Transcript The Future of Development Financing: Challenges, Scenarios and Strategic Choices Keith Bezanson Development Centre - OECD 04 February, 2005, Paris.

The Future of Development
Financing: Challenges, Scenarios
and Strategic Choices
Keith Bezanson
Development Centre - OECD
04 February, 2005, Paris
Background and structure of the presentation
 Background
 Report
on the future of development financing
written with F. Sagasti and F. Prada
 Sponsored by EGDI at the Swedish Ministry for
Foreign Affairs
 Final study in a set under the Development
Financing 2000 initiative
 Structure
 Brief
of presentation
account of development financing ‘system’
 Scenarios of the development financing system:
components; four scenarios for 2015; policy
implications
 Concluding remarks
The role of financing in development
 Initial
focus:
 Capital
investment and financial resources (big
push, priority of capital investment)
 Gradual
evolution towards:
 More
complex appreciation of of development
process and of the role of finance in relation to
other factors (human capital, institutions,
governance, knowledge, geography)
 Current
conception:
 Finance
is essential but not sufficient for
development
The evolution of international development
financing over time


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
Shift from official (ODA, MDBs) to private
sources (FDI, remittances)
Downward trend and higher volatility in net
official flows (especially in relation to GDP of
donor countries)
Shift in the type of private financial flows:
from commercial bank debt to FDI, bonds and
equity
Structure now skewed in favour of highly
concentrated and mobile private flows and
less towards long-term development needs
Initiatives to reform international development
financing


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United Nations (since 1997: incremental but sustained
improvements, financial constraints)
International Financial Institutions (changes in IMF,
World Bank, larger role of regional and subregional
development banks)
Bilateral agencies (coordination, aid effectiveness,
selectivity, focus on poor, tied aid)
European Union (criticisms of aid and trade, EU and
national funds, enlargement, fiscal constraints)
Emerging initiatives (reward performance, enhance
private flows, issue-based partnerships, direct budget
support, global public goods, International Financing
Facility, global taxes?)
The international development financing ‘system’
at the beginning of the 21s century

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Growth in number of institutions has led to a
complex and messy array of development
assistance organisations
Rapid and uncoordinated expansion of private
agents and flows
Incoherent picture of overlap, duplication and
missing entities that can hardly qualify as an
international development financing ‘system’
Major shocks have driven change in the past
Cumulative unease creates opportunity for
fundamental rethinking of development finance
Key attributes of an effective international
development financing system





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
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Adequacy (match between development financing
and needs of developing countries)
Predictability (amount, anti-cyclical funds)
Responsiveness (balance needs vs. performance)
Diversity and choice (variety of instruments,
institutions and programs)
Capacity to absorb shocks (rapid response)
Links to domestic resource mobilization
(complementarity)
Voice, representation and accountability (in the
formulation of key policies)
Flexibility, adaptation and learning (with the
possibility of ‘sunset clauses’ and mergers)
Scenarios for development financing: components





Institutional arrangements (‘scaffolding’ to
place financial instruments)
Financing instruments (variety of means to
channel resources)
Developing country capacity to mobilize finance
(external and domestic sources)
Political viability (factors affecting reform
process)
Combinations of these components lead to four
scenarios (time horizon: 2015)
Scenarios: institutional arrangements



Business as usual (BASU). By 2015:
Little or no change in organisational structures:
conflicts, rivalry and overlap persist
(“dysfunctional family”).
Large gap between expectations and results:
sense of failure. MDGs remain distant
Leadership failures, missing institutions
Broad range of intermediate outcomes


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Comprehensive reforms (CORE). By 2015
Significant changes (incremental but sustained):
improved management and accountability,
collaboration, better division of labour, synergies
Expectations and results more aligned. Advances
in reaching MDGs
Combination of forward-looking leadership,
innovative and risk-taking approach
Scenarios: financing instruments

Eight categories of financial instruments
(existing and proposed):
1.
2.
3.
4.
5.
6.
7.
8.
Bilateral aid
International organizations and agencies
International financial institutions
Private sector
International capital markets
International taxes and fees
Creation of international markets
Global and regional partnerships
Capacity to mobilize financial resources


Developing countries have very different capacities to
mobilize external and domestic finance
Current classification schemes focus primarily on
categories according to:




Income per capita
Debt service burden
Special conditions (e.g. post-conflict)
Great variation within these categories in country
capacity to mobilize internal and external resources.
Indicators:


Domestic savings, fiscal deficit, gross fixed capital
formation, bank credit
Exports, international reserves, direct foreign investment,
ODA flows
Capacity to mobilize financial resources
Heterogeneity of developing countries: income levels
and indicators of capacity to mobilize financial resources
Capacity to mobilize financial resources

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Need for alternative schemes to classify countries
(various options explored)
Adopted a sequential approach to classify countries
according to indicators of:
 capacity to mobilize external resources (FDI,
exports)
 capacity to mobilize internal resources (domestic
savings, tax revenues)
Result: nine categories of countries:


Matrix with high, medium and low external and internal
resource mobilization (plus four outlier countries)
Shifts in country placements over time
Capacity to mobilize financial resources
Category A
Category 0
Category 1
Category 2
Category 3
Category B
Category C
Country
categorization
Capacity to mobilize financial resources
Category A
Category 0
Category 1
Category 2
Category 3
Category B
Category C
Country changes of category
and ranking between 19901996 (blue dot) and 19972002 (green dot)
International political economy and political
viability

