In this blog series, our experts share their thoughts on key financing for development issues.
At the start of 2016, the U.N. will launch a new set of Sustainable Development Goals, or SDGs, to drive development efforts around the globe. But one question still needs some thought: How will we finance these new goals?
Even more questions lie within this broader question on finance. Which countries need more resources? What types of resources are needed most? Where does international finance, both public and private, currently flow? Where does it not? Answers to all of these require reliable and easy-to-understand data on all international financial flows.
When governments convene in July in Addis Ababa, Ethiopia to agree on a framework for financing the new sustainable development agenda, there will be a key window of opportunity to improve the existing, haphazard approach to data collection and reporting.
In one sense, we already have unprecedented data at our fingertips. Yet, for example, if you were to ask the heads of the U.N., the IMF, and the World Bank how much financing low-income countries receive in a given year and from which sources, you would receive a very different answer from each. This happens for a variety of reasons.
- Defining the pool. First, none use the same definition of “low-income countries.” The World Bank has 34, the IMF has 60, and the U.N. uses a different label entirely (least-developed countries, of which there are currently 48).
- Varying accuracy. Second, when it comes to reporting on international financial flows, the accuracy of the numbers of course depends on the capacity of the country in question to collect and report on them. Poor data can be especially problematic in low-income countries.
- Method of counting. Third, each agency “counts” (or doesn’t) different flows, and counts them in different ways. Different methodologies, definitions, institutional mandates, sources, and overlap make comparisons difficult and confusing. For example, there is no common definition of foreign direct investment (FDI), which is basically the largest source of private foreign finance for developing countries.
The picture is equally difficult when it comes to development aid. There is only one definition of aid (official development assistance or ODA) used by OECD Development Assistance Committee (DAC) members; all other providers are free to define aid as they choose. Meanwhile, finance from non-OECD DAC countries (e.g., Brazil, China, or India) is not tracked or reported on in any systematic way. The term “South-South cooperation” has emerged to describe a heterogeneous mix of aid-like and non-aid like interventions that bundle investment, trade, concessional and non-concessional finance as well as technical assistance under the same label. But there are no standardized definitions or methodologies to count or report on these flows, even where data is available. As the donor landscape expands further in the post-2015 period, these challenges will become all the more accentuated. To further complicate the picture, the World Bank collects external debt data on a loan by loan basis from recipient countries, excluding grants while the IMF collects balance of payments data.
- Evolving sophistication. Finally, financing instruments have become more sophisticated over recent years and there is currently no way, for instance, to count how much money is “leveraged” for development through public-private partnerships and other increasingly common financial instruments—many of which will expand further to support the SDGs. There is an effort ongoing within the OECD to develop a new measure of “Total Official Support for Sustainable Development,” which aims to overcome some of these challenges. This will be useful, but non-DAC providers of official finance—who ultimately did not develop this definition—may or may not choose to report it.
Similarly, data on private aid (e.g., philanthropy) is partial. The International Aid Transparency Initiative (IATI) attempts to make information about public and private aid spending more available and easier to understand. But aid providers like governments and foundations report to IATI on a strictly voluntary basis. Some of this data—which has its own methodology again—also overlaps with that supplied by the OECD.
To take an example, FDI for Afghanistan in 2010 is reported by the World Bank and the IMF to have equaled $75 million; UNCTAD has it at $211 million. In the case of Burkina Faso, the World Bank reports that in 2010 it received $763 million in grants, while the OECD has it at $888 million. This discrepancy can be resolved when you read the “small print.” The first number excludes technical cooperation while the latter includes it. But reading small print should not be necessary and can easily lead to mistakes.
In sum, different definitions, methodologies, sources, and overlap make comparisons extremely difficult.
It’s hard, if not impossible, to get a complete and accurate picture of international financial flows with the current institutional arrangements.
Now, we face the so-called data revolution. We have more opportunities than ever before to collect and produce high-quality data providing the right information on the right things at the right time, and in ways that are accessible to everyone.
To successfully implement the SDGs, we need the right kinds of (international) finance to reach the places where it is needed and at the right time. For this to happen, there is a clear need to harmonize data definitions, methodologies, and sources and to publish data in common, open, and electronic formats. Huge investments are likely to be toward the SDGs over the next 15 years, from a variety of public and private sources, as well as debt and non-debt-creating financial instruments. If we are to ensure that the development process is inclusive and sustainable (and that we do not sow the seeds of future debt crises), the international financial institutions and the U.N. need to act to make sure we can accurately count what international finance is going where.
The Addis Ababa Conference on Financing for Development provides an opportunity to emerge not only with solutions that can help fund the new development agenda, but with a commitment to harmonize data on international financial flows. If anything, this should be an easy agreement to reach in Addis—and to implement shortly thereafter.