Service on Finance and Development (Mar20/01)
macroeconomic strategy needed to achieve SDGs
Geneva, 25 Feb (Kanaga Raja) -- Achieving sustainable development is only possible through a coordinated expansionary macroeconomic strategy that revives global growth, strengthens industrialization in the South and reduces carbon emissions, inequalities and instability.
This is one of the main arguments put forward by the UN Conference on Trade and Development (UNCTAD) in a Secretariat Note prepared for the fourth session this week of the Multi-Year Expert Meeting on Enhancing the Enabling Economic Environment at All Levels in Support of Inclusive and Sustainable Development, and the Promotion of Economic Integration and Cooperation.
According to UNCTAD, with roughly a decade left to achieve the 2030 Agenda for Sustainable Development, efforts to meet the Sustainable Development Goals (SDGs) are behind schedule.
What is required to put it back on track is a coordinated investment push - on an unprecedented scale - across the world, said UNCTAD.
It pointed out that closing the Sustainable Development Goal financing gap will require, at a minimum, an additional $2 trillion to $3 trillion a year in developing countries alone.
The Trade and Development Report 2019 shows - for a sample of 30 developing countries across all income categories - that with weak multilateral support, developing countries would see their debt-to-gross domestic product (GDP) ratios rise to 185 per cent on average by 2030; or they would require average annual GDP growth rates of 12 per cent to meet the investment needs of only the first four Sustainable Development Goals (eliminate poverty, achieve better nutrition, promote good health, ensure quality education).
On average, low-income developing countries need additional annual resources equivalent to 21.6 per cent of GDP.
This figure falls to 9.6 per cent and 3.3 per cent of GDP for lower-middle-income countries and upper-middle- income countries, respectively.
Mobilizing domestic resources for productive investment is a long-standing challenge for many developing countries, and hopes of funding the Sustainable Development Goals from the proceeds of economic growth alone seems wishful thinking, given that the global economy has been unable to establish a robust, stable growth path since the 2008 financial crisis, said UNCTAD.
Weak demand, rising debt and volatile capital flows have left many economies oscillating between incipient recoveries and financial instability.
Austerity measures and a widespread corporate "rentierism" have pushed inequality higher, dragging down growth and damaging the social and political fabric.
"Financialization has dominated the global economy; yet the promise that it would generate a dynamic investment climate has not materialized," said the Secretariat Note.
In response to these challenges, market-oriented solutions, such as blended finance or public-private partnerships have been promoted, particularly since the 2008 financial crisis, by various think tanks and international agencies.
To date, however, these have failed to push economies in a more financially, socially and environmentally sustainable direction.
"Indeed, as emphasized in previous UNCTAD publications, efforts to finance the Sustainable Development Goals by blending public and private sources have routinely failed to boost productive investment. Moreover, they were instrumental in the boom-bust cycle that fuelled the 2008 financial crisis."
For the 2030 Agenda to move from rhetoric to results, a new multilateralism is needed on a different financial footing, UNCTAD emphasized.
"Such a process should start with a serious discussion of public financing options. This would be part of a wider effort to repair the social contract through which inclusive, sustainable outcomes can emerge and from which private finance can be engaged on more socially productive terms," it said.
SCALING UP PUBLIC INVESTMENT AND CROWDING IN PRIVATE INVESTMENT
According to UNCTAD, making finance work for development has been a challenge for many international agencies, researchers and other stakeholders in the development business.
It noted that the last four editions of the UNCTAD Trade and Development Report (TDR) had called for a paradigm shift for effective long-term mobilization of development finance.
According to the TDR, what is needed is a new global financial order that would boost infrastructure investment in the context of structural transformation.
The new order would also provide countries with an alternate perspective on how to plan, execute and coordinate those investments to build their industrial capacities.
The UNCTAD Secretariat Note pointed out that four global trends are hindering achievement of the Sustainable Development Goals: the fall of labour's share of global income, the erosion of public spending, the weakening of productive investment and the unsustainable increase of atmospheric carbon dioxide.
The increasing stock of atmospheric carbon dioxide, which is responsible for global warming, harbours the threat of serious socioeconomic damage across the planet and to life itself.
The rise of temperatures must be stopped and reversed soon if it is not to become self-sustaining, said UNCTAD.
