Select Committee on International Development Minutes of Evidence


Supplementary memorandum submitted by Mr John Roberts, Head of CAPE, ODI

PROPOSAL FOR AN INTERNATIONAL DEVELOPMENT TRUST FUND

SUMMARY

  1.  The main points made in this note are that:

    1.1.  If there is a large increase in development assistance as proposed by the Zedillo Panel it is desirable that there should be an impartial and respected body, whose legitimacy is not questioned, to determine the uses of the extra aid and how it should be administered. A suitably constituted International Development Trust Fund might fulfil this role.

    1.2.  The quickest way to mobilise that part of the proposed $50 billion per annum of additional development assistance that will not come in the form of conventional ODA (which donors pledged to increase on the eve of Monterrey) would be guaranteed market borrowing, as proposed by the Chancellor.

    1.3.  Guaranteed market borrowing in amounts that seem likely to be required (some $40-45 billion per annum in current prices post 2005) would soon give rise to an embarrassingly large burden of debt for guarantor countries that might impair their ability to sustain and increase their conventional ODA effort.

    1.4.  It is therefore highly desirable that other non-conventional sources of development assistance, such as SDRs or hypothecated international taxes, be agreed and implemented as soon as possible so that reliance on market borrowing is reduced and then eliminated, if at all possible before 2010.

CHANCELLOR'S PROPOSAL

  2.  In his speech to the New York Federal Reserve Bank on 16 November 2001 the Chancellor of the Exchequer outlined ways in which international donors could meet the additional $50 billion per annum target for additional official development assistance that the Zedillo Panel thought necessary to meet the Millennium Development Goals.  

  3. The Chancellor proposed that:

    —  The richest countries should commit themselves to a substantial increase in their ODA up to and beyond the year 2015;

    —  In order to meet the $50 billion per annum target contributions additional to this conventional ODA should be sought through market borrowing with the guarantees of donor governments or against other forms of collateral;

    —  The $50 billion should be disbursed in a balanced way through existing bilateral, multilateral and civil society channels, and used to support developing countries' poverty reduction strategies;

    —  One way of handling the additional funds would be to create an International Development Trust Fund overseen by the World Bank, the IMF and perhaps some individual donor countries.

  4.  No further details of how these proposals would work in practice have been made public. However, it is possible to construct outline scenarios describing their operation, both as regards the uses to be made of the additional aid flows and as concerns their financing. This note offers a rationale for an International Development Trust Fund and an illustration of the implications of financing the Fund by market borrowing.

USES OF ADDITIONAL AID

  5.  The volume of net ODA stagnated in the 1990s. Its average level in 1989-1990 was $57 billion and in 1999-2000 it was $56 billion[8]. Increasing this level of flow by $50 billion (90 percent) would place strain on existing management capabilities in both donor agencies and in aid recipient countries. It would very likely imply some alteration in current priorities in developing countries' poverty reduction strategies and their aid use. It would require that close attention be paid to increasing recipients' expenditure programme management capacities. Recipients would also have to take care that the macroeconomic effects of higher aid did not damage their longer term growth prospects[9].

  6.  The prospect of very much larger aid flows would create particular pressures on multilateral aid institutions—to which bilateral donors would probably look to handle a significant share of the additional flows. There would be rivalry between institutions over the shares of the extra aid which they should control. Those institutions such as those in the UN group which now regard themselves as underfunded would expect large increases in their endowments. On the other hand, the World Bank and the regional development banks which are used to disbursing large volumes of concessional finance to developing countries would be looked to by some donors as the natural administrators of the bulk of the additional resources.

  7.  Special purpose trust funds set up to meet particular development challenges and to provide larger volumes of "global public goods" would probably emerge and increase in number to take advantage of the prospect of an increase in aid volume. An example of these is the recently created Global Fund for Malaria, TB and HIV/AIDS[10].

  8. A quantum increase in aid would therefore make necessary the creation of some means of adjudicating between competing claims by institutions to manage the resources and to determine thematic and geographical priorities for their use. One purpose of an International Development Trust Fund would be to stand as impartial arbiter in this process. The Trust Fund would have primary responsibility for allocating to multilateral and other international channels those additional resources that bilateral donors do not themselves wish to administer. To do this it would have to form a collective view on: (a) priorities in using aid for poverty reduction, (b) assessing aid effectiveness and developing countries' absorptive capacity, (c) the most appropriate forms of support, and (d) which institutional channels are most apt to administer this support. The Trust Fund would also have to take a view on the shares of resources to be channelled to global programmes and to national development programmes.

