  key  finding  is  that 
achieving  triple-win  finance  for  enablers  of 
sustainable  development  requires  actions  in 
four  areas.  First,  targeting  finance  to  prioritise 
sustainable  development  projects  and  direct 
subsidies  to  the  most  vulnerable,  e.g.  through 
enhanced  DFI  support  for  hydropower  projects 
that create jobs and transform economies. Second, 
designing standards that encourage adherence to 
principles of sustainable development finance (e.g. 
infrastructure  procurement  standards  that  require 
sustainable  development 
impact  assessments) 
could unlock triple-win finance. Third, supporting 
public-sector 
and 
implement  sustainable  development  strategies 
helps to unlock sustainable development finance. 

to  mobilise 

capacities 

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda 
Finally,  coordinating  and  networking  in  the 
design  and 
implementation  of  sustainable 
development strategies at appropriate levels can 
unleash sustainable development finance.

    Increase the stability of international private 
finance  (e.g.  global  banking  (Basel  III)  rules 
lead  to  benefits  for  countries  in  SSA  that  are 
ten times greater than the costs)

Infographic 9 | Policy Matters

POLICY MATTERS

The virtuous circle of policies and finance

   Pull  finance  from  less  productive  to  more 
productive uses (e.g. better tax policies such as 
reducing bad transfer-pricing or tax-avoidance 
practices can lead to large benefits, or relaxing 
SWF  investment  restrictions  can  lead  to  more 
finance for developing country infrastructure)

   Lead to more results with the same amount 
of  finance  (better  project  management  can 
improve infrastructure productivity by 60%)

    Reduce  the  need  for  finance  (cutting  fossil-
fuel subsidies reduces the amount of climate 
finance  required  to  keep  climate  change 
within safe levels)

Synergies and complementarities across enablers 
point to the need to consider not only how much 
finance is mobilised for them, but also whether it 
is the right type of finance. While public finance 
for  infrastructure  can  have  multiple  benefits  and 
create additional capacities, greater involvement 
of  DFIs  and  MDBs  is  needed  to  channel  finance 
towards  green  infrastructure.  National  climate 
change adaptation and mitigation plans can help 
to mobilise finance for infrastructure that benefits 
the  environment.  Similarly,  PES  can  be  used  to 
mobilise  finance  for  natural  capital  and,  when 
it  is  well  targeted,  can  achieve  social  benefits. 
Moreover, the removal of fossil-fuel subsidies will 
mobilise more finance and the co-benefits could 
include  more  spending  on  renewable  energy 
(which  can  have  triple-win  effects)  and  a  less 
regressive tax and subsidy system (in cases where 
fossil-fuel subsidies go mainly to prosperous firms 
and consumers).

7.3.4 

 Finance cannot be treated 
independently from policy

In  summary,  it  is  crucial  to  link  policy  alongside 
finance  in  order  to  implement  a  transformative 
post-2015 development agenda. Poor or adverse 
policy  can  stop  the  potential  of  finance,  but 
appropriate policy can:

 Generate,  attract  and  guide  finance  (clear 
policy  frameworks  for  transformation,  e.g. 
Mauritius CI)

 Unleash  more  public  and  private  finance 
(e.g. reductions in tax exemptions and public 
finance (Tanzania CI), or weaknesses in energy 
regulatory framework limit private finance for 
renewables energy (Tanzania CI))

«THE VIRTUOUS CIRCLE»
OF POLICIES AND FINANCE

FINANCIAL
FLOWS

POLICIES TO
MOBILISE FINANCE 

POLICIES FOR EFFECTIVE
USE OF FINANCE 

ENABLERS FOR
SUSTAINABLE DEVELOPMENT

Regulatory framework

Financial sector instruments

Public sector capacity

Sufficient national and
local public capacities

Design and implementation of
adequate public and private standards

Appropriate and clear
regulatory frameworks

Local governance

Human capital

Infrastructure

Development finance
institution / Sspecial funds

Improved transparency,
information and accountability

Green energy technology

International policy environment

Policy coherence
(also for sustainable development)

Trade 

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  7.4 

 Steps towards a Global Partnership 
for the post-2015 development agenda 

for 

The  UN  Secretary-General’s  Synthesis  Report 
(2014)  discusses  establishing  a  new  Global 
Partnership 
the  post-2015  development 
agenda  at  the  Third  International  Conference 
on  Financing  for  Development  (para.  24  ff)  in 
Addis  Ababa.  The  value  of  this  renewed  Global 
Partnership  is  that  it  would  establish  a  common 
foundation and contribute to new ways of thinking 
about collective action in much the same manner 
as previous non-binding agreements have done, 
including the MDGs or G20 communiqués. Such 
agreements help to coordinate collective actions, 
such  as  establishing  rescue  plans  following  the 
2007–2008  global  financial  crisis,  or  put  the 
spotlight  on  specific  global  challenges,  such  as 
green growth or tax avoidance and evasion. The 
Conference  outcome  could  therefore  provide  a 
set of common principles on the nature and value 
of  different  types  and  combinations  of  finance 
and policy, and how these are best used. 

7.4.1 

 Financing for development 
as an on-going process

A  finance  and  policy  framework  under  such 
a  Global  Partnership  would  be  expected  to 
steer  global  collective  action  up  to  2030  by 
stimulating domestic and international efforts by 
all countries, commensurate with their capacities. 
There is compelling evidence that the MDGs had 
persuasive value at the global and to some extent 
national levels, and that over time they prompted 
increasing  acceptance  and  collective  action 
towards poverty reduction; but they were perhaps 
insufficiently  exploited  as  a  basis  for  on-going 
accountability and dialogue among stakeholders. 
The  wide-ranging  nature  of  the  SDGs  being 
considered for a post-2015 development agenda 
will make it still more challenging to reach broad 
international  consensus  on  a  strong  framework. 
Moreover,  as  implementation  progresses,  there 

will  be  a  need  for  flexibility  and  realignments. 
A  strong  agreement  at  the  2015  Addis  Ababa 
conference  should  therefore  include  agreements 
on monitoring and accountability and be followed 
by continuing dialogue, to monitor progress and 
refine approaches.

Moreover, as our analysis of finance shows, private 
sources  of  finance  that  lie  beyond  the  direct 
control  of  national  governments  are  gaining  in 
importance, especially at higher levels of country 
income  level.  This  is  another  important  aspect 
of  the  concept  of  Global  Partnership.  Although 
other stakeholders in development finance, such 
as  the  private  sector,  philanthropists  and  NGOs, 
may  not  be  formal  parties  to  the  agreement  at 
the  Addis  Ababa  conference,  it  is  important  to 
seek a formula that encourages their participation 
in  the  financing  and  implementation  of  the 
post-2015  development  agenda  –  all  the  more 
important  given  the  widespread  consultative 
and  participative  process  that  has  gone  into 
formulating the agenda. 

7.4.2 

 Keeping core principles in mind

The post-2015 development agenda is expected 
to  be  ‘universally  applicable’  while  ‘taking  into 
account  different  national  realities,  capacities 
and levels of development’, building on the two 
principles  of  universality  and  differentiation  (UN 
Secretary-General  Synthesis  Report,  2014).  Both 
principles  would  make  the  new  framework  very 
different from the MDGs and would help to move 
the debate away from the donor–recipient model, 
which most stakeholders seek to put behind them.

Universality

Universality  implies  that  the  new  framework  will 
apply  to  all  countries  and  governments  and  not 
only  to  developing  countries.  On  this  basis,  each 
government will be expected to pursue the agreed 
goals in a manner that is appropriate for their country, 
and to contribute resources (finance and other MOI) 
to the global effort commensurate with their means. 

The  underlying  theme  of  the  UN  Secretary-
General’s Synthesis Report (2014) is the need for 
a universal set of goals that apply to all countries 
and  for  countries  and  individuals  to  take  shared 
responsibility for achieving them.

responsibility.  Domestic 

First  and 
foremost,  the  finance  and  policy 
framework  needs  to  recognise  governments’ 
domestic  efforts  in  raising  resources.  This  is 
a  universal 
resource 
mobilisation  (of  both  public  and  private  finance) 
needs to be properly recognised and valued as the 
real  foundation  of  the  financing  framework  in  all 
countries, and is the most important source of FFD 
in most countries. It also enables countries, as they 
get richer, to provide international public finance. 

Equally, our analysis suggests it is not simply the 
mobilisation  of  finance  that  matters,  but  that 
government efforts to adopt and pursue policies 
for its effective use are of equal importance. The 
principle  of  universality  should  apply  equally 
to  this  aspect  of  the  framework.  In  other  words, 
if  governments  adhere  to  the  new  framework 
and  expect  it  to  be  based  on  the  principle  of 
universality,  by  extension  they  are  expected  to 
make effective use of the finance raised. 

The  same  argument  applies  to  both  domestic 
and  international  finance.  Just  as  it  is  important 
for  governments  to  adopt  policies  to  ensure 
the  prudent  use  of  domestic  resources,  so 
appropriate  policies  also  need  to  be  in  place  to 
make  effective  use  of  international  resources, 
whether  public,  private,  or  extended  at  different 
levels of concessionality.

