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Successful modernization of aid

17 December 2014
by Guest author
The relative weight of ODA in external financing to developing countries, 2000-11. Click to see full size.

The relative weight of ODA in external financing to developing countries, 2000-11. Click to see full size.

Today’s post is from Erik Solheim, Chair of the OECD Development Assistance Committee (DAC)

The donor countries representing well above 90% of all global development aid agreed in the Development Assistance Committee of the OECD on December 16 on a set of measures to modernize official development assistance, ODA. We will build on the historic success of aid and make it fit for the future. The goal is to provide more and better aid and support the global process of financing the post-2015 sustainable development goals.

The huge development progress over the past decades has made the world a better place to live than at any other point in human history. Extreme poverty, child mortality and malaria have been halved. The majority of people on the planet are better educated and live longer and healthier lives than ever before. But progress has been uneven. Development in states at war and in the poorest nations has been much slower. Conflict has even reversed development in some nations by 20-30 years. Extreme poverty will increasingly be found in weak states and in vulnerable groups such as indigenous communities, small scale farmers, ethnic and religious minorities, and the disabled. The majority of the very poor are women and they are living in rural areas. Global economic growth alone will not get all these people out of poverty. Specific policies targeting the most vulnerable groups and directing more resources to the least developed countries will be required to end poverty.

This is why the Development Assistance Committee has agreed to provide more development assistance to the least developed countries and other nations most in need, including small island states, land-locked countries and fragile states and nations in conflict. Those who have committed have reconfirmed the UN targets of 0.7% of national income for development assistance and at least 0.15% for the least developed countries. New agreed rules for concessional loans will give the poorest nations better access to this important source of development finance. The Development Assistance Committee agreed to modernise the reporting of concessional loans to encourage more resources on softer terms to the poorest nations while putting in place safeguards to ensure debt sustainability. The result of all this will be more and better development assistance to the poorest nations. More grants for schools and hospitals. More loans for railways, manufacturing plants and clean energy.

Development assistance is an important source of external funds for the least developed countries. But the big drivers of global development are private finances and domestic resources. Development assistance reached a record high of $135 billion last year, but foreign direct investments are almost 5 times greater. By far the biggest share of the money spent on education in the developing world comes from domestic resources. A three letter word for development is “tax”. A 1% increase in developing country tax revenues would mobilise twice as much for health, education and roads as total development assistance.

But development assistance can have a big impact on global sustainable development if used smarter to mobilize more private investments and domestic resources. $20 trillion will be invested annually across the world in the coming decades. More of this should be directed to green growth and development.

As our contributions to the global process of financing sustainable development, the OECD Development Assistance Committee will continue to develop new statistical measures to account for and mobilise more private finances. A new statistical tool measuring total official support for sustainable development will complement, not replace, official development assistance data. The purpose is to use public funds to mobilise more of those $20 trillion for green growth and development by making better use of the available financial instruments such as guarantees and equity investments. This work will be refined leading up to the third international conference on financing for development in Addis Ababa. We encourage all nations, private sector and civil society organization to work with us.

Better rules for development assistance are only relevant if it reduces poverty and has a real impact on the life of real people. More and better development assistance will help us towards eradication of extreme poverty by 2030. Our new broader measure is an additional contribution to the UN led process of shaping the sustainable development agenda and ending poverty while protecting the planet.

Useful links

 OECD Development Co-operation Report 2014: Mobilising Resources for Sustainable Development.

Myanmar: Anticipating a leap-frog in development through financial inclusion

17 December 2014
by Guest author

Myanmar reviewIn preparation for the 2015 Global Forum on Development, which will focus on how access to financing can contribute to inclusive social and economic development, the OECD Development Centre, United Nations Capital Development Fund (UNCDF) and the Better than Cash Alliance have developed a series of articles exploring the key issues and dimensions of financial inclusion. Today’s post by James Eberlein of the OECD Development Centre and Kameshnee Naidoo of UNCDF provides an overview of the Financial Access Landscape and the usage of financial services by consumers in Myanmar. These findings are some of the highlights from the recent “Making Access Possible” (MAP) diagnostic undertaken in Myanmar and draws on the OECD’s Multi-dimensional Country Review of Myanmar.

