Report on the Ministerial Meeting: Enhancing the Mobilization of Financial Resources for LDCs

REPORT ON THE MINISTERIAL MEETING: ENHANCING THE MOBILIZATION OF FINANCIAL RESOURCES FOR LEAST DEVELOPED COUNTRIES’ DEVELOPMENT Pre-Conference Event for the Fourth United Nations Conference on the Least Developed Countries

LISBON OCTOBER 2010

United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developed Countries and Small Island Developing States (UN-OHRLLS)

Partnership Against Poverty

UN LDC-IV

REPORT ON THE MINISTERIAL MEETING: ENHANCING THE MOBILIZATION OF FINANCIAL RESOURCES FOR LEAST DEVELOPED COUNTRIES’ DEVELOPMENT Pre-Conference Event for the Fourth United Nations Conference on the Least Developed Countries

LISBON OCTOBER 2010

United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developed Countries and Small Island Developing States (UN-OHRLLS)

Partnership Against Poverty

UN LDC-IV

TABLE OF CONTENTS

Introduction

2

Section I: Summary of the ministerial meeting

3

Section II: Background Papers » Global Governance and Stimulus Package for the LDCs

12

» Enhancing the Quality and Quantity of ODA for LDCs

24

» Tapping Innovative Sources of Finance Including Migrant Remittances for LDCs Development

34

» Effective Mobilization of Domestic Resources the LDCs

41

» Harnessing Private Capital Flow to LDCs

50

» Addressing the Debt Problems of the LDCs

60

INTRODUCTION

The Ministerial Meeting on “Enhancing the Mobilization of Financial Resources for Least Developed Countries’ Development” was held in Lisbon, Portugal, on 2nd and 3rd October 2010. It was coorganized by the Government of Portugal and the United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States (UN-OHRLLS). The Ministerial meeting, which involved the majority of least developed countries and several development partners, was attended by some 140 stakeholders of the Brussels Programme of Action, including member States, organizations of the United Nations system, relevant international and regional organizations, and civil society representatives.

Inaugurated by H. E. Mr. Luís Amado, Minister of State and Foreign Affairs of Portugal, the meeting was attended by more than 20 ministers and many senior officials from the participating countries. H. E. Mr. Cheick Sidi Diarra, Under-Secretary-General & High Representative and Secretary General of the Fourth UN Conference on LDCs delivered an opening statement. H.E. Mr. Gyan Chandra Acharya, Permanent Representative of Nepal to the United Nations and Chair of the global coordination bureau of LDCs also made a statement during the inauguration of the meeting.

The Interactive policy dialogue on “Enhancing the quantity and quality of ODA for LDCs, and addressing their debt problems” was co-chaired by H. E. Dr. Dipu Moni Nawaz, Foreign Minister of Bangladesh and H. E. Ms. Ruth Nankabirwa, Minister of State, Ministry of Finance, Planning and Economic Development of Uganda. The Interactive policy dialogue on “Harnessing private capital flows (FDI) to LDCs” was co-chaired by H. E. Mr. Thongloun Sisoulith, Deputy Prime Minister and Minister of Foreign Affairs of the Lao PDR. A key note speech was delivered by H. E. Ms. Soraya Rodríguez, Secretary of State for International Cooperation of Spain. The Interactive policy dialogue on “Effective mobilization of domestic resources by LDCs” was co-chaired by H. E. Mr. Peter Shanel Agovaka, Minister of Foreign Affairs and External Trade of Solomon Islands and H. E. Mr. Ahoéfa Dédé Ekoue, Minister in the Service of the President of the Republic of Togo in charge of Planning, Development and Management of the Territory. The Interactive policy dialogue on “Tapping innovative sources of finance, including migrant remittances for LDCs’ development” was co-chaired by H. E. Mr. Bakary Fofana, Minister of State for Foreign Affairs of Guinea and H.E. Mr. Zacarias Albano da Costa, Foreign Minister of Timor-Leste.

Concluding remarks and vote of thanks were given by H. E. Mr. Cheick Sidi Diarra, Under-SecretaryGeneral & High Representative and Secretary General of the 4th UN Conference on LDCs. The session was closed by H. E. Professor João Gomes Cravinho, Secretary of State for Foreign Affairs and Cooperation of Portugal.1

1

Documents related to the meeting are available at: https://www.un.org/wcm/content/site/ldc/home

2

SECTION I

SUMMARY OF THE MINISTERIAL MEETING Significance of the Ministerial Meeting The Meeting recognized the role of financial resources as one of the key elements of the Brussels Programme of Action (BPoA), which is critical to achieve sustained and inclusive economic growth, sustainable development, poverty eradication and gender equity. The main objective of the Meeting was to substantively address all issues related to the mobilization of financial resources for LDCs’ development including, ODA, FDI, debt relief, debt sustainability, global stimulus and crisis mitigation package, domestic resources, innovative sources of finance including migrants’ remittances. The Meeting also examined the international macroeconomic, monetary and financial systems related governance issues from the perspective of LDCs. Supporting development in the world’s poorest and most vulnerable countries is both a moral and ethical imperative. It is not simply a matter of providing charity to the LDCs but recognizing the important contributions they can provide to overcome many challenges on the international agenda.

Thus the political economy dimension of the importance of LDCs and their wellbeing for the purpose of global security, progress and sustainable development in the context of rapidly changing world needs to be taken into account.

The LDCs represent a paradox because, on the one hand, they suffer from acute poverty and hunger, low levels of human development, structural rigidities to growth and therefore need and deserve the assistance of the international community. On the other hand, they represent hope for the entire humanity as many of them are endowed with abundant natural resources, huge capacities for generating clean energy, and young, dynamic populations.

Assisting the LDCs to realise their development potentials will increase supply and demand for the world economy leading to higher global economic growth and prosperity. Conversely, neglecting the LDCs could see more environmental degradation, uncontrolled immigration and even an increase in acts of terrorism in some cases. A genuine partnership against poverty, a partnership for prosperity, is needed to unlock this huge potential.

Resources for investment in most LDCs are predominantly foreign especially ODA, FDI and remittances. Despite significant efforts to mobilize domestic resources and attract more private capital inflows, there is still a huge savings-investment gap in most LDCs. Their domestic savings stagnated around 13 percent of their GDP. Thus LDCs development needs far exceed the availability of resources. Despite significant domestic reforms there is still a huge resource of around $150–$300 billion. This is acerbated by negative flow of resources from LDCs through trade deficits, FDI profit transfers, debt repayment etc.

The high dependence of LDCs on external resources limits their policy space and creates dependency, as has become evident during the economic and financial crisis. Their economic vulnerability is further exacerbated by indebtedness, which remains a challenge despite major write-offs in the recent past, especially since global interest rates are expected to increase in upcoming years. In a similar vein, many LDCs run large deficits in the current and trade accounts, financed by official grants and loans. Even a small reversal in external capital flows may therefore cause domestic contraction. In a new Programme of Action a successful partnership in the area of resource mobilization can catalyze success in other areas. If it is accompanied by good governance at the national and international level it can bring about better synergies between domestic and external resources and contribute to crisis mitigation and resilience building.

The following recommendations have emerged from the discussions at the ministerial meeting, based on the six background papers which had been prepared by UN-OHRLLS, and they will provide inputs for the Fourth UN Conference on LDCs. 3

SECTION I

Effective mobilization of domestic resources by LDCs Domestic savings have a critical role to play in financing development. They are needed to provide resources for investment, boost financial market development, and stimulate economic growth. At the same time broad based growth is a precondition for increased domestic resource mobilisation constituting a virtuous cycle.

Yet, most LDCs have difficulties mobilizing adequate domestic resources to meet their investment needs. This is mainly due to the predominance of subsistence activities which barely generate enough resources to meet basic social needs and to cope with the overall high levels of poverty, with extreme poverty exceeding 50 percent on average in LDCs. Mobilizing domestic resources will help reduce vulnerability arising from dependence on fragile external income. Domestic resource mobilization provides the only viable long-term financing basis for development. One of the development dividends of effective tax systems is greater ownership of the development process, whereby the government shapes an environment that is more conducive to foreign and domestic private investment, sustainable use of debt and effective foreign aid.

The BPoA recognizes that the most important financing of development comes from domestic resources. Specifically it calls for the promotion and enhancement of effective measures, including fiscal and financial sector reforms for better domestic resource mobilization.

The most effective way of increasing public revenue is through policies that increase government revenue through sustained economic growth. Any increases in taxation should ideally be growth-neutral, without harming the already weak private sector in many LDCs. In designing tax policy, LDCs should aim to broaden the tax base and administer a broader range of taxes in order to minimize economic distortions. Reducing tax exemptions, raising VAT rates on luxury consumption items, and extending property taxes would help make the general tax structure more progressive. Ways to integrate the informal sector in the domestic economy and to tax some activities should also be explored.

Increased effectiveness in tax administration requires that tax authorities are endowed with greater capacity to follow up and sanction tax evasion, for instance by granting them more autonomy. Likewise information campaigns can be used to explain the relationship between tax policies and spending for priority sectors. Implementing advanced IT systems will help boost analytical capacities of tax administrations as well as making it easier to pay taxes through e-filing.

The deepening of capital markets is crucial for more private investment as well as for public borrowing for long-term investment. Thus LDCs need to improve regulation of capital markets, expand the portfolio of savings and investment products available and improve information systems, which can help reduce the risk and uncertainty of lending and investing. Expanding the provision of microcredit and -savings, micro-insurance, venture capital and long term financing would help provide the products best suited for the needs of savers and investors in LDCs. Especially the re-establishment of development banks, rural and agricultural banks and other institutions, which fill the gaps in service provision, needs to be pursued to foster private investment in crucial areas. The increasing use of technological tools, such as mobile phone banking, as well as the promotion of regional equity markets could also reduce costs for financial services and increase access to credit.

The role of small and medium enterprises for private sector development needs to be recognised and supported more. SMEs not only need better access to credit and markets but are also crucial partners when it comes to the design of pro-poor growth strategies that focus on employment generation, increasing productivity and value addition.

4

SECTION I

While some degree of macroeconomic stabilisation is beneficial for long-term investment and growth very low inflation rates should not always be the sole aim of monetary policies. LDCs should also aim at ensuring moderately low real rates of interest and enhanced supply of credit to stimulate private investment.

Development partners should support LDCs in their efforts to raise domestic resources through revenue generation and capital market developments. Thus it is important to direct ODA more towards building the capacities of LDCs to mobilize domestic sources of development finance.

Enhancing the quantity and quality of ODA for LDCs, and addressing their debt problems Official Development Assistance is critically important for LDCs to meet their development needs. In the BPoA, donor countries made a commitment that they would provide 0.15-0.20 percent of their GNP as ODA to LDCs but up to 2008 only 0.09 percent were provided by DAC donors. Within LDCs the allocation of ODA per capita is very unequal.

Debt service takes up a large part of scarce budgetary resources that could be directed to productive and social sectors, and the debt overhang harms the internal and external investment climate. The total external debt of 45 LDCs for which data is available stands at US$155 billion in 2008. Despite significant debt relief under HIPC and MDRI, the total debt service burden of LDCs reached US$6.03 billion. On average LDCs have debt ratios about 50 percent higher than the overall developing country average.

The BPoA calls upon the LDCs to initiate joint actions with their development partners, including a comprehensive assessment of their debt problems and debt sustainability and to intensify efforts to improve debt management capability. The BPoA also calls on the development partners to effectively implementing the enhanced HIPC Initiative and to make expeditious progress towards full cancellation of outstanding official bilateral debt. Development partners should also consider debt relief measures for LDCs which are not HIPCs. Furthermore the Non-Paris Club official creditors need to be encouraged to participate in debt relief measures to assist LDCs. Finally the issue of illegitimate debt needs to be tackled.

The DAC donors should set concrete time plans to fulfil their ODA commitments of 0.15-0.2 percent of GNI to LDCs as soon as possible. Donor countries and other developing countries, which are in a position to do so, should set progressive quantitative targets based on needs assessments in LDCs. Furthermore LDCs need more access to highly concessional funds and grants if they are to meet their essential spending needs and respond in a counter-cyclical way to the global economic crisis without getting back into debt distress.

