A lack of trust between developing countries and donors makes it hard to mobilize sufficient investment for a sustainable global recovery. Co-creation of development initiatives and accountability surrounding these initiatives can help ‘reset’ relations between partners. This is essential if key development objectives are to be met.
Introduction: a lack of trust as a barrier to mobilizing capital
Efforts by the G7 to close the ‘global infrastructure gap’ face a worsening international context marked by a cascading series of crises. At the G7 summit in Cornwall in June 2021, US president Joe Biden announced the Build Back Better World (B3W) Partnership, an initiative to stimulate infrastructure investment in low- and middle-income countries. Within months, Russia had invaded Ukraine and the ensuing war spurred food, fuel and debt crises across the developing world, creating an urgent need for relief and further complicating prospects for longer-term economic development and a transition away from fossil fuels. When the G7 reconvened in Germany, one year later, and announced the Partnership for Global Infrastructure and Investment (PGII), it confronted a radically altered international environment.
The PGII, though, does not address the fundamental nature of the challenge. Like many previous initiatives, it is designed to leverage public development assistance to mobilize private capital. By 2027, the G7 aims to raise $600 billion in global infrastructure investments. This is not nearly enough: underinvestment in infrastructure in the developing world is estimated at over $40 trillion. At the same time, the problem is more than simply a matter of scale. A trust deficit continues to inhibit efforts to increase public and private finance. And the current geopolitical and domestic contexts are exacerbating this deficit. Russia’s ongoing war in Ukraine and the Western response to it have antagonized developing countries; competition between the US and China has undermined prospects for development cooperation between these two great powers; and inflation in the advanced democracies, compounded in Europe by an energy crisis, has reduced the political will in Western capitals to increase spending on development assistance.
This trust deficit plagues international development cooperation more broadly, and inhibits effective partnerships between developing countries in the Global South, private lenders, and developed-country governments in the Global North. Even where financial capital is abundant, its potential to overcome development challenges is limited as a result. The ability to restore trust is thus a crucial ingredient in improving development outcomes.
The problem has at least three dimensions. The first centres on perceptions of fairness, and concerns that developing countries are more exposed to the unintended but nonetheless negative effects of principled Western policies – whether on climate change or on economic sanctions against Russia – than are the countries making them. For instance, in the current geopolitical context, some developing countries charge the West with hypocrisy for sanctioning Russia while failing to protect them from the resultant costs, manifest in surging food, fuel and fertilizer prices. (The argument is reinforced by the reality that inflation is even higher in emerging markets and developing countries than it is in advanced economies, with the International Monetary Fund projecting a 14.2 per cent rise in consumer prices in low-income countries in 2022.)
This trust deficit plagues international development cooperation more broadly, and inhibits effective partnerships between developing countries in the Global South, private lenders, and developed-country governments in the Global North.
The second dimension of the trust deficit is the politicized framing of development relationships. In rich countries in the Global North, populist politicians vociferously question the legitimacy of development assistance in a world where domestic priorities are insufficiently funded. They also highlight the risk of public money being stolen by elites in aid recipient countries, instrumentalizing these fears for political gain and thus further deterring government spending on foreign aid. In the Global South, meanwhile, recipient-country governments and publics resent what they see as paternalistic instruction and often coercive donor conditionality on the proper use of assistance; this resentment is fed by a history of post-colonial recriminations.
A third dimension is the reticence of the private sector, which often does not trust developing-country borrowers to repay their debts. Financial institutions withhold credit except at usurious rates that overprice risk and make borrowing fiscally unsustainable. Persistent debt crises almost inevitably follow, sometimes even in well-managed countries. Indeed, a track record of sound economic stewardship can sometimes increase the problems, allowing governments to borrow more in the first instance but then causing a harder financial shock. Debt distress in Ghana, which is in discussions with the IMF about a potential 17th bailout, is a current example. Private sector lenders lack confidence in the ability of public lending to create the right environment for private capital, thus rendering government intervention less effective as a potential catalyst for private finance.
These three dimensions of the trust deficit are compounded and made worse by an overarching lack of transparency. As alluded to above, corruption has sometimes been allowed to grow unchecked in recipient countries, with aid failing to reach those who need it most. In some cases, billions of dollars in development assistance never finds its way out of the treasuries or government agencies of recipient-country capitals. In other cases, development funds have been siphoned into offshore bank accounts. A 2020 paper by the World Bank’s Development Research Group found that ‘aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centers known for bank secrecy and private wealth management, but not in other financial centers’.
