The Changing Face of Development Finance Amar Bhattacharya G24 Secretariat February, 2008 The...

The Changing Face of Development Finance

Amar BhattacharyaG24 SecretariatFebruary, 2008

The Changing Face of Development Finance

Amar BhattacharyaG24 SecretariatFebruary, 2008

I. From Divergence………….to

Convergence

But many challenges remain…

-2

0

2

4

6

8

1981 82 83 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000 1 2 3 4

2005 6 7 8 9

Accelerating growth in developing economiesAccelerating growth in developing economies

Real GDP, percent changeReal GDP, percent change

Early 1980s debt crisis

1990s recession Transition countries

East Asia financial crisis

2001 global downturn

ForecastForecast

Source: World Bank.

Developing economies

-2

0

2

4

6

8

1981 82 83 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000 1 2 3 4

2005 6 7 8 9

Growth has far-exceeded that of high-Growth has far-exceeded that of high-income countries for an extended periodincome countries for an extended period


High-income

Source: World Bank.


ForecastForecast

-2

0

2

4

6

8

1981 82 83 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000 1 2 3 4

2005 6 7 8 9

Positive developments in Sub-Saharan Positive developments in Sub-Saharan Africa are of particular noteAfrica are of particular note


Sub-Saharan Africa

Source: World Bank.


ForecastForecast

High-income

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

Developing Countries per Capita GDP Growth Rates 2001-6: average and dispersion (lower and upper quintiles)

-4%

-2%

0%

2%

4%

6%

8%

10%

Unweighted averages weighted averagesLow income countries (46)

Lower middle

income countries (48)

Upper middle

income countries (34)

High income

countries (34)

Source: World Bank staff calculations.

Poverty goals are likely to be reached in Poverty goals are likely to be reached in most regions, but Africa lags…most regions, but Africa lags…

0

10

20

30

40

50

Developing countries Sub-Saharan Africa

Percent of pop. living below $1/day

Millennium Development Goals

Source: World Bank.

1990


0

10

20

30

40

50



1990

Source: World Bank.

2004



0

10

20

30

40

50



Source: World Bank.

Forecast 2015

1990

2004


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)

0 5,000 10,000 15,000 20,000 25,000

Madagascar, Nigeria, Zambia, Mali

Bihar, India

Georgia, Indonesia, Syria, Nicaragua

Maranhão, Brazil

Morocco, Paraguay, Swaziland, Armenia

Maharashtra, India

Distrito Federal, Brazil

Czech Republic, Portugal, Korea, Rep.


Gini Annual Change (percentage points)

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

INCREASING INEQUALITIES

DECREASING INEQUALITIES

Within-country inequality has grown as well


Carbon dioxide emissions are mounting and accumulating in the atmosphere

Source: World Bank.

Source: Cline (2007), Global Warming and Agriculture: Impact Estimates by Country, Center for Global Development : Peterson Institute for International Economics, Washington DC.

Climate change has a disproportionate impact on the poor

Impact of Baseline Global Warming

on Agricultural Production, by the 2080s

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

OECD

Mala

wi

Tanzania

DR C

ongo

Nig

er

Madagasc

ar

Chin

a

India

Indonesi

a

Bra

zil

Pakis

tan

%change in output (range with and without fertilization effect)

… lowest GDP per capita (PPP)

… largest population

Impact in the five countries within the sample with the ...

II. The Changing Context of Development Finance

Investment and SavingsInvestment and Savings Trends in Trends in Developing CountriesDeveloping 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

Low & middle income 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

Source: World Bank.

Governments meeting more of their financing needs in domestic market

Source: World Bank staff calculations based on JP Morgan

0

10

20

30

40

1998 1999 2000 2001 2002 2003 2004 2005 2006

External Domestic

Percent

Public debt as a share of GDP in 28 emerging market economies

Trade growth outpace GDP growth

Source: World Bank.

Exports from developing countries have grown fast

Source: World Bank.

$ billions

0

1

2

3

4

2000 2001 2002 2003 2004 2005 2006

Percent

Migrant remittance flows Migrant remittance flows / GDP

Remittance flows continue to expand…

0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006

Middle-income countriesLow-income countries

Low-income countries

Middle-income countries

$206 billion

Source: World Bank staff estimates.

