Select Committee on International Development Fifth Report


  1. Meeting the MDG targets will require substantial resource transfers from developed to developing countries; of this there can be no doubt. The real question is, which method of generating and transferring financial resources is most effective at reducing poverty? [46] The Financing for Development agenda ranged from domestic resource mobilisation, to foreign direct investment, debt relief, trade earnings, and aid. A single inquiry cannot deal comprehensively with all these issues, but, it is important that, in focussing on aid and the potential of innovative sources of development finance, we do not forget the bigger picture.
  2. The ultimate aim of the FfD process was not to increase aid levels. It aimed, in line with the Millennium Declaration, to eradicate poverty, achieve sustained economic growth, and promote sustainable development. Aid is extremely important, but achieving the MDG targets will require progress on several fronts. Looking at the big picture of financial resource flows, we can distinguish between domestic resource mobilisation within developing countries, inflows into developing countries, and outflows from developing countries (see figure 2). It is the combination of these three elements which determines the resources which a country has to work with in its development.
  3. Diagram Source: Committee's own.

    Domestic Resources and Responsibilities

  4. The starting point of the Monterrey Consensus is the responsibility of countries for their own development, and the importance of domestic resource mobilisation. Domestic resource mobilisation refers primarily to public and private savings, taxation, and investment. As the Zedillo report put it "The domestic economy is virtually always the dominant source of savings for investment, and the domestic policy environment is a decisive determinant of the desire to invest. Furthermore, the equally crucial question of the efficiency with which resources are invested is determined overwhelmingly by national decisions and the domestic policy environment".[47] Such sentiments were strengthened in the Monterrey Consensus, with particular attention given to the importance of "good governance", "sound economic policies" and "solid democratic institutions" in mobilising and attracting resources.[48] We concur fully with these views; if developing countries are to escape poverty they must take responsibility for their own development. Developing countries will need to establish policy environments, and local banking and financial systems, to both retain and mobilise domestic resources, and to attract and retain international resources.[49]
  5. As we noted in our report on Corruption,[50] and saw during our recent visit to Nigeria, corruption is the enemy of development. It will not be possible to reduce the present levels of poverty in developing countries unless corruption is controlled. For instance, Nigeria's growing poverty has coincided with the generation of huge wealth from oil and gas. In Angola too, many millions of people live in abject poverty whilst millions of pounds of oil and diamond revenues have been used to finance wars. In paragraph 27, we refer to the "staggering 39 percent" of African private wealth that is held abroad. Developing countries must show that they are taking strong measures to tackle corruption and money laundering so that countries' resources benefit all the people rather than corrupt elites. Developed countries must rigorously enforce their own anti-corruption laws and insist that financial transactions by firms with developing countries are open and transparent.
  6. Getting the local institutional and policy environment right is likely to have significant multiplier effects in terms of mobilising both domestic and international capital. However, important as the national policy environment is, reliance on domestic resources will not enable developing countries to meet the MDG targets. DFID and HM Treasury told us that "It is only likely to be possible for developing countries to generate domestically a small share of the additional $50 billion of funds required to meet the MDG targets.  The World Bank estimate that if poorly-performing countries raised their savings rates and efficiency of investment to the average levels achieved in countries with good policies, then this would reduce their funding requirements by some $7 billion (from $22 billion to $15 billion)".[51] Therefore, we must consider other resource flows too.
  7. Inflows into Developing Countries: Trade, Investment, Remittances, Aid and Philanthropy

  8. A quick look at the data reveals the magnitude and type of North-South flows of financial resources (see figure 3). On average, from 1996-2000, the total net flow of long-term financial resources from DAC donors[52] to developing countries and multilateral organisations was more than US$170 billion per year. The components of this total annual flow were: private flows at US$106.6 billion (62 percent); ODA at US$50.6 billion (30 percent); other official flows at US$7.6 billion (5 percent); and, net grants by NGOs at US$5.9 billion (3 percent).[53] The volume of private flows has been quite volatile, peaking within the 1996-2000 period at US$127 billion in 1997 and reaching a low of US$75 billion in 2000. The volume of ODA has been steady at around US$50 billion. Whilst aid is important, clearly, any consideration of financing for development must not exclude other flows of financial resources; the Monterrey Consensus reflects this point in its enthusiasm for trade and foreign direct investment as engines for development.
  9. Data Source: OECD International Development Statistics Online. Diagram Source: Committee's own.

