Development Impact Bonds and Impact Investing – genuine Impact, or snake oil?

August 5, 2013

Panels of the Poor: What would poor people do if they were in charge of the post-2015 process?

August 5, 2013

How will development be financed? The eclipse of aid, and what it means for post-2015

August 5, 2013
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Thanks to Alex Evans for recommending ‘Who Foots the Bill’, a report from the ODI’s Romilly Greenhill and Annalisa Prizzon on trends in developmentSomalia-food-aid-007 finance. It was published at the end of last year, but somehow I missed it – probably because it is pegged to funding the post-2015 goals, a timesuck discussion I have tried to avoid (without much success).

But actually its value goes way beyond post2015. Here are some highlights:

Conclusions on Financing for Development:

  • Developing and emerging economies have been driving global growth over the past decade and it is this, not aid, that has been the main driver of poverty reduction at a global level.
  • Developing countries have also been expanding domestic tax revenues at a rapid rate, giving much more scope for development to be funded domestically. The average tax ratio rose from 23% of GDP in 2000 to nearly 29% in 2011.
  • All the main sources of development finance considered in this paper have been expanding rapidly over the past decade. Foreign direct investment inflows and workers’ remittances tripled in nominal terms between 2001 and 2010; philanthropic funding more than tripled between 2003 and 2009. (see first table below for detail)
  • The relative importance of official aid  vis-à-vis other forms of finance has declined. In middle income countries, aid/GDP ratios have nearly halved during the 2000s, whereas tax revenues, FDI and workers’ remittances have all seen an upward trend.
  • These trends are very uneven across countries, with private cross-border flows heavily concentrated in middle income countries, whereas low-income countries remain much more dependent on aid.
  • While aid  is now under pressure, there has been rapid growth in new ‘aid-like’ forms of development finance, which are not classified as aid but nevertheless have a public interest purpose. This includes South–South cooperation, philanthropy and other private development assistance and climate finance. All these flows have been growing at rapid rates over the past decade and are likely to continue to do so in future.

And some v handy summary stats: The table is a bit hard to read, so the headline is that from 2000-2010, here’s how sources of development finance changed (worth focussing – the numbers are pretty striking):

In Middle Income Countries:

  • FDI, net inflows: $146bn -> $501bn
  • Portfolio Equity, net inflows: $14bn -> $130bn
  • Workers remittances: $76bn -> $301bn
  • Net official aid: $76bn -> $52bn

In Low Income Countries:

  • FDI, net inflows: $2,4bn -> $13bn
  • Portfolio Equity, net inflows: $0bn -> $0bn
  • Workers remittances: $4bn -> $25bn
  • Net official aid: $10bn -> $40bn

ODI table 1

ODI table 2As for the implications for the post-2015 debate, the paper concludes:

‘It will be important for the post-2015 agreement to have an even stronger focus on, and  foundation within, country-level leadership and priorities. Country-level targets, or a menu of options that countries can adopt, may be more appropriate than a single global set of targets.’

And

‘The post-2015 goals may be able to be more ambitious, but the limited contribution of aid should be recognised. Domestic tax revenues and cross-border finance flows are now much more important than ODA.’

Which kind of brings us back to the concern I expressed in my paper with Stephen Hale and Matthew Lockwood last year: the MDG process was dominated by global institutions and aid. I totally agree that the post-2015 system needs to focus instead on national processes and non-aid flows, , in order to reflect the almost unrecognizably different landscape of financing for development. But then the discussion should have been designed very differently – it still feels far too much like a revamp of the MDG paradigm, rather than something really new.

7 comments

  1. @Development Initiatives, thanks for sharing the working paper. I agree that there’s differences in the provision aid in LDCs and middle income countries. I just wonder where aid/ODA for that matter really goes when in fact it’s not the major source/driver of global development? How did the economic downturn also affected foreign aid?

  2. From a quick glance at the summary table, this is far from demonstrating aid’s irrelevance. In low income countries, FDI and aid have both roughly quadrupled since 2000 while remittances have increased slightly more than that (hard to say more than that since numbers are given in current prices). Presumably therefore their relative share in foreign capital inflows remains about the same as in 2000 (not forgetting that FDI fell off a cliff in 2009/10 and has yet to recover in most LICs). Moreover, aid is the only one of these flows that has an ostensible public interest purpose. So do we conclude that in (the admittedly shinking group of) low income countries, aid remains just as significant now as in 2000?

