2.

1 Overview

Image by: World Bank/CC BY-NC-ND 2.0 license

Following Week 1’s look at the concept of development and types of

development finance, Week 2 turns to the role of public finance in development,
and of the public sector in facilitating greater finance for development. This week
you will learn about the critical stakeholders, instruments and trends associated
with domestic and international public finance in support of development. You
will also be introduced to the role of the public sector in setting a national
development plan to guide investments, including from the private sector,
towards development goals, and in fostering an improved investment climate
and “business environment” that can help unlock investment opportunities.
Finally, you will understand the negative impact of illicit financial flows and
corruption and how these activities can decrease finance for development, and
how to combat them.
Domestic Public Finance

Domestic Resource Mobilization

Domestic Resource Mobilization (DRM) is, for most countries, the largest source of
funding for development. “Domestic resources” are generated within a country—
from individuals, companies, and governments. Individuals contribute to
development resources through personal income tax, firms through corporate
and business-related taxes, and governments through a variety of public revenue
streams and debt management strategies. As discussed below, a persistent
challenge that erodes DRM is illicit financial flows, which include corruption and
tax evasion. In this week’s Core Readings and Videos, you’ll learn how a country’s
ability to mobilize and spend its domestic resources effectively is at the center of
financing for development.
Efficiency of Public Spending
Next, you’ll examine Public Expenditures and identify how the efficiency of public
spending is achieved, through 1) improving the design and management of
public programs, and 2) cutting low priority or poorly-designed spending. Both
methods increase development impact and free up resources (fiscal space) for
additional development-focused outlays. Strong performance metrics, effective
monitoring, better policies, and reforms in procurement and in subsidy regimes
help to create higher quality, sustainable results. The Core Reading materials and
related Video Talks will help you better appreciate the issues related to this critical
aspect of public finance.
International Public Finance

Official Development Assistance

Official Development Assistance (ODA), as outlined in the Course Overview, is a
component of international public finance. ODA funding consists of grants and
highly concessional loans and is provided by governments and official agencies
to finance development in low and middle income countries. (Concessional
means financing that offers flexible or lenient terms for repayment, usually at lower
than market interest rates). ODA has traditionally been the primary public,
international resource flow focused on the development outcomes and welfare
of developing nations. This week’s Core Reading material and accompanying
Video Talks define ODA and clarify its role as a catalyst for mobilizing other
resources.
National Development Plans – Using all sources of finance

National Development Plans (NDPs) help governments prioritize investments with

the highest development returns and are meant to be the lynchpin for mobilizing
all sources of finance aimed at achieving the SDGs. By implementing NDPs,
governments also play a role in establishing a more favorable investment climate
to attract private sector financing through supportive governance structures,
competition policy, local capital market development and infrastructure, as well
as by supporting public-private partnerships. The Core Reading material and
accompanying Video Talk will explain how, in the case of Colombia, defining a
national development plan and introducing reforms and policies to attract
private sector financing are critical. You will learn more about the importance of
creating an enabling environment and private sector participation in Week 3.
Public Sector Policy for FFD, Part 1: Business Environment Reform and the
Investment Climate

The business environment is the set of policy, legal, institutional, and regulatory
conditions that govern business activities. It contributes to the investment climate,
which is defined as the economic and financial conditions in a country that affect
whether individuals and businesses are willing to invest there. Governments can
set policies that change the business environment and improve the investment
climate, thus unlocking investment opportunities and increasing the
attractiveness for private sector participants. Making positive policy decisions and
regulatory changes that improve the business environment and investment
climate is Business Environment Reform (BER).

BER is the exclusive responsibility of government, but development institutions and

NGO’s can recommend steps for the public sector to take. BER steps that help
improve attractiveness to investors include enhancing investor protections,
deregulating financial markets, establishing credit reporting bureaus, and
reducing the time for registering as an investor. The core readings explain BER and
present policy recommendations and tools governments can use.

Note that BER can also help foster “inclusive businesses.” An inclusive business (IB)
is a business or investment that is geared towards meeting the needs of the
poorest consumers. There is some debate around whether there are specific steps
needed for inclusive versus normal businesses, since so much of the population in
poor countries would count as IB customers. The attached core readings discuss
these issues as well.

The first video talk from Ngozi Okonjo-Iweala discusses the investment climate and
how improvements can unlock opportunities.
Public Sector Policy for FFD, Part 2: Tackling Corruption and Illicit Flows

The other policies governments can implement to increase financing for

development and unlock investment opportunities have to do with illicit financial
flows. Money laundering, bribery, and other forms of corrupt financial practices
divert finance from legitimate development and crowd out additional
investment. The core reading on this topic from Transparency International
discusses practical steps governments can take to improve capture and reduce
corruption in their economies.
The second video talk from Ngozi Okonjo-Iweala discusses illicit flows and how
governments can reduce them.

Checklist
Watch the videos for your Track (General Awareness or Development Specialist)

Do the Core Readings specific to your Track

Complete the Week 2 Quiz

First Project (see below)

Activities

Both Tracks
First Project, both Tracks

Core readings have been selected to give you a high-level and introductory
overview of the weekly topics. Naturally, they only touch the surface of the
materials that have been produced on what development and financing for
development mean.

We expect that it will take you 3-5 hours to complete the checklist for the General
Awareness Track and 5-7 hours to complete the Development Specialist Track.

This Week, do not forget to join the Hangouts On Air with YouTube Live to discuss
the role of the public sector in development. A separate announcement on this
will be sent out.