What does the changing context of development finance mean for the post-2015 agenda?

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Annalisa Prizzon, Overseas Development Institute, Research Fellow at the Centre for Aid and Public Expenditure (CAPE)
This blog was originally published on the development progress blog which is running a series on finance and development

It’s a daunting task, trying to summarise a series of viewpoints from eminent researchers and experts on how the development finance landscape has evolved and what it all means for the financing of development beyond 2015.  While I doubt I can do justice to all the contributions so far, we need to take stock of the lessons contained in these different viewpoints.  I see four key questions that provide real food for thought.

  • Do partner countries still need external finance?
  • What will development finance fund in the future?
  • Where will it go?
  • How will it be raised?
1. Do partner countries still need external finance?
Yes, but it’s going to be different from now on. While financing needs will still be high in the poorest countries, in his blog post Stephan Klingebiel argues that the demand for finance is likely to shift from concessional assistance to financing at commercial terms and to a more sophisticated blend of finance instruments.
Yes, there are large resources in international private financial markets that could be tapped. But Gail Hurley stresses that these resources will not target critical areas for sustainable development, such as social services, high-risk innovative investment and global public goods (GPGs).
Public resources for development, albeit small, will still be needed to support these projects and objectives. Gail asks how public resources for development will be financed – by voluntary or statutory contributions, citing precedents in the financing models of the UN, IMF and the EU. And yes, there are clear challenges in achieving an agreement and in enforcing it across countries – the stalled climate-change negotiations and the failure to achieve the 0.7% ratio of official development assistance (ODA) to gross national income (GNI) by most ‘traditional’ donor countries are two notable examples. But, Gail argues, we should not lose momentum right now, just when we need to shift the general mindset from aid – seen as a temporary and charitable measure – to permanent support for partner countries that is in line with both national and collective interests.
2. What will development finance fund in the future? Global public goods that are better integrated with development cooperation.
In his contribution, Stephan Klingebiel also advocates financing for development that is increasingly channelled towards GPGs. This would enable collective actions at global and regional levels, especially when crucial policies are expected to be designed at these levels in particular. 
On this point, Inge Kaul argues that more effort should be spent to boost synergies between GPGs and the development cooperation agenda, with GPGs that are ‘development-proof’ and development that is, in the same vein, ‘GPG-proof’. In the first case, disaster-risk reduction is a prime example: while the media highlight news of any major natural disaster, financing for risk prevention is negligible (accounting for just $0.40 in every $100.00 of ODA, according to ODI research). Policy-makers should advocate for greater availability and affordability of natural-disaster risk-financing. The second case (GPG-proof development) is more familiar to the development discourse. With calls for countries to adapt their national priorities to low-carbon growth and development, compensatory financing should be ‘new and additional’, and go beyond ODA pledges. 
3. Where will it go? Middle-income countries (MICs) should not be neglected,  as income per capita does not always reflect a country’s capacity to mobilise either domestic or external resources
In his blog Jose Antonio Alonso argues that most development assistance should be disbursed to low-income countries, where the average transfer needed to raise the poor above the $2 per day poverty line is as high as 56.8%, compared to just 0.28% in upper MICs and 5.32% in lower MICs. However, MICs may still benefit from aid flows to help them escape three traps that often face fast-growing economies:
  • a structural change trap (no sustained process of technical and productive change)
  • a governance trap (lack of more sophisticated institutional arrangements required from a more demanding civil society)
  • a financial trap (limited integration into international financial markets and buffer for countercyclical policies).
In addition, Francisco Sagasti provides clear evidence that rising income per capita (the indicator for MIC graduation) is not a good measure of a country’s capacity to mobilise either domestic or external resources. The graduation to MIC status means that countries can no longer access soft loans from multilateral development banks (such as the World Bank, Asian Development Bank or African Development Bank) and bilateral donors may consider phasing out of a country where they feel their contributions are no longer needed. Francisco argues that the choice of instruments (grants, soft and hard loans, etc.) should be based on the capacity of the country to mobilise resources, not on per-capita income levels. He suggests that the discourse be shifted from graduation (across income levels) to gradation (a combination of development finance instruments).
4. How will it be raised? Via taxation and the taming of illicit flows, as well as continued external support in some cases.
The significant growth in domestic revenues in developing countries will enable a larger share of development to be financed domestically, either through taxation or through financial deepening, particularly in MICs and resource-rich countries. And the scope to expand the domestic envelope could be even larger if illicit flows are tamed.  However, an effective solution requires international and collective action. First, Alex Cobham argues, countries need to develop their capacity to assess the potential magnitude of resources that can be tapped. Second, transparency on tax information should be inserted as a target. The success of international agreements on illicit flows will require the consensus of all countries, especially high-income economies, as well as accountability on commitments. 
To sum up, I argued earlier this year that the international community should start debating possible financing scenarios for post-2015 alongside discussion of the development goals. Now is the time, therefore, to plan a Monterrey Plus Conference on development finance, because new actors who are left out at this stage are unlikely to contribute financially or to discuss what the financing architecture should look like to sustain the new set of goals.
But who are these new actors and how can they be involved? The next Development Progress blog series will look  at the role of non-state actors, particularly the evolving and expanding group of international NGOs, the arrival of foundations (some much bigger than state funders) on the international scene, and the private sector. Will the private sector, for example, help to foot the bill on the post-2015 goals? And if so, how? These are just two of the questions that our next set of blog posts will try to answer.

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