Op-Ed: ‘Financing Development in a Post-Crisis World: The Need for a Fresh Look’

By Gerardo della Paolera, GDN President and George Mavrotas, GDN Chief Economist.

Gerardo della Paolera, GDN President

Gerardo della Paolera, GDN President

In the shadow of the global financial crisis, development finance has an uncertain and challenging future. External capital flows are extremely volatile and are concentrating mainly in certain developing countries and emerging markets, private capital flows and remittances are in decline in the poorest countries in the world, while many donors are currently struggling to honour their aid commitments. Add to these, the growing complexity of the development finance ‘system’ and a new landscape in this area seems to have emerged.

GDN’s 12th Annual Conference, which takes place in January 2011 in Bogotá, aims to put the spotlight on this issue by bringing together some of the brightest minds to challenge and develop current thinking. Finding alternative and innovative sources of development finance is crucially important: there can be no slippage in the fight against poverty.

How did we get here?

Cracks began to emerge in the façade of the system that had defined development finance for over three decades, during the final years of the twentieth century. This system, underpinned by the Washington consensus and based on a mantra for stabilizing, privatizing, and liberalizing developing economies, was under attack. Economic instability in countries like Mexico, Thailand, Russia and Brazil highlighted the growing uncertainty and risk attached to this kind of openness.

George Mavrotas, GDN Chief Economist

George Mavrotas, GDN Chief Economist

The transition from the Clinton to the Bush administration brought about an abrupt change in the United States policy to the architecture of the IMF, underpinning this system. A shift highlighted through the abandonment of the ‘stand ready’ multilateral insurance scheme used in the past to help emerging economies weather economic uncertainty. The economic freefall in both Argentina (once considered the ‘darling’ of the IMF) and Turkey in 2001 were indicative of this decline and signalled the end of a regime.

The transition to a new world order was underlined when the US Treasury bailed out Wall Street’s bad loans to the tune of $700 billion. A low point captured by Martin Wolf, who declared: “Remember Friday March 14 2008; it was the day the dream of global free-market capitalism died”. The US had not applied those rules which had shaped the global economy under the Washington consensus for three decades.

Since this point, emerging countries have understood that they would most likely have to rely on global private markets and international reserves to tackle future uncertainty.

Which direction should we go in the future?

On this note, the South is much better placed to utilise domestic resource mobilisation than in the past due to more widespread economic liberalisation. Yet, domestic investment has been disappointingly low, the regulatory capacity of these newly liberalised economies lacking, and as a result there is little that protects the poor and encourages them to save.

In the micro-finance area, the Grameen bank and the pioneering work of Muhammad Yunus has shown that the poorest households are reliable bank customers. However, micro-finance schemes are increasingly under scrutiny due to high defaults on payments and excessively high interest rates. Pro-poor policies must help develop the capacity and regulation of such schemes and to fend off this kind of scrutiny. A well oiled domestic capital market is the basic foundation for more advanced growth within the global economy.

In the South Korea High Level Meeting in November 2010, world leaders recognized financial inclusion as one of the key pillars of the global development agenda and a new action plan in this crucial area was agreed, to be implemented via the Global Partnership for Financial Inclusion (GPFI). The GPFI will be an inclusive scheme for G20 and non-G20 countries thus allowing for developing country perspectives in the emerging policy agenda.

It’s now time to lift the lid on development finance, to explore as a cornerstone how solid domestic capital markets prevent instability and enable growth. We urgently need to find sound alternatives to the West for financial assistance and aid. Rather than continually relying on the USA and Europe, we need to understand the options, to challenge what we know about them, and bring new, creative thinking to the table.


A bigger role for the South

It’s apt that GDN’s annual conference 2011 conference takes place in Bogotá, on the back of the recent high level meeting in March on South-South cooperation. The South has a bigger role than ever to play, and its economic ‘powerhouses’ must meet the responsibility that comes with economic growth. It must also look to develop the same culture of philanthropy that exists in the West among its moneyed elites, not only to make up for the vacuum left by the financial crisis, but also to increase overall aid.

Innovation is needed and options are on the table to help make the financial system work for development, but having options on the table is not enough. We need to understand clearly the feasibility of the proposals, their overall potential and how these can promote growth and help bring people out of poverty. Universal agreement will not be found on the choices to be made. If the past has shown us anything it is that a flexible geometry is essential in making sure we make best use of the options available.

We want you to join us to unpack these challenges, to take a crucial step forward, at a critical time for the world’s poor. If you can’t be at the conference, follow the debate online, and have your own say. There will be more than 200 participants at this year’s conference, but the debate that takes shape needs to be heard across the globe to bring about change.



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One Response to Op-Ed: ‘Financing Development in a Post-Crisis World: The Need for a Fresh Look’

  1. I see a lot of interesting articles here. Bookmarked for future referrence.

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