U Chit Po is 49 years old and runs a grocery store in Myanmar. He is responsible for his wife and two children. He recently had a major health scare and consequently would like to retire soon. U Chit Po has no medical coverage, as there is no license for the health insurance market in Myanmar. His income consists of profit from his small business and interest on loans to others, which he lends at 20% interest per day. He has never saved in a formal banking institution, but his knowledge about the value and complexities of saving are highly sophisticated. He feels that banks have so much red tape, especially for provisions which he might need to access at short notice, and the interest offered by banks on savings is so little, that it is not worth the hassle.

Like U Chit Po, most adults in Myanmar do not use formal financial services. More than half of all credit in the country is sourced informally, through people like U Chit Po who on-lend their savings as a way of generating additional income. While such local intermediation plays an important role in the local economy, from a public policy perspective it means that such funds are not available for national investment.

Nature of financial services usage in Myanmar

Click to see full size

Click to see full size

Source: FinScope Myanmar, 2013

For people who do use formal financial services, it is common for such usage to be limited to one service — a phenomenon known as being thinly served. 30% of the total adult population have access to a regulated financial service from a regulated institution, but only 6% have access to more than one (a combination of credit, savings, insurance and payments); this is higher for urban adults than rural, as shown in the figure above.

The development of the rural financial system is particularly critical. Of all the segments of Myanmar’s economy, the rural sector is the most underserved by the formal financial system: only 2.5% of all loans go to this sector, even though it represents 30% of GDP and two-thirds of employment. Improving access to finance in rural areas could catalyse a process of agricultural modernisation and the creation of non-farm jobs, which will be critical for the future.

Thinly-served populations results in adults using ‘inappropriate’ financial services to meet a particular financial need. Like U Chit Po, 31% of the adult population in Myanmar experienced illness within their household or family that resulted in medical expenses. However, in the absence of health insurance, 47% of adults reported using credit, 27% sold assets or reduced expenditure, 22% used their savings and 4% did nothing. In all these responses, adults are forced to rely on wealth-depreciating mechanisms, leaving them more vulnerable to shocks in the future and undermining the productive allocation of resources.

The UNCDF’s Making Access Possible (MAP) programme unpacks the realities of adults like U Chit Po, across various economic groups based on their income profile, to understand the needs of different segments of the population and to position the supply-side response within the current contextual and market challenges. These include a heavy reliance on paper-based banking systems, a rapidly changing political economy and a modernising financial sector that will require new skills and approaches to meet needs on the ground.

MAP targets low-income consumers, as well as small and micro businesses, and hence its application in Myanmar is supporting the Government’s objectives to improve access to financial services, reduce poverty and catalyse jobs and economic activity. The figure below gives an idea of the levels of income and the size of these different groups of consumers that are not being efficiently served.

Target markets for financial inclusion in Myanmar

Click to see full size

Click to see full size

Source: FinScope Myanmar, 2013

To achieve this, UNCDF, in partnership with the Ministry of Finance, developed a roadmap for financial inclusion. By analysing the various options available, timelines and resources required, it will assist the Ministry in developing policy and setting out its priorities for financial inclusion in the short, medium and long terms, and in attracting development partners to support specific areas of financial or other need.

The roadmap was presented at the ASEAN Financial Inclusion Conference hosted in October by the Ministry of Finance of the Government of the Republic of the Union of Myanmar in Yangon. The event took place in the framework of Myanmar’s contribution as the Chair of the 18th ASEAN Finance Minister’s Meeting and offered a space to develop a collective agenda. It concluded with the Yangon Outcomes for Financial Inclusion, a set of recommendations to accelerate financial inclusion in the ASEAN region.

