Fiscal Policy and Development
Human, Social, and Physical Investments for the SDGs
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund

Contributor Notes

The goal of this paper is to estimate the additional annual spending required for meaningful progress on the SDGs in these areas. Our estimates refer to additional spending in 2030, relative to a baseline of current spending to GDP in these sectors. Toward this end, we apply an innovative costing methodology to a sample of 155 countries: 49 low- income developing countries, 72 emerging market economies, and 34 advanced economies. And we refine the analysis with five country studies: Rwanda, Benin, Vietnam, Indonesia, and Guatemala.

Abstract

The goal of this paper is to estimate the additional annual spending required for meaningful progress on the SDGs in these areas. Our estimates refer to additional spending in 2030, relative to a baseline of current spending to GDP in these sectors. Toward this end, we apply an innovative costing methodology to a sample of 155 countries: 49 low- income developing countries, 72 emerging market economies, and 34 advanced economies. And we refine the analysis with five country studies: Rwanda, Benin, Vietnam, Indonesia, and Guatemala.

I. Introduction

1. Progress has been achieved in key human development areas over the past few decades, but poverty remains high in some regions. Globally, since 1990, over a billion people have been lifted out of extreme poverty, infant mortality has decreased from 65 to 31 deaths per 1,000 births, and the share of primary-school-age children out of school has fallen from 18 to 9 percent. These developments reflect robust economic growth and coordinated national and global efforts under the United Nations Millennium Development Goals (MDGs). However, global progress masks regional disparities (Figure 1). In eastern and southern Asia, China and India have led a substantial reduction in poverty. In contrast, in sub-Saharan Africa progress has been limited, and countries in this region remain among those in the world with higher poverty. Furthermore, the global decline in poverty rates has slowed (World Bank, 2018).

Figure 1.
Figure 1.

Extreme Poverty by Region, 1990 and 2015

(Percent of population living on less than US$1.90 a day)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations using World Bank Poverty and Equity database.Note: AP = Asia and Pacific; LAC = Latin America and the Caribbean; MENAP = Middle East, North Africa, Afghanistan, and Pakistan; SSA = sub-Saharan Africa.

2. The Sustainable Development Agenda aspires to a world free of poverty and deprivation. In 2015, the global community agreed on implementing a comprehensive development agenda by 2030, building on the substantial progress achieved under the MDGs. The Sustainable Development Goals (SDGs) (1) set wider-ranging targets in the original MDG areas; (2) expand the number of goals from 8 to 17, acknowledging interactions between goals and including issues such as climate change and good governance; (3) apply to every country, including advanced economies; (4) reflect deeper civil society participation compared with the government-led process that begot the MDGs; and (5) expand sources of financing, supplementing aid flows—when needed—with sustainable sources, such as countries’ own tax revenues.

3. Fulfilling the 2030 Agenda requires sustainable and inclusive economic growth. On average, countries with higher per capita income have better SDG outcomes (Figure 2). The median composite SDG index score—a measure that tracks performance across all SDG areas—for advanced economies is 78 percent, which implies that they are 22 percent short of reaching the SDGs.2 In contrast, the median score for low-income developing countries is 53 percent. The variation in SDG scores is larger within low-income developing countries than within other income groups. Sharing the benefits of growth is also correlated with SDG achievement. Countries with less inequality (lower Gini coefficient) display better SDG performance (Figure 3).

Figure 2.
Figure 2.

2017 SDG Composite Index by Income Group

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Figure 3.
Figure 3.

2017 SDG Composite Index and Gini Coefficient 1/

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations using data from the United Nations 2018 SDG Index and Dashboards Report.Note: AEs = advanced economies; EMEs = emerging market economies; LIDCs = low-income developing countries.1/ Low inequality for Gini coefficient less than 0.32; medium-low for Gini between 0.32 and 0.37; medium-high for Gini between 0.38 and 0.43; high for Gini above 0.43. The thresholds correspond to the quartiles of the sample of countries.