The surge in net private inflows is matched by a pickup in gross outflows

$ billions

0

100

200

300

400

500

600

700

1990 1992 1994 1996 1998 2000 2002 2004 2006

0

1

2

3

4

5

6

Net private capital flows to developing countries

Percent of GDP (right axis)

Percent$647 billion in

2006 (left axis)

Private capital flows have reached a new peak….

Source: World Bank.

-100

0

100

200

300

400

500

600

700

1990 1992 1994 1996 1998 2000 2002 2004 2006

Private debt

Portfolio equity

FDI

$ billions

Total in 2006

$647 billion

FDI$325billio

n

Net private capital flows to developing countries

Driven by equity flows…

Portfolio

equity$94billion

Source: World Bank.

0

50

100

150

200

250

300

1992 1994 1996 1998 2000 2002 2004 2006e

0

1

2

3

$ billions

FDI inflows keeping pace with rapid FDI inflows keeping pace with rapid growth…growth…

Net FDI inflows to developing countries

PercentPercent of GDP

(right axis)

$325 billion in 2006

(left axis)

Source: World Bank.

0

50

100

150

200

250

300

1990 1992 1994 1996 1998 2000 2002 2004 2006

Other

Latin America & Caribbean

Europe & Central Asia

East Asia & Pacific

$ billionsTotal in

2006$325 billion

$88 billion

Net FDI flows to developing countries

……ledled byby inflows to Europe and Central inflows to Europe and Central AsiaAsia

$116 billion

Source: World Bank.

0

5

10

15

20

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006e

0

2

4

6

8

$ billions

FDI inflows to Sub-Saharan Africa on the FDI inflows to Sub-Saharan Africa on the rise…rise…

Net FDI inflows to developing countries

Percent

Percent of GDP (right axis)

$18.5 billion in 2006

(left axis)

Source: World Bank.

0

5

10

15

2000 2002 2004 2006

Angola, Sudan, Nigeria & Equitorial Guinea

South Africa

Other

$ billions

……concentrated in resource-rich concentrated in resource-rich countriescountries

$6 billion

Net FDI inflows to countries in Sub-Saharan Africa

Total in 2006$18.5 billion

$2.5 billion

$10 billion

Source: World Bank.

Ten largest one-day losses in global stock markets

0 1 2 3 4 5

Jan 21 '08

May 22 '06

Aug 16 '07

Apr 16 '00

Jun 13 '06

Sep 14 '01

Sep 20 '01

May 10 '04

Feb 27 '07

Jun 8 '06

Simple average of daily % decline in 60 high-income and developing stock markets

Source: Development Prospects Group.

80

90

100

110

120

130

140

150

160

Jan-07

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Source: Morgan-Stanley.

Emerging equity markets hit across the board

index January 1, 2007 = 100

ASIA

LACMSCI total

ECA

110

130

150

170

190

210

230

250

270

290

310

Jan-07

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Source: JPMorgan-Chase.

Sovereign spreads increase across developing economies

spreads over ten-year U.S. T-note, basis points

East Asia

LACMSCI total

ECA

...but in historical perspective ...but in historical perspective the present widening of spreads is the present widening of spreads is

modestmodest

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

1994M1 1995M9 1997M5 1999M1 2000M9 2002M5 2004M1 2005M9 2007M5

Bond spreads (basis points)

Emerging market bond spread (EMBIG)

Source: JPMorgan.

Developing Country Multinationals are becoming global investors

Source: UNDP

-100

-50

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Net private lendingNet official lendingNet debt flows

$ billions

Net official lending continues sharp decline…Net official lending continues sharp decline…

Net debt flows to developing countries

-$76 billion

$228 billion

-$71 billion

Source: World Bank.

-50

-40

-30

-20

-10

0

10

20

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

IMF Paris Club and others World Bank

$ billions

……with large repayments to Paris Club and with large repayments to Paris Club and IMFIMF

Net official lending to developing countries, 1995-2006

-$48 billion

-$25 billionSource: World Bank.

Reserve AccumulationReserve 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) Reduction of Debt Stock (NPV terms) for the 30 Decision-point Countriesfor the 30 Decision-point Countries

89

76

3734

10

0

20

40

60

80

100

Before traditional debtrelief

After traditional debt relief After HIPC initiative debtrelief

After additional bilateraldebt relief

After MDRI

US$ Billions (end-2005 terms)

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.)

