Can development aid enhance the resilience of investment in developing countries?

Sam Mealy, Financing for Sustainable Development Division, OECD and Martin Wermelinger, Investment Division, OECD

The current crisis is stretching developing countries’ financing capacities to their limits. Already suffering from rising debt levels and the risk of debt distress, and insufficient domestic and external financing resources, developing countries are now struggling to mitigate the interrelated health, humanitarian and economic effects of the pandemic.  COVID-19 has the potential to widen further the already cavernous USD 2.5 trillion SDG financing gap, jeopardise any hope of achieving the 2030 Agenda, and cause a 10-year setback in the fight against poverty just as we enter into the “decade for action”.

Investment and development cooperation policymakers must act urgently in response to the crisis and help avoid a collapse of financing flows to developing countries. This involves exploiting the complimentary roles that their respective financing sources can provide to help build a sustainable and resilient recovery. Development aid, although low in volume, is historically the most stable source of external finance to developing countries. Private investment, although much larger in volume, is more volatile, as capital flight after the great financial crisis (Figure 1) and during the current pandemic demonstrates. Using development aid to directly catalyse additional investment (through blended finance, for example), improve the qualities of existing investment, and help shape enabling policy environments to attract investment that is more resilient as countries develop will be crucial to the recovery.

Figure 1. Historically, ODA is the most stable external resource for developing countries

Source: OECD (2020), Six decades of ODA: insights and outlook in the COVID-19 crisis

The OECD’s recent paper Investment and sustainable development: Between risk of collapse and opportunity to build back better explores what such a response could look like. It’s built around three pillars:

1. Mitigating the impacts of the investment collapse on livelihoods

As development aid is historically the most stable source of external financing for developing countries, it plays a key stabilising role during crises. Donors must maintain this role, step up their game and provide funding to mitigate the impacts on livelihoods, for example through temporary unemployment or social protection schemes, working with MNEs where appropriate (e.g. in specific sectors such as garments and textiles) and tailored to groups in need and different country contexts.

2. Containing the drop in FDI to developing countries

As countries become richer, they reduce their dependency on ODA and require higher levels of private investment. The OECD estimates that in the most optimistic scenario FDI levels will drop by 30% due to COVID. Creating more enabling investment environments is crucial to contain this drop. Donors can help public authorities to improve framework conditions for investment that could reduce costs, risk and uncertainty for investors.

3. Building back better: enhancing the resilience of investment for sustainable development

Mitigating impacts on livelihoods and restoring investment flows is not enough: donors and investment policymakers must work together to ensure that investments are more sustainable and resilient to future crises. This involves using the catalytic role of ODA to build partnerships with private sector actors, conditioning recovery and stimulus packages on SDG and Paris-aligned criteria, embedding responsible business conduct (RBC) principles and standards into investment decision-making, enhancing the qualities of FDI and exploring how to enhance the impact of the international investment regime on sustainable development.

Join us

On 30 September 2020, at the virtual OECD Roundtable on Investment and Sustainable Development, where the investment and development cooperation communities plus other stakeholders will discuss how they can work together to mitigate the effects of FDI disruptions, contain the drop in FDI in, and help developing countries build back better.

Time: 30 September, 13.30-15.30 (CET)

Register online

Agenda

Roundtable background paper

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