Rhetoric vs. reality: New approaches to development financing June - PowerPoint PPT Presentation

Rhetoric vs. reality: New approaches to development financing June 2009 NCDE, Oslo Sam Jones, University of Copenhagen 1

Structure What do we know about non- traditional financing instruments? … are they complements or substitutes to ODA? 1. Why is this of interest? 2. Critiques of “traditional” aid 3. Three instruments (Private capital flows; specialized (vertical) funds; risk-sharing instruments) 4. Financial crisis

Quick caveats More of a policy-oriented paper • Based largely on literature • survey + descriptive stats Makes some very basic points … • but these are often forgotten Not an apology for ODA or the • status quo = seeks to provide a balanced view

Motivation Expansion of „new‟ instruments • Rapid growth of private and “smart aid” • flows High expectations!! • In sub-Saharan Africa, international private capital markets ... “provide countries with an alternative source of financing [... and ... ] contribute to higher growth while enhancing prospects for meeting the Millennium Development Goals. ” (IMF, 2008: 45)

Motivation Macro-micro debate renewed • “ Randomistas ” • Recent macro. papers and books • Rajan and Subramanian (2008) • Dambisa Moyo (2009) • “Africa's differences with other regions lie not in aid, but in circumstances and history. ” J. Sachs, 2009 “The aid interventions that Mr. Sachs lauds as evidence of success are merely band aid solutions that do nothing to lift Africa out of the mire ... ” D. Moyo, 2009

Critiques of aid 1. Recipient weaknesses: • Public sector distortions • Dutch disease 2. Donor-recipient relationship: • Agency problems (ex ante, interim, ex post) 3. Donor behaviour: • Multiple principals/tasks • Fragmentation • Unpredictability; insufficiency

Private capital flows • Neoclassical & ”agency” potential • Lucas paradox • Incentive-compatible • Just get the complementary conditions ”right” • Optimism fuelled by EM boom (2002-08) • Not just BRICs, SSA has been promising: • Net private inflows = 8.1% of GNI (2007) • Eurobond issues: Ghana and Gabon • Dazzling stock market performances (e.g., Nigeria)

Private capital flows External capital flows to developing countries, USD billions (constant 2000 prices)

Private capital flows • Endogenous to global & local growth ... pretty obvious point, but often ignored • Highly uneven allocation: • general trends ≠ specific cases • natural resource emphasis • First order role of institutional environment • Social infrastructure (Hall & Jones, ‟99) • Potential for mutliple equilibria • Public goods NOT funded by private (external) players • c.f. European funds for disadvataged areas

Private capital flows Volatility of alternative financing instruments by aid intensity status, 1980-2005

Specialised funds • Rapid and massive expansion (esp. health) • Characteristics: • operate as independent organizations • private and non-public partnerships • raise and pool funds for highly specific causes • disburse grants to local implementing agents (from the public and private sectors) • results-focus, often via formal evaluation of outcome

Examples Active Total spend Vehicle period (projected) Objective Main funding sources Official grants (96%) + other private sources (e.g., PRODUCT RED TM , Bill & Melinda 2000 Combat of HIV/AIDS, Global Fund 17,100 onwards tuberculosis & malaria Gates Foundation); existing financing pledges extend until 2010. Reduce child mortality by IFFIm (legally-binding long-term official grant 2006- increasing access to commitments to 2026 used to back GAVI 4,000 2015 vaccination and international bond issues); Advanced Market immunization Commitments; direct official funding. Education For Accelerate progress All – Fast 2002- towards universal primary Official grants to core trust funds (Catalytic 1391 Track 2015 school completion by Fund, Education Program Development Fund). Initiative 2015 Alliance for a Catalyze an African Green Seed funding from Bill & Melinda Gates Green 2006- Revolution via support to Foundation ($100m) and Rockefeller >150 Revolution in 2011 small-scale farming Foundation ($50m); (small) additional funds Africa systems from official and private sources (e.g., DFID).

Specialised funds • Achievements: • Rapid mobilization substantial long-term funding, with better desgined aid contracts (?) • Global fund: 64% of global funding for malaria; PEPFAR: 3 million cumulative life years • Weaknesses: • Depend on official funding (new ODA channel) • Do not address system-wide challenges: • Parallel units; staff poaching; volatility • Skewed objectives • Weak institution building (conflicting objectives) .. health systems are now the problem in SSA • A viable model outside health? (known technology)

Risk-sharing instruments • Newer approach, based on PPP model • Characteristics: • Focus on projects or goods with a (semi-)public character, esp. infrastructure • Donor intervention aims to subsidise or mitigate certain but not all risks • Objective is to stimulate greater private participation

Examples Vehicle Summary Progress Arranges debt financing on commercial terms US$281.9 million funds currently Emerging Africa with a tenor of up to 15 years ranging from committed out of total potential of Infrastructure Fund US$10 million to US$36.5 million; political risk US$365 million (as at March (EAIF) cover not required. 2008); 12 deals arranged. Two deals completed (end 2008) – Provides guarantees to encourage local currency GuarantCo funding of infrastructure investment by domestic Celel Kenya (US$10 mn) & Celtel financial institutions and municipalities. Tchad (US$7 mn) Designs and arranges performance-based Global Partnership on subsidies to support delivery of basic services 72 projects valued at US$154.73 Output Based Aid where public funding to complement or replace million (January 2009) (GPOBA) user-fees is justified Global Emerging Markets Supports development of local currency bond Local currency global bond index Local Currency Bond markets to increase domestic and international (GEMX); investments managed Program (GEMLOC) investments through PIMCO (no details). Mobilizes domestic capital for urban upgrading Under construction with US$11.8 activities by facilitating links among local actors million seed official funding from Slum Upgrading Facility and helping to prepare projects to raise the United Kingdom (DFID) and investment Sweden (SIDA).

Specialised funds • Achievements: • Remain relatively small • BUT appear to address genuine needs • US$ 75 billion annually reqd to address SSA infrastructure gap (World Bank, 2008) • Some evidence regarding enhanced access to services • Weaknesses: • Cost effectiveness doubted and unproven • Major administrative and bureaucratic burden (this is the lesson from richer countries) • Focus is on specific kinds of projects (telecoms)

Financial crisis • Fear of sudden stop to capital flows • Risk appetite severely diminished • Effects look similar to 1998 ... • Bond spreads remain much wider • Sovereign issues have been postponed • Calls to sustain & increase aid flows! • Underlines view that optimism regarding private flows may have been part of “boom fever”

CONCLUSION “Don‟t believe the hype” New approaches are not a panacea • Finance narrow range of goods • Address only specific aid problems ... system-wide and recipient weaknesses largely ignored • Bring new costs and challenges • Comparative effectiveness unproven (long-term) = Complements and not substitutes • This is an old argument ... just like the aid debate itself. But we do seem to forget.