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

The Future of Development The Future of Development Financing: Challenges, Financing: Challenges, Scenarios and Strategic Scenarios and Strategic

ChoicesChoices

Keith BezansonKeith Bezanson

The Future of Development The Future of Development Financing: Challenges, Financing: Challenges, Scenarios and Strategic Scenarios and Strategic

ChoicesChoices

Keith BezansonKeith Bezanson

Development Centre - OECDDevelopment Centre - OECD

04 February, 2005, Paris04 February, 2005, Paris

Development Centre - OECDDevelopment Centre - OECD

04 February, 2005, Paris04 February, 2005, Paris

Background and structure of the presentationBackground and structure of the presentation BackgroundBackground

Report on the Report on the future of development future of development financingfinancing written with F. Sagasti and F. Prada written with F. Sagasti and F. Prada

Sponsored by EGDI at the Swedish Ministry Sponsored by EGDI at the Swedish Ministry for Foreign Affairsfor Foreign Affairs

Final study in a set under the Final study in a set under the Development Development Financing 2000Financing 2000 initiative initiative

Structure of presentationStructure of presentation Brief account of development financing Brief account of development financing

‘system’‘system’ Scenarios of the development financing Scenarios of the development financing

system: components; four scenarios for 2015; system: components; four scenarios for 2015; policy implicationspolicy implications

Concluding remarksConcluding remarks

The role of financing in developmentThe role of financing in development

Initial focus:Initial focus: Capital investment and financial resourcesCapital investment and financial resources

(big push, priority of capital investment)(big push, priority of capital investment) Gradual evolution towards:Gradual evolution towards:

More complex appreciation of of development More complex appreciation of of development processprocess and of the role of finance in relation and of the role of finance in relation to to other factorsother factors (human capital, institutions, (human capital, institutions, governance, knowledge, geography)governance, knowledge, geography)

Current conception:Current conception: Finance is Finance is essential but not sufficientessential but not sufficient for for

developmentdevelopment

Shift from official (ODA, MDBs) to Shift from official (ODA, MDBs) to private sources (FDI, remittances)private sources (FDI, remittances)

Downward trend and higher volatility in Downward trend and higher volatility in net official flowsnet official flows (especially in relation (especially in relation to GDP of donor countries)to GDP of donor countries)

Shift in the type of private financial Shift in the type of private financial flows: from commercial bank debt to flows: from commercial bank debt to FDI, bonds and equityFDI, bonds and equity

Structure now skewed in favour of Structure now skewed in favour of highly concentrated and mobile private highly concentrated and mobile private flows and less towards long-term flows and less towards long-term development needsdevelopment needs

The evolution of international development The evolution of international development financing over timefinancing over time

Initiatives to reform international development Initiatives to reform international development financingfinancing

United NationsUnited Nations (since 1997: incremental but (since 1997: incremental but sustained improvements, financial constraints)sustained improvements, financial constraints)

International Financial InstitutionsInternational Financial Institutions (changes in (changes in IMF, World Bank, larger role of regional and IMF, World Bank, larger role of regional and subregional development banks)subregional development banks)

Bilateral agenciesBilateral agencies (coordination, aid (coordination, aid effectiveness, selectivity, focus on poor, tied aid)effectiveness, selectivity, focus on poor, tied aid)

European UnionEuropean Union (criticisms of aid and trade, EU (criticisms of aid and trade, EU and national funds, enlargement, fiscal and national funds, enlargement, fiscal constraints)constraints)

Emerging initiativesEmerging initiatives (reward performance, (reward performance, enhance private flows, issue-based partnerships, enhance private flows, issue-based partnerships, direct budget support, global public goods, direct budget support, global public goods, International Financing Facility, global taxes?)International Financing Facility, global taxes?)