0

25

50

75

100

1990 1992 1994 1996 1998 2000 2002 2004 2006

0

0.1

0.2

0.3Debt relief

Other components of ODA

Total ODA (2005 $ billions)

Percent

Source: OECD Development Assistance Committee (DAC)

ODA/GNI (right scale)

Underlying aid flow trends do not support Underlying aid flow trends do not support scaling up commitmentsscaling up commitments

Total ODA $107 $104

0

25

50

75

100

1990 1992 1994 1996 1998 2000 2002 2004 2006

0

0.1

0.2

0.3Debt relief

Other components of ODA

ODA/GNI (right scale)

Total ODA $107 $104

Development Aid for Africa has not Development Aid for Africa has not increasedincreased

Emerg. Aid

Debt Relief

Tech. Coop.Oceana

Americas

Europe

E. Asia

S. & C. Asia

Mid. East

Unallocated

SSA

Food Aid

Admin

Food Aid

Admin

Emerg. Aid

Debt Relief

Tech. Coop.

Europe

Mid. East

Oceana

Americas

S. & C. Asia

E. Asia

Unallocated

SSA

1995: $63 Billion

2005: $107 Billion

$12 bn.

$12 bn.

$38 bn.

$28 bn.

$22 bn.

$18 bn.

$4

$25 bn.

Dev.Aid

Development Aid

source: OECD/DAC and author’s calculations.

Tech. Coop.

ODA by sector and destination$US 2005

Oceania

Oceania

Reaching the 2010 Target for Africa Reaching the 2010 Target for Africa will require exceptional effortswill require exceptional efforts

Source: OECD Development Assistance Committee (DAC) and World Bank Staff estimates.

Modest Progress on Innovative Financing

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

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…Aid flows remain volatile…

Proliferation of donor activity

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

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

$BillionsFoundations 2.2Corporations 5.1PVOs and INGOs 16.2Higher Education 4.6Religious Organizations 5.4

Total 33.5

source: Index of Global Philanthropy , 2007.

US Private International Giving, 2005

Development Aid

Technical Cooperation

Emergency and Food Aid

Adminstrative Costs

Debt Relief and Interest

Development Aid and TC


Adminstrative Costs

0

20

40

60

80

100

US

$2

00

5,

bill

ion

s

Official Aid Private Aid

DAC Members, 2005

Official versus Private AidDevelopment Aid



Adminstrative Costs




Adminstrative Costs

0

20

40

60

80

100

U

S$2005, billion

s


DAC Members, 2005

Official versus Private Aid

Official versus Private AidDAC Members, 2005

Development Aid



Adminstrative Costs




Adminstrative Costs

0

20

40

60

80

100

U

S$

20

05

, b

illio

ns


DAC Members, 2005



Development Aid



Adminstrative Costs




Adminstrative Costs

0

20

40

60

80

100

U

S$

20

05

, b

illio

ns


DAC Members, 2005


Source: OECD/DAC, Index of Global Philanthropy (2007) and author’s calculations

Rich Governments Poor Governments

?Poor Individuals

?Poor Individuals

Private Aid Organizations

corruption


debt relief & admin. New Bilaterals

Rich IndividualsRich IndividualsRich Individuals

Multilateral Institutions (233)

NewMultilaterals




NewMultilaterals

$21

bilateral aid

project admin.

capture byrich citizens

Tech. Cooperation

interest on loans

interest on loans

2005 Development AssistanceFigures in $ US2005, billions

administration and fundraising

debt relief

Vertical Funds

$29 $26

$25 $20

$.5

$105 $1.5 $6

$2

$1.5

$63

$5

$39

$19?

$5.5

$2.5

$8

admin., tech. cooperation, etc.

taxes

$.5

$10

emergency and humanitarian aid

$24.5

$38

Development Aid and technical cooperation, from Private Aid Organizations, including official contributions

Development Aid from official donors (DAC and new bilaterals)

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?

Upgrading road networks can foster regional inclusiveness

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.

Upgraded network increases trade flows by US$20 billions per year

Carbon emissions are linked to coal plant technology

Approx. CO2

emissions (g/kWh)

Reduction from Chinese

average (%)

Lifetime CO2

saving (Mt CO2) a

Coal-fired plants:

Chinese coal-fired fleet average, 2006 1140 - -

Global standard 892 22 73.3

Advanced cleaner coal 733 36 120.5

Supercritical coal with carbon capture 94 92 310.8

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 (%)

Estimated cost

(US $ billion) 2005

Mid range of estimated cost

(US$ billion) 2005

Investment (US$ billion)

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

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

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