A Post-Pandemic Assessment of the Sustainable Development Goals

Dora Benedek; Edward R Gemayel; Abdelhak S Senhadji; Alexander F. Tieman

doi:10.5089/9781498314909.006.A001

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A Post-Pandemic Assessment of the Sustainable Development Goals

Author: Ms. Dora Benedek, Mr. Edward R Gemayel, Abdelhak S Senhadji, and Alexander F. Tieman

Publication Date:: 27 Apr 2021

eISBN:: 9781513577302

Language:: English

Keywords:: donor country support; SDG agenda; priority area; physical capital; country circumstances

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The COVID-19 pandemic hit countries’ development agendas hard. The ensuing recession has pushed millions into extreme poverty and has shrunk government resources available for spending on achieving the United Nations Sustainable Development Goals (SDGs). This Staff Discussion Note assesses the current state of play on funding SDGs in five key development areas: education, health, roads, electricity, and water and sanitation, using a newly developed dynamic macroeconomic framework.

Abstract

I. Introduction

1. The Sustainable Development Goals (SDGs) represent important benchmarks for human development. They encompass broad areas both of human capital, such as better health and educational outcomes, and of physical capital, such as better water and sanitation and roads and electricity provision—all with an emphasis on sustainability and inclusiveness. The SDGs were set following the broadly successful experience with the Millennium Development Goals (MDGs) agenda, which concluded in 2015.

2. While advances have been made under the SDG and MDG development agendas, further progress remains paramount. Between 2000 and 2018, human development improved across the globe, and countries with low and medium levels of human development were gradually but steadily catching up with their best-scoring peers (Figure 1). Nevertheless, progress has been uneven, with poverty remaining widespread (Figure 2), and lagging progress on SDGs in many low-income developing countries (LIDCs) (Figure 3). Even following pre–COVID-19 pandemic trends, the world was not on track to meet the SDGs by 2030, as it set out to do in 2015 (United Nations 2020; Gaspar and others 2019).

3. The COVID-19 pandemic hit this development agenda hard. The pandemic has plunged the world into a deep recession (Figure 4) and, by mid-April 2021, had infected 140 million people, killing over 3 million. The impact on LIDCs and the world’s poor is especially harsh. Millions of people may be pushed into extreme poverty in the short term and even more over the medium term (Figure 5), much of this effect concentrated in LIDCs in sub-Saharan Africa and South Asia (World Bank 2020a; IMF 2020b). The United Nations warns that in some regions poverty levels could reach as high as those last seen 30 years ago (Sumner, Hoy, and Ortiz-Juarez 2020). The pandemic has put the SDGs firmly out of reach by their 2030 target date in most countries.

4. A renewed commitment to pro-SDG public policies will be critical to avoid a permanent setback to this development agenda. The impact of the pandemic on development reemphasizes the importance of reforms to foster sustainable and inclusive growth. Reversing (some of) these setbacks and moving closer to the development goals will entail significant scaling up of spending on human and physical capital. National authorities should continue implementing structural reforms to boost potential growth, increasing public resources through progressive taxation and spending reforms, and improving spending efficiency. They should also reinvigorate strategies to facilitate private investment in the SDGs. But in many countries domestic policies will not be able to raise sufficient funding to meet the SDGs by 2030.

5. This note presents a framework for assessing the financing strategies for development. The analysis is based on a novel long-term macroeconomic framework that can assess whether and how the SDGs can be achieved under various policy scenarios and financing options, including domestic revenue mobilization, private sector funding, and support from the international community. In particular, the framework gauges whether and how the SDGs can realistically be achieved by 2030 and, if not, by when. More generally, the framework allows policymakers to assess the macroeconomic coherence of their development strategies. The note illustrates the framework through four country case studies. Section II lays out the framework, Section III assesses the setback from the pandemic, and Section IV discusses policy options for reinvigorating the SDG agenda. To conclude, Section V uses country case studies to illustrate the potential impact of comprehensive development policies.

