Why has aid failed to achieve development? Should other forms of financing for development (FfD) be emphasised instead for narrowing the wealth and income gaps between developing and developed countries? Are developed countries and international financial institutions (IFIs) doing enough to help developing countries mobilise domestic resources, encourage foreign investment and expand earnings from trade?

A paper entitled ‘Financing for Development: Perspectives and Issues’ looks at how the widening gap between the incomes of people in developed and developing countries might be narrowed. Over US $1.2 trillion spent on official development assistance (ODA) between 1950 and 2000 has not narrowed that gap. Challenging the belief that development requires more aid, the study identifies factors that diminish aid and finds no correlation between aid and development.

Over 20 per cent of ODA does not reach recipient countries. Most ODA is focused on food aid, emergency and humanitarian assistance. Less than 30% finances investment. A rising proportion is absorbed by administrative costs. The shifting preferences of multilateral and bilateral donors, and the intrusion of neo-colonial altruism by NGOs in shaping the use and direction of ODA, all discourage local ownership of the development process and distort priorities.

Examining this unintended outcome, the study suggests that instead of relying on (government-to-government) aid, developing countries should rely more on private capital flows (PCF) to realise the potential of globalisation for development.  Development effort needs to focus on expanding domestic savings, encouraging efficient capital formation and investment, real output, employment and trade – and less on reducing poverty.

Developing economies need to grow by seven to eight per cent annually. Sustainable growth can only come about by raising savings from less than 20 per cent to over 30 per cent of GDP. Voluntary savings must be encouraged by new financial and tax regimes, privatisation, reducing wasteful government expenditure and rapid privatisation of banks and financial institutions. Trade earnings need to be expanded by (a) donors pursuing more open trade policies in agriculture, textiles and developing country access to their labour markets – consistent with their stated aims for development; and (b) recipients dropping the barriers to investment and trade that inhibit their trade prospects.

Key points include:

• Poverty reduction strategy papers detract from the ability of developing states to develop effective policies.
• The premature imposing of environmental, labour, investment and competition rules on developing countries is damaging developing country business.
• If enacted, initiatives such as the Tobin Tax, a world taxation authority or a Global Carbon Tax would detract from raising additional resources for FfD.

Arguing the need to abandon the currently dysfunctional development assistance model in order to enhance earnings from trade, the study calls for:

• developed nations to offer tax breaks and risk guarantees to their private investors putting money into developing countries
• replacing the 0.7 per cent ODA/GNP target with a total capital flow target of 2 per cent with tax breaks provided by donor countries for investment in developing countries being counted toward ODA contributions
• overhauling the ‘aid system’ and international financial architecture by redefining and focusing more clearly the roles of the World Bank and IMF, giving regional banks a larger role, and enhancing private flows to the developing world  
• creating a streamlined UN Agency for International Development to absorb and restructure a confusing plethora of UN overlapping funds, programmes and initiatives
• providing technical and financial assistance on how to comply with and benefit from WTO rules.

Source(s):
‘Financing for Development: Perspectives and Issues’, Economic Paper 47, Economic Affairs Division, Commonwealth Secretariat, by Percy Mistry, 2002 Full document.

Funded by: Commonwealth Secretariat

id21 Research Highlight: 28 August 2003

Further Information:
Economic Affairs Division
Commonwealth Secretariat
Marlborough House
Pall Mall
London SW1Y 5HX
UK

Tel: +44 (0)207 747 6251
Fax: +44 (0)207 747 6235
Contact the contributor: i.coomaraswamy@commonwealth.int

Commonwealth Secretariat, UK

Other related links:
The UN reports on financing for development from the 2002 conference

Financing for Development from Global Policy

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