The trees and the forest Mapping development finance towards developing countries

1. The trees and the forestMapping development finance towards developing countries Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre Development Finance Architecture Paris3 July 2006

2. 1 Mapping the flows to developing countries 2 The trees and the forest (a) The relative importance of aid flows (b) Emerging economies vs developing countries (c) Are official and private flows complementary? A new development finance architecture? 3

3. Financial flows to developing countriesin USD million Net Private flows to developing countries Total net flows to developing countries 24% 9% 9% 9% 9% 13% Asia Latin America Africa Eastern Europe Africa’s share of developing countries inflows X% Source: OECD DAC, IIF, UNCTAD, World Bank 2006

4. Capital Inflows in developing countries, 2004 2 85 39 19.4 CIS and South Europe 180 72.3 68 29.3 Developing Asia 0.5 28 24 34 Africa and Middle East -10 62 7 41 Latin America Net FDI and portfolio Investment Recipient Country Remittances Donour country ODA Disbursements Private creditors Source: IIF, OECD DAC, UNCTAD, World Bank 2006

5. Focus: Capital inflows in Africa 41% 37% 49% 0.5 65% 24 37 24 0.5 28 77% $ bn; 2004 FDI and portfolio Investment ODA Disbursements Private creditors Remittances Share of ODA in Africa’s total inflows X% Source: World Bank, UNCTAD, IIF, OECD 2006

6. 1 Mapping the flows to developing countries 2 The trees and the forest (a) The relative importance of aid flows (b) Emerging economies vs developing countries? (c) Are official and private flows complementary? A new development finance architecture? 3

7. Private flows to developing countries increased at a record pace in 2005 2005 Source World Bank GDF 2006

8. Development Finance according to the US: US Total flows going to developing countries according to two sources, 2003 Total 84 $bn Sources: OECD Development Centre, Hudson Institute 2003 Total 112 $bn Source: USAID 2006

9. 1 Developing countries external financing 2 The trees and the forest (a) The relative importance of aid flows (b) Emerging economies vs developing countries (c) Are official and private flows complementary? A new development finance architecture? 3

10. Financial resources of emerging economies in 2004 2004 1980 Developing countries (excl emerging) Emerging Economies Source: UNCTAD, World Bank GEP 2006, IIF online statistics, OECD DAC 2006

11. Are emerging economies really emerging? BRICS’ Share of all foreign investment stocks a century ago and now 1913 BRIC + Mexico Rest of the world 2003 Source: OECD Development Centre, based on figuers from Schularick, M. A tale of two globalizations, 2006

12. 1 Developing countries external financing 2 The trees and the forest (a) The relative importance of aid flows (b) Emerging economies vs developing countries (c) Are official and private flows complementary? A new development finance architecture? 3

13. Aid progressive distribution vs private flows regressive distribution 0 .2 .4 .6 .8 1 Population Ranked by GDP per cap. 2000-03 Tot. ODA/OA 2000-01 nets FDI 2000-01 Natives living in OECD v. 2000 Exports to OECD 2000-01 GDP Per cap. 2000 Line 45 deg. Concentration Curve 1 0.8 0.6 0.4 0.2 Source: Lambert, S et Cogneau D; L’aide au développement et les autres flux nord sud: Complémentarité ou substitution? Centre de Développement de l’OCDE, janvier 2006

14. 1 Mapping the flows to developing countries 2 The trees and the forest (a) The relative importance of aid flows (b) Emerging markets vs developing countries? (c) Are official and private flows complementary? A new development finance architecture? 3

15. New Flows, New Actors • Private flows increasingly constitute a main source of development finance • Consequently, new flows and actors have to be integrated into the development process • We lack of a clear mapping of both those flows and actors involved in development finance • Another issue is that apart for remittances, private flows are directed towards emerging economies • The policy response thus varies depending on the type of country

16. Low Income Countries Aid is still very much needed to bridge financing needs of developing countries Main challenge for developing countries: continue the process of alignment and aid harmonisation to increase aid effectiveness Promote other private flows to increase their significance in developing countries Emerging Economies Other sources of development finance are strongest in emerging economies The development finance architecture needs to incorporate these new sources Major coordination / interaction needed between ODA actors and Non-ODA actors of development finance Policy Options

17. Policy Issues • The issue is not only DAC Donors coordination or DAC Donors versus Emerging Donors coordination • As new actors and new flows are becoming increasingly relevant for developing economies the issue is also about better coordination and synergies between • Official donors and private actors • Private actors between themselves (i.e. public private equity funds; sri investors; corporate foundations; etc.) • Country based strategy or issue based strategy? The example of Health Sector in Ghana.