  9.  In the spirit of Monterrey a wide spectrum of countries would have to be represented in the council of the Trust Fund. It would create unfortunate North-South and inter-institutional tensions if the Trust Fund were felt to be the creature only of the major donors or only of particular multilateral agencies. Suggestions have been made in the past that the product of novel sources of development finance should be administered by the UN. However, the UN is itself an interested party and there is at present no UN body able to take a sufficiently impartial and detached view of needs and capabilities[11].

FINANCING OF ADDITIONAL AID

  10.  One of the main proposals in the Chancellor's speeches of late 2001 was in fact translated into specific pledges in the approach to the Financing for Development conference in Monterrey. This is that the donors should commit themselves to substantial increases in their aid—prior to and beyond the year 2015. The European Community and its member states committed themselves to increase their aid disbursements by $7 billion per annum over the 2004-06 period; and the US promised to increase its aid effort by $5 billion per annum in the course of the same period. Other significant donors such as Canada and Japan also indicated their willingness to increase their aid flows.

  11.  If these pledges are fulfilled they should in due course give rise to additional net flows of assistance of some $12-14 billion per annum at today's prices. Furthermore, the pledges before Monterrey were couched in terms of increases in the percentages of donors' Gross National Income devoted to aid. This should mean that the higher levels of official flow envisaged will be made to grow at least as fast in nominal terms as nominal GNI—say 5 per cent per annum.

  12.  These welcome pledges will however still leave a large volume of finance to be raised by other means if the $50 billion target is to be attained, viz $36-$38 billion at today's prices. To raise these resources innovative sources of financing, lying outside aid donors' conventional budgets, will have to be sought.

  13.  The Chancellor's proposal for mobilising extra-budgetary resources is that there should be market borrowing against guarantees (or other forms of collateral) provided by donor governments. Other suggestions include the emission of new SDRs and the raising of various forms of international tax, eg the Tobin Tax on international transactions, a carbon tax and an air transport tax. It should be stressed that these suggestions are not mutually exclusive. In fact there are practical and presentational advantages in combining two or more of them.

MARKET BORROWING (WITH ANNOUNCED INCREASES IN CONVENTIONAL ODA)

  14.  The modalities of the market borrowing envisaged by the Chancellor have not been spelled out. However, it is not difficult to construct a financial scenario to illustrate the magnitudes involved. For this purpose it is convenient to assume that the International Development Trust Fund will have a legal status and intergovernmental guarantees and, as such, will have the ability and responsibility of issuing bonds in its own name up to the amount required to fill the shortfall in development finance below the $50 billion target.

  15.  Other assumptions used in the scenario are that: (a) the interest yield on IDTF bonds will continue indefinitely to be a nominal 5 per cent (roughly the current yield on the most creditworthy US and European long term bonds), (b) the IDTF will be able to roll over its debt for as long as it wishes, (c) the IDTF will pay no interest[12], but will roll interest due up into new debt, the IDTF will provide development finance in the form of credits on highly concessional IDA terms[13], (d) inflation will remain of the order of 2-2.5 per cent.

  16.  The table in the Annex projects (Col 1) additional aid disbursements reaching the inflation-adjusted equivalent of $50 billion in 2005. The conventional ODA share of this (Col 2) rises more slowly but, by 2007, contributes $15 billion to the total[14]. This increase raises the ratio of OECD donors' ODA to GNI modestly from 0.22 per cent in the recent past up to 0.27 per cent[15]. Overall additional disbursements (Col 1) rise at the rate of inflation, while additional conventional ODA rises, post 2007, at the rate of GNI growth (assumed to be 5 per cent per annum). The shortfall between the inflation-adjusted additional disbursement target and additional conventional ODA is borrowed in the markets. The net market borrowing requirement (of approximately $40-45 billion per annum in nominal terms) is shown in Col 4.

  17.  The projection shows that, if interest on IDTF bonds is rolled up into new debt and no debt is repaid, the debt of the Trust Fund mounts rapidly, reaching $400 billion by 2010 and $750 billion in nominal terms by 2015 (Col 6). Debt service payments due to the IDTF from developing country borrowers (Col 3) are puny compared with annual interest payments on accumulated ITDF debt (Col 5), and have insignificant impact on the size of this debt.

  18.  If it were decided to call a halt to market borrowing in 2010 and to repay the IDTF's accumulated debt in equal annuity instalments over the following 15 years the annual cost to guarantor governments would be $38.5 billion (which could be partly offset by interest and amortisation payments from aid recipient countries rising from $3 billion to $25 billion over the period—Col 4). If the IDTF were to continue borrowing up to and including 2015 guarantor governments would have to pay $72.25 billion per annum in order to expunge the debt by 2030 (partly offset by debt service payments by recipients rising from $10 billion to $28 billion over the period).

