Mazzucato: excessive financialization of the economy is not producing good results

Mariana Mazzucato, economist and professor at UCL, criticizes the failure of blended financing and defends in FfD4 a transformative approach to mobilizing resources towards the SDGs

The Sustainable Development Goals (SDGs) are dangerously off track. With just five years left until 2030, almost half of the SDG targets are stagnating or moving backwards. Hunger levels have regressed to those of 2005, and no SDG 13 (Climate Action) target is on track. These alarming trends reveal more than just unmet goals; expose a systemic failure to embed the SDGs at the core of our economic and financial systems.

Still, the global response remains fixated on filling funding gaps. In an upcoming policy report from the UN Department of Economic and Social Affairs and UCL’s Institute for Innovation and Public Purpose (IIPP), I explain why the current “gap-filling” approach has failed to deliver the scale, impact and the necessary equity.

Blended financing, often promoted as a solution to the SDG financing gap, has clearly failed to deliver on its promise. Over the past 15 years, annual blended finance volumes have stagnated at around $15 billion — far short of the $5-7 trillion needed annually to achieve the SDGs. Even within this limited scope, private equity contributions to blended finance are marginal, representing just 38% of the total mobilized and just 16% for climate finance. Worse still, blended finance is diverting scarce concessional resources to mitigate private business risks in lower-risk regions and sectors. Low-income countries (LICs), for example, mobilize just US$0.37 of private capital for every US$1 of public financing, compared to US$1.06 in lower-middle-income countries (LMICs). This inequality exposes the fundamental flaw of blended finance: prioritizing risk reduction to the detriment of addressing the real challenges of sustainable development.

With the Fourth International Conference on Financing for Development (FfD4) approaching, we have a unique opportunity to change course and adopt a transformative approach to financing the SDGs. FfD4, scheduled for June 30 to July 3, 2024, in Seville, Spain, represents a pivotal moment in aligning global economic and financial systems with the SDGs. This conference must be more than a place to reiterate past commitments; it must be a starting point for systemic changes in how we finance development.

Three Fundamental Changes to Financing the SDGs

1. Putting the SDGs at the Center of Economic Planning:
   This requires robust public investment pipelines aligned to the SDGs and Nationally Determined Contributions (NDCs). These pipelines enable the public sector to strategically guide private investment toward high-impact, mission-driven strategies.

Examples include Germany’s Energiewende and KfW, its public development bank, which have mobilized private capital for renewable energy initiatives. The Development Bank of South Africa (DBSA) has also attracted US$110 million for climate-resilient infrastructure, demonstrating the multiplier effect of aligning public and private resources.

2. Incorporate Conditionalities in Mixed Financing:
   Public funding must be tied to explicit goals such as decarbonization or equitable access to healthcare, forcing private partners to focus on outcomes aligned with high-impact missions.

This approach also corrects the lack of additionality in current models, where many publicly funded projects would have advanced without intervention, wasting scarce resources.

3. Socialize Risks and Rewards:
   A portfolio approach can share risks and reinvest rewards, scaling transformative financing of the SDGs. Public Development Banks (PDBs) and Multilateral Development Banks (MDBs), which collectively manage more than US$22.5 trillion in assets, are positioned to lead this effort.

Tools such as equity, royalties and profit-sharing agreements can ensure that public contributions generate tangible returns, allowing public entities to offset losses and reinvest in new opportunities.

A Decisive Moment

FfD4 offers a chance to recalibrate our approach to financing the SDGs. Our financial systems need to be as ambitious as the SDGs themselves. This means prioritizing impact over scale, aligning public and private resources through mission-driven structures, and embedding accountability at all levels.

Only by fundamentally reimagining the role of public finance can we mobilize the transformative investments needed to deliver on the promise of the SDGs. The time for incremental change has passed; FfD4 should mark the beginning of a bold new approach to financing sustainable development.

Mariana Mazzucato, PhDis professor of Innovation Economics and Public Value at University College London (UCL) and founding director of the UCL Institute for Innovation & Public Purpose. She has received international awards including the Grande Ufficiale Ordine al Merito della Repubblica Italiana (2021), the John von Neumann Prize (2020) and the Leontief Prize (2018). She was recently named by Pope Francis to the Pontifical Academy for Life for her contributions to humanity.