Changes in international power relations


Large economic and demographic imbalances

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Fiscal constraints in donor countries
Concerns about migration
New situations and key actors
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Uneasy coexistence of: unilateralism, bilateralism,
regionalism, multilateralism, public-private and private
regimes, emergence of global concerns
US, Japan, EU
Brazil, Russia, India, China
Multilateral institutions (IMF, WB, RDBs and SRDBs)
From G7-G8 to G20?
G77 and developing country groups
Uncertainty, but also window of opportunity
Interactions between scenario components
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Linkages between institutional arrangements and
financing instruments
Correspondence between financing instruments and
country categories
Degree of utilization of financial instruments
Appreciation of:
Overlap and duplication, division of labour, consolidation
 Missing institutions and instruments
 Potential for expanding use of financing instruments
 Limitations of classification criteria based on income per
capital levels

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Construction of scenarios
Financial instruments and country categories
High capacity
Low capacity
High capacity
CATEGORY A
CATEGORY
1
Contingent
credit lines
CATEGORY B
CACs
MDB and bilateral
regular and blend
loans
Low capacity
CATEGORY
2
CATEGORY
3
MDBs and
bilateral
guarantees to
attract private
flows
MDBs and
bilateral soft and
blend loans
CATEGORY C
•Guarantees to catalyze
external resources mobilization
•Domestic currency bonds
•Smooth debt service
instruments
•MDBs and bilateral soft loans
•Bilateral-private investment
funds
•Debt reduction instruments
•Remittances
Technical assistance to
improve policy
environment
•Grants: Budget
support, debt
cancellation
Scenarios for the international development
financing system
(a)
Institutional
arrangements
(b)
Financing
instruments
1
BASU
(c)
Types of
countries
Inertia
I
2
3
5
6
7
8
Limited
reforms
II
4
CORE
(d)
Political
viability
…
IX
Power
relations
Major
reforms
Transformation
Scenarios for the international development
financing system
Inertia:

‘Business as usual’, possible deterioration of institutional arrangements,
no increase in flows or change in financing instruments, mismatch with
country types.
Limited Reforms:

Minor changes and disconnected improvements in institutions, modest
increases and improvements in financial instruments, focused almost
exclusively on poorest countries.
Major Reforms:

Widespread institutional reforms, significant increases in financial flows
and broader range of instruments, better balance between country
types.
Transformation:

‘Comprehensive reforms’ in institutions, full range of financial
instruments (some automatic) available to all types of countries.
Policy implications of the scenarios
A framework for strategic choices:

How to move from Inertia towards
Transformation?
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Rich menu of possibilities regarding
institutional arrangements, financing
instruments, country classification schemes
and political viability
Identification of main issues in each of the
four components of the scenarios
Policy implications of the scenarios
(institutional arrangements)
Main issues:
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Support current reform momentum and press
for further reforms in international
organizations
Devise and put in place institutions to deal
with global and regional public goods
Establish the G20 at the heads of state level
Explore innovative institutional arrangements
to deal with special problems
Policy implications of the scenarios
(financing instruments)
Main issues
 Bilateral
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instruments:
Increase ODA in a sustainable manner and significantly
reduce bilateral debt
Clarify the relation between the EU development budget, the
European Development Fund and European bilateral aid
Reduce bilateralization of multilateral aid
Revamp technical assistance
 International
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organizations and agencies
Funding patterns of international organizations: core vs. non
core, voluntary vs. replenishments
Consolidation of lines of work, programs and projects
(merge some programs and institutions)
Policy implications of the scenarios
(financing instruments)

International financial institutions
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A systemic perspective of the multilateral development
banks and the role of the World Bank
Creation of sub-regional development banks
Multilateral debt reduction and IDA grants
Exploring greater voice and representation of developing
countries in IFIs (voting power)
Private sources
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Enhancing private foreign investment for infrastructure:
Measures to promote FDI in poor countries
Remittances and their possible link to the provision of local
public goods
Avoiding a ‘race to the bottom’ to attract external capital
Possible impact of Basle II over commercial banks
Policy implications of the scenarios
(financing instruments)

International capital markets

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Expand existing and create new guarantee mechanisms to
stimulate appetite for relative more risky financial assets
Promote and expand access by developing countries
(special investment funds, provision of credit ratings,
financial engineering to mitigate risks)
International taxes, fees and charges

Explore possibility carbon tax when energy prices begin to
diminish. Other proposals are less likely to succeed.
Policy implications of the scenarios
(financing instruments)

Market creation
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Emissions trading (Kyoto Protocol, EU)
Explore post-Kyoto Protocol options
Create public markets for key international public goods
Global and regional partnerships
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Consolidate special purpose global funds
Promote regional and local partnerships to address specific
problems (e.g. conservation and natural parks)
Support the International Financing Facility, but be
prepared to advance variants
Policy implications of the scenarios
(types of countries)
Main issues

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Explore alternative classification schemes for
developing countries
‘Gradation’ instead of graduation
Go beyond performance vs. needs arguments for the
allocation of development assistance
Dealing with changes over time in country capacity to
mobilize external and domestic resources
Concluding remarks

Determined leadership required to move from Inertia
through Limited Reforms and Major Reforms to
Transformation.
Crises have driven structural reforms in the past
 Fundamental shift in international development
finance required
 ‘Radical incrementalism’ may be best approach to
advance towards Transformation:

Articulation of radical shared vision of the future.
 Pragmatic, down-to-earth incremental steps to achieve it
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Do not wait for major tragedies and catastrophes to
steel political resolve and catalyze action