Time for a New Financing for Development Conference

The Biden administration inherited a world reeling from the public health and economic effects of the Covid-19 global pandemic. Rightly, the administration is prioritizing its response to the current crisis and moving swiftly to improve the country’s domestic and international efforts. This includes rejoining the World Health Organization, requesting $11 billion of foreign assistance, and joining the global vaccine distribution organization, COVAX. These are important first steps, but the administration also must confront the lingering effects of the pandemic, including the significant economic downturn. This will require investments not just in health infrastructure, but a more holistic approach that draws together the various threads that make up development finance. To do so, the Biden administration should work with allies and partners to convene a new Financing for Development Conference.

The last Financing for Development Conference was held in Addis Ababa in 2015. The centerpiece of that conference was a commitment by the donors to double the amount of official development assistance (ODA) directed toward domestic resource mobilization (DRM) projects. This was an important step that recognized that a country’s own resources provide the vast majority of financing available to generate social and economic development progress. But this remains an unfulfilled commitment: the United States has not doubled its spending on DRM in spite of widespread support. The Addis conference also properly recognized that private investment flows were critical to ensuring the economic growth needed to drive development. These again should form the center of a new development finance framework, but as part of this conference, the Biden administration should also make three commitments: targeting increases to underfunded assistance accounts, convening a new debt relief discussion, and returning the U.S. International Development Finance Corporation’s (DFC) activities to match its intended mandate.

First, the administration should seek to raise overall U.S. foreign assistance levels by 20–30 percent on an annual basis to help countries meet their very real, immediate, and near-term needs. This investment should be targeted toward those assistance accounts that have been chronically underfunded, including infrastructure; climate mitigation; economic growth; and democracy, governance, and human rights. It should also fulfill the earlier agreement to double spending on DRM projects. While increasing spending on foreign assistance is likely to face political hurdles, the Biden administration has an opportunity to make good on its campaign promises to renew U.S. leadership. Focusing more funding to certain areas while advocating for increased flexibility to allow for better alignment with local development priorities will improve the efficiency and effectiveness of the dollars spent.

Second, the administration should work with other members of the Paris Club, China, and private investors to reach agreement on a new debt relief plan for developing countries. Unlike the last time the world confronted a debt crisis, most sovereign debt is now held by China and private investors rather than Paris Club countries or international financial institutions. Developing countries took advantage of favorable market conditions over the past decade to issue debt at an unprecedented level; private investors chasing yield bought up this debt. China, through its Belt and Road Initiative (BRI) and other lending programs, has massively increased the amount of developing world debt it holds. There is a legitimate debate over whether this is part of a nefarious plot to control strategic infrastructure or an effort to meet the real infrastructure needs of the developing world. Regardless, China is now a major player in debt and it must be at the table of any new debt relief conversation; the Biden administration must work to secure its participation.

Third, the Biden administration should find ways to increase private investment flows. This means setting a new course for the DFC—a full-fledged development finance institution (DFI) that launched during the Trump administration. The DFC has enormous promise, but the previous administration skewed it toward national security priorities in geographies far afield from its core mandate. The DFC will always need to balance strategic priorities with its development mission, but there is a need to better balance the two. Fundamentally, the Biden team needs to adjust the risk profile of the DFC by taking on more risk—not risk for risk’s sake but smart risk that will increase private investment in lower-income and lower-middle-income countries that need it the most. The DFC alone cannot meet these goals; it will need to partner with other DFIs and multilateral development banks to mobilize private capital.

These commitments are not just about addressing the development finance needs of the world, they are also about renewing U.S. leadership in global development. The Trump administration reveled in its disdain for foreign assistance and development; for all its talk about countering China’s growing role in developing countries, it failed to make the logical connection between a well-resourced international budget and that objective. The reality on the ground is more complex, with a continued need for traditional assistance but also demand for new ways of catalyzing greater resources. This means greater attention to supporting local actors and building a country’s capacity at all levels to generate long-term, sustainable development. Throughout his campaign, President Biden promised to renew U.S. leadership in the world in a mutually beneficial way. Pushing for a new Financing for Development Conference and making these clear commitments will help achieve those goals while elevating development as a matter of national interest.

Conor M. Savoy is the executive director of the Modernizing Foreign Assistance Network and a senior associate (non-resident) with the Project on Prosperity and Development at the Center for Strategic and International Studies in Washington, D.C.

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Conor M. Savoy
Senior Fellow, Project on Prosperity and Development