This paper is an edited version of the keynote speech delivered by Axel van Trotsenburg at the seminar on “Meeting the New Challenges in Furthering International Development Cooperation and the Role of Emerging Economies”. The seminar was jointly held by the Shanghai Institutes for International Studies (SIIS) and the World Bank in Shanghai on July 11, 2012. This was the first event of this nature organized in China specifically on the topic of international development cooperation and followed similar events hosted in India and Russia.

I. Global Economic Trends

The international development finance architecture has changed dramatically in the past two to three decades. These changes must be seen in the context of the mega trends that have taken place in world economy after the 2nd World War. Some of these mega trends include:

the increased role of developing countries in the global economy;

the decline of poverty rates in developing countries;

the massive expansion of net private flows to developing countries; and

the emergence of middle-income countries (MICs) as growth poles and important sources of development finance.

In 1950, a few advanced economies accounted for more than half of the world economy but only 15 percent of the world’s population. Many things have changed since then. The pattern of development began to shift when developing countries started to grow after World War II. This was also a time when many developing countries gained independence from colonial rule. The post war economic expansion, which lasted until the turn of the 1970s, saw worldwide economic growth with advanced economies in the lead. After a slowdown in global economic growth through the 1980s, developing countries’ growth accelerated since the 1990s significantly outpacing growth by advanced economies.

The result has been a major structural shift in the global economy. Today, under some measures, the G7 account for 35 percent of the world gross domestic product (GDP) compared to close to 50 percent in 2000. In the same period, the share of the so-called BRICS (Brazil, Russia, India, China, and South Africa) increased from less than 20 percent to over 30 percent, with China accounting for nearly 20 percent of world GDP. [①] Similar trends are evident when we look at trade or foreign direct investment and other external financial flows from developing countries. Under current trends, it is projected that China and India will account for half of the world GDP by 2050.

The impact on poverty has been remarkable. Rapid economic growth in developing countries has lifted millions of people out of poverty. Poverty rates have declined sharply and the Millennium Development Goal (MDG) of halving absolute poverty was already reached in 2010. The proportion of people living under US$1.25 per day fell from 43 percent in 1990 to 22 percent in 2008 and it is projected to reach 16 percent by 2015. The most rapid decline in poverty occurred in East Asia, with China’s extreme poverty falling from 60 to 13 percent between 1990 and 2008—the fastest poverty decline recorded in human history.

The growth performance among developing countries has not been uniform. Some have been growing faster and have reached middle income or even high-income status while many others have lagged behind and have remained low-income countries (LICs). The differences have to do with several factors, including initial conditions and the pace of reforms.

In the International Development Association (IDA) countries, the majority of which are low income countries, the poverty rate for the absolute poor declined from 58 percent in 1981 to 38 percent in 2008, also thanks to accelerated growth particularly in the 2000s. However, the rate of decline in the poverty rate has been lower than that of all developing countries.

Massive increases in net private financial flows have underpinned rapid growth in developing countries, particularly in MICs. In 1990, net official flows accounted for 46 percent of net external financial flows to developing countries, but in 2010, this share had gone down to 12 percent.   Between 1990 and 2007— before the onset of the financial crisis— net private flows had increased 23-fold to nearly US$ 1 trillion, with the bulk going to middle income countries in the form of foreign direct investment (FDI) and private debt financing.

While private flows to LICs have also increased significantly, the volumes have been modest.  For instance, only 2 percent of FDI to developing countries were going to LICs in the years before the financial crisis. In 2010, net official financial flows accounted for 60 percent of total external flows to LICs, mostly in the form of official development assistance (ODA) grants. Worker remittances have also become important financial flows for both MICs and LICs.
                                                               
II. The Evolving Development Finance Architecture

For much of the past half century, ODA has been provided primarily by OECD-Development Assistance Committee (DAC) members, using bilateral and multilateral channels.[②] After falling in the immediate years following the end of the cold war, ODA saw a period of unprecedented growth since the late 1990s and through the 2000s, reaching a record high of about US$130 billion in 2010. This growth reflected massive debt relief provided to poor countries—under the HIPC and multilateral debt relief initiatives—and greater donor commitment around the MDGs. However, net ODA recorded a 2.7 percent decline in real terms in 2011, largely reflecting fiscal constraints in many OECD economies.

The 2000s also saw the increased engagement of other development partners outside the DAC. These include a number of middle income countries such as Brazil, China and India as well as several private foundations, corporations, and hundreds of civil society organizations. Additional annual aid flows from these official and private sources are estimated at about US$12-15 billion and US$22-53 billion, respectively. The growing importance of some of these new actors is further elaborated in Section IV below.

Looking at the composition of ODA, significant shifts are apparent:

First, the share of the social sectors in total ODA has increased from 42 percent in the early 1990s to 58 percent in the late 2000s. At the same period, the share of infrastructure has decreased from 32 to 24 percent.

Second, ODA channeled through the multilateral system has increased but has become more earmarked. The breakdown between bilateral and multilateral ODA has remained relatively stable at 70 and 30 percent respectively, with multilateral ODA reflecting core contributions from DAC members to multilateral organizations such as IDA.

