Okonjo-Iweala: Who will pay for Africa’s development?

Okonjo-Iweala: Who will pay for Africa’s development?
  • PublishedOctober 14, 2015

A recent UN Report on the just concluded MDGs shows significant progress in the key areas of focus: the number of people living in extreme poverty in developing countries has declined by more than half, falling from 1.9 billion in 1990 to 836 million in 2015; the number of out-of-school children of primary school age worldwide has also fallen by nearly half, to an estimated 57 million in 2015 from 100 million in 2000; and many more girls are now in school. Maternal and child mortality has fallen drastically, by about 50% since 1990; the war on HIV/AIDS, malaria, tuberculosis, and other infectious diseases is being won, amongst others.

These successes notwithstanding, there are still significant gaps within the global development space. Hundreds of millions of people across the globe still live in extreme poverty and suffer malnutrition, gender inequality still persists, while global emissions of carbon dioxide have increased by over 50% since 1990.

Now to bridge these gaps, we have the new Sustainable Development Goals, which become applicable in January 2016.

With 17 proposed goals and 169 targets, the SDGs, which are the product of a process that has been described as the “largest consultation programme in the UN’s history”, are far more comprehensive than the MDGs were. The SDGs will serve as a focal point for governments to hinge their policies to end poverty and hunger, ensure access to affordable and sustainable energy for all, build resilient infrastructure, combat climate change and its impact, and promote rule of law and equal access to justice for all, amongst others.

In Africa, the quest for “home-grown” solutions to the continent’s challenges has also spurred a lot of work in articulating a post-2015 development agenda which builds on the past achievements and challenges (of the MDGs) and takes into account the continental and global context.

Under the leadership of the African Union (AU) for example, the seven aspirational goals of Agenda 2063 – “for the Africa we want in the next fifty years” – according to the Assembly of the AU, and the six pillars of the Common African Position on the Post-2015 Development Agenda are expected to provide a solid foundation for the soon-to-be-unveiled African Development Goals (ADGs) which are expected be in sync with the SDGs, and implemented pari passu.

The debate on financing the SDGs

The question now is, “How will countries finance the SDGs?” In the case of the MDGs, the goals were first drawn up largely within the UN system, and the debate and work on financing them came afterwards. Many may argue that this approach constrained the MDGs’ major sources of funding to Official Development Assistance (ODA). ODA from developed countries saw an increase of 66% in real terms from 2000 to 2014, reaching $135.2 billion annually, according to the UN.

In contrast, the debate and work on financing the SDGs have been taking place in parallel with the development of the SDG goals and targets themselves. Actually, “strengthening the means of implementation (i.e. financing) and revitalising global partnerships…” is one of the seventeen goals.

So this ongoing debate on financing augurs well for the implementation of the SDGs, particularly in the sense of how to bring the financing of poverty eradication together with the financing of climate change mitigation and adaptation. According to the World Bank, extreme weather events resulted in losses of just over $3 trillion globally between 1980 and 2012, placing several communities at risk of poverty. Nearly 50% of all emergency multilateral food assistance to Africa is due to natural disasters, mainly drought, according to African Risk Capacity (ARC).

Therefore to prevent the reversal of decades of work towards ending poverty, climate change must be given due consideration. “We do not need to choose one or another”, according to the New Climate Economy Report of the Global Commission on the Economy and Climate (GCEC). Both can and must be solved together. But what really brings poverty eradication and climate change together is the cross-cutting importance of infrastructure. Better water, health, agriculture, education, and energy infrastructure will make a huge difference to poverty eradication.

At the same time, alternative energy sources and a low carbon infrastructure development pathway will make a huge difference to the pace and impact of climate change.  Thus, bringing solutions to poverty eradication and the maintenance of a 2oC limit to global warming by the end of the century can be made possible through the right kind of infrastructure investments.

The cost of attaining the SDGs’ infrastructure targets by 2030 is estimated by the GCEC at about $90 trillion but when we integrate climate risk into these investments by choosing a low carbon and climate resilient path, we need an additional $4 trillion in investment, according to the GCEC. Thus for an incremental 5% in additional cost we can bring solutions to our objectives of climate resilience and poverty eradication.

Mobilising finance resources

The financial resources required to achieve the SDGs are certainly enormous, as studies by the World Bank Group and other Multilateral Development Banks (MDBs) and the GCEC have shown. Infrastructure investment – which accounts for about 80% of the total financing of the SDGs – will require over $6 trillion per year (totalling $90 trillion over 15 years) but current global spending is estimated at around $1.7 trillion. So there is already a huge funding gap, much of which will be borne in emerging and developing countries since they account for about 60% of the global infrastructure needs. 

Assuming that savings, foreign direct investment and official development assistance stay at their 2014 level, the African Union Commission and the Economic Commission for Africa (AUC-ECA) estimate that the additional financial resources required to reduce poverty in Africa by half, range from $48 billion (to halve poverty by 2030, with inequality remaining constant) and $246 billion (to halve poverty and inequality simultaneously) per year between 2015 and 2030. Therefore, there needs to be a paradigm shift in how development is financed. Annual ODA of about $135 billion is too meagre and erratic in nature, even though it remains an important source of funding for low-income countries. However, domestic resource mobilisation (DRM) is the key source of funding development. DRM of emerging and developing economies amounted to $7.7 trillion in 2012, which means that developing countries now receive over $6 trillion more each year than in 2000, according to the World Bank 2013 report on Financing for Development Post-2015.

As a result, between 50 and 80% of infrastructure financing under the SDGs is expected to be from countries’ own domestic resources.

Hence the key message in this debate is the ability of Africans to rise to the challenge of ever greater mobilisation of their own resources, which frankly speaking, is not a bad thing. According to the African Development Bank, there are only 12 countries on the continent where ODA exceeds domestic resources, so already Africans are financing the bulk of their own development. But more has to be done, and the opportunities to raise more domestic resources exist in both public and private sectors; these include:

Boosting Taxes and Other Revenues Sources: Tax revenue is playing an increasingly important role in the financing of Africa’s development, ranking second only to export earnings.

According to AUC-ECA the continent’s total tax revenue increased from $331 billion in 2009 to $527.3 billion in 2012. While tax revenue collection has improved in many African countries since the 1990s, there are many leakages and gaps to be plugged, and more effective tax administration could contribute to improving revenues.

Two estimates of tax opportunities show serious potential for DRM in Africa. First, the IMF estimates that a further increase in tax revenues of about 4% of GDP per year is attainable in many low-income countries. With Africa’s GDP of about $1.7 trillion (in 2014), this means an extra $68 billion per year. Second, according to McKinsey, there is an additional tax revenue opportunity of up to $300 billion in Africa, of which $25–50 billion can be captured over the next 5 years.

African countries need donor support to build capacity to mobilise and use domestic resources. Investing ODA in building tax systems can yield impressive returns. According to the OECD, every $1 of ODA spent on building tax administrative capacity has the potential to generate thousands of dollars in incremental tax revenues depending on the country situation. Yet as at 2012 only about 0.1% of ODA was targeted at improving tax institutions.

Ngozi Okonjo-Iweala is the former Minister of Finance of Nigeria

Written By
New African

Leave a comment

Your email address will not be published. Required fields are marked *