4. Fiscal policy has a crucial role for development. Specific SDGs were set in development areas for which public intervention is critical, including ending poverty (SDG1) and hunger (SDG2), improving health (SDG3) and education (SDG4), achieving gender equality (SDG5), reducing inequality (SDG10), and enhancing infrastructure (SDGs 6, 7, 9, 11).3 The private sector typically plays a limited role in these areas, in part because the returns on investment may be highly uncertain or may take a long time. Public expenditure and tax revenue tend to rise with per capita income (Figure 4),4 a pattern known as Wagner’s Law (Wagner 1958). Thus, the fiscal role for redistribution, through taxes and income-related transfers, and for equalizing opportunity, through in-kind spending—including on infrastructure, education, and health—is higher in advanced economies than in emerging market economies and low-income developing countries (IMF 2017). Compared with advanced economies, low-income developing countries and emerging market economies on average spend less on education, health, and infrastructure (Table 1), which is consistent with their falling behind in SDG achievement, given the importance of these expenditures for inclusive growth.5

Figure 4.
Figure 4.

Primary Expenditure and Income

(Percent of GDP)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations using World Economic Outlook (WEO) data.Note: PPP = purchasing-power parity-adjusted 2011 international dollars. Unbalanced sample from the WEO covering 1990–2015.
Table 1.

Spending by Functional Classification and Income Group, 2016

(Percent of GDP)

article image
Source: IMF staff calculations using Government Finance Statistics.Note: AEs = advanced economies; EMEs = emerging market economies; LIDCs = low-income developing countries. Sample size in parentheses. The figures reported correspond to the GDP-weighted average country.

5. This note estimates the additional total—private and public—spending required to make substantial progress toward the SDGs in five areas (education, health, roads, electricity, water and sanitation). Section II summarizes the results for spending estimates in 121 emerging market economies and low-income developing countries and zooms in on five country cases (Benin, Guatemala, Indonesia, Rwanda, Vietnam). Section III makes a case for creating the conditions for growth, raising tax capacity, and enhancing spending efficiency to assist governments in the process of development. It also discusses the potential role of private sector financing and official development assistance in reaching the SDGs. Section IV emphasizes that governance is critical for development. Section V concludes.

II. Spending Estimates

6. Spending estimates are derived for 155 countries—34 advanced economies, 72 emerging market, and 49 low-income developing countries. The general methodology is described briefly below and in more detail in Annex 1. Spending estimates have been further refined for five country cases—Benin, Guatemala, Indonesia, Rwanda, and Vietnam—after tailoring the methodology to country-specific circumstances (Annex 2). While the methodology accounts for synergies across the sectors analyzed, spending estimates presented in this paper should be viewed with caution, as other SDG areas might involve substantial additional costs.

  • The methodology quantifies the annual cost of achieving high performance across five SDG areas (education, health, roads, electricity, water and sanitation). For each sector, we assume that performance is a function of a set of input variables. We identify the median level of inputs for countries that perform well today, with performance being measured by SDG index scores. Then, for each country we calculate spending in 2030 by assigning these input levels and controlling for other factors such as demographics and the level of GDP per capita projected in 2030.6

  • The estimates are consistent with increasing spending efficiency. Countries that perform well are also among the most efficient in terms of spending. Thus, when assigning the input levels observed in countries that perform well today to a particular country, our spending estimates for high performance assume not only more but better spending. Should improvements in efficiency not take place, the spending required to reach the SDGs would be larger.

  • We summarize the results as additional spending in 2030.7 For education and health care, we report additional spending in percentage points of GDP, corresponding to the difference between the share of GDP in spending consistent with high performance in 2030 and the current level of spending as a share of GDP. For physical capital, additional spending in percentage points of GDP corresponds to the annualized spending required to close infrastructure gaps between 2019 and 2030. We also report additional spending in constant 2016 dollars, derived by multiplying the additional spending in percentage points of GDP by the projected GDP in 2030 expressed in constant 2016 dollars.

  • The variation in additional spending across countries reflects various factors. One important factor explaining the variation in additional spending is the level of expenditure today. For example, countries that spend relatively little on health usually have fewer doctors per person than countries with good health performance. Raising the number of medical professionals between now and 2030 accounts for some of the additional spending. Another factor is demographics. For example, countries with a large projected share of school-age children in in 2030 tend to have higher additional education spending. Current outcomes also matter. Countries with poorer roads, lower access to water and sanitation or to electricity today are expected to have higher additional spending on infrastructure.

