Needs of Countries in Special Situations: African Countries, LDCs, LLDCs, and SIDS as well as Specific Challenges Facing the Middle Income Countries
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Needs of Countries in Special Situations: African Countries, LDCs, LLDCs, and SIDS as well as Specific Challenges Facing the Middle Income Countries
- 1. Needs of Countries in Special Situations: African Countries, LDCs, LLDCs, and SIDS as well as Specific Challenges Facing the Middle Income Countries Mahmoud Mohieldin, President's Special Envoy The World Bank Group Email: mmohieldin@worldbank.org 1 December 11, 2013
- 2. Unique Challenges • African countries – growth with little poverty reduction in many countries • LDCs – limited investment, poverty, challenges of human development, jobs, governance and regulation, technology, some in conflict • LLDCs – transport and trade • SIDs – scale, isolation and vulnerability to climate change • MICs – home to 75% of world’s poor, second generation development challenges, many caught in a “middle income trap” 2
- 3. MDGs Progress Source: Global Monitoring Report, World Bank, 2013 3
- 4. The Middle Income Trap • Of 101 middle- income economies in 1960, only 13 became high- income by 2008 • Sharp deceleration of growth • Stagnation of innovation and productivity Source: Economic Presmise: Avoiding Middle-Income Growth Traps, Agenor, Canuto, Jelenic, World Bank, 2012 4
- 5. Good Policies for Development are not the Same Everywhere Source: Adapted from World Development Report 2013: Jobs 5
- 6. Universal Challenges – Leave no one behind – Put sustainable development at the core – Transform economies for jobs and inclusive growth – Build peace and effective, open and accountable public institutions – Forge a new global partnership Source: High-Level Panel of Eminent Persons on the Post-2015 Development Agenda 6
- 7. An Implementation Challenge: Financing the Post-2015 Development Agenda – The financing for development requirement is large, and aid will meet only a small part of it. – Countries will need to put in place sound policies and institutions in order to use existing resources more effectively and leverage other sources of financing to achieve the MDGs. – It also needs to adapt to changes in the global economic and financing landscape and tap financing from diverse sources: 1. Better and smarter aid 2. Domestic resource mobilization 3. Private finance for development 4. Innovative sources of finance, including for global public goods – The relative significance of each source, and the associated leveraging challenges, will differ between countries. 7
- 8. A Challenge to Grow and Diversify Finance Foreign Direct Investment 22% ODA 40% Worker remittances 38% Gross financial flows to fragile states, 2010 Total: USD 125 billion FDI 40% Portfolio investment 10% Long-term debt (private) 12% ODA grants 7% Long-term debt (official) 5% Worker remittances 25% Net financial flows to developing countries, 2010 Total: USD 1,267 billion Source: World Bank CFP Working Paper No. 8, Finance for Development Source: Fragile States 2013, OECD NB: Based on OECD definition of fragile states 8
- 9. Source: MDG Gap Taskforce Report, 2012 0.00 0.20 0.40 0.60 0.80 1.00 1.20 United States Germany United Kingdom France Japan Netherlands Sweden Canada Australia Norway DAC Members' Official Development Assistance as a percentage of GNI, 2000-2011 2000-2001 2007 2009 2011 UN Target: 0.7% of GNI ODA Still Falls Short of Monterrey Target 9
- 10. Recent Downturn in ODA “Official development assistance (ODA) plays an essential role as a complement to other sources of financing for development, especially in those countries with the least capacity to attract private direct investment…For many countries in Africa, least developed countries, small island developing States and landlocked developing countries, ODA is still the largest source of external financing and is critical to the achievement of the development goals and targets of the Millennium Declaration and other internationally agreed development targets.” Monterrey Declaration, 2002 Source: OECD DAC Database 0.20 0.22 0.24 0.26 0.28 0.30 0.32 0.34 1995-1996 average 2000-2001 average 2007 2008 2009 2010 2011 Net ODA (% of GNI) by all DAC members 10
- 11. Emerging Donors Could Change the Aid Landscape ODA from Non-DAC donors, excluding BRICS 0 2 4 6 8 10 2003 2004 2005 2006 2007 2008 2009 Other Non-DAC Donors OECD, non-DAC Donors EU, Non-OECD Donors Arab Countries Source: World Bank Paper, Financing for Development Post-2015, 2013 11