The Conference was part of UNCDF’s new programme, Shaping Inclusive Finance Transformations (SHIFT) which aims to double financial inclusion in the ASEAN region by 2020, and will focus on interventions at country level while bringing cross-border and regional solutions to problems that cannot be addressed by any single country. It also seeks to take advantage of economies of scale, including training and policy research and advocacy to make financial inclusion a key outcome of the financial integration process.

With the recent changes in government and new investor interest, Myanmar is poised for growth. In its 2015 Economic Outlook for Southeast Asia, China and India, the OECD Development Centre forecasts that Myanmar’s economy will grow by nearly 7.8% over the next five years. This has the potential to move millions of people out of poverty. There is growing evidence that financial inclusion can play a critical role in contributing to equitable growth policies that reduce poverty and inequality.

Given the current level of development of the financial sector in Myanmar, much work needs to be done to further expand access and, importantly, to improve the quality and depth of services offered to those already financially included. Thus the roadmap will provide a structured approach to that that the benefit of economic growth is shared across the poor and marginalised groups.

Useful links

OECD Development’s work on:

Inclusive Societies and Development

Multidimensional Country Reviews

UNCDF Making Access Possible Making Access Possible (MAP) for Myanmar

A clearer picture of climate-related development finance

15 December 2014
by Guest author
Climate finance

Climate-related development  finance totals $37 bn

Today’s post is by Stephanie Ockenden of the OECD Development Co-operation Directorate

The world will need more and better targeted financing to meet the challenges of global development post-2015. This means taking important decisions not only on what qualifies as official development assistance (ODA), but also on how those flows can be most strategically used. The Ministers of the OECD Development Assistance Committee (DAC) are in discussions today and tomorrow at the DAC High Level Meeting to redefine the terms for determining what qualifies as ODA.

But these terms are just part of that package of what the DAC is putting together to contribute to successful outcomes at the Third International Conference on Financing for Development in Addis Ababa, 13-16 July 2015, the UN General Assembly Post-Millennium Development Goals (MDG) Review Summit in New York in September 2015, and the United Nations Climate Conference (COP21) in Paris in December 2015.

An equally important objective is to provide a better picture of the total resources available for global sustainable development, including for action on climate change. It is now widely understood that climate change and development are intrinsically linked. Achieving an efficient and effective allocation of public finance to simultaneously support good development and climate change outcomes will be critical to ensuring that the most vulnerable get the targeted attention they need.

Robust statistics on climate-related development finance can facilitate better decision making, in part through improved co-ordination and priority setting. Consistent, comparable and transparent statistics on climate-related development finance will, in turn, support parties in their monitoring and reporting to deliver greater accountability and help build trust under the UN Framework Convention on Climate Change.

As an important step in this direction, the DAC, in collaboration with the multilateral development banks and other international organisations, has presented – for the first time ever – an integrated picture of bilateral and multilateral development finance flows targeting climate change objectives in 2013.

By adding data on the multilateral flows, the DAC promotes transparency and makes a wealth of data publically available online, including information on over 7,000 development finance activities in 2013, contributing to over USD 37 billion of climate-related development finance.

Energy, transport and water received over two-thirds of climate-related development finance, according to the statistics. On the regional level, Asia is the largest recipient of climate-related development flows, at around 40%, and Africa is the second largest, at 30%. The data show that in 2013, adaptation receives a significant share of total climate-related flows (39% when activities that are designed to tackle both mitigation and adaptation are included). Measured in the same way, mitigation receives 74% of the total flows (with 13% also targeting adaptation). A larger share of the bilateral development assistance portfolio is dedicated to adaptation, as compared to the multilateral portfolio.

Among other advantages, this integrated dataset avoids double counting and provides consistency across countries using standardized definitions and measurements. Going forward, the DAC will continue to work in collaboration with other partners to further improve the quality, coverage, communication and use of environmental development data.

