The problem can be illustrated using a simple mortgage calculator: borrow a billion dollars for 30 years at 2 percent interest and your monthly payment is $3.7 million. How much investment developing countries can afford to carry out depends on how much they have to pay the institutions who provide the money to invest. It also implies the need for a lot of money from outside sources to make such significant investments even somewhat plausible. That may suggest some of the development targets were set at an excessively ambitious level, and it is dangerous to assume that investment is the only or most significant challenge in meeting many development goals. According to Kharas and McArthur, for many poorer countries, the amount they would have to spend annually in order to meet the Sustainable Development Goals is 10 percent of GDP or more per year (for two countries they actually suggest numbers as high as 100 percent or more). We are seeing eyewatering numbers for the costs associated with meeting global development targets including climate mitigation and adaptation, involving trillions of dollars. Everyone agrees we need considerable investment… In turn, that suggests any investment gap will only be substantially reduced with massive subsidies for private companies or considerably smaller financial infusions to bankroll international public investment. The situation is dramatically improved if projects only need to generate financial returns of 1 or 2 percent, closer to the interest rates currently demanded by multilateral development banks. The short answer: if poorer developing countries face a cost of capital that requires a 20 percent annual return or more, about the rate being demanded by international private investors at the project level, there isn’t going to be much investment in clean energy, green transport, better healthcare, or more education. But how much you can afford to invest depends on how much you’re paying for it. And that’s where the simple math of development finance comes in. Global gatherings from Addis Ababa to Glasgow are setting targets from climate through health and education to energy and transport that call for a lot of investment for sustainable development.
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