Remarks by Judith Karl, UNCDF Executive Secretary, at the Expanding the frontier side event at the FfD3

  • July 13, 2015

  • Addis Ababa, Ethiopia

The emerging post-2015 development agenda goes beyond the MDGs in scope and ambition. It has a very strong focus on inclusive and sustainable development.

Many LDCs have enjoyed unprecedented economic growth since 2000. Yet, the financial requirements for LDCs to achieve the post-2105 development agenda and the goals of the Istanbul Programme of Action remain enormous.

ODA can be the largest source of external finance in some of the poorest and most vulnerable countries in the world.

How then – and this speaks to the title of this side event –can we use ODA in new and smart ways to leverage public and private resources, especially at the domestic level, to support inclusive and sustainable growth? What models have worked in using ODA to unlock these resources for local development? And how can we scale up those models?

Let me make three points in this regard.

First, we know that LDCs and some middle-income countries face serious challenges in mobilizing resources for development. Often their contexts are not yet seen as ripe for private sector investment, beyond certain sectors and capital cities, so resources don’t always flow to where they are needed most.

Second, many LDCs have been growing in real terms, and have accumulated stocks of public and private capital to levels much greater than a decade ago. This is reflected in the development of the banking sector and stock markets in some LDCs. Yet these domestic resources are not always leveraged or invested to support public investments for local and rural development, leaving these economies vulnerable to shocks.

Furthermore, even when economic growth is high nominally, it might not lead to equitable and sustainable growth, and could in fact result in growing inequalities and missed economic opportunities if not accompanied by adequate financial flows at the local level, and growing financial inclusion for un-banked households and micro, small, and medium enterprises.

Third, to expand the frontiers when it comes to mobilizing resources for development, we must make better use of sources of growth in localities and with population groups and businesses which are typically off the radar of most financial investors because of the expectation of greater risk and lower returns.

At UNCDF, we believe this can be done by using ODA in new and smart ways to crowd in and leverage public and private resources, especially by combining ODA with domestic capital formation in support of local economic development. ODA is used to demonstrate concept and de-risk the investment climate, paving the way for other sources of capital to flow in with greater confidence.

We see two complementary channels as especially promising in this regard.

One channel is through financial inclusion. Two billion people are still ‘unbanked’, meaning they are excluded from the formal financial systems. Women make up 1.1 billion of that figure.

That is why at UNCDF we match poor people and businesses with access to appropriate and responsibly provided financial services such as savings, credit, insurance, payments and other financial instruments. This way, we help people and businesses take money saved under their mattresses, put it in more formal and less risky savings vehicles, and give them better ways to manage their financial needs; invest in their education and health; and cope with shocks they might face.

We support strong financial institutions that mobilize domestic savings and incentivize the domestic financial sector to increase lending to the micro, small, and medium enterprise “missing middle”. This strengthens the private sector, and creates jobs and economic opportunities, especially for women and the youth. Expanding financial inclusion also strengthens the reliability and stability of national financial systems.

The benefits of offering appropriate and accessible products while building financial literacy to un- and under-banked can be seen in UNCDF’s YouthStart programme. Through this initiative, over half a million young people—particularly young women— now have access to savings accounts. The savings mobilized are then used to give loans to tens of thousands of young entrepreneurs. This is done with small amounts of UNCDF seed funding which we then leverage many times over.

We also see that recent innovations in digital financial services can help with domestic savings mobilization by reaching unbanked and rural populations, generating efficiencies which can be spent on other development priorities.

The Better Than Cash Alliance, which is housed at UNCDF, works with governments, companies and international organizations to promote digital payments in the economy. This enhances transparency and reduces costs to governments when they make wage, pension, and social transfer payments electronically. Mexico saves $1.3 billion annually by digitizing and centralizing these payments.

The second channel we use is through expanding local development finance and local fiscal space.

To better serve their citizens, local governments need the right tools, regulatory environment, and financial mechanisms to address the needs of a growing population. We have a long history of working with governments to develop the conditions for decentralization and fiscal transfer systems to local level, to derive the acceleration and empowerment benefits of bringing public finance for basic services and infrastructure closest to the people who use them. This has also been a very relevant approach in post- crisis setting to help reestablish state presence locally and build trust.

UNCDF uses its own seed funding – through grants, loans, and credit enhancements - to help municipalities raise finance from a blend of sources, including the private sector, to fund their local development plans. This helps them stimulate their local economies and build up their infrastructure to provide expanded access to essential services and opportunities for better jobs. We also help local governments develop the capacities to manage fiscal transfers, and to raise funds from global sources to build resilient investments and retrofit vulnerable infrastructure.

Local development finance means business models for productive and sustainable growth at the local level. For example, in Tanzania, UNCDF is supporting female entrepreneurs in a rural area to run a small hydro power plant. We do this by helping them structure a deal which is attracting funds from a local bank – leveraging local resources which are then put to work productively in support of local development. Specifically, we are seeing our technical support and small seed investment of $250,000 trigger an investment of $15 million from local banks. We hope to attract a total of $100 million in Tanzania alone to support such initiatives this year.

We also work to embed these innovations in institutions, policies, capacities, and systems.

We believe that models like these are relevant on a large scale, and are ripe for scaling up.

Therefore, UNCDF is calling for action in three areas:

First, we are calling on actors to localize a critical volume of public and private finance so that it reaches the local decision makers and communities most left out by aggregate growth figures. Localized finance can ensure critical investment for secondary and tertiary infrastructure development that is so important to grow local economies; to provide expanded access to essential services and job opportunities; and to support greater resilience and social cohesion within countries.

Second, and connected, we are calling for the formation of flexible capital vehicles for local investment. Such vehicles can serve as last-mile investors to de-risk the local investment climate and lay the groundwork for other investors and stakeholders – both public and private - to enter with confidence. We must together expand our investments beyond narrow corridors or sectors of wealth.

Third, we are calling for accelerated investment in financial inclusion, including through digital finance, in order to support poverty reduction and women’s economic empowerment, and expand employment through small and medium enterprises, especially for young people.

Bringing more people and businesses into the formal economy is essential for making growth inclusive and for mobilizing the savings needed to boost the real economy.

By using ODA in innovative ways, we can demonstrate how to use public and private resources to build robust local economies which are at once resilient, inclusive, and sustainable. This can lay the groundwork for other investors and stakeholders to replicate proven concepts of what works.

Working together, leveraging ODA, and with the right financing models, we can support major pillars of transformative development, including food security, women’s economic empowerment, essential infrastructure, green energy technology, and livelihoods.

Working together in expanding the frontiers of how we mobilize and utilize financing for development, we can contribute significantly to achieving the post-2015 development agenda in an inclusive way.