  10. The mix of resource flows differs, both by recipient and by donor country. (See figure 4 for a comparison of selected OECD/DAC countries). At Monterrey, Andrew Natsios, head of the United States Agency for International Development (USAID), emphasised that 80 percent of flows from the USA to developing countries are private, including investment, philanthropy, and remittances: the Gates Foundation spends more money in terms of health care in the developing world than any other donor country; remittances from the USA to developing countries amount to US$30 billion per year ;[54] and, private giving through US NGOs amounts to some US$4 billon per year.[55] Alan Larson, US Under Secretary of State for Economic, Business and Agricultural Affairs, reported that US imports from developing countries amount to some US$450 billion per year, and applauded the fact that US imports from sub-Saharan Africa increased by 17 percent in 2001 under the African Growth and Opportunity Act.[56] As the USA seems keen to emphasise, perhaps to deflect attention from its modest aid contribution, the apparent generosity of donor countries does differ depending on whether generosity is defined in terms of ODA as a percentage of GNI, or in terms of total resource flows as a percentage of GNI. Yet, the adoption of a broader definition of generosity only succeeds in lifting the USA from being the least generous of the DAC countries to a place fifth from bottom of the donor table, providing total resource flows which amount to 0.25 percent of GNI. Nevertheless the point remains: non-aid resource flows are important.
  11. Financing for development must be considered in the round; the focus should not be solely on aid. Non-aid flows of resources are crucial for developing countries' prospects of meeting the MDG targets. In 2001, of the developing countries' total GNI of US$6389 billion, US$2176 billion or some 34 percent came from the export of goods and services. For sub-Saharan African countries, the figure was 40 percent—US$117 billion out of a total GNI of US$294 billion.[57] Clearly, trade earnings are a major inflow into developing countries, and could—particularly if we as developed countries were to practice what we preach, reducing subsidies and opening our markets to developing country exports—be a very powerful engine for development. Clare Short emphasised that making the Doha round of WTO negotiations a "development round" was part of the consensus reached at Monterrey, and lamented the fact that agricultural subsidies in OECD countries amount to US$360 billion per year. As she said: "if we do not give countries better trading opportunities they will not have the chance to grow their economy".[58]

    Figure 4: North-South resource flows by type, selected country comparisons for 2000 (US$ billions, 2000 prices, except where stated otherwise)









    Official Development Assistance







    ODA as % of GNI







    Other Official Flows including Export Credits







    Grants by Private Voluntary Agencies







    Private Flows at Market Terms (including FDI)







    Total Long Term Resource Flows







    Total Resource Flows as % of GNI







    Data Source: OECD Development Co-operation Report 2001, Table 13.

  13. The WTO calculates that abolishing OECD agricultural subsidies would provide developing countries with three times their current ODA receipts. Such issues are of particular importance at a time when the USA has passed legislation to increase its agricultural subsidies by some 80 percent, providing nearly US$200 billion of subsidies to its farmers over the next ten years under the new Farm Act, a move which will rob developing countries of export opportunities and potential trade earnings. Whilst this US policy initiative is without doubt detrimental to the goal of poverty reduction, it in no way relieves EU governments of the responsibility for removing their own export subsidies, subsidies which Oxfam estimates are twice as high as those in the USA.[60] The WTO claims too that the elimination of all tariff and non-tariff barriers—barriers which cost poor people in rich countries too—could result in gains for developing countries of around US$182 billion in the services sector, US$162 billion in manufactured goods, and US$32 billion in agriculture.[61] The current situation in which Northern governments advocate trade liberalisation whilst themselves engaging in agricultural protectionism is a disgrace, and puts at risk not only the Doha trade round, but also the MDGs. The developed countries must act now to eliminate agricultural subsidies and to enable developing countries to sell their products in Northern markets. We urge the Government to do its utmost to bring such changes about. We will be monitoring progress very closely.
  14. Outflows from Developing Countries: 'Capital Flight', Debt and Debt Service Repayments