To  be  consistent,  the  principle  of  universality 
means  that  all  governments  should  both  pursue 
the  new  post-2015  development  agenda  at  the 
national  level,  and  also  all  seek  to  contribute  at 
the  international  level.  The  universality  principle 
would  thus  apply  both  to  the  resources  they 
contribute to the global system and to their efforts 
to  establish  effective  global  policies  in  order  to 
secure the ‘conducive international environment’ 

is 
that  the  post-2015  development  agenda 
expected  to  include  as  part  of  the  proposed 
Global  Partnership.  Moreover,  it  is  important 
to  take  into  account  the  international  impact  of 
national policies and apply the PCD principle. As 
suggested  by  the  UN  OWG’s  (2014)  use  of  the 
term  PCSD  (para.  17.4),  or  ‘policy  coherence  for 
sustainable  development’,  this  principle  would 
apply  to  all  governments  at  the  national  and 
international level. It would thus have a universal 
application  and  also  cover,  for  instance,  the 
impact in developing countries of climate policies 
in emerging economies.

Differentiation

The  concept  of  differentiation  is  an  important 
complement  to  the  notion  of  universality  (UN, 
2014,  para.  84)  in  that  it  clarifies  that  while  the 
new  framework  should  apply  to  all  countries, 
given  the  differences  in  capacities  and  needs, 
not  all  can  or  should  be  expected  to  contribute 
to its achievement in the same way. This implies 
first,  that,  although  contributions  may  differ, 
each  is  important.  All  contributions  are  valued. 
Second,  these  responsibilities  do  not  apply  only 
to  governments,  but  call  for  all  stakeholders  to 
contribute according to their capacity.

Our analysis suggests that financing mix vary not 
only from one enabler to another, but also across 
different  country  income  groupings.  As  we  have 
seen,  countries'  capacities  are  dynamic  and  the 
spectrum  of  income  groupings  is  evolving  and 
increasingly  diversified.  As  countries  develop, 
public  finance  constitutes  a  progressively 
declining  proportion  of  total  FFD  as  the  relative 
share  of  private  finance  grows.  Many  poor 
countries tend not to be attractive to international 
private  finance,  which  can  be  a  very  important 
source  for  richer  countries.  Equally,  as  countries 
develop  they  tend  to  be  able  to  raise  more 
domestic public finance. The role of international 
public  finance  is  thus  expected  to  fall,  although 
this also depends on the policies adopted. 

7.4

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agendaInfographic 10 | The route to a Global Partnership

CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda

THE ROUTE TO A GLOBAL PARTNERSHIP

A Global Partnership 

A financing for development (FFD) framework for the post-2015 development agenda can establish a common 

foundation and contribute a new way of thinking about international development action. It can provide a common 

understanding of the nature and value of different finance resources as well as how these are best used. 

NATIONAL 
GOVERNMENTS
AND PARLIAMENTS 

Core principles

The post-2015 development agenda will build 

on the principles of universality and differentiation. 

Universality implies:
   the new framework will apply to all countries and governments

  all countries will take shared responsibility for achieving the SDGs

Differentiation highlights:
  the differences in capacities and needs of individual countries

   the different expectations of what each country can contribute

Monitoring and accountability

A major challenge for the new FFD framework 

is to establish targets and measures that can incentivise 

finance and implementation. 

Access to accurate data will be crucial to achieve 

the necessary level of monitoring and ensure transparency.

DATA

ANSPARENCy

R
T

ENTATION

M
E
L
P
M

I

MULTILATERAL 
INSTITUTIONS 
(WORLD BANK, IMF, 
RDBS, DFIS, ETC.) 

OTHER NATIONAL 
STAKEHOLDERS (ACADEMIC 
INSTITUTIONS, THINK 
TANKS, CSOs, LABOUR 
UNIONS ETC.) AND LOCAL 
AUTHORITIES 

COUNTRY GROUPINGS 
AND REGIONAL 
ORGANISATIONS

AUTONOMOUS STATE 
BODIES (EXPORT CREDIT, 
EXPORT PROMOTION 
AGENCIES ETC.)

BUSINESS 
ORGANISATIONS 
OR ASSOCIATIONS

FINANCIAL AND 
NON-FINANCIAL 
FIRMS

A Global Partnership for  
the post-2015 development 
agenda will include multiple actors.  
Each actor will have distinct roles 
and responsibilities. 

ACCOUNTABILIT

y

TARGETS

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A  useful  and  relatively  simple  way  to  distinguish 
between  roles  and  responsibilities  with  respect 
to  finance  for  development  is  to  look  at  three 
main  groups  of  countries  by  income  levels:  (a) 
LDCs/LICs  and  fragile  states;  (b)  MICs;  and  (c) 
HICs or developed countries. It also needs to be 
recognised  that  small  and  vulnerable  economies 
face  special  challenges,  which  implies  that  they 
cannot  be  easily  categorised  as  LICs  or  MICs 

(e.g.  some  small  MICs  have  very  large  debts). 
The  broad  distinctions  between  what  each  of 
these groupings would be able to do in terms of 
mobilising and making effective use of finance are 
identified in Box 7.2, but further differentiation is 
possible.

Box 7.2 | Differentiation: illustrative stylised roles and responsibilities of country income groupings

For LICs/LDCs, fragile and small and vulnerable states: 

•	

•	

		Mobilisation  requires  an  essential,  often  tough,  domestic  effort  to  improve  the  regulatory  environment  and  administrative 
capacities,  to  build  up  the  tax  revenue  system,  combat  tax  evasion  and  to  start  to  mobilise  private  capital  flows,  including 
remittances.  Ensuring  effective  regulation  and  supervision  of  the  financial  markets  encourages  private  capital.  Well-managed 
domestic public finance will tend to attract international public finance (including ODA and SSC) to fill development finance gaps. 
These may also be a catalytic role in helping to reform the domestic revenue system.

 Effective use involves focusing on domestic budget allocations on transformative priorities and associated enablers, as well as 
channelling international public resources to invest in human capital, capacity-building and strengthening institutions as well as 
creating specialised facilities or funds to direct public and private resources to specific enablers, most notably infrastructure and 
networks. 

For MICs: 

•	

 Mobilisation at this level entails greater emphasis on DRM as the major source of FFD. Strengthening the tax effort and extending 
the tax base are important priorities. MICs can be expected to have a well-developed domestic private finance sector and should 
also be able to attract higher levels of international private finance (although small and vulnerable MICs face challenges in this 
area that are similar to those facing LICs). Small amounts of ODA may be still be used in a catalytic fashion to stimulate other 
finance (including tax revenues). Development of stock exchanges and bond markets can mobilise additional private resources, 
as can PPPs, which might save resources over a project’s lifetime. At the same time, as countries move to MIC status they also 
move  into  the  league  of  potential  SSC  providers  contributing  external  financing  (international  public  and  private  finance)  or 
concessional lending to other countries and to GPGs. This effort needs to be acknowledged and encouraged. The UN Secretary-
General Synthesis Report (2014) suggests that ‘more countries will need to commit to increasing their contribution to international 
public finance, and set targets and timelines to do so’ (para. 111).

• 

 Effective use involves, among other things, allocating the domestic budget to transformative priorities and associated enablers, 
encouraging private investment to support public investment in key enablers such as infrastructure, reducing ODA to a minimum 
and using it mainly to pursue social or environmental goals and/or enhance leverage of other resources. At the national level, 
PCSD and a serious commitment to establish and maintain a supportive international policy framework need to be major policy 
priorities. MICs can also be expected to play a growing role in global governance in helping to establish such a policy environment 
and through their willingness to accept and adhere to global standards, as is increasingly the case for the G20 and the UN.

For HICs/developed countries

•	

•	

	Mobilisation involves sufficient DRM to finance national efforts towards achieving the goals as well as providing the basis for 
sizeable  ODA  contributions  and  major  concessional  lending  to  the  countries  most  in  need.  Given  their  developed  domestic 
private finance markets, HICs should be able to attract large volumes of international private finance, although it is important to 
prevent illicit transfers, which among other things may undermine poorer countries’ ability to mobilise finance.

		Effective use involves in particular ensuring that resources intended to achieve domestic and international goals are allocated 
most effectively and making serious efforts to adjust other internal and external policies to ensure greater policy coherence to 
support development objectives. In their role as major contributors to establishing a conducive international policy framework, 
they need to ensure by means of proper incentives, rules, regulations and oversight that GPGs – including an open trade regime, 
environmental  sustainability,  and  financial  stability  etc.  –  are  provided  in  a  consistent  and  inclusive  manner.  Further,  domestic 
policies in areas such as climate resilience and economic development also have important spillovers on other countries. 

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda7.4.3 

Involving multiple actors

The Global Partnership that is expected to be part 
of  the  universal  post-2015  development  agenda 
implies  that  all  governments  should  make  an 
explicit commitment to it. Relevant actors, each with 
a  distinct  role  and  responsibility,  include  national 
governments and their various departments, country 
income  groupings,  autonomous  state  bodies  (e.g. 
export  credit  or  export  promotion  agencies),  and 
non-state  actors  such  as  business  organisations 
or  associations,  financial  and  non-financial  firms, 
and  other  national  stakeholders  such  as  academic 
institutions,  think  tanks,  CSOs  and  labour  unions. 
Multilateral institutions such as the World Bank, IMF, 
RDBs and other DFIs are also key stakeholders. 

Country 
regional 
income  groupings  and 
organisations  could,  in  accordance  with  their 
respective competencies, contribute to finance and 
policy-setting  by  adopting  appropriate  standards, 
consensus-seeking  and  spotlighting.  The  EU 
and  the  AU,  for  instance,  play  valuable  roles  in 
consensus-seeking.  The  EU  is  the  first  contributor 
to  global  ODA,  and  although  it  has  still  not  met 
its  commitment  to  the  0.7%  GNP  target  (COM, 
Accountability Report 2014), it provides half of total 
ODA, is a strong advocate of aid effectiveness (Paris 
Declaration,  etc.)  and  actively  seeks  to  promote 
PCD.  The  EU-based  DFIs  are  also  major  global 
players.  Other  country  groupings  such  as  the  G7 
mobilise  the  efforts  of  the  largest  economies  and 
the G20 plays a valuable role in establishing global 
rules given its widely recognised status as the world’s 
premier economic forum. 

