BMZ study ´The Future of Multilateral Concessional Finance´ online

Ready by June 2014, Chris Garroway and myself had to wait a while until the BMZ put our study online. Here is the link:

http://star-www.giz.de/fetch/3dQ00u3Xc0001Qgm0f/giz2014-1668en-mulilateral-concessional-finance.pdf

You can discuss with me (or us) at the following events.

• This Wednesday, I will present the study to BMZ staff at their luncheon Events (BMZ-Mittagsgespräche),
• on 8th October at ETH Zürich (http://www.nadel.ethz.ch/aktuell/Events)
• 2nd half October at ODI in London (still to be determined, 30th Oct likely, and
• on 8th December at Cologne University (http://www.iwp.uni-koeln.de/veranstaltungen/ringvorlesung/aktuelle-veranstaltung/

Executive Summary

Emboldened by a decade of poor-country convergence and poverty reduction, many are now imagining a world without extreme poverty (often defined as 3 percent of the world population living on USD 1.25 Purchasing Power Parity a day or less) in not too distant a future.  This paper presents the major determinants of the future demand for concessional finance and produces scenarios for multilateral concessional finance eligibility. It then discusses general strategic implications for the future orientation of multilateral concessional finance and presents actionable options for the development of each the International Development Association (IDA), the Asian Development Fund (ADF), the African Development Fund (AfDF) and concessional facilities of the International Monetary Fund (IMF).

 This report considers four major determinants of the future demand for concessional finance: (i) national productivity and welfare, (ii) the extent of poverty and deprivation, (iii) the capacity to mobilize domestic financial resources and (iv) the vulnerability to exogenous shocks and global public “bads”.

 The paper finds that recent studies on poverty and growth projections have been overly optimistic. The 2000s may well have been a special decade, and growth rates in the coming decades may hardly approach the past high levels. This paper projects the number of countries eligible for multilateral soft finance to decline to 26 in 2025, down from 39 in 2012 (based on GNI per capita simulations).

The number of extreme poor population will have been halved globally by 2025, estimated at still more than half a billion according to the basic scenario of the study. Prospective graduates India and Nigeria as well as Democratic Republic Congo are likely to constitute half of global poverty ten years from now. At the same time, the distribution of incomes has blurred the distinction between poor people and poor countries. Projected relative poverty headcount ratios indicate that even if the number of extreme poor population is strongly reduced globally by 2025, most countries will face sizeable problems with social exclusion and relative deprivation. 

Higher domestic resource mobilization may reduce reliance on concessional flows. However, marginal tax rates required to close the poverty gap remain prohibitively high in most developing countries. Moreover, tax effort calculations show little untapped potential for domestic resource mobilization for most Sub-Saharan African countries. In South Asian countries - in particular Bangladesh, India and Pakistan - where a higher domestic tax effort could be envisaged to help combat extreme poverty, challenges for fiscal federalism and cross-state revenue sharing remain nonetheless formidable and require technical support.

Climate change and natural disasters threaten to derail efforts to eradicate poverty over the next decade. In Asia, disaster damage cost in selected IDA recipient countries is substantially higher than concessional IDA flows. In Africa, disaster costs are of about the same magnitude as IDA credits. A major political decision hence relates to the provisioning of global public goods through multilateral concessional finance, especially adaptation to and mitigation of climate change as well as disaster management. Mainstreaming climate change into development cooperation would require multilateral donors to integrate vulnerability to environmental and global risks into their allocation criteria for concessional funds.

Abovementioned uncertainties would suggest a gradualist, precautionary and insurance-oriented approach to the future of multilateral concessional windows. Shrinking multilateral aid would ignore the option value of preserving IFIs and their concessional windows in a world with considerable uncertainty about future poverty outcomes. Realistic options presented in this study are:

1. redefining eligibility criteria for concessional funds based either on relative or absolute poverty terms, e.g. as per capita income relative to per capita income in a specified grouping, or even as overall levels of extreme poverty; alternatively new and more comprehensive measures such as the UN Human Development Index or the Multidimensional Poverty Index could be considered; 
2. smoothing transition periods from IDA-only via blend to IBRD-status for upper-middle-income countries (UMICs), with similar graduation paths in the other multilateral windows; such an “IDA+ transitional window” would be available for countries with a per capita income between the current IDA threshold and its double, and funds could be directed towards measures of social inclusion and redistribution; 
3. strengthening sub-sovereign allocation to take account of the rural-urban duality of inequality and higher disaster risks in certain provinces; 
4. opening the multilateral-soft windows for regional and global public goods, with climate change mitigation and disaster risk management as tracer sectors; this could take the form of turning MDBs into global/regional public goods facilities or the greening of MDB’s projects.

Finally, this paper presents strategic options for the four soft windows covered in the analysis. It suggests for the IMF to increase its share of blended finance, increase its grant element for Poverty Reduction Growth Trust (PRGT)-only countries and add an insurance-type instrument to the PRGT lending facilities. For IDA, often a lead institution in defining rules for concessional finance, it recommends increasing the grant element of its loans, considering a two-window approach with the second window focusing on transitional support, focusing the performance-based allocation (PBA) on direct poverty reduction outcomes and including vulnerability to environmental and global risks in the allocation criteria. The division of labor between IDA and the AfDF needs to be sharpened in the conceivable case of a largely overlapping client group. The report concludes that the provision of regional public goods in the form of trade development may become an AfDF focus while IDA could concentrate on climate-change related finance.  The AfDF may further consider departing from an IDA-pegged to a specific allocation mechanism tracking the AfDF’s performance; recent changes to its loan policy in its core fields of infrastructure development might be extended to regional integration by the means of structural indicators. The ADF on the other hand, with its largely different client base, is already on a good track with its current effort to merge the ADF with ordinary capital resources (OCR), thereby increasing the institution’s lending and leveraging capacity; the latter would be greatly enhanced by raising China´s and India´s capital shares.