Financing for Development in a Fragmented World

The report analyzes the sources of development finance for low-income countries (LICs), identifying tax revenues as the primary source but highlighting systemic risks such as cuts to official development assistance (ODA), trade fragmentation, and an impending external debt crisis. It argues that while domestic resource mobilization (DRM) is essential, it must be balanced with 'external revenue mobilization' through export diversification to avoid balance of payments crises. The authors propose a pragmatic approach to the Financing for Development (FfD) agenda, recommending specific international reforms—such as separating poverty-reduction ODA from global public goods funding—and national reforms, including the removal of fossil fuel subsidies and the implementation of wealth and natural resource taxes.

• Tax revenues are the most critical source of primary revenue for the public sector across all income levels, accounting for nearly 60% of total primary revenues.
• Low-income countries (LICs) exhibit a structural reliance on grants to compensate for a lack of social contributions, though the share of grants has decreased since the implementation of the Addis Ababa Action Agenda (AAAA).
• Environmentally harmful subsidies (EHSs) represent a major global outflow exceeding USD 2 trillion per year, which undermines domestic resource mobilization and the clean energy transition.
• LICs rely heavily on transfers—including remittances and grants—to finance their external sectors, with secondary income and the capital account accounting for 30%–40% of import payments.
• External debt sustainability in LICs is threatened by a shift toward costlier, shorter-term, non-guaranteed private debt, which is driving debt service costs back to levels seen during the Heavily Indebted Poor Countries (HIPC) era.
• To prevent the double-counting of resources, the report recommends a two-tiered ODA approach that separates country-focused poverty reduction funding from spending on global public goods, such as climate action.
• Domestic resource mobilization (DRM) should be scaled up through specific reforms: increasing taxes on profit, income, and property; removing fossil fuel subsidies; and expanding natural resource taxation.
• An exclusive focus on DRM without a corresponding increase in 'external revenue mobilization' (specifically export diversification) risks triggering balance of payments crises and currency instability in LICs.

APA

Morra, F., & Readhead, A. (2025). Financing for Development in a Fragmented World. International Institute for Sustainable Development. https://www.iisd.org/system/files/2025-06/financing-development-fragmented-world.pdf

Chicago

Morra, Fernando, and Alexandra Readhead. Financing for Development in a Fragmented World. International Institute for Sustainable Development, 2025. https://www.iisd.org/system/files/2025-06/financing-development-fragmented-world.pdf.

Wikipedia

{{cite report |last1=Morra |first1=Fernando |last2=Readhead |first2=Alexandra |title=Financing for Development in a Fragmented World |publisher=International Institute for Sustainable Development |date=June 2025 |url=https://www.iisd.org/system/files/2025-06/financing-development-fragmented-world.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{morra2025financing, author = {Morra, Fernando and Readhead, Alexandra}, title = {{Financing for Development in a Fragmented World}}, institution = {International Institute for Sustainable Development}, year = {2025}, month = jun, url = {https://www.iisd.org/system/files/2025-06/financing-development-fragmented-world.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }