The emerging landscape of development finance: the Bourguignon perspective

Francois Bourguignon speaking in the Plenary Session

Francois Bourguignon

Is the global financial crisis at the heart of the emerging landscape of development finance? Francois Bourguignon, at the opening plenary of GDN’s Annual Conference, says not. Bourguignon, Director of the Paris School of Economics, speaking in the session ‘Financing Development in a Post-Crisis World: The New Agenda’ believes that the changes in the global economy had already been set in motion before the crisis. This was underpinned by a shift over time from a focus on the quantity to quality of development finance.

For many years, policy makers and academics talked about a two gap model, which saw development countries as lacking investable resources and foreign currency. The solution to this problem was seen as increasing foreign flows, and this led to a focus on North-South flows of finance.

The quantity of development finance is no longer seen as the primary restraint on development. Bourguignon was keen to point out that this shift is linked to the evolution of the global economy, and the acceleration of growth rates in the South.

Emerging Economies

In the majority of emerging economies, finance is not seen as a problem because of advances in international capital markets, countries and their financial sectors. It was also outlined how this situation has been enhanced by domestic saving rates, which have increased by around 3.5% since the 1970s in low and middle-income countries (increasing from 20% to 23.5%).

The challenges facing development finance is then very different from the past, and for many nations, sourcing development finance does not create the same headache as it used to. Bourguignon stresses that the issue that these countries must now tackle is the way that financial services are managed.

This covers a range of different factors. Effective financial regulation is important, but perhaps more relevant is the call to make finance available in more ‘development-effective ways’. This involves not only putting money in those sectors that offer the highest rate of return, but investing in those sectors where the social rate of return is the highest. Investing in small and medium-term enterprises which, on average, offer better employment opportunities is a good example. This kind of policy could help to overcome the issue of income distribution in many emerging economies, which currently tends to favour the more wealthy sections of society.

Perhaps one of the most difficult challenges faced by emerging economies is how to manage the variable cycles of growth that shape regional and global economies. Bourguignon believes that downward cycles, like the one faced in 2009, can hurt national economies in a permanent way and potentially place them in a poverty trap. Domestic and foreign finance is deemed as crucially important at times when there is a scarcity of funds.

Special pleading for Africa?

In the case of Africa, aid continues to be the most important financial flow, according to Bourguignon. This is primarily because these countries continue to find it difficult to access international financial markets. In such scenarios, potential drops in aid and aid effectiveness are profound. It is argued that it ought to be possible to compensate for a drop in the quantity of aid by focusing on its effectiveness.  This does not just mean directing aid through projects in an efficient way, but also managing the new multiplicity of donors to reach global objectives such as the MDGs.

There are numerous challenges here, but the emergence of new donors to Africa, such as China, means that Africa is not reliant on DAC donors. However, Bourguignon finished the discussion by warning of new challenges, which could put extra pressure on international donors: namely the urgent need to support climate change adaptation across Europe, which is expected to be the worst hit region by the effects of climate change. This has the potential to change the landscape of aid significantly.

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