MARKET BORROWING (WITH HIGHER INCREASES IN CONVENTIONAL ODA)

  19.  It goes without saying that the debt and its servicing would be less onerous if conventional ODA flows increase above the levels shown in Col 2 of the Annex table, thus limiting the need for market borrowing. Koos Richelle, Director-General of DGDEV, has proposed a mechanism for raising conventional ODA flows from EU member states. This consists of asking those member states whose aid disbursements are less than 0.7 per cent of GNI to raise them at least to the current EU average (0.33 per cent) by 2006. If the mechanism is enforced from now on this ratio will increase to 0.39 per cent in 2006 (and potentially rise thereafter towards 0.7 per cent of GNI).

  20.  The following table illustrates the effect on the need for market borrowing and on IDTF debt of a staged increase of the ratio of all OECD donors conventional ODA to GNI from its current level of 0.22 per cent to a ceiling of 0.4 per cent, reached in 2007[16]. The results are compared with more modest increases announced before Monterrey which take the ODA/GNI ratio only up to 0.27 per cent. The higher level of conventional ODA would reduce IDTF debt very significantly by nearly 30 per cent in 2010 and by 50 per cent in 2015, compared with the lower level.

  21.  An ODA/GNI ratio of 0.4 percent, while modest and attainable for the EU, would be extremely challenging for the US (whose ODA/GNI ratio would almost have to quadruple), and also challenging for Japan (whose ratio would have to rise by nearly 70 per cent from its reduced 2001 level). On present form, therefore, it is regrettably improbable that conventional aid will rise to this level in the present decade, even if the EU effectively implements the Richelle mechanism.
2001
actual
  2007 projectedprojected   2010 projectedprojected   2015 projectedprojected
ODA/GNI ratio (%)0.22 0.270.40.27 0.40.270.4


Total net conventional ODA ($billion at current prices)
51.484.1125.1 97.4144.8124.3 184.9


IDTF debt ($ billion at current prices, end of period
n/a232.5230.8 402.0287.8751.3 383.1

BEYOND MARKET BORROWING

  22.  Although these scenarios are only illustrative they strongly suggest that, without an early and improbably large increase in conventional ODA, ITDF debt could quickly reach a magnitude at which debt service could have a negative effect on donors' willingness to provide conventional ODA in the longer term. Guarantor governments might find themselves unable both to meet their obligations to pay down ITDF debt and to sustain even their modest Monterrey pledges to increase ratios of ODA to GNI. This could bode ill for development assistance volumes in the years after 2015.

  23.  For this reason it would be advisable for the ITDF to seek to mobilise sources of non-conventional additional financing, other than market borrowing, as soon as possible. It will not be easy to reach international agreement on creating new SDRs or raising new hypothecated international taxes of the kind mentioned in paragraph 12 above. Many more parties would be required to give their assent than would be needed to start guaranteed market borrowing. Entrenched institutional resistance might well be encountered. The yield on some possible forms of international tax would probably be limited[17]. However, in the interest of sustaining the higher levels of development assistance recommended by the Zedillo Panel it is important that one or more innovative sources of finance be tapped at the very latest by 2010, thus preventing a build-up of ITDF debt which could, within a few years, have seriously negative consequences for net assistance flows to poor countries.

Mr John Roberts

Head of Centre for Aid and Public Expenditure (CAPE), ODI

May 2002


8   At 1999 prices and exchange rates-cf "Development Cooperation-2001 Report" Statistical Annex Table 9, OECD Development Assistance Committee, 2002 Back

9   Eg by counteracting possible inflationary and exchange rate overvaluation consequences. Back

10   George Soros in "on Globalisation" (2002) proposes that additional development finance should be allocated to a range of such special purpose funds. Back

11   UNDP could be an arbitrator if it returned from its present role as technical cooperation provider and in-country UN agency coordinator to its original role as adjudicator within the multilateral system. Back

12   At least within the period of the projection, because interest on IDTF debt is likely to compete for resources with transfers to developing countries. Back

13   Comprising a 10 year grace period, a 40 year repayment period and an interest rate of 0.75 per cent. Back

14   Ie, the $12 billion per annum pledged by the EU and the US prior to Monterrey, increased by the rate of inflation and augmented by additional conventional aid from other OECD donors. Back

15   OECD (DAC) projects an ODA/GNI ratio of only 0.24 per cent in 2006 if pre-Monterrey pledges are fully implemented, based perhaps on a low estimate of what EU actions will yield or on a high assumed rate of erosion of the pledges by inflation. Back

16   The 2001 unweighted average ODA/GNI ratio of OECD donors is 0.4 per cent. Back

17   The ODI Memorandum to the International Development Committee on "Financing for Development", estimated, for example, that an international air transport tax might only yield $6-7 billion per annum. Back


 
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