II. A Framework for Assessing Development Strategies

6. This note analyzes development financing strategies to achieve the SDGs using a novel long-term macroeconomic framework. The framework is suitable for the analysis of a variety of long-term economic issues. It allows the simulation of various development paths consistent with domestic policies to increase available public and private funding for development, and with alternative scenarios for donor contributions. Analyzing these different policy packages and options can help policymakers assess whether current or stepped-up policies will suffice to reach the development goals by 2030. And if not, the framework illustrates by how many years the SDGs will be delayed. The focus is on recurrent and investment spending in the five SDG sectors that Gaspar and others (2019) argue are at the core of sustainable and inclusive growth and for which a costing exercise has been carried out: education, health, roads, electricity, and water and sanitation. Although the full financing needs to achieve all 17 SDGs are not covered, these sectors are key for development and represent a large share of government outlays.

7. More generally, policymakers can use the framework to help build realistic development strategies and assess the long-term impact of shocks. The framework focuses on the real economy and the fiscal sector, is fully dynamic, and has a long time horizon (2050 in this note).² In addition to helping build coherent development strategies, the framework makes it possible to assess truly long-term effects. For instance, it can illustrate permanent scarring of the economy as a result of the pandemic through the impact on human capital from higher and longer unemployment and lower educational attainment due to school closures, and it illustrate the benefits of modest but sustained reform.

8. The framework ensures macroeconomic consistency and can be tailored to specific country circumstances. It imposes standard macroeconomic accounting identities and interlinkages throughout the real, fiscal, and external sectors (IMF 2021a; Bartolini and Hellwig, forthcoming) and models the relationship between investment and growth (Box 1). It is flexible, allowing users to set key model parameters to analyze different country settings (Bartolini and Perrelli, forthcoming). The framework is also user-friendly, automatically building on countries’ macroeconomic projections (set out in the IMF’s World Economic Outlook), population projections (following the United Nations medium-fertility scenario, UN 2019), and other key country-specific data.

^{Box 1.}

Key Relationships in the Long-Term Macroeconomic Framework

The macroeconomic framework models the interaction between the fiscal and private sectors that finance spending on human capital and infrastructure and the productive capacity of the economy. It centers on the long-term relationship between investment and growth, following the Debt, Investment, and Growth (DIG) model and its extension to include human capital (Atolia and others 2019). Investment in education, health, roads, water, and power translates into better-educated and healthier populations and better and more infrastructure—all boosting economic growth (IMF 2014). The framework is fully dynamic, showing how investment boosts growth over time.

Spending in the areas mentioned above builds human capital, private capital, and two forms of public capital: publicly financed and privately financed. The latter is a novel feature of the model. It includes public infrastructure projects that are suitable for private investment, often labeled “bankable” public projects. The distinction between public and private capital lies mainly in the types of projects they encompass. For instance, rural roads normally require public investment (that is, they are “nonbankable”), while highways and water treatment plants can be thought of as public investment, possibly open to private financing (that is, bankable), and factories and farm equipment can (largely) be regarded as private sector investment. Human, public, and private capital are complementary. Hence investment in one type of capital raises the return on investment in other types of capital.

The framework is applied to the financing of SDGs. Taking the assessment of SDG needs in human and physical infrastructure as given (from Gaspar and others 2019 or more recent costing assessments), the model allows its user to construct different financing scenarios. For each scenario, it shows whether the SDG targets can be met or, if not, how large the remaining financing gap is on average between the current and the target years. The baseline sets the SDG target year at 2030 and follows the IMF’s 2020–25 World Economic Outlook projections, keeping growth at its long-term potential thereafter as no additional SDG spending occurs in this scenario. Alternative macroeconomic and financing scenarios are user-defined, providing the flexibility to analyze different policies in a tractable manner while ensuring internal consistency. Details of the model are described in IMF (2021a).