- 12. Emerging Donor Trends Emerging donors, led by China, provide limited aid now as defined by the OECD but they also contribute through other external flows and in-kind assistance. 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 2003 2004 2005 2006 2007 2008 2009 Estimated aid from BRICS, 2003-2009 (USD billion) China India Russia Brazil South Africa For the purpose of comparison, in 2009, net ODA from DAC members was 119.8 bn USD. Source: World Bank CFP Working Paper No. 8, Finance for Development 12
- 13. Emerging Donor Trends ODA from Saudi Arabia, South Korea, and Turkey 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 0 1 2 3 4 5 6 2003 2004 2005 2006 2007 2008 2009 Saudi Arabia Turkey (Secondary Axis) South Korea (Secondary Axis) Source: World Bank Paper, Financing for Development Post-2015, 2013 13
- 14. Progress in Implementing the Paris Declaration 14 Maximize the Impact of ODA Limited progress on certain aid modalities but improvement still needed on most indicators Source: MDG Gap Taskforce Report, 2012 Percentage of countries
- 15. Domestic Resource Mobilization Taxation capacity improving in MICs, progress needed in LICs 21.2 28.4 28.4 29.3 18.8 17.1 19 19.3 11.3 10 10.5 13.6 0 5 10 15 20 25 30 35 1994 1998 2003 2009 High Income Middle Income Low Income Tax Revenue (in % of GDP) by Income Groups, 1994-2009 Source: World Development Indicators 15
- 16. Ensure Efficient Public Spending Fossil fuel subsidies do not target the poor Source: World Energy Outlook, IEA, 2011 Subsidies are an inefficient means of assisting the poor: only 8% of the $409 billion spent on fossil- fuel subsidies in 2010 went to the poorest 20% of the population. Fossil fuel consumption subsidies measure what developing countries spend to provide below-cost fuel to their citizens. High-income countries offer support to energy production in the form of tax credits or loan guarantees, which are not included in these calculations since they are directed towards production rather than consumption of the fuel. 16
- 17. Private Finance for Development Financial and private sector development creates opportunities for entrepreneurship and job creation How do financial institutions contribute to economic growth? Improve the allocation of resources Lower the cost of financial and nonfinancial transactions Facilitate efforts to reduce and trade risks 17
- 18. Improving Financial Inclusion Globally, about 50 % of adults have a bank account The other 50 % (2.5 billion) remain “unbanked” Adults with accounts at a formal financial institution Source: Global Financial Inclusion (Global Findex) Database, worldbank.org/globalfindex 18
- 19. Improving Financial Inclusion Source: Two trillion and counting, IFC & McKinsey, 2010 21 9 3 10 #Total MSMEs (formal andinformal) #with Checking account #with Loan/Overdraft #Unserved+ Underserved 52 25 13 27 # Total MSMEs (formal and informal) # with Checking account # with Loan/Overdraft # Unserved + Underserved 20 12 6 10 #Total MSMEs (formal andinformal) #with Checking account #with Loan/Overdraft #Unserved+ Underserved 188 62 23 92 # Total MSMEs (formal and informal) # with Checking account # with Loan/Overdraft # Unserved + Underserved 78 34 11 36 #Total MSMEs (formal andinformal) #with Checking account #with Loan/Overdraft #Unserved+ Underserved 40 18 4 22 # Total MSMEs (formal andinformal) # with Checking account # with Loan/Overdraft # Unserved+ Underserved LAC MNA ECA EAP SAR AFR # of MSMEs (in Mn) # Total MSMEs (formal and informal) # with Checking account # with Loan/Overdraft # Unserved + Underserved 19
- 20. International Long Term Debt to Developing Countries 0.0 0.5 1.0 1.5 2.0 0 50 100 150 200 250 300 350 400 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Bonds Bank Lending % GDP (right axis) $ billion % of GDP Source: World Bank Development Prospects Group 20
- 21. Rise of South-South FDI South-South FDI rising, although small % of world average South-South FDI Flows, Worldwide, 1990-2009 Source: John Wilson presentation on Constraints and Opportunities for Growth in the LDCs: Research to Support Action, World Bank DECRG, 2012 21
- 22. Leverage the Private Sector: Partnerships Maharashtra & Tamil Nadu, India CLIFF COMMUNITY SANITATION PROJECT Total initial investment: $7.2 million - Homeless International - SPARC (NGO in India) - Community-based Organizations Kenya PRIVATE SECTOR POWER GENERATION PROJECT Total initial investment: $623 million - Kenya Power and Lighting Company - IFC - MIGA - Commercial Banks Sao Paulo, Brazil METRO LINE 4 Total initial investment: $450 million - Companhia do Metropolitano de Sao Paolo - 5 Equity Sponsors - Inter-American Development Bank - Commercial Banks Lake Kivu, Rwanda KIVU WATT Total initial investment: $142.25 million - ContourGlobal - Energy Authority of Rwanda - MIGA - Emerging Africa Infrastructure Fund - FMO - AfDB - Belgian Development Bank Source: Emerging Partnerships, IFC, 2013 and World Bank, Africa Region. 22
