Development has defined international economic discourse for decades as efforts towards global poverty reduction and increased growth continue to fuel ambitious and expensive projects. For years, billions of dollars have been funneled into regions such as Sub-Saharan Africa that have subsequently seen limited, if any, sustained growth.
Development efforts are unique in the necessity of comprehensive initiatives that target both micro and macro economic challenges ranging from access to clean water to the sustainability of national industrial complexes. Consequently, public development aid has proven to be inefficient in generating the necessary funds for such projects.
Private investment in development has existed as long as development itself. However, most private activity in development stems from industrial involvement by multinational corporations in countries where standard wages are lower and labor regulations are limited. Foreign direct investments (FDI), the total of which is valued in the hundreds of billions of dollars, are simply not enough to reach the new standard of international development as measured by the Sustainable Development Goals (SDGs). The 17 SDGs, adopted by the UN in 2015, outline the official agenda for global economic growth through 2030. Ambitious and comprehensive, the SDGs target everything from global poverty and quality education to climate change.
Today, FDI now outnumbers official development aid (ODA), or public aid from multilateral institutions or individual countries, five to one. This is due in part to a recent change in strategy on behalf of development institutions that no longer denote ODA as the primary driver of economic growth, and instead value it as a means to incentivize other investments, namely FDI.
Ultimately, the current combination of private and public investment is not enough to raise sufficient funds to meet the SDIs, which need trillions of dollars to be successful. In terms of sustainability and clean energy, nearly all countries who signed onto the agenda, and those that set emission limits in the 2015 Paris Climate Accord, are nowhere near reaching their desired goals. The UN recognized that the cooperation of individual states, even if all member countries did participate in full to make the SDGs a reality, would not be enough to enact global change. As such, the business sector was heavily included in the 2030 Agenda, by both national governments and the UN.
The private sector functions in a framework focused primarily on the bottom line. Simply put, businesses need a greater incentive than the achievement of the SDGs to participate in such development policies in full. Potential private investors need see a benefit to supporting development initiatives that supersede the benefits they reap from the perpetuation of underdevelopment, namely cheap access to resources and labor.
Currently, the private sector provides nine out of ten jobs in developing countries across the globe. According to a 2013 World Bank Group report, 600 million new jobs will be needed by 2020 to accommodate the ever increasing international population growth.
Job growth is not the only factor of development, however. Often the most vulnerable populations of low-income countries, especially women and low-skilled laborers, benefit from the availability of positions in the typically robust informal sectors found in many underdeveloped regions. Participation in the informal sector essentially eliminates the middle-man, or government, in the generation of profit. Taxes cannot be collected on wages generated outside of the formal sector, restricting government revenue, consequently limiting public funds for development initiatives. Concurrently, the informal sector tends to be less productive and offer lower wages than the formal sector, further exasperating discrepancies in economic growth between developing and developed economies.
As of 2010, the informal sector makes up 37 per cent of all developing economies’ GDP. Comparatively, only 16 per cent of GDP in developed countries is composed of informal sector activity. In sum, developing countries are, on average, losing 21 per cent more potential government revenues compared to developed regions. The private sector, in addition to developing economies, would benefit from a growing share of employment in the formal sector. The associated high labor productivity would translate into a greater generation of profits for businesses invested in not just the realities of a low-income economy, but the perspective of increased development.
In addition to maintaining a stake in the progression of global labor productivity, private investors must be incentivized to increase the flow of capital in development financing. The fulfillment of the SDG goals such as greater access to healthcare and education require substantial investment that does not necessarily translate directly into profit for private businesses in the short run.
However, education and healthcare are inherently connected with the ability to develop and as such are crucial to the efforts of development finance today. Specifically, development finance is the generation of investments, both private and public, to ensure access to capital and the long-term sustainability of projects. For greatest success, the private sector must be as included in the long term initiatives of economic growth as it is involved in short-term gain.
For such comprehensive and transformative change, private financing is more important than ever in achieving development goals. Blended finance initiatives, local and international investments, and continued foreign direct investment will be crucial in increasing economic growth. As such, increased coordination between governments, institutions, and the private sector will be necessary to effectively allocate the finances required. To encourage more substantial private involvement, development institutions and donor countries have begun to work on mitigating some of the potential risks involved with such long-term and complicated investments.
Whether these efforts are too little too late to generate the necessary trillions for achieving desired goals, in 2030 or even within this century, is yet to be seen. An international transformation in the way in which private actors invest and institutions direct funds will be extraordinarily difficult, however crucial to facilitating the coordination needed.
Edited by Sophia Kamps
The opinions expressed in this article are solely those of the author and they do not reflect the position of the McGill Journal of Political Studies or the Political Science Students’ Association.
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