III. The Setback from the Pandemic

9. The global coronavirus pandemic and the ensuing economic crisis are having a severe adverse effect on LIDCs and emerging market economies alike. Government support has saved lives and livelihoods, but governments have a hard time paying for it. Just as their spending increased, revenues collapsed. Even though most LIDCs received rapid support, including from the IMF (IMF 2020a) and the World Bank, the needs far outstripped support. Meanwhile, capital flows have proved to be precarious, with emerging market economies experiencing the largest capital outflow ever recorded in early 2020 as investors looked to safeguard their assets amid widespread uncertainty, followed by a sharp recovery later in the year on the back of improved sentiment (IIF 2021). The impact of the crisis on government deficits, debt, and debt service capacity is massive (Figures 6 and 7). The situation would have been significantly worse without the rapid emergency financing from international financial institutions and the G20 Debt Service Suspension Initiative.

10. We illustrate this impact through four case studies that can each be seen as representing a group of countries with specific characteristics.

Our first case study looks at a fast-growing sub-Saharan country with a sizable public sector. Starting from a low base, Rwanda has made swift progress on social and economic development over the past two decades (Figure 8). Along with rapid economic growth, poverty levels fell quickly, declining from 60 to 38 percent between 2000 and 2019, while the country’s human development score doubled to 0.52 between 1990 and 2019 (IMF 2021a).

Second, we look at an East Asian economy that has also grown fast. Over the past two decades this growth has enabled Cambodia to make remarkable progress on development. At the end of 2018, the country had practically eradicated extreme poverty: three-quarters of the population had some access to electricity and decent roads, and more than half had access to clean water. Over the past decade spending on health and education doubled and tripled, respectively, putting Cambodia among the top 10 most improved countries on the United Nations Human Development Index (Zdzienicka 2020; IMF 2021a).
Third, we explore a natural resource economy with a small public sector. As the most populous country in Africa, Nigeria is key to global achievement of the SDGs. In the period up to 2015, the country made good progress on development amid rapid population growth, reducing extreme poverty by some 20 percentage points while improving health indicators and lowering the HIV/AIDS infection rate. However, much remains to be done, with healthy life expectancy at birth an abysmal 49 years and only 4 percent of the population connected to a safe water supply. Even before the COVID-19 crisis struck, growth had decelerated and was projected to remain lackluster, making it that much harder to achieve development goals (IMF 2021a).
Our last case study is of an emerging market economy that still has serious development gaps. While Pakistan has made some progress on development amid volatile economic performance and fast population growth, its performance in critical SDG sectors lags that of its emerging market peers. In the areas of education, water, and sanitation it is below the LIDC average (Brollo, Hanedar, and Walker, forthcoming; IMF 2021a). Still, poverty (according to the national poverty line) fell by 40 percentage points, to 24 percent, between 2000 and 2015.

11. The COVID-19 crisis has severely affected all four economies. The Rwandan economy is projected to contract in 2020, compared with growth of more than 9 percent in 2019. The country’s government deficit will rise to almost 10 percent of GDP, mainly because of tax revenue losses and increased spending on social protection and economic support. Even under the baseline scenario, in which the country returns to its previous growth path in five years, a long-term permanent output loss of some 10 percent is forecast (Figure 9). Similarly, the COVID-19 crisis caused recessions in Nigeria, Pakistan, and Cambodia. LIDCs and emerging market economies have been able to provide only a fraction of the support in advanced economies in the form of mitigating measures, in part because of limited fiscal space (Figure 10). Hence even though all four countries experienced large declines in tax (and in the case of Nigeria oil) revenue, 2020 deficits are expected to have increased by a relatively modest 1¾ percentage points of GDP on average compared with pre-pandemic projections.

12. The pandemic has set back development (Box 2). We estimate that, after the pandemic, even under assumptions of a relatively quick economic recovery—during which the four countries return to their precrisis growth path in five years—average additional (public and private) spending of just over 14 percent of GDP is needed every year between now and 2030 to achieve the selected SDGs.³ These estimates range from 8 and 9 percent of GDP in Cambodia and Pakistan, respectively, where the main spending shortfalls are in health and education, to 21¼ percent of GDP in Rwanda, which mainly needs to build its physical infrastructure (Figure 11). In case the recovery takes longer due to economic scarring, even more resources will be needed (Box 2). Without these additional resources, these four countries will meet their SDG goals much later than the target year of 2030.⁴

