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 GlobalDevelopment : Peterson Institute for International Economics, Washington DC.

16. II. The Changing Context of Development Finance

17. Investment and SavingsTrends 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. …ledbyinflows 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. Simple average of daily % decline in 60 high-income and developing stock markets Ten largest one-day losses in global 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. 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.) 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 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

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