This dysfunctional dynamic prevents much-needed action when and where it is needed most. To be blunt, why should donors continue to pour money into countries when it is difficult to determine how such funds are being used and whether they are being spent properly? An absence of transparency impedes any hope of accountability, and so saps progress on issues that require international cooperation, from public health to climate change to global economic policy coordination.
Global consequences: no solidarity on climate policy
Climate policy exemplifies the nature of the challenge. Tackling climate change will require the Global South and Global North to work together to reduce greenhouse gas emissions. The world, it has been argued, needs to spend $3–6 trillion a year on climate-related measures between now and 2050 to stay on a ‘1.5°C pathway’ (that is, limiting the rise in global temperature to 1.5°C relative to pre-industrial levels), but annual spending currently totals only $630 billion. Moreover, of this amount, very little goes to developing countries. A combination of domestic constraints in advanced economies – cleaning up the ‘neighbourhood’ is more politically palatable than cleaning up the world – and donor distrust of the integrity of government spending plans in the Global South makes securing the necessary additional funding highly challenging. The failure to this day of developed countries to deliver on the pledge made in Copenhagen, at the COP15 climate conference in 2009, to provide $100 billion each year to developing countries by 2020 has accentuated a sense of betrayal. The recent adoption in principle at COP27 in Egypt of a ‘loss and damage’ finance facility addresses a long-standing Global South complaint – and source of broken trust. Yet like so many previous COP promises, it comes without a number or a plan; just a commitment to report back next year.
Already, higher oil, gas and food prices in the wake of the Russian invasion of Ukraine threaten the plan for a ‘just transition’ from fossil fuels to renewable energy – a plan which anticipated developed countries helping fund the energy transition in poorer ones. ‘There is a risk that some countries, especially those without adequate funding, might, under pressure, set a course for high-emission, expensive energy in the future,’ the UN Global Crisis Response Group on Food, Energy and Finance concluded in the summer of 2022. At COP27, African countries – led by the current head of the African Union, President Macky Sall of Senegal – pressed for a much bigger role for the development of African gas as a transition fuel. Part of the rationale is that African leaders see a double standard: Europe reverting to traditional fossil fuel sources because of the energy crisis while developing countries are condemned to, in their leaders’ eyes, unrealistic renewable options. Not just the financing of measures to address climate change, but the current political consensus around urgent action, hangs in the balance.
The West vs China: counterproductive rivalry
Alternative aid and development arrangements that take place outside the West’s influence – not least China’s provision of funds to developing countries through its Belt and Road Initiative (BRI) – are also stymied by an atmosphere of rampant mistrust. Poorly designed, poorly executed BRI projects have left borrowing nations with unsustainable debts. China, consequently, has become increasingly coercive in seeking repayment. William Burns, director of the Central Intelligence Agency, identifies the economic crisis in Sri Lanka as a case in point:
Prospects for effective international development are further undermined by the existence of two separate systems, which exist in a context of heightened competition and deep mistrust, in the form of the Western- and Chinese-led assistance models respectively. It would be more constructive if the IMF and World Bank, which continue to be Western-led, worked collaboratively with the Chinese-led development banks – the Asian Infrastructure Investment Bank and the New Development Bank – rather than in opposition or in parallel as is frequently the case now. For example, Western donors could be encouraged to focus on the provision of services, especially in health and education, while Chinese stakeholders could scale up investment in climate-friendly, affordable infrastructure.
Perversely, the West’s conception of China as an adversary has given a short-term boost to development initiatives, as competing efforts to raise finance and launch infrastructure projects have led to an increase in overall funding. The announcement at the 2022 G7 summit in Germany of a $600 billion infrastructure initiative (much of which depends on an ambitious and unrealized mobilization of private capital) is in part a bid to counter Chinese activity in similar areas. However, this is not an efficient approach and it is unlikely to be sustainable.
So long as the US and China remain the two major stakeholders in the global economy, there will be a strong case for trying to segregate environmental and development cooperation from the two countries’ wider competition – indeed, engagement in the development arena could have the added benefit of reducing overall geopolitical tensions, even if it is unlikely to eliminate them. For both governments, the underlying motivation for delivering aid to the developing world may remain one of competitive engagement, as Washington and Beijing seek to win friends and cement alliances. But suspicion and mistrust not only undermine the coordination of assistance towards a shared purpose, they also impair constructive relations with recipient-country leaders. The latter resent the feeling of being pushed into an exclusive choice between partnering with the US or China, and instead want to maximize their options in terms of support from the West, China and other donors alike.
