Lukas Goltermann: Reforming International Financing for Sustainable Development (Policy Brief)

Introduction

With only five years remaining to achieve the Sustainable Development Goals (SDGs) and in the context of escalating climate change, the world is facing an urgent financing crisis. The current international financial architecture is failing to mobilize and manage sufficient resources for adequate action. This failure is putting the achievement of global goals in danger and undermines trust in global institutions and processes. This policy brief explores the challenges of the current system and proposes five priorities that should be further explored at the United Nations (UN) Summit of the Future and the Fourth International Conference on Financing Development in 2025.

Current Challenges in Financing Sustainable Development

Escalating Debt Crisis in the Global South

The Global South faces a severe debt crisis, exacerbating the difficulty of mobilizing domestic resources for sustainable development. The Global Sovereign Debt Monitor reports that over 45 countries allocate more than 15% of government revenue to debt servicing (Erlassjahr 2024). This financial strain forces countries to prioritize debt repayment over crucial investments in education and green transitions.

Declining Commitment to ODA

Since the Covid-19 pandemic, rich countries are increasingly withdrawing from the current system of financing international solidarity through Official Development Assistance (ODA). According to Eurodad (2024), ODA from more than half of OECD Development Assistance Committee (DAC) members decreased last year, with European Union (EU) countries’ aid dropping by 7.7 percent in real terms. For example, Germany is on a path to cut the budget for the Ministry for Economic Cooperation and Development (BMZ) from 2021 to 2025 by more than 20 percent. Additionally, significant portions of ODA are being diverted in many donor countries to in-donor refugee costs, reducing the funds available for global development. Meanwhile, the financing gap for implementing the SDGs is growing. According to the Financing for Sustainable Development Report 2024 there is an annual investment gap of over four trillion USD for achieving the SDGs (United Nations DESA 2024).

Contradictory Subsidies and Policies

Despite commitments to sustainable development, many Global North countries maintain economic policies and subsidies that undermine these goals. For example, the World Bank continues to finance fossil fuel projects and the European Investment Bank supports climate-harmful industrial agricultural projects in the Global South (ActionAid, 2024). Germany’s Federal Environment Agency reports annual spending of 65 billion Euros on environmentally harmful subsidies in Germany alone. Such policies hinder progress toward achieving the SDGs (Burger & Brettschneider 2022).

Colonial Mindset in Global Financial Institutions

The governance structures of major financial institutions like the International Monetary Fund (IMF) and World Bank are dominated by the United States and European countries, lacking democratic accountability and transparency. Their colonial structures perpetuate power imbalances and undermine the effectiveness of international development efforts. This has frequently been criticized by civil society, but recent reform efforts have failed to address these structural shortcomings.

Shrinking Civic Space

Civil society space is shrinking in a growing number of countries. According to the Civicus Monitor, in 118 of 198 countries civil society is under severe attack (Civicus 2023). An alarming 30 percent of the world’s population lives in countries with closed civic space. As a result, government accountability is failing. Corruption and bad governance are a major threat to ensuring that available resources both domestic and international are spend well and according to their intended purpose.

Proposed Solutions

Resolving the Debt Crisis

Reforming the global debt architecture and implementing a sovereign insolvency process at the UN level to help heavily indebted countries escape the debt trap without risking state collapse should be a prime focus (Miranda 2023). Debt relief measures, including those involving the private sector, should be linked to strengthening climate and development funding. In this way, the debt burden can be relieved while ensuring that newly available resource are spend in line with the SDGs.

Rethinking Resource Mobilization

To address rising wealth inequalities, improve tax justice, and enhance resource mobilization, a global tax on billionaires was proposed by Brazil’s G20 presidency. The French economist Gabriel Zucman estimates that a two percent tax on billionaires could raise up to 250 billion USD per year. At the same time, identifying and promoting good practices at the national levels such as SDG Bonds, SDG Budgeting, and other successful instruments that have been tried and tested in different countries should be prioritized (Barchiche et al. 2023). Lastly, the flawed system of how ODA is calculated needs to be radically reformed to reduce whitewashing and increase incentives for better ODA allocation (CONCORD 2023).

Ending Harmful Subsidies and Policies

Subsidies and policies that harm or contradict global efforts towards achieving the SDGs need to be phased out. A multilateral process is needed to ensure a level playing field and to increase incentives for change, because the political costs of change are potentially very high at the national level. To this end, these policies and subsidies should be monitored and reviewed at OECD or UN levels. Technical policy recommendations and regular peer-reviews should push for reforms and hold governments accountable.

Decolonizing Financial Institutions

80 years after the Bretton Woods institutions have been set up, global financial architecture needs a robust process of decolonization. Recent World Bank reforms fell short of addressing governance deficits. Innovative approaches such as the Global Public Investment (GPI) concept developed by Jonathan Glennie offer a promising alternative. GPI is based on the principles of equality, with all participating countries having an equal voice, while benefits are distributed based on needs rather than contributions. This approach promotes a decolonial mindset, which can potentially help to restore trust, collaboration and ownership among countries.

Protecting and Expanding Civic Space

Civil society plays a critical role for achieving progress towards the SDG implementation and the Paris Climate Agreement. Furthermore, civil society is also central when it comes to holding government accountable, demanding transparency for government actions, and protecting marginalized people and communities. The world can protect civic space by placing human rights at the core of efforts to reform the global architecture for development finance.

Conclusion

The current international financial architecture is inadequate for delivering the resources necessary to achieve the SDGs and the goals of the Paris Climate Agreement. Addressing the escalating debt crisis, rethinking resource mobilization, ending harmful policies and subsidies, decolonizing financial institutions, and enhancing civic space are crucial steps. Urgent action is needed to realign financial architecture with the global development and climate agenda. The UN Summit of the Future and the Fourth Conference on Financing Development are important opportunities for discussing and promoting the solutions outlined in this policy brief.

Policy Recommendations

1. Implement Sovereign Insolvency Processes: Develop mechanisms for debt relief linked to climate and development funding.
2. Introduce a Global Tax on Billionaires: Generate substantial funds for sustainable development and reduce wealth inequalities.
3. End Harmful Subsidies and Policies: Monitor and review current practices at the UN or OECD levels.
4. Decolonize Financial Institutions: Reform governance structures to ensure democratic accountability and transparency.
5. Expand Civic Space: Put human rights at the core of the reforms of the global financing architecture for sustainable development.