  15. Outflows from developing countries complete the picture. A first strand of resource outflows is 'capital flight' or investment overseas by developing countries. Over the course of the 1980s and 1990s such resource outflows amounted to around US$1200 billion, or nearly 20 percent of the GDP of developing countries.[62] This average hides significant regional variations; in South Asia 3 percent of private wealth is held abroad; in Africa the figure is a staggering 39 percent.[63] Such flows are of course difficult to identify, measure or control, but if developing countries are to retain more of the resources they need to meet the MDG targets, steps must be taken both to improve in-country conditions and remove the incentive for capital flight, and—through improved surveillance and regulation of the international banking system—to discourage illegal outflows.
  16. Debt and debt service repayments are the second major resource outflow from developing countries. As we noted in our first report on debt relief, in 1995 the total debt service paid by developing countries was US$194 billion, or, more than three times the volume of aid then provided to developing countries by DAC donors.[64] Since then, the HIPC initiative has been established, and subsequently enhanced, with the aim of providing eligible countries with a sustainable exit from the burden of debt so that they are able to retain more of their resources for poverty reduction. In conjunction with the provision of debt relief, the HIPC process has entailed encouraging countries to adopt policies of macroeconomic adjustment, and structural and social policy reforms.
  17. Under HIPC, the IMF and World Bank have approved debt-reduction packages for 26 countries, amounting to a total of US$40 billion or about half what these countries owe. Alongside the impact of other debt reduction, the HIPC process will reduce these countries' debts by about two thirds, and make their actual debt service payments for 2001-05 some 30 percent lower than they were in 1998-9. The debt service payments of HIPC countries in 2001-05 will average 9 percent of exports—or less than half what the typical developing country pays—and 14 percent of government revenue, which is around half the 1998-9 share. Prior to the HIPC initiative eligible countries were spending more on debt service than health and education combined; this is no longer the case. Now, HIPC countries' spending on social services is three times that spent on debt service, and takes up an increasingly large proportion of the countries' budgets.[65] (See figure 5 for additional measures of the impact of debt relief).
  18. We welcomed the HIPC initiative, and applauded the role of the UK Government in pushing for debt relief,[66] but, we are very concerned that it is not delivering sufficient debt relief and is in many cases failing in its stated aim of providing a sustainable exit from debt for the poorest countries. Jubilee Research, the successor to Jubilee 2000, now takes the view that HIPC is little more than an accounting exercise which has succeeded in replenishing the books of the international financial institutions, whilst providing little debt relief to developing countries. This is a view shared by some US parliamentarians, albeit with different conclusions drawn. For Jubilee Research, the failure of HIPC ought to lead to the development of a fair, independent and transparent process for sovereign debt cancellation, in which debtors and creditors share the responsibility for the situation that many poor countries find themselves in. For some US parliamentarians, the likely implication is that the USA ought not to provide more funds for debt relief.

    Figure 5: Debt Service and Social Expenditure for 26 HIPCs that have reached their Decision Points (in US$ billions, unless otherwise stated)







    Debt service paid[67]






    Debt service due after HIPC relief








    Social expenditure





    Debt service/exports (percent)





    Debt service/fiscal revenue (percent)





    Social expenditure/debt service (percent)





    Data source: IMF/World Bank, HIPC Initiative—Status of implementation report, March 2002.