This is only possible through decarbonization. Investing in renewable energy needs to be pursued on a global scale and to be supported by a green industrial policy using a mix of general and targeted subsidies, equity investments, tax incentives, loans and guarantees.
It should also be supported by investments in research, development and technology adaptation and a new generation of intellectual property and licensing rules, it added.
"Technological solutions abound but their adoption on a large scale is at odds with other global trends."
UNCTAD also said that although operating on a different time horizon, one of the most alarming global trends is the falling share of labour income.
Since the 1980s, the share of national income accruing to labour has decreased in almost every country. This shift has generally been larger in developed countries; in some countries, 10 per cent or more of GDP has transferred from workers to capital, including in Australia, Italy and Japan.
"The trend has been visible in developing countries as well, highlighting a global race to the bottom in labour costs," said UNCTAD.
The proximate cause of the latter is wage repression, which has prevented wages from keeping pace with the cost of living and increases in productivity.
Other, more fundamental factors have included the erosion of social security, growing market concentration, decreasing unionization rates and the spread of outsourcing through global value chains, all of which have eroded labour's bargaining power.
As a result, a growing share of household spending has been financed with borrowing, said UNCTAD.
Overall, household consumption and business investment have slowed, undermining aggregate demand, with negative consequences on productivity growth.
By fuelling demand for goods and services, including those produced or provided by government employees, government spending contributes to aggregate demand as much as, or more than, private investment.
Fiscal policy determines the level of government spending. In most countries, fiscal policy has been flat or contracting for several decades. Exceptions occurred during the shallow recession in the United States in the early 2000s and during the global financial crisis.
Following the Great Recession, several countries adopted fiscal stimulus packages, only to tighten sharply in 2010.
The subsequent fiscal contraction, in the form of spending cuts and increases in value added taxes, aimed to reduce government debt relative to GDP.
In most countries, the cuts affected social protection systems and public investment. This further exacerbated inequalities, heightened insecurity and diminished prospects for future growth.
Declining public investment in developing countries in the 1980s and 1990s can be linked to the adoption of fiscal adjustment policies. These, in turn, were a response to the rash of debt crises, triggered in large part by monetary policy decisions taken in advanced economies and ensuing structural adjustment programmes.
The upshot is that today, the world is under-investing and consequently, is creating a cumulative infrastructure gap, though the exact order of magnitude is unclear, said UNCTAD.
In developed countries, public investment, a proxy for infrastructure investment, was at a historic low in 2015, at 3.4 per cent of GDP, compared with 4.7 per cent in 1980 and about 6 per cent in the 1960s.
In emerging economies other than China, it fell from above 8 per cent of GDP in the early 1980s to about 5 per cent in 2000, recovering to 5.7 per cent in 2008 and declining thereafter. The outlier was China, which enjoyed impressive rates of public investment to GDP of 15-20 per cent and associated high rates of output growth for several decades.
These declining trends in aggregate demand brought increased reliance on credit for total spending, including private investment, consumption and government spending. Such reliance is not necessarily negative, if credit is used productively.
However, since at least the 1980s, credit expansion in many countries has surged without a corresponding accumulation of fixed capital. This sometimes occurs for long periods, before contracting in a credit crunch.
In periods of expansion, credit has been used to finance speculative activities by financial and non-financial corporations, as well as by households to maintain living standards in the face of stagnant real wage growth.
This decoupling of credit and investment is a concern for most developed and developing countries, said UNCTAD.
It affects productive investment in two major ways. First, due to funding financial operations with credit, non- financial corporations turned away from productive investment because of its long maturity, low liquidity and often lower yields.
Simultaneously, credit-fuelled accumulation of large financial liabilities produced financial crises and recessions that inhibited productive investment.
Overall, productive investment has not increased, despite repeated bouts of credit expansion, increases of corporate profit shares and corporate tax cuts, in developed and emerging economies alike.
According to the Secretariat Note, infrastructure investment, with its lower yields and longer maturities, has been particularly affected by weaker investment trends. This has had negative impacts on industrialization in developing countries and on productivity growth everywhere due to its central role in transforming economies.