Solutions for building trust
Three factors are especially critical and must be taken into account to make possible collective global action on today’s agenda of big problems:
- Power. Developing countries despair of an international financial system still run predominantly by Western donors, and which operates according to those donors’ conditions and values. Despite efforts at progress, poorer countries continue to find themselves without a meaningful place at the table.
- Scale. The present system has failed to adapt to the size of the development challenge, with needs far exceeding the funding available. The United Nations recently estimated that humanitarian crises would require UN agencies and their private partners to spend $48.7 billion in 2022, but together they have less than one-third of that sum on hand. The funding shortfalls in the much larger development sector are greater still. While much of the debate has focused on public aid organizations, the lack of private capital – which brings both scale and visibility to development efforts – looms large. The combined value of government-supported projects represents a fraction of the resources available to Fortune 500 companies in the US, and to equivalent corporations in Europe, Asia and other parts of the world. In August 2022, Kristalina Georgieva, the managing director of the IMF, estimated that financial assets in private firms totalled $210 trillion, equivalent to about twice the GDP of the global economy.
- Confidence. Private investors lack confidence that allocating money for infrastructure projects in developing countries is worth their while. Meanwhile, public actors are wary of partnering with the private sector on deals which they fear will not benefit recipient-country citizens. Policymakers and aid managers in governments, the World Bank and regional development banks anticipate bad policies in target countries and are aware that corruption can be a barrier to effective assistance. This has created a downward spiral: support and financial sponsorship are eroded, which means less funding, which in turn causes a breakdown in coordination between donor staff and the officials in developing countries tasked with implementing aid programmes.
These three factors are interconnected. The absence of investor confidence limits the scale of investments achieved, which has the effect of crowding out the voice and undermining the negotiating power of developing countries. This in turn biases the system towards the status quo. The alternative is a ‘reset’ followed by the rebuilding of the current system along more effective and inclusive lines. It needs to be presented as the precondition for achieving the scale and ambition of solution required.
The core task is to create incentive structures and social mechanisms that establish a basis for trust between public and private donors in the Global North and recipients in the Global South. Drawing on the evidence from examples of successful development, we stress two essential principles – co-creation and accountability – and emphasize the importance of adopting measures to strengthen the broader ‘ecosystem’ in which development takes place.
‘Co-creation’ between stakeholders in developing countries and the Global North involves recipients and donors working collectively to agree development programming. Co-creation facilitates co-ownership: the idea that all parties should have a meaningful stake in and responsibility for such programming. This in turn can facilitate more ambitious investment strategies and prevent the recurring cycles of austerity imposed by outsiders resulting in forced reductions in public spending in recipient countries.
Co-creation would imply a much more equitable process of negotiation between funding providers and recipient countries. There needs to be a shared definition of success – including what is meant by human development and a just energy transition – but much greater flexibility on strategies to get there.
This requires almost ‘unlearning’ development policy. It means addressing the fact that the ‘Washington consensus’ is hard-wired into the Western aid and development model, and still implicitly frames the crisis responses of organizations such as the IMF and World Bank. Although this straitjacket approach has been publicly repudiated, a conservative culture of investment protection continues to drive lending policy, impeding growth-focused alternative models. Some would argue that this tendency does not begin in the corridors of international financial institutions (IFIs), but in the economics lecture halls of leading research universities. In other words, development economics itself needs to be reimagined, and its new principles incorporated into mainstream policy thinking.
What might co-creation look like in practice? For a start, it would imply a much more equitable process of negotiation between funding providers and recipient countries (including the latter’s leaders and key stakeholders). There needs to be a shared definition of success – including what is meant by human development and a just energy transition – but much greater flexibility on strategies to get there. Recipient countries must own and drive these strategies.
An example of this sort of model can be seen in Indonesia, where the World Bank has supported the PNPM National Program for Community Empowerment with loans and technical assistance, using community-driven development as its guiding principle. This arrangement enables the anti-poverty objectives of the programme while building the capacity of civil society. Village facilitators – rather than technocrats in New York, Washington or London – recommend how block grants are used and help decide which projects are funded. Community members are ‘in control of the planning, design, implementation and monitoring of project activities’. The results have been encouraging: ‘As a result of participation in the program, real per capita consumption gains were 9.1 percentage points higher among poor households in PNPM areas compared with control households.’
What makes this example so instructive is that it combines co-creation with the building blocks of civil society. International organizations and providers of aid are engaged, but not dictating the terms or setting the agenda. Just as importantly, local members of the community are doing the hard work of pushing for transparency and accountability (see below) from their own governments.