However, the use of multilateral channels has increased due to the rapid growth of multi-bilateral ODA (trust funds) which in 2010 accounted for 12 percent of ODA. Multi-bilateral ODA is bilateral ODA earmarked for a specific purpose and channeled through the multilateral system.

In addition, within multilateral ODA, there has been increased earmarking through new thematically-focused multilateral organizations created in the 2000s to target specific development issues particularly in the health sector. Examples include the Global Fund for AIDS, Tuberculosis and Malaria (GFTAM) and the Global Alliance for Vaccines and Immunization (GAVI).

Another important trend is that ODA has become more complex. Aid channels have proliferated and aid flows are increasingly fragmented and earmarked. This complexity is a major concern to beneficiary countries and has been highlighted in Paris, Accra, and Busan.

Proliferation of aid channels: There are now about 60 bilateral donors (compared to a dozen in 1960) and about 260 international organizations. Many of these organizations are sectorally or thematically focused and therefore earmark their assistance to specific uses. On average, one partner country manages over 30 donors, each with its own processes and reporting requirements.

Fragmentation. The number of donor-funded activities has increased to over 120,000 compared to 20,000 a decade ago with an average size of less than $1.5 million. Recipient countries have to manage a multiplicity of aid channels and a myriad of small donor-funded activities, which reduces the effectiveness of aid.

Earmarking. In addition to earmarked ODA channeled through the multilateral system, a significant share of bilateral ODA is earmarked through bilateral vertical funds, freestanding technical assistance or emergency assistance. Total earmarking is estimated at 40 percent of total ODA.

The past decade has also seen a growing contribution of new development partners (NDPs) in the form of additional resources, innovation, and learning. The term” new” does not capture well the constitution of this group, as many have actually been involved in development finance for many years. What is new about them is the increased scope and size of their engagement in development finance.

III. The Increased Role of “New” Development Partners

With the term “new development partners” here we refer to those official providers of development assistance outside the traditional DAC membership. This is a very diverse group. Some of them are new DAC members such as the European Union (EU) New Member States and South Korea, while others have been engaged in development cooperation for many years such as several Arab States. They range from high-income countries (Saudi Arabia, Kuwait), to upper middle-income (Russia, China, Turkey, South Africa), and to lower middle income countries (India). For the most part, NDPs do not see themselves as “donors” but rather as equal partners following the principle of mutual benefit under South-South cooperation.

The contributions of NDPs are becoming more visible thanks to better reporting. For instance, several non-DAC countries—such as Saudi Arabia and Turkey—provide annual reporting on their aid flows using DAC definitions, which facilitates comparison and aggregation. Others have started to provide more official information not only on volumes, but also on modalities and approaches— a good example is China’s White Paper on Foreign Aid published last year.

Notably, the BRICS have become important growth poles and sources of development finance. Aid flows from BRICS have been growing fast, although from a small base. Based on various official and unofficial sources, these flows were estimated at about US$4 billion in 2009, which is probably an underestimation. However, aid volumes do not fully capture the significance and impact of BRICS on the financial architecture of low income countries. For instance, since 2000 trade between BRICS and Sub-Saharan Africa surged by 25 percent annually, reaching US$206 billion in 2011. Moreover, as a group the BRICS overtook the European Union as the major trading partner in Sub-Saharan Africa in 2010. Similarly, debt financing expanded rapidly over the period reaching US$6 billion in 2010.

Beyond financial resources, many NDPs bring to the table their own development experiences, in the framework of South-South cooperation. This represents a paradigm shift in the global financing architecture where the flow of knowledge is no longer dominated by North-South exchanges.

Finally, NDPs contribute with complementary investments in key sectors such as infrastructure where traditional assistance has placed less emphasis over time. This is particularly important given huge funding gaps in poor countries.

IV. The Challenges Ahead

As we enter the second decade of the 21st century we face a number of challenges. In the aftermath of the 2008 financial crisis, developing countries have continued to grow, albeit at a slower pace, while advanced economies are recovering slowly amidst high public debt and continued high budget deficits. The global economic outlook remains uncertain.

While private investment and trade must ultimately drive economic recovery and long term development, ODA remains an important source of finance particularly for LICs. In contrast with middle income countries, net private capital flows to low income countries only amounted to US$16 billion in 2010 compared to around US$130 billion in net ODA from traditional DAC donors.

A key challenge going forward is to sustain ODA levels and maximize its development impact. This will require coordinated efforts on several fronts:

First, we must do better at achieving and communicating results. In the context of rising public debt and fiscal constraints in several advanced economies, political support for ODA is waning and aid budgets are being cut or under threat of being cut. To sustain political support for ODA, we must demonstrate that we are achieving results with taxpayers’ money. Despite different approaches and ways to assess effectiveness, all development partners, traditional and new, seem to share this common objective.

However, measuring results is an area where we are all struggling with. While we have made progress in developing output indicators, there remains the challenge of linking these indicators to country-level development outcomes. Another challenge is how to capture the impact of our interventions in the “soft areas” such as capacity building and technical assistance which are essential to our development work.