- 23. Leverage the Private Sector: Syndications 4% 29% 25% 13% 22% 41% 6% 14% 23% 8% 21% 24% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1 to 5 years 5 to 10 years 10+ years Lower Lower middle Upper middle BRICT IFI participation in syndications contributes to extending maturities of private flows to developing countries and therefore financing long-term productive investments Source: International Finance Institutions and Development through the Private Sector, IFC, 2011 Percent of international syndications to the private sector in developing countries where an IFI participated, by income level and maturity, 2007-2010 23
- 24. Innovative Financing I n t e r n a t i o n a l F i n a n c e F a c i l i t y f o r I m m u n i z a t i o n ( I F F I m ) Examples of Innovative Financing Global Funds that pool resources for specific issues of global importance, e.g., GAVI Alliance (formerly the Global Alliance for Vaccine and Immunization) Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM) Global Partnership for Education Global Environment Fund (GEF) CGIAR Fund: International agricultural research trust fund Carbon markets Diaspora (remittance) bonds Remittances are expected to reach US$ 414 billion in 2013. There is scope to further reduce the costs of remittances. Diaspora bonds could be a means to leverage the flow of remittances for investment needs. 24 Source: World Bank Paper, Financing for Development Post-2015, 2013
- 25. Five Critical Components of Development Finance Supportive framework for development cooperation Effective domestic resource mobilization Better and smarter aid More private finance for development More inclusive and innovative sources of finance 25
- 26. A Life of Dignity for All 26
- 28. WB Africa Strategy • IDA/IBRD – Competiveness and Employment – Vulnerability and resilience – Governance and public sector capacity • IFC – Improving the investment climate – Encouraging entrepreneurship – Transforming key markets and industries 28
- 29. WB and LDCs • LDC’s – End extreme poverty – Promote shared prosperity – Achieving goals in a sustainable manner (securing the furture of the planet and its resources, ensuring social inclusion, limiting economic burdens on future generations) • Conflict and security: – Provide surge response through analytical and operational support to country teams working in high priority fragile situations – Design and advocate for more agile policies and practices to improve results in FCS – Build a global community of practice to share knowledge and experience of delivering effectively in FCS – Leverage existing funds and reduce volatility of financing for FCS – Coordinate and build effective partnerships to address the core issues of security, justice, and jobs in FCS 29
- 30. WB and Middle Income Countries • Partner with MICs as global actors • Work with MICs to meet second generation development challenges • Strengthen knowledge partnerships and facilitate cross-country learning • Provide a range of financial services – Financial risk mitigation – Disaster risk reduction – Asset management – Sub-national solutions – Streamlined investment lending 30
- 31. WB and Small States • IDA financing, including small islands economies exception, minimum performance base allocation for each country and eligibility for funding through regional programs. • Risk mitigation for external shocks • Sovereign risk management • Resilience building • Technical and advisory services 31
Editor's Notes
- Today’s panel asks us to discuss the special needs of African countries, LDCs, LLDCs, SIDs and MICs. These groupings are useful in that they help us identify unique challenges (see slide). The groupings also help us identify tailored strategies and solutions. For example, WB strategy for Africa addresses competitiveness and employment, vulnerability and resilience, governance and public sector capacity For LDCs, poverty reduction and shared prosperity anchor the WB strategy. WB provides highly concessional financing through IDA, improves the enabling environment for investment, and provides sector specific technical support and advice. A special unit for Conflict, Security and Development provides surge response through analytical and operational support to country teams working in fragile situations. For small states, the WB offers extends eligibility for concessional financing, support to mitigate external shocks, and programs to build resilience. For MICs, the WB offers a range of tailored knowledge and financial solutions, in areas such as financial risk, exposure to natural disasters, and asset management. Specialized sector analysis helps countries deal with second generation development challenges, such as lifestyle diseases, aging populations, pesnion reforms, tertiary education, and social inquality.