7. Additional spending in 2030 amounts to 2.6 trillion US dollars (2.5 percent of the 2030 world GDP) in 121 emerging market economies and low-income developing countries. The focus is on these countries.8 The Asia and Pacific region has the largest global additional spending requirement, estimated at 1.5 percent of 2030 world GDP (Figure 5). Sub-Saharan Africa has the second largest additional spending requirement, estimated at 0.4 percent of 2030 world GDP, reflecting the region’s lag in development. Although sub-Saharan Africa has a greater concentration of low-income developing countries than the Asia and Pacific region, the latter accounts for a much larger share of global GDP, which pushes up its additional spending requirement when expressed as a percentage of world GDP.

Figure 5.
Figure 5.

Additional Spending in 2030 by Region and Income Group

(Percent of 2030 world GDP)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations.Note: AP = Asia and Pacific; CIS = Commonwealth of Independent States; EUR = Europe; LAC = Latin America and the Caribbean; MENAP = Middle East, North Africa, Afghanistan, and Pakistan; SSA = sub-Saharan Africa; EMEs = emerging market economies; LIDCs = low-income developing countries.

8. On average, emerging market economies face additional spending of 4 percentage points of their GDP in 2030.9 The variation in additional spending across countries largely reflects differences in income levels, current government spending, and other country-specific circumstances such as demographics (Figure 6). Emerging market economies with relatively high estimated additional spending (above 8 percentage points of GDP, 75th percentile of income group) had average GDP per capita spending of US$4,200 in 2016 and additional spending driven mostly by the education sector. Countries around the median for additional spending (4.2 percentage points of GDP) are resource-rich countries whose estimates are driven largely by the health care sector. Countries below the 25th percentile for additional spending are higher-income emerging market economies, with average GDP per capita of US$9,100 in 2016.

Figure 6.
Figure 6.

Variation in Additional Spending Estimates in 2030 for 72 Emerging Market Economies

(Percentage points of GDP)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations.Note: EMEs = emerging market economies; GTM = Guatemala; IDN = Indonesia.1/ GDP-weighted average of emerging market economies.

9. The country cases for Guatemala and Indonesia illustrate the development challenges faced by emerging market economies (Figure 7). Both countries have a relatively low tax-to-GDP ratio—close to 10 percent of GDP—and large outcome gaps in key indicators. Guatemala faces more than twice the average emerging market economy additional spending, at 8.7 percentage points of GDP in 2030. This largely reflects relatively low enrollment in education and a deficient road network. Indonesia faces additional spending slightly above the emerging market economy average, at 5.6 percentage points of GDP in 2030, mainly as a result of necessary investment in health care.

Figure 7.
Figure 7.

Additional Spending in Indonesia and Guatemala in 2030 by Sector

(Percentage points of GDP)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

10. Estimated at 15.4 percentage points of GDP in 2030, the average additional spending is larger in low-income developing countries.10 Additional spending in these countries in 2030 is split between education and health care (8.3 percentage points of GDP) and infrastructure (7.1 percentage points of GDP). Across the 49 low-income developing countries included in the analysis, additional spending ranges from about 50 percentage points to about half a percentage point of countries’ GDP in 2030 (Figure 8). This diversity in estimates largely corresponds to different development levels across low-income developing countries (Figure 9). Those with additional spending above 22 percentage points of GDP (the 75th percentile of additional spending in low-income developing countries) exhibit low GDP per capita (on average US$580 in 2016) and the need for high investment in health care. Two-thirds of the countries in this group are fragile states, which face even higher spending pressures due to security and institutional challenges.11 Countries with additional spending near the low-income developing country median (17 percentage points of GDP) have GDP per capita of about US$1,200 in 2016 on average and spending pressure driven by education and roads. Countries with additional spending below 12 percentage points of GDP (25th percentile of additional spending in low-income developing countries) exhibit GDP per capita of about US$1,600 in 2016 on average and must invest heavily in roads.