Growth in number of institutions has led to a Growth in number of institutions has led to a complex and messy array of development complex and messy array of development assistance organisationsassistance organisations

Rapid and uncoordinated Rapid and uncoordinated expansion of private expansion of private agents and flows agents and flows

Incoherent pictureIncoherent picture of overlap, duplication and of overlap, duplication and missing entities that can hardly qualify as an missing entities that can hardly qualify as an international development financing ‘system’international development financing ‘system’

Major shocks have driven change in the pastMajor shocks have driven change in the past Cumulative unease creates Cumulative unease creates opportunity for opportunity for

fundamental rethinking of development fundamental rethinking of development financefinance

The international development financing ‘system’ The international development financing ‘system’ at the beginning of the 21s centuryat the beginning of the 21s century

Key attributes of an effective international Key attributes of an effective international development financing systemdevelopment financing system

AdequacyAdequacy (match between development (match between development financing and needs of developing countries)financing and needs of developing countries)

PredictabilityPredictability (amount, anti-cyclical funds) (amount, anti-cyclical funds) Responsiveness Responsiveness (balance needs vs. (balance needs vs.

performance)performance) Diversity and choiceDiversity and choice (variety of instruments, (variety of instruments,

institutions and programs)institutions and programs) Capacity to absorb shocks Capacity to absorb shocks (rapid response)(rapid response) Links to domestic resource mobilizationLinks to domestic resource mobilization

(complementarity)(complementarity) Voice, representation and accountability Voice, representation and accountability (in the (in the

formulation of key policies)formulation of key policies) Flexibility, adaptation and learning Flexibility, adaptation and learning (with the (with the

possibility of ‘sunset clauses’ and mergers) possibility of ‘sunset clauses’ and mergers)

Scenarios for development financing: components

Institutional arrangementsInstitutional arrangements (‘scaffolding’ (‘scaffolding’ to place financial instruments)to place financial instruments)

Financing instrumentsFinancing instruments (variety of means (variety of means to channel resources)to channel resources)

Developing country capacity to mobilize Developing country capacity to mobilize financefinance (external and domestic sources) (external and domestic sources)

Political viabilityPolitical viability (factors affecting reform (factors affecting reform process)process)

Combinations of these components lead Combinations of these components lead to to four scenariosfour scenarios (time horizon: 2015) (time horizon: 2015)

Scenarios: institutional arrangementsScenarios: institutional arrangements

Business as usual (Business as usual (BASU). By 2015:BASU). By 2015: Little or no change in organisational Little or no change in organisational

structures: conflicts, rivalry and overlap structures: conflicts, rivalry and overlap persist (“dysfunctional family”). persist (“dysfunctional family”).

Large gap between expectations and Large gap between expectations and results: sense of failure. MDGs remain results: sense of failure. MDGs remain distantdistant

Leadership failures, missing institutionsLeadership failures, missing institutions

Comprehensive reformsComprehensive reforms ( (CORE). CORE). By 2015By 2015 Significant changes (incremental but Significant changes (incremental but

sustained): improved management and sustained): improved management and accountability, collaboration, better division accountability, collaboration, better division of labour, synergiesof labour, synergies

Expectations and results more aligned. Expectations and results more aligned. Advances in reaching MDGsAdvances in reaching MDGs

Combination of forward-looking leadership, Combination of forward-looking leadership, innovative and risk-taking approachinnovative and risk-taking approach

Broad range of intermediate Broad range of intermediate outcomesoutcomes

Scenarios: financing instrumentsScenarios: financing instruments

Eight categories of financial Eight categories of financial instruments (existing and proposed):instruments (existing and proposed):1.1. Bilateral aidBilateral aid2.2. International organizations and International organizations and

agenciesagencies3.3. International financial institutionsInternational financial institutions4.4. Private sectorPrivate sector5.5. International capital marketsInternational capital markets6.6. International taxes and feesInternational taxes and fees7.7. Creation of international marketsCreation of international markets8.8. Global and regional partnershipsGlobal and regional partnerships

Capacity to mobilize financial resourcesCapacity to mobilize financial resources Developing countries have very different Developing countries have very different

capacities to mobilize external and domestic capacities to mobilize external and domestic financefinance

Current classification schemes focus primarily on Current classification schemes focus primarily on categories according to:categories according to: Income per capitaIncome per capita Debt service burdenDebt service burden Special conditions (e.g. post-conflict)Special conditions (e.g. post-conflict)