^{Box 2.}

Development Setbacks from the Pandemic and Long-Term Scarring

The pandemic increased the financing needs to reach the SDGs by 2½ percentage points of GDP on average in our four case study countries, assuming no long-term damage to their growth potential. Even before the pandemic the countries would have needed substantial additional resources to meet their SDGs by 2030, ranging from 7 percent of GDP a year in Cambodia to some 16 percent of GDP in Nigeria and Rwanda. A comparison with the currently estimated needs (paragraph 12; Figure 2.1) suggests that the pandemic resulted in an additional annual financing need of 2½ percent of GDP, or $59 billion a year, when extrapolated to all LIDCs. These additional financing needs arise directly from the recession through lower tax revenue and more resources devoted to fiscal consolidation (as in the case of Rwanda). This implies that even if the countries had been able to mobilize the necessary resources to achieve the SDGs by 2030 before the pandemic struck, in the wake of the pandemic these amounts will no longer suffice. Without additional resources to offset the costs of the pandemic (on top of the substantial additional pre-COVID funding needs), achievement of the SDGs will be delayed by one year for Cambodia and four to six years for Rwanda, Pakistan, and Nigeria. There could be an even greater delay if the pandemic persists longer than expected (IMF 2021a).

Long-lasting damage to an economy’s human capital and hence growth potential (that is, economic scarring) would increase these financing needs by an additional 1.7 percentage points. Lockdown measures have ground economies to a halt, closing firms and sharply increasing unemployment. They have prevented children from attending school, while remote learning has remained out of reach for at least 500 million children, the vast majority in developing economies. And it may prove more difficult for recent school graduates to enter the labor market (Von Wachter 2020; Wolf 2020). We simulate these effects by increasing the depreciation of human capital (loss of skills due to unemployment), decreasing the elasticity of new human capital to education spending (lower benefits of schooling), and decreasing the diffusion of the human capital into the economy (difficulties entering the labor market). We calibrate the growth impact to a downside scenario in which long-term growth returns to only three-quarters of its pre-pandemic potential. In these circumstances, our case study countries on average would need 1.7 percent of GDP in additional resources every year—over and above the 14 percent estimated under the assumption of no scarring (paragraph 12)—in order to maintain a credible path toward achieving their SDGs by 2030 (Figure 2.1). The scarring effect is even more pronounced over the long term, when the full impact on human capital accumulation can be assessed (illustrated for Cambodia in Figure 2.2)

13. The crisis has also exacerbated inequality. The IMF estimates that the average Gini coefficient, a measure of inequality, could increase by 2.6 percentage points for emerging market and developing economies following the pandemic, wiping out equity improvements since 2008 (Figure 12; IMF 2020c). As lockdowns hit particularly the service and education sectors, they affected women and younger cohorts disproportionately. The World Bank estimates that globally more than 90 percent of all students had their education disrupted to some extent last year, with about 40 percent losing the majority of the school year. This is costly, given that an additional year of schooling is associated with a 10 percent increase in wages (World Bank 2021).

IV. Improving the ODDS

14. Government policies have a crucial role in advancing development. Structural reforms can boost growth and thus generate more resources. There is room for additional domestic revenue mobilization once the crisis has subsided (see for example de Mooij and others 2020) and for improvements in efficiency and governance to ensure that scarce resources are well spent. The public sector should also enable and catalyze private investment by strengthening institutions and improving the business climate. Still, even in the medium term, for many countries the SDG needs exceed potential domestic public and private resources, pointing to the vital role the international community can play in advancing development.

A. Public policies and structural reforms

15. Higher inclusive economic growth can accelerate the development path. Governments should focus on structural reforms, including efforts to enhance macroeconomic stability, institutional quality, transparency, and governance, which are associated with stronger medium-term economic growth. Financial system reform and financial inclusion can likewise boost inclusive growth by strengthening the allocation of capital in the economy. Promoting digitalization, green technologies, and trade could further improve economic prospects while enhancing resilience. Stronger growth in turn generates more resources that can be spent on financing the SDGs.

