10 Ways Financing for Development has Changed in 10 years
Financing for Development Conferences – the chief event in the United Nations (UN) system on mobilizing the resources needed to achieve development – don’t come around very often: a decade ago in Addis Ababa, negotiators produced the Addis Ababa Action Agenda, which offered a comprehensive framework to guide development policymaking over the last decade.
Now, 10 years later, the United Nations will host the Fourth International Conference on Financing for Development (FfD4) in Seville, Spain in June, and the economic landscape negotiators will be working within has shifted substantially since 2015.
Despite the Addis Ababa Action Agenda, financing for development has faltered, and with it, so has global progress. After decades of declines, the percentage of the world living in poverty increased during the pandemic. At a time when greenhouse gas emissions need to fall rapidly, global emissions continue to increase. With just five years until the critical 2030 milestone, less than a fifth of the UN 2030 Sustainable Development Goals (SDGs) are on track. Now is a time for a comprehensive re-think of the international financial architecture.
As this year’s FfD negotiations evolve, a recurring question is whether this year’s outcome should hew closely to the agreement that came out of the 2015 conference or whether this year’s outcome should push in new directions. Many perceive the Addis Ababa Action Agenda as having taken a somewhat conservative approach, offering general recommendations without specific instructions or deadlines. It also tended to focus on domestic factors shaping financing for development—like domestic resource mobilization and creating an enabling environment for investment—rather than how the broader international system shapes resource mobilization and development.
If the system were making healthy progress, a modest fine-tuning could be an adequate outcome for FfD4. But as the figures below show, progress is stagnating and the window to meet global goals is slipping away. The Addis Ababa Action Agenda has proven inadequate, and a retrospective look shows that financing for development has changed a lot in the last 10 years—and that a new approach is needed.
1. Developing countries’ tax-to-GDP ratios have gone in the wrong direction
Figure 1: Tax-to-GDP ratio of low- and middle-income countries, 2015-2023
Domestic resource mobilization formed one of the key focuses of the Addis Ababa Action Agenda. Unfortunately, as seen in Figure 1, low- and middle-income countries’ tax-to-GDP ratios have actually decreased since 2015. And it is not that low- and middle-income countries are suffering from a global trend: high-income countries’ tax-to-GDP ratios increased in that same period.
2. Blended finance has also decreased
Figure 2: Blending finance market, 2014-2023
Along with domestic resource mobilization, private capital mobilization is remembered as one of the main outcomes of the 2015 conference. The World Bank’s submission to the conference coined the phrase “billions to trillions,” marking the idea that private finance could be encouraged to flow to developing economies on the back of small amounts of public finance. This, too, has not panned out. According to Convergence’s State of Blended Finance Report (which Figure 2 is from), while blended finance has increased in terms of the number of deals, the dollar value of blended finance has decreased since 2015.
3. Interest rates have increased significantly
Figure 3: Cost of borrowing in international bond markets by region, 2010-2023
One reason private capital mobilization looked more appealing in 2015 is that FfD3 took place in a context of low interest rates. That era came to an end with rate hikes in 2022. While all sources of finance became more costly, private finance is the costliest. As shown in Figure 3, rates on bonds for African countries nearly doubled from 2015 levels, while Asia and Latin America also experienced significant increases. Over 3 billion people now live in countries that pay more on the interest on their debt than health or education.
4. Debt distress has grown
Figure 4: Levels of debt distress of countries covered by LIC-DSF, 2015-2023
As debt stocks and debt servicing costs have grown, more countries have fallen into risk of debt distress, according to the World Bank and International Monetary Fund (IMF) Debt Sustainability Framework for Low-Income Countries and illustrated in Figure 4. When investment needs for the SDGs and Paris Agreement are fully taken into account, even more countries face solvency risks.
5. Net flows to developing countries have turned negative
Figure 5: Net flows to developing countries, 2000-2025
With the increase in external debt servicing outpaces inflows of finance, net financial flows to developing countries have turned negative, shown in Figure 5. In other words, developing countries are paying more to the rest of the world than they are receiving.
6. Foreign aid hasn’t filled the gap
Figure 6: Official development assistance by category, 2015-2023
Note: ODA = official development assistance; IDRC = in-donor refugee costs.
