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The Changing Face of
Development Finance
Amar Bhattacharya
G24 Secretariat
February, 2008
I.

From Divergence……
…….to Convergence
But many challenges remain…
Accelerating growth in developing economies
Real GDP, percent change
Forecast
8
Developing economies
6
4
2
East Asia
financial
crisis
0
81 82 83 84 85 86 87 88 89 990 91 92 93 94 95 96 97 98 99 000
9
1
1
2
-2
2001 global
downturn
Early
1980s
debt
crisis
Source: World Bank.
1990s recession
Transition countries
1
2
3
4
05
0
2
6
7
8
9
Growth has far-exceeded that of highincome countries for an extended period
Real GDP, percent change
Forecast
8
Developing economies
6
High-income
4
2
0
81 82 83 84 85 86 87 88 89 990 91 92 93 94 95 96 97 98 99 000
9
1
1
2
-2
Source: World Bank.
1
2
3
4
05
0
2
6
7
8
9
Positive developments in Sub-Saharan
Africa are of particular note
Real GDP, percent change
Forecast
8
6
Developing economies
Sub-Saharan
Africa
High-income
4
2
0
81 82 83 84 85 86 87 88 89 990 91 92 93 94 95 96 97 98 99 000
9
1
1
2
-2
Source: World Bank.
1
2
3
4
05
0
2
6
7
8
9
But Many Challenges Remain