16. Many LIDCs and emerging market economies have relatively low tax revenues. In general, the public sector is smaller in LIDCs, somewhat larger in emerging market economies, and largest in advanced economies (Figure 13). But with appropriate policy changes government resources can be increased over time. Updated estimates for a panel of 116 countries show a tax capacity—the predicted maximum taxation in an economy given its macroeconomic, demographic, and institutional features—of about 23 and 28 percent of GDP, respectively, for the average LIDC and emerging market economy (IMF 2021a). As LIDCs in the sample currently collect only about 17½ percent of GDP and emerging market economies collect about 20½ percent of GDP, on average, in tax and social security contributions, there is considerable potential for a gradual increase in domestic revenue. Even closing part of the gap can substantially increase available resources.

17. Increasing the tax-to-GDP ratio by about 3–7 percentage points over the medium term through comprehensive policy and administration reform is an ambitious but achievable aspiration for many countries. Looking at successful tax reform episodes, Akitoby and others (2019) and Akitoby, Honda, and Primus (2020) found that several LIDCs were able to increase their tax collection significantly over a medium-term horizon. Among our case study countries, the Pakistani authorities have started to implement tax policy and revenue administration reforms that could help raise the tax revenue ratio by more than 3 percentage points of GDP over four years, while Rwanda is crafting a medium-term revenue strategy (MTRS) to raise revenue after the pandemic subsides.⁵ Such reform episodes center on improving tax policies by eliminating tax incentives and exemptions that undermine the efficiency, equity, neutrality, and simplicity of the tax system. They also encompass enhancements to revenue administration to increase taxpayer compliance, raising efficiency and increasing revenues from hard-to-tax sectors, thus reducing informality and the shadow economy (for details, see, for example, OECD 2020). In the international context, countries should focus attention on eliminating opportunities for base erosion and profit shifting as well as possibly introducing carbon taxation to curb global warming.

18. The impact of such a comprehensive tax reform strategy is substantial and long-lasting. Nigeria features structurally low government revenue. An ambitious tax reform to raise non-oil revenue by 6 percentage points of GDP over the medium term could help the country generate almost a quarter of the resources needed to achieve its SDGs. In Rwanda and Cambodia, increasing tax revenue gradually by 7 and 3 percentage points of GDP, respectively, and spending the proceeds on development would allow these countries to achieve their SDGs by the mid-2040s and mid-2030s, respectively.⁶^,⁷ To be successful, tax reforms require a holistic perspective, as outlined in the MTRS approach, not least to convince stakeholders that the reform is in the interest of all.

19. Still, raising domestic revenue will have to await a solid recovery. Even as tax revenue has decreased significantly due to the pandemic (Figure 14), in the short term and to the extent their fiscal position allows it, governments will need to focus on supporting the economy by running deficits, thus partially making up for the lack of private demand. Only once a country’s economy is on track for a solid post-pandemic recovery should the authorities aim to increase domestic revenues. At the same time progressive taxes need to be enforced to ensure that those who can pay during the pandemic contribute.

20. Besides taxes, governments can also increase revenues from other sources by stronger management of government assets. Good management of existing public assets aims to make sure that maximum value is derived from their use and that they are maintained optimally over their lifetime. Governments should expect to earn a return on their financial and nonfinancial assets that can help meet their spending needs. The revenue potential is sizable. The 2018 Fiscal Monitor (IMF 2018c) highlights a potential average revenue gain from improved management as high as 3 percent of GDP a year. In LIDCs a large share of these potential gains is likely to come from improvements in the management of state-owned enterprises, which are prevalent in many LIDCs. But, like other revenue-raising reforms, implementing better asset management takes considerable time and is thus no short-term panacea.

21. Increased efficiency of public spending can also help to meet the SDGs. Analysis suggests that the average LIDC loses about 53 percent of the returns on its investment to inefficient public investment management (Figure 15; IMF 2015a, 2018a). For instance, in Nigeria and Pakistan the efficiency of physical infrastructure investment is relatively low, whereas Cambodia and Rwanda perform in line with their peers. Better public investment management and infrastructure governance—that is, strengthening public sector institutions’ capacity to plan, allocate, and implement public investment in infrastructure to ensure that every available dollar boosts economic development—can help countries close up to two-thirds of their efficiency gap (Baum, Mogues, and Verdier 2020). And countries can use the efficiency savings to finance shortfalls in SDG financing elsewhere (Box 3).

