Making Development Financing in LDCs
More Conducive to Development
By
Patrick Guillaumont
Development Cooperation Forum
High-level Symposium in preparation of the 2012 DCF
Gearing Development Cooperation towards the MDGs:
Effectiveness and Results
Session 2
Accountable Development Cooperation In Least Developed Countries
Bamako, 6 May 2011
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What ODA means in LDCs
• An old « target concept », still used and unavoidable,
but not fully meaningfull and to be revisited (is CPA he
answer? which target for CPA?)
• ODA to LDCs target (0.15-0.2% of GNI) far to be
reached, but ODA still a major source of development
financing in LDCs
• either compared to remittances (ODA > in ¾ of LDCs)
• or to FDI (ODA > in 4/5 of LDCs)
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mean of remgdpmedldc
mean of fdigdpmedldc
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
5
10
15
20
Fig. A.1. LDCs : median value of the ratio of (net) ODA (in red),
of the ratio of remittances (blue) and of FDI (green)
for 1980 to 2008, in %
mean of odagdpmedldc
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Development effectiveness in LDCs
• LDCs: low income countries facing structural handicaps
to growth (low human capital and high vulnerability),
so threatened to stay poor and « caught in a trap »
• Aim of the category: push the LDCs « out of the trap »,
i.e. make them capable to move away from the category
• Effectiveness in LDCs means:
- more growth,
- lessening structural handicaps to growth
- and tackling state fragility
4
ODA, a leverage in LDCs?
• While ODA to LDCs is far from target, can it become a
leverage for other development financing ?
• Remittances : possible leverage through improvement of
financial structures, but also a risk of substitution?
• FDI: leverage possible by financing infrastructures and
insurance schemes
• Tax receipts: in spite of a risk of substitution, leverage
resulting from growth effects and TA, and possible by
cancellation of exonerations
• Leverage effects are rather long term effects
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Aid effectiveness
conditioned by the structural features of LDCs
• Structural vulnerability in LDCs:
a factor of lower economic growth,
but also factor of higher aid effectiveness (on growth),
due to the stabilizing impact of aid
• Human capital weakness: impact on aid effectiveness
depending on the knowledge content of ODA
• Lessons from project evaluation: increasing returns in
LDCs
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predicted rate of success of
the projects
Fig.A.2. Rate of success of World Bank projects : initial
handicap, but higher absorptive capacity in LDCs
80%
75%
70%
65%
60%
55%
50%
0
2
4
6
8 10 12 14 16 18 20 22 24 26
ODA (% of GDP)
LDC
non LDC
Development effectiveness in LDCs:
depends on how are tackled structural handicaps
• By enhancing human capital, with 2 issues:
fungibility and trade-off with growth enhancing activities
• By lessening structural vulnerability. How?
- diversification: should be competitive, need of aid for
trade, and again infrastructure
- regional integration: financing loss of duties, regional
institutions, regional infrastructures, …(regional EIF?)
- insurance schemes, at macro (money) & micro (poor
farmers)
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A new aid paradigm focused on LDCs?
• 2000’s paradigm: ODA is effective only when policy is
«good »
• Aid should be allocated in priority to countries pursuing
such policies
• And budget support should itself conditioned by policy
measures
• A new paradigm needed, focused on LDCs, based on
addressing structural handicaps,
and assessing outcomes rather than policies
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LDCs identification criteria as aid allocation criteria
• LDCs identification criteria: besides GNIpc, HAI and EVI,
capturing structural handicaps are better aid allocation
criteria than the assessment of policy (usual PBA model)
• Better assessment of « performance »
• More equitable (compensation for handicaps)
• Better fitting alignment and ownership principles
• Higher effectiveness (stabilizing impact)
• Less procyclical and volatile
• Leading to more transparency (fragile states)
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More on vulnerability among aid allocation criteria
• Does not involve giving up « performance »
• Simulations at the request of AfDB show the feasibility
and how it favours LDCs and « fragile states »(Afdb)
(Id.with IDA for LDCs and « post conflict & reengaging »)
• Proposal expressed in various reports (DCF 2010,
2012), Commonwealth Secretariat and OIF,….
• Vulnerability approach also valid for the allocation of
resources for adaptation to climate change, the criterion
being the specific vulnerability to climate change
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Budget support and outcome-based conditionality
• Share of budget support to be increased, depending on
state management capacity, but likely to enhance this
capacity
• Need of real outcome-based conditionality or contract
to promote ownership and alignment,
using final impact (instead of intermediaries) indicators,
in line with MDGs
• Avoids arbitrary assessment, permits harmonization and
progressivity
• Why so slow to implement in spite of usual rhetoric?
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Fragile states treated in an integrated framework
• Many definitions of fragile states…, a majority of LDCs
being fragile states by one or another definition, with few
extreme cases of failed states and countries in conflict
(even if said post-conflict)
• State fragility often treated separately and curatively
• Need of an integrated treatment (except for extreme
cases), more transparent and more preventive
• For global aid allocation
• For aid modalities: avoiding parallel administrations and
enhancing incentives within local administration
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Conclusion
• LDCs are facing structural handicaps (vulnerability,
human capital weakness) to be fully considered for the
accountability of cooperation
• LDCs don’t need less ownership as a result of human
capital weakness. On the opposite, ownership is a way
to overcome this weakness.
• Taking into account LDCs structural vulnerability in aid
allocation and addressing it by appropriate aid modalities
is also fully consistent with ownership
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