Especially since the early 2000s, large emerging countries have become
important providers of development funds. Shifting Wealth has allowed
governments to tap a bigger pool of ´transformative infrastructure finance´ (Xu
and Carey, 2017) and to choose from more financing options. From a long-term
development perspective, infrastructure finance is arguably the most important
prerequisite to close the infrastructure gap that has been identified as the
major bottleneck for delivering on growth and on the SDGs, notably in Africa. Much of the new funding supply is through official
bank credit outside the Paris Club framework, however. So concerns that a new debt overhang might be
building in the absence of a concerted mechanism for debt prevention and
resolution have become louder recently.
The rise in South-South finance is being channelled through three major
vehicles: i) a rise in remittances within the non-OECD area, often resulting
from oil riches; ii) growing corporate equity participation via mergers and
acquisitions as well as greenfield FDI by emerging multilateral companies; and iii)
an extension of bilateral and multilateral bank credit supply, notably by China.
The overall rise of
development funds occurred despite a downward trend of official development assistance (ODA) as a fraction of recipient
countries rising GDP. Western donors, including private, had reduced in the past
decades investment in infrastructure, instead devoting more attention to
poverty reduction, health, good governance, and climate change mitigation.
Research at ODI (Prizzon, Greenhill and Mustapha, 2016) found total external
development finance to all developing countries to have more than doubled
between 2003 and 2012 to $269 billion. In 2012, development finance flows
beyond ODA by DAC donors – excluding FDI and portfolio equity and remittances -
accounted for $120 billion, or around 45%. 13%
of this $120 billion by so-called emerging donors (13%), such as Brazil, China, the Gulf States, India, Malaysia,
the Russian Federation and Thailand.
Over recent years, remittance flows - funds sent by migrants living and
working abroad to their home countries - have been increasing rapidly. Booming oil prices translated in higher demand for immigrants in the
construction and other service sectors of the Gulf States and Russia. While private capital mainly flows to emerging
countries, remittances are particularly important in poorer countries where
they can represent up to a third of GDP. India, China the Philippines and
Mexico are the largest remittances receiving countries in the world. As a share
of GDP, however, smaller countries such as Tajikistan (42 percent), the Kyrgyz
Republic (30 percent) and Nepal (29 percent) were the largest recipients.
The top six immigration countries, relative to population, are outside
the high-income OECD countries (World Bank, 2016b): Qatar (91 percent), United
Arab Emirates (88 percent), Kuwait (72 percent), Jordan (56 percent), and
Bahrain (54 percent). As a consequence of an upsurge in migration, remittance
flows into developing countries sprung up in the 1990s, becoming another
important financial resource for developing countries. During the period
1970-2000, workers´ remittances to Sub-Sahara Africa had only reached 2.6% of
GDP, an inflow clearly lower than its official inflows that added up to 11.5%
of Sub-Saharan Africa´s GDP (Buch and Kuckulenz, 2010). This was in contrast to
North Africa and the Middle East that received almost 9% of GDP through
remittances over the timespan. By 2015, remittances
represented the largest source of external finance for many developing
countries, ahead of ODA and FDI. Then, worldwide remittance flows were
estimated to have exceeded $601 billion. Of that amount, developing countries
are estimated to receive about $441 billion, nearly three times the amount of
official development assistance.
Table 1: Developing-Country FDI Outflows and
Inflows, bn $
|
FDI
Outflows
|
1990
|
2000
|
2008
|
2016
|
|
LDCs
|
0.0
|
2.1
|
18.4
|
11.9
|
|
China
|
0.8
|
0.9
|
55.9
|
183.1
|
|
Total Dev
|
13.1
|
90.0
|
288.6
|
383.4
|
|
FDI Inflows
|
|
|
|
|
|
LDCs
|
0.6
|
5.3
|
32.3
|
37.9
|
|
China
|
3.5
|
40.7
|
108.3
|
133.7
|
|
Total Dev
|
n.a.
|
233.8
|
592.7
|
646.0
|
Source: UNCTAD, World Investment Report 2017, http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx
Traditionally, and until the late 1990s, developing countries have
rather hosted than homed FDI flows. While inward FDI have plateaued for many of the emerging
economies in the 2010s, much of the dynamism is now taking place in outward
FDI. Table 1 provides evidence on FDI outflows and inflows for the years 1990, 2000, 2008
and 2016. It shows that FDI flows have increasingly turned into a two-way
street since the GFC. Up to the GFC, Latin American companies used to spearhead outward
investment from emerging economies. Since
then, China raised its percentage share in developing-country FDI outflows from
1% in 2000 to almost half by 2016. Chinese multinationals have increasingly
taken the mergers and acquisitions (M&A) route for their overseas
expansion, particularly after the global financial crisis of 2008-09.
Greenfield investment is an important mode of
entry for Indian and Malaysian multinationals compared to mergers and
acquisitions, behind China the only two other emerging countries listed among
the top 15 countries for greenfield FDI in 2016. Emerging countries continue to
primarily invest South-South in other emerging and developing economies, as
most emerging economies’ regional markets serve as the primary destination for
their outward greenfield FDI flows. However, the share of the E20 group OFDI
projects (in value) directed to the Asian-Pacific region has declined while the
shares of Africa, Latin America and especially North America increased
(Casanova and Miroux, 2017).
It is noteworthy that the poorest countries classified by UNCTAD as LDC
group has started to participate at last in hosting considerable FDI inflows,
as a proportion of their GDP. South-South FDI contributed to that new trend,
with growing activity from many firms in China, Brazil, India and South Africa.