^{Box 3.}

Doing More with Less: Efficiency Savings in Brazil

Brazil has achieved remarkable social and economic progress over the past two decades, but poverty and income inequality remain high by regional standards (Figure 3.1). A recent analysis by Flamini and Soto (2019) estimating Brazil’s spending needs to meet its SDGs found that it faces a large infrastructure gap, in particular for roads, with a more modest shortfall for water and sanitation and electrification targets. Achieving its SDGs in these infrastructure areas will require about 3½ percent of GDP a year in additional investment between now and 2030.¹

The same analysis found that the country also falls short on its education and health targets. But in these sectors, there is substantial scope for improving outcomes while containing expenditure. Regarding education, demographic developments imply a large decline in the school-age population, pointing toward lower overall education costs. While some of these savings should be spent on increasing enrollment rates and staffing to improve educational outcomes, estimates suggest there would be room to reallocate up to 1½ percent of GDP a year over the long term.

Similarly, the analysis suggests there is room to improve health outcomes while realizing efficiency savings. Even after allowing for an increase in the number of doctors to improve health outcomes in line with high-performing peer countries, potential cost reductions of up to 2½ percent of GDP in the medium term may be possible.

Brazil would thus be able to improve both human and physical capital by pursuing efficiency gains in its health and education sectors. The country can do more with less by increasing the efficiency of public spending, but this will require substantial reforms.

¹This assessment was done in 2019, before the pandemic struck.

B. Private sector policies

22. Private investment can make a significant contribution to economic growth and development. In developing economies, the private sector generates 90 percent of jobs and 60 percent of all investment and provides 80 percent of government revenues (IMF 2020c; IFC 2013). Private investment boosts development by increasing labor productivity and wage growth, leading to an inverse relationship between investment and poverty (IMF 2018b). It can also serve to enlarge the resource envelope, bring efficiency gains, and enhance risk sharing between the public and private sectors. Many LIDC governments therefore look to boost private finance to bridge the financing gap required to achieve the SDGs. Examples of such private finance include public-private partnerships to build roads and power plants and privately financed and run schools and universities. Given often limited domestic private saving in LIDCs, much of this additional private finance would come from abroad.

23. The potential for (external) private finance remains largely unrealized, but some positive examples have emerged over the past few years. Globally, institutional investors manage more than $100 trillion in assets (Figure 16). For the pension funds and insurance companies among them financing infrastructure projects may be particularly attractive, as they typically have long investment horizons and seek risk diversification. But overall, only a small fraction of institutional investment is concentrated in LIDCs and emerging markets (McKinsey 2020), even though infrastructure investments in these countries on average have strong yields. This suggests that there may be opportunities to scale up private engagement. For example, Rwanda managed to increase World Bank–sponsored infrastructure projects in which the private sector participates from virtually nothing in the early 2000s to about 1½ percent of GDP annually during 2015–17—concentrated in the energy sector (Figure 17).

24. Policies should support a favorable business climate to catalyze higher private finance. Macroeconomic and sociopolitical conditions are key determinants of credit risk and foreign investment. Weak institutions and high levels of corruption magnify the risk of asset loss and carry high reputational risk for investors. Effectively, this reduces the risk-adjusted returns on private investment. Countries with weak governance and regulatory environments should therefore strengthen their institutional framework to enhance the clarity and transparency of the regulatory and legal frameworks and ensure consistent enforcement of contracts and property rights.

25. For many projects, public sector support may be required to generate an attractive risk-return profile for private investors. When the risk-return profile on a project is not a priori attractive to a private investor, public sector and concessional resources can be leveraged to improve the risk-return tradeoff (World Bank 2020b; Economist 2016). Such blended finance can be tailored to the project; for example, through subsidies, guaranteed minimum returns, or shouldering part of the risk directly. Of course in any project careful consideration should be given to fair and proportional distribution of risk and return among public and private participants.