While the Organization for Economic Cooperation and Development (OECD)’s official development assistance (ODA) figures have increased, this doesn’t reflect an increase that will make up for the shortfalls in finance in developing countries. As seen in Figure 6, most of the increase in aid comes from new aid responding to Russia’s war in Ukraine or what is called “IDRC” in this graph—“in-donor refugee costs,” meaning money that countries spend within their own borders to support refugees, rather than foreign aid reaching other countries. And these statistics only go up to 2023, before recent announcements of aid cuts—major cuts in Europe and enormous cuts in the United States.
7. Chinese finance has tapered off
Figure 7: Trends in China’s overseas lending and development finance
Note: In 7A, 7C and 7D, the data depicts loans supplied by China’s development finance institutions (DFIs), the China Development Bank and the Import-Export Bank of China. In Figure 7B, the data shows loans given by China’s DFIs, state-owned commercial banks, companies and other government entities.
China scaled up its overseas finance in the years before FfD3, most famously launching the Belt and Road Initiative in 2013. This finance helped generate valuable development investments while also coming with environmental and debt sustainability risks, and the quantity of Chinese development finance has tapered off since a peak in 2016. While there are signs of a new uptick in Chinese financing, it remains much smaller than peak levels.
8. Demand for IMF and World Bank support is way up
Figure 8: IMF outstanding credit and World Bank disbursements, 2015-2024
With debt pressing down on developing countries’ financing and other sources of finance stagnating or decreasing, countries have had to turn to the IMF and World Bank for support. As shown in Figure 8, both IMF outstanding credit and World Bank disbursements have nearly doubled since 2015. The World Bank’s efforts to stretch its balance sheet has helped it scale up lending, but both institutions are grappling with the extent to which their existing resources can meet high demand for financing.
9. Climate finance has increased
Figure 9: Climate finance provided and mobilized, 2012-2022 (USD billion)
There are many legitimate critiques of the way the OECD counts climate finance: the extent to which it is additional to development finance, the lack of distinction between grants and loans and and the lack of clarity about what counts as climate finance. Still, Figure 9 reveals that reported climate finance has significantly increased since FfD3, even if it falls far short of needs. Multilateral development banks have powered this increase, accounting for more than half the growth in climate finance provided by developing countries.
10. The 2021 SDR issuance is a rare bright spot
Figure 10: 2021 SDR issuance in perspective
The IMF’s 2021 issuance of $650 billion in Special Drawing Rights (SDRs), a reserve asset that costs nothing to create, was the biggest bright spot for developing countries’ financial stability over the last decade. Because SDRs are allocated in line with the IMF’s unbalanced quota formula, only $209 billion went directly to developing countries, though this is still a large amount relative to other sources of financing. Developed countries pledged to re-channel another $100 billion to developing countries, but it has been slow to materialize. Still, while sources of finance like the OECD’s climate finance, ODA or Chinese overseas development finance are not identical in purpose or composition to SDRs, looking at the SDR issuance in this perspective shows a single policy decision in 2021 produced finance rivaling other major sources of finance over a decade.
Business-as-usual can’t be the path forward
If you listen to the negotiations for FfD4, many parties continue to push a business-as-usual approach: in their eyes, domestic resource mobilization and private capital mobilization should lead the way, and the Addis Ababa Action Agenda just needs a modest touch up. The zero draft’s more ambitious proposals are facing pushback.
However, as these trends show, the outlook for financing for development was much rosier in Addis Ababa, when interest rates and debt were lower, climate change was not as far along, and scaling up private capital mobilization and domestic resource mobilization seemed much more tractable. At that time, it was easier to think that well-managed developing countries would quickly see development arrive. That view is much harder to hold now. Factors outside the control of individual developing countries have worsened development prospects, such as advanced economies’ interest rate hikes, changes in the availability of international financing, and pandemic and climate shocks. The importance of these external factors has contributed to a renewed focus on the international financial architecture.
The pandemic and mounting climate impacts should have shown the ways that people in all parts of the world are bound together, but financing for development is declining at the exact moment when a major increase is needed to preserve a safe climate, meet the SDGs and demonstrate the multilateral system’s ability to rise to global challenges. Learning the lessons of the last 10 years would mean ensuring FfD4 produces a stepwise increase in public international finance, rather than relying on private international finance that has failed to scale. It would mean adequately resourcing the IMF and the multilateral development banks that developing countries rely heavily on in a high-interest, shock-prone era. And it would mean providing relief for unsustainable debts that are crowding out development and climate investments.
None of this will be easy, but at a time when so many trends are moving in the wrong direction, business-as-usual isn’t an option.
*
Never miss an update: Subscribe to the Global Economic Governance Initiative newsletter.