  3. Duncan, thanks, as always, for an insightful piece. But like with many of these discussions I keep wondering about von Munchausen pulling himself up from the swamp by his hair / bootstraps: if the 2015 agenda was successful because of its narrow focus (MDGs), how can the same system broaden its mandate without losing its power? And in fact, one important conclusion from your useful table is the rapid increase in aid to poorest countries (faster increase in aid than FDI!): shouldn’t ‘we’ instead focus more narrowly on enhancing progress, within the means of an ‘international community’ in those areas where there is most need?

  4. I am currently doing some work in Bolivia with GNTP who was a member of the 2000 group of organizations that worked under Voice of the Poors.

    This pre or post 2015 discussion seems to revolve around one or the other and less on what would be the scenario if most of “aid” issues would be taking care in great majority by a combination of private sector and civil society partnership with less government participation. In that scenario, the government would collect taxes and look after the rest of the needs and a system of infrastructures that are built without much vision. Government revenues that use to come from ODA would be replaced by taxes. Detroit recently declared bankruptcy …was it too much spending or depleting tax base. With the best technology and talent — most cities have a very high infrastructure deficit ..they just can’t afford them.

    This scenario is highly optimistic because it would means that the cost of the existing bureaucracy would be paid out of new taxes in countries where most of the economy is informal. It would also assume that the role of corporations would be for long-term commitments knowing that business cycles (so far) have never been that constant.

    So how would business pay for this? Are corporations becoming quasi-governments where the burden is past on consumers (indirect taxes)because we all know that corporate revenues come from consumers. So the prices to deliver those programs is now included in the cost of the product or service? Or would we see a new trend where corporations would be less profitable and would allow a portion of their profit to social causes. Who would look after orphan “causes”? Corporations would most likely pick causes that are “sexy”.

    Who came up with the idea that governments would be able to plan ahead in a system where “most” of the new forms of revenues would take place outside of government programs? Would we come up with new financial targets for corporations…something like 7% for social causes? What if they don’t?

    It took 60 years to figure out that ODA is somewhat working but lacks transparency and well…it’s not that efficient when it comes to generating economic development. ODA takes place within a small group of DAC donors. Governments (receiving countries) already have difficulty managing 20 donors and a few other large foundations that have vertical programs – how would this coordination take place when 1000 new stakeholders would want to have their logo on school desk or hospital rooms!? I see it here where the government made these great partners

    Would taking money out of the formal economy would be better managed by national governments and would that money trickle back to the people? No need to look South, I think we have some good examples in Europe, the USA, and Canada.

    The countries that are generating the most wealth in Latin America (Mexico, Colombia, Brazil) are host of 60% of poverty in Latin America.

    Let’s not get too excited about Remittances and FDI….like government revenues…they are cyclical. Numbers published and showing increased remittances flow doesn’t tell us if migrants are sending more…or it’s just more migrant abroad sending less. Remittances are also associated with high leakages.

    Let’s just say that things are better North and that the diaspora community is increasingly engaged in their communities of origin…how would you coordinate this so that it’s strategic and somewhat efficient!?!

    Is the employment situation equally better with increased FDI? Are leakages higher than investment?

    I agree that a new model is needed but maybe more energy should be spent on the HOW then just flicking the switch!

    We hope that our work here in Bolivia will help inform this ongoing discussion on how PDA complements ODA and national strategies.

    I still wonder why Tanzania decided to tax “declared volunteers” 5 times more for a visa than a tourist. Maybe a new trend? Tax PDA!!!

  5. Thanks for a nice summary of ODI’s work. Something that worries me is that even if there is a broadening out of focus onto other forms of finance for development, money has never been the only answer to anyone’s problems. Surely domestic policy that has a footprint abroad also matters, whether we’re talking tax policy, trade policy, migration policy, security policy, etc. Will these receive any attention now and in a post-2015 context?

  6. This is something that worries us here at the EFA Global Monitoring Report too. How will even more ambitious development goals be achieved if there isn’t the money to achieve them? To look at just one sector, education financing has stagnated, leaving a $26 billion finance gap every year just for basic education. How the 57 million children are going to get into school between now and 2015 without large amounts of additional funding is a mystery.

    This is more than enough of a reason for there to be a specific goal on financing in the post 2015 development agenda.

    Without the finance, the other goals will be vapid.

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