26. Countries also need a solid pipeline of infrastructure projects available for private sector financing, with transparent and accessible information. Some SDG priority areas are less suitable for large-scale private investment than others. Sectors that generate revenue from stable usage fees (such as energy, airports, and toll roads) are more attractive to investors due to their more predictable repayment capacity—which is why they are often referred to as “bankable.” In health and education, private delivery of services is typically much smaller in LIDCs and emerging market economies than in advanced economies, which limits the potential to scale up investment (Kenny 2019). Finally, some types of direct investment, such as greenfield infrastructure projects, may not be feasible for many institutional investors as they cannot demonstrate financial viability and are hence deemed too risky.

27. Increasing private finance for development may be feasible in our case study countries. Countries that attract little foreign direct investment (FDI)—the main source of additional private finance—could pursue reform to emulate their better-reforming peers (see, for example, Eyraud and others, forthcoming). Consider Pakistan and Nigeria, which saw FDI inflows of just 0.7 and 0.5 percent of GDP a year during 2015–19, respectively—both well below the average of their peers (Figure 18). Similarly, Rwanda, which attracts more FDI and aims to increase it further, could strive to raise FDI to emulate the top quartile of its peers.

C. International support

28. Most LIDCs will not be able to achieve their SDGs by 2030 without international support. Even if the public sector implements the right policies and the private sector responds positively, a gap would remain. The international community could help fill this gap. Donor country support has been fairly constant as a percentage of their gross national income, at a level representing about half the recommended UN target (Figure 19). Because low-income countries’ economies have grown faster than those of donor countries, especially since the early 2000s, this support translates to a declining share of LIDCs’ GDP and hence a declining impact on the ground. This trend limits the scope for donor inflows to finance new SDG-related projects.

29. Multilateral financial institutions also have a role to play. The IMF and other multilateral institutions should focus their capacity development in LIDCs, particularly in fragile and conflict-affected states, on critical SDG bottlenecks. This includes helping build technical and financial capacity on the ground to manage investment pipelines and in the process increasing the capacity to absorb the necessary large inflows. In addition, development banks could leverage their balance sheets to de-risk investment projects and transform them into tradable assets through securitization, providing a better risk-return profile for investors and, by creating financial instruments that align better with private investor mandates, making investment attractive to a new class of private investors (IPS 2020). Development banks can also help market development more generally as, for example, the International Finance Corporation did by issuing a series of bonds to help build an offshore yield curve in Indian rupees. The IMF should continue catalyzing support for countries hit by shocks, thus helping maintain macroeconomic stability, and incorporating targets and objectives for (public) expenditure on SDG priority areas, while expanding them where possible. Across the IMF membership, increased attention to governance should continue, along with encouragement of regulatory reform to improve the investment climate.

30. Supporting development with both funding and capacity development is in the self-interest of all. More than half of world population growth between now and 2050 will come from sub-Saharan Africa, potentially transforming the continent into the most dynamic market in the world. Helping LIDC populations achieve better lives and livelihoods would also decrease migration and the politically difficult issues surrounding it. A global effort to support the success of LIDCs in getting development back on track is thus in the interest of all.

V. A Path for Development

31. LIDCs face a daunting challenge in achieving their SDGs. Drawing on the previous section, we simulate several illustrative scenarios to assess the depth of the challenge. In a baseline scenario without further reform effort, our four case study countries on average need additional resources of just over 14 percent of GDP every year between now and 2030 to meet their development goals (paragraph 12). Without these additional resources we estimate that some countries will not be able to reach their SDGs even by 2050. This dire reality makes it all the more important to pursue economic recovery policies that are carefully designed to support higher and more inclusive growth and generate more resources for development.

32. Countries should face this challenge by improving policies to spur growth and generate more resources for development. The right mix of policies can substantially speed up the development agenda. To this end, boosting economic growth through structural reforms is perhaps the most important channel (IMF 2015b). IMF (2019) estimates that in emerging market economies and LIDCs comprehensive reforms could raise output by more than 7 percent over a six-year period on average, accelerating convergence with advanced economies.⁸ Gaspar and others (2019) estimate that doubling projected GDP per capita in 2030 would reduce additional spending needs by some 4½ percentage points. At the same time, countries should pursue the policies discussed above to generate additional public funds for development through domestic revenue mobilization, better management of public assets, more efficient spending, reprioritization of expenditure toward development, and encouragement of more private sector investment in SDG sectors.