Figure 8.
Figure 8.

Variation in Additional Spending Estimates in 2030 for 49 Low-Income Developing Countries

(Percentage points of GDP)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations.Note: BEN = Benin; LIDCs = low-income developing countries; RWA = Rwanda; VNM = Vietnam.1/ GDP-weighted average of low-income developing countries.
Figure 9.
Figure 9.

Additional Spending in Benin, Rwanda, and Vietnam in 2030 by Sector

(Percentage points of GDP)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

11. From a global perspective, additional spending in low-income developing countries in 2030 amounts to about half a trillion US dollars—US$528 billion—equivalent to half a percentage point of 2030 world GDP. These countries’ spending requirements as a percentage of world (or advanced economy) GDP help put into perspective the size of the development challenge for this income group.12 Although the additional spending seems insurmountable for many individual low-income developing countries from a national perspective, it is manageable as a global endeavor.

12. Our additional spending estimates are comparable to estimates in the literature. Reconciling cost estimates across studies, including ours, is complicated given differences in country groupings, sectoral coverage, spending definitions, and years for which estimates are reported. After adjusting for these factors, our estimates—additional spending of US$1.4 trillion on roads, electricity, and water and sanitation and US$1.2 trillion on education and health care—fall in the range of those by other studies (Annex 4). Nevertheless, uncertainty surrounds the estimates presented in this paper as well as those in the literature. First, as noted above, our estimates could be a lower bound of the spending pressures faced by low-income developing countries and emerging market economies, as only 5 sectors out of 17 are included in the exercise. Second, growth projections could deviate from the baseline projections. Other growth paths—as highlighted in the next section—would significantly affect the estimates of additional spending. Last, changes in the underlying assumptions of the methodology could also affect the spending estimates.

III. Financing the SDGs

A. Creating Conditions for Economic Growth

13. Fostering inclusive growth through 2030 would lower the estimates of additional spending. Structural reforms that boost the level and durability of growth can help address development needs.13 We estimate that doubling projected GDP per capita in 2030 would reduce additional spending by 4.5 percentage points (Figures 10 and 11). The country case of Vietnam illustrates how growth accompanied by a national reform agenda helps in addressing development challenges. Today, Vietnam faces additional spending of 6.4 percentage points in 2030, among the lowest in low-income developing countries and comparable to the development challenge faced by many emerging market economies. The extreme poverty rate is 5 percent, and education and health outcomes are comparable to those in the emerging market economies. Part of this reflects the pace of economic growth (since the 1980s, Vietnam’s GDP per capita has increased tenfold), continued fiscal efforts (tax revenue increased from 16 to 19 percent of GDP during 1998–2017), and inclusive reforms (the Doi Moi program) that have allowed Vietnam to attend to development needs.14

Figure 10.
Figure 10.

Additional Spending and GDP per Capita in 2030

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Figure 11.
Figure 11.

Impact of Growth on Spending Estimates in 2030 in Low-Income Developing Countries

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations.Note: Low-income developing countries are placed in three groups according to the size of the spending estimates in the baseline scenario. Additional spending in the higher-growth scenario is calculated based on the estimated spending needs in the baseline for countries projected to achieve the corresponding GDP per capita level in the baseline.1/ Adds to the baseline growth the difference between the 95th percentile and the median of historic GDP growth from Penn World Tables for low-income developing countries. GDP growth in these countries over the projection period of 2018 and 2030 is about 80 percent higher than in the baseline.

