Non-concessional financial flows

1. Non-concessional financial flows

2. Multilateral (public) lending • Lending to developing countries on non-concessional terms (with rates of interest and repayment periods determined in the market). • Most important lenders are Multilateral development banks and IMF, which borrow in international capital markets to raise funds.

3. Multilateral development banks: members include developed donor countries and developing borrower countries. • World Bank • African Development Bank • Asian Development Bank • Inter-American Development Bank which lend to governments of LDCs • European Bank for Reconstruction and Development (EBRD), which lends to the private sector in transition economies • IMF

4. Purpose of loans to governments To finance development projects aimed at alleviation of poverty and at economic and social development. • Funds used to finance investments in infrastructure, health, education, trade and energy. Together with technical assistance.

5. Purpose of loans to private borrowers (by EBRD) • To assist the development of private sector activities • To assist the strengthening of markets • Support of privatization • Development of private sector institutions

6. IMF has a very different mandate, as it lends to countries in order to alleviate balance of payments difficulties and avoid exchange rate fluctuations.

7. The World Bank • ‘A development assistance organization that extends long-term credit to developing country governments for the purpose of promoting economic development and structural change’. • Created in 1944, to help reconstruct Europe after WW II. From late 1950s, activities extended to LDCs. • 185 member states, joint owners.

8. Consists of two organizations: • International Bank for Reconstruction and Development (IBRD). Lends on non-concessional terms to LDCs. • International Development Association (IDA). Similar activities to IBRD, but lends funds to very poor countries on highly concessional terms (soft loans).

9. World Bank activities • 1950s-1960s: focused on lending for development of infrastructure, such as energy, transport, telecommunications, irrigation. • 1970s: poverty alleviation. Projects focusing on water supplies, sanitation, education, health, employment,...

10. 1980s-mid 1990s: structural adjustment loans (SALs). • Intended to reduce government intervention and promoting competition • Key mechanism by which the WB influenced LDCs to adopt an outward orientation to int’al trade (free trade and free market principles). • Loans in order to assist governments in: removal of price controls, interest rate liberalization, trade liberalization, elimination of restrictions to new FDI, cuts in G,...

11. Mid-1990s to present: poverty alleviation, sustainable development, role for the government. • Poverty alleviation. Countries borrowing funds for debt relief are required to commit to attacking poverty. Also, the WB has committed itself to helping countries achieve the MDGs. • Poverty-oriented projects are intended to be environmentally sustainable, they must not give rise to environmental destruction and, whenever possible, improve upon the quality of the environment.

12. WB pays attention to the need for institutional development. Markets cannot work effectively in the absence of strong institutions that • Provide education and health services • Ensure availability of and access to necessary infrastructure • Provide and effective and equitable taxation system • Ensure access to credit • Secure property rights • Minimize corruption • Ensure and promote competition, ...

13. Evaluating the role of the WB • Social and environmental concerns. The WB has been criticized for implementing environmentally unsustainable projects. However, in the recent years it makes greater efforts to ensure that project objectives are consistent with social and environmental concerns.

14. WB governance dominated by rich countries. Voting power determined by the size of financial contributions, which are in proportion to the size of the country. Poor countries have the least representation in decision-making. • Excessive interference in countries’ domestic affairs, particularly in connection with structural adjustment lending.

15. Conditional lending. Conditions imposed to the borrowing country in order to qualify for the loan are a mechanism for inducing desirable policy changes. • Damaging impacts on LDCs. SALs have been criticized for increasing income inequalities and poverty within LDCs, due to: increasing UE, cuts in provision of merit goods, cuts in food subsidies, introduction of fees for health and education,...

16. Inadequate attention to poverty alleviation. The WB has been criticized for... • not allocating enough funds for loans intended to meet the needed investments in education, health services and infrastructure. • Not doing enough in the area for debt relief through the Highly Indebted Poor Country Initiative (HIPC). Many very poor and highly indebted countries do not qualify for debt relief.

17. The IMF • Established together with the WB in 1944. • Original purpose: lending to countries with BoP deficits under the fixed exchange rate system prevailing at the time. • Current purpose: to make short-term loans to governments on commercial terms in order to stabilize exchange rates and alleviate BoP problems.

18. Activities • Since the 1980s: focus on lending funds to developing countries. • Stabilization policies: a package of policies that the country receiving the loan must adopt. • They include: • Tight monetary policy: ↑i → ↓AD → ↓ demand for M. Higher i encourages financial inflows. • Tight fiscal policy: cuts in G + cuts in food and other subsidies + ↑ taxes + imposition of fees for education and health services → ↓AD

19. Currency devaluation or depreciation, to discourage M and encourage X. • Cuts in real wages in order to ↓AD. • Liberalization policies: • Eliminating or reducing controls on prices, interest rates, M and foreign exchange • Encouraging full currency convertibility on both the current and financial accounts ...in order to promote a free market and free trade environment

20. Evaluating the role of the IMF Criticisms: • IMF governance dominated by rich countries (idem WB) • Excessive interference in countries’ domestic affairs, even more than in the case of the WB. • Conditional lending. Countries are forced to accepts harsh conditions.

21. Damaging impacts on developing countries. IMF policies (leading to higher UE, lower real wages, cuts on provision of merit goods,...) are inconsistent with economic and human development objectives. • IMF stabilization policies based on a flawed concept. Success in alleviating BoP problems is only short-lived. Countries suffer low or negative growth rates, being unable to grow out of their BoP problems.