18. Annex I: Two eras of financial integration:Are emerging economies financial integration higher than before? Share of international investment stocks in 1913 and 2000 Share of world GDP (in ppp, 1990 international dollars) Integration Index Country’s share in world Invesment stocks Integration Index = Country’s share in World GDP 1913 2000 Source: Maddison (1995, 2001) ; Schularick, M. A tale of two globalizations 2006.

19. Annex I: Are emerging economies really emerging? BRICS’ Share of all foreign investment stocks a century ago and now 1913 BRIC + Mexico Rest of the world 2003 Source: OECD Development Centre, based on figuers from Schularick, M. A tale of two globalizations, 2006

20. Annex II: How many economies are emerging according to Wall Street? International Institute of Finance: 29 countries. (chosen sample) OECD Development Centre, based on selected major financial organisations Emrging Markets analysis reports 2006

21. Annex II: Who are the emerging economies according to Wall Street? Presence frequency in banks Analysis (n=38) African Emerging Countries Note: Countries most frequently analysed in selected Emerging Markets Analysis. (Citigroup, Morgan Stanley, HSBC, Lehman Brothers, Bear Sterns, Credit Suisse, FTSE, JP Morgan, IIF) The percentage represents the average presence in their analysis. Only countries analyzed by more than 30% of them appear on the graph. Source: OECD Development Centre, calculation according to selected analysis reports

22. Annex II: Where are the emerging economies in 2005 according to Wall Street? Source: OECD Development Centre, calculation based on major investment banks analysis, 2006

23. Annex III: Remittances flows are particularly strong towards low-income countries… Billions of Dollars Share of GDP Nigeria 2.8 10 Yemen, Rep. United States 3 Kiribati 11.3 Colombia 3.2 Nepal 11.7 Vietnam 3.2 11.7 Albania Portugal 3.2 Nicaragua 11.9 Egypt, Arab Rep. 3.3 Tajikistan 12.1 Bangladesh 3.4 12.4 Samoa Brazil 3.6 Lebanon 12.4 Pakistan 3.9 Dominican Rep. 13.2 Serbia 4.1 13.5 Philippines Morocco 4.2 Honduras 15.5 United Kingdom 6.4 16.2 EI Salvador Germany 6.5 Serbia and Montenegro 17.2 Belgium 6.8 Jamaica 17.4 Spain 6.9 20.4 Jordan Philippines 11.6 Bosnia and Herzegovina 22.5 France 12.7 Haiti 24.8 Mexico 18.1 25.8 Lesotho China 21.3 Moldova 27.1 India 21.7 Tonga 31.1 0 5 10 15 20 25 0 5 10 15 20 25 30 35 Source: Based on OECD and The World Bank (2006)

24. The central issue for developing countries:Transaction costs … but not in all countries Remittances costs in Mexico Remittances costs in Latin America * (%, for 200 USD) (%, 200 USD) 13.0 12.1 11.3 10.6 8.9 8.6 9.2 8.2 7.9 7.3 7.3 7.3 6.9 8.1 6.4 7.3 5.8 7.4 5.6 5.4 2002 2003 2004 2000 2001 Source: Pew Hispanic Center Haiti Peru Cuba Bolivia México Jamaica Ecuador Colombia Honduras Average Nicaragua Guatemala Venezuela Rep. Dominicana El Salvador * From USA; 2004 Source: PEW Hispanic Center

25. The central issue for all developing countries: How to capitalize remittances’ bonanza? Uses of remittances in Mexico in 2004 % of total 78.0 7.0 5.0 4.0 1.0 1.0 Consummer Savings Others Investment Households Education Goods Source: Fomin y Pew Hispanic Center

26. Annex III: Credit worthiness and higher access to capital can be reached through remittances… (2004) Source: OECD Development Centre, 2006. Based on: “Economic Implications of Remittances and Migration”. World Bank, 2006.

27. …which could have a positive effect on sovereign credit ratings Potential Improvements in Credit Rating through Remittances Determinants of Sovereign Credit Ratings Rating (S&P) Source: OECD Development Centre, 2006. Based on: Rowland, P. “Determinants of Spread, Credit Ratings and Creditworthiness for Emerging Market Sovereign Debt: A Follow-Up Study Using Pooled Data Analysis”. Banco de la Republica de Colombia, 2005.