There is the risk that the increasing focus of ODA allocation on performance, e.g. in the concept of “cash on delivery” or “results-based financing”, will result in a lower share of ODA allocated to LDCs as their institutions are weak and thus effects of ODA are likely to take longer to materialize.

Thus the allocation of ODA towards individual countries should also take into account their financing needs and vulnerability. This is particularly true for those LDCs facing fragile situations steaming from weak State structures and security concerns, for which a new approach is therefore required.

Aid for Trade (AfT) can help LDCs to build trade-related infrastructures and trade competitiveness, including at the sectoral level. A substantial increase in aid for trade is needed for LDCs to support national reform programmes and initiatives aimed at enhancing LDCs trade performance and structural transformation. Faster progress in granting duty free quota free market access for all products from all LDCs without overly restrictive rules of origin, as agreed in the 2005 Hong Kong Declaration, will complement increased AfT. 5

SECTION I

Funds of the multilateral development banks need to be replenished as well as contributions to the UN agencies, funds and programmes increased, to better enable them to support country level efforts particularly in addressing the impacts of multiple global crises in LDCs. With respect to aid quality the implementation of the Paris declaration and Accra Agenda for increasing aid effectiveness which includes issues of ownership and leadership, predictability, mutual accountability and transparency, conditionality, and earmarking of aid, needs to speed up.

Specifically with respect to untying ODA, strengthening country ownership e.g. by aligning ODA with recipient country’s own development strategies and plans, and increased use of LDCs own systems—for procurement, financial management, and environmental and social safeguards—more progress is needed. The concept of aid effectiveness should be broadened to capture all aspects of development effectiveness in the future.

To increase aid predictability donors should provide reliable indicative estimates of disbursements and commitments within the year and over a multi-year framework. Although donors have taken steps to increase flexibility of aid in recent years by providing more budget support and improving various soft loan windows in the IMF and World Bank for countering shocks, more needs to be done to allow for policy space in LDCs, including a further reduction of the conditionality of ODA. Donor fragmentation continues to be a problem at the country level, especially in LDCs, because of their aid dependency, as well as large numbers of donors and projects. Collaboration and coordination among donors and between donor and recipients is therefore critical, to increase the quality of aid. There is scope to further develop and build commitment to the concept of mutual accountability—at global and regional, as well as at national levels. Existing platforms like the United Nations ECOSOC Development Cooperation Forum (DCF) should be strengthened and stronger accountability measures should be included in a renewed partnership for LDCs including non-DAC providers.

Debt relief for LDCs needs to continue. Continued and increased access to concessional financing is required to maintain debt sustainability beyond the completion point. In light of the negative consequences of the global economic and financial crisis, efforts should be made to ensure that all eligible countries benefit from debt relief under the Heavily Indebted Poor Countries and Multilateral Debt Reduction Initiatives. Creditors should consider the possible extension of the sunset clause following adaptation of criteria and clauses for the potential inclusion of new countries. Debt swaps that will increase investment in LDCs should also be used whenever possible.

The terms and high costs entailed in debt work-outs, need to be revisited. It is important to devise institutions and policies that can reduce the costs of defaults and increase access to credit and reduce the overall costs of borrowing. The composition of debt of LDCs needs to better reflect their potential for repayments. Safer debt instruments that could reduce the risks of sovereign borrowing include domestic currency debt, long-term debt and debt contracts which require payments that are linked to the borrower’s ability to pay. Some delegations referred that GDP-indexed bonds could thus be further explored. International financial institutions could switch to a system in which they borrow and lend in the currencies of their client countries and hence help the development process with both their assets, through local currency loans and their liabilities, by helping to develop the international market for bonds in the currencies of LDCs.

Tapping innovative sources of finance, including migrant remittances for LDCs development Participants noted that to fill the resource gap of LDCs it is necessary to mobilize new and innovative sources of finance, which should be additional, substantial, predictable, and disbursed in a manner that respects the priorities and special needs of LDCs. 6

SECTION I

One example that has been supported by several member states including Portugal is a currency transaction tax. It has the potential of raising revenue and it is technically feasible without adversely affecting financial markets. Such additional funds need to be allocated to LDCs as the countries which are most vulnerable to external shocks and natural disasters and have very limited access to financial markets. New funds dedicated to the development of LDCs, which could be financed by international taxes or levies, need to ensure democratic decision-making by various stakeholders.

Furthermore, access to the Fund must be easy in terms of procedures. To make such taxes a reality strong political commitment is needed.

To facilitate remittances transfers, home and host countries should establish measures to lower transaction costs, through improved technology, in particular in the area of mobile phones and e-transfers; through improved regulation, e.g. removing restrictions on outward remittances in the source country and removing taxation on remittances repatriated. Home countries can support access to formal remittances transfer channels by improving overall populations’ access to financial and banking services.

To make the most out of remittances it would be desirable to channel a larger share into productive use and private sector development activities. In order to foster this approach co-development schemes should be explored. National and local authorities in home and host countries could provide investment information in business areas of interest to migrants and their families. Home and host countries should foster the development of formal financial systems which would facilitate the integration of remittance senders and recipients into the banking system and thus increase their potential savings and investments. For remittances which are invested in local development projects recipient and donor countries could develop incentive schemes, e.g. with matching grants.

Migrant policies also need to be improved in home and destination countries to ensure human rights for all migrants and prevent trafficking and other harmful treatment. Migrant organisations can be partners for the dissemination of information and can also be involved in the co-development schemes mentioned above.

Other innovative instruments related to climate change were also referred to, such as the Clean Development Mechanism and climate funds, which should be targeted and made more accessible to LDCs. The meeting took note of the announcement of the Republic of Guinea to organise an African Conference on Strategies for the Mobilisation of Innovative Sources of Finance at which these issues will be further discussed.

Harnessing private capital flows to LDCs Foreign direct investment (FDI) has been the most rapidly increasing resource flow to LDCs over the past decade. In addition, the source of FDI has shifted from predominantly developed countries to a majority of investments from developing and transition countries. Despite these developments the total share of FDI to LDCs in global FDI remains below 2 percent. Furthermore many investments are concentrated in a small number of LDCs and have focused on resource extraction, which do not fully release the potential for developmental progress that FDI could deliver.

The BPoA recognises the role of foreign direct investment as an important source of capital, knowhow, employment and trade opportunities for LDCs. It states: “A paramount objective of the actions

by LDCs and their development partners should be to continue to strengthen productive capacities by overcoming structural constraints. Access to finance by way of domestic resource mobilization, foreign direct investment and increased ODA resources will be critical in this regard.� However

7

SECTION I

despite considerable efforts the goal to increase the ratio of investment to GDP to 25 percent per annum could not be reached. Thus there is an urgent need to develop new strategies to attract FDI to LDCs in order to increase productive capacities and foster structural transformation.

LDCs need to attract more FDI given their large gaps in financing for infrastructure and productive capacity. They should create an enabling policy and regulatory framework that is required for attracting domestic and foreign investment and establish support policies for sectors central to their development process including agriculture. Specifically LDCs should encourage FDI including through public private partnerships in infrastructure, including transport, communication and energy.

Measures to increase knowledge transfer and skill development from FDI should be developed.

A special focus on vocational education in partnership with foreign enterprises could increase the pool of people with scarce technical and managerial skills needed for entrepreneurship.

LDC governments should formulate an integrated strategic policy and regulatory framework for FDI in agricultural production. This should include vital policy areas such as infrastructure development, competition, trade and trade facilitation, and R&D. Governments could also promote contract farming between TNCs and local farmers which could enhance farmers’ predictable income, productive capacities and benefits from global value chains. In order to address some concerns related to the recent increase of FDI in agriculture a set of core principles is being developed by FAO, IFAD, UNCTAD and the World Bank. These principles need to be implemented jointly by host and home countries. To ensure food security in host countries as a result of export-oriented FDI in food production, home and host countries could consider output-sharing arrangements.

International support measures including market access and ODA should be designed in a way to encourage FDI in all LDCs in priority sectors, including in labour intensive manufacturing.

Specifically ODA for technical capacity of domestic firms would enable them to partner with foreign investors. In this respect multilateral agencies which support FDI in LDCs need to be strengthened.

Outward investment promotion strategies should be directed at fostering a lasting impact of the investments for LDCs development. Thus development partners should adopt an investment preference regime to encourage their corporations to invest in infrastructure and productive capacity in LDCs. These incentives could take various forms including tax exemptions for firms that invest in priority sectors in LDCs, investment guarantees and credit risk guarantees, inclusion of productive capacity and infrastructure related provisions in International Investment Agreements (IIAs), dissemination of information about investment opportunities in LDCs to suitable home country firms and encouragement of Multinationals to disclose corporate information about their investments in LDCs. Such incentives need to be further developed in close cooperation between home and host countries.

Global economic governance and stimulus package for LDCs Over the past decades global economic integration has outpaced the development of appropriate political institutions and arrangements for governance of the global economic system. The current system therefore has not been able to yield the results that originally were envisioned. The effectiveness and credibility of the international financial institutions especially their development impact have been adversely affected by deficiencies in their governance. This has been highlighted by the inadequate responses to the global financial and economic crises. While the G20 has successfully stopped the spread of the financial crisis progress towards establishing new governance structures including better regulation of financial markets has been very slow.

The BPoA underlined that governance issues at the international level including multilateral policy and regulatory issues and international economic decision-making processes that affect LDCs’ development, including issues of their effective participation, should be addressed.

8

SECTION I

The rapid spread of the financial crisis has demonstrated the need for more surveillance at the global level. The focus of such a surveillance mechanism should be on the stability of the system as a whole, particularly on the spill-over effects of macroeconomic and financial policies of the larger economies on other countries. Likewise a reform of the current international reserve system should be considered.

In order to properly address LDC issues the voice of LDCs in international decision making needs to be increased. Any future governance format must ensure inclusiveness and adequate representation not only of developing countries, but particularly LDCs, and promote complementarily and coherence. This includes voting rights in the IMF and the IBRD as well as representation at other international organisations. While the invitation of two LDCs to the next G20 meeting by the Republic of South Korea was welcomed, a more institutionalised approach was suggested, especially given the expansion of the agenda of the G20 including development and other issues of crucial importance for LDCs. Achieving more sustainable and balanced global growth requires close coordination of macroeconomic policy decisions with other areas of global governance, including those related to the multilateral trading system, aid architecture, poverty eradication and sustainable development agenda including climate change. The United Nations, given its universal membership on the basis of sovereign equality, can effectively contribute to addressing the pressing needs of the world today. It should play a central coordinating role in achieving greater coherence among different actors.

All international and regional organisations of relevance for LDCs, including the IMF and the World Bank and regional development banks, should recognize LDCs as the most vulnerable group of countries, as identified by the UN. This would facilitate the dedication of special financial and technical support measures in favour of LDCs. The growing development needs of LDCs as well as the multiple global crises require a global stimulus package for LDCs, not only to undertake stimulus measures, but to build resilience against any future crisis and shock. It was suggested that the international community might consider creating a special “crisis mitigation and resilience building (CMRB) fund for LDCs to enable them to respond to various kinds of shocks. An initial value of US$100 billion could be provisioned for this new initiative through a special allocation of SDRs, additional ODA, and from innovative sources of finance. Furthermore, the establishment of a “global financial safety net� for LDCs on a permanent basis that could make a major contribution to their socio-economic development was also suggested.

Cross-cutting issues LDCs need to strengthen their domestic institutions, policy processes and systems for managing financial resources including external resources. LDCs and their development partners should increase their efforts for capacity building in several areas related to the mobilisation of financial resources, including the capacity for revenue collection, debt management, use of ODA and use of remittances for development purposes. The development capacity of LDCs needs to be enhanced by building necessary institutional and human capacities. This is especially important for LDCs with situations of fragility stemming from weak State structures and security problems, which compound their difficulties, and underline the importance of identifying appropriate mechanisms for special, differentiated and long-term engagement.

As employment creation is one of the most important priorities of LDCs all resource flows discussed should be channelled in a way to maximise their impact on employment. In this respect more support for higher education and technology as a precondition for domestic and foreign investment in higher value added production and modern services is warranted.