This video explains the treatment of multilateral climate-related flows in DAC statistics:

Useful links

OECD DAC Climate Change External Development Finance Statistics

OECD Statistics on External Development Finance Targeting Environmental Objectives Including the Rio Conventions

Increasing the transparency of climate-related development finance flows: publishing detail on over 7,000 projects in 2013 Stephanie Ockenden on the Climate Funds Update blog

Is inequality good or bad for growth?

9 December 2014

Inequality and growthIf you’ve been following the income inequality debate, you’ll know there’s been much discussion of the question in the headline above. Until just a few years ago, it’s probably fair to say that mainstream opinion leaned towards the “good for growth” side of the debate. Yes, inequality might leave a bad taste in the mouth, but it was worth it if it meant a strong economy.

This case rests on three main arguments: First, inequality creates incentives for entrepreneurs. Second, wealthy types are a source of investment for the economy. Third, when the state tries to reduce inequality by taxing wealth and transferring it to the less well-off, some of these resources will be lost in the “leaky bucket” of bureaucracy and administration. From an economic perspective, that’s inefficient.

All these arguments have some merit, and indeed few would disagree with the idea that some level of inequality is necessary in a modern economy. But over the past couple of years, the bigger proposition – that inequality is good, or at least not bad, for growth – has come under increasing fire, including from the IMF, the OECD and even Standard & Poor’s. And now comes new research from the OECD indicating that “income inequality has curbed economic growth significantly”.

Much of the coverage of rising inequality has focused on the incomes of “the 1%”. But the OECD research, which was led by Michael Förster and Federico Cingano, indicates that it’s the situation of people at the other end of the earnings scale that has the biggest impact on growth. These lower-income households are not a small group. They represent some 40% of the population, comprising families that, from a social perspective, might be called lower-middle and working class.

Where overall inequality is higher in a society, a clear pattern emerges: People from such backgrounds invest much less in developing their human capital – essentially their education and skills. By contrast, it has almost no impact on the educational investment of middle-income and wealthy families. The implications for social mobility are clear – an ever-widening education and earnings gap between society’s haves and have-nots.

This gap is seen not just in the length of time people spend in education but also in their skill levels. At the risk of swamping you in data, this is strikingly evident in the chart below. It divides the overall population into three groups based on parental education background, or PEB (which is used to represent socioeconomic status) – high, medium and low levels of education. The chart then looks at the average numeracy scores of people from each of these three groups in the OECD’s Adult Skills Survey and charts them against levels of inequality as measured by the Gini coefficient (where 0 equals absolute equality and 1 equals absolute inequality).

b

Where inequality is relatively low (around 0.20), the gap in numeracy levels between the three groups is relatively modest. But, on the other end of the scale, where inequality is higher (around 0.36 – a little more than in the UK today and a little less than in the US), the score of people from poorer backgrounds is markedly lower; by contrast, the scores of people from middle and high-income families don’t change much.

How does this affect growth? As an economist might say, it’s “inefficient” – workers with higher skill levels can contribute more to the economy. If a large swathe of the population is unable to invest in its skills, that’s bad news for the economy.

Just how bad is clear from the OECD research. It estimates that rising inequality knocked more than 10 percentage points off growth in Mexico and New Zealand in the two decades up to the Great Recession. The impact of rising inequality was also felt – albeit not as strongly – in a number of other OECD countries, including Italy, the UK and the US and even in countries with relatively low levels of inequality like Sweden, Finland and Norway

To be sure, the debate over inequality and growth will certainly continue. Just last week (before publication of the new OECD paper), Nobel laureate Paul Krugman admitted he was a “skeptic” who remained to be convinced of the link. But the fact that the debate is happening at all is surely a good thing. Rising inequality is one of the most significant socioeconomic trends of our time. Understanding its possible impact on our societies and economies has surely never been more important.

