1 DEVELOPMENT FINANCE ARCHITECTURE THE CASE OF THE 20 PER CENT CLUB SCALING UP AND EXIT IN AID-DEPENDENT COUNTRIES Richard Carey, Deputy Director Development Co-operation Directorate, OECD

2 Outline I. Scaling Up of ODA The reference commitments and scenario–where are we? The reference commitments and scenario–where are we? The Fundamental Challenges of Scaling Up The Fundamental Challenges of Scaling Up Making something happen: aid management and collective action frontiers Making something happen: aid management and collective action frontiers Generating and sharing forward information Generating and sharing forward information Collective action compacts Collective action compacts The multi-donor aid industry The multi-donor aid industry Macroeconomic management of scaling up Macroeconomic management of scaling up II. Long term development finance scenarios: exit strategies Stylised trajectories for key economic vectors The transition from high and rising aid dependence to exit from aid via growth The key drivers of the transition from aid dependence Growth Governance Financial systems Fiscal systems

3 I. Scaling Up: 1. The Reference Commitments and Scenario--where are we? Implied ODA growth rate (excluding the debt bubble) = 8% pa 80 per cent from EU; 60 per cent from Germany, Spain, Italy, France and UK

4 2. The Fundamental Challenges of Scaling Up The political challenge: these (relatively) vast amounts must be extracted from taxpayers/current government spending –becoming the fastest growing item in public budgets for the foreseeable future. The political challenge: these (relatively) vast amounts must be extracted from taxpayers/current government spending –becoming the fastest growing item in public budgets for the foreseeable future. The intermediation/systemic challenge: these amounts must be channelled and disbursed via bilateral/multilateral channels or NGOs to developing countries. The intermediation/systemic challenge: these amounts must be channelled and disbursed via bilateral/multilateral channels or NGOs to developing countries. For reference: 2004 ODA $ 80bn: increase to 2010 is $50bn. IDA disbursements in 2004 were $7 bn EC disbursed $8 bn.

5 3. Making things happen: aid management and collective action frontiers a) Generating and sharing forward information Forward Information: If scaling up is not planned, it wont happen; and MDG achievement implies pushing out time frames (5-10 years?). Forward Information: If scaling up is not planned, it wont happen; and MDG achievement implies pushing out time frames (5-10 years?). Donor progress on these fronts – indications from 2006 DAC Survey of forward information. Donor progress on these fronts – indications from 2006 DAC Survey of forward information. 16 out of 24 donors now have multi annual financial envelopes (3-5 years) and can discuss these with partners at country level. 16 out of 24 donors now have multi annual financial envelopes (3-5 years) and can discuss these with partners at country level. This covers however only 25% of total ODA (more significant than it may seem however as share of programmable ODA). This covers however only 25% of total ODA (more significant than it may seem however as share of programmable ODA). One further major donor is currently creating a radically extended capacity for working in terms of multi-annual envelopes and sectoral concentration. One further major donor is currently creating a radically extended capacity for working in terms of multi-annual envelopes and sectoral concentration. The 16 donors indicate aid growth above trend to 2008, but well below aid growth needed for $50 bn increase by The 16 donors indicate aid growth above trend to 2008, but well below aid growth needed for $50 bn increase by Survey likely to be repeated, with methodological improvements, in 2007 Survey likely to be repeated, with methodological improvements, in 2007

6 b) Towards Collective Action Compacts Scaling up multi-donor country-led programmes constitutes a major collective action problem in terms of joint action over extended time periods. Chefs dOrchestra in short supply. Scaling up multi-donor country-led programmes constitutes a major collective action problem in terms of joint action over extended time periods. Chefs dOrchestra in short supply. World Bank/UNDP effort to promote Results and Resources Matrix approach--Compacts based on Paris Club principles: World Bank/UNDP effort to promote Results and Resources Matrix approach--Compacts based on Paris Club principles: Budget Support Compacts: Ghana, Mozambique, Tanzania, etc. Budget Support Compacts: Ghana, Mozambique, Tanzania, etc. Sector Compacts: Education (Fast Track Initiative; UK/African Finance Ministers Abuja initiative); and Health (Global Fund etc.) Sector Compacts: Education (Fast Track Initiative; UK/African Finance Ministers Abuja initiative); and Health (Global Fund etc.) Multisector Compacts: Aid for Trade/Trade Facilitation in the Doha Round Multisector Compacts: Aid for Trade/Trade Facilitation in the Doha Round Regional Compacts: Power pools, transport corridors Regional Compacts: Power pools, transport corridors Problem–based Compacts: local/regional malaria campaigns Problem–based Compacts: local/regional malaria campaigns Political Dialogue as a necessary element in scaling up compacts. Political Dialogue as a necessary element in scaling up compacts.

