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Development financing: Eradicating poverty or private sector promotion?

Posted on 13 July 2019

The following article largely consists of excerpts from a policy brief titled “Development Financing: Serving whose interest?” which can be read here.

Ongoing discussions for the implementation of current sustainable development agenda take place in a context of protracted crisis. Amid slow growth a decade post-2008, rising debt concerns are afoot, and multinational and transnational corporations (TNCs) have growing monopoly power and market concentration.

Growing inequalities is the trend, with millions still subsisting below USD 5.50 a day. Civil society, especially people’s organisations and movements at the forefront of struggles for rights and genuine development, are threatened with repressive state measures on pretexts of domestic security goals. Faced with such a landscape, the implementation of the current development agenda–especially the questions of financing –deserve closer inspection.

Financing for development: From public to private sources

Domestic public finance mainly refers to fiscal policy concerns, such as sources of revenue-generation through taxation, and spending. Issues in raising tax revenue include the various tax avoidance practices of TNCs (e.g., the use of offshore centres, transfer mispricing); the prevalence of indirect taxes and regressive taxation; the decline of tariffs and corporate taxes due to the history of blanket trade and investment liberalisation. Domestic tax revenues remain low especially for poor countries: they are at an average of 14% of the GDP in low-income and least developed countries, below the “recommended minimum” of 15% for“effective state functioning,” according to a December 2018 OECD report.

International public finance sources include official development assistance (ODA), or what is also called external development finance. Historical commitments of developed countries, included in the sustainable development goals, are ODA allocations worth 0.7% of their Gross National Income (GNI) to developing countries, and 0.15% to 0.2% of their GNI as ODA to least developed countries.

Domestic and international private finance, meanwhile, includes domestic businesses such as micro, small and medium enterprises (MSMEs), foreign direct investment, private investment in financing infrastructure (e.g., from pension funds, insurance companies), other private flows (e.g., portfolio investments), and, in development policy conversations, also include migrants’ remittances.

Developing economies: Sources of external financing, 2009-2018

Source: UN Conference on Trade and Development. 2019. World Investment Report.

Enter the private sector

In contrast to stagnation for official development assistance (ODA) ( see Figure above ), the picture is rosier for the private sector. Amid the persisting influence of neoliberal policy norms, private sector involvement in the current public development agenda is growing.

The term “private sector” refers to a range of actors, but could be delimited to those nongovernmental but profit-oriented entities. This includes classifications such as big businesses vis-a-vis MSMEs and different actors comprising the informal economy; and according to nationality, as MNCs and TNCs and domestic businesses. Today, TNCs feature in conversations of inequality, given a trend of soaring incomes of the top 2000 TNCs while labour incomes decline.

Private sector involvement in the public development agenda comes in various forms today. They could be targets of governments’ investment incentives and greater drive for more open “business climates” and capital markets, towards generating more foreign direct investment and