9

SECTION I

Resource flows are also related to gender issues. For example, the migration of women has a strong impact on their access to resources and access to credit for women, which is crucial for their contribution to development. Thus, the effects that the different measures discussed during the meeting will have on women need to be assessed before policies are designed and access of women to financial resources needs to be actively promoted.

Data are lacking or are of low quality for many issues important to LDCs including debt structure, remittances, domestic lending and sources of taxation. To improve policy analysis in these areas increased capacity and resources for timely data collection need to be developed with support from development partners.

While some macroeconomic stability is crucial for the mobilisation of domestic resources, attraction of FDI managing debt more focus on pro-poor policies might be needed. LDCs, with the support of their development partners, should strengthen their macroeconomic policy buffers and enhance their shock absorbers to prepare themselves against future shocks and volatility.

Furthermore it is important for LDC governments to institute some forms of management of the capital account in order to safeguard the resources for development, including the reduction of capital flight. To reverse and prevent capital flight a more transparent international financial system and concrete measures to repatriate LDC assets from abroad are needed.

As stated in the Monterrey Consensus the coherence and consistency of the international monetary, financial, and trading systems needs to be enhanced to ensure that they support the internationally agreed upon development goals, including social and environmental sustainability. Specifically there is a need to ensure that the specific needs and challenges facing LDCs are taken into account in all policy domains including economic and trade policies, in environment policy including climate change, and in some cases even in the fields of security and defense policy.

In all the areas discussed the role of developing country partners for resource mobilisation for LDCs needs to be explored further building on positive developments over the past decade. Especially their contribution for capacity building and technology transfer needs to be harnessed. As emerging economies often use a combined approach for FDI, trade and financial support there is scope for mutual learning for example through triangular cooperation. In this context the announcement of India to host a pre-conference event on South-South cooperation in early 2011 was welcomed by participants.

While the BPoA includes almost all areas of importance to LDCs the implementation of many of the commitments is incomplete and the implementation and monitoring mechanisms are perceived as weak. Thus the mechanisms for monitoring the implementation of a new programme of Action need to be improved focusing not only on goals and targets but also on commitments of LDCs and their development partners.

Towards the Fourth UN Conference on LDCs To develop a new Programme of Action for LDCs for the next decade, it is important to undertake a comprehensive assessment of short- as well as long-term financial needs in LDCs as well as of the implementation gaps in the BPoA in the area of resource mobilisation. As resource mobilisation is a precondition for all other priorities a renewed commitment in this area is needed.

In the lead-up to the UN LDC IV Conference the recommendations of this meeting need to be transformed into policy proposals and deliverables. As aid is the strongest manifestation of global solidarity in a new Programme of Action a new generation of international support measures is needed. ‘Business as usual� is not an option.

10

SECTION I

Thus it is crucial to mobilise political support at all levels to improve resource mobilisation for LDCs’ development in order to further develop the proposals discussed in Lisbon. In this respect it is also crucial to put the LDC specific issues on the agendas of relevant fora including the G-20 meetings, climate change negotiations and other international conferences.

11

SECTION II

Background Papers GLOBAL ECONOMIC GOVERNANCE AND STIMULUS PACKAGE FOR THE LEAST DEVELOPED COUNTRIES (LDCs) Introduction The world economy is experiencing its most profound transformation since the industrial revolution 200 years ago. Over the years, global economic integration has outpaced the development of appropriate political institutions and arrangements for governance of the global economic system.

The current system therefore has not been able to yield the results that originally were envisioned.

Furthermore, the global financial crisis has proven that the world is facing serious lack of appropriate institutional frameworks to manage development and rapid economic and financial liberalization, deregulation and globalization. The effectiveness and credibility of the international financial institutions especially their development impact have been adversely affected by deficiencies in their governance.

There has been growing inconsistency between the economic and financial weight of developing countries including LDCs in the world economy and their share of quota and voting power and access to resources in IMF and the World Bank. This is one of the important underlying factors behind the loss of credibility of those organizations in addressing systemic issues. There is an urgent need to reform the international monetary and financial system to ensure that it is more inclusive and equitable and thus to enable them to create more effective and credible global economic governance.

LDCs, who are marginalized in the financial, monetary & economic governance structure are the most affected and vulnerable to the impacts of the policy decisions adopted there. They are also most exposed and least equipped to cope with the crises and shocks.

The Brussels Programme of Action underlined that the governance issues at the international level and international economic decision-making processes that affect LDCs’ development, including issues of their effective participation, should be addressed. Multilateral policy and regulatory issues that affect LDCs’ development efforts should also be addressed. The circumstances and interests of LDCs should be taken fully into account in multilateral institutions and processes.

Recognition of LDCs as a special category by BWIs The least developed countries, representing the most vulnerable countries of the world, is a wellestablished category in the United Nations System, WTO and many other international organizations. However, this group is not recognized in the BWIs. The United Nations Committee for Development Policy, consisting of a group of independent experts, is responsible for inclusion and graduation of a country in the list of LDCs based on a scientifically pre-determined set of criteria that comprise economic, social and environmental aspects of a country. The Ministerial Meeting of the least developed countries, held on the sidelines of the 65th UNGA, has invited the BWIs, regional banks and all other relevant international and regional organizations to recognize LDCs as the most vulnerable group of countries, as identified by the UN. They have also requested the BWIs to dedicate special financial and technical support measures in favour of LDCs. It may therefore be considered that the allocation of resources from the soft-loan windows of the BWIs2, should be based on UN’s vulnerability index developed for LDCs.

2 The International Development Association (IDA) of the World Bank and Rapid Credit Facility (RCF), Extended Credit Facility (ECF), The Standby Credit Facility (SCF) of IMF.

12

SECTION II

Representation of LDCs in the IMF LDCs are hugely underrepresented in the decision making process of IMF. In total, 49 LDCs have 5.11 billion SDR allocations, which is only 2.88 percent of the total quota allocation of IMF. In terms of voting rights, jointly LDCs have 64,669 votes which is only 2.92 percent of total IMF votes (see annex-I). The voice and representation of LDCs, which now represent more than one-fourth of the total membership and around thirteen percent of the global population, should be significantly enhanced. It is imperative that reform of the existing institutions should re-establish their credibility as truly international institutions contributing to growth with equity and stability for all countries.

Any future governance format must ensure inclusiveness and adequate representation of developing countries, particularly least-developed countries (LDCs), and promote complementarity and coherence.

Basic votes in the IMF Strengthening the voting weight of developing and least developed countries can be done by increasing quotas or by further increasing the share of basic votes. When the IMF was established in 1944, each of the 44 members had 250 basic votes, which presented 11.3 percent of total voting power. Over the years, quotas have increased which has resulted in the falling of basic votes significantly and reached its lowest to 2.1 percent of total voting power for 184 members in the mid-2000s. The April 2008 decision taken by the IMF Board of Governors to reverse this trend by tripling basic votes only increased the total share of basic votes to 5.5 percent of current voting power, which falls far short of restoring the initial share.

The reform of IMF, based on the decision of its Board of Governors of 2006 and 2008, have resulted in modest progress in addressing the under-representation of developing countries. Quota reform has been done on an ad-hoc basis, first in 2006 for a small group of emerging market countries and in April 2008 for the larger membership.

General and Special SDR Allocations A general allocation of Special Drawing Rights (SDRs) equivalent to about US$250 billion became effective on August 28, 2009. The allocation is designed to provide liquidity to the global economic system by supplementing the Fund’s member countries’ foreign exchange reserves. The general SDR allocation was made in proportion to their existing quotas in the Fund, which are based broadly on their relative size in the global economy. Separately, the Fourth Amendment to the IMF Articles of Agreement providing for a special one-time allocation of SDRs entered into force on August 10, 2009. The special allocation was made to IMF members on September 9, 2009. The total of SDRs created under the special allocation was SDR 21.5 billion3. Though the general and special SDR allocations led to change the balance marginally in favour of developing countries, it failed to shift significantly the balance of power between developed and developing countries.

General and Special SDR Allocations for LDCs Before the reform, the cumulative SDR allocation for LDCs was 1.47 billion, which was 6.86 percent of the total global allocation. Out of $250.00 general allocation, which became effective on 8 August 2009, LDCs got only 3.89 billion and from special SDR allocation of 21.5 billion,

3

13

IMF website, updated September 9, 2010, http://www.imf.org/external/np/tre/sdr/proposal/2009/0709.htm

SECTION II

LDCs got 464 million. After this reform, the cumulative SDR allocation for 48 LDCs (for which data is available) is 5.22 billion against the total cumulative global allocation of 204.07 billion. LDCs share is 2.56 percent of the total global allocation (See Annex-II). Though the new formula has increased the SDR allocation of LDCs from 1.47 billion to 5.22 billion, in percentage terms, LDCs share has fallen from 6.86 to 2.56 percent. In fact, the new formula actually shifts voting weight to industrial countries at the expense of other developing and least developed countries. It is therefore important to undertake a comprehensive reform with improved quota formula or alternative procedural reforms to ensure adequate representation of LDCs.

Double Majority voting The double majority voting-85 percent of voting power and a 60 percent majority of members – which is required for amendment of the Articles of Agreement of IMF, can be applied for important policy decisions and approval of access to lending operations. Such an approach can offset, to some extent, the voting imbalances at IMF.

Reform of the World Bank (IBRD) The World Bank Group (WBG) Shareholders agreed in the fall of 2008 to undertake a two-phase package of reforms to enhance Developing and Transition Economies (DTC) voice and participation. The Phase I of the World Bank’s voice reform was agreed by members in 2008 and is currently in implementation process, by which voting power of DTCs in the International Bank for Reconstruction and Development (IBRD) has been increased from 42.6 percent to 44.1 percent, by increasing Basic Votes to 5.55 percent of total votes. Importantly, the Phase I reform adds an elected Executive Director for Sub-Saharan Africa (SSA) on the WBG Boards. The proposal for phase II package to increase the voice and participation of developing and transition countries is on board4.

It has been noted that a large number of DTCs would be negatively affected by the proposed package, in part because it does not take into account the contributions of DTCs to the Bank’s development mandate5.

Voting Power of LDCs in the IBRD For 48 least developed countries6, together had only 3.82 percent share of the total IBRD voting power. Phase I of the voice reforms has increased this share up to 4.43 percent. However, the proposed Phase-II package, which would increase voice of the developing and transition economies as a whole by 3.1 percent, would reduce voting rights of LDCs from 4.43 percent to 4.36 percent. It is important to ascertain that LDCs are not negatively affected by any reform measure. Given their number, size of population and the severity of challenges that this group face, LDCs voice should be increased further to ensure that LDCs are effectively represented and they get the opportunity to voice their concerns.

4

(World Bank Group voice reform: enhancing voice and participation of developing and transition countries in 2010 and beyond)

5

G-24 Communiqué 22 April 2010) http://www.g24.org/04-10ENG.pdf

6

Data is not available for Tuvalu

14

SECTION II

Multilateral Surveillance The importance of multilateral surveillance and the associated process of policy coordination can not be overstated. Surveillance should pay special attention to those countries and sectors that are systemically important. The IMF should further strengthen its surveillance activities for all economies.

However, the focus of the surveillance should be on the stability of the system as a whole, particularly on the spill-over impact of macroeconomic and financial policies of the larger economies on other countries. It would require more rigorous surveillance over systemically important countries issuing major reserve currencies.

Global reserve system The need to explore options for reform of the international monetary system, especially reserve system, currently based on virtually one national currency, is now broadly recognized. It is generally agreed that the long-term issue of moving towards a more diversified, balanced and stable international reserve system, including an enhanced role for SDRs, should be kept under consideration.

Reform of the current international reserve system should be part of a broader framework. It is not likely that any feasible change would bring about smooth and automatic balance of payment adjustment. Therefore, along with moving towards a greater variety of reserve options, further progress in dialogue and cooperation aimed at more balanced and sustainable global growth, will remain indispensable7.

