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How will Development be Financed? The Eclipse of Aid, and What It Means for Post-2015

Duncan Green's picture

Thanks to Alex Evans for recommending ‘Who Foots the Bill’, a report from the ODI’s Romilly Greenhill and Annalisa Prizzon on trends in development finance. It was published at the end of last year, but somehow I missed it – probably because it is pegged to funding the post-2015 goals, a timesuck discussion I have tried to avoid (without much success).

But actually its value goes way beyond post2015. Here are some highlights:

Conclusions on Financing for Development:

  • Developing and emerging economies have been driving global growth over the past decade and it is this, not aid, that has been the main driver of poverty reduction at a global level.
  • Developing countries have also been expanding domestic tax revenues at a rapid rate, giving much more scope for development to be funded domestically. The average tax ratio rose from 23% of GDP in 2000 to nearly 29% in 2011.
  • All the main sources of development finance considered in this paper have been expanding rapidly over the past decade. Foreign direct investment inflows and workers’ remittances tripled in nominal terms between 2001 and 2010; philanthropic funding more than tripled between 2003 and 2009. (see first table below for detail)
  • The relative importance of official aid vis-à-vis other forms of finance has declined. In middle income countries, aid/GDP ratios have nearly halved during the 2000s, whereas tax revenues, FDI and workers’ remittances have all seen an upward trend.
  • These trends are very uneven across countries, with private cross-border flows heavily concentrated in middle income countries, whereas low-income countries remain much more dependent on aid.
  • While aid  is now under pressure, there has been rapid growth in new ‘aid-like’ forms of development finance, which are not classified as aid but nevertheless have a public interest purpose. This includes South–South cooperation, philanthropy and other private development assistance and climate finance. All these flows have been growing at rapid rates over the past decade and are likely to continue to do so in future.

And some v handy summary stats: The table is a bit hard to read, so the headline is that from 2000-2010, here’s how sources of development finance changed (worth focussing – the numbers are pretty striking):

In Middle Income Countries:

  • FDI, net inflows: $146bn -> $501bn
  • Portfolio Equity, net inflows: $14bn -> $130bn
  • Workers remittances: $76bn -> $301bn
  • Net official aid: $76bn -> $52bn

In Low Income Countries:

  • FDI, net inflows: $2,4bn -> $13bn
  • Portfolio Equity, net inflows: $0bn -> $0bn
  • Workers remittances: $4bn -> $25bn
  • Net official aid: $10bn -> $40bn


As for the implications for the post-2015 debate, the paper concludes:

‘It will be important for the post-2015 agreement to have an even stronger focus on, and  foundation within, country-level leadership and priorities. Country-level targets, or a menu of options that countries can adopt, may be more appropriate than a single global set of targets.’

And

‘The post-2015 goals may be able to be more ambitious, but the limited contribution of aid should be recognised. Domestic tax revenues and cross-border finance flows are now much more important than ODA.’

Which kind of brings us back to the concern I expressed in my paper with Stephen Hale and Matthew Lockwood last year: the MDG process was dominated by global institutions and aid. I totally agree that the post-2015 system needs to focus instead on national processes and non-aid flows, in order to reflect the almost unrecognizably different landscape of financing for development. But then the discussion should have been designed very differently – it still feels far too much like a revamp of the MDG paradigm, rather than something really new.

This post first appeard on From Poverty to Power

Photo Credit: Jonathan Ernst / World Bank
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