The chang­ing face and na­ture of devel­op­ment fi­nanc­ing

Stabroek News Sunday - - LETTERS -


Some­times people do not think of things that they see or do, es­pe­cially when the oc­cur­rence be­comes rou­tine. This can also hap­pen be­tween coun­tries. One as­pect of the re­la­tion­ship be­tween coun­tries in the in­ter­na­tional com­mu­nity is the al­lo­ca­tion of re­sources be­tween them. De­spite the vast­ness of the planet, re­sources re­main scarce for a va­ri­ety of rea­sons. For ex­am­ple, in Guyana, the re­sources to de­ter­mine if oil ex­isted and to ex­tract it from the ground re­main scarce since Guyana does not pro­duce oil rigs and had no money to ac­quire them on its own.

The un­avail­abil­ity of oil ex­plo­ration skill sets is an ad­di­tional rea­son for the scarcity of oil in Guyana. In a global econ­omy dom­i­nated by mar­ket par­tic­i­pants, the al­lo­ca­tion of re­sources be­tween sov­er­eign states takes place through of­fi­cial flows, fi­nan­cial mar­kets, for­eign di­rect in­vest­ment and trade re­la­tions. Each set of fi­nan­cial flows can lead to changes in the economic wel­fare of coun­tries and, at an ag­gre­gate level, in­crease the wel­fare of the global econ­omy.

The amount of re­sources that a coun­try gets de­pends as much on its needs as on the type of re­la­tion­ship it has with rich and in­flu­en­tial donor coun­tries. The im­por­tance of some of th­ese re­la­tion­ships is mea­sured by geopo­lit­i­cal in­ter­ests, economic op­por­tu­ni­ties, fac­tor en­dow­ments and se­cu­rity vul­ner­a­bil­i­ties. Th­ese fac­tors do not carry the same weight for each coun­try with the re­sult that the al­lo­ca­tion of re­sources could be un­even. The un­even­ness in the al­lo­ca­tion of re­sources sets off a dis­course about devel­op­ment fi­nanc­ing, that el­e­ment of in­ter­na­tional fi­nan­cial flows that are sup­posed to help poorer and weaker coun­tries reach that mag­i­cal phase of pros­per­ity. One might won­der there­fore amidst all the known types of fi­nan­cial flows which one is typ­i­cally char­ac­ter­ized as devel­op­ment fi­nanc­ing and why. This ar­ti­cle seeks to dis­cuss that is­sue and other as­pects of the re­la­tion­ship per­tain­ing to devel­op­ment fi­nanc­ing.

A gap

Devel­op­ment fi­nanc­ing is a con­cept that refers to cash, ser­vices or in-kind con­tri­bu­tions ac­quired and used to in­crease economic op­por­tu­ni­ties in a coun­try. The need for fi­nanc­ing de­vel­ops when there is a gap be­tween re­quired and avail­able re­sources.

The gap be­tween in­vest­ments and sav­ings in de­vel­op­ing coun­tries is what gives rise to the need for ex­ter­nal fi­nanc­ing (devel­op­ment fi­nanc­ing). It stands to rea­son that, in most cases, th­ese coun­tries do not have suf­fi­cient rev­enues to fill this gap. Guyana has ben­e­fited from such gap-fill­ing flows, even though the amount re­ceived might not have met its to­tal needs.

At one time, all types of flows, grants, loans, ex­port cred­its, mixed cred­its, as­so­ci­ated fi­nance and pri­vate in­vest­ment were thrown into the devel­op­ment as­sis­tance pot.

Early in the life of the pro­vi­sion of devel­op­ment as­sis­tance, this pot­pourri of as­sis­tance pre­sented con­cep­tual and op­er­a­tional prob­lems. How­ever, de­vel­oped coun­tries which pro­vided large amounts of grant in their aid pack­ages called for a new mea­sure of devel­op­ment as­sis­tance. Emerg­ing as well at the same time were calls by de­vel­op­ing coun­tries, many of whom were fos­ter­ing a re­la­tion­ship from a new po­si­tion of sovereignty, for more con­ces­sional aid. After some de­bate, es­pe­cially among donors who are mem­bers of the Devel­op­ment As­sis­tance Com­mit­tee, a de­ci­sion was taken to clas­sify as­sis­tance pro­vided by th­ese coun­tries into three cat­e­gories. Th­ese cat­e­gories are of­fi­cial flows, other of­fi­cial flows and pri­vate flows. This clas­si­fi­ca­tion en­abled the sep­a­ra­tion of of­fi­cial flows from pri­vate flows.