Enhancing resources of the international organizations International financial institutions and the UN agencies should have adequate financial resources to enable them to provide counter-cyclical financing to least developed countries. They should be provided with non-earmarked funding with long-term predictability. An ambitious IDA-16 replenishment8 with the support of all donors including emerging economies is important to enable it to support the growing needs of developing and least developed countries.

Reform of the Basel Committee and Financial Stability Board A large number of global standards and codes, which are meant for global financial regulation, are being formulated outside multilateral system. The institutions can be made more representative and accountable to adequately reflect the views of and the conditions in developing countries including LDCs. Most developing countries are not represented in today’s standard-setting institutions. This is important to create standard setting institutions with universal membership that takes in to account the challenges of all countries particularly the least developed countries. This can result in better regulation leading to a more stable global financial system with welfare-enhancing effects for all.

The Basel Committee of the Bank for International Settlements (BIS) and Financial Stability Board (FSB) set important global economic standards in areas such as data dissemination, bank supervision, financial regulation, and corporate governance. Insufficient representation of developing countries in these ad-hoc bodies has made their analyses and recommendations incomplete and biased in a number of important aspects. Different countries are at different levels of development with varying financial and institutional capacities. This is probably the reason that poses major obstacle to universal and effective implementation of these instruments.

15

7

Report of the Secretary General on FFD for 65th UNGA, advanced unedited version.

8

16th round replenishment of International Development Association (IDA), the soft-lending arm of the World Bank

SECTION II

Reforms in the Financial Stability Board (FSB) by addressing deficiencies in its governance, mandate, and economic perspectives, can make it more effective. The initial move to strengthen and reform the Financial Stability Board (FSB), as agreed at the April 2009 G-20 Summit, is an important initial step towards establishing much more representative, appropriate, and effective financial regulation at both national and international levels. The proposed widening of the membership is, for instance, necessary if there is to be international confidence in the FSBs effectiveness and balance, but governance and participation reforms have not gone far enough. It’s membership needs to be widened with the participation of developing and least developed countries to make it more inclusive and representative.

A major step in the financial regulation and supervision reform process is the modification of the Basel II framework for capital and liquidity regulation, whose gradual implementation is expected to start at the end of 2012. The modified framework envisages the rise in the level, quality, consistency and transparency of the bank capital; the introduction of counter-cyclical capital buffers; and the establishment of mandatory leverage ratio, i.e. a cap on the amount of assets a bank can have in relation to its equity. There have been, however, some concerns that the final version of international bank standards will be based on the lowest common denominator.

Representation of LDCs in the G-20 The G-20 has already taken a number of important decisions in relation to global macroeconomic policies, fiscal expansion and financial regulations. However, since the majority of UN Member States are excluded, it should forge stronger institutional linkages with other States and develops constructive dialogue with the United Nations, to ensure that the views and concerns of all countries, be taken into account. Since, LDCs constitute the most vulnerable group of countries, their active voice and participation in the G-20 process can add real value to their policies and programmes. The Ministerial Meeting of LDCs held on the sidelines of the 65th session of the UNGA calls upon the G-20 countries to ensure voice and participation of LDCs in all their activities. The Ministers from LDCs also urge G-20 countries to accord special priority to the challenges faced by LDCs in the agenda and multi-year action plan of the G-20 development working group.

Policy space for LDCs In present days, each country is party to a number of international and regional treaties, agreements, protocols, resolutions and decisions. These instruments contain certain commitments and obligations that often restrict the ability of countries to undertake policy measures in a flexible manner. The flexibility and policy space are important to address unusual circumstances, such as those posed by global economic and financial crisis and other multiple crises that hit the world severely. Developing countries and least developed countries have imposed on them deregulation and liberalization policies that have restricted their ability to manage their capital account and financial systems. LDCs need flexibility and policy space in determining their own macroeconomic policies that can create jobs, reduce poverty, meet health and education goals and build sufficient resilient capacities against exogenous shocks.

16

SECTION II

Accession of LDCs to the WTO There have been imbalances in WTO accession practices, trade dispute mechanisms, and negotiation modalities. These have placed developing countries including DLCs and new members of the WTO at a disadvantaged situation. All LDCs acceding to the Principles and Agreements of the WTO should be given membership. They should not be subjected to conditions that go beyond those to which existing members are subjected. Furthermore, developed countries need to provide developing countries with additional resources for support of adequate legal representation in the dispute settlement mechanism.

Global Public Goods The provision of global and regional public goods should be an important part of development institutions’ work and mandates. Preservation of the environment is an important issue related to global public goods. Increased CO2 emissions place the global atmosphere at a high risk for the humanity.

Preventing global warming and climate change is therefore a quintessential global public good. The international community thus faces a collective responsibility. There is a need for an international set of rules and incentives that will ensure international cooperation in preserving the self-sustaining nature of the earth’s atmosphere.

Coordination and Coherence among various organizations Achieving more sustainable and balanced global growth requires close coordination of macroeconomic policy decisions with other areas of global governance, including those related to the multilateral trading system, aid architecture, poverty eradication and sustainable development agenda and the climate change. The three post-war international economic institutions—the World Bank, IMF and GATT/WTO—were expected to work in a complementary fashion to promote sustained economic recovery and growth, full employment, and thus economic welfare, as well as reconstruction and development of economic capacities and capabilities. While progress has been made in enhancing coherence, coordination and cooperation among multilateral organizations, in particular in response to the fall-out of multiple international crises9, no specific mechanism to promote coherent policy responses to the interdependent development issues exists at present. There have been proposals that place a strengthened United Nations framework for enhancing coordination and complementarity at the centre of efforts to bridge this gap10.

The World Bank, IMF, WTO and other international institutions and intergovernmental processes have their own charter-bound role to play. However, there is a need for transparency, accountability and a better coordination among all of them. More importantly an appropriate forum is needed for consensus building to broaden and guide their policy agendas. The overarching theme of the UN Financing for Development (FfD) conference and the resulting Monterrey Consensus was the need to enhance the coherence and consistency of the international monetary, financial, and trading systems to ensure that they support the internationally agreed upon development goals, including social and environmental sustainability. The United Nation, given its universal membership on the basis of sovereign equality, can effectively contribute to addressing the pressing needs of the world today. It can play a central coordinating role in achieving greater coherence among different actors.

9

World Bank, “Coherence, Coordination and Cooperation among Multilateral Organizations- 2009 Progress Report”, 5 May 2009

10

Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System (http://www.un.org/ga/econcrisissummit/docs/FinalReport_CoE.pdf

17

SECTION II

Global Stimulus package for LDCs As the world enters in to the second decade of the 21st century, the development community faces renewed challenges in the fight against poverty, hunger, malnutrition and other human deprivations.

According to the World Bank data, 1.1 billion people were living on less than $1 a day and 923 million were undernourished, even before the food, fuel and financial crises. The multiple global crises, such as financial, food and fuel caused severe impacts on the development gains in the world.

The financial crisis will leave an additional 64 million people in extreme poverty by the end of 201011.

The food crisis alone was projected to drive around 100 million more people into poverty and hunger. Climate change, according IPCCC 4th Assessment report, is projected to lead an extra 50 million people at risk of hunger by 2020. Ironically, more than 50 percent of the total global hardcore poor lives in the least developed countries and more than 75 percent of their population live on less than two US Dollar a day.

The least developed countries are especially vulnerable to various kinds of shocks, such as natural disasters, commodity price fluctuations and volatility in financial flows including instability in aid.

At the same time, LDCs do not have effective shock absorbing systems. Social protection systems that could act as automatic stabilizer, are also absent. They are also under-insured as reserve accumulation has high opportunity cost and market based instruments are expensive or unavailable for LDCs. Due to lack of shock absorbers and under insurances, LDCs suffer significant growth and welfare losses from macroeconomic volatility. LDCs, with the support of their development partners, should strengthen their macroeconomic policy buffers and to enhance their shock absorbers to prepare themselves against future shocks and volatility12.

Many middle-income countries and emerging market economies, based on available policy tools and resources, could undertake aggressive policies and pro-active response measures, which resulted in a modest recovery in their economies. However, least developed countries could not adopt and implement appropriate stimulus measures primarily due to lack of adequate fiscal space and access to resources, both domestic and external. For many countries, the crises have jeopardized years of progress in combating poverty and improving the foundations for economic growth. The growing development needs of LDCs as well as the multiple global crises require a global stimulus package for the least developed countries. Thy need substantial increase in resources both domestic and external, not only to undertake stimulus measures, but to build resilience against any future crisis and shock.

Crisis Mitigation and Resilience Building (CMRB) Fund for LDCs LDCs are highly susceptible to internal and external shocks. However, they have limited capacity to build up cushions of reserves and fiscal resources as a shield against various shocks. They do not have inventible surplus and fiscal space for stimulus package. In addition, market insurance is highly expensive or often not available to these countries. As a result, shocks lead to resources being diverted to mitigate the loss of income rather than spent on social and productive sectors that have a longer term payoff in building resilience and reducing vulnerability.

11

World Bank

12

Reaching the MDGs: Macroeconomic prospects and Challenges in Low-Income Countries; background note by IMF Staff for the UN MDG Summit

18

SECTION II

International community may consider creating a special “crisis mitigation and resilience building (CMRB) fund for LDCs” to enable them to respond to various kinds of shocks that LDCs might face. An initial value of $100 billion could be provisioned for this new initiative. This amount could be generated from the following three sources: (i) US$25 billion from an especial allocation of SDR, (ii) $42.5 billion from additional ODA, as explained below, and (iii) US$32.5 billion from innovative sources of finance. Current ODA allocation to LDCs constitutes 0.09 percent of OECDDAC GNI. If all of them provide 0.2013 percent of their GNI as ODA, it would yield another $42.5 billion. Initiatives for innovative sources of finance, that are already operationalized or at an advanced stage towards implementation can generate billions of dollars, from which 32.5 billion could be earmarked for LDCs for CMRB fund. It may be noted that only a 0.005 percent Currency Transaction Tax can yield $33.41 billion, assuming daily turnover of around $3 trillion of US$, Euro, Japanese Yen and UK Sterling14.

The SDR allocation would provide a liquidity cushion in case of shocks. Such an SDR allocation would also allow LDCs to reduce their reliance on more expensive domestic and external debt for building reserves. Additional resources from ODA and innovative sources of finance can make an enormous contributions to productive capacity development, sustained economic growth, sustainable & inclusive development and poverty eradication, employment generation to secure full & productive employment and decent work for all, particularly youth, and universal access to essential services such as health, education, water & sanitation, energy and settlement, which can build buffers and ex-ante cushions against all kinds of internal and external shocks in LDCs.

Financial safety net for LDCs An effective “global financial safety net” can serve as an important safeguard for global economic and financial stability. The multilateral safety net was strengthened significantly during the crisis through $350 billion in capital increases for the multilateral development banks, reform of the IMF credit facilities, including the introduction of a Flexible Credit Line, and the commitment to triple IMF resources15. IMF played an important role by providing crisis prevention facilities during the global economic and financial crisis. The initiatives, however, was not adequate to address the challenges.

Therefore, establishment of a “global financial safety net” for LDCs on a permanent basis can make a major contribution to their socio-economic development.

Full market access as an early harvest under DDA Conclusion of the WTO Doha round of trade negotiations, with its full development mandate, can be an important collective stimulus package. The market access package on industrial and agricultural goods that is on the table in the Doha Round is equivalent to a new stimulus package for consumers of over US$150 billion. Other elements of the Round, such as the very important services sector and a new Trade Facilitation agreement, could yield results more than double of that. In current circumstances, opportunities to inject an economic stimulus of this magnitude into the global economy must not be discarded lightly. WTO members can decide on key development deliverables such as duty-free, quota-free market access for all products from all LDCs, implementation of special modalities in Services in the form of “early harvest” under the Doha Development Agenda.

13

As an upper-end commitment in the BPoA (Donor countries providing more than 0.20 percent of their GNP as ODA to LDCs: continue to do so and increase their efforts) Para 83 (a) of the Brussels Programme of Action for LDCs 14 15

Report of the Committee of Experts to the Taskforce on International Financial Transactions and Development.

Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System September 21, 2009

19

SECTION II

Annex-I: LDC Members’ Quotas in IMF and Voting Power Quota Member

Millions of SDRs

Votes % of Total

Number

% of Total

Afghanistan

161.9

0.07

1869

0.08

Angola

286.3

0.13

3113

0.14

Bangladesh

533.3

0.25

5583

0.25

Benin

61.9

0.03

869

0.04

Bhutan

6.3

0.003

313

0.01

Burkina Faso

60.2

0.03

582

0.04

Burundi

77

0.04

1020

0.05

Cambodia

87.5

0.04

1125

0.05

Central African Republic

55.7

0.03

807

0.04

Chad

56

0.03

810

0.04

Comoros

8.9

0.004

339

0.02

Congo (DRC)

533

0.25

5580

0.25

Djibouti

15.9

0.01

409

0.02

Equatorial Guinea

32.6

0.01

576

0.03

Eritrea

15.9

0.01

409

0.02

Ethiopia

133.7

0.06

1587

0.07

Gambia

31.1

0.01

561

0.03

Guinea

0.1

0.05

1321

0.06

Guinea-Bissau

14.2

0.01

392

0.02

Haiti

81.9

0.04

1069

0.05

Kiribati

5.6

0.003

306

0.01

Lao People’s Democratic Rep.

52.9

0.02

779

0.04

Lesotho

3.9

0.02

599

0.03

Liberia

129.2

0.06

1542

0.07

Madagascar

122.2

0.06

1472

0.07

Malawi

69.4

0.03

944

0.04

Maldives

8.2

0.004

332

0.01

Mali

93.3

0.04

1183

0.05

Mauritania

64.4

0.03

894

0.04

Mozambique

113.6

0.05

1386

0.06

Myanmar

258.4

0.12

2834

0.13

Nepal

71.3

0.03

963

0.04

Niger

65.8

0.03

908

0.04

Rwanda

80.1

0.04

1051

0.05

Samoa

11.6

0.01

366

0.02

Sao Tome and Principe

7.4

0.003

324

0.01

Senegal

161.8

0.07

1868

0.08

Sierra Leone

103.7

0.5

1287

0.06

Solomon Islands

10.4

0.005

354

0.02

Somalia

44.2

0.02

692

0.03

Sudan

169.7

0.08

1947

0.09

Timor-Leste

8.2

0.004

332

0.01

Togo

73.4

0.03

984

0.04

Tuvalu

1.8

0.001

268

0.01

Uganda

180.5

0.08

2055

0.09

20

SECTION II

United Rep. of Tanzania

198.9

0.09

2239

0.1

Vanuatu

17

0.01

420

0.02

Yemen

243.5

0.11

2865

0.12

Zambia

489.1

0.22

5141

0.23

Total

5112.9

2.877

64669

2.92

Source: IMF website, last updated: 16 September 2010. http://www.imf.org/external/np/sec/memdir/members.htm

Annex-II: General and Special SDR Allocations for Least Developed Countries (in millions of SDRs)

21

Name of the country

Existing Cumulative General SDR SDR Allocation Allocation

Special SDR Allocation

Cumulative SDR Allocation

Afghanistan, Islamic State of

26.7

120

28.6

155.3

Angola *

0

212.2

60.8

273

Bangladesh

47.1

395.3

67.9

510.4

Benin

9.4

45.9

3.9

59.2

Bhutan *

26.7

4.7

1.3

164.1

Burkina Faso

9.4

44.6

3.5

57.6

Burundi

13.7

57.1

3.1

73.8

Cambodia

15.4

64.9

3.6

83.9

Central African Republic

9.3

41.3

2.8

53.3

Chad

9.4

41.5

2.7

53.6

Comoros

716.4

6.6

1.2

8.5

Congo, Dem. Republic of

86.3

395.1

29.4

510.5

Djibouti

1.2

11.8

2.2

15.1

Equatorial Guinea

5.8

24.2

1.3

31.3

Eritrea *

0

11.8

3.4

15.1

Ethiopia

11.1

99.1

17.7

127.9

Gambia, The

5.1

23.1

1.6

29.7

Guinea

17.6

79.4

5.5

102.4

Guinea-Bissau

1.2

10.5

1.9

13.6

Haiti

13.7

60.7

4.1

78.5

Kiribati *

0

4.2

1.2

5.3

Lao, People’s Dem. Republic

9.4

39.2

2.1

50.7

Lesotho

3.7

25.9

3.3

32.9

Liberia

21

95.8

7.2

124

Madagascar

19.3

90.6

7.2

117.1

Malawi

10.9

51.4

3.9

66.3

Maldives

0.3

6.1

1.3

7.7

Mali

15.9

69.2

4.3

89.4

Mauritania

9.7

47.7

4.2

61.7

Mozambique *

0

84.2

24.6

108.8

Myanmar

43.4

191.6

10.7

245.7

Nepal

8.1

52.9

7.1

68.1

Niger

9.4

48.8

4.8

62.9

Rwanda

13.7

59.4

3.7

76.8

Samoa

1.1

8.6

1.3

11.1

Sao Tome and Principe

0.6

5.5

1

7.1

SECTION II

Senegal

24.4

119.9

10.4

154.8

Sierra Leone

17.5

76.9

5.2

99.5

Solomon Islands

0.6

7.7

1.5

9.9

Somalia

13.7

32.8

4.2

50.6

Sudan

52.2

125.8

16.1

194.1

Tanzania

31.4

147.4

11.7

190.5

Timor-Leste *

0

6.1

1.6

7.7

Togo

10.9

54.4

4.9

70.3

Uganda

29.4

133.8

9.9

173.1

Vanuatu *

0

12.6

3.7

16.3

Yemen, Republic of

28.7

180.5

23

232.2

Zambia

68.3

362.6

38.3

469.1

Total

1469.1

3891.4

464.9

5220.5

Source: IMF, September 9, 2010. http://www.imf.org/external/np/tre/sdr/proposal/2009/pdf/0709.pdf

Annex-III: IBRD 2010 Voting Power Realignment Member

Pre-Phase 1 (%)

Voice Reform–Phase 1 (%)

Voice Reform–Phase 2 (%)

Afghanistan

0.03

0.05

0.05

Angola

0.18

0.19

0.18

Bangladesh

0.31

0.32

0.3

Benin

0.07

0.08

0.08

Bhutan

0.04

0.06

0.06

Burkina Faso

0.07

0.08

0.08

Burundi

0.06

0.07

0.07

Cambodia

0.03

0.04

0.05

Central African Republic

0.07

0.08

0.08

Chad

0.07

0.08

0.08

Comoros

0.03

0.05

0.05

Congo (DRC)

0.18

0.19

0.18

Djibouti

0.05

0.06

0.06

Equatorial Guinea

0.06

0.07

0.07

Eritrea

0.05

0.07

0.06

Ethiopia

0.08

0.09

0.09

Gambia

0.05

0.06

0.06

Guinea

0.1

0.11

0.11

Guinea-Bissau

0.05

0.06

0.06

Haiti

0.08

0.09

0.09

Kiribati

0.04

0.06

0.06

Lao People’s Democratic Rep.

0.03

0.04

0.04

Lesotho

0.06

0.07

0.07

Liberia

0.04

0.06

0.06

Madagascar

0.1

0.12

0.11

Malawi

0.08

0.1

0.09

Maldives

0.04

0.06

0.06

Mali

0.09

0.1

0.1

22

SECTION II

Mauritania

0.07

0.08

0.08

Mozambique

0.07

0.09

0.08

Myanmar

0.17

0.18

0.17

Nepal

0.08

0.09

0.09

Niger

0.07

0.08

0.08

Rwanda

0.08

0.09

0.09

Samoa

0.05

0.06

0.06

Sao Tome and Principe

0.05

0.06

0.06

Senegal

0.14

0.15

0.15

Sierra Leone

0.06

0.07

0.07

Solomon Islands

0.05

0.06

0.06

Somalia

0.05

0.06

0.06

Sudan

0.07

0.08

0.11

Timor-Leste

0.05

0.06

0.06

Togo

0.08

0.1

0.1

Uganda

0.05

0.07

0.07

United Rep. of Tanzania

0.1

0.11

0.11

Vanuatu

0.05

0.07

0.06

Yemen

0.15

0.16

0.16

Zambia

0.19

0.2

0.19

Total

3.82

4.43

4.36

Tuvalu

Source: World Bank Group Voice Reform: Enhancing Voice and Participation in Developing and Transition Countries in 2010 and Beyond, DC 2010-0006/1, April 25, 2010. http://siteresources.worldbank.org/NEWS/Resources/ IBRD2010VotingPowerRealignmentFINAL.pdf

23

SECTION II

ENHANCING THE QUANTITY AND QUALITY OF OFFICIAL DEVELOPMENT ASSISTANCE FOR THE LEAST DEVELOPED COUNTRIES Introduction The Brussels Programme of Action recognizes that the official development assistance will remain a critical resource for achieving the objectives, goals and targets of the Programme of Action. Despite significant efforts to mobilize domestic resources and attract more private capital inflows, there is still a huge savings-investment gap in most LDCs. Their domestic savings stagnated around 13 percent of their GDP. In the Brussels Programme of Action (BPoA), donor countries made commitment that they would provide 0.15-0.20 percent of their GNP as ODA to LDCs. The development partners also agreed to implement the OECD-DAC recommendation to untie aid to LDCs, to improve aid transparency through internal reviews and OECD-DAC peer reviews and to allow greater participation of recipient countries in discussions on international aid policy in order to strengthen partnerships and enhance the effectiveness of ODA. The least developed countries pledged in BPoA to set up the necessary public sector auditing and accounting systems, coherent budgets and medium-term expenditure plans, to integrate and coordinate aid within national plans, to design, implement and regularly update national development strategies, to identify sectors where ODA can have the most significant catalytic effect on efforts to eradicate poverty, and foster sustained economic growth and sustainable development and to establish, with the assistance of development partners, information systems to monitor the use and effectiveness of external resources, including ODA. Since Brussels, most LDCs have come a long way in establishing an effective, fair and stable institutional, legal and regulatory framework for public, private and civil society activities. In many cases, they have made considerable progress in the promotion of democracy, human rights and the rule of law. Many least developed countries have made substantial progress in their socio-economic sectors, such as their infant and child mortality has reduced, primary school enrolment rate has significant increased, access to safe drinking water and sanitation has also augmented.

Despite some progress in some sectors, poverty is still highly prevalent in LDCs. More than half of the 800 million people in LDCs live below the poverty line. Only six LDCs have poverty rates of less than 30 percent. Hunger and malnutrition are widespread. Given the LDCs’ high vulnerability to external shocks, these figures are growing at an alarmingly rapid rate in the wake of the global multiple crises, placing an increasing number of people at risk of malnutrition, in particular children and women. Recent international support measures adopted by the international community were largely insufficient and hardly reached the LDCs and the poorest segments of their population.

The scope of domestic resource mobilization is extremely narrow in LDCs. A majority of LDCs citizens survive on subsistence agriculture in conditions of chronic poverty, outside the formal economy and beyond the tax system. Besides, lack of modern institutional infrastructure, such as complete database and computerized tax collection system, greatly constrains revenue collection in LDCs. Given the bare minimum per capita income, the investable surplus of the majority of their population is negligible. Their largely agrarian economies are affected by a vicious cycle of low productivity and low investment. LDCs governments lack the needed fiscal space for implementing economic and social development policies as well as infrastructure and productive capacity building. LDCs are therefore greatly reliant on external sources to meet their development finance gaps.

24

SECTION II

For LDCs, ODA remains a vital source of development finance. ODA can play an essential role, as a complement to other sources of development financing, in facilitating the implementation of their national development strategies including the internationally agreed development goals, in particular the Millennium Development Goals. ODA can certainly play a catalytic role in building social, institutional and physical infrastructure; promoting foreign direct investment, trade and technological innovation; improving health and education; fostering gender equality; preserving the environment; and eradicating poverty.

Total ODA from DAC donors in 2009 and 2010 Preliminary data show that total aid by DAC donors reached almost $120 billion in 2009, or 0.31 percent of donor country GNI16. Only five European countries exceeded the 0.7 percent United Nations target, namely, Denmark, Luxembourg, the Netherlands, Norway and Sweden (see figure 1).