Developed countries such as the USA, Japan and 
others  can  contribute  to  international  agreements 
on  trade,  investment,  climate  change  and  other 
areas,  which  in  turn  can  help  to  contribute  to 
financial flows and appropriate policies. The BRICS 
and  other  providers  of  SSC  will  be  particularly 
important  in  the  implementation  of  the  post-2015 
development  agenda.  Already  SSC  is  providing 
an  increasing  amount  of  FFD  both  in  the  form  of 
international  public  finance  and  as  international 

private finance to support trade and investment, as 
well as sharing technology and technical assistance 
– areas in which assistance can be provided quickly, 
flexibly and efficiently. The international community 
should  welcome  SSC  efforts  to  help  mobilise 
finance  of  all  types.  At  the  same  time,  as  Uneze 
(commissioned background paper, 2015) suggests, 
ways in which to improve the effectiveness of SSC 
include  better  coordination  among  providers, 
stronger  governance, 
institution-building  and 
greater transparency.

institutions  are  also 
Development  finance 
key  players.  While  national  governments  will 
be  making  decisions  at  the  2015  Addis  Ababa 
Conference,  e.g.  on  sustainable  development 
finance, these would apply to and be implemented 
by  a  range  of  financial  actors  such  as  export 
credit agencies, SWFs and development banks or 
development  agencies.  This  means  that  it  is  not 
only  civil  servants  who  would  need  to  adapt  to 
the  new  financing  for  development  framework, 
but also these other semi-autonomous agencies. 

Private-sector  actors  and  social  partners, 
including 
labour  unions,  CSOs,  business 
associations  and  representatives  of  the  financial 
sector, also have specific roles and responsibilities 
as  critical  partners  in  development  in  addition 
to  being  public  actors  in  their  own  right.  Their 
participation in policy dialogue and in the design, 
implementation and monitoring of policies for the 
mobilisation  of  finance  and  its  effective  use  can 
go a long way towards enhancing and supporting 
transformative  processes  and  outcomes  and 
mitigating negative ones. A transformative agenda 
would  need  to  be  supported  by  social  contracts 
that  spell  out  the  rights  and  responsibilities  of 
each party.

Leadership and partnership: While governments 
will  play  the  leading  role  in  implementing  the 
agenda,  they  will  need  to  assume,  at  both  the 
national and global levels, an explicit responsibility 
to promote open dialogue and partnership among 
all relevant parties. 

A common effort implies the need for a common 
system  for  mutual  accountability  or  at  least  one 
that  brings  together  various  complementary 
systems in a transparent manner. In other words, 
imposing a top-down system is unlikely to improve 
on the accountability framework of Monterrey.

Given  the  fundamental  role  of  the  finance  and 
policy  framework  in  the  post-2015  development 
agenda,  it  will  be  important  to  ensure  that  this 
monitoring and accountability process is part of a 
broader  system  which  monitors  progress  against 
the  goals  and  targets  as  well  as  their  means  of 
implementation.

Table  7.1  identifies  selected  finance  and  policy 
areas that can be taken as part of such an integrated 
monitoring  and  accountability  framework.  The 
selection covers many of the key areas of action 
for  governments  and  other  stakeholders  that 
have  emerged  in  the  course  of  our  research. 
They  therefore  constitute  a  useful  starting  point 
from  which  to  identify  which  actions  to  pursue. 
These actions will vary from one country and set 
of  circumstances  to  another,  but  taken  together 
these  work  in  a  common  direction  and  illustrate 
what  kinds  of  things  governments  could  usefully 
do to pursue these three main priorities. They also 
cover all type of flows. 

At  the  national  level  they  will  need  to  reach 
political  settlements  that  favour  and  support 
transformative  agendas  while  maintaining  social 
cohesion.  In  the  same  way,  at  the  global  level 
governments  need  to  demonstrate  a  willingness 
to  share  responsibility  for  implementation  and 
become involved in collective leadership.

7.4.4 

 Introduce a monitoring 
and accountability framework

Part  of  the  success  of  the  MDGs  was  that  they 
allowed for specific monitoring and follow-up. Yet 
in terms of the finance and policy in the Monterrey 
Consensus  it  was  really  only  international  public 
finance that was assigned a target that could be 
monitored.  A  major  challenge  for  a  new  finance 
and  policy  framework  is  to  establish  targets  and 
other measures that can incentivise finance as well 
as other aspects of financing and implementation 
in the years ahead. This is not an easy task but it is 
vital in order to make genuine progress. Equally, 
it is important in terms of promoting transparency 
and  the  full  participation  of  all  those  whose 
support will be required to make the framework a 
reality. A strong effort in this direction is ultimately 
what  will  give  substance  to  the  term  ‘global 
partnership’.

Data  will  be  crucial  in  order  to  achieve  the 
necessary monitoring and ensure transparency. In 
the past it was possible to monitor ODA because 
the OECD provided data supplied by its members, 
according  to  their  own  agreed  definitions  and 
systems.  Other  data  systems  to  cover  different 
aspects  of  finance  and  MOI  can  be  established 
(e.g.  on  disclosure  for  private  entities,  including 
banks) alongside the existing system. An approach 
that encourages different actors to create the data 
systems  concerning  the  financial  flows  for  which 
they are  responsible is  likely  to  foster  ownership 
and  support  –  but  these  need  to  be  compatible 
or to work easily alongside each other in order to 
create an overall picture of progress.

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda  
  
Table 7.1 | Illustrative examples of a Finance and Policy monitoring and accountability framework (rationale, actors and indicators)

International 
trade rules

KEY ELEMENTS 
OF THE FINANCE & 
POLICY FRAMEWORK

DETAILS

Domestic public finance and policies

REASONS 
FOR INCLUSION

PRINCIPAL ACTORS

INDICATORS FOR 
ACCOUNTABILITY
(EXAMPLES)

Domestic tax 
revenue systems

Institutional capacity 
development; extend tax 
base; less exemptions; 
‘smart’ use of investment 
incentives 

To provide a strong basis 
for increasing tax revenue 
and extending the tax 
base (incl. into the informal 
sector)

Tax authorities; Ministries 
of finance; Social 
consensus on tax and 
distribution policy

Public financial 
management

Use of PFM standards; 
Medium-term expenditure 
plans;

To increase efficient 
allocation and use of 
finance

Government departments 
such as the finance ministry

Government 
procurement

Procurement standards 
that encourage adherence 
to principles of sustainable 
development finance.

Increased transparency 
and accountability 
in procurement can 
incentivise private sector 
and improve impact of e.g. 
green infrastructure finance

Government 
procurement agencies

Debt sustainability 
and debt-restructuring

Design and incorporate 
new methods of debt 
sustainability 

To check debt increases 
seen in many country 
groupings

Governments, donor 
international development 
partners and source funds 
of debt

Domestic private finance and policies

Financial sector 
development

Transparency and oversight 
of sector; stock and bond 
markets; specialised funds

To ensure vibrant stable 
financial sector allocates 
savings to profitable and 
needed purposes

Regulator, central banks, 
development banks, 
institutional investors

Encourage 
competition 
and innovation 
in financial sector 

Apply competition policy 
to financial sector

To remove uncompetitive 
practices and improve 
market access

Regulators, banks, 
competition authorities

Capacity of tax authority, 
extent of tax base, Tax 
effort, tax-GDP ratio 
towards at least a minimum 
%

Benchmarks for budgeting 
procedures, 
Clear agreed standards 
in contracts (e.g. publish 
as you pay)

Government procurement 
agencies adhering by 
standard operating 
procedures and 
e-tendering

Levels of sovereign debt, 
debt sustainability analysis

Credit to private sector 
(minimum of 30-50%), 
stock market capitalisation, 
financial inclusion reduce 
2.5 billion unbanked, 
better oversight of credit, 
non-performing loans

Benchmark the interest rate 
spread (between central 
bank base rate and lending 
rates of commercial banks), 
bank cost to income 
ratio, and overhead 
cost to assets ratio to 
the developing country 
average

Business environment

Regulatory environment, 
skills, infrastructure, 
corporate governance

To provide an attractive 
business environment 
with efficient rules and 
regulations (incl. on firm 
operations and corporate 
governance)

Sectoral ministries, 
semi-autonomous public 
agencies, private sector, 
competition authorities 

Indicators of public-private 
dialogue
Selected doing business 
indicators

International private finance and policies

International 
rules on taxation

Transparency on transfer 
pricing and illicit flows, 
country by country 
reporting

Difficulties to ascertain 
what profits levels can be 
taxed in country

Governments, private 
firms, tax and trade 
authorities

Number of appropriate tax 
agreements, number of 
private entities reporting 
payments; Measures of 
illicit flows

All G20 countries to 
implement DFQF to LDCs 
and introduce services 
preferences, all countries 
to implement Trade Facili-
tation agreement, reduce 
all trade distortionary 
subsidies

Adopt global financial 
regulation and foster 
network of financial and 
non-financial actors on 
stability & sustainable 
development finance

To ensure liberalisation 
relevant to current trading 
realities

Governments, G20

To create a more stable 
financial environment, 
discussed by public and 
private players

G20, developed countries, 
financial institutions

International finance 
rules and finance 
networks

Rules for TNCs

To improve government 
ability to regulate TNCs 
and their contribution

To create level playing 
field, balance distribution 
of economic power

Governments, Investment 
agencies, TNCs

Trade logistics index, 
trade distortionary subsi-
dies, share of G20 imports 
from LDCs/LICs covered 
by preferences

Implement Basel III 
Number of financial 
institutions part of a 
sustainable development 
financial network 

Number of firms complying 
with new standards, 
e.g. disclosure of terms 
of engagement

Improve international 
investment by 
institutional investors 

Remittance transfers

Agreement on carbon 
dioxide emissions 
reduction

Institutional investors & 
SWFs to invest in long-
term assets in developing 
countries; 

To increase institutional 
investment and help 
developing countries deal 
with foreign investors

Set standard rates for 
transfers; establish 
reporting systems by banks 
and transfer services

To increase remittances 
and flows through formal 
banking improve safety 
and monitoring 

Under the auspices of 
UNFCCC, agree a binding 
reduction for emission 
reduction 

To promote a transparent 
framework that incentivises 
joint action by public and 
private sector conducive to 
sustainable development

SWFs, governments, 
institutional investors 

Levels of SWF investment 
in poor countries. 