B. Boosting Tax Revenue and Enhancing Spending Efficiency

14. Most emerging market economies and low-income developing countries have room to increase government revenue. Important progress has been made in raising tax-to-GDP ratios. For example, in low-income developing countries tax revenue on average has increased from about 12 percent of GDP in the early 2000s to nearly 15 percent of GDP today. Yet tax revenue varies widely across countries, typically increasing with GDP per capita. At the median, revenue collection as a share of GDP is 15 percent in low-income developing countries, 18 percent in emerging market economies, and 26 percent in advanced economies (Figure 12). About a third of emerging market economies and half of low-income developing countries have tax-to-GDP ratios lower than 13 percent, a threshold documented as a tipping point for development (Gaspar, Jaramillo, and Wingender 2016). While the appropriate level of taxation depends on country characteristics, a sizable increase in tax capacity plays a significant role in attaining the SDGs.15 Moreover, improvements in tax collection can be achieved without necessarily hurting growth. For example, well-designed tax policies that broaden the tax base and minimize distortions can support growth. But, more important, it is not the impact of a tax instrument in isolation that matters for growth, but the combined effect of all measures, including the spending that additional revenues finance.

Figure 12.
Figure 12.

Distribution of Tax-to-GDP Ratios across Income Groups in 2016

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations.Note: Tax revenues exclude social security contributions. AEs = advanced economies; EMEs = emerging market economies; LIDCs = low-income developing countries.

15. Increasing the tax-to-GDP ratio by 5 percentage points of GDP in the next decade is an ambitious but reasonable aspiration in many countries. If countries with tax-to-GDP ratios below the 75th percentile for their income group (which stands at 19 percent in low-income developing countries, 22 percent in emerging market economies, and 29 percent in advanced economies) were to raise their tax-to-GDP ratio to the 75th percentile, such an increase would amount to 5 percentage points of GDP, on average. This is in line with revenue potential estimates from the literature that typically benchmark tax revenue performance across countries, controlling for a range of characteristics, such as per capita income (IMF 2013; Fenochietto and Pessino 2013).16 Country experiences show that increases of this order have been achieved with a combination of tax policy and administration efforts (IMF 2018a; Akitoby 2018). For example, in China the 1994 tax reform contributed to raising revenue from 10 to 15 percent of GDP between 1995 and 2002 (Ahmad 2011), and in Georgia tax reforms contributed to raising revenue by more than 12 percentage points of GDP between 2004 and 2009 (ITC and OECD 2015).

16. Adopting a medium-term approach to raising revenue is critical to achieving and sustaining the much-needed increases in the tax-to-GDP ratios. Mobilizing revenue for development is a central theme of the Addis Ababa Action Agenda (UN 2015). To this end, formulating a medium-term revenue strategy is a promising way forward.17 Such a strategy frames the tax system reform in four interdependent components: (1) building broad-based consensus for medium-term revenue goals to finance needed public expenditures; (2) designing a comprehensive tax reform covering policy, administration, and the legal framework; (3) committing to sustained political support over multiple years; and (4) securing adequate resources to support coordinated implementation of the medium-term revenue strategy. Indonesia is an example of how articulating a medium-term revenue strategy can help in the progress toward the SDGs (Box 1).

Indonesia’s Medium-Term Revenue Strategy

Indonesia has made impressive progress in the past 20 years. It has cut the poverty rate by half; increased life expectancy; expanded access to clean water, sanitation, and electricity; and improved educational attainment. Yet with a tax-revenue-to-GDP ratio close to 10 percent, it would be difficult to finance additional expenditures that are critical to unlock Indonesia’s development potential. A medium-term fiscal strategy, with a medium-term revenue strategy at its core, is under consideration as part of government reforms started in 2016.

The thrust of the fiscal strategy is to raise revenue by about 5 percentage points of GDP in the medium term, corresponding to the needs identified to finance growth- and equity-enhancing expenditure priorities in infrastructure, health, education, and social assistance. Tax policy reforms could potentially generate up to 3.5 percentage points of GDP, including through new excises and major revisions to value-added and income taxes. Tax administration measures can add 1.5 percentage points of GDP in revenue, including through compliance improvement and institutional reforms. The medium-term revenue strategy should also include efforts to strengthen governance through multiyear commitments with appropriate mandates and monitoring to ensure effective implementation.

Source: de Mooij, Nazara, and Toro (2018).

