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

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Rhetoric vs. reality: New approaches to development financing

June 2009 NCDE, Oslo Sam Jones, University of Copenhagen

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

• f

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
• bvious 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
• utcome

Examples

Vehicle Active Total spend period (projected) Objective Main funding sources Global Fund 2000

• nwards

17,100 Combat of HIV/AIDS, tuberculosis & malaria Official grants (96%) + other private sources (e.g., PRODUCT REDTM, Bill & Melinda Gates Foundation); existing financing pledges extend until 2010. GAVI 2006- 2015 4,000 Reduce child mortality by increasing access to vaccination and immunization IFFIm (legally-binding long-term official grant commitments to 2026 used to back international bond issues); Advanced Market Commitments; direct official funding. Education For All – Fast Track Initiative 2002- 2015 1391 Accelerate progress towards universal primary school completion by 2015 Official grants to core trust funds (Catalytic Fund, Education Program Development Fund). Alliance for a Green Revolution in Africa 2006- 2011 >150 Catalyze an African Green Revolution via support to small-scale farming systems Seed funding from Bill & Melinda Gates Foundation ($100m) and Rockefeller Foundation ($50m); (small) additional funds 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 Emerging Africa Infrastructure Fund (EAIF) Arranges debt financing on commercial terms with a tenor of up to 15 years ranging from US$10 million to US$36.5 million; political risk cover not required. US$281.9 million funds currently committed out of total potential of US$365 million (as at March 2008); 12 deals arranged. GuarantCo Provides guarantees to encourage local currency funding of infrastructure investment by domestic financial institutions and municipalities. Two deals completed (end 2008) – Celel Kenya (US$10 mn) & Celtel Tchad (US$7 mn) Global Partnership on Output Based Aid (GPOBA) Designs and arranges performance-based subsidies to support delivery of basic services where public funding to complement or replace user-fees is justified 72 projects valued at US$154.73 million (January 2009) Global Emerging Markets Local Currency Bond Program (GEMLOC) Supports development of local currency bond markets to increase domestic and international investments Local currency global bond index (GEMX); investments managed through PIMCO (no details). Slum Upgrading Facility Mobilizes domestic capital for urban upgrading activities by facilitating links among local actors and helping to prepare projects to raise investment Under construction with US$11.8 million seed official funding from the United Kingdom (DFID) and 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.