Financial intermediaries

Governments, private 
sector, civil society

Costs of remittances
Volume of remittances 
going through formal 
banking system

CO2 emission levels
Carbon price 
Climate finance 
incentivised

International public finance and policies

Target ODA on LDCs 
and Fragile States 

Differentiation policies

In MICs use ODA 
for catalytic purposes

Use ODA in a 
transformative way 
so it can enhance the 
development of other 
sources of finance

To use ODA in the poorest 
countries for enablers 
such as governance, 
infrastructure and human 
capital

Governments 
and international 
development partners

To optimise use ODA 
(a minor source of finance 
in MICs) 

Governments 
and international 
development partners

Aid statistics - share of 
ODA to LICs, LDCs and 
Fragile States not less 
than current

Aid statistics 
and impact assessments

Statistics on 
international finance

Expand statistics; Introduce 
grant, officially supported 
and GPG categories

To incentivise different 
providers of international 
public finance

International 
development partners

International 
finance statistics 

Recognise 
the valuable 
role SSC

Recognise the 
transformational 
role of DFIs & RDBs 

Establish system to define 
different components 
of SSC and allow data 
collection

Pool resources of DFIs, 
improve additionality 
and prioritise enablers 
of transformation

To create greater 
transparency on role of 
SSC and maximise value 

Providers of SSC and 
partner governments

Create definition and 
collect data on SSC 
contributions 

To enhance catalytic role 
and improve transparency 
and allocative efficiency 

DFIs and RDBs

Recognise export credit 
& promotion agencies 
as international 
development players

Incorporate export 
promotion agencies in 
development debates 

To promote coherence 
between export and 
development objectives

Export credit and 
promotion agencies

Exposure of DFIs and RDBs 
in sustainable development 
finance areas; Leverage 
ratios (short and long run, 
direct and indirect)

Number of cases of ECAs 
assessing their development 
impact and making 
decisions based on it

318 | EUROPEAN REPORT ON DEVELOPMENT 2015

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agendaframework for on-going dialogue between the 
various stakeholders involved in each type of 
finance during the implementation of the post-
2015 agenda. Participation in such a dialogue 
will  allow  stakeholders  to  monitor  progress, 
hold  each  other  accountable,  jointly  manage 
the  evolving  pattern  of  finance  and  make 
adjustments  as  required.  The  dialogue  will 
need to be informed by data from appropriate 
monitoring and evaluation (M&E) systems.

7.5.1 

 The pattern of finance for development evolves 
at different levels of income

Since  the  2002  Monterrey  Consensus,  in  real 
terms  (2011  dollars)  developing  countries  have 
had access to an additional $0.9 tr in international 
private finance, $3 tr in domestic private finance 
and $4 tr in domestic public revenues. International 
public  finance  increased  by  just  under  $0.1  tr. 
Total  public  revenues  increased  by  272%  from 
2002  to  2011,  international  public  finance  (net 
ODA  and  OOF)  increased  by  114%,  domestic 
private finance by 415%, and international private 
finance inflows increased by 297%.

Private  finance  generally  becomes  more 
significant  as  incomes  rise.  Domestic  private 
finance (measured by gross fixed capital formation 
by  the  private  sector  minus  FDI)  increases  as 
incomes  rise,  and  becomes  larger  than  ODA  at 
income per capita of $1,000–$2,000. Remittances 
and FDI also exceed ODA at income per capita of 
$2,000–$3,000, albeit at more modest levels as a 
share of GDP than domestic private investment. 

There  are  many  implications  for  different  types 
of flow. Given the emergence of domestic public 
and private flows, much attention has focused on 
these  flows.  One  further  implication  is  to  design 
international  public  finance  so  that  it  becomes 
more transformative depending on the financing 
context  and  helps  leveraging  other  types  of 
finance. The evidence suggests it needs to be less 
fragmented,  more  inclusive  of  new  actors,  more 
catalytic,  more  sustainable,  and  more  focused 

(c)  more  ODA 

on  addressing  bottlenecks,  for  example  through 
channelling: (a) more aid to tax authorities for the 
purpose of institution-building; (b) more support 
for DFIs, subject to monitoring their additionality; 
focused  on  addressing 
and 
blockages 
to  sustainable  development  and 
vulnerable  sectors  of  the  population.  Serious 
application of the principles of debt sustainability, 
aid  effectiveness  (including  donor  coordination) 
and agreement on a sovereign debt-restructuring 
mechanism are all essential measures to improve 
the use of international public finance.

This  Report  has  provided  quantitative  evidence 
underpinning  the  transformative  potential  of 
development cooperation. One dollar of support 
on  African  tax  administrations  leverages  $6  in 
revenues.  Development  finance  institutions  can 
create  jobs  at  a  cost  of  $5–10,000  each,  with 
significant  repercussions  for  indirect  job  creation 
and  productivity.  Providers  should  therefore  be 
concentrating  not  only  on  the  direct  impact  of 
their support but also on the long-term incentives 
for a transformative development agenda.

7.5.2  Policy matters

Extending and reforming domestic 
finance and policy frameworks

Domestic  finance  and  policy  is  crucial  for 
mobilising  and  using  finance  effectively.  This 
applies  to  public  and  private  finance  and  to 
developed and developing countries. 

Many  countries  in  all  income  groupings  lack  the 
capacities,  resources  or  political  incentives  to 
address shortcomings that limit the tax base and/
or  prevent  tax  and  other  government  revenues 
the  other 
from  supporting 
critical  enablers  of  sustainable  development 
transformation.  More 
technical  and  political 
support  for  tax  authorities  to  implement  and 
design tax policy that can mobilise public finance 
for  sustainable  development,  especially  via  the 
enablers, can therefore be important. 

institutions  and 

Evidence  also  suggests  that  governments  can 
do  more  to  guide  and  facilitate  the  private 
sector  (including  banks,  SMEs  and  TNCs)  to 
channel finance to productive uses and promote 
the  expansion  of  trade  and  investment  so  that 
it  can  support  development  and  contribute  to 
rather  than  hamper  sustainable  development 
transformation.  As  an  example,  the  Report 
highlights ways in which inefficient regulation can 
prevent  private  investment  and  that  its  absence 
can  exacerbate  risks  and  inequalities.  Similarly, 
the  financial  sector  needs  more  competition  to 
drive  down  costs  and  interest  rate  spreads.  The 
finance  and  policy  framework  needs  to  signal 
that complementary policies are just as important 
as  the  finance  itself,  including  in  the  case  of  the 
private  sector.  Monitoring  interest  rate  spreads 
would  be  a  first  step  and  could  be  applied  to 
other economic areas.

Designing a global system and policy 
environment that is fit for purpose

The  finance  and  policy  framework  needs  an 
approach to monitoring that can follow up efforts to 
enhance tax-to-GDP ratios. This Report highlights, 
for example, that when countries take supportive 
policy  action,  they  have  been  able  to  raise  tax-
to-GDP ratios by five percentage points in the 
scope of a few years, which in the case of LICs 
would raise around $20–25 bn, or more than half 
of their current ODA inflows. Monitoring tax-to-
GDP ratios and understanding the determinants 
of tax is thus a crucial first step.

Designing a global system that is fit for purpose 
entails  significant  reforms  alongside  finance. 
The  evidence  suggests  that  the  lack  of  effective 
and 
lack 
inclusive  financial  governance,  the 
of  progress  on  trade  and  climate  rule-setting 
and  the  continued  presence  and  abuse  of  out-
dated international tax systems harm the growth 
prospects particularly of the poorest people and 
countries.  The  current  guidelines,  frameworks 
and  networks  fail  to  offer  sufficient  incentives  to 
financial  institutions  to  contribute  to  sustainable 

  7.5  Concluding remarks

In  conclusion,  this  Report  has  identified  three 
broad  findings  that  should  inform  a  new  finance 
and policy framework.

     The  pattern  of  finance  for  development 
evolves  at  difference  levels  of  income.  A 
key government objective should be to move 
the  financing  pattern  to  the  next  level  and 
as  each  form  of  finance  declines  to  ensure  it 
is  put  to  best  use.  This  has  implications  for 
the  mobilisation  and  use  of  all  types  of  flow, 
including,  for  example,  ensuring  a  more 
transformative  role  for  international  public 
finance in the evolving pattern of finance.

