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19 September 2018
Gail Hurley - Policy Specialist on Development Finance, United Nations Development Programme, New York
How finance is raised and spent must be transformed to effectively meet the enormous challenges of the 21st century
The International Labour Organisation (ILO) recently reported that the world economy will need to spend at least US$ 7 trillion extra on social care by 2030 to cope with demographic changes worldwide. Rising birth rates and increased life expectancy mean there will be at least 200 million additional people worldwide needing care by 2030, with the bulk of the increase to come from African nations. Spending on social care (children, the elderly, the disabled and neediest in society) will need to rise from about 8.7% of GDP at present to almost 15% of projected world economic output by the end of the next decade.
This comes on top of an estimated US$ 650 billion to US$ 1 trillion needed annually to mitigate and adapt to climate change, with climate change costs already running into hundreds of billions a year in storm damage, health costs and lost productivity.
Climate change, in turn, is expected to lead to dramatic increases in migration, as millions (or even billions) of people become exposed to coastal sea level rises and extreme weather conditions (hurricanes, droughts, heatwaves etc.). One study estimated that 1 million migrants could attempt to settle in the European Union annually by 2100, as a result of climate change.
Already, migration and displacement are at an all-time high. The International Organisation for Migration’s (IOM) newest projections are that there will be 405 million international migrants by 2050. Some of this movement will be involuntary – driven by conflict, poverty, environmental disasters and persecution.
Displacement risks are especially high for those in low and middle-income countries, and those living in poverty. Oxfam estimates that people in low- and lower-middle-income countries are five times more likely to be displaced by sudden-onset extreme weather disasters than people in high-income countries.
Other ‘megatrends’ include: continued rapid urbanisation; continued environmental degradation; advances in technology and artificial intelligence (AI); a youth ‘bulge’ in some countries; as well as, arguably, a rise in vulnerability to various economic, environmental and conflict-related shocks.
UNDP and the UN Research Institute for Social Development (UNRISD) have pointed to both opportunities and challenges associated with these major shifts. Opportunities include enhanced abilities to both learn and teach through new technologies, with more possibilities for collaborative work. Big data can transform data collection and analytics for better decision-making. Renewable energy technologies will be critical in tackling climate change. Urbanisation, especially amongst ‘secondary’ cities, provides opportunities to build ‘smart cities’ as well as more easily meet peoples’ needs.
Threats are that worsened environmental degradation could lead to food insecurity for many more people worldwide, as well as critical biodiversity loss and more vulnerability to natural hazards and conflicts. We have also seen fevered speculation around what advances in artificial intelligence may mean for the future of work. Depending on the study, anywhere from 15 to over 50% of jobs could be automated over the next 20 years with younger people and lower qualified workers especially vulnerable.
What do these trends mean for financing the UN’s Sustainable Development Goals (SDGs)? These are structural transformations on a global scale, the consequences of which will be with us for the next 50-100 years at least.
There are both challenges and opportunities.
Many developing countries have made efforts to raise more revenues domestically over recent years, and they are by far the largest and most important source of finance for development. However, AI may drive down the income states are able to derive from labour as robots replace more and more jobs. Proposals for a ‘robot’ tax have been mooted, but it’s not yet clear how seriously these have really been taken. In this context, efforts to tackle tax avoidance (and evasion), and broader reforms to international taxation and tax cooperation, are increasingly important, especially as we see debt-fuelled investment rise across many developing countries.
On the other hand, digital finance (the fintech revolution) has the potential to support a transformation in financing for sustainable development by, for instance, mobilising capital for critical priorities, supporting financial inclusion and mainstreaming social and environmental factors throughout the financial system.
Climate change, environmental disasters and increased migration (themselves sometimes inter-linked) may drive large changes to patterns in international aid allocation. Arguably, this is already in evidence within some European Union countries as larger shares of Official Development Assistance (ODA) are allocated to dealing with refugee and migrant flows, associated security operations and humanitarian responses. Development Initiatives reports that the level of humanitarian assistance within overall ODA has grown much faster (at 124% since 2007) than overall ODA (at 41% since 2007). Climate related aid is also capturing large shares of overall aid.
On the flip side, more migrants imply larger diaspora communities worldwide, many of whom will remit funds to their home countries or invest in local businesses. Some countries have already successfully engaged diaspora communities in development financing efforts (e.g. through diaspora targeted bonds in Ethiopia, India and Nigeria, and in Mexico by providing opportunities to invest in social enterprises). New technologies are also facilitating the emergence of diaspora finance platforms. Strategies to engage the diaspora may therefore warrant increased attention, and we should also return to the as-yet unfulfilled international promise to reduce remittance transfer costs and explore ideas for not-for-profit remittance services.
Many countries are likely to need to invest much more in renewable energy infrastructure and in disaster risk-reduction and preparedness. Already, investment in these areas is on the rise. Last year investment in renewables reached almost US$ 280 billion worldwide, driven mainly by solar and wind. Yet this still falls far short of investment needs, and is being driven by mostly larger middle-income economies. Investment remains low in poorer countries and many small island states, which are amongst the most vulnerable to climate change. Perhaps it is time for countries to revisit longstanding proposals for carbon taxation as an efficient tool to mobilise more resources for these purposes on a sustainable basis.
Insurance will also become more important, and new insurance products are being developed. UNDP and the Nature Conservancy are piloting coral reef insurance in Mexico for example, and more attention could be paid to not-for-profit insurance models.
A transformation in the ways in which finance is both raised and spent is needed to effectively meet the challenges of the 21st century. UN Environment and the World Bank suggest that a sustainable financial system is one that integrates sustainability considerations into all its operations, including the full costing of positive and negative externalities, leading to a substantial reorientation of the flow of resources toward more inclusive and sustainable activities. They suggest the transition to a sustainable financial system will involve a combination of: market-based incentives (e.g. integration of environmental and social risks into business models); national initiatives (e.g. improved public policy in the area of climate change), and; international initiatives (e.g. the adoption of shared principles and actions).
Emerging technologies and disruptive trends are reshaping financing; these shifts must be harnessed for good. Policies and political leadership are needed at both national and international levels to ensure the benefits are available for all countries and communities, and that these trends do not lead to worsening inequalities both within and between countries.
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