  20. In evidence, the Chancellor defended HIPC but acknowledged that there are some problems with the initiative, particularly as a result of falling commodity prices and the use of over-optimistic projections in calculating what debt relief would be required.[68] He told us that, "there is no complacency on our part about both what has been achieved and what has yet still to be done",[69] and accepted that countries would need a "systematic topping-up at completion point to ensure that no country exits the HIPC process with an unsustainable debt burden".[70] Towards the end of our inquiry, at the G8 Summit in Kananaskis, it was announced that the HIPC trust fund would be topped up to the tune of US$1 billion. We welcome this announcement, and applaud the Chancellor for his continuing efforts in pushing for debt relief.
  21. There must not be any complacency about the HIPC process and the prospects of the HIPC countries' debt being reduced to sustainable levels. Our assessment, whilst supportive of HIPC and the debt relief process overall, is that there are a range of serious problems. Firstly, the process is too slow. After six years of the HIPC process only six countries—Uganda, Bolivia, Mozambique, Tanzania, Burkina Faso and Mauritania—have passed fully through the initiative to completion point. The rate of countries' progression through the process has clearly meant that less debt relief than promised has been delivered, and that fewer countries than expected have received debt relief. Secondly, the definition of debt sustainability used is rather arbitrary and takes little account of the developmental needs of poor countries or the resources needed to meet the MDG targets; debt relief should be more closely linked with an assessment of the resources countries need to meet the MDG targets. Thirdly, at least ten of the 26 HIPC countries are likely to exit the process with unsustainable debt burdens, even using the IMF and World Bank's measures of sustainability. This is due, in part to the fact that decisions about the amount of debt relief to be granted were made on the basis of unknown future levels of exports and over-optimistic projections of economic growth, and in part to the fact that developing countries have—unsurprisingly—suffered a series of economic shocks which have knocked them off course. In this, we are in agreement with the Chancellor; additional debt relief will be required.
  22. In sum, we remain supportive of the HIPC process, but recognise that there are serious problems which require addressing, particularly as regards the speed of the process, the linking of debt relief to development needs, and the likelihood of countries
  23. exiting HIPC with sustainable debt burdens. The HIPC process must also be flexible enough to cope with the diversity of circumstances which developing countries face, including those which are emerging from conflict.

  24. We are also concerned to ensure that debt relief calls forth additional resources, rather than simply diverting the flow of aid from non-HIPC to HIPC developing countries. Our concerns were heightened by the realisation that debt relief counts towards a country's ODA contribution, something which we imagine may come as a surprise to others too. So, for instance, in 2000, 3.4 percent of UK ODA was in the form of debt relief.[71]
  25. We sought clarification about this from the Chancellor and the Secretary of State, and were told that whilst debt relief is counted as part of a country's ODA contribution, if the UK were to grant additional debt relief, this would not be at the expense of DFID's aid budget.[72] We accept this explanation, but do have some lingering concerns which stem in part from the fact that debtors were rarely servicing their debt in full anyway. In such cases debt relief is to some extent a virtual transfer of resources, rather than something which actually provides a country's government with additional resources for development. This is in marked contrast to other forms of ODA which—notwithstanding the fungibility of aid—do provide developing countries with additional real resources. Pound for pound, debt-relief ODA may well provide less resources for poverty reduction than ODA which is not in the form of debt relief.
  26. Therefore, we wish to emphasise three points: first, the granting of additional debt relief by donor countries, perhaps to top-up countries as they exit the HIPC process, must never be at the expense of other ODA flows; second, donors must make every effort to be as transparent as possible when they are reporting on the debt relief components of their ODA; and third, the international community must consider carefully for each developing country on a case-by-case basis whether development resources are best provided through debt relief, or through other ODA instruments. Debt relief must provide additional real resources, and must never be provided at the expense of other ODA flows.
  27. Aid for Poverty Reduction

  28. The map of globalisation reveals an uneven landscape of opportunity and exclusion. The world is criss-crossed by huge flows of trade and investment, but developing countries are largely bypassed. Lacking the capacity to trade, or the ability to attract investment, developing countries are marginalised and the least developed countries are almost totally excluded. In 1998, the least developed countries attracted less than 4 percent of long term capital investment headed for developing countries. In consequence, 84 percent of the total resource flow to the 48 least developed countries was aid.[73] Developing countries will not meet the MDG targets through attracting inward investment and generating export revenues. Both the pattern and purpose of non-aid resource flows explain why aid—more aid, used more effectively—is crucial. As the joint DFID/HM Treasury memorandum explained:
  29. "Globalisation is changing the context in which governments interact with private investors. Although foreign private investment in developing countries has risen significantly over the last couple of decades or so, much of this investment is concentrated in a small number of large countries. Many of the poorest countries including those in sub-Saharan Africa have not succeeded in attracting significant amounts of foreign or local private savings and investment sufficient to sustain high rates of economic growth".[74]