7 c) The Multi-Donor Aid Industry Multilateral/bilateral split remains stable at 70:30 and may decline. Regional Banks and vertical funds may increase faster than IFIs. Multilateral/bilateral split remains stable at 70:30 and may decline. Regional Banks and vertical funds may increase faster than IFIs. But bilateral aid is increasingly implemented by multis: cf. recorded bilateral contributions to UN at $4bn but UN agencies disburse $12bn p.a. But bilateral aid is increasingly implemented by multis: cf. recorded bilateral contributions to UN at $4bn but UN agencies disburse $12bn p.a. Foundations role growing: enlarged Gates Foundation must increase spending from $1.4 to $3bn within two years under US Charities Law requirement. Foundations role growing: enlarged Gates Foundation must increase spending from $1.4 to $3bn within two years under US Charities Law requirement. Partner countries must become discriminating managers of aid and other financial inflows from OECD, Emerging Donors, and foundations: aid management capacity issues. Partner countries must become discriminating managers of aid and other financial inflows from OECD, Emerging Donors, and foundations: aid management capacity issues.

8 d) Macroeconomic Management of Scaling up Revolution or evolution at the IMF? Revolution or evolution at the IMF? The African Department Checklist/Scenario approach The African Department Checklist/Scenario approach Scaling up challenges yes, but they can be actively managed and IMF will work with countries on that basis (official IMF position?) Scaling up challenges yes, but they can be actively managed and IMF will work with countries on that basis (official IMF position?) Assessing the credibility of donor medium-term commitments (role for the IMF?) Assessing the credibility of donor medium-term commitments (role for the IMF?) Dealing with political shocks Dealing with political shocks Dutch Disease and all that Dutch Disease and all that Import intensive growth as basis for productivity revolution and medium term competitive capacity? Import intensive growth as basis for productivity revolution and medium term competitive capacity?

9 II. Long Term Development Finance Scenarios: Exit Strategies 1. Stylised Trajectories for Key Economic Vectors ODA/GNI ratio Growth rate Revenue/GNI ratio MDG Achievement Phase I Phase II

10 2. The transition from high and rising aid dependence to exit from aid via growth (outpacing Dutch Disease) Key drivers Key drivers Growth Growth Governance Governance Financial sector development Financial sector development Fiscal systems Fiscal systems

11 a) Growth Drivers Infrastructure Enhancement Infrastructure Enhancement Transport Transport Energy Energy Communications Communications Employment Employment Human Capital Human Capital Health Health Education Education Intellectual capital Intellectual capital Gender equality as smart economics Gender equality as smart economics

12 b) Governance Drivers Performance and accountability as key values. Performance and accountability as key values. Capacity development. Capacity development. Public financial management. Public financial management. Anti-corruption. Anti-corruption. Peace building and security systems reform. Peace building and security systems reform. Corporate social responsibility. Corporate social responsibility. Social cohesion. Social cohesion.

13 c) Financial Transition Drivers Deeper, broader, and competitive financial sectors Deeper, broader, and competitive financial sectors Domestic investment Domestic investment Enterprise sector development Enterprise sector development FDI FDI Remittances Remittances Small Savings Mobilisation Small Savings Mobilisation

14 d) Fiscal Transition Drivers Growth of Income Growth of Income Growth of Imports Growth of Imports Revenue Collection Systems Revenue Collection Systems