Many low-income countries are lagging
behind
Mixed progress on MDGs
Regional disparities and growing
inequality
Environmental sustainability and global
commons
Many low-income countries lag behind
D evelo p ing C o unt r ies p er C ap it a GD P Gr o wt h R at es 2 0 0 1- 6 :
aver ag e and d isp er sio n ( lo wer and up p er q uint iles)
10 %
8%
6%
4%
2%
U ppe r m i ddl e
Lowe r m i ddl e
0%
i nc om e c ount r i e s ( 4 8 )
i nc om e c ount r i e s ( 3 4 )
H i gh i nc om e
c ount r i e s ( 3 4 )
- 2%
Low i nc om e c ount r i e s ( 4 6 )
U nwe i ght e d a v e r a ge s
- 4%
Source: World Bank staff calculations.
we i ght e d a v e r a ge s
Poverty goals are likely to be reached in
most regions, but Africa lags…
Percent of pop. living below $1/day
50
1990
40
30
Millennium
Development
Goals
20
10
0
Developing countries
Source: World Bank.
Sub-Saharan Africa
Poverty goals are likely to be reached in
most regions, but Africa lags…
Percent of pop. living below $1/day
50
1990
2004
40
30
Millennium
Development
Goals
20
10
0
Developing countries
Source: World Bank.
Sub-Saharan Africa
Poverty goals are likely to be reached in
most regions, but Africa lags…
Percent of pop. living below $1/day
50
1990
2004
40
Forecast 2015
30
Millennium
Development
Goals
20
10
0
Developing countries
Source: World Bank.
Sub-Saharan Africa
More than a billion people still lack
access to safe drinking
Source: World Bank.
Regional disparities pose difficult
challenges
Per capita incomes (US$ PPP 2005)
Czech Republic, Portugal, Korea, Rep.
Distrito Federal, Brazil
Maharashtra, India
Morocco, Paraguay, Swaziland, Armenia
Maranhão, Brazil
Georgia, Indonesia, Syria, Nicaragua
Bihar, India
Madagascar, Nigeria, Zambia, Mali
0
Source: World Bank staff calculations.
5,000
10,000
15,000 20,000 25,000
Within-country inequality has grown as
well
Gini Annual Change (percentage points)
2
1.5
1
0.5
DECREASING INEQUALITIES
0
INCREASING INEQUALITIES
-0.5
-1
-1.5
-2
-2.5
Source: World Bank staff calculations.
Carbon dioxide emissions are mounting
and accumulating in the atmosphere
Source: World Bank.
Climate change has a disproportionate
impact on the poor
Impact of Baseline Global Warming
on Agricultural Production, by the 2080s
%change in output (range with and without fertilization effect)
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
Pakistan
Brazil
Indonesia
India
China
Madagascar
Niger
DR Congo
Tanzania
Malawi
OECD
-45
Impact in the five countries within the sample with the ...
… lowest GDP per capita (PPP)
… largest population
Source: Cline (2007), Global Warming and Agriculture: Impact Estimates by Country, Center for Global
Development : Peterson Institute for International Economics, Washington DC.
II. The Changing Context of
Development Finance
Investment and Savings Trends in
Developing Countries
Gross Capital formation
(% of GDP)
Gross Savings
(% of GDP)
1990
2005
1990
2005
Low Income
21
29
18
28
Middle Income
26
27
27
30
Lower middle income
29
31
30
35
Upper middle income
23
22
22
23
26
27
26
29
East Asia
35
38
36
45
Europe &Central Asia
27
23
25
23
Latin America &Carib
19
21
20
22
Middle East & N.Africa
28
26
26
30
South Asia
23
31
21
30
Sub-Saharan Africa
18
19
16
17
Low & middle income
Source: World Bank.
Governments meeting more of their
financing needs in domestic market
Public debt as a share of GDP in 28 emerging market economies
Percent
External
Domestic
40
30
20
10
0
1998
1999
2000
2001
2002
2003
2004
Source: World Bank staff calculations based on JP Morgan
2005
2006
Trade growth outpace GDP growth
Source: World Bank.
Exports from developing countries
have grown fast
Source: World Bank.
Remittance flows continue to expand…
Migrant remittance flows
$206 billion
$ billions
200
Migrant remittance flows / GDP
Percent
Middle-income countries
Low-income countries
4
150
Low-income countries
3
100
2
50
1
0
0
2000
2001
2002
2003
2004
2005
2006
Middle-income countries
2000
2001
2002
Source: World Bank staff estimates.
2003
2004
2005
2006
The surge in net private inflows is
matched by a pickup in gross outflows
Private capital flows have reached a
new peak….
Net private capital flows to developing countries
$ billions
$647 billion in 2006
(left axis)
700
Percent
6
Percent of GDP
(right axis)
600
5
500
4
400
3
300
2
200
100
1
0
0
1990
Source: World Bank.
1992
1994
1996
1998
2000
2002
2004
2006
Driven by equity flows…
Net private capital flows to developing countries
$ billions
Total in 2006
$647 billion
700
Private debt
600
Portfolio equity
500
FDI
400
Portfolio
equity
$94
billion
300
200
FDI
$325
billion
100
0
-100
1990
1992
Source: World Bank.
1994
1996
1998
2000
2002
2004
2006
FDI inflows keeping pace with rapid
growth…
Net FDI inflows to developing countries
$ billions
$325 billion in 2006
(left axis)
Percent
Percent of GDP
(right axis)
300
3
250
200
2
150
100
1
50
0
0
1992
Source: World Bank.
1994
1996
1998
2000
2002
2004
2006e
…led by inflows to Europe and Central
Asia
Net FDI flows to developing countries
$ billions
Total in 2006
$325 billion
Other
300
Latin America & Caribbean
Europe & Central Asia
250
East Asia & Pacific
200
150
$116 billion
100
50
$88 billion
0
1990
1992
Source: World Bank.
1994
1996
1998
2000
2002
2004
2006
FDI inflows to Sub-Saharan Africa on the
rise…
Net FDI inflows to developing countries
$ billions
$18.5 billion in 2006
(left axis) 8
Percent of GDP
(right axis)
20
Percent
15
6
10
4
5
2
0
0
1997
Source: World Bank.
1998
1999
2000
2001
2002
2003
2004
2005
2006e
…concentrated in resource-rich
countries
Net FDI inflows to countries in Sub-Saharan Africa
$ billions
Angola, Sudan, Nigeria & Equitorial Guinea
Total in 2006
$18.5 billion
South Africa
Other
15
$10 billion
10
$2.5 billion
5
$6 billion
0
2000
Source: World Bank.
2002
2004
2006
Ten largest one-day losses
in global stock markets
Simple average of daily % decline in 60 high-income and developing stock markets
Jun 8 '06
Feb 27 '07
May 10 '04
Sep 20 '01
Sep 14 '01
Jun 13 '06
Apr 16 '00
Aug 16 '07
May 22 '06
Jan 21 '08
0
1
Source: Development Prospects Group.
2
3
4
5
Emerging equity markets
hit across the board
index January 1, 2007 = 100
160
LAC
MSCI total
150
140
130
ECA
120
110
ASIA
100
90
80
Jan07
Jan07
Feb07
Mar07
Apr07
May07
Jun07
Source: Morgan-Stanley.
Jul07
Aug- Sep07
07
Oct07
Nov- Dec07
07
Jan08
Sovereign spreads increase across developing
economies
spreads over ten-year U.S. T-note, basis points
310
LAC
MSCI total
290
270
250
230
210
190
ECA
170
150
East Asia
130
110
Jan07
Jan07
Feb07
Mar07
Apr07
May- Jun07
07
Source: JPMorgan-Chase.
Jul07
Aug07
Sep07
Oct07
Nov07
Dec07
Jan08
...but in historical perspective
the present widening of spreads is modest
Bond spreads (basis points)
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
Emerging market bond spread (EMBIG)
0
1994M1
1995M9
Source: JPMorgan.
1997M5
1999M1
2000M9
2002M5
2004M1
2005M9
2007M5
Developing Country Multinationals are
becoming global investors
Source: UNDP
Net official lending continues sharp decline…
Net debt flows to developing countries
$ billions
250
Net private lending
Net official lending
Net debt flows
200
$228 billion
150
100
50
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-$76 billion
-50
-$71 billion
-100
Source: World Bank.
2006
…with large repayments to Paris Club and
IMF
$ billions
Net official lending to developing countries, 1995-2006
30
IMF
Paris Club and others
World Bank
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-10
-20
-30
-40
-50
Source: World Bank.
-$48 billion
-$25 billion
Reserve Accumulation
Source: IMF, International Financial Statistics, and IMF staff calculations
III. Towards a New Aid
Architecture
The Post-Monterrey Aid
Compact