Recently, there has been a revival of interest in infrastructure investment. This is in part due to a growing belief that such spending can have positive short- and long-term impacts on growth, and thus, a role in tackling secular stagnation.
It also reflects recognition of the importance played by large infrastructure projects in the remarkable growth and poverty-reduction story that has unfolded in China and an awareness of the urgent need to decarbonize economies through green investments.
Multilateral financial institutions, including institutions from the South, such as the Asian Infrastructure Investment Bank and the New Development Bank, are scaling support for infrastructure investment in developing countries.
There are also several international initiatives, such as the Belt and Road Initiative (China) and Marshall Plan with Africa (Germany), that put infrastructure investments at their centre.
International institutional investors seem increasingly keen on infrastructure as an asset class, because of the prospect of steady returns.
This reflects the broad understanding that infrastructure projects, particularly the capital intensive ones, such as highways, airports, harbours, utility distribution systems, railways, water and sewer systems and telecommunication systems, have exhibited scale and network effects that spill over to the private sector and engage both the public and private sectors in a variety of complicated financial, economic and political interactions.
With respect to infrastructure, the conventional financing gap narrative rests on several assumptions, said UNCTAD.
First, the estimated infrastructure investment gaps imply a financing gap of a similar order of magnitude. Second, public sectors in most countries are financially constrained, face governance problems and run the risk of running into debt-sustainability issues if they undertake infrastructure investments on the scale needed to reach the Sustainable Development Goals. Third, given this public resource constraint, private capital, which is typically invested in short-term financial assets, should be unlocked for infrastructure projects. Fourth, for this to occur, a pipeline of bankable projects needs to be developed.
Numerous factors are said to restrict the delivery of bankable projects. These include low preparation capacity, high transaction costs, lack of liquid financial instruments, weak regulatory frameworks and legal opposition, along with various types of risks during the life cycle of a project, including macroeconomic, political, technical and environmental risks; cost over-runs; and demand and revenue risks.
This narrative has serious limitations, said UNCTAD. The first concerns the expected scale and role of private sector engagement in infrastructure development.
Throughout history, domestic public financing for infrastructure development has been dominant. Experience suggests that such public sector dominance will continue even if private finance grows in the years ahead.
In places where private finance does exist, it comes together with public funding. In Africa, domestic public finance accounts for 66 per cent of total infrastructure finance. In Latin America, when private financing of infrastructure occurs, public finance still accounts for a third of total project funding.
The rapid recovery of overall infrastructure investment will depend on Governments' capacities to carry out their leadership roles in planning and implementing new infrastructure projects. To do so, Governments should reclaim their policy and fiscal space and boost aggregate demand, said UNCTAD.
They should assume a leading role in a coordinated investment push by investing directly (through public sector entities) and establishing the conditions for productive investment by the private sector. Governments should address inclusiveness and sustainability challenges by redistributing income in ways that bolster growth and by directly targeting social outcomes through employment measures, decent work programmes and expanded social insurance.
A range of policy instruments are required. These include fiscal policies, industrial policies, credit policies, financial regulation and welfare policies, and international trade and investment policies.
Their effectiveness demands appropriate international coordination to counteract the disruptive influence of capital mobility, contain current account imbalances, and support the transition to a low-carbon economy, especially in developing countries, said UNCTAD.
It also said that reaching sustainable development requires financial regulators, including central banks and financial market authorities, to curb destabilizing financial trades and return finance to its socially useful function of funding productive investment.
The implementation challenge to this productivist approach to finance is the need for complementary policies on many fronts, including international capital controls, exchange-rate management, subjecting bank mergers to financial stability tests and establishing international protocols to resolve sovereign debt crises so as to avoid predatory financial behaviour.
MECHANISMS TO FACILITATE RESOURCE MOBILIZATION
According to the Secretariat Note, financial institutions and mechanisms have a direct role to play in creating and allocating credit.
UNCTAD, however, noted that the financial system has in recent years morphed into a system that favours speculation rather than productive activities. It has proved reluctant to invest, especially in the kinds of activities needed to achieve the Sustainable Development Goals.
