As leaders gather for the Financing for Development conference in Addis Ababa, we look at how private investment is key to sustainable development in Asia
As the world’s economic growth engine, Asia is uniquely placed to provide a blueprint for ending poverty and realising sustainable development. The challenge is not where to find resources to achieve these goals, but rather how to unlock the resources already available.
Private sources of development financing should be central to this effort. Private investments dwarf the $26bn of official development assistance delivered annually to the region’s developing countries. Remittances total $205bn, private savings $6tn and insurance premiums $1tn. Asian pension and sovereign wealth funds alone are valued at over $3.5tn.
As world leaders gather in Addis Ababa from July 13-16 for the third international conference on Financing for Development, there is consensus that while domestic government resources will remain the most important source of development finance, these resources alone are insufficient.
How can private sources of finance tackle climate change, eliminate rather than just reduce poverty, and decrease inequality? Businesses and financial markets can affect the sustainability of development gains in both positive and negative ways. The potential to contribute positively is there, if two market failures are addressed.
First, businesses remain largely unconvinced about investing in developing countries in ways that have a long-term development impact; and second, far too many private funds are invested in richer countries with stronger financial markets, not in the disadvantaged destinations that need them the most. We need to rethink financing for development to attract new partners and to entice private investment to developing countries.
Over the last two decades the private sector has become a more active development partner. Improvements in financial inclusion, led by private sector-led microfinance schemes and mobile banking, and a global wave of public-private partnerships to build infrastructure are but two examples. But these are just a teaser of the potential benefits of private sector involvement in development.
Closing the trade gap – estimated at $1.1 tn – is one avenue. Asia accounts for 60% of global trade, yet trade finance is limited to just 10% of firms. New approaches, such as microtrade programmes, modelled on microfinance, could allow more small- and medium-sized businesses to share the benefits of global trade.
On a larger scale, we need to shift our focus to outcomes from private sector support – not just inputs. Social impact bonds, for example, help governments address one of their biggest challenges – finding the resources to deliver quality public services – by getting private investors to fund them. These bonds encourage investors to provide working capital to a service provider. In return, investors receive a return over time, dependent on the actual services delivered. This arrangement makes service providers more innovative and cost effective, while lifting funding pressures from governments. In India, this kind of financial product has been used to help get girls into school. Part of the post-Addis agenda should explore how these ideas can be scaled up.
Private investors also need more incentive to bring their money back to the region. Currently, over 80% of global assets – $70 tn – are invested in rich countries. Nowhere is this more evident than in Asia, where newly created wealth is diverted to the safe haven of US treasury bonds rather than invested locally.
The underdevelopment of financial and capital markets in Asia deprives the region of badly needed investment. But the prospect of quick financial outflows from footloose foreign investors has deterred many countries from expanding their financial markets.
Countries like South Korea and Malaysia demonstrate how efforts to deepen domestic financial markets can help finance industrial development and stabilise the financial system. This has been pioneered by the evolution of local currency bonds, which help protect financial systems from currency fluctuations.
The payoff is not just better financial stability – but more robust and competitive domestic businesses. Take a roadbuilding firm in the Philippines. Without access to long-term capital, it might risk losing contracts to foreign firms with access to deep capital markets. But if the Philippine firm can tap the local bond market, it can be more competitive, create more jobs, and generate real returns for investors in the Philippines.
Local bond markets, however, do not develop by themselves. Persuading local corporations to issue bonds, while improving market efficiency and transparency, won’t happen without government intervention. We need to step up support to improve local financial regulations, and work with both firms and investors to make sure the benefits of local bond issuances are better understood.
Development banks recognise they need to do more to catalyse private sector investment. Late last year, the world’s leading development banks made a joint commitment on financing the sustainable development goals. The sheer scope of the development challenges encompassed by these goals makes private financing more important than ever.
Asia remains home to more than 60% of the world’s extreme poor, who deserve to share in its rising prosperity. With a new deal on development financing, it can be done.
Source: The Guardian