Two years after the adoption of the Sustainable Development Goals (SDGs) by world leaders in New York, the ongoing practical question is how to finance the needs of such an ambitious and universal agenda.
It has been estimated that if the world’s developing countries are to achieve the targets set out in the global development blueprint, an additional public investment of at least $1.4 trillion per year will be needed. This is admittedly a hefty figure and a significant burden for governments given the still fragile recovery of the global economy. The fundamental question we need to ask ourselves is how we can finance some of the most basic needs for local populations and communities to live healthy and productive lives.
As Asia and the Pacific is home to more than 4.5 billion people, exploiting domestic revenue sources is critical. Relying on the government alone to finance sustainable development needs of the region will not be enough. We need more innovative solutions that draw resources from both public and private sectors. While national governments are expected to shoulder the bulk of the responsibility, evidence has shown that a committed private sector can play a catalytic role in accelerating the attainment of the SDGs.
The Addis Ababa Action Agenda adopted by the international community in 2015 has provided us with the guiding principles for finding the financial resources to implement the 2030 Agenda. This week senior policymakers, including finance ministers and central bank chiefs from across the region are meeting at the United Nations Economic and Social Commission for Asia-Pacific (ESCAP) headquarters in Bangkok to brainstorm a SDGs’ financing action-plan focused on three financing for development (FfD) priorities for the region; namely, domestic resource mobilization, financing sustainable infrastructure, and enhancing financial inclusion.
In terms of domestic resource mobilization, there is now an emerging consensus that an effective tax policy and strategic public spending have the potential to support inclusive and sustainable development. However, the resource mobilization and redistributive potential of tax policies is largely underutilized in Asia-Pacific developing countries. Unlike advanced economies, most developing countries in the region predominantly rely on indirect taxes which have much less redistributive impact. Personal income tax collection in most Asian countries is less than 2 per cent of GDP compared to nearly 9 per cent in developed countries, while property taxes collect less than half a percentage of GDP in poorer countries against around 2 per cent in more well-off nations.
While tax incentives may help in dealing with the issue of the large informal economy and the problem of tax evasion, their use needs to remain cognizant of the specific features and overall development objectives of countries. Moreover excessive tax competition to attract investment and promote trade has affected resource mobilization by developing countries in the region.
For infrastructure, Asia-Pacific financing needs are huge, estimated at close to 10.5 per cent of GDP annually in the least developed countries, landlocked developing countries and small island developing States. Public-private partnerships (PPP) are being encouraged in many countries in the region but there is a need to strengthen government capacities to assess, implement and leverage the right blend of financing for such projects. Moreover, regulatory approaches of governments may need to be revisited to help develop inclusive, resilient and environment friendly infrastructure. Regional cooperation and risk sharing across borders will also be needed if multi-country PPP projects are to happen.
In this respect, development and integration of capital markets and institutional investors’ base has great potential to support private sector infrastructure projects. It is interesting to note that the region is also currently turning to innovative capital market innovations such as green bonds which have grown rapidly, for example in China, amounting to $36 billion of issuance in 2016 and accounting for 39% of global issuance.
Building inclusive finance for all is a critical element of financing for development. Access to financial services reduces poverty, allows people access to opportunities and promotes economic growth.
Unfortunately, the region is home to 55 per cent of the world’s unbanked population, with women more unbanked than men. Small and medium-sized enterprises (SMEs) account for 96 per cent of all enterprises and 62 per cent of the work force, yet receive only 19 per cent of total bank lending in the region.
In such an environment, a regulatory approach tailoring prudential norms to risk profile can enable micro-commercial establishments to offer basic financial services on behalf of banks. It should be noted, however, that while national policy makers are giving increasing recognition to policies that promote financial inclusion, regulators have been more prudent due to the higher credit risk nature of small borrowers. The main issue, therefore, is how to strike the right balance between financial inclusion and financial stability.
Another interesting aspect of financial inclusion is the emerging FinTech companies that are successfully leveraging information technology to enhance financial access. These companies range from mobile money and payments companies such as AliPay in China, to micro lending and credit scoring companies such as Lenddo’s social media based credit scoring algorithm in Singapore. However, the challenge is the need to address cyber risks related to these and for regulatory clarity on their status.
Progress in these three dimensions of financing-for-development priorities are critical to move Asia and the Pacific forward in achieving SDGs. This will enable countries in the region to go a long way in footing the bill for ensuring the future well-being of their people.
*Dr. Shamshad Akhtar is an Under-Secretary-General of the United Nations (UN) and the Executive Secretary of the Economic and Social Commission for Asia and the Pacific (ESCAP).