Great variation within these categories in Great variation within these categories in country capacity to mobilize internal and country capacity to mobilize internal and external resources. Indicators:external resources. Indicators: Domestic savings, fiscal deficit, gross fixed capital Domestic savings, fiscal deficit, gross fixed capital

formation, bank creditformation, bank credit Exports, international reserves, direct foreign Exports, international reserves, direct foreign

investment, ODA flowsinvestment, ODA flows

Capacity to mobilize financial Capacity to mobilize financial resourcesresources

Heterogeneity of developing countries: income Heterogeneity of developing countries: income levels and indicators of capacity to mobilize levels and indicators of capacity to mobilize

financial resourcesfinancial resources

Capacity to mobilize financial resourcesCapacity to mobilize financial resources Need for alternative schemes to classify Need for alternative schemes to classify

countries (various options explored)countries (various options explored) Adopted a sequential approach to classify Adopted a sequential approach to classify

countries according to indicators of:countries according to indicators of: capacity to mobilize external resourcescapacity to mobilize external resources

(FDI, exports)(FDI, exports) capacity to mobilize internal resourcescapacity to mobilize internal resources

(domestic savings, tax revenues)(domestic savings, tax revenues) Result: nine categories of countries:Result: nine categories of countries:

Matrix with high, medium and low external and Matrix with high, medium and low external and internal resource mobilization (plus four outlier internal resource mobilization (plus four outlier countries)countries)

Shifts in country placements over timeShifts in country placements over time

Capacity to mobilize financial resourcesCapacity to mobilize financial resources

Category 0

Category A Category B Category C

Category 1

Category 2

Category 3

Country categorization

Capacity to mobilize financial resourcesCapacity to mobilize financial resources

Category 0

Category A Category B Category C

Category 1

Category 2

Category 3

Country changes of category and ranking between 1990-1996 (blue dot) and 1997-

2002 (green dot)

International political economy and political International political economy and political viabilityviability

Changes in Changes in international power relationsinternational power relations Uneasy coexistence of: unilateralism, bilateralism, Uneasy coexistence of: unilateralism, bilateralism,

regionalism, multilateralism, public-private and regionalism, multilateralism, public-private and private regimes, emergence of global concernsprivate regimes, emergence of global concerns

Large Large economic and demographic imbalanceseconomic and demographic imbalances Fiscal constraints in donor countriesFiscal constraints in donor countries Concerns about migrationConcerns about migration

New situations and key actorsNew situations and key actors US, Japan, EUUS, Japan, EU Brazil, Russia, India, China Brazil, Russia, India, China Multilateral institutions (IMF, WB, RDBs and SRDBs)Multilateral institutions (IMF, WB, RDBs and SRDBs) From G7-G8 to G20?From G7-G8 to G20? G77 and developing country groupsG77 and developing country groups

Uncertainty, but also window of opportunityUncertainty, but also window of opportunity

Interactions between scenario componentsInteractions between scenario components

Linkages between institutional arrangements Linkages between institutional arrangements and financing instrumentsand financing instruments

Correspondence between financing Correspondence between financing instruments and country categoriesinstruments and country categories

Degree of utilization of financial instrumentsDegree of utilization of financial instruments Appreciation of:Appreciation of:

Overlap and duplication, division of labour, Overlap and duplication, division of labour, consolidationconsolidation

Missing institutions and instruments Missing institutions and instruments Potential for expanding use of financing Potential for expanding use of financing

instrumentsinstruments Limitations of classification criteria based on Limitations of classification criteria based on

income per capital levelsincome per capital levels Construction of scenariosConstruction of scenarios

Financial instruments and country categoriesFinancial instruments and country categories