     Policy  matters:  finance  is  not  enough  on  its 
own  and  it  is  essential  to  adopt  appropriate 
domestic  and  international  policies  for  its 
effective mobilisation and use:

facilitating 

their  effective  use 

 Domestic  policy  and  financial  frameworks 
that  promote  mobilising  domestic  resources 
for 
and 
sustainable  development.  This  includes  an 
effective  regulatory  framework  to  govern 
private sources and adequate capacity to raise 
public  revenues,  and  applies  to  developing 
and developed countries. 

 A  conducive  global  system  and  policy 
environment  that  supports  the  mobilisation  of 
finance  and  includes  supportive  agreements 
on  climate  change,  an 
improved  global 
trade  regime,  better  global  tax  rules  and  the 
management of the global financial system.

     Accountability  and  participation:  Given 
the  new  financing  context,  and  within  it  the 
importance  of  using  several  different  types 
of finance in synergy (domestic, international, 
public,  private),  it  is  essential  to  create  a 

7.5

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CHAPTER 7. Synthesis & Conclusions: Enabling a post-2015 development agenda 
 
 
 
 
development and fail to direct finance away from 
wasteful uses (e.g. fossil-fuel subsidies, or financial 
instruments that ignore social development) and 
towards sustainable development transformation. 

For example, the removal of fossil-fuel subsidies 
(more  than  $500  bn)  would  be  sufficient  to 
address  green  finance  gaps;  and  the  cost  of 
better  global  banking  rules  to  SSA  would  be 
ten  times  lower  than  the  benefits  achieved 
by  averting  crises.  Ultimately  a  stronger  real 
economy is in the long-term interest of most if not 
all countries and actors.

7.5.3 

 Accountability and participation

One  of  the  lessons  from  the  experience  with 
the  Monterrey  Consensus  was  that  follow-up 
concentrated  almost  exclusively  on  ODA  since 
it was really the only type of finance for which a 
target was set and a monitoring system (i.e. DAC 
aid  statistics)  existed.  In  future  other  types  of 
finance should also be monitored in order to arrive 
at  a  more  extensive  accountability  framework. 
Equally,  given  the  new  financing  context,  the 
recognition  of  the  importance  of  other  types  of 
finance and the different stakeholders (public and 
private) involved in each of them, it is important 
to  establish  a  mechanism  that  allows  for  their 
participation 
in  the  on-going  dialogue  and 
accountability framework. 

Having  in  place  a  framework  for  multi-stakeholder 
dialogue, which can monitor progress over time, will 
allow the FFD system to be properly managed and 
adjusted as required. Such a framework will depend 
on having appropriate data and information, which 
in  turn  depends  on  establishing  an  appropriate 
M&E system adapted to each form of finance. We 
have provided examples in Table 7.1.

the 

This  Report  has  analysed  the  considerable 
changes  in  the  FFD  landscape  since  the  2002 
Monterrey  Consensus.  It  has  also  noted  that 
the  implementation  of  the  Consensus  came 
to  focus  largely  on  the  role  of  ODA  and  paid 
insufficient  attention 
importance  of 
to 
increasing  domestic  tax  revenue.  Yet  in  some  of 
the  countries  that  were  achieving  the  greatest 
in  reducing  poverty,  domestic  tax 
progress 
revenue  carried  the  main  burden.  This  calls  for 
adopting  a  more  comprehensive  view  of  FFD 
that takes fully into account the crucial role of 
domestic  public  finance  and  private  finance, 
both  domestic  and  international.  This  will  set 
the scene for international public finance to be a 
valuable complement to other flows of FFD.

The Report’s main message is that finance alone 
will  not  be  sufficient  to  promote  and  achieve 
the  post-2015  development  agenda.  Policies 
also  matter.  Indeed,  they  are  fundamental. 
Appropriate  policies  will  ensure  that  finance  is 
used  effectively  to  achieve  results  and  that  it  is 
not wasted or underused. Good policies will also 
help  to  ensure  that  more  finance  is  mobilised 
as  success  breeds  further  success.  The  Report 
has  identified  many  examples  of  governments 
in 
that  are  making  effective  policy  choices 
mobilising  and  using  finance  for  major  enablers 
of  development 
including 
local  governance,  infrastructure,  green  energy 
technology, biodiversity, human capital and trade.

transformation, 

Given  the  challenges  encountered  in  the  follow-
up  of  the  Monterrey  conference,  it  is  crucial  to 
develop  an  appropriate  system  of  monitoring 
and  accountability  that  covers  as  many flows of 
finance  as  possible  and  that  stimulates  the  right 
actions  in  the  finance  and  policy  framework, 
nationally  and  internationally.  This  accountability 
system  must  cover  both  the  SDGs  and  their 
targets  and  the  finance  and  policies  required  to 
achieve  them.  It  can  then  guide  implementation 
of  the  post-2015  agenda  in  a  way  that  covers 
finance, policies and partnerships.

Overall  our  analysis  suggests  that  it  is  not 
an  overall  shortage  of  funds  that  will  be  the 
constraining factor in achieving a transformative 
post-2015  development  agenda.  Rather,  it 
is  the  way  finance  is  mobilised  and  used  that 
will  determine  success  in  achieving  the  goals 
the agenda enshrines. This in turn will require 
efforts  both  to  improve  the  effectiveness  of 
each  category  of  financing  by  drawing  on 
its  unique  characteristics  in  support  of  the 
enablers of poverty eradication and sustainable 
development, and also to explore how different 
flows can work together more effectively. This 
will call for reform of national finance and policy 
frameworks, as well as concerted effort at the 
international level.

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•	 Dalgaard,	 C-J.	 and	 Hansen,	 H.	 (2001)	 ‘On	
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CHAPTER 6.

6.1 Local Governance

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•	 Bahl,	 R.	 and	 Bird,	 R.	 (2014)	 Decentralization 
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•	 Bird,	R.,	Vaillancourt,	F.	and	Roy-César,	É.	(2010)	
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(2011)	

taxation	

‘Subnational	

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(2012)	

‘Fiscal	 Decentralization	

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reform 

and 

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•	 Canavire-Bacarreza,	 G.,	 Martinez-Vazquez,	 J.	
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•	 DELOG	 (2006)	 Survey  on  support  to  local 
governance and decentralisation. For the Informal 
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•	 DELOG	 (2011)	 Busan  and  Beyond:  Localising 
Paris  Principles  for  More  Effective  Support  to 
Decentralisation and Local Governance Reforms. 
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References•	 DELOG	 (2013)	 Financing  Local  Infrastructure. 
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•	 Diawara,	 M.	 (2006)	 Partnenaires  ou  citoyens: 
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•	 ECDPM	 (unpublished)	 Literature  review  on  smart 
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L.	

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•	 Steffensen,	 J.	 (2010)	 Fiscal  decentralisation 
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•	 Steiner,	 S.	 (2005)	 Decentralisation  and  Poverty 
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•	 Watkins,	 K.	 and	 Alemayehu,	 W.	
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•	 Yilmaz,	 S.,	 Beris,	 Y.	 and	 Serrano-Berthet,	
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6.2 Infrastructure

•	 AfDB	 (2007)	 ‘Options	 for	 a	 Comprehensive	
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•	 AfDB	(2010)	Annual Development Effectiveness 
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•	 AfDB	(2012)	Annual Development Effectiveness 
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•	 AfDB	(2013)	Annual Development Effectiveness 
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•	 Albino-War,	 M.,	 Cerovic,	 S.,	 Flores,	 J.C.,	
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•	 Andrés,	 R.J.,	 Boden,	 T.A.,	 Bréon,	 F-M.,	 Ciais,	
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•	 Andrés,	 L.,	 Biller,	 D.	 and	 Herrera-Dappe,	
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•	 Bangladesh	Bank	(2013)	Investment Promotion 
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•	 Bhattacharya,	 A.,	 Romani,	 M.,	 Stern,	 N.	
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•	 BIFFL	 (n.d.)	 Bangladesh  Infrastructure  Finance 
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•	 Blas,	J.	(2014)	‘African	Bonds	Lose	Honeymoon	
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•	 Cadot,	 O.,	 Fernandes,	 A.	 M.,	 Gourdon,	 J.,	
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•	 Canning,	 D.	 and	 Bennathan,	 E.	 (2000)	 ‘The	
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•	 Collier,	 P.	 and	 C.	 Mayer	 (2014)	 Unlocking 
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•	 EIB	 (2014)	 Annual  Report  2013  –  EU-Africa 
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•	 Ellmers,	B.,	Molina,	N.	and	Tuominen,	V.	(2010)	
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•	 Fatuna,	 D.M.	
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•	 Foster,	 V.	 and	 Briceño-Garmendia,	 C.	 (2010)	
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•	 Cadot,	O.,	Engel,	J.,	Ugarte,	C.	and	Jouanjean,	
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•	 Damuri,	Y.,	Setiati,	I.,	Atje,	R.	and	Santoso,	B.	(2015)	
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•	 European	 Report	 on	 Development	
(2012)	
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and  land  for  inclusive  and  sustainable  growth. 
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•	 Fic,	 T.	 (2015)	 Global  Economic  Policies  and 
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2015 development agenda (2015). 

•	 Frankfurt	 School-UNEP	 (2015)	 Global  Trends 
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Management Gmbh.

•	 Ghedrovici,	 O.	
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2015 development agenda (2015). 

•	 Global	 Financial	 Integrity	 (GFI)	 (2014)  Hiding 
in Plain Sight: Trade Misinvoicing and the Impact 
of Revenue Loss in Ghana, Kenya, Mozambique, 
Tanzania,  and  Uganda:  2002-2011.  Washington, 
DC: Global Financial Integrity.

•	 IFC	 (2013)	 ‘IFC  Jobs  study:  Assessing  private 
sector  contributions  to  job  creation  and  poverty 
reduction’. Washington, DC: International Finance 
Corporation.