Figure 1: OECD-DAC members’ net official development assistance in 2008

Source: Development Cooperation Report 2010

16

25

See OECD, “Development aid rose in 2009 and most donors will meet 2010 aid targets,” 14 April 2010

SECTION II

Of the seven DAC countries that met in Gleneagles in 2005, France increased the value of its aid by 17 percent in 2009, the United Kingdom by 15 percent and the United States by over 5 percent. In contrast, Canadian aid fell by almost 10 percent, that of Japan by 11 percent, that of Germany by 12 percent and that of Italy by 31 percent and (each measured in 2008 prices and exchange rates)17.

Total ODA gap In accordance with OECD/DAC preliminary estimates for 2009 and its review of aid budgets for 2010, DAC members as a whole are not on track to meet the 2010 aid volume targets. Indeed, OECD expects total ODA in 2010 to fall $18 billion short (in 2004 prices and exchange rates) of the updated Gleneagles target. Translated into more recent 2009 prices, the shortfall is $20 billion.

In terms of the 0.7 percent target of DAC donors’ GNI, the aid delivery gap in 2009 is $153 billion.

In accordance with the Gleneagles promises, DAC countries were required to provide an estimated $25 billion in additional assistance for Africa, measured in 2004 prices and exchange rates, of which only about $11 billion is now expected to be delivered, according to the DAC secretariat. This will leave a shortfall of $14 billion, owing mainly to reduced aid delivery relative to ambitious targets set by a number of European donors that usually allocate large shares of their aid to African countries.18

Total ODA received by LDCs from 2001-2008 Total ODA to LDCs, in nominal terms, has increased by three folds since the adoption of the Brussels Programme of Action. The most recent data show that the net ODA flows to the least developed countries, in terms of volume, increased from $32.8 billion in 2007 to $38.41 billion in 2008. The figure was 13.97 billion in 2001.

Figure 2: Total ODA received by LDCs from 2001-2008

Source: World Development Indicators, World Bank

17

MDG Gap Task Force Report 2010

18

OECD, “Development aid rose in 2009”

26

SECTION II

ODA Gap for LDCs Though, ODA to LDCs has increased in volume over the years, in terms of percentage, it was only 0.09 percent of DAC donors’ GNI in 2008, which is considerably below the target of 0.15 to 0.20 percent. If we consider the upper limit of the pledge, which is 0.20 percent of GNI, the gap in 2008 was US$ 42.5 billion.

As shown in table 2 below, nine DAC countries have already met or surpassed their Commitment made in the Brussels Programme of Action. These are Luxemburg (0.38 percent), Norway (0.33 percent), Denmark (0.32 percent), Sweden (0.32 percent), Ireland (0.30 percent), Netherlands (0.23 percent), Belgium (0.19 percent), UK (0.16 percent) and Finland (0.15 percent). In the year 2000, only five countries had met the target of 0.15–0.20 percent.

Table 2: Aid from DAC countries to LDCs net disbursement in (millions of US dollars) Aid from DAC Countries to Least Developed Countries Net disbursements 1997–1998

2008

USD million

% of donor’s total

% of donor’s GNI

USD million

% % of donor’s of donor’s USD GNI million total

% % of donor’s of donor’s GNI total

Australia

177

18

0.05

687

26

0.08

765

26

0.08

Austria

113

24

0.05

253

14

0.07

280

16

0.07

Belgium

236

29

0.09

773

40

0.17

930

39

0.19

Canada

420

22

0.07

1 562

38

0.11

1 859

39

0.13

Denmark

529

32

0.31

1 075

42

0.34

1 097

39

0.32

Finland

99

26

0.08

365

37

0.15

400

34

0.15

France

1 340

22

0.09

2 958

30

0.11

3 056

28

0.11

Germany

1 188

21

0.06

3 019

25

0.09

3 628

26

0.10

Greece

8

5

0.01

110

22

0.04

144

21

0.04

Ireland

90

47

0.14

606

51

0.28

674

51

0.30

Italy

585

33

0.05

1 296

33

0.06

1 587

33

0.07

Japan

1 707

17

0.04

2 521

33

0.06

2 498

26

0.05

Luxembourg

24

23

0.14

146

39

0.36

162

39

0.38

Netherlands

810

27

0.22

1 805

29

0.23

2 028

29

0.23

New Zealand

32

22

0.06

84

26

0.07

101

29

0.09

Norway

509

39

0.33

1 322

35

0.34

1 496

38

0.33

Portugal

137

54

0.13

206

44

0.10

225

36

0.10

Spain

165

13

0.03

1 118

22

0.08

1 462

21

0.10

Sweden

481

29

0.22

1 357

31

0.29

1 543

33

0.32

Switzerland

285

31

0.10

488

29

0.11

498

24

0.10

United Kingdom

923

25

0.07

4 011

41

0.14

4 199

37

0.16

United States

1 353

17

0.02

6 113

28

0.04

8 270

31

0.06

TOTAL DAC

11 211

22

0.05

31 874

31

0.09

36 904

30

0.09

Source: Development cooperation report 2010 Allocation of ODA: highly inequitable

27

2007

SECTION II

Evidence shows that the allocation of ODA is highly skewed. Some countries continue to receive more aid than would be expected (“donor darlings”), and an almost equal number receive less than would be expected (“donor orphans”). Often non-LDC developing countries receive more aid than many LDCs. The countries receiving more aid per capita or as a percentage of GNI tend to be those with small populations, those affected by conflict and some middle-income countries. Conversely, LDCs that are not in post-conflict situations but that nevertheless face severe internal pressures, as well as African and Asian countries with larger populations, receive much lower aid per capita or as a percentage of GNI. Figure 3: Per capita ODA disbursement to LDCs in the year 2008

Source: World Development Indicators, World Bank

Many donors continue to allocate bilateral aid based on their political, strategic and economic interests and are yet to establish an objective and transparent mechanism for allocating aid among countries. There is also a growing trend to adopt strategies to allocate aid based largely on “performance” trying to measure the quality of policies and institutions in programme countries. There is the risk that the increasing focus on performance, e.g. in the concept of “cash on delivery”, will result in a lower share of ODA allocated to LDCs as their institutions are weak and thus effects of ODA are likely to take longer to materialize. There are proposals under discussion to base the geographical allocation of ODA to all recipient countries on the criteria used for the identification of LDCs. This would not only increase the allocation of ODA to the most vulnerable countries but would also reduce potential negative effects of graduation from the LDC category.

28

SECTION II

Sectoral allocation and tying of ODA During the period 1980-2005, the share of DAC aid to social and governance sectors increased because of the Millennium Development Goals. As a result, share going to economic infrastructure and productive sector faced sharp decline. Between 2006 and 2008, DAC aid allocated to governance continued to rise, from 10 percent to 12 percent, while aid allocated to social sectors declined from 30 percent to 26 percent and aid allocated to infrastructure and production rose from 19 percent to 26 percent, with infrastructure accounting for almost all of that rise and agriculture the rest. This is a welcome trend as it responds to the major infrastructure (transport, energy, water, and information and communications technology) and agricultural development needs of the developing and least developed countries. This move is further accelerated during 2009 and 2010, as donors channelled more funding to the private sector, infrastructure and agriculture in order to combat the impact of the global crises, including continuing food crisis. Nevertheless, the share of total aid allocated to economic infrastructure and productive capacity in manufacturing, agriculture and service sectors is still below what it was in 2000.

Figure 4: DAC donors’ bilateral ODA to least developed countries by sector - $million

Source: OECD-DAC, online databank, assessed 30 March 2010.

Some studies suggest that tied aid raises the cost to developing countries by 15 percent to 30 percent on average, and by as much as 40 percent or more for food aid. In fact, the real costs may be higher, as these figures do not incorporate the significant indirect costs of tying, such as higher transaction costs for partner countries. For these reasons, in 2001, the DAC adopted a recommendation to untie ODA (except technical co-operation and food aid) to the LDCs.

Enormous progress has been made since 2001. For example, the vast majority of DAC member countries have by now either fully or almost fully untied their entire bilateral aid programmes.

As a result, 79 percent of DAC bilateral ODA was reported as untied by 2007. Of the remainder, 17 percent was still tied, while the status of the remaining 4 percent (mostly technical co-operation) has not been reported.

29

SECTION II

Table 3: Tying status of ODA of DAC countries and grant elements of bilateral ODA commitments to LDCs for the year 2008 Tying status and grant elements of Bilateral ODA of DAC countries for the year 2008 Tied

Grant element of bilateral ODA commitments to LDCs

Australia

Untied 96.7

3.3

100

Austria

82.3

17.7

100

Belgium

91.9

8.1

99.8

Canada

90.8

7.9

100

Denmark

98.5

1.5

100

Finland

92.3

7.7

100

France

81.9

18.1

93.7

Germany

98.2

1.8

100

Greece

37.9

61.9

100

Ireland

100

Italy

78

Japan

96.5

Luxemburg

100

Netherlands

94.5

New Zeland

92.7

Norway

100

Portugal

29.1

Spain

69.1

Partially Untied

1.3

0.1

100 1.7

20.3

98.4

3.5

99.4 100

5.5

100

7.3

100

0

100

59.4

11.5

80

1.2

29.7

93.3

0

Sweden

99.9

0.1

100

Switzerland

97.3

2.7

100

United Kingdom 100 United States

75

Total DAC

87.3

100 0.2

25

100

12.5

99.2

Source: Development Cooperation Report 2010

Development assistance from the countries of the South The landscape of global partnership has changed significantly with the emergence of new donors and new ways of technical exchange and cooperation. In the year 2008, as reported by developing and transition economies to OECD, around $9.6 billion of development assistance was given by developing countries to other developing countries through South-South Cooperation. More than half of this total was provided by Saudi Arabia, $800 million was provided by transition economies in Eastern Europe and the same amount was provided by Turkey. While this accounts for only about 10 percent of DAC bilateral aid, the volume has been growing rapidly. The flow of aid grew by almost half, in constant prices and exchange rates, from 2006 to 200819. In addition, it appears that roughly at least another $2 billion has been provided by non-reporting countries, primarily by China but with substantial aid also having been provided by India and the Bolivarian Republic of Venezuela. Significant contributions in aid have also been made by Brazil, Nigeria and South Africa. Furthermore, despite the strain of the global financial and economic crisis on many of these providers, total contributions are expected to have risen again in 2009. If pledges are kept, it is thought that total flows could reach $15 billion in 201020.

19

Data received from OECD

20

MDG gap task force report 2010

30

SECTION II

Around 90 percent of South-South development cooperation assistance is allocated in the form of project finance and technical assistance, while around 10 percent in balance-of-payment or budget support. Some contributors are being planned to move to more programme-based approaches in future. In addition, there is an increasing focus on humanitarian assistance, which exceeded $1 billion in 2008, especially by Arab providers, with Saudi Arabia being the third largest global provider of humanitarian assistance.Many contributors to South-South cooperation have programmes that are co-financed by triangular cooperation, whereby DAC donors finance the projects and southern institutions execute them. The focus of triangular development cooperation is primarily technical cooperation, because Southern institutions are seen as having expertise relevant to meeting the needs of developing countries. Multilateral development banks, United Nations organizations and Southern providers of development cooperation are also increasingly using this modality.

Recommendations for enhancing the quantity of ODA Official Development Assistance is critically important for LDCs to meet their development needs.

The existing flow of ODA to LDCs is far below their requirements. It is therefore important to undertake a comprehensive assessment of short as well as long-term ODA needs in LDCs. The international community should undertake a number of initiatives, to accelerate progress in the implementation of the internationally agreed development goals including MDGs. The ODA requirements in LDCs need to be supported by the provisions of concrete deliverable commitments and a clear multi-year road-map for their implementation by donor countries in a transparent and accountable manner.

The DAC donors should set concrete time plans to fulfil their ODA disbursement of 0.15-0.2 percent to LDCs as soon as possible. Donor countries and other developing countries, who are in a position to do so, should set a progressive quantitative target based on needs assessments in LDCs with a view to reaching or exceeding their percentage target to LDCs. LDCs need more access to highly concessional funds and grants if they are to meet their essential spending needs and respond in a counter-cyclical way to the global economic crisis without getting back into debt distress.