It said that notwithstanding the particularities of currently existing institutions, two main financing needs must be met:
(a) Ensuring adequate and reliable sources of patient, long-term finance, which continues to be scarce, despite a deluge of short-term finance. This means not only scaling up significantly but in a robust and sustainable way, respecting the developmental mandate for finance;
(b) Making sure that finance has breadth, both geographical - especially to under-served areas in Africa - and sectoral - in particular to under-served activities such as water - extending to under-served communities as well (for example, small enterprises and cooperatives).
According to UNCTAD, public banking has the ability to meet these requirements, as reflected in the renaissance of interest in this long-standing but somewhat neglected area. Banks can mobilize resources by virtue of their capacity to create credit, although this depends on maintaining credibility and viability.
However, there is no need to wait until sufficient savings have been accumulated before investments can be made. Banks can offer further benefits of scale and reach because of their modus operandi of forming partnerships with other investors and financiers.
And public banks are distinctly different from private banks because they can include social and developmental objectives, as well as financial ones - or they should.
"As the financial needs of the Sustainable Development Goals and the Global Green New Deal are more in the nature of a marathon than a sprint, only public banking has the capacity to create the diversified portfolios, spread over a broad geographical range, that can reach the under-served areas and segments of the economy," said UNCTAD.
In principle, they also have the capacity to take the long-term view, another sharp distinction, as compared with private banks.
Taken together, public banks and bank-like institutions are already pulling above their weight when it comes to financing the Sustainable Development Goals.
Estimates of their number and size vary but most agree that public banking accounts for about one fourth of the total banking universe and a higher proportion in developing countries.
Yet, they support a much higher proportion of Sustainable Development Goal-type investments than that. Of the $454 billion estimated to be invested in climate finance in 2016, the public sector contributed almost half.
Alongside central banks, public development banks are the engine room providing the heavy lifting required for a big investment push.
Many are already doing a great deal, especially in developing countries, where new Southern-led and Southern- oriented banks have been established at a phenomenal rate and long-standing ones, significantly expanded.
Southern development banks now lend as much as the Bretton Woods institutions in some cases, and under much more flexible conditions.
According to UNCTAD, for all banks to better play their role, a well-articulated system is needed that links central banks, development banks and governments' development plans with industrial policy, social support systems and the broader social justice framework that ensures a more equitable path on which none are left behind.
To be effective, banks need to have sufficiently large initial capitalization from government and reliable and stable sources over time.
Virtually all public banks use this capitalization to borrow more funds on international capital markets, so they can on-lend them to other borrowers, and the extent to which they are reliant on these international markets determines crucially the extent to which they can afford to make more social and developmentally oriented choices when they lend.
The Secretariat Note said that it is a concern that "one of the main means promoted for banks to scale up is through securitisation approaches, as a way to bring private investors into financing development."
Recalling the role securitisation played in the junk mortgages that led to the financial crisis just one decade ago, it is a concern the debate is not about weighing the various risks involved in different forms of securitisation but rather how more complex forms of securitisation can attract private investors to developing countries, said UNCTAD.
It also noted that current mechanisms and institutions that can mobilize resources are unevenly distributed. Even with the rise of Southern-led finance, poorer countries and regions remain unserved.
The uneven allocation of public banks and public funds has important implications for social inclusiveness, as well as for long-term investment, it said.
The Secretariat Note also highlighted some problems related to micro-finance. It said the provision of finance for under-served communities and activities is not new but the needs are now greater.
At one time, it was thought that micro-credit could be a solution - lending either at the level of households or to micro-enterprises and thereby helping the poor to establish their own income-generating activities.
From small beginnings in the mid-1980s, micro-finance became one of the most popular poverty-reduction policies, being highly praised as a way to both lift people out of poverty and generate sufficient returns as to be self-financing.
However, said UNCTAD, these laudable beginnings swiftly became co-opted as the micro-finance industry became mainstreamed by the financial services industry and increasingly associated with excessively high interest rates, high profits for the lender and a kind of debt bondage for the borrowers.
The scale of loans was so small that few if any borrowers ever got beyond being small traders, burdened by rising debts. And its focus on individual entrepreneurs meant that borrowers were rarely, if ever, incorporated into any significant step-change in terms of productive capacities or even incipient manufacturing, let alone a path towards industrialization.
Rather than being helped, the global poor became trapped at the bottom of the new world of globalized financialization, said UNCTAD. +