•	 Jouanjean,	 M.A.	 and	 te	 Velde,	 D.W.	 (2013)	
‘The  role  of  development  finance  institutions  in 
promoting  jobs  and  structural  transformation:  A 
quantitative  assessment’.  ODI  Working  Paper. 
London: Overseas Development Institute.

•	 Kapstein,	E.B.,	Kim,	R.	and	Eggeling,	H.	(2012)	
Modelling the Socio-Economic Impact of Potential 
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Employment  and  Value  Added.  Final  Report. 
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•	 Kingombe,	 C.,	 Massa,	 I.	 and	 te	 Velde,	 D.W.	
(2011)  Comparing  Development 
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Department for International Development.

•	 Lunogelo,	 H.	 B.,	 Bregu,	 S.,	 Ngilangwa,	 R.	 and	
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policies to implement a transformative post-2015 
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•	 Massa,	 I.	 (2011)	 The  Impact  of  Multilateral 
Development  Finance  Institutions  on  Economic 
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for International Development.

(2013)	

•	 McKinsey	
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(2014)	 Development  Co-operation 
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Combining finance and policies to implement a transformative post-2015 development agenda | 363

ReferencesANNEXES

•	 OECD	
(2014)	 Development  Co-operation 
Report 2014: Mobilising Resources for Sustainable 
Development.  Paris:  Organisation  for  Economic 
Co-operation and Development.

•	 UN	 Intergovernmental	 Committee	 of	 Experts	
on  Sustainable  Development  Financing  (2014) 
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Experts  on  Sustainable  Development  Financing 
Final  Draft  8  August  2014  [Advance  unedited 
version]. New York: United Nations.

•	 te	Velde,	D.W.	(2011)	The role of development 
finance  institutions  in  tackling  global  challenges. 
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International Development.

(2015) 
•	 Treebhoohun,	 N.	 and	 Jutliah,	 R.	
Mauritius Country Illustration. Background  paper 
to  the  European  Report  on  Development  2015: 
Combining  finance  and  policies  to  implement  a 
transformative  post-2015  development  agenda 
(2015). 

•	 UN	 Intergovernmental	 Committee	 of	 Experts	
on  Sustainable  Development  Financing  (2014) 
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Experts  on  Sustainable  Development  Financing 
Final  Draft  8  August  2014  [Advance  unedited 
version]. New York: United Nations.

•	 UN	 Open	 Working	 Group	 on	 the	 Sustainable	
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•	 UN	Secretary-General	(2014)	Report of the UN 
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(2015) 
in  achieving  MDGs 

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Impact  of  South-South 
in  LICs. 
cooperation 
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Development  2015:  Combining  finance  and 
policies to implement a transformative post-2015 
development agenda (2015). 

•	 World	Bank	(2013)	Financing for Development 
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364 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 365

ReferencesANNEXES

Annex 1. 
The approach taken in the current European 
Report on Development compared 
with other reports 

Annex 2. 
Variation in flows across countries 

Annex 3. 
Further details of IFD 

368 

372 

375 

Finance alone will not be 
sufficient to promote and 
achieve the post-2015 
development agenda.
Policies also matter. 
Indeed, they are 
fundamental. 

Combining finance and policies to implement a transformative post-2015 development agenda | 367

 
 
 
 
Annex 1.

The approach taken in the current European 
Report on Development compared with other reports

The  Report  has  demonstrated  the  importance 
of  policies  in  financing  sustainable  development 
transformation  through  enablers.  Table  1  below 
compares these policies with those highlighted by 
other  reports  on  financing  for  development  (the 
ICESDF  report,  2014,  and  OECD  Development 
Co-operation  Report,  2014).  There  are  many 
similarities  and  this  Report  extends  the  policies, 
and  distinguishes  between  domestic  and 
international policies.

This table highlights that the follow-up agreement 
on  Financing 
(to  support 
for  Development 
the  post-2015  development  agenda)  must 
systematically  address  the  role  of  policies  in 
mobilising finance and making more effective use 
of  finance  for  development.  Though  there  are 
many  policies  that  will  be  important  in  creating 
a  coherent  implementation  agenda  (under  the 
follow-up  finance  for  development  agreement), 
Chapter  7  highlights  those  that  will  be  vital  in 
creating  an  enabling  environment  for  further 
policies and finance.

Table 1 | Mobilising financial flows - specific domestic and international policies by type of flow

Domestic 
public (e.g. 
tax revenues)

ICESDF

OECD/DAC

POLICIES FOR MOBILISATION OF FINANCE (ERD)

Improve capacity of tax 
and custom authorities

Enhance the tax base by 
bringing more and a wider 
range of contributors into 
the system; incentives and 
regulatory changes to combat 
informality 

Ensure good financial 
governance and public 
financial management

Internalise externalities and 
mainstream environmental 
sustainability

Address inequity and social 
protection imperatives

Manage public debt 
effectively

Explore the potential 
contributions of national 
development banks

International support in 
taxation (e.g. Tax Inspectors 
Without Borders)

Platform for learning, 
capacity-development and 
dialogue on tax (e.g. African 
Tax Administration Forum)

Build capacity of tax systems 
and administrations, and 
strengthen the effectiveness 
and efficiency of existing 
systems (structures and 
processes)

Build capacity on international 
policy, transfer pricing and 
exchange of information

Remove tax exemptions.

Policies to promote more 
transparent, accountable 
and fairer tax systems

Domestic

International

A conducive domestic 
policy environment

Promote the capacity of tax 
authorities (and government 
more generally)

Enhance the tax base by 
bringing more and a wider 
range of contributors into the 
system, or through expansion 
of the economy

Increase tax collection 
efficiency, and introduce new 
taxes, e.g. real-estate taxes

Increase coherence of 
taxation regimes, e.g. 
for SMEs

Increase technical and 
political support for tax 
authorities

A conducive international 
policy environment, including 
financial stability and 
transparency in international 
flows

Make international efforts 
(e.g. global tax rules) to 
address tax avoidance and 
evasion (e.g. OECD Base 
Erosion and Profit Sharing) 
to increase public resources, 
including measures to stop 
illicit flows enforce and more 
disclosures in tax havens

Negotiate (or re-negotiate) 
and disclose contracts with 
details on tax and royalties 
between state and natural 
resource or infrastructure 
companies

Cancel debt in order to 
raise expenditure for 
human development, green 
technology and infrastructure

Ensure ODA is untied

Promote sustained donor 
commitment, debt relief 
and conducive incentives 
for middle class/elites

Global policies on 
appropriate pricing strategies 
to prevent transfer mispricing

International co-operation 
to promote liquidity on bond 
markets

Improve the capacity to 
investigate and prosecute 
financial criminals, recover 
illicit assets and tackle 
international bribery 
payments

Sustained political 
commitment and strong 
leadership in revenue 
administration and reform

Increased training and pay 
for tax-administration officials. 

Transparent fiscal regimes 
for natural and mineral 
resource extraction

New and innovative DRM 
instruments

Confront tax base erosion

Involve civil society and 
business associations in 
effective tax bargaining 
to tax increase compliance

Make consistent data sets on 
domestic revenue collection 
publicly available

Single global standard 
for automatic exchange 
of information

Adopt effective laws and 
regulations to protect 
taxpayers

Promote fiscal sustainability, 
and a predictable and stable 
tax system

Improve tax administrative 
infrastructure, e.g. 
introduction of e-governance

Combat corruption

Improve public-sector 
budgeting

Reduce inefficient subsidies 
to increase fiscal space.

Develop domestic bond 
markets

Expend political capital on 
reaching pro-poor political 
settlements

Innovative DRM, e.g. currency 
exchange taxes or increased 
taxes on alcohol and tobacco, 
diaspora bonds or GDP-linked 
bonds

Suspend tax exemptions for 
e.g. officials and NGOs

Domestic policies with 
detailed requirements for 
TNCs on transfer pricing, 
and adequate monitoring

Decentralise tax collection 
to promote accountability

Innovative policies 
to finance GPGs

Agree on an international 
target for international 
cooperation, e.g. 2% GDP 
to fund GPGs

Develop a global co-
ordination mechanism for 
new and emerging sources 
of development finance

Global fiscal tools to finance 
global goals (e.g. carbon 
taxation or arms trade)

Recommitment to 0.7% GNI 
target for ODA

Elaborate a national 
transformative strategy, 
supporting policies to finance 
enablers

Create National Facilities or 
Funds to pool resources and 
implement specific sectorial 
programmes

Tackle corruption

Agree regional and global 
additional resource targets 
(e.g.. SDGs, climate finance)

Improve donor co-ordination 
and management and pool 
resources to improve aid 
effectiveness 

Create blending schemes, 
trust funds, facilities (in DFIs)

Blending schemes for ODA 
grants to leverage OOF

Develop South–South 
partnerships

Shock facilities to address 
shocks and crises

Introduce international taxes 
(e.g. carbon or financial 
transaction tax) and market 
mechanisms (e.g. carbon 
trading)

Increase political commitment 
to ODA

Reform fossil-fuel subsidies

International 
public finance

Meet existing commitments

Make use of all international 
public financing sources and 
instruments

Use international public 
resources efficiently and 
effectively

368 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 369

Note: Although policies for domestic private finance and international private finance are presented separately, 
many of these policies may attract both domestic and international private finance.

