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Closing the ‘great finance divide’ for the SDGs

New UN report calls for radical overhaul of international finance architecture

May 9^th, 2023

The Sustainable Development Goals (SDGs) are in emergency mode. Halfway to the 2030 deadline, progress is eroding before our eyes.

The overlapping food, health, energy and economic shocks of the past few years have pushed tens of millions of people into poverty.

Tighter global financial conditions have been devastating for countries with crushing debt burdens. And increased interest rates and costs of borrowing on international markets have pushed risk up. Many developing countries are on the verge of default.

During the pandemic, rich countries could afford to invest in recovery and got back on pre-pandemic growth paths. Their recovery spending was 30 times higher than for developing countries, and 610 times higher than least developed countries, which could only afford US$20 per person.

The food and energy crisis and debt payments up to two times higher than in 2019 have combined to put massive fiscal pressures on most developing countries. This drastically limits their ability to invest in sustainable transformation.

Closing the ‘great finance divide’ for the SDGs

The evidence is stark. The global financial system has failed to protect developing countries in this time of unprecedented crises, in part because it was never designed with their interests in mind in the first place.

The ‘great finance divide’ risks becoming a lasting sustainable development divergence.

Modernizing global finance

With just seven years to go until the SDG deadline, the United Nations is calling for revolutionary financial and industrial transformation to meet the Goals and close the widening gaps between rich and poor. It is called the SDGs Stimulus Plan.

The SDG Stimulus Plan outlines the need for the international community to come together to mobilize investments for the Goals and proposes three areas for immediate action: injecting liquidity, restructuring sovereign debt, and lowering the cost of long-term lending to developing economies.

The 2023 Financing for Sustainable Development Report lays out what it will cost and how we can get there.

It calls for a large-scale SDG stimulus focused on tackling the high cost of debt and rising risks of debt distress, particularly for the world’s poorest countries on ‘debt row’, and massively scaling up long-term financing for development; and expanding liquidity through contingency financing to countries in need.

It also says the current international financial architecture is outdated and must be modernized. We will not solve today’s challenges by relying on the thinking that helped to create them.

There is already encouraging signs of change. The energy crisis caused by the Russian invasion of Ukraine has lit a fire under investments in the global energy transition, which skyrocketed in 2022 to a record $1.1 trillion. That year energy transition investments surpassed fossil fuel investments for the first time.

But this progress was almost all in China and developed countries. This must change.

A more effective and coordinated form of multilateral cooperation is an imperative for addressing current and future crises.

A recent UNDP policy brief, Building Blocks out of the Crisis, says developing countries could save hundreds of billions of dollars with an SDG stimulus plan.

The 2023 Financing for Development Forum provided a space to address the global challenges and advance policies for financing long-term sustainable development.

Re-thinking taxation and fiscal policies

The international finance system is undergoing the biggest rethink of monetary, trade and tax systems since the Bretton Woods Conference in 1944, which was set up to regulate the international monetary and financial order after the end of the Second World War.

The UNDP policy brief calls for better and fairer tax systems and for catalyzing private and international public investment. Developing countries are already working towards that objective using integrated national finance frameworks (INFF) to chart their own national paths to finance the SDGs. That way governments examine and reform public financing, weigh trade-offs and overcome short-termism to more effectively raise, spend and monitor public resources.

For UNDP, a reformed international financial system that delivers sustainable transformation must include domestic and international tax norms – including rules for taxing digitalized and globalized business – that meet the needs of developing countries. It also requires policies that link private sector profitability to sustainability.

Taxes are a vital source of stable state revenues for financing the SDGs. Fiscal policies can recalibrate economies and encourage choices that advance the SDGs, particularly in areas such as climate, nature, health and governance.

“The time has come to address the deepening chasm between rich and poor countries, to change the multilateral landscape, and to create a debt architecture that is fit for purpose in our complex, interconnected and post-COVID world.”