Melamed and Mohieldin | A neglected solution to the development finance gap

Last week, the United Nations convened world leaders and development experts in Addis Ababa, Ethiopia, to try to focus minds on the need for more development finance. In the face of tight government budgets, a looming debt crisis, and the chronic challenge of attracting private investment, the outlook for many developing countries – especially in Africa – seems bleak.

Yet the situation need not be so dire. Astonishingly, governments, financial institutions, and investors have neglected a critical tool. Although new technologies enable easy access to data that earlier generations could only dream of, they are not being used to make the most of every available dollar.

As the UN’s Financing for Sustainable Development Report 2024 shows, better data lead to better finance, and improving data systems can unlock new funds and improve the efficiency of resource allocation. Specifically, investment in data and digital technologies, including artificial intelligence, can help us mobilise more money in three ways.

The first channel is taxation. If governments are to provide the health and education services that people rightly expect, they need a sustainable source of revenue. But effective taxation requires knowledge of where people are and how much they can afford to pay. Some of the earliest writing specimens are marks made thousands of years ago by tax collectors recording household assets on clay tablets. Today, the tablets are digital, but billions of people still lack a registered physical address.

Investment in data systems and digital technologies can help. A recent randomised trial in Ghana showed that equipping tax collectors with better data-collection technology more than doubled tax revenues to local governments and resulted in a more progressive tax system, meaning the highest earners pay the highest rate.

Despite these clear benefits, too many governments and development partners neglect the foundational elements of modern data systems – the census, administrative competence, and core capacity in statistics offices – and the efficiencies that would follow from sharing data across governmental and public institutions.

Second, better data are key to mobilising private finance, which is essential to meeting the goals enshrined in the UN 2030 Sustainable Development Agenda. But companies have long argued that a lack of data constrains their ability to invest in digital infrastructure, clean transportation, housing, and so forth. They can neither identify investment projects nor calculate the risks and likely returns.

In fact, much of this information does exist. For example, in 2022, data from multilateral development banks, MDBs, on their portfolios’ returns and defaults were crucial in establishing a US$1 billion fund to bring in private capital for sustainable-development investments.

The problem is that while some of these data are already available, they need to be made accessible at a more granular level to be useful to ratings agencies and other private-sector interlocutors. By focusing resources on such improvements, we can strengthen the link to private-sector investment flows.

Finally, we need better information not only to mobilise finance, but also to make the most efficient use of available resources. Without data, allocating resources – whether from domestic sources, bilateral or multilateral aid programs, or private-sector investment – will be depend on assumptions and guesswork. That is not good enough, especially nowadays, when every dollar needs to be leveraged as much as possible.

Reliable data enables decision-makers to focus directly on the greatest needs and to determine what is and is not working. Consider traffic accidents. Because improving infrastructure is costly, Kenya combined administrative, crowdsourced, and private-sector data to enable the National Police to generate 100 new variables for identifying crash hotspots; it turned out that in Nairobi, the capital, half of casualties occurred on just five per cent of the road network. Public authorities have since focused their road-safety interventions on these high-risk areas, resulting in a much more efficient use of available funds.

Rapid advances in AI create even bigger opportunities to process and analyse data in similar ways. But to make the most of these technologies, political leaders first must invest more in data systems, mandate data sharing across institutions, and support the development of the right public-sector skills and capacities.

This should be an easy sell, because investments in data pay off many times over. One recent study suggests that projects focused on strengthening data systems return an average of US$32 for every dollar invested, whether through doubling tax revenues, raising billions in new private-sector investments, or achieving greater efficiency in the allocation of available resources. If anything, AI and other data-driven technologies will supercharge this process, making such investments even more productive.

There is no magic money tree for global finance. But by failing to invest in data, and by failing to make the most of the data available, too many governments are making life harder for themselves. Data can unlock more financing. We just need today’s leaders to turn the key.

Mahmoud Mohieldin, UN Special Envoy on Financing the 2030 Agenda for Sustainable Development, is the co-author of ‘Business, Government and the SDGs: The Role of Public-Private Engagement in Building a Sustainable Future’. Claire Melamed is CEO of the Global Partnership for Sustainable Development Data.© Project Syndicate 2024www.project-syndicate.org