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Blogs, Macroeconomic policies

New briefing sheds light on evolving shape of responsible finance standards

Developing countries continue to suffer from profits taken out by foreign investors, lending by developing countries to rich countries and particularly from illicit financial flows (IFFs). In 2014 Eurodad reported that for every USD 100 a developing country makes, USD 10 are lost, flowing out of the country. Last year’s “Mbeki report” estimated that Africa is losing more than USD 50 billion annually in IFFs.

Another flaw in the financial system is that financial and development additionality of publicly-backed private lending as well as the use of financial intermediaries by development banks to invest in small and medium-sized enterprises are suspect. A recent report on the use of financial intermediaries by the IFC, published by Eurodad members Urgewald, 11.11.11, Bank Information Center and others highlighted once more that this practice often leads to severe human rights violations and environmental damage.

Since the financial crisis many DFIs have scaled up their use of blending mechanisms to increase their support and lending to private companies, and to partner with private financiers in funding these activities. At the European level this includes using ever larger quantities of ODA to subsidise private companies based in OECD countries. Likewise, the World Bank and G20 increasingly started to promote public-private partnerships as the right tool to finance the infrastructure projects for which developing countries are crying out, often not paying attention to liabilities which can pose a huge fiscal risk to the public sector.

In 2008 – in the midst of the global financial crisis – Eurodad released its first “Responsible Finance Charter.” The idea behind the Charter was to “go beyond a do-no-harm approach” by setting out the standards that are needed to ensure that public lending to developing countries actively delivers positive development outcomes. Underpinning the Charter was the notion that transparency, accountability and participation in the process of lending were central to delivering such outcomes. The charter was revised in 2011 to broaden its scope by including publicly-backed private lending and investment with a development purpose.

While many of the standard-setting institutions which were mentioned in Eurodad’s Charter in 2011 still set the tone today at the national, regional and global levels (for example the OECD’s Guidelines for Multinational Enterprises, the United Nations’ Guiding Principles on Business and Human Rights and the Equator Principles), since 2011 a significant number of old standards have been revised and new ones emerged. These include, for example, the OECD’s High-Level Principles on Long-term Investment Financing by Institutional Investors and the OECD Principles for Public Governance of Public-Private Partnerships.

Many of the new standards specifically address debt sustainability issues. For example, in 2012 UNCTAD released two sets of principles: Principles on Responsible Sovereign Lending and Borrowing and Basic Principles on Sovereign Debt Restructuring. In addition, at a time when countries like Greece are burdened with illegitimate debt and strangled with austerity measures, the same organization released a Roadmap on Sovereign Debt Workouts.

In a new briefing Eurodad sheds light on the different issues covered by old and new standards, the actors they seek to influence and the mechanisms they have in place to encourage or enforce implementation.

Mathieu Vervynckt is a Policy and Research Analyst at the European Network on Debt and Development – Eurodad. The full briefing can be accessed here.

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