Published 9 June 2023 in Analysis , News
On June 22 and 23, 2023, a Summit for a New Global Financing Pact will be held in Paris, co-organized by France and India. Many leaders from States, governments, international organizations, civil society and the private sector will be invited to discuss solutions for financing global development and the climate transition.
In order to decipher the stakes of this Summit, Focus 2030 aims to gather and highlight the point of view of organizations that are expert in their respective fields and is conducting a series of interviews with representatives of governments, international organizations, NGOs, think tanks, and others.
Discover our Special Edition about the Summit for a New Global Financing Pact and all the interviews with experts conducted ahead of the Summit.
Written interview received on May 12, 2023.
Focus 2030 : Every year, the UN Sustainable Development Solutions Network (SDSN) publishes the Sustainable Development Report and its SDG Index, which measure national progress towards the SDGs in all 193 UN Member States. The latest edition of the report highlights that a global plan to finance the SDGs is needed, and discusses the critical channels of development finance for low-and lower-middle income countries. In your view, what are the most important advances and reforms to be made ? To what extent can the Summit for a New Global Financing Pact contribute to this agenda ?
Jeffrey Sachs : With a suitable reform of the global financial architecture, low-income countries would boost their domestic investment rates by around 20 percent of GDP and lower-middle-income countries by around 10 percent of GDP. The rise in investment rates would greatly accelerate economic growth and sustainable development, dramatically expanding access to education, health care, low-carbon electricity, public transportation, housing, safe water and sanitation, and digital services. The poorer countries would finally see a viable future. Ending extreme poverty would become practicable and within reach, as occurred in China between 1980 and 2020. To get this started, we need official financing – such as from the multilateral development banks and sovereign wealth funds. Yet over time, market financing (from pension funds, insurance companies, banks, and others) could surely play a growing role.
Focus 2030 : The Covid-19 pandemic, the war in Ukraine and their cascading consequences have significantly reduced the fiscal space of many countries, affecting their ability to implement public policies contributing to the realization of the 2030 Agenda. In the meantime, many countries have experienced downgrades of their sovereign credit ratings, higher borrowing costs, and increased risks of debt distress. Credit-rating agencies, which determine sovereign ratings, play a crucial role on debt sustainability and stability. What role can credit-rating agencies play in the implementation of the 2030 Agenda, and under which conditions ?
Jeffrey Sachs : The first point is that the war in Ukraine should end through a negotiated settlement. Ukraine cannot win it on the battlefield, against a nuclear superpower that is intent on stopping NATO enlargement. My personal view is that we shouldn’t accept an utter policy disaster like the Ukraine War as a fait accompli, or something delivered by only one side of the conflict. We should understand the deeper history of such debacles and solve them at their core, in the case of Ukraine (and US-China relations) by establishing a suitable global security architecture that includes all nations, rather than dividing the world between the “West” and the “Rest.”
Having said that, let me get to the crux of the question, about the credit-rating system. The problem is this. Credit ratings mainly measure liquidity risks, not long-term development risks. And liquidity risks are quite high for poorer countries, since these countries borrow in foreign currencies (dollars and Euros) rather than in their own currencies. Simply put, governments of developing countries occasionally run out of dollars in the short term, through mismanagement or panic by bond buyers, or a combination of the two. As a result, they go into default, even though the long-term growth prospects of the economy are strong. In the midst of such crises, nobody knows much, or thinks much, about the longer term.
The poor credit ratings of these countries therefore signal this liquidity risk. The IMF, in turn, advises countries not to borrow very much, generally to keep gross sovereign debt under 50 percent of GDP, or even lower. The result is sustained poverty, not sustainable development.
The real solution is to stop the liquidity crises, not to stop the borrowing and long-term development. There are three main ways to do this. The first is for governments to borrow long-term, not short-term. The multilateral development banks should greatly step up their long-term development finance. The second is for governments to borrow in domestic currencies. This would be possible for the larger emerging economies and for monetary unions linking smaller countries. The third would be for the IMF (together with the major central banks) to play the role of a true liquidity provider (and lender of last resort) rather than acting as an emergency room doctor only after a default occurs. For that, the IMF would need to be given much more liquidity and much more power than it now possesses.
For their part, the credit-rating agencies should provide two kinds of indicators, the short-run indicator of liquidity risk as now, but also a long-run measure of growth potential. For that, the credit-rating agencies would need to develop a new methodology based on long-term growth modeling. This would be a quite salutary development. The truth is that poorer countries have strong growth prospects – if they gain access to long-term financing.
Focus 2030 : The 2022 Sustainable Development Report also reveals that for the second year in a row, the world is no longer making progress on the SDGs. In addition to sufficient financing, what would it take for the world to achieve the SDGs by 2030 ?
Jeffrey Sachs : There are five pillars of global SDG success. The first is an integrated national development strategy in each country that links together six key areas of SDG-based public investments : education, health, energy, agriculture, urban infrastructure, and digital platforms.
The second is a long-term SDG financing strategy in each country, based on higher domestic saving, higher foreign financing, and higher government revenues as a share of GDP in the long term.
The third is improved implementation capacity at the national and city levels, both for public investments and for public services (such as healthcare, education, public transport, and water and sanitation).
The fourth is regional cooperation in each part of the world, in building a low-carbon energy system, including a low-carbon power grid, hydrogen economy, electric-vehicle infrastructure, and public transport (fast inter-city rail, etc.).
The fifth is global cooperation across the regions, in which the US and Europe stop trying to exclude Russia and China, but actually work together with all regions – Latin America, Africa, Russia, China, Southeast Asia, and others. The developing world is tired of the battle of the West versus the Rest, and tired of being lectured to by the US and Europe. The developing world wants truly global sustainable development, not just wealth for the North Atlantic region of the world.
These are some of the important messages that we push in the 2023 Sustainable Development Report, which includes the global SDG Index, released in June on the sidelines of the Summit in Paris. More broadly the SDSN promotes global cooperation and works with governments and scientists from all over the world to define long-term investment and policy pathways aligned with the SDGs.