CATEGORY ACATEGORY A CATEGORY BCATEGORY B CATEGORY CCATEGORY C

CATEGORY CATEGORY 11

CATEGORY CATEGORY 22

CATEGORY CATEGORY 33

High capacity Low capacity

Hig

h

cap

acit

yLow

cap

acit

y

MDBs and bilateral guarantees to attract private flows

Contingent credit lines

CACs •Guarantees to catalyze external resources mobilization

•Domestic currency bonds•Smooth debt service

instruments

MDB and bilateral regular and blend loans

•MDBs and bilateral soft loans•Bilateral-private investment

funds•Debt reduction instruments

•Remittances

MDBs and bilateral soft and blend loans

Technical assistance to improve policy environment

•Grants: Budget support, debt cancellation

Scenarios for the international development Scenarios for the international development financing systemfinancing system

(a) (a) Institutional Institutional arrangementarrangement

ss

(b) (b) Financing Financing

instrumentsinstruments

(c)(c)Types of Types of countriescountries

(d)(d)Political Political viabilityviability

IIII

IIIIIIII

…………

IXIXIXIX

1111

2222

3333

4444

5555

6666

7777

8888

BASBASUU

CORCOREE

InertiaInertiaInertiaInertia

Major Major reformsreformsMajor Major

reformsreforms

Transformation Transformation Transformation Transformation

LimitedLimitedreformsreformsLimitedLimitedreformsreforms

Power Power relationsrelationsPower Power

relationsrelations

Scenarios for the international development Scenarios for the international development financing systemfinancing system

Inertia:Inertia: ‘‘Business as usual’, possible deterioration of institutional Business as usual’, possible deterioration of institutional

arrangements, no increase in flows or change in financing arrangements, no increase in flows or change in financing instruments, mismatch with country types.instruments, mismatch with country types.

Limited Reforms:Limited Reforms: Minor changes and disconnected improvements in Minor changes and disconnected improvements in

institutions, modest increases and improvements in financial institutions, modest increases and improvements in financial instruments, focused almost exclusively on poorest countries.instruments, focused almost exclusively on poorest countries.

Major Reforms:Major Reforms: Widespread institutional reforms, significant increases in Widespread institutional reforms, significant increases in

financial flows and broader range of instruments, better financial flows and broader range of instruments, better balance between country types.balance between country types.

Transformation:Transformation: ‘‘Comprehensive reforms’ in institutions, full range of financial Comprehensive reforms’ in institutions, full range of financial

instruments (some automatic) available to all types of instruments (some automatic) available to all types of

countriescountries..

Policy implications of the scenariosPolicy implications of the scenarios

A framework for strategic choices: A framework for strategic choices: How to move from How to move from InertiaInertia towards towards

TransformationTransformation?? Rich menu of possibilities regarding Rich menu of possibilities regarding

institutional arrangements, financing institutional arrangements, financing instruments, country classification instruments, country classification schemes and political viabilityschemes and political viability

Identification of main issues in each of Identification of main issues in each of the four components of the scenariosthe four components of the scenarios

Policy implications of the scenariosPolicy implications of the scenarios ( (institutional arrangements)institutional arrangements)

Main issues:Main issues: Support current reform momentum and Support current reform momentum and

press for further reforms in international press for further reforms in international organizationsorganizations

Devise and put in place institutions to Devise and put in place institutions to deal with global and regional public deal with global and regional public goodsgoods

Establish the G20 at the heads of state Establish the G20 at the heads of state levellevel

Explore innovative institutional Explore innovative institutional arrangements to deal with special arrangements to deal with special problemsproblems

Main issuesMain issues Bilateral instruments:Bilateral instruments:

Increase ODA in a sustainable manner and Increase ODA in a sustainable manner and significantly reduce bilateral debtsignificantly reduce bilateral debt

Clarify the relation between the EU development Clarify the relation between the EU development budget, the European Development Fund and budget, the European Development Fund and European bilateral aidEuropean bilateral aid

Reduce bilateralization of multilateral aidReduce bilateralization of multilateral aid Revamp technical assistanceRevamp technical assistance

International organizations and agenciesInternational organizations and agencies Funding patterns of international organizations: core Funding patterns of international organizations: core

vs. non core, voluntary vs. replenishmentsvs. non core, voluntary vs. replenishments Consolidation of lines of work, programs and projects Consolidation of lines of work, programs and projects

(merge some programs and institutions)(merge some programs and institutions)

