2.2. Why Mobilize Private Finance for Development?

The global development landscape is changing in profound ways. Huge pools of private capital - in developed and developing economies alike – have emerged and are looking for attractive investment opportunities. 

While Official Development Assistance (ODA) has been flat in recent decades, private foreign direct investment has continued to grow. Even more remarkable is the growth in domestic private capital within developing economies (see graphic below). These resources have great potential to support economic development if directed towards suitable investments and opportunities, and mobilizing this abundant capital for development is emerging as a core element of strengthening countries’ ability to finance their development plans and strategies. 

This graph displays upward trends in international and domestic development finance in developing countries.

 2 Sources: OECD, World Bank Remittances Data, International Monetary Fund (IMF) World Revenue Longitudinal Database (WoRLD), UNCTAD Stat and World Bank World Development Indicators (WDI), USAID analysis. 

In addition to the growing abundance of private financial resources, other factors are prompting donors to shift their focus toward facilitating private investment, working to unlock market forces and transform private capital into investments that can advance development:

The context is right. The time is right for this shift. While ODA has been flat in recent decades, foreign direct investment has continued to grow. Even more remarkable is the growth in domestic capital within emerging market countries. Thus, development agencies can play a critical role in facilitating productive investment of that capital. Efficiency and better outcomes. Private capital brings with it the enterprises which own or manage that capital. Engaging private enterprise in investment decisions can lead to better and more sustainable investment outcomes in which development dollars can have higher long-term impact. There is a need. Meeting the Sustainable Development Goals is estimated to cost $4 trillion annually, while annual global ODA funding to countries in all income categories is estimated to total $1.4 trillion. Engaging private capital is necessary to close this gap and meet development objectives. It is a development agency priority. Leaders of development agencies increasingly champion private enterprise-led development, reminding us that the ultimate goal of development should be creating the conditions in which countries can stand on their own and meet the needs of their populace without reliance on foreign assistance.