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Thus far, the “billions to trillions” vision is not coming to fruition. The greatly expanded private capital flows that people hoped for, especially for SDG-related infrastructure and for low-income countries (LICs), have not materialized. Given stagnating aid flows, attempts to accelerate spending have raised public debt, putting macroeconomic stability at risk in many LICs. Many call for more catalytic use of donor resources to mobilize private finance, but others question whether blending public and private monies would just subsidize the private sector, or divert public funds from social and infrastructure investment in LICs and fragile states aimed at reducing poverty. CGD research focuses on building the evidence base for better understanding the challenges and devising innovative solutions in synergizing public and private finance. We are analysing private capital flows to LICs after the global financial crisis; examining the factors limiting the role development finance institutions (DFIs) are playing in mobilizing private finance; exploring the characteristics and sources of finance of infrastructure projects in Africa; assessing the impact of blended finance on poverty; and proposing changes to the development finance architecture to boost DFI risk tolerance, mobilization, and impact.
There are arguments for and against “spending through the tax system.” On one hand tax incentives are relatively easy to implement; they don’t require an outlay of cash and they make use of information that revenue agencies already collect. But on the other, loading the tax system with too many policy objectives conflicts with the drive for a coherent, simple, transparent tax system. Despite decades of advice from international organisations to curtail tax incentives, they remain a popular tool for governments.
The future of development policy is in development finance. Developing countries need aid less and less as their incomes rise and economies grow. What they need now is private investment and finance. US development policy, however, has failed to bring its development finance tools in line with this reality. Related US efforts have not been deployed in an efficient or strategic manner because authorities are outdated, staff resources are insufficient, and tools are dispersed across multiple agencies.
Other players are doing more. Well-established European development finance institutions (DFIs) are providing integrated services for businesses, and these services cover debt and equity financing, risk mitigation, and technical assistance. Moreover, emerging-market actors — including China, India, Brazil, and Malaysia — have dramatically increased financing activities in developing regions such as Latin America and Sub-Saharan Africa.
Kingsley Moghalu, former Deputy Governor of the Central Bank of Nigeria, believes that Africa’s development potential lies in the hands of Africans themselves and that underdevelopment is due to the lack of a suitably ambitious worldview.
Governments, donors, and public sector agencies are seeking productive ways to ‘crowd in’ private sector involvement and capital to tackle international development challenges. The financial instruments that are used to create incentives for private sector involvement are typically those that lower an investment’s risk (such as credit guarantees) or those that lower the costs of various inputs (such as concessional loans, which subsidise borrowing).