Keep in mind that net FDI flows do not constitute net capital flows as they are
often financed in the host country´s domestic financial markets, as
multinational companies try to keep currency and expropriation risk down.
In the 2000s, China became a global leader in official bank credit for
infrastructure funding, benefitting Africa above all, by building roads, dams,
bridges, railways, airports, seaports, and electricity grids. Meanwhile, China
has established a number of bilateral and multilateral funds across the world,
in addition to two policy banks, the China Development Bank (CDB) and the
Export Import Bank of China (C-EXIM). Figure 22 suggests (for Africa) that in
recent years bilateral official lending flows have been substituted for
multilateral flows. Despite steady growth in private sector funding in the past
decade, official development finance backs 80% of Africa´s infrastructure
funding, for example (ECN, 2015). ). China has also pioneered a host of bilateral
and regional development funds in the wake of founding the Belt and Road
Initiative (BRI) in 2013 (see next section). These funds add upwards of $100
billion in development finance; a major portion of these Chinese investments is
in Asia, with the largest being the $40 billion Silk Road Fund established in
2014 (Kamal and Gallagher, 2016).
Staying outside the relatively transparent DAC framework, China does
not disclose comprehensive or detailed information about its international
development finance activities. Aid Data (Dreher et al., 2017) constructed a
dataset with a new methodology for tracking underreported financial flows.
According to these new data, the scale and scope of China´s overseas
infrastructure activities now rival or exceed that of other major donors and
lenders. Between 2000 and 2014, the Chinese government committed more than $350
billion in official finance to 140 countries and territories in Africa, Asia
and the Pacific, Latin America and the Caribbean, the Middle East, and Central
and Eastern Europe. Transport and power generation are the two main sectors
financed. Chinese cooperation also invests significantly in health, education,
water and sanitation, agriculture, and other social and productive sectors.
Chinese official finance consists of Official Development Assistance
(ODA), which is the strictest definition of aid used by OECD-DAC members, and
Other Official Flows (OOF). China provides relatively little aid in the
strictest sense of the term (development projects with a grant element of 25
percent or higher). A large proportion of the financial support that China
provides to other countries comes in the form of export credits and market or
close-to-market rate loans. Table 2 provides a calculation of the weighted
average of China´s development finance that was extended at concessional ODA
terms: 24.5 percent for the period 2000 – 2014.
Table 2. Recipients of Chinese Official Finance,
2000 - 2014
|
World Region
|
Total, $bn
|
ODA Terms, %
|
|
No. of Projects
|
|
|
Africa
|
118.1
|
58
|
|
2345
|
|
|
Eastern Europe
|
56.7
|
3
|
|
171
|
|
|
Latin America
|
53.4
|
12
|
|
317
|
|
|
South Asia
|
48.8
|
10
|
|
423
|
|
|
Southeast Asia
|
39.2
|
7
|
|
507
|
|
|
Other Asia
|
28.5
|
6
|
|
183
|
|
|
Middle East
|
3.1
|
1
|
|
93
|
|
|
Pacific
|
2.8
|
3
|
|
265
|
|
|
Total/Average
|
350.6
|
24.5
|
|
4304
|
|
Source: Aid Data
(2017); authors´ calculation
Table 2 shows that Africa benefitted most from Chinese development
finance during the period 2000-14 – in terms of amounts, degree of
concessionality (percentage share at ODA terms) and number of projects.
Zimbabwe, Angola, Sudan, Tanzania, Ghana, Kenya and Ethiopia headed the ranking
of Africa´s recipients in number of projects. Africa has received more Chinese
ODA-like finance than all other developing regions in the world combined.
Infrastructure funding has risks for low-income countries with low debt
tolerance, however, despite its transformative nature. Much of China´s and
other emerging creditors´ new funding supply is through official bank credit
outside the Paris Club framework.
Concerns have become louder recently (notably in Washington DC) that a
new debt overhang might be building in the absence of a concerted mechanism for
debt prevention and resolution. The expansion of available borrowing opportunities has provided more
room to expand development-oriented spending and address infrastructure gaps.
But long-term growth is enhanced only if borrowed funds are used productively,
yielding a high economic rate of return that exceeds borrowing costs. The IMF
(2018) has noted, however, that higher budgetary borrowing levels have been
associated with a drop in public investment in many LIDCs.
The Fund is
particularly worried by the rise since 2013 and by the composition of debt in
several post-HIPC countries now judged by then IMF at high risk of or in debt
distress. Those countries are all
African: Cameroon, Chad, DR Congo, Ethiopia, Ghana, Mauritania, Mozambique and
Zambia. Their rise in debt levels has been financed by a mix of emerging
bilateral creditors, commercial external creditors, and the domestic financial
system. By contrast, the contribution of traditional creditors (the
multilateral development banks, Paris Club creditors) has been modest as they
tend to limit their provision of loans to countries at high risk of/in debt
distress, or are more likely to provide grant finance in such cases.
Washington DC is also worried by prospective
debt distress in connection with the BRI. A recent policy paper at CGD (Hurley,
Morris and Portelance, 2018) cites media sources, according to which the BRI could
span at least 68 countries with an announced investment as high as $8 trillion over
the coming years and decades. The CGD paper identified a subset of 23 countries
to be significantly or highly vulnerable to debt distress, of which ten are
Asian and four African.
Are these concerns more than ´sour grapes´?
