THE Financing for Development (FfD) conference will take place shortly before the September UN Summit that is expected to agree on the post-2015 Sustainable Development Goals to succeed the Millenium Develoment Goals.

Developing countries lobbied intensely to have the FfD conference precede the summit because they have become increasingly skeptical about taking on new international obligations — implicit in the draft SDGs — without adequate resources and the enabling international economic environment to meet new obligations.

When the Third Financing for Development Conference takes place, the global economy will still be struggling to overcome the near collapse in 2007-2008 of the international financial system. Unlike previous crises, however, the current one originated in the developed North.

For the countries of the global South, the first reality is that they are net investors in developed countries.

The international financial system is not mobilising resources for development for them. Central banks in developing countries have been building up their international reserves as a form of self-insurance from any sudden reversal of private investment flows like the ones that devastated East Asian economies in the late 1990s. For almost two decades, the net flow of investment has been from developing to developed countries.

For those developing countries without a current account surplus, a good proportion of their reserves are borrowed from external sources. If their authorities had greater confidence in the ability of the IMF to provide adequate, timely, and counter-cyclical liquidity in the event of private sector portfolio reversals, they would reduce their reserve accumulations. The IMF is, after all, meant to be a cooperative among its members for emergency liquidity support. This gap is included as draft SDG target 10.5: ‘improve the regulation and monitoring of global financial markets and institutions and strengthen implementation of such regulations.’

In 2015, developing countries continue to face the consequences of an external shock not of their own making, with the looming increase in US interest rates and reversal of private portfolio flows. Developing country international reserves are not large enough to withstand large bank runs.

The international economy is now shorn of many public policy tools to monitor and control volatile private capital movements. The conventional wisdom was that allowing freer capital movements would increase the availability of financing for developing countries and thus raise their rates of investment. The availability of private financing increased in the 1990s and first part of the twenty-first century but collapsed with the financial crisis of 2007-2008.

The record suggests that the underlying issue is not the availability of finance, either public or private, but the lack of demand for investment. Diminished public policy space is the result because of the reduced scope for public authorities to ‘dream up’, respond to estimated future needs, and plan investment projects such as in infrastructure and energy.

The scale of vulnerability is greater when the amount of short-term private funds invested in a developing country is larger. Thus the availability of finance is not a driver of the amount of investment activity and can even be a hindrance.

The seemingly sudden, recent discovery of a global infrastructure gap is the culmination of years of procyclical public expenditure policies in developing countries to meet fixed public sector deficit ceilings. While the strength of correlations among interest, exchange, and inflation rates vary by country, restoring capabilities for capital account management or regulation is critical to creating public policy space to sustain domestic demand for long-term investment. Capital controls are also critical to making feasible income policies to reduce inequality, increase wage rates, and expand public taxation and expenditures for social objectives.

Estimates of necessary financing for the SDGs are well within the capacity of the global system. Experts have indicated that the global economy generates savings of $22trn annually, while $5-7trn will be required annually for infrastructure and $66bn for eradicating extreme poverty. .

Both the domestic and international environments are intimately connected. Developing countries, for example, can mobilise domestic financing from national savings and taxes for development, but such an effort can be undone by capital f light and tax evasion if international cooperation is inadequate to monitor and reduce illegal activities.There is a need for a global system conducive to financing development.

Public domestic finance in developing countries more than doubled between 2002 and 2011, increasing from $838bn to $1.86trn. This FfD process must be strengthened with international cooperation.

Among these desirable actions are two in particular.: One, upgrading international tax cooperation and multilateral efforts against capital f light and tax evasion. Institutional innovation, including moving more of ongoing efforts to the UN to have a large impact for reasons of universality, equity, and transparency.

The OECD, dominated by the countries of the large transnational corporations and financial companies, has found difficulty in arriving at simple and practical approaches to reporting and regulating financial movements and the treatment of transfer pricing.

Two, developing further domestic financial sectors in developing countries to help mobilise greater long-term finance is essential, which will require not only better domestic financial regulation and supervision and capital account management but also external support to make capital management tools effective in developing countries.

Such progress will be impossible without more effective financial regulation and supervision in developed countries and global financial centers, even if only to generate timely information for developing countries on assets and liabilities of their citizens abroad and their foreign investors.The revival of multilateral cooperation will be required to regulate volatile private capital flows, mobilise long- instead of short-term international financing, open greater public policy space for investment, and mitigate the scourge of sovereign debt crises. Abridged and edited.—Coutesy: South Centre

The writer is a Senior Advisor on Finance and Development, South Centre, Geneva

Published in Dawn, Economic & Business, August 3rd, 2015

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