  30. Poverty reduction is not what motivates private capital. Given the appropriate pro-poor policy environment, inward investment may lead to a reduction of poverty in the long term through increased growth and trickle-down, but there are no guarantees. In addition, it is unlikely to have a speedy impact on people's ability to meet their basic needs for food, water, shelter, education and health services. As the Chancellor told us: "there is absolutely no doubt that, when we are talking about health and education and anti-poverty programmes, these cannot be done properly without the richest countries being prepared to devote a higher share of income to the poorest countries".[75] There are various flows of financial resources, any of which might be tapped by developing countries, but only aid can be truly focussed on poverty reduction. We are glad that DFID, the Treasury and the Government are so supportive of aid, and encourage them to continue to push the case for aid in both domestic and international fora. As Development Initiatives told us, "you have to remember that most private finance which is invested in developing countries is not targeted on poverty reduction. It may be welcome, it may contribute to growth, but if you look at the people who are chronically poor, then they are the people who most need the aid which is the only international resource which can be specifically targeted on poverty and the goals".[76] We return to issues of aid volume and aid effectiveness in chapters five and six.


46   Clearly the answer to this question will vary depending on a particular country's circumstances, but nonetheless the question's value remains. We acknowledge gratefully the help of Simon Maxwell, the Director of ODI, in formulating this question. Back

47   Zedillo Report, pp.36-37. Back

48   Monterrey Consensus, paragraph 11. See footnote 12 for web-site. Back

49  The New Economics Foundation's report on "Chasing shadows" offers an interesting perspective on domestic resource mobilisation, suggesting that domestic saving is a key driver of growth.

See- Back

50   Fourth Report from the International Development Committee, Session 2000-2001, Corruption, HC39-I . Back

51   Ev 83, para 25 Back

52   The DAC donors are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, UK, USA. Back

53   Data from OECD/DAC Development Cooperation Report 2001. Back

54   ODA: A key to global stability. Forum hosted by BOND/Interaction/Norwegian Forum/Action Aid during the Financing for Development Conference-copy placed in library. Back

55   Ev 26 Back

56   Transcript of press conference given by Alan P. Larson, US Under Secretary of State for economic, business and agricultural affairs at the UN Conference on Financing for Development-copy placed in library. Back

57   Global Development Finance, World Bank, 2002, p.200. See- Back

58   Q129 Back

59   This reverse flow is made up primarily of US$5 billion of repayments made by developing countries to Japan on loans extended during the Asian financial crisis. Back

60   Europe's double standards: How the EU should reform its trade policies with the developing world, Oxfam Briefing Paper no. 22, June 2002. See- Back

61   Doha: A Trade round for development. Speech given by Mike Moore, Director-General of the WTO at the Third Annual Conference of the Parliamentary Network on the World Bank, Berne, 10 May 2002. Back

62   Global Development Finance, World Bank, 2002, p.69-for web-site see footnote 57. Back

63  Flight capital as a portfolio choice, World Bank, 2000, p.5. See- Back

64   Third Report from the International Development Committee, Session 1997-1998, Debt relief, HC563, paragraph 20. Back

65  HIPC Initiative-Status of Implementation, IMF/World Bank, April 12 2002. See- Back

66   Third Report from the International Development Committee, Session 1997-1998, Debt relief, HC563; Fourth Report from the International Development Committee, Session 1998-1999, Debt relief and the Cologne G8 summit, HC470; Fourth Report from the International Development Committee, Session 1999-2000, Debt relief-further developments, HC251. Back

67   Debt service figures for 2000 largely reflect debt service for countries that reached their decision points at end-2000 or later. The full impact of debt relief therefore does not appear until 2001 and thereafter. Back

68   Q99 Back

69   Q128 Back

70   Q99 Back

71   OECD/DAC Development Cooperation Report 2001, p.91. Back

72   Ev 101 to Ev 103 Back

73   Briefing on International Conference on Financing for Development, UN Department of Public Information, February 2002. Back

74   Ev 83, para 26 Back

75   Q104 Back

76   Q39 Back

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