Useful links

OECD work on income inequality and poverty

Focus on Inequality and Growth (OECD, 9 Dec. 2014)

Trends in Income Inequality and its Impact on Economic Growth (OECD Working Paper, 2014)

A prayer for your pension

8 December 2014
by Brian Keeley

OECD Pensions Outlook 2014In the 18th century, the Church of Scotland had a problem – widows. Whenever a married minister died, his salary was transferred to his successor. If the dead man was married, his widow and children could find themselves without either income or home. The only option for some was the poorhouse – an unedifying spectacle for a church.

Two churchmen, Dr. Robert Wallace and Alexander Webster, decided something needed to be done. They wanted to create a fund that would provide ministers’ widows with a pension. But how to design it? Rather than turning to prayer, the two sought a solution in another of their great passions – mathematics.

As Yuval Noah Harari explains in his excellent Sapiens, the two churchmen exploited the emerging field of probability and, in particular, the Law of Big Numbers. This stated, in effect, that while “it might be difficult to predict with certainty a single event … it was possible to predict with great accuracy the average outcome of many similar events”. So, while it was impossible to say how many years an individual 60-year-old minister might live, one could say how much longer the average 60-year-old man would live. All that was needed was good data.

Here the two ministers were in luck. At the end of the 17th century, the great astronomer Sir Edmund Halley – better known today as a comet spotter – had studied records for births and deaths in the German city of Breslau. From these, he produced some of the world’s first life tables, which gave precise odds for the probability that a person of a certain age would die in a certain year.

The two preachers used this data to design their fund. As Dr. Harari explains, the fund proposed a range of pension plans: For example, any minister who paid in £2.12s.2d (or about £2.61) a year would guarantee an annual pension for his widow of £10 – more than enough to keep her out of the poorhouse.

The fund was an enormous success, not just because of the peace of mind it brought to ministers’ families but also because its careful design meant it was financially sound. Wallace and Webster had predicted that 20 years after its establishment, the fund would be worth £58,348. They were wrong: In fact it was worth, £58,347 – just £1 short of their forecast.

If only things were as straightforward today. The church fund existed at a time when – outside periods of disease and war – life expectancies changed little. That’s not the case now. In a typical wealthy country today, the life expectancy of a 65-year-old is rising by nearly two months every year.

Rising life expectancies are, of course, a good thing, but they do create problems for pension funds, most notably “longevity risk” – in other words, pension funds aren’t always taking sufficient account of just how much longer people are living. That’s due in part to the fact that they may be relying on outdated data that doesn’t improvements in life expectancy. According to a new OECD report, getting these estimates wrong can be costly: “Each additional year of life expectancy not provisioned for can be expected to add around 3-5% to current liabilities.”

Rising longevity is posing other problems for pensions, according to the OECD Pensions Outlook 2014, released today. In many countries, the rising share of retirees in the population will leave more people dependent on a shrinking share of workers. This imbalance will become much more evident as growing numbers of post-war baby-boomers reach retirement age.

There are other uncertainties, too, notably what Larry Summers (pdf) calls “secular stagnation” – a drawn-out period of economic sluggishness “characterized by low returns, low interest rates, and low growth”, says the Outlook. Meeting pension commitments against that backdrop could become quite a challenge.

How are governments responding? The Outlook reports that the pace of reforms has speeded up. Priorities have included raising the retirement age and linking benefits to expected rises in longevity as well as steps to strengthen the funding of private pensions. And to respond to rising public concern over private pension providers, there’s a growing focus on how the sector is regulated. Still, there’s no doubt that much more will need to be done if today’s future pensioners are to enjoy the peace of mind of those 18th century Scottish widows.

Useful links

OECD Pensions Outlook 2014 (OECD, 2014)

Mortality Assumptions and Longevity Risk (OECD, 2014)

OECD work on insurance and pensions

 

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