17. Greater efficiency of spending is crucial to reach the SDGs. A large portion of the expected returns from spending on health, education, and infrastructure is lost as a result of spending inefficiencies.18 In many countries, public investment does not lead to productive capital (Pritchett 1996). Addressing such inefficiencies—at least to some extent—is necessary for development and thus, as noted earlier, is embedded in our baseline estimates for additional spending. In an alternative scenario in which countries fail to improve spending efficiency, additional spending will increase from 15 to 25 percentage points of GDP in low-income developing countries and from 4 to 6 percentage points of GDP in emerging market economies. Alternatively, if countries were to spend more efficiently than assumed in the baseline scenario, additional spending requirements will decline.

18. Most emerging market economies would be able to rely on their own resources to finance the SDGs, but the challenge is much greater for low-income developing countries. Assuming countries spend efficiently, raising tax revenues by 5 percentage points of GDP should be sufficient to finance the additional spending required in most emerging market economies. However, for low-income developing economies, the mobilization of taxes will not be enough to finance the ambitious SDG agenda. For this group of countries, the additional spending net of the tax increase amounts to US$358 billion (equivalent to 0.3 percent of global GDP) (Figure 13).

Figure 13.
Figure 13.

Low-Income Developing Countries: Additional Spending and Increased Tax Revenues in 2030

(Billions of 2016 US$)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations.

C. Other Financing Options

19. Low-income developing countries and some emerging market economies have limited room to finance the SDGs through debt financing. Some infrastructure projects could be financed by public debt or guarantees. However, in many low-income developing countries high public debt and increasing reliance on nonconcessional lending expose vulnerabilities that constrain the role of debt for development. Since 2013, debt service costs have been increasing rapidly (Figure 14), and the share of countries at high risk or in debt distress has doubled to 40 percent (IMF 2018b). But even when fiscal space is available, projects need to be vetted carefully to ensure that public investment translates into productive capital. This requires strengthening the various legal, institutional, and procedural elements of public investment management, particularly in low-income developing countries with poor governance (IMF 2014, 2015a).

Figure 14.
Figure 14.

Low-Income Developing Countries: Interest Expense as a Share of Tax Revenue, 1995–2019

(Percent)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF, World Economic Outlook.

20. Private financing can play a role. Private flows—particularly in the form of foreign direct investment—could make a significant contribution to economic growth. Foreign private investment can also support faster transfer of technology and skills, job creation, and innovation. In Guatemala, for instance, the new public-private partnership law could help mobilize additional private financing for road infrastructure. In certain projects, there may be scope for cost recovery. For instance, in relation to roads, the private sector could collect fees directly from the asset’s users (for example, tolls). But given the relevance of private financing, countries must ensure that, regardless of the financing program, projects deliver value for money while limiting fiscal risk.19 More broadly, public policies should support a favorable investment climate. These include efforts to strengthen governance, build fair and predictable tax systems, efficient and transparent regulatory frameworks, and rule of law. In addition, through blended financing, development partners can catalyze additional private capital (OECD 2018a).

21. Delivering on existing official development assistance targets would make a substantial contribution to closing financing gaps. Although net inflows of official development assistance to low-income developing countries as a percentage of their GDP have declined during the past decade (Figure 15), it still accounts for the largest share of concessional financial flows to developing economies (Figure 16).20 In some low-income developing countries that are able to attract only limited foreign private capital, official development assistance accounts for a very large share of their total external capital inflows. Funding of key SDG sectors (education, health, water and sanitation, transportation and communication, energy) accounts for about 40 percent of total aid. Meeting the 0.7 percent of gross national income target would provide about US$230 billion in additional funding to contribute to closing development gaps. This can have a transformative impact on development, particularly if better targeted to countries most in need of such assistance.

Figure 15.
Figure 15.

Net Official Development Assistance, 1970–2016

(Percent)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Figure 16.
Figure 16.

External Concessional Financing Flows to Developing Economies

(Billions of US dollars)

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations using data from the Organisation for Economic Co-operation and Development and the United Nations Conference on Trade and Development.Note: DAC = Development Assistance Committee of the Organisation for Economic Co-operation and Development; GNI = gross national income; LIDC = low-income developing country; ODA = official development assistance.

