The Changing Face of Development Finance

1
The Changing Face of Development Finance
The Changing Face of Development Finance

• Amar Bhattacharya
• G24 Secretariat
• February, 2008

Amar Bhattacharya G24 Secretariat February, 2008
2
From Divergence .to Convergence

• But many challenges remain

3
Accelerating growth in developing economies
Real GDP, percent change
Forecast
Developing economies
2001 global downturn
East Asia financial crisis
Early 1980s debt crisis
1990s recession Transition countries
Source World Bank.
4
Growth has far-exceeded that of high-income
countries for an extended period
Real GDP, percent change
Forecast
Developing economies
High-income
Source World Bank.
5
Positive developments in Sub-Saharan Africa are
of particular note
Real GDP, percent change
Forecast
Developing economies
Sub-Saharan Africa
High-income
Source World Bank.
6
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

7
Many low-income countries lag behind
Source World Bank staff calculations.
8
Poverty goals are likely to be reached in most
regions, but Africa lags
Percent of pop. living below 1/day
1990
Millennium Development Goals
Source World Bank.
9
Poverty goals are likely to be reached in most
regions, but Africa lags
Percent of pop. living below 1/day
1990
2004
Millennium Development Goals
Source World Bank.
10
Poverty goals are likely to be reached in most
regions, but Africa lags
Percent of pop. living below 1/day
1990
2004
Forecast 2015
Millennium Development Goals
Source World Bank.
11
More than a billion people still lack access to
safe drinking
Source World Bank.
12
Regional disparities pose difficult challenges
Source World Bank staff calculations.
13
Within-country inequality has grown as well
Source World Bank staff calculations.
14
Carbon dioxide emissions are mounting and
accumulating in the atmosphere
Source World Bank.
15
Climate change has a disproportionate impact on
the poor
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.
16
II. The Changing Context of Development Finance
17
Investment and Savings Trends in Developing
Countries
Source World Bank.
18
Governments meeting more of their financing needs
in domestic market
Public debt as a share of GDP in 28 emerging
market economies
Percent
Source World Bank staff calculations based on JP
Morgan
19
Trade growth outpace GDP growth
Source World Bank.
20
Exports from developing countries have grown fast
Source World Bank.
21
Remittance flows continue to expand
Migrant remittance flows
Migrant remittance flows / GDP
billions
206 billion
Percent
Low-income countries
Middle-income countries
Source World Bank staff estimates.
22
The surge in net private inflows is matched by a
pickup in gross outflows
23
Private capital flows have reached a new peak.
Net private capital flows to developing countries
billions
Percent
647 billion in 2006 (left axis)
Percent of GDP (right axis)
Source World Bank.
24
Driven by equity flows
Net private capital flows to developing countries
billions
Total in 2006 647 billion
Portfolio equity 94 billion
FDI 325 billion
Source World Bank.
25
FDI inflows keeping pace with rapid growth
Net FDI inflows to developing countries
325 billion in 2006 (left axis)
billions
Percent of GDP (right axis)
Percent
Source World Bank.
26
led by inflows to Europe and Central Asia
Net FDI flows to developing countries
Total in 2006 325 billion
billions
116 billion
88 billion
Source World Bank.
27
FDI inflows to Sub-Saharan Africa on the rise
Net FDI inflows to developing countries
billions
18.5 billion in 2006 (left axis)
Percent of GDP (right axis)
Percent
Source World Bank.
28
concentrated in resource-rich countries
Net FDI inflows to countries in Sub-Saharan Africa
billions
Total in 2006 18.5 billion
10 billion
2.5 billion
6 billion
Source World Bank.
29
Ten largest one-day losses in global stock
markets
Simple average of daily decline in 60
high-income and developing stock markets
Source Development Prospects Group.
30
Emerging equity markets hit across the board
index January 1, 2007 100
LAC
MSCI total
ECA
ASIA
Source Morgan-Stanley.
31
Sovereign spreads increase across developing
economies spreads over ten-year U.S.
T-note, basis points
LAC
MSCI total
ECA
East Asia
Source JPMorgan-Chase.
32
...but in historical perspective the present
widening of spreads is modest
Bond spreads (basis points)
Emerging market bond spread (EMBIG)
Source JPMorgan.
33
Developing Country Multinationals are becoming
global investors
Source UNDP
34
Net official lending continues sharp decline
Net debt flows to developing countries
billions
228 billion
-76 billion
-71 billion
Source World Bank.
35
with large repayments to Paris Club and IMF
Net official lending to developing countries,
1995-2006
billions
-48 billion
-25 billion
Source World Bank.
36
Reserve Accumulation
Source IMF, International Financial Statistics,
and IMF staff calculations
37
III. Towards a New Aid Architecture
38
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

39
Reduction of Debt Stock (NPV terms) for the 30
Decision-point Countries
40
Underlying aid flow trends do not support
scaling up commitments
Total ODA (2005 billions)
Total ODA 107 104
Total ODA 107 104
ODA/GNI (right scale)
ODA/GNI (right scale)
Percent
Source OECD Development Assistance Committee
(DAC)
41
Development Aid for Africa has not increased
42
Reaching the 2010 Target for Africa will require
exceptional efforts
Source OECD Development Assistance Committee
(DAC) and World Bank Staff estimates.
43
Modest Progress on Innovative Financing

• A pilot IFF for Immunization but what happened to
  the IFF
• A modest aviation solidarity levyin 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

44
Limited Progress on Aid Effectiveness

• Adoption of PRSPs but...
• Reduced conditions but...
• Greater alignment but...
• Continued volatility and lack of predictability
• Increased fragmentation

45
Harmonisation and alignment
Source OECD/DAC, 2004
46
Aid flows remain volatile
47
Proliferation of donor activity
48
Emergence of New Players

• 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

49
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

50
(No Transcript)
51
(No Transcript)
52
(No Transcript)
53
So what are the main challenges...

• 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?

54
Upgrading road networks can foster regional
inclusiveness
Upgraded network increases trade flows by US20
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.
55
Carbon emissions are linked to coal plant
technology
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
56
The cost of climate-proofing development
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.
57
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