33. A full reform scenario along the lines discussed in Section IV can generate up to half the resources needed for the SDG agenda in the case study countries. A comprehensive reform scenario should combine reforms to boost growth, revenue mobilization strategies, reforms to attract private investment, and further structural reforms, such as increasing the efficiency of state-owned enterprises and (for natural resource producers) revisiting the natural resource regulatory and taxation regime.⁹ We estimate that such comprehensive reform plans could on average generate about 40 percent of the resources needed to achieve the selected SDGs in our four case study countries and cover half the need in Pakistan and Cambodia (appendix; IMF 2021a). Still, to reach their SDGs by 2030, the countries would need to find additional resources amounting to almost 8½ percent of GDP a year, even with these ambitious reform agendas (Figure 20).

34. Country-specific conditions heavily influence the yield of reforms. Both Rwanda and Nigeria have much higher SDG needs than Pakistan and Cambodia. Hence similar reforms can be expected to pay for a smaller portion of their SDG needs. At the same time, Rwanda and Cambodia have a good track record of reform in recent years, while Pakistan and Nigeria have pursued less reform. Therefore, while harder to achieve, the scope for reforms and their potential gains are larger in the latter two countries. For instance, while tax revenue represents 15–18 percent of GDP in Rwanda and Cambodia, Nigeria and Pakistan are projected to have collected only 3 and 11 percent, respectively, of GDP in tax revenue in 2020. Comprehensive reforms of the tax system hence imply greater potential gains in Nigeria and Pakistan.

35. The benefits of reform are even more significant over the long term. Looking beyond 2030 illustrates the sizable benefits from sustained reform, showing truly large increases in development indicators that can be achieved through the cumulative buildup of physical and human capital over a prolonged period. Pursuing and maintaining the domestic reforms discussed above would reduce poverty meaningfully as 2050 GDP per capita increases significantly over a no-further-reform baseline scenario (illustrated for Pakistan in Figure 21). Similarly, investment in health and education under such scenarios would provide a large long-term boost to the collective value of knowledge (illustrated for Cambodia in Figure 22).

36. Even if countries undertake ambitious reforms, the SDGs will be significantly delayed without a contribution from the international community. In our case study countries, the resources generated by the ambitious domestic policy reform above are substantial but far from sufficient for achieving the SDGs. Even though the reforms would not suffice to achieve the SDGs by 2030, they would allow countries to meet their goals eventually. The reforms would enable Cambodia to meet its SDGs by 2033. Considering their larger SDG needs, it would take Rwanda and Nigeria until 2040 and 2043, respectively, while the reform policies—on top of current reform plans under its IMF-supported program—would enable Pakistan to meet its SDG targets by 2045.

37. Additional donor support is hence critical for the SDG agenda. Donor countries and their public finances have been hit hard by the pandemic, putting constraints on their fiscal resources. However, gradually building donor support toward the United Nations’ recommended official development assistance (ODA) target of 0.7 percent of gross national income (GNI) over the next decade would release some $200 billion (in 2020 US dollars) for development. Based on our case studies, that would fill more than two-thirds of LIDCs’ average SDG needs gap after pursuing reform. The impact on individual countries depends on how this amount is distributed across countries. Combining the domestic reforms outlined above with additional support distributed to LIDCs in accordance with recent aid flows would allow Cambodia and Rwanda to (largely) fill their remaining financing gaps and meet their SDG agendas in the five sectors considered in this note by 2030 and 2031, respectively (Figure 23).¹⁰ In this scenario Nigeria and Pakistan would receive less support, and—while the funds would help both countries—it would still take them at least a decade longer to achieve their SDG goals. Distributing the support based on countries’ GDP would allow Pakistan to meet its SDG agenda by 2030, while Nigeria—which has much larger initial needs—would be able to meet its SDG goals by the middle of the next decade.¹¹

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