Policy implications of the scenariosPolicy implications of the scenarios ((financing instruments)financing instruments)

International financial institutionsInternational financial institutions A systemic perspective of the multilateral A systemic perspective of the multilateral

development banks and the role of the World Bankdevelopment banks and the role of the World Bank Creation of sub-regional development banksCreation of sub-regional development banks Multilateral debt reduction and IDA grantsMultilateral debt reduction and IDA grants Exploring greater voice and representation of Exploring greater voice and representation of

developing countries in IFIs (voting power)developing countries in IFIs (voting power) Private sourcesPrivate sources

Enhancing private foreign investment for Enhancing private foreign investment for infrastructure: Measures to promote FDI in poor infrastructure: Measures to promote FDI in poor countriescountries

Remittances and their possible link to the provision Remittances and their possible link to the provision of local public goodsof local public goods

Avoiding a ‘race to the bottom’ to attract external Avoiding a ‘race to the bottom’ to attract external capitalcapital

Possible impact of Basle II over commercial banksPossible impact of Basle II over commercial banks

Policy implications of the scenariosPolicy implications of the scenarios ((financing instruments)financing instruments)

International capital marketsInternational capital markets Expand existing and create new guarantee Expand existing and create new guarantee

mechanisms to stimulate appetite for relative more mechanisms to stimulate appetite for relative more risky financial assetsrisky financial assets

Promote and expand access by developing Promote and expand access by developing countries (special investment funds, provision of countries (special investment funds, provision of credit ratings, financial engineering to mitigate credit ratings, financial engineering to mitigate risks)risks)

International taxes, fees and chargesInternational taxes, fees and charges Explore possibility carbon tax when energy prices Explore possibility carbon tax when energy prices

begin to diminish. Other proposals are less likely to begin to diminish. Other proposals are less likely to succeed.succeed.

Policy implications of the scenariosPolicy implications of the scenarios ((financing instruments)financing instruments)

Market creationMarket creation Emissions trading (Kyoto Protocol, EU)Emissions trading (Kyoto Protocol, EU) Explore post-Kyoto Protocol options Explore post-Kyoto Protocol options Create public markets for key international public Create public markets for key international public

goodsgoods Global and regional partnershipsGlobal and regional partnerships

Consolidate special purpose global fundsConsolidate special purpose global funds Promote regional and local partnerships to address Promote regional and local partnerships to address

specific problems (e.g. conservation and natural specific problems (e.g. conservation and natural parks)parks)

Support the International Financing Facility, but be Support the International Financing Facility, but be prepared to advance variantsprepared to advance variants

Policy implications of the scenariosPolicy implications of the scenarios ((financing instruments)financing instruments)

Main issuesMain issues Explore alternative classification schemes for Explore alternative classification schemes for

developing countriesdeveloping countries ‘‘Gradation’ instead of graduationGradation’ instead of graduation Go beyond performance vs. needs arguments Go beyond performance vs. needs arguments

for the allocation of development assistancefor the allocation of development assistance Dealing with changes over time in country Dealing with changes over time in country

capacity to mobilize external and domestic capacity to mobilize external and domestic resourcesresources

Policy implications of the scenariosPolicy implications of the scenarios (types of countries)(types of countries)

Concluding remarksConcluding remarks

Determined leadership required to move fromDetermined leadership required to move from Inertia Inertia throughthrough Limited Reforms Limited Reforms andand Major Major Reforms Reforms toto Transformation. Transformation.

Crises have driven structural reforms in the Crises have driven structural reforms in the pastpast

Fundamental shift in international development Fundamental shift in international development finance requiredfinance required

‘‘Radical incrementalism’ may be best approach Radical incrementalism’ may be best approach to advance towards to advance towards TransformationTransformation::

Articulation of radical shared vision of the future.Articulation of radical shared vision of the future. Pragmatic, down-to-earth incremental steps to Pragmatic, down-to-earth incremental steps to

achieve itachieve it Do not wait for major tragedies and Do not wait for major tragedies and

catastrophes to steel political resolve and catastrophes to steel political resolve and catalyze actioncatalyze action