Aid for trade can help LDCs to build trade-related infrastructures and competitive supply capacities, including at the sectoral level. The international community has continued to mobilise new Aidfor-Trade resources. In 2008 commitments totalled US$41.7 billion, a 35 percent increase in real terms from 2007, and an increase of 62 percent from the 2002/05 baseline. In 2008, LDCs received US$10.5 billion or 25 percent of the total flows. A substantial increase in aid for trade is needed for LDCs to support national reform programmes and initiatives aimed at enhancing LDCs trade performance.

Funds of the multilateral development banks should be urgently replenished and contributions, particularly non-earmarked contributions to the UN agencies, funds and programmes should be increased, which will advance their outlays to support country level efforts particularly in addressing the impacts of multiple global crises in LDCs. Participation of LDCs in the decision making processes of these institutions should also be enhanced so that special concerns, priorities and constraints of this group of countries are better reflected in the policies of these institutions.

The Leading Group on Innovative Financing for Development is playing an important role both for raising additional funds for the MDGs and for exploring innovative financing mechanisms, including currency transaction taxes. Implementation of their recommendations can yield results in mobilizing new and additional resources for development. A given percentage of all new and innovative

31

SECTION II

sources could be earmarked for LDCs. Strengthening international tax cooperation and multilateral anti-corruption initiatives is also crucial with a view to stem tax evasion and corruption and mobilize additional resources for development.

Recommendations on enhancing the quality of ODA for LDC’s development Quality of aid is as important as its quantity. A number of issues need to be addressed to enhance aid effectiveness, which include among others, lack of country ownership and leadership, lack of predictability, lack of accountability and transparency, conditionality, and earmarking of aid. Addressing these challenges is a continuous effort for LDCs and their development partners, as it requires political commitment and collective action on a number of fronts by a group of diverse stakeholders at the global and country levels. The Paris Declaration on Aid Effectiveness and Accra Agenda for Action highlight a number of principles and commitments made at the global level that are aimed at increasing the development effectiveness of aid. These need to be implemented by all stakeholders, as appropriate.

Further progress in untying ODA is still needed, most particularly in respect of a few members and in relation to technical co-operation. The DAC member countries should implement the untying commitments they made under the Accra Agenda for Action21 as soon as possible.

Country ownership should be strengthened with a collective endeavour that requires different commitments by LDCs and their partners. LDCs need to strengthen their domestic institutions, policy processes and systems for managing financial resources including external resources. At the same time, donors can support country ownership by ensuring that their development assistance programs are aligned with recipient country’s own development strategies and support the country’s efforts to implement policies and programs to achieve their economic and social goals. ODA targeted to economic development and productive capacity building focusing on employment for the poor and the growing number of youth can make an effective contribution to poverty eradication.

Increased use of the country’s own systems—for procurement, financial management, and environmental and social safeguards—is core to improving the development effectiveness of a country’s resources, regardless of the source of financing. The following measures could be pursued in this regard: (i) deepening the already substantial achievements related to financial management and focus on audit capacity; (ii) encouraging greater use of national procedures in procurement under national competitive bidding, when feasible; (iii) building on the international competitive bidding for procurement on a pilot basis; and (iv) continuing to scale-up the use of country systems to address environmental and social safeguard issues.

Aid predictability should also be improved in order to enable recipient countries to plan long-term development strategies, medium-term expenditure frameworks and annual budgets. There has been a sharp increase in multi-year projection reporting to OECD but a much smaller increase in reporting to programme countries. In order to make the best use of increasingly scarce resources, LDCs need to be in a position to plan and optimize aid allocation within and across sectors. This calls on donors to provide reliable indicative estimates of disbursements and commitments within the year and over a multi-year framework.

21

Paragraph 18 of the Accra Agenda for Action

32

SECTION II

Maintaining flexibility is essential to respond to the changing priorities and mandates of Governments and to counter exogenous shocks, whether macroeconomic or related to natural disasters. Although donors have taken steps to increase flexibility in recent years by providing more budget support and improving various soft loan windows in IMF and World Bank for countering shocks, this remains one of the poorest performing aspects of aid, with more than 80 percent of aid still inflexible.

A key cause of unpredictability and inflexibility of aid is policy conditionality, which has not improved much over the past years. Most DAC donors and multilateral organizations continue to disburse aid based on the implementation of negotiated policy measures and governance indicators, even though research has shown that policy-based conditionality is generally ineffective and unduly restrictive of policy space. Conditions are also too numerous and detailed, leading to long delays in disbursing aid.

Donors should continue to reduce their conditions as some have already started, limiting conditions to a minimum Decades of development experience show that uncoordinated and fragmented aid increases the costs for both donors and recipients and can reduce the development effectiveness of aid. Donor fragmentation continues to be a problem at the country level, especially in LDCs, because of their aid dependency, as well as large numbers of donors and projects. Collaboration and coordination among donors and between donor and recipients is therefore critical, to align aid with government priorities, to strengthen government leadership of aid management, to reduce transaction costs for the governments in LDCs and to strengthen coherence across development partners with a view to reducing multiple obligations on the recipient countries, such as multiple reform and reporting obligations.

Donor earmarking of funds often goes against the international strategy to increasingly align ODA with national development strategies. Consistent with the principles of the Paris Declaration, the ultimate aim is to build mutual confidence for providing ODA as unrestricted budget support.

Establishing mutual accountability between donors and recipients is critically important. Not only the recipients should be held accountable to donors for the use of their funds, but donors should also be accountable to the recipients for promises, commitments and disbursements. There is scope to further develop and build commitment to the concept of mutual accountability—at global and regional, as well as at national levels—within the framework of the United Nations ECOSOC Development Cooperation Forum (DCF), which has been tasked to enhance the coherence and effectiveness of international development cooperation, including towards realizing the MDGs. As a global multistakeholder forum, the DCF offers a unique opportunity to address this question which should be seized.

Non-DAC providers (Governments, global funds, non-governmental organizations and private foundations) should be encouraged to participate in mutual accountability at the national level. For this to be achieved, these providers will need to facilitate their own processes with a view to improving quality that reflect the comparative advantages of their development cooperation clearly. Such targets may need to be discussed in international forums such as the United Nations22.

22

Trends and progress in international development cooperation, E/2010/93, http://daccess-dds-ny.un.org/doc/UNDOC/GEN/ N10/399/30/PDF/N1039930.pdf?OpenElement,

33

SECTION II

TAPPING INNOVATIVE SOURCES OF FINANCE INCLUDING MIGRANT REMITTANCES FOR LDCS DEVELOPMENT Introduction Innovative development financing is a mechanism for raising funds for development partly as a reaction to shortfalls in ODA despite commitments made by donors over the past decades. The mechanisms are thus complementary to official development assistance. Given the scale of the funding gap for LDCs, they will need to be of significantly larger scale than previously established innovative financing mechanisms.

Innovative finance can be defined as mechanisms based on global activities that can help to generate substantial and stable flows of funds for development. A key feature of the innovative financing for development framework is human solidarity. It is also closely linked to the idea of global public goods which should be financed by taxes on global externalities like global warming or exchange rate volatilities.

One of the most popular early ideas for innovative financing through taxes was the Tobin tax, originally proposed in 1972 by the late James Tobin. He argued that currency speculation was having a disruptive effect on the world economy. To reduce these disruptions, he called for a small tax on every exchange of currencies. Such a tax would be a trivial expense for people engaged in foreign trade or long-term investment; but it would be a major disincentive for short-term oriented speculators. It would, as Tobin said, “throw some sand in the well-greased wheels� of speculation.

Over the past decade several initiatives to bring the concept to fruition have been undertaken and have been endorsed at various fora. These financing mechanisms were conceived from the outset as a way to correct the negative effects of globalisation. They use various mechanisms, ranging from government taxes to public-private partnerships, and focus on several areas of public action, such as health and the environment.

Today, the notion of innovative development financing mechanisms designates resources that are provided in addition to Official Development Assistance (ODA) and are more predictable. The General Assembly, in its resolution 64/193 of 21 December 2009, recognized the potential of various voluntary innovative sources of financing to supplement traditional sources of financing, stressed that those funds should be disbursed in accordance with the priorities of developing countries and should not burden them unduly. Innovative financing mechanisms have demonstrated their strong potential to complement traditional development aid even though the quantitative impact has been limited, having raised about US$2.5 billion in additional funding between 2006 and 2008.

The financial and economic crises resulted in more analysis of the financing needs of developing countries, highlighting underlying problems related to the internationally agreed development goals that have not been tackled and identifying preferred channels for mobilizing or providing financing, including innovative mechanisms for financing development. The BPoA already called for: Promoting and encouraging innovative sources of funding and providing technical support through partnerships among LDC and donor Governments, the national and international private sector, and NGOs and foundations; in paragraph 32 (ii) (b) but the development of these ideas was not given much emphasis.

34

SECTION II

Recent developments in raising new finance New taxes at the international level Taxes on international flows or negative externalities, such as taxes on currency transactions or aircraft fuel aim at reducing negative effects of speculation or pollution and at the same time make available new funds for development. There has been a series of recent proposals for innovative sources of financing, including global carbon taxes, taxes on international transport emissions, taxes on international financial or currency transactions, new allocation of IMF special drawing rights, gold sales or the sale of “green bonds” in global capital markets.

There are several new mechanisms that are sector specific, mainly in the area of health: Levies and voluntary solidarity contributions (VSC) on airline tickets are estimated to generate as much as US$1 billion annually worldwide. Since its inception in September 2006, 29 Governments have joined France in contributing finances to UNITAID, which raised US$1.2 billion through airline tickets sold in 15 of its member countries, to scale up access to life-saving HIV/AIDS, tuberculosis and malaria treatments, lower the prices of drugs and tests and accelerate the pace at which they reach those in need in 93 countries. In March 2010, the MassiveGood initiative was launched to mobilize through VSC additional funding for UNITAID activities, by enabling travelers to make a donation of US$2, €2 or £2 collected from online purchase of travel products and sales through travel agents.

The International Finance Facility for Immunization (IFFIm), launched in January 2006 on the basis of the initial proposal by the United Kingdom, has raised more than US$2 billion on the international capital markets through the issuance of floating bonds. Of that amount, more than US$1.2 billion was already disbursed to support life-saving immunization programmes in 70 developing countries through the Global Alliance for Vaccines and Immunization (GAVI) Fund.

The Advance Market Commitments (AMC) initiative seeks to address the shortcomings of pharmaceutical markets, especially in the poorest countries, by establishing contractual partnerships between donors and pharmaceutical firms to focus research on neglected diseases and distribute drugs at affordable prices. In June 2009, the Governments of Canada, Italy, Norway, Russia and the United Kingdom, together with the Gates Foundation, launched a pilot AMC with a collective US$1.5 billion commitment. In addition, GAVI has committed to contribute up to US$1.3 billion for the period 2010-2015. The first long-term agreement with the private sector was announced in March 2010, in which GlaxoSmithKline and Pfizer agreed to supply pneumococcal vaccines at a fraction of the price charged in developed countries.

The Debt2Health initiative, launched by Germany in September 2007, uses debt swaps to relieve the strain on resources of developing countries by converting portions of their old debt claims into new domestic resources for health through the Global Fund. To date, Germany has signed two agreements with Indonesia (to cancel €50 million in debt and to invest the equivalent of €25 million in health programmes in Indonesia approved by the Global Fund) and with Pakistan (to cancel €40 million in debt and to invest the equivalent of €20 million in health programmes in Pakistan approved by the Global Fund). Australia joined the initiative in May 2009 with a pledge of A$75 million (US$ 57 million).

Payment for Environmental Services (PES) is an innovative scheme devised to channel resources to those delivering desired public goods programs. Some of these schemes are already operational locally in different areas of the world, on a variety of environmental services. They allow consumers of a public good to compensate for part of the costs borne by those in charge 35

SECTION II

of producing or preserving it. Current PES schemes have been developed mainly around three groups of environmental services: water quality and quantity, carbon sequestration and biodiversity conservation.

