Covid-19 has very been expensive in terms of budgets as well as lives. Rich countries have rightly ramped up their budgetary spending – and budget deficits – to keep their populations afloat and to spur a post-pandemic recovery. They have been aided in doing so by historically low interest rates on public debt. Yet developing countries can’t do the same as their richer counterparts, since poorer countries lack access to low-cost funds. The pandemic is therefore hitting the developing countries much harder than the richer ones, exacerbating inequalities, and leaving the developing world even further away from achieving the Sustainable Development Goals (SDGs).
Climate change is only deepening the crisis of the developing countries. The rich countries are pressing the developing world to step up their pace of energy decarbonization, which is certainly justified given the climate emergency. Yet the rich countries are failing miserably to provide the long-promised 100 billion dollars per year in climate financing to the developing countries to help them make those energy sector transformations. At the same time, the multiplying scale of climate-related disasters, including droughts, floods, heatwaves, forest fires, hurricanes, and more is wreaking havoc across the globe.
According to International Monetary Fund (IMF) data from July 2021, the advanced economies (advanced in income, not in honoring commitments!), with a total population of about 1.1 billion people, have spent about 17 trillion dollars in Covid-related outlays. That compares with some 4 trillion spent by the emerging economies, which have a total population of approximately 4.8 billion people, and with about 2 trillion dollars in Covid spending by the low-income developing countries (LIDCs), with their population of 1.5 billion people. Rich countries have spent more since July, of course, and are already planning the next round of spending.
UNSUSTAINABLE FINANCING. Achieving the SDGs and mitigating climate change are big ticket items, and developing countries will need to urgently ramp up their investment spending to accelerate progress. To some extent, developing countries will be able to raise domestic tax revenues to pay for part of the increased investment spending, especially if global tax reforms help all countries to cut down on tax evasion. Yet even with a rise in domestic taxes, developing countries will also have to borrow to finance new investment outlays.
The international bond markets, however, will not provide the needed sdg financing on adequate terms. While borrowing costs are currently very low for the high-income countries, they are very high for the developing world. If developing countries take on more debt with high coupon rates, they are likely to face fiscal crises down the road.
Again, a few quick numbers are helpful here. The US government is paying about 1.2% on ten-year debt. Germany is paying -0.5%, since investors have high confidence both in German fiscal policy and in the euro. By contrast, Brazil must pay around 10%, South Africa around 9%, Mexico around 6%, and India around 6%. And these are countries that can borrow. Dozens more developing countries have no access to the bond markets whatsoever. Their sovereign debts are already rated as “junk bonds”.
With such high borrowing costs facing the developing countries, there is no way to finance the incremental investments needed to achieve the SDGs with private-sector lending.
We will therefore need a breakthrough in official development financing. The rich countries need to help the poor countries to access financing on favorable terms similar to those currently paid by the rich world. The most effective means to do this will be to increase the lending capacity of the multilateral development banks (MDBs), which include the World Bank and the regional development banks (such as the African Development Bank and the Asian Development Bank).
SUSTAINABLE DEVELOPMENT GOAL 17 WAS CLEAR. When the SDGs were adopted in 2015, it was already known that much more official financing would be necessary. Covid-19 has simply made the case even more urgent. SDG17 explicitly recognizes the need to mobilize increased financing for the developing countries, using several tools (including domestic tax collection, official development assistance, other additional resources, and debt relief). The first four targets of SDG17 are as follows:
• Strengthen domestic resource mobilization, including through international support to developing countries to improve domestic capacity for tax and other revenue collection.
• Developed countries to implement fully their official development assistance commitments, including the commitment by many developed countries to achieve the target of 0.7% of official development assistance/gross national income (oda/gni) to developing countries and 0.15 to 0.20% of oda/gni to least developed countries; oda providers are encouraged to consider setting a target to provide at least 0.20% of oda/gni to least developed countries.
• Mobilize additional financial resources for developing countries from multiple sources.
• Assist developing countries in attaining long-term debt sustainability through coordinated policies aimed at fostering debt financing, debt relief and debt restructuring, as appropriate, and address the external debt of highly indebted poor countries to reduce debt distress.
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Even before the pandemic, the financing to meet the needs of the developing countries had not been mobilized. In a 2019 note on financing gaps to achieve the SDGs, the IMF, together with the un Sustainable Development Solutions Network (SDSN), demonstrated that the incremental financial costs of achieving the sdgs in 57 low-income developing countries exceeded their potential public revenues even after assuming a significant rise in their tax/gdp ratios.
The IMF estimated that the LIDCs would have to increase their sdg outlays by roughly 12% of gdp to achieve the 2030 targets. This incremental spending was beyond the means of these countries, leading to a financing gap on the order of $300 to $500 billion per year. The financing gap in this IMF paper was based only on five sectors: health, education, roads, water/sanitation, and electrification. Including other SDG sectors would certainly increase the estimated financing gap.
The Covid-19 pandemic has also further increased the SDG financing gap. Given the severe economic setbacks caused by the lockdowns and the two-year delay in implementing sdg investments, the IMF estimates that the incremental spending needs now facing LIDCs are roughly 14% of gdp each year to 2030 – roughly 21% more than estimated in 2019.2 Part of the increased outlays should come from domestic taxes; the rest will have to come from increased official financing and debt relief.
