Making Development Financing in LDCs

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• 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 gt in ¾ of
  LDCs)
• or to FDI (ODA gt in 4/5 of LDCs)

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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
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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

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• 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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• 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?
• 2000s 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 dont 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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