Debt Relief
Higher Aid Commitments
Innovative Financing Modalities
A New Partnership on Aid Effectiveness



Ownership
Results Focus
Harmonization and Alignment
Reduction of Debt Stock (NPV terms)
for the 30 Decision-point Countries
US$ Billions (end-2005 terms)
100
89
76
80
60
37
40
34
20
10
0
Before traditional debt
relief
After traditional debt relief
After HIPC initiative debt
relief
After additional bilateral
debt relief
After MDRI
Sources: HIPC initiative documents; IDA and IMF staff estimates.
Note: based on decision-point debt stocks. (Updated compared to Progress Report to include Malawi, Sao Tome and Principe, and Sierra Leone as
completion-point countries and Haiti as interim country.)
Underlying aid flow trends do not support
scaling up commitments
Total ODA (2005 $ billions)
Total ODA
$107
$104 Percent
ODA/GNI
(right scale)
100
Debt relief
0.3
Other components of ODA
75
0.2
50
0.1
25
0
0
1990
1992
1994
1996
1998
2000
Source: OECD Development Assistance Committee (DAC)
2002
2004
2006
Development Aid for Africa has not
increased
ODA by sector and destination
$US 2005
1995: $63 Billion
Europe
Mid. East
Oceania
Oceana
Tech. Coop.
Americas
$18 bn.
S. & C. Asia
Dev.
Aid
E. Asia
Unallocated
$28 bn.
$4
$12 bn.
SSA
Debt Relief
Emerg. Aid
2005: $107 Billion
Admin
Oceana
Oceania
Tech. Coop.
Food Aid
Americas
Tech. Coop.
Europe
$22 bn.
E. Asia
S. & C. Asia
Development
Aid
$25 bn.
Debt Relief
Unallocated
$38 bn.
$12 bn.
Emerg. Aid
Food Aid
Admin
source: OECD/DAC and author’s calculations.
Mid. East
SSA
Reaching the 2010 Target for Africa
will require exceptional efforts
Source: OECD Development Assistance Committee (DAC) and World Bank Staff estimates.
Modest Progress on
Innovative Financing

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A pilot IFF for Immunization but what happened
to the IFF
A modest aviation solidarity levy…in part to
finance UNITAID
Advance Market Commitments
No agreement on financial transactions taxes
Stolen Asset Recovery Initiative
CDM Market -- $5 billion
Renewed interest in a carbon tax
Limited Progress on Aid
Effectiveness




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Adoption of PRSPs but...
Reduced conditions but...
Greater alignment but...
Continued volatility and lack of
predictability
Increased fragmentation
Harmonisation and alignment
Source: OECD/DAC, 2004
Aid flows remain volatile…
Proliferation of donor activity
Emergence of New Players