Acountability is essential for building trust, and the mechanisms for achieving this are well known: empowered legislatures; private sector due diligence; strong, politically independent IFIs; and a robust, independent local civil society. In the ideal circumstances, the presence of these elements would foster an environment of transparency that creates accountability. But in a world in which less than 25 per cent of people live in free societies, few investments take place in ideal circumstances. Still, pragmatism does not mean giving up on governance. Investments in civil society should be strategic, designed not only to support specific institutions but to create the wider conditions for more effective civil society engagement. Governments in the Global South should be encouraged to support this process through their own efforts at reform, corruption prevention and promotion of good governance. The upside is clear: the prospect of increased investments from donors who have access to information that can verify whether funds reach the intended targets. This shifts the requirement for accountability on to recipients of aid, giving them greater ownership of the issue.
To be sure, supporting civil society is a challenge. Risks of a popular backlash against civil society are pervasive. Civil society organizations, even local ones, are often seen by recipient-country publics as extensions of powerful states in the Global North – and thus as neither independent nor local. This makes society-level workarounds important. One method which could be integrated into the strategic toolkit of development assistance is to provide local citizens with the resources and capabilities they need to guide and grow local institutions. Support from organizations in the Global North would create a space for local initiative and control, enabling civil society to assume a larger role in co-creation while also creating a foundation for greater accountability. We can see this principle in practice in Jamaica, where the Jamaica Accountability Meter Portal (JAMP) has provided digital tools for citizens, the media and others to monitor everything from government procurement and contractor decisions to governance and regulatory policy. Using online tools and capacity-building expertise from the International Budget Partnership, JAMP leverages citizen engagement to remedy mismanagement and improve the performance and responsiveness of public agencies and elected officials.
Part of the accountability solution could involve a ‘relaunch’ of the IFIs, so that they might function on a cooperative model in which recipients enjoyed a substantive stake in governance.
Ultimately, greater accountability is essential to encourage private investment. In the wake of the Panama Papers revelations in 2016 about offshore hidden assets and tax avoidance, the World Bank developed a loan programme in collaboration with Panamanian officials that emphasized tax transparency and anti-money-laundering provisions. These transparency-enhancing reforms resulted in improved tax collection, enhanced government revenue, and so an expansion of social assistance to reach 81 per cent of the extreme poor, up from 37 per cent previously.
Many emerging markets are dependent on extractive industries and hydrocarbons, condemning their economies to repeated boom-and-bust cycles that contribute to what is widely known as the ‘resource curse’. With improved local oversight and more robust civil society participation in these countries, sectors beyond natural resources could secure private capital, offering new opportunities for young people (and other cohorts) who often struggle to find employment.
Part of the accountability solution could also involve a ‘relaunch’ of the IFIs, so that they might function on a cooperative model in which recipients enjoyed a substantive stake in governance, as opposed to the present donor–beneficiary arrangement where power lies with donors. Too often IFI leaders have expressed a public commitment to more cooperative relationships, only to encounter resistance and inertia within their own institutions. The old economics remains ‘hard-wired’ into thinking at staff level. There is neither the commitment to sustainable growth nor sufficient respect for the principle of partnership with recipient-country leaders. The ultimate goal should be for recipient countries to work in partnership with lenders to develop plans which are costed and investable, transparent and accountable.
Co-creation and accountability are essential for closing the trust deficit and rendering economic gains more sustainable while spreading the benefits of growth more equitably. Amid multiple global and local development finance challenges, the individual examples of co-creation and accountability highlighted earlier in this chapter provide some nascent reasons for hope. A further example is the inspiring activism of Barbados where, under Prime Minister Mia Mottley’s leadership, the government is offering greater accountability to its citizens while securing a real place at the negotiating table for its policymakers. Mottley has put climate change at the centre of debt relief and financial support negotiations with the IMF, and went directly to Christine Lagarde, the fund’s former managing director, to do so. This illustrates how small countries can meaningfully influence the debate and challenge donor-centric patterns of development relationships.
There are signs, too, that international institutions are coming around to the need for reform. António Guterres, the UN secretary-general, has made the case for a renewed ‘social contract’, and ‘for Multilateralism 2.0 to demonstrate a practical “hard interest” as well as a “values case” for why international cooperation inclusively benefits individuals as well as states’.
As the authors of this research paper argue, the resources exist in the public and private sectors to mount a more ambitious effort, but the enabling condition is trust. If trust can be put at the heart of development, this will enable a new level of ambition, and success can flow from there.