1 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

2 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 ( % 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)

3 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 %

4 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

5 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

6 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

8 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)

9 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

10 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)

11 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

12 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?

13 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

14 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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