AnnexesICESDF

OECD/DAC

POLICIES FOR MOBILISATION OF FINANCE (ERD)

International 
private 
finance

Domestic 
private 
finance

Provide access to financial 
services for households 
and micro-enterprises

Promote lending to SMEs

Develop financial markets for 
long-term investment and 
enhancing regulations to 
balance access and stability

Strengthen the enabling 
environment

Strengthen economic, 
environmental, social and 
governance (EESG) and 
sustainability issues in 
the financial system

Instruments to mitigate risks 
or augment returns

Policy reform in the areas 
of tax, finance, investment 
and trade

A stable macroeconomic 
environment conducive 
to growth with consistent 
policies

Remittance schemes 
to encourage receiving 
households to invests in 
the formal financial sector 
or productive capital

Private sector development, 
an enabling environment for 
sustainable development 
e.g. guarantee schemes

Whole-of-government 
approach to improving policy 
frameworks for investment

Promotion of PPPs e.g. 
through public sector 
investment in risk capital 
(e.g. equity stakes 
in domestic companies)

Clear and transparent 
laws and regulations for 
investment, including 
for SMEs

Effective and transparent 
regulations on investment 
restrictions, access to land, 
investor protection and tax 
incentives

Improving the efficiency and 
governance of state-owned 
infrastructure providers (to 
attract private investors)

Domestic

International

Develop and supervise 
development of the financial 
market sector: banking 
sector, equity, bond and stock 
markets (managed adequately 
for volatility), including 
appropriate regulation

Reform international finance 
architecture (e.g. Basel III)

Reform investment strategies 
of institutional investors that 
allow them to invest in illiquid 
assets in developing countries

Mobilise DFIs in leveraging 
resources through blended 
and risk-mitigation 
instruments, including the 
issuance of development 
bonds that could attract 
domestic private capital

Improve M&E of DFI and 
multilateral development 
bank (MDB) activities to 
support national stakeholders 
and development outcomes

Adopt trade policies 
conducive to development 
(e.g. duty free quota free for 
LDCs, application of services 
waiver for LDCs 

Form regional Free Trade 
Areas

Form regional stock markets

Use ODA to support 
institutional reforms and 
private-sector development 

Develop procurement policies 
that enable the domestic 
private sector

Develop and increase 
the capacity of savings 
institutions, pension funds 
and banks

Tackle financial illiteracy

Bind political settlements and 
consensus-building to reduce 
expected risks/delays 

Create Free Economic Zones, 
growth corridors, industrial 
parks and clusters to reduce 
expected costs and enhance 
profitability

Create specialised facilities 
or funds for infrastructure or 
private-sector development 
and use blended instruments

Promote a collaborative 
attitude towards the private 
sector, e.g. PPPs

Risk mitigation instruments

Regulatory reforms: 
standards, competition policy, 
improve property rights

Adopt user fees or incentives 
to enhance expected 
profitability of investments.

Policy incentives for 
sustainable development 
investments

Incentives for domestic saving

Design of bankable projects

Promote private sector 
awareness in export promotion

International 
private 
finance

Channel international funds 
towards long-term investment 
in sustainable development

Instruments to mitigate risks

Reduce transaction taxes and 
transfer costs for remittances

Financial market development 
through appropriate domestic 
policies and institutions

Reform international trade 
policy; participation in 
regional trade agreements

Promote a collaborative 
attitude towards the private 
sector e.g. PPPs

Apply international climate 
policies and associated 
mechanisms (e.g. GEF)

Manage volatility of risk 
associated with short-term 
cross-border capital flows

Facilitate the flow of 
remittances and private 
development assistance (PDA)

Introduce schemes on 
subsidising or matching 
remittances

Channelling remittances 
through national commercial 
banks for greater leverage

Use remittances as collateral 
or to securitise sovereign 
external loans and improve 
countries’ credit ratings

Create policies/environment 
required to attract investment

Promote macroeconomic 
stability, institutional quality, 
infrastructure development 
and supply of skilled labour 

Industrial policy for trade 
promotion and to attract FDI 

Political stability and 
improved governance

Regulatory reforms 
(standards, competition 
policy, market surveillance, 
property rights, timely dispute 
settlements, etc.)

Implement Basel III rules

Mechanisms to attract finance 
from institutional investors 
and philanthropic groups.

Risk-mitigation instruments 
(guarantees, insurance, 
equity)

Introduce shock facilities

Innovative instruments 
e.g. loan and insurance 
mechanisms, crowd funding

Mobilise DFIs and Regional 
Development Banks; create 
of facilities, funds and use 
of blended instruments to 
address risks 

Mobilise sovereign wealth 
funds (SWFs) and pension 
funds to developing countries

Develop bond financing 
including diaspora bonds 
preferably issued by DFIs or 
MDBs 

Design global banking 
supervision rules 

Devise a coherent 
international financial network 
(with a more effective voice 
for developing countries)

Establish rules of conduct for 
TNCs and lead firms in GVCs

Stabilise global monetary 
conditions

Rules on migration

Global environmental policies

Transparent tariff rates and 
taxation schemes

Reduce costs of remittance 
transfers

International anti-money 
laundering regulation

Monetary policy

Monitoring of exchange rates, 
interest rates and inflation

Natural resource and clean 
energy incentives and 
regulation

Design of bankable projects

Blending DFI and private 
sector investment, to reduce 
risk, short-term investment 
and volatility in private 
finance

A stable and integrated 
policy environment for clear 
and long-term investment 
incentives (e.g. for 
infrastructure)

A national, long-term strategy 
for the infrastructure sector; 
with predictable pricing and 
competitive infrastructure 
markets (sound regulation) 

Regional infrastructure 
projects

Policy reform in tax, finance, 
investment and trade

Domestic action on 
bureaucracy, controls and 
weak financial infrastructure

Policies to tackle inflation 
and currency risk, restrictive 
investment requirements, 
and lack of local capacity/
expertise

Investigate regulatory barriers

Foster collaborative 
mechanisms between 
investors

Market transparency and 
improved data gathering

Collect international, official, 
accurate and comparable 
data on alternative 
investments, pension fund 
asset allocations, and their 
returns

Include philanthropic 
organisations in international 
development processes

Correction of market failures

Transparent bidding 
processes, property 
protection and non-
discrimination

Reform of legal investment 
frameworks, improvements 
in transparency and 
predictability of procedures, 
phasing out of capital transfer 
restrictions on businesses and 
improve capacity of ministries 
in PPPs

Adequate capacity to 
negotiate and implement 
international investment 
agreements

Effective rules and 
enforcement for IPR

Proactive policies to pre-empt 
market failures

Well-coordinated business 
registration and land-
allocation processes

370 | EUROPEAN REPORT ON DEVELOPMENT 2015

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AnnexesAnnex 2.

Variation in flows across countries

There is a significant variation in the experiences 
of  countries  across  country  groupings  and  for 
a  range  of  individual  countries  including  (1) 
outliers (i.e. those at either end of the range of 
country  groupings);  (2)  selected  countries  that 
are  the  focus  of  country  illustrations  discussed 
throughout  this  Report 53;  and 
(3)  selected 
countries where the largest numbers of people 
in extreme poverty will be living in the coming 
years. 54

Figure 2 also illustrates the variation of levels of net 
ODA/GNI within the country income groupings by 
identifying for each group the countries with the 
highest and lowest levels of this source of finance 
in  2011,  as  well  as  the  group  average  and  data 
for  select  high  poverty  countries. 55  It  illustrates 
that by far the largest range in net ODA/GNI was 
experienced  by  LICs,  with  a  notable  range  also 
apparent  for  LMICs.  In  terms  of  poverty  focus 
countries,  Ethiopia  and  Pakistan  received  higher 
than average levels of net ODA/GNI compared to 
other countries in their groupings, and Bangladesh 
and  India  received  lower  than  average  levels  of 
net  ODA/GNI  compared  to  other  countries  in 
their groupings.

We  first  examine  in  Figure  1  the  variation  in  tax 
revenues across countries by identifying for each 
group  the  countries  with  the  highest  and  lowest 
levels  of  this  source  of  finance  in  2011,  as  well 
as  the  group  average  and  data  for  select  high 
poverty  countries.  It  illustrates  that  the  range 
of  PR/GDP  within  each  group  increases  as  you 
progress  through  the  income  groups.  In  terms 
of  poverty  focus  countries,  Tanzania  mobilised 
higher than average levels of PR/GDP compared 
to  other  countries  in  its  group,  and  Bangladesh, 
Pakistan,  India  and  China  received  lower  than 
average  levels  of  PR/GDP  compared  to  other 
countries in their groupings.

Figure  3  presents  an  overview  of  the  variation 
in levels of REM/GDP within the country income 
groupings,  by  identifying  for  each  group  the 
countries  with  the  highest  and  lowest  levels 
of  this  source  of  finance  in  2011,  as  well  as  the 
group  average  and  data  for  select  high  poverty 
countries. The largest diversity of REM/GDP levels 
has  been  experienced  by  LICs,  although  each 
group has a wide range of levels for this resource. 
In  terms  of  poverty  focus  countries,  Bangladesh 
and  Nigeria  received  higher  than  average  levels 
of  REM/GDP  during  2010-12  compared  to  their 
groups, with DRC, Ethiopia and Pakistan receiving 
lower than average levels of REM/GDP. 

