Will a New Development Architecture Undercut the Poorest?

We are still living in the global financial crisis. Much of Europe and even the world of emerging economies are in the doldrums. By some standards, the situation has become grimmer, with China and Germany joining the list of countries struggling to maintain their economic sparkle. There is some recovery in the U.S. and UK, but hard-headed OECD and IMF forecasters say the future remains uncertain. Moreover indicators on new sustainable jobs (versus temporary low-skilled) are not very positive. Finance Minister Joe Oliver is crossing fingers about the promised budget surplus as oil prices tumble.

The subject is at times rather technical, with talk of grant elements and reflows, but ultimately it is part of the new politics of aid, in which right-leaning Western governments want to contribute less grant funding to global efforts for the poor.

Among low-income and fragile states (LDCs), things remain difficult. Many of them are looking to next year’s launch of the Post-2015 Agenda at the UN General Assembly to lift the gloom. Canada has provisionally signed on to this program of new Sustainable Development Goals, including eliminating extreme poverty by 2030. But this ambitious agenda cannot be realized if there is no economic recovery that LDCs can tax, or no increased concessional aid (ODA) financing from traditional and new donors. Even the resource-rich are facing depressed global commodity prices. Those that are even poorer are seeing traditional aid funds stagnating and important new donors, notably the BRICS, more domestically preoccupied.

In this gloomy world, we are hearing more talk of the importance of foreign direct (i.e. private) investment (FDI) as the way to bolster the Post-2015 Agenda for the poorest. But is this for real? How many company boards will opt for life as a non-profit ‘social business’? FDI has been around for decades as a mechanism that facilitates faster growth by bringing new capital and matching technological innovation into play. However, it is largely going to a privileged subset of countries, certainly not those most in need. The single biggest beneficiary of FDI is actually the USA, with Canada in fourth place. Emerging economies were major beneficiaries of global 2013 FDI inflow, even as they also became important sources of FDI for other developing countries. A few LDCs have exploitable mineral resources, but the ensuing FDI is often volatile. It also brings linked corruption and crises over fair taxation, and is rarely a major job creator.

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 In Canada, speeches by Development Minister Christian Paradis regularly talk of ‘leveraging’ the private sector’s skills and investible capital. But does this approach have credible developmental or market ‘legs’? Canada’s record as a FDI source shows most flows going to the U.S. and to a few extractives opportunities in middle-income countries. We are indeed a net beneficiary of FDI.

Past efforts by governments to direct, even just ‘incentivise’, their private sectors to engage in LDCs have had limited success. The old CIDA Industrial Cooperation Program was deemed a dismal failure. Canada’s Export Development Corporation seems disengaged from poverty. The federal government seems to be exploring creating a new development finance institute, a bilateral clone of the IFC. However, could it find Canadian private sector clients ready to compete against projects in Africa or Asia funded by loans from China or Brazil?

So what is there for the poorest? They still need the shrinking lifeline of traditional grant aid from the OECD Development Assistance Committee (DAC) members. Compounding the problem is a recent downturn in DAC aid for LDCs. These countries would welcome offshore investors that help create jobs, but not as a substitute for stalled grant ODA.

Regrettably, the current efforts of increasingly conservative and self-focused Western donors, including Canada, are somewhat the opposite. A divided DAC wants to find new ways of making current harsh realities look more positive. TOSD (Total Official Support for Development) is the flavour of the year, a kitbag of new statistical ‘tricks’ for reporting non-ODA public contributions. These might include costs associated with peace-keeping missions, support for resettled refugees, embassy operations, even some export credits. Some want to count remittances, the private micro-contributions of citizens to family members back home.

There is a big push for a shift from grants to more loans. This will be a heavy blow for poor countries, many still recovering from a huge overhang of ill-judged debt that donors, including Canada, have systematically written off during the last 20 years. It was just such an earlier massive debt write-off in the late-70s that drove Canada’s decision to move an all-grant aid program.

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This is all part of a now divisive debate among DAC members about the quality and volume of future aid. It should head the agenda at their High Level Meeting (HLM) this December in Paris. The subject is at times rather technical, with talk of grant elements and reflows, but ultimately it is part of the new politics of aid, in which right-leaning Western governments want to contribute less grant funding to global efforts for the poor. They talk instead of ‘innovative’ financing such as taxes on financial transactions or carbon emissions, but have failed to act.

Meanwhile those same DAC countries, wearing their OECD hats, are obsessing over growing competition from new emerging economies as donors and financiers of development across Asia and Africa, often in the very countries where we are seeking trade and investment opportunities.

The HLM meeting is a last chance for Western donors to get their act together before the critical UN’s Financing for Development conference in Ethiopia (symbolically, in a centre built by China). Agreement there on development financing is essential to sign off on a viable Post-2015 Agenda at the September 2015 UN Summit.

Is Canada ready to be serious contributor? So far we seem to prefer inaction, despite our imminent budget surplus, on both reversing our declining ODA and giving a much larger share to the poorest countries. Will Mr. Harper end up going to New York in 2015 as a mega-dollar emperor with no clothes?

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