UNCTAD Calls for increased development aid to support anti-poverty goals, productive investment, debt sustainability

Trade and Development Report 2008 highlights shortcomings of aid policies and debt-relief measures

Geneva, 4 September 2008 - Many developing countries have made significant economic progress in recent years, but meeting the United Nations´ Millennium Development Goals (MDGs) -- which include halving extreme poverty by 2015 -- will nonetheless require raising flows of official development assistance (ODA) to poor nations by at least US$50 billion per year, UNCTAD´s Trade and Development Report 2008(1) concludes.

The report, known as the TDR, also says that debt-relief measures must truly be additional to other forms of aid.

The TDR 2008, released today, is subtitled "Commodity Prices, Capital Flows and the Financing of Investment." It notes that in every year of the new Millennium, developing countries as a group have achieved a current-accounts surplus -- thanks to a number of fast-growing exporters of manufactures and several oil and mineral exporters. This means that, in the aggregate, developing countries have become net capital exporters to the North.

The report welcomes the performance of a large number of developing countries in reducing their external debt ratios. This achievement is due partly to better macroeconomic policies, improved debt management and debt relief, but is mainly the result of a favourable external environment characterized by high commodity prices and low interest rates, the TDR says. It notes that "this scenario that may not last forever." It recommends that governments build on recent improvements in debt and economic indicators and accelerate processes of investment, growth, and structural change while maintaining sustainable debt situations. The likelihood of debt sustainability is considered greatest when debt financing is used only for projects with returns that are higher than the interest rate costs of the loans. And foreign-currency-denominated borrowing should, in principle, be limited to projects that can either directly or indirectly generate the foreign currency necessary to service the debt. Therefore, UNCTAD suggest that external debt strategies should be closely linked to renewed efforts to strengthen domestic financial systems. They also should be linked to macroeconomic and exchange-rate policies that aim to prevent overvaluation and current-account deficits.

Despite recent progress, many poorer developing countries continue to depend on foreign capital inflows, not only to meet the MDGs but to step up domestic investment to achieve faster growth, support social expenditures, and carry out structural change beyond 2015, the report notes. Official development assistance (ODA) remains critical, especially for poor, commodity-dependent economies, which typically rely on official loans and grants from bilateral and multilateral donors.

Following the Monterrey Consensus of 2002, most bilateral donors set ambitious targets for increasing ODA as their contribution to a global partnership for development intended to meet the MDGs. However, "despite a substantial increase in disbursements, most donors are not on track to meet their ODA commitments. Moreover, there is still a considerable gap between actual ODA flows and the aid estimated to be necessary for implementing measures in pursuit of the MDGs," UNCTAD Secretary-General Supachai Panitchpakdi remarks in the overview to the TDR.

The report also addresses the issue of aid effectiveness, which has received increasing attention in recent years. Aid effectiveness is mostly viewed in relation to procedures for implementing aid and to the quality of institutions and policies in recipient countries. The TDR is critical of the fact that in many cases the provision of ODA has become conditional on fulfilling numerous criteria for good governance, although views differ widely as to what constitutes good institutions and policies -- and although there is little empirical evidence that governance has a causal impact on aid effectiveness.

According to the report, aid effectiveness should be measured against clearly defined objectives. The TDR notes that with the Millennium Declaration, human development objectives have come to the forefront at the expense of other objectives aimed at promoting long-run economic growth. "Growth and structural change have lost prominence as explicit objectives of development policy in an intellectual and policy environment that seems to be governed by the implicit assumption that, in a liberalized and globalizing economy, growth and structural change are generated automatically by market forces," UNCTAD experts state in the report. As a consequence, the proportion of ODA spent for health, education and other social purposes has increased substantially at the expense of the share of ODA dedicated to improving economic infrastructure and strengthening productive sectors. UNCTAD considers ODA grants for health, education, and other social purposes essential and justified, but points out that sustained poverty reduction depends even more on faster income growth and job creation. "Unless ODA helps boost growth, it is unlikely to be effective in reducing poverty in the long term beyond the MDG target year of 2015," the report says.

UNCTAD economists believe that aid effectiveness could also be raised by leveraging ODA with domestic investment financing, for example through the creation or strengthening of institutions that would channel ODA into public and private investment projects financed jointly with domestic financial institutions. This could ease the access of potential domestic investors to long-term financing and reduce credit risks for domestic banks. The approach also could help strengthen the system of domestic financial intermediation. Furthermore, UNCTAD believes that overall aid effectiveness could be improved by directing further increases in ODA grants to the poorest countries that have the greatest difficulty in initiating self-sustaining processes of investment and growth.

The report concludes that ODA has to be increased not only by $50 - $60 billion above its current level to meet the MDGs by 2015, but by a considerably larger amount to cover the financing needs for productive investments necessary to ensure that poverty reduction can be sustained beyond that date. New challenges for the global development partnership also arise with the need to adapt to climate change and to mitigate its impact on the poorest countries.