What place for aid in the new era of development?

At the start of the year the European Commission proclaimed 2015 as the ‘European year for development’. But perhaps more appropriate would have been to describe it as the year when the methods for financing development policy changed.

In September government leaders will meet in New York to agree on the next generation of development policy targets - the Sustainable Development Goals (SDGs). These will replace the Millennium Development Goals which aimed to halve the number of people living in extreme poverty and dramatically increase access to education by 2015.

Anybody who thinks that the new policy targets, featuring 17 goals, with 169 associated targets, ranging from ensuring access to energy, water and education, to improving infrastructure and industrialisation and tackling inequality, will be accompanied by a new wedge of cash from western governments is going to be disappointed.

If the UN Financing for Development conference in Addis Ababa earlier this month is any indication, the era of ever increasing development aid is over. The FFD conference, which saw finance ministers from around the world gather to discuss how to finance the new SDGs, saw no new commitments on aid or debt. A pledge by European governments in 2005 to increase Official Development Assistance (ODA) to 0.7 percent of economic output by 2015 has now been extended to 2030.

Debt burdens, which remain an expensive burden for many countries, were not even discussed.

Official Development Assistance (ODA) has increased by 66 percent in real terms since 2000, when the Millennium Development Goals, were agreed. However, almost all of this increase came between 2000 and 2009. Total aid amounted to €120 billion in 2014, a mere €0.1 billion higher than the previous year, according to the Organisation for Economic Co-operation and Development (OECD).

EU governments and the Commission accounted for almost 50 percent of the total contributed a combined 0.42 percent of the bloc’s total income in 2014, €2 billion up on the previous year, a total of €58.2 billion.

The desire to tighten the purse strings is no surprise - the EU has, after all, several years into its own era of austerity - and the EU’s record on aid compares favourably to the rest of the developed world. Nonetheless, if the new SDGs are to be about more than just hot air, new money will have to come from somewhere.

There is little scope for developing countries - particularly those in Africa - to significantly increase public spending.

The average budget deficit in sub-Saharan Africa is 6 percent, for example, and many countries are under pressure from the International Monetary Fund to keep a lid on their debt and deficit levels.

“The last 30 years of economic policy has been about a drive to pay off debts,” says Gyekye Tanoh of the Third World Network.

So where will development finance come from?

EU legislation requiring firms in the extractive sector to publish country-by-country reports of all payments they make to governments came into force this month, and country-by-country reporting is gradually being expanded to other sectors of the economy. Meanwhile, the OECD has drawn up plans on base erosion and profit shifting (BEPS), that would prevent firms from re-routing profits through shell companies, and require automatic exchange of information on tax payments between governments by 2016.

However, African, Latin American and Asian nations had proposed to upgrade the UN’s committee of tax experts to become a formal rule-making body - taking over the OECD’s role - arguing that they are not represented among the OECD’s 34 member countries. The proposal was rejected by the EU, US and Japan on the grounds that it would slow the process of tax reform.

Besides, however important tax justice is, it would be highly optimistic to expect that increased tax transparency will swiftly result in higher tax receipts for developing countries.

If the Addis summit is a guide, the funding gap will have to be filled by the private sector.

The summit communiqué agreed by ministers states that “blended finance instruments including PPPs serve to lower investment specific risks and incentivise additional private sector finance across key development sectors” and speaks of the value of “unlocking the transformative potential of people and the private sector”.

This means more public-private partnerships and a bigger role for the European Investment Bank, World Bank and other development finance institutions.

Ultimately it is the private sector that will create jobs and sustainable economic growth in developing countries, while tax reform will make public finances more robust. But neither will provide a quick solution, especially for the poorest countries which are least attractive to investors. Without an important role for aid - not to mention more favourable trading terms - the so-called ‘year of development’ could in fact end up leaving the poorest behind.