RAISING TAX REVENUES IN DEVELOPING COUNTRIES. Most countries in the world, with the exception of the high-tax countries of Europe, will have to raise tax revenues as a share of gdp in order to achieve the sdgs. Higher tax revenues are needed for four purposes: public investments in physical infrastructure; public investments in human capital (notably nutrition, health, and education); public investments in r&d and technology transfer; and public investments in income redistribution.
The Nordic countries – the closest to achieving the SDGs – already collect government revenues on the order of 50% of gdp. The US – far behind in sdg achievement – collects only 30% of gdp in government revenues (though the Biden administration is trying to push that percentage up).
The developing countries, however, collect far less. Specifically, the LIDCs collect only around 17.5% of gdp, and the emerging economies collect only 20.5% of gdp. As the IMF notes, these countries should be able to increase their domestic government revenues on the order of 3-7% of gdp through comprehensive administrative and policy reforms.
Yet much of the work of raising government revenues will require international tax cooperation. The rich countries, led by the US, UK, Netherlands, Switzerland, Ireland, Luxembourg, and some others, have created a plethora of tax havens in their own national tax jurisdictions, as well as in the Caribbean, the North Sea, and other places popularly dubbed “Treasure Islands”. These offshore tax havens are not the result of renegade small island states evading the will of the powerful countries, but of highly paid tax lawyers in New York City and London and lobbyists in Washington and some European capitals who have conspired to create a truly global scam: hundreds of billions of dollars of corporate profits are shifted each year from the tax coffers of rich countries to tax havens.
Several global tax reforms could significantly increase the government revenues of developing countries and the global minimum tax on multinationals is a step in this direction. Another positive development would be for the G20 to collect and share a worldwide wealth tax on the world’s super-rich. According to an April 2021 compilation by Forbes Magazine, there are currently 2,755 billionaires worldwide, with a combined net worth of $13.1 trillion. A 2% wealth tax would therefore raise as much as $260 billion per year on fewer than 3,000 taxpayers! The Group of Twenty countries could also agree on the long-discussed financial transactions tax that could raise tens of billions of dollars per year to be directed to the SDGs.
INCREASED LENDING BY MULTILATERAL DEVELOPMENT BANKS. Another way to increase sdg financing is through the mdbs. Currently, the mdbs lend slightly more than $100 billion per year to developing countries, roughly half of which is from the World Bank and the rest from the regional development banks. There is a powerful – indeed, urgent – case for a major scaling-up of mdb lending in the coming decade, perhaps roughly tripling the annual lending to around $300 billion per year to cover about half of the sdg financing gap of the LIDCs.
There are powerful reasons to scale up MDB lending in support of the SDGs. The mdbs borrow on highly favorable market terms (generally aaa or thereabouts) based on the creditworthiness of their leading shareholders, which are mainly the high-income countries. The mdbs therefore have the possibility to borrow at long maturities and at low interest rates, which the banks can then pass along to lidc recipient countries. Moreover, the mdbs, by their very design and purpose, are equipped to handle complex lending for sdg-related infrastructure projects that simultaneously address economic, social, and environmental considerations.
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The MDBs also leverage the development aid given by the high-income countries. For example, if the US Congress votes $1 of new paid-in capital for the World Bank, that dollar can leverage an additional five dollars of loans by the World Bank, since the World Bank will use the $1 of capital to borrow $5 from the bond market on highly favorable terms. Then, as noted above, the World Bank will be able to on-lend the $5 on highly favorable terms as well, that is, with long maturities and low, fixed interest rates.
In fact, the World Bank’s own lending can often generate additional co-financing from private investors, also on favorable terms. Therefore, the original $1 in paid-in capital could result in as much as $10 of new sdg-related lending on favorable terms, half from the World Bank and half from co-financing of private investors.
G20 PLUS ONE. As mentioned above, in the fourth target of SDG17, the G20 should also use debt relief and debt restructuring to help finance the sdgs, building on the success of the Highly Indebted Poor Country (HIPC) Initiative that supported the Millennium Development Goals. At the start of the pandemic, the G20 adopted the Debt Service Suspension Initiative (DSSI) for low-income countries (specifically those eligible for International Development Association support), which was a very small step in the needed direction. The DSSI provided initially for a one-year suspension of debt servicing to bilateral creditors during 2020. The deadline was twice extended by six months to cover the period until the end of 2021. As the dssi offers temporary relief only for low-income countries vis-à-vis bilateral creditors, it is of small benefit, resulting in short-term relief of approximately $5.7 billion of debt servicing during 2020.
There will have to be much greater debt relief following the pandemic. A plausible approach will be to negotiate “Debt for SDG Swaps”, by which the creditors agree to convert the debt service coming due into new low-interest loans to achieve the Sustainable Development Goals.
Official development finance was at the center of the G20 agenda when the group gathered in Rome. Now the group should invite the African Union to become the twenty-first member, adding the representation of 54 countries and 1.4 billion people to the table. The presence of the au would help to ensure that the needs of the world’s low-income nations are properly represented and considered at crucial deliberations.
In any decision-making setting, leaders should make every effort to ensure that finance works for the poor countries as well as the rich ones. That, after all, is the core promise of the sdgs: to leave no one behind. In the age of Covid, and with instability and suffering throughout the world, the common good must be our guiding purpose.
*This article draws from the author’s essay in the 2021 Sustainable Development
Report, “Increasing the fiscal space of developing countries to achieve
the SDGs” and has been published in Aspenia 93-94.