Figure 1 | PR/GDP selected LICs, LMICs and UMICs, 2011

60

50

40

30

20

10

0

56

42.8

23.9

20

16.6

13.8

10.3

13.7

11.2

18.9 20.3

13.9

25.7

21

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LMIC

UMIC

Figure 2 | ODA/GNI selected LICs, LMICs and UMICs, 2011

Source: PR/GDP from IMF FAD database; Note: Average is 
weighted; countries selected have the highest and lowest 
levels of PR/GDP in each group, and are also select poverty 
focus countries

60

50

40

30

20

10

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53.6

11.2

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LMIC

UMIC

ODA/GNI from WDI; Note: Average is weighted; countries se-
lected are highest and lowest levels in each group, plus select 
poverty focus or significant countries

53 Bangladesh, Ecuador, Indonesia, Moldova, Mauritius and Tanzania.

54  The 2014 Chronic Poverty Report identifies the following countries as the projected location for the largest numbers of people living on under US$2 a day by 
2030 (in order of significance) – India, Pakistan, Bangladesh, Ethiopia, Democratic Republic of Congo, Niria, China, Tanzania, Madagascar and the Philippines 
(CPR, 2014).

55  The 2014 Chronic Poverty Report identifies the following countries as the location for the largest numbers of people living on under $2 a day by 2030 (in 
order of significance) – India, Pakistan, Bangladesh, Ethiopia, Democratic Republic of Congo, Nigeria, China, Tanzania, Madagascar and the Philippines; these 
countries are the focus of our presentation of country experiences (CPR, 2014).

372 | EUROPEAN REPORT ON DEVELOPMENT 2015

Combining finance and policies to implement a transformative post-2015 development agenda | 373

Annexes 
Figure 3 | REM/ GDP, select LICs, LMICs and UMICs, average 2010-12

50

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40

35

30

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Source: Remittances % GDP – WDI; Note: Average is 
weighted; countries selected are highest and lowest in 
each group, plus select poverty focus countries

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Annex 3.

Further details of IFD 

A  significant  number  of  all  types  of  instruments 
have  been  implemented  during  the  last  two 
decades.  The  UNDP 
categorised 
instruments  based  on  their  “sourcing” 
IFD 
mechanisms, as follows:

(2012) 

A.   Taxes,  dues  and  other  obligatory  charges 
on  globalised  activities  (initiatives  levied  at 
the  national  level  but  within  a  framework  of 
revenues 
international  co-ordination.  The 
raised 
international 
are 
development)

allocated 

to 

B.   Voluntary  solidarity  contributions  (initiatives 
that  give  consumers  the  option  to  donate 
a  small  sum  to  international  development 
at  the  point  of  product  purchase.  Although 
private  in  nature,  public  authorities  facilitate 
such  contributions  through  tax  incentives 
and technical facilitation in the distribution of 
resources)

C.    Front-loading  and  debt-based  instruments 
(initiatives  that  ‘frontload’  resources,  make 
public funds available earlier for development, 
via  the  issuance  of  bonds  on  international 
capital markets)

D.    State  guarantees,  Public–Private  Partnerships 
(PPPs),  Insurance  and  other  Market-based 
Instruments (initiatives which leverage private 
funds  to  create  investment  incentives  for 
the  private  sector,  e.g.  through  subsidies  or 
commitments to purchase a particular product 
at a set price (e.g. a vaccine). In doing so these 
initiatives aim to correct market failures. Other 
mechanisms  aim  to  reduce  sovereign  risk 
and/or  macroeconomic  vulnerabilities  (e.g. 
weather-based  insurance  or  counter-cyclical 
loans). These mechanisms aim to improve the 
effectiveness of finance rather than create new 
revenue streams for development)

The main characteristics of IFD mechanisms could 
be summarised as follows: 

sources  of  development  finance 
 New 
expand  countries’  choices,  whether 
from 
innovative  sources,  emerging  donors,  private 
philanthropists  or  other  stakeholders.  They 
all  bring  with  them  more  resources  to  help 
developing  countries  achieve  the  MDGs. 
According  to  the  UN  (2012),  there  are  a 
number  of  IFD  proposals  that  are  technically 
feasible  and  have  significant  potential  to 
raise  revenues,  even  though  co-ordinated 
international  implementation  is  likely  to  face 
substantial  political  difficulties.  Examples 
of  these  include  international  taxes,  such 
as  financial  and  currency  transaction  taxes, 
carbon tax, and non-tax revenues such as the 
use of IMF’s SDRs for development finance. 

 According  to  Herman  (2012),  IFD  proposals 
have  usually  shared  two  common  objectives 
–  to  raise  significant  additional  resources  for 
development  and  to  do  so  in  a  stable  and 
predictable manner. Predictability can be an 
advantage to most IFDs over ODA, albeit with 
variation  across  initiatives  e.g.  taxation-base 
incentives are more predictable than voluntary 
solidarity contributions. IFDs are characterised 
by  great  transparency  and  accountability 
regarding  criteria  for  accessing  resources. 
However,  LICs  often 
lack  the  necessary 
capacity to handle the complex procedures.

ex-ante 

represents 

 The  general  principle  of  IFD  is  to  ‘earmark’ 
resources  in  order  to  motivate  participation 
and 
conditionality. 
Performance-based  approaches  to  IFDs  also 
represents  ex-ante  conditionality,  therefore 
IFDs  have  a  double  conditionality 
these 
burden. 
approaches 
are  suitable  for  short-time  relatively  simple 

Performance-based 

374 | EUROPEAN REPORT ON DEVELOPMENT 2015

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Annexes 
 
 
Although currently limited to HIPCs, countercyclical 
loans  that  reduce  debt/service  payments  when 
major  shocks  occur  could  be  viewed  from  a 
different  angle  in  view  of  the  current  economic 
situation. (Mustapha et al., 2014)

PPP 

   IFD 
(Public-Private-Partnerships) 
initiatives  in  the  form  of  venture  capital 
and  mutual  funds  for  strengthening  SME 
development  are  gaining  ground 
(ADB 
and  OECD,  2014).  In  addition  to  tax-based 
initiatives, solidarity contributions and diaspora 
bonds,  using  PPP  initiatives  for  IFD  are 
important in the agricultural sector to facilitate 
modern  banking  instruments  and  guarantees 
in order to assist SME development.

interventions  rather  than  for  more  complex, 
expensive  and/or  longer-term  interventions 
(e.g. women’s empowerment). 

There  also  important  considerations  about  the 
effectiveness of IFDs:

   IFD amounts are generally small compared to 
official ODA and spread over a wide range of 
different  initiatives,  involving  a  large  number 
of mechanisms, participants and beneficiaries. 
Many  small  un-coordinated  priorities  and 
programmes are associated with fragmented 
aid delivery and can create heavy costs, thus 
reducing their effectiveness. 

There  is  potential  for  scaling  up  and  replicating 
IFD mechanisms, UNTT (2013d): 

  IFFIMs  frontloading  aid  using  a  securitisation 
mechanism could be replicated in programmes 
where  there  are  benefits  to  be  gained  by 
large  upfront  investments  such  as  (green) 
infrastructure investment. 

 Advanced  market  commitments  mitigate  risks 
and  change  incentives  with  the  purpose  of 
spurring innovation. These could be replicated 
in  other  areas  of  innovation,  in  particular  with 
regard to clean energy and low carbon products 
(e.g.  mini-grids  in  remote  areas  with  limited 
access  to  central  electricity  grid,  large-scale 
grid-connected 
renewable-energy  projects, 
development  of  new  technologies  to  address 
problems  of  land  and  water  scarcity,  climate 
change  and  declining  crop  yields,  medium-
scale  deployment  of  biogas  for  schools  and 
hospitals,  etc.)  and  to  social  sectors  as  well 
(e.g.  similar  structures  to  promote  education 
and health services such as ICT or web-based 
applications  adapted  for  isolated  and  poor 
communities in Africa for example.)

 The  Caribbean  Catastrophe  Risk  Insurance 
Facility  mechanism  could  be 
replicated 
covering  more 
risks  and/or  groups  of 
addition,  well-structured 
countries. 
insurance  pools  could  be  sold  to  the  private 
sector as “catastrophe bonds”.

In 

 The  importance  of  an  adequate  delivery 
mechanism  is  particularly  evident  with  some 
suggesting  that  a  ‘capable  institution’  is  a 
key requirement (UNDP, 2009). Most IFDs are 
supported  officially,  a  few  IFDs  are  classified 
(front-loading  and  debt-based 
as  public 
instruments).  Private  IFDs  concerned  with 
crowd-funding  increased  in  2012  by  81% 
(Massolution, 2013).

loans,  sovereign 

   IFD  instruments  focusing  on  improving  the 
effectiveness  of  development  finance  (e.g. 
countercyclical 
issuance 
pools, performance-based aid) are increasingly 
added to those creating new revenue streams. 
Major development banks and regional banks 
are  becoming  involved  in  this  process  thus 
connecting  the  advantage  of  holistic  project 
assessment  from  both  the  banking  and  the 
development perspective. 

   Concrete  results  are  most  evident  in  the 
health  sector,  owing  to  the  economies  of 
scale  achieved  by  the  implementation  of 
thematic  single-use  vertical  programmes. 
the  environment/climate  sector, 
In 
the 
initiatives supported are more diverse and the 
results more difficult to measure (UNDP, 2012). 

   Long-term  sustainability,  a  key-importance 
factor in the post-2015 development agenda 
as  indicated  in  UNTT  (2013d).  Long-term 
sustainability varies significantly across different 
IFD  initiatives,  e.g.  tax-based  initiatives  are 
sustainable  as  long  as  countries  wish  to 
endorse  the  specific  policy  and  voluntary 
solidarity  contributions  are  sustainable  as 
long  as  the  donors’  commitment  continues. 
For front-loading and debt-based instruments 
(e.g.  diaspora  bonds,  green  bonds)  medium 
long-term  debt  sustainability  of  the 
and 
beneficiary countries is crucial. 

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ISBN 978-92-79-43009-1

9 789279 430091

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