22. Private philanthropy can be a useful source of funding. Although philanthropic flows are only about 5 percent of official development assistance, they can have an important impact on key sectors, for instance in health care (OECD 2018c).21 Annual philanthropic flows are equivalent to 0.02 percent of the estimated global wealth held by individuals with investable assets greater than US$1 million (Capgemini 2018). Private foundation funding targets largely middle-income economies, and only about a third of flows go to the least developed economies. Further resources from philanthropy could be tapped for development. Beyond funding, private philanthropic efforts can spur innovation in service delivery and help build capacity in recipient countries together with other development partners.

IV. Challenges Beyond Resources

23. Success in achieving the SDGs requires strong national ownership.22 The SDGs can be a guiding force in delivering development outcomes if they are set as government objectives, incorporated into the budget process, reliably monitored, and transparently reported. Many countries have started to incorporate the SDGs into their budget process.23 Anchoring development plans to a medium-term revenue strategy is a promising way forward. For example, in Indonesia the SDGs have been mainstreamed into national development plans, and the Indonesian authorities are considering a medium-term revenue strategy to raise revenue by about 5 percentage points of GDP over the medium term (Box 1).

24. Building an investment-friendly environment can help. Governments should decrease indirect costs to business by providing public infrastructure, enforcing contracts and regulations, strengthening financial systems, and increasing the flexibility of labor markets. Development partners can also help private entrepreneurship thrive. This is, for example, the objective of the Compact with Africa, which brings together governments, Group of Twenty economies, international organizations, and the private sector to scale up private investment in support of national development. The private sector also has an important role to play through willingness to take a more long-term investment perspective and support government efforts to improve the business environment.

25. Managing potentially large inflows can be challenging. Fiscal and monetary authorities should anticipate large inflows and coordinate responses with potential pressure on the real exchange rate that could crowd out private investment and harm growth (Berg, Portillo, and Zanna 2015). For donors, longer-term commitment and coordination—for example, through pooling of funds—may help reduce the volatility of these flows (Isard and others 2006). Large inflows can also affect the ability to raise tax revenue and spend the proceeds efficiently (Morrissey 2015; Crivelli and Gupta 2017). Strengthening public financial management frameworks can contribute to improving the allocation and efficient use of public resources. Donors can help through technical assistance and policy support for reforms aiming at increasing institutional capacity and government effectiveness.24 Building such capacity and accountability can mobilize diverse stakeholders, including the private sector and civil society organizations.25

26. These efforts need to be supported by a strong governance framework. Adequate governance among all actors—that is, international financial institutions, donors, the private sector, civil society, and national governments—is key to ensure that the available financing for the SDG agenda is effectively and efficiently spent. Transparency and accountability are an integral part of the necessary governance. Countries with strong institutional capability and accountability deliver high development outcomes (Figure 17).26 Furthermore, the allocation of aid should reflect recipients’ SDG needs rather than the foreign policy priorities of the countries providing aid. Another challenge is to set the global conditions that help all countries generate and sustain stable growth. This requires a variety of global public goods, including stability, open trade, adequate international taxation, fair regulations, climate initiatives, and access to technology.

Figure 17.
Figure 17.

SDG Composite Index and Government Effectiveness

Citation: Staff Discussion Notes 2019, 003; 10.5089/9781484388914.006.A001

Source: IMF staff calculations using World Bank Worldwide Governance Indicators and the 2018 SDG Index and Dashboards Report.Note: The government effectiveness indicator ranges from 0 (lowest) to 100 (highest). The indicator “reflects perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.”

V. Conclusions and Policy Options

27. Considerable resources are needed to deliver on the SDGs agenda. Building on global progress in key human development areas over the past few decades, the SDGs aim at advancing by 2030 toward a world free of poverty and deprivation, where all children, wherever they are born, are given a fair chance. To get there, countries need to unlock large amounts of resources. Improving outcomes in five key areas (education, health, roads, electricity, water and sanitation) would require additional spending in 2030 of about US$0.5 trillion (0.5 percent of 2030 global GDP) for low-income developing countries and US$2.1 trillion in emerging market economies.

28. Financing the SDGs will be challenging, particularly for low-income developing countries. For emerging market economies the average additional spending required represents about 4 percentage points of GDP. Raising this amount is a considerable task, but in most cases these countries can rely on their own resources to finance the SDG targets. However, the challenge is much greater for low-income developing countries, where the average additional spending represents 15 percentage points of their GDP.