Par­tic­u­lar iden­tity

While it could ap­ply to economic in­vest­ments in any coun­try, devel­op­ment fi­nanc­ing has a par­tic­u­lar iden­tity, use and pur­pose. Devel­op­ment fi­nanc­ing typ­i­cally is as­so­ci­ated with chang­ing the economic con­di­tions in de­vel­op­ing coun­tries through in­vest­ment in pub­lic, pri­vate and phil­an­thropic ini­tia­tives. It has economic growth as a goal, the low­er­ing of the unem­ploy­ment rate and lift­ing people out of poverty.

Devel­op­ment fi­nanc­ing there­fore car­ries with it an ex­pec­ta­tion that, if the re­sources re­ceived are in­vested prop­erly, un­der­de­vel­oped or poor com­mu­ni­ties will ex­pe­ri­ence change in their pro­duc­tive ca­pa­bil­ity and their ac­cess to ba­sic ser­vices, in­clud­ing health, san­i­ta­tion and ed­u­ca­tional ser­vices.

The fo­cus of devel­op­ment fi­nanc­ing then is both economic and so­cial. It dif­fers from other forms of cross-bor­der re­source flows which rely on mar­kets to achieve the re­source move­ment and which have profit as their mo­tive. For­eign di­rect in­vest­ment (FDI), for ex­am­ple, is achieved through the move­ment of eq­uity cap­i­tal across bor­ders. It re­sponds to op­por­tu­ni­ties that can in­crease the value of its share­hold­ers’ in­vest­ments.

FDI would lead to economic changes, but the dis­tri­bu­tion of its ben­e­fits could be very nar­row since its main pur­pose is to re­ward those who are will­ing to take risks with their money. Other fi­nan­cial flows like bonds (loans) can oc­cur through the use of cap­i­tal mar­kets. Ac­cess to such re­sources can come with a heavy debt-bur­den which could end up de­feat­ing the devel­op­ment ob­jec­tive.

Trade fi­nanc­ing

Trade fi­nanc­ing too is mar­ket ori­ented in that it seeks to en­sure that mar­ket trans­ac­tions for in­ter­me­di­ate and fi­nal con­sump­tion goods can be com­pleted. As such trade fi­nanc­ing in­volves bridg­ing the gap be­tween the time ex­porters wish to be paid and the time im­porters are will­ing to pay. In essence, it fa­cil­i­tates the re­al­lo­ca­tion of re­sources be­tween mar­ket par­tic­i­pants us­ing things like credit, pay­ment guar­an­tees and in­sur­ance to en­sure that the trans­ac­tion is fully con­sum­mated. In con­trast, devel­op­ment fi­nanc­ing, like flows through cap­i­tal mar­kets and FDI, fo­cuses on help­ing coun­tries with their cap­i­tal for­ma­tion, par­tic­u­larly that re­lat­ing to the creation or strength­en­ing of their in­fra­struc­ture, in­clud­ing those for giv­ing ac­cess to health­care, san­i­ta­tion, wa­ter and ed­u­ca­tional ser­vices.


For a very long time, one of the prin­ci­pal sources of devel­op­ment fi­nanc­ing was of­fi­cial devel­op­ment as­sis­tance or ODA. ODA is de­fined by its par­tic­i­pants as those flows that coun­tries and ter­ri­to­ries re­ceive from them di­rectly or through their con­tri­bu­tions to mul­ti­lat­eral lend­ing in­sti­tu­tions.

To qual­ify as ODA, the money has to be pro­vided by of­fi­cial agen­cies or through in­sti­tu­tions used by govern­men­tal units of donor coun­tries for the pur­pose of meet­ing the devel­op­ment needs of ben­e­fi­ciary coun­tries. Such as­sis­tance must have a con­ces­sional com­po­nent which must be either in the form of grants, or loans with very low in­ter­est rates and long re­pay­ment pe­ri­ods. Con­se­quently, loans that are pro­vided for a pe­riod of one year or less do not count as ODA.

Devel­op­ment fi­nanc­ing through of­fi­cial chan­nels has been tak­ing place for about 56 years.

At the time that the is­sue of ODA emerged, the ma­jor de­sire of the in­ter­na­tional com­mu­nity was to have de­vel­oped coun­tries trans­fer 0.7 per cent of their gross do­mes­tic prod­uct (GDP) to de­vel­op­ing coun­tries to help with devel­op­ment.

That has not hap­pened and was un­likely to hap­pen any­time soon. De­spite its long ex­is­tence, there is much dis­sat­is­fac­tion with ODA flows. While the as­sis­tance tar­gets de­vel­op­ing coun­tries, it pro­vides ben­e­fits for donors. Donors are able to send prod­ucts and ex­perts from

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