As important as achieving results is to communicate them to the general public. The feedback received from several stakeholders, including donor partners, is that we need to do better at communicating results. However, in doing so, we must always remember that our partner countries are in the driver seat and ultimately are the ones producing the results.

Second, we need to manage the complexity of the aid architecture. The multiplicity of aid channels and donor-funded activities raises transaction costs for partner countries. While earmarking has helped fundraising by targeting specific issues, it reduces the flexibility of countries to allocate funds across and within sectors. Moreover, when earmarked funds are both narrowly focused and large they can lead to significant distortions in sectoral funding. Ultimately, it is difficult to reconcile supply-driven initiatives with country-own priorities. In response, several DAC members are in the process of implementing division of labor initiatives. At the multilateral level, platforms like IDA and the regional development funds are powerful instruments to reduce fragmentation and enhance country-based programs.

Third, we may need to revisit the concessionality of ODA. Given scarce resources relative to needs, grants and highly concessional resources would need to be directed to the poorest countries, while other countries with greater financial means would have to access financing at terms consistent with their capacity to pay. We are already doing this within IDA, where the terms of our financial assistance are provided according to the country’s capacity to pay and debt sustainability.

Fourth, we need to improve coordination of all development aid providers to ensure complementarity and sustainability of development results. Given that many NDPs deliver aid as part of trade and investment packages, it is often difficult to distinguish the concessional and non-concessional components. This could potentially undermine long term debt sustainability of some poor countries and reverse the benefits of past debt relief. A central aspect of this agenda is to improve the reporting of aid and other financial flows both at the country and global levels. Many new development partners are making progress on this front, also as they make progress in establishing their own aid agencies and reporting systems.

In sum, we must tap the opportunities brought by the more diverse aid architecture and work together to make it more effective. This will require also a more systematic dialogue.

V. The Role of the World Bank

Multilateralism began also at the end of the World War II with the creation of the Bretton Woods Institutions, the International Monetary Fund (IMF) and the World Bank or the International Bank for Reconstruction and Development (IBRD). The idea behind multilateralism was to learn from the mistakes made in the aftermath of the Great Depression in the 1930s and create a system that facilitates international cooperation to promote growth and prosperity.

In 68 years of operations, the World Bank has evolved from a project finance institution to a development institution providing a tailored package of knowledge, technical assistance and financial services to clients around the world. IDA, the World Bank fund for the poorest countries, was created in 1960 as an added mechanism specifically targeting this group of countries.

As a global multilateral institution, the World Bank can help address the challenges posed by the increasingly diverse and complex aid architecture. Its ability to do so derives from its core strengths, which include: its global membership, its country-driven approach, its focus on results, and its unique role as generator and interconnector of global knowledge.

Given its global membership, the World Bank provides a platform for coordination and inclusive dialogue among all its members. The recent governance reform gives greater voice to developing countries in the IBRD and IDA’s membership has expanded to include 52 donor countries (from 18 in 1960) and borrower representatives from all regions. Within IDA, donor countries leverage not only financial resources but also ideas which ultimately shape IDA’s policies and strategies.   

IDA helps to mitigate the impact of fragmentation and earmarking of donor assistance in several ways. Because of its country-driven approach and non-earmarked resources, IDA can tailor its financial and technical assistance to national priorities thereby helping to reduce funding imbalances that may result from excessive earmarking. Because of its convening power, knowledge base, and multi-sector approach IDA can support governments’ coordination of donor activities and help strengthen public sector management and delivery systems for more effective use of overall development resources.

As generator and connector of knowledge, the WB promotes knowledge sharing and dissemination of good practice. The Bank’s operational work across a wide range of countries provides a suitable platform for knowledge sharing, including South-South exchanges. But, we have not even scratched the surface of what can be achieved in the area of South-South learning and we need to do more. The challenge for the multilateral institutions such as the World Bank is how to realize this potential to its fullest extent.

In the area of results measurement, the World Bank is playing a leadership role and IDA is leading within the Bank. In the early 2000s, IDA pioneered a Results Management System (RMS) which was subsequently adopted by other multilateral development banks. The RMS was further refined and expanded in the context of the latest IDA replenishment process completed in 2010 (IDA16). However, this agenda remains work in progress, and further efforts are needed to capture the “un-measurable”, the “soft areas” as mentioned earlier. This is particularly important given the World Bank’s focus on knowledge services and technical assistance.

VI. Final Remarks

The global aid architecture is no longer an exclusive club of advanced economies. It now involves a broader and more diverse membership. This is clearly an opportunity. The challenge is to exploit this diversity to tackle poverty and make progress on the MDGs, through better coordination, more knowledge sharing, focus on results, and more systematic dialogue.

Given recent changes, we need not only to deepen our dialogue with new partners, but also to ensure the continued engagement of advanced economies. It is ultimately about global responsibility and international solidarity. To effectively carry out this mission, we need to understand each other better and identify common ground.

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