29. As a necessary step, countries need to own responsibility for achieving the SDGs. Country efforts should focus on strengthening macroeconomic management, enhancing tax capacity, tackling spending inefficiencies, addressing the corruption that undermines inclusive growth, and fostering business environments where the private sector can thrive. Action in these areas will support the sustainable and inclusive growth that is fundamental to SDG progress.

30. Raising revenue is one important pillar for development. An ambitious but appropriate target for many countries is to increase their tax ratio by 5 percentage points of GDP—several countries have achieved this in the past. This requires strong administrative and policy reforms. A recommended starting point for many countries would be to adopt a medium-term revenue strategy to develop multiyear, holistic, and realistic plans for revenue reform in line with the countries’ development.

31. Countries need to spend not only more, but better. Today, a large portion of investments is lost to inefficiency. Enhancing the efficiency of spending is thus crucial to reaching the SDGs. We estimate that countries could save about as much through efficiency efforts in education, health care, and infrastructure as they could raise through tax reform.

32. Contributions to development from the private sector, official development assistance targets, philanthropists, and international financial institutions will also be essential. Some infrastructure projects could be financed with public debt or guarantees, but this would be difficult in countries with already high public debt levels. The private sector is well placed to contribute to development in areas that blend with private investment, such as infrastructure and clean energy—the Compact with Africa points in this direction. Regardless of the financing method—for example, through public-private partnerships—it is critical to ensure that these investments deliver value for money, while limiting contingent fiscal risk. Foreign aid remains crucial in supporting the development efforts of poorer countries. Indeed, the economic returns on well-targeted aid—in terms of poverty reduction, health and education outcomes, job creation, and improving security and stability—are high. All these efforts need to be articulated within countries’ national plans.

33. Beyond resources, developing political and civil society consensus, enhancing state capacity, and promoting good governance are needed to achieve the SDGs. An important aspect of the broader challenge is the environment in which countries seek to generate and sustain stable growth. This requires a variety of global public goods including geopolitical stability, open trade, and climate initiatives, as well as good governance, which depends on tackling both the supply and demand elements of corruption. These important foundations for development underscore the need for joint action by all stakeholders for the SDGs to be realized.

Fiscal Policy and Development: Human, Social, and Physical Investments for the SDGs
Author: Vitor Gaspar, Mr. David Amaglobeli, Ms. Mercedes Garcia-Escribano, Delphine Prady, and Mauricio Soto
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    Extreme Poverty by Region, 1990 and 2015

    (Percent of population living on less than US$1.90 a day)

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    2017 SDG Composite Index by Income Group

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    2017 SDG Composite Index and Gini Coefficient 1/

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    Primary Expenditure and Income

    (Percent of GDP)

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    Additional Spending in 2030 by Region and Income Group

    (Percent of 2030 world GDP)

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    Variation in Additional Spending Estimates in 2030 for 72 Emerging Market Economies

    (Percentage points of GDP)

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    Additional Spending in Indonesia and Guatemala in 2030 by Sector

    (Percentage points of GDP)

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    Variation in Additional Spending Estimates in 2030 for 49 Low-Income Developing Countries

    (Percentage points of GDP)

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    Additional Spending in Benin, Rwanda, and Vietnam in 2030 by Sector

    (Percentage points of GDP)

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    Additional Spending and GDP per Capita in 2030

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    Impact of Growth on Spending Estimates in 2030 in Low-Income Developing Countries

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    Distribution of Tax-to-GDP Ratios across Income Groups in 2016

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    Low-Income Developing Countries: Additional Spending and Increased Tax Revenues in 2030

    (Billions of 2016 US$)

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    Low-Income Developing Countries: Interest Expense as a Share of Tax Revenue, 1995–2019

    (Percent)

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    Net Official Development Assistance, 1970–2016

    (Percent)

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    External Concessional Financing Flows to Developing Economies

    (Billions of US dollars)

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    SDG Composite Index and Government Effectiveness