- The challenges these groups of countries face reveal themselves in differentiated progress toward the MDGs. MICs gave done reasonably well, while Africa and LICs show much slower progress.
- When we think about achieving specific goals, it can be useful to think outside the more traditional groups of countries we are accustomed to. For example, the Jobs WDR breaks down challenges for countries in 8 categories: Agrarian economies – it may take decades before urbanization is complete, so increase productivity in agriculture Conflict-affected countries – immediate employment programs to support social cohesion, investments in infrastructure to pave the way for the future Urbanizing economies – focus on jobs that deepen global integration, and jobs that minimize environmental damage often associated with urbanization Resource rich countries – promote jobs that support diversification Small island nations – outmigration as an alternative, return migration and diaspora communities as a stimulant for the diffusion of new business ideas. Countries with high youth unemployment – remove privileges in business entry and access to jobs. Formalizing economies – premium on jobs that can be formalized without making labor too costly, and on jobs that recue the divide between those who benefit from formal institutions and those who do not. Aging societies – policies for active aging, ensuring the most productive members of society, including the highly skilled elderly, can work.
- What ever grouping of countries used, there are five common challenges, well captured by the Report of the High-Level Panel of Eminent Persons on the Post-2015 Development Agenda If African countries, LDCs, LLDCs, and MICs faced special challenges in achieving the MDGs, these may be compounded in the post-2015 era, as the pressures of environment, demography, inequality, and finance mount. The existing grouping of countries may prove useful as an analytical and organizing device in the future, or other groupings might emerge that provide a sharper framework, as in the case of thinking about jobs. One thing we do know is that a successful post-2015 world will require an extraordinary degree of partnership to address the interconnected challenges of growth, sustainability, and inclusion. Another thing we know is that the demands for finance will be very high – finance to invest the education and health of the next generation. in infrastructure, resilience, and technology. I’d like to focus my remarks now on this specific challenge of finance.
- Access to finance is a major constraint to growth for entrepreneurs in LICs. In addition, globally 50% of adults (2.5 billion) are “unbanked”
- Between 2000-2009, South-South FDI worldwide more than tripled, attaining $140 billion in the latter year, when they accounted for 14% of world total. Between 2003-2010, when total FDI flows to LDCS were growing on an average of nearly 20 percent per year, the share of FDI projects accounted for by Southern investors climbed from 25 per cent to upwards of 40 per cent. Southern investors have also proved more resilient than Northern ones in the wake of the financial crisis partially owing to the lower dependency on debt financing (Bhinda and Martin 2009).
- The World bank is ready to stand by these countries who need us most and work together with all of you to change the lives of the citizens of these countries and make the world a better place to live
- IDA/IBRD: Competitiveness and employment - The plan will assist countries to diversify their economies and generate jobs, especially for the 7-10 million young people entering the labor force each year. It will help to close the gap between infrastructure needs and investments -- currently about $48 billion annually -- and support efforts to make it easier for business to operate. In addition, the plan will focus on building the skills of workers. Vulnerability and resilience - Africa’s poor are directly affected by shocks -- economic, health-related, natural disasters and conflict -- which keep them in poverty. By focusing on better health care, dealing preemptively with the effects of climate change through improved irrigation and water management, and strengthening public agencies to share resources more fairly and build consensus, the plan seeks to reduce the number of shocks and limit the damage from those that do occur. Governance and public sector capacity - Critical services, in education, health and basic infrastructure, are too often either not delivered or delivered badly because of weak management of public funds. The Bank’s program of support aims to give citizens better information on what they should expect from their governments, as well as the capacity to report on instances when services are not delivered properly. The Bank will also work directly with governments to help them improve their systems and capacity to deliver basic services and manage accounts. IFC: • Improving the Investment Climate, working at both the national and regional level to remove the barriers to greater private investment, forming the basis for the increased job creation and earning power that lead to poverty reduction. • Encouraging Entrepreneurship, building micro, small, and medium enterprise owners’ access to finance, markets, and management skills, with a special emphasis on women entrepreneurs and inclusive business at the base of the pyramid. • Transforming Key Markets and Industries, through strategic initiatives in priority areas where private sector participation is currently low, beginning with a major focus on infrastructure and food and agribusiness.