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
Proliferation of multilateral channels often
in the form of vertical funds
New non-DAC donors including from the
South
Growing role of Private Foundations
Proliferation of private philanthropic
channels
The New Bilaterals
(estimated flows in 2005 $ billion)
Non-DAC EU
0.5 – 0.7
Other non-DAC
5.0 – 6.0
Arab Countries
1.7 – 2.5
TOTAL
7.2 – 9.2
US Private International Giving, 2005
Foundations
Corporations
PVOs and INGOs
Higher Education
Religious Organizations
Total
source: Index of Global Philanthropy , 2007.
$Billions
2.2
5.1
16.2
4.6
5.4
33.5
Official versus Private Aid
DAC Members, 2005
100
Debt Relief and Interest
Official
Private
Aid Aid
Officialversus
versus
Private
DAC Members, 2005
DAC Members, 2005
80
100
Debt Relief and Interest
US$2005, billions
Adminstrative Costs
Emergency and Food Aid
80
Adminstrative Costs
Adminstrative Costs
Emergency and Food Aid
60
Adminstrative Costs
Technical Cooperation
60
Emergency and Food Aid
US$2005, billions
Technical Cooperation
40
Emergency and Food Aid
Development Aid
Development Aid and TC
40
Development Aid
Development Aid and TC
20
Official versus Private Aid
20
DAC Members, 2005
Official versus Private Aid
Official Aid
Debt R elief and Int erest
Admins trat ive Cos ts
Emergency and Food Aid
Official
Official Aid
Aid
0
Private Aid
Private
Aid
Private Aid
100
80
60
Food
Aid
Emergency and Food Aid
US$2005, bil ions
Emergency and
Admins trat ive
T echnic al C ooperation
Emergency and
Dev elopment Aid
0
80
Admins trat ive Cos ts
T echnic
al C
ooperation
Admins trat
ive Cos
ts
100
Source: OECD/DAC, Index of Global Philanthropy (2007) and author’s calculations
US$2005, bil ions
Debt R elief and
Int erest
DAC Members,
2005
60
Cos ts
Food
Aid
40
Dev elopment Aid and T C
40
Dev elopment Aid
Dev elopment Aid
and T C
20
2005 Development Assistance
Figures in $ US2005, billions
Poor Governments
Rich Governments
bilateral aid
$26
debt relief & admin. $29
$8
New Bilaterals
admin., tech.
Multilateral
Institutions (233)
$2.5 cooperation, etc.
$5.5
Technical Cooperation
$21
Development Aid from official
donors (DAC and new bilaterals)
Vertical
Funds
$20
$25
New
Multilaterals
corruption
$10
project admin.
$38
capture by
rich citizens
$.5
taxes
debt relief
Tech. Cooperation
$105
$1.5
$1.5
$6
$19?
interest on loans
$.5
emergency and humanitarian aid
$2
interest on loans
$24.5
$39
$63
Private Aid Organizations
$5
Rich Individuals
administration and fundraising
Development Aid and technical
cooperation, from Private Aid
Organizations, including official
contributions
?
Poor Individuals
So what are the main
challenges...

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
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

Scaling-up with sustainability in low income
countries
Tackling poverty and inclusion in middle-income
countries
Paris approach vs. competitive pluralism
Financing regional investments including
regional infrastructure
Financing climate mitigation and adaptation
And does the financing add up?
Upgrading road networks can foster
regional inclusiveness
Upgraded network
increases trade flows by
US$20 billions per year
Source: Buys, Deichmann and Wheeler (2006), Road Network Upgrading and Overland Trade Expansion
in Sub-Saharan Africa, Policy Research Working Paper 4097, World Bank, Washington DC.
Carbon emissions are linked to
coal plant technology
Approx. CO2
emissions
(g/kWh)
Reduction from
Chinese average
(%)
Lifetime CO2
saving
(Mt CO2) a
1140
-
-
Global standard
892
22
73.3
Advanced cleaner coal
733
36
120.5
94
92
310.8
Coal-fired plants:
Chinese coal-fired fleet average, 2006
Supercritical coal with carbon capture
a.
Lifetime savings assume a 1GW plant running for 40 years at an average capacity factor of 85 percent in
comparison with a similar plant with Chinese average efficiency (currently 29 percent).
Source: Watson et al. 2007
The cost of climate-proofing
development
Developing
countries
(US$ billion)
2005
Estimated
portion sensitive
to climate
change
(%)
Estimated
costs of
climate
adaptation
(%)
2,724
2-10
5-20
3-54
~30
Foreign direct investment
(US $ billion)
281
10
5-20
1-6
~3
Net official development
assistance
107
17-33
5-20
1-7
~4
Investment
(US$ billion)
Estimated
cost
(US $ billion)
2005
Mid range of
estimated cost
(US$ billion)
2005
Source: Data on investment from IMF 2007, data on foreign direct investment from world Bank 20007d data on ODA from
indicator Table 18; assumptions on climate sensitivity and cost from Stern 2006.
Implications for the BWIs







Learning to live with competitive pluralism
An expanded but reformed IDA
Re-establishing the relevance of the World Bank
in middle-income countries
What role in the Climate Change Agenda?
A more effective surveillance role for the IMF
Adequate IMF lending instruments for merging
markets and low-income countries
The central issue of governance and voice