- The World Bank tailors its assistance to the unique challenges of small states. Tailored country and regional programs help small states assess social and structural sources of vulnerability, address underlying policy and institutional weaknesses, and respond to and manage shocks. In addition, the World Bank works closely with small states to generate and share in-depth analysis on specific local challenges. Twenty small states (countries with populations of 1.5 million or less) are currently eligible for IDA funding. Thirteen of these countries have access to IDA under the small islands economies exception, with three of them having gained access during the IDA16 period. These countries have access to IDA funding in recognition of their vulnerability to economic shocks and natural disasters despite having GNI per-capita levels on average four times the IDA operational cutoff (and in some cases as high as six times the operational cutoff). Over time, in recognition of their particular challenges, the World Bank has enhanced its financial support to small states: First, as part of its Performance Based Allocation (PBA) system, IDA provides a minimum base allocation to each country. For small states, this minimum base allocation constitutes the majority of IDA’s financial support. The minimum base allocation was increased from SDR1.1 million per year in IDA14 to SDR3 million per year in IDA16. As a result, IDA’s annual per-capita allocation to small states during IDA16 was on average twice that for non-small states. As part of the IDA17 discussions, there is consideration for further increasing the minimum base allocation to SDR4 million per year. In IDA16, the terms of IDA funding for countries under the small island economies exception were changed from blend to regular IDA credit terms, which resulted in longer maturities and grace periods, as well as a lower interest rate. Beyond core IDA funding, small states are eligible for funding under the regional IDA program. Provisions have also been made to allow for leveraging significantly more financing from the regional program compared to larger IDA clients, with national co-financing capped at 20% of annual allocation for small states. In IDA16, several regional projects ranging from aviation investment to broadband connectivity are being funded in the Pacific, further raising IDA’s financing contribution in these small states by US$100 million. Similarly, in the Caribbean several small states received an additional US$17 million in support of a regional telecom project approved in addition to country allocations. The World Bank is supportive of initiatives to help small states mitigate the impact of external shocks. While much of the financial assistance provided to small island states is targeted at addressing longer-term development needs, other innovative financing windows in the Bank provide complementary resources to respond rapidly and effectively to sudden, unexpected needs, such as the IDA16 Crisis Response Window (CRW) and the recently established Immediate Response Mechanism (IRM). These instruments are only the latest in a range of sovereign risk management products provided by the Bank to small states. Examples include weather derivatives against drought risks, call options to help cap the price of maize imports, regional risk pooling schemes (the Caribbean Catastrophic Risk Insurance Facility, the Pacific Catastrophe Risk Insurance Pilot Program); and other innovative approaches to leverage concessional funds for adaptation to climate change and mitigation of the impact of natural disasters (the Program for Climate Resilience, Agriculture Risk Insurance, SIDS DOCK support). Resilience building, including disaster preparedness and mitigation investments, is critical to help protect small states against exogenous vulnerabilities. Given the high propensity for natural disasters, a development policy operation with a Catastrophic Risk Deferred Drawdown Option (Cat DDO) can be critical to rapidly respond to a natural disaster and restore economic activity. The Cat DDO instrument, which is available to IBRD-eligible countries, can provide immediate liquidity in emergency situations caused by natural disasters and catastrophes. In addition to being a source of bridge financing while other resources are being mobilized, this instrument can support countries’ efforts to enhance resilience and capacity to manage natural hazard risk. Technical and advisory services represent an important component of the Bank’s work with small states to produce tailored solutions and generate lasting impact. The World Bank works in partnership with small states as a global connector of practitioner knowledge, a broker of development solutions, and a facilitator of capacity development. The Small States Forum—the annual gathering of Finance Ministers and Central Bank Governors from small states in conjunction with the World Bank/IMF Annual Meetings—provides a platform for small states to discuss common challenges, learn from each other, interact with development partners, and forge new partnerships.