The Report of the Committee of Experts to the Taskforce on International Financial Transactions for Development entitled: “Globalizing Solidarity: The Case for Financial Levies” assessed the feasibility of different financing options against a number of criteria: sufficiency (where potential revenues are sufficient to make a meaningful contribution); market impact (where market distortions and avoidance are within acceptable limits); feasibility (where legal and technical challenges can be feasibly addressed); and sustainability and suitability (where the flow of revenues would be relatively stable over time, and the source suited to the role of financing global public goods). The analysis includes a financial transactions tax as well as different forms of currency transaction taxes as additional sources of funding the vast shortfall of international aid commitments.

The report concludes that a global currency transaction tax (CTT), which would apply to foreign exchange transactions on all major currency-markets at the point of global settlement is the most appropriate option (see 2010 Leading group report on Innovative Financing to Fund Development).

As the volume of international transactions is immense, at an estimated $1 trillion per day, a very small levy on foreign exchange transactions still could raise billions, without affecting markets. For instance, a coordinated 0.005 percent tax on all the major currencies is estimated to raise at least $33 billion every year. More importantly, it would widen the dealer spread by only one basis point and reduce transaction volume by 14 percent, which would be well within the recent range of transaction volume variability and would not be disruptive of the world foreign exchange markets.

The proceeds of this “Global Solidarity Levy (GSL)” would be paid into a dedicated fund. The report proposes the establishment of a new “Global Solidarity Fund” financing facility for global public goods. This fund could contribute to provide substantial resources for LDCs development not restricted to health or other specific sectors but to be used to speed up structural transformation.

The Report demonstrates that a financial transaction tax would be more predictable and stable than traditional ODA as resources are not linked to government revenues and political priorities in industrial countries.

There is a large array of innovative financing proposals under discussion, but they differ markedly in the amount of political support they generate. The challenge now is to identify the most useful and realistic ones in terms of quick implementation and revenue generation, and concentrate international attention and efforts on their development into concrete practical undertakings.

Once new funds are made available the question of governing these funds is one of the biggest challenges. LDCs need to have a voice in decision making bodies to influence the sectoral allocation and allocation across countries as well as other related issues. At the same time accountability mechanisms for the generation and use of these financial means need to be designed.

Private contributions including remittances The role of philanthropy in funding development projects has also increased over the past decade.

In 2009 global funds and private philanthropy accounted for 17 percent of total international development cooperation. During the period 2006-2008 private contributions rose by at least 62 percent. During the financial and economic crisis private philanthropy (both Northern and Southern) has continued to increase. Although the share of private development finance going to LDCs is not exactly known it can be assumed that these trends are similar.

36

SECTION II

Although remittances are not a new phenomenon, their importance for LDCs has been increasing over the past decade and there are new initiatives to make these private flows more effective for development.23 Currently remittances are mainly financing consumption and thus reducing poverty and hunger but they are also used for health and education, and to a lesser extent Small and Medium Enterprises. Remittance flows to least developed countries have increased from US$6.1 billion in 2000 to US$17.5 billion in 2007 and further to US$23 billion in 2008 (see appendix for country data).

The World Bank estimates remittance flows to LDCs at more than USD 24 billion in 2009. This resilience to the global economic crisis is especially significant given that globally recorded remittances are estimated to have declined. However, this is partly driven by the fact that return migrants transferred their savings to their home countries.

It is most likely that the available figures on remittances are underestimated due to the extent of unrecorded money sent through both formal and informal channels. For some countries, it is estimated that as much as half of all remittances could be sent outside official banking channels, owing to burdensome procedures, high transfer costs and unfavourable exchange rates.

Second only to Official Development Assistance, remittance flows to LDCs superseded Foreign Direct Investment. Representing 4 percent of GDP of LDCs in 2007, in relative terms remittances are an important source of external finance for LDCs. In relative terms, these financial funds sent by migrants can be of critical importance. In Lesotho and Samoa they made up more than a quarter of the GDP in 2008 and around one fifth of GDP in Nepal and Haiti.

In LDCs, where aid and foreign investment flows vary quite significantly from year to year remittances represent a more stable and countercyclical financial flow as compared to FDI and ODA flows. In times of halting growth in developed countries, remittances may thus become an even more significant source of external financing. The higher the diversification of migration destinations and the greater the labour mobility, the more robust are remittance flows.

Community projects financed through remittances have contributed to develop the local infrastructure in several LDCs. In addition, remittances can promote development of the financial sector, which has important returns on economic growth. A business-friendly environment manifested in well-functioning local institutions, political and economic stability, financial regulations and monetary policy as well as the absence of corruption are key structural determinants for beneficial outcomes.

At the l’Aquila Summit in July 2009, given the impact migrant remittances have on development, the Heads of State and Government committed to work on reducing the average cost of remittances currently estimated to be 10 percent of the total amount transferred to 5 percent within five years and to increase access to financial services in developing countries.

LDCs are well aware of the potential contribution of remittances to development and the need to enhance their transfer based on data and research. However, the paucity of data related to migration and remittances and a lack of comparability of statistical information available impedes a comprehensive analysis of human mobility in some cases and remains a key challenge. Recognizing the role of migration in supporting yet not replacing development efforts, it was agreed at the Ministerial Conference of LDCs on Enhancing the Development Impact of Remittances in Cotonou, Benin, in February 2006 to launch the Migrant Remittances Observatory for LDCs (ConfĂŠrence MinistĂŠrielle, 2006), which is one step in the right direction.

23 Remittances are very closely linked to the bigger issue of migration, which has been covered in detail in a previous pre-conference event organised by UNITAR and IOM on 17 June 2010 in New York. Results of this event were used for the analysis provided here.

37

SECTION II

The cost of remittances transfers vary widely across LDCs and high South-South transfer costs are a drain on the incomes of poor migrants. Given that South-South migration remains the most important feature of migration in LDCs, lowering transfer costs is a significant measure to enhance the capability of these transfers to reduce poverty, benefiting migrants and their households.

Furthermore, recognizing that remittances are private funds and that decisions about their use belong to senders and receivers is not contradictory with enhancing the use of remittances for productive investments. Migrants and their households are often interested in such use of their finances, but often lack means and information about how to do so, particularly in rural areas.

Way forward To fill the resource gap of LDCs it is necessary to mobilize new and innovative sources of finance, which should be additional, substantial, predictable and disbursed in a manner that respects the priorities and special needs of LDCs. Innovative financing has focused mostly on health issues and it should be expanded to other crucial areas, including food security, education and climate change and ultimately be provided as budget aid so recipients can align it with their priorities.

Additional funds created through the establishment of international currency or financial transaction taxes need to be allocated to LDCs as the countries most vulnerable to external shocks and natural disasters with very limited access to financial markets.

New Funds dedicated to the Development of LDCs financed by international taxes or levies need to ensure democratic decision-making by various stakeholders. Furthermore, the access to the Fund must be easy in terms of procedure.

To reduce vulnerability to shocks a “crisis mitigation and resilience building fund for LDCs� should be established to enable them to respond to various external and internal shocks. A substantial special SDR allocation should be made for LDCs, which will provide a liquidity cushion in case of any internal and external crisis and shock. Access to those funds should be fast-tracked and the funds to be released without any unwarranted conditionality (see background paper on Global economic governance and stimulus package for LDCs). Research suggests that the use of SDRs for supplementing aid and providing global public goods would not compromise international stability; in fact, the pattern of recent years suggested that a decreased dependence on the currency of one country as a unit of account and to provide global liquidity could actually improve systemic stability.

Non-Development Assistance Committee providers of aid, including global funds, non-governmental organizations and private foundations, should be encouraged to participate in mutual accountability at the national level. For this to be achieved, these providers will need to facilitate their own processes for developing their own targets for improving quality that reflect the comparative advantages of their development cooperation clearly. Such targets may need to be discussed in international forums such as the United Nations.

To facilitate remittances transfers home and host countries can lower transfer costs, through improved technology, in particular in the area of mobile phones and e-transfers; through regulation changes, such as removing restrictions on outward remittances in the source country and removing taxation on remittances repatriated. Home countries can support the access to formal remittances transfer channels by improving overall populations’ access to financial and banking services.

To make the most out of remittances it would be desirable to channel a larger share into productive use and private sector development activities. In order to foster this approach co development schemes should be explored. National and local authorities in home and host countries could provide investment information in business areas of interest to migrants and their families. Home and host countries should foster the development of formal financial systems which would facilitate the inte38

SECTION II

gration of remittance senders and recipients into the banking system and thus increase their potential savings and investments. For remittances which are invested in local development projects recipient and donor countries could develop incentive schemes, e.g. with matching grants.

SOURCES UN (2010) Report of the Secretary-General to the Development Cooperation Forum 2010, Trends and progress in international development cooperation, New York UN (2010) Report of the Secretary-General, Progress report on innovative sources of development finance (A/64/189) Innovative Financing to Fund Development - Leading group report (2010) Globalizing Solidarity: The Case for Financial Levies, Report of the Committee of Experts to the Taskforce on International Financial Transactions and Development World Bank (2010), World Development Indicators IOM (2010) Mainstreaming Migration, Development and Remittances into the Fourth United Nations Conference on the Least Developed Countries (LDC-IV) 2011Annex Table: Workers’ remittances, receipts (BoP, current US$ million) Least-developed countries

2001

2002

2003

2004

2005

2006

2007

2008

Afghanistan

0

Angola

0

Bangladesh

2094.1

2847.7

3180

3572.2

4302.4

5417.7

6553

8980.7

Benin

77.8

70

49.5

54.1

137.1

186.2

234.2

71

Bhutan Burkina Faso

43.6

Burundi

0

0

0

0

0.1

0

0.2

3.6

Cambodia

110

120

125

144

160

180

183.6

187.3

0.7

0.8

2.9

3

3

3.7

3.5

4.3

Ethiopia

18.3

33

46.5

133.7

173.5

169.2

355.9

386.7

The Gambia

0

0

64.1

61.5

56.7

62.9

60.9

57.3

Central African Republic Chad Comoros Dem. Rep. of the Congo Djibouti Equatorial Guinea Eritrea

39

Guinea

8.7

15.2

111

41.6

15.1

59.8

Guinea-Bissau

9.5

17.4

21.3

26.9

0

0

Haiti

623.6

675.7

811

931.5

986.2

1062.9

1222

1409.8

Kiribati

0

0

0

0

0

0

0

0

Lao People’s dem. Rep.

0

0

0

0

0

0

0

0

Lesotho

1.3

9.8

11.5

14.4

6.9

4.5

12.9

6.6

Liberia

0

0

0

53.4

22.6

60.5

42.1

35.7

Madagascar

0

0

8.3

4.3

1.4

0

0

0

Malawi

0.7

0.8

Maldives

0

0

SECTION II

Mali

82.1

126.5

138.9

138.1

153.3

192.7

323.1

0

Mauritania

0

0

0

0

0

0

0

0

Mozambique

41

29

29.9

2.5

5.8

15.8

30.9

34.1

Myanmar

86.5

76.1

59.3

81.3

87

65.7

0

0

Nepal

147

655

744.4

792.6

1126.3

1373.3

1647

2581.3

Niger

13.8

8.7

11.5

42.9

45.5

49.1

42.7

0

Rwanda

5.4

7.2

9.4

9.6

8.6

17.2

28.3

63.3

Samoa

0

0

0

0

0

0

0

0

Sao Tome and Principe

0.6

0.8

1.8

1.1

1.5

1.6

2

0

Senegal

259.6

296.7

448.2

563.2

717

850.6

1107

0

Sierra Leone

6.2

7.5

25.8

24.6

2.3

12.1

39.8

20.2

Solomon Islands

0

1

1.1

2.2

2.7

9.5

0

0

Somalia

0

0

0

0

0

0

0

0

Sudan

730.4

970.2

1218.4

1401.2

1014.1

1177.3

1767

3100.5

Timor-Leste

0

0

0

0

0

0

0

0

Togo

51.5

86.6

128.3

153.3

164.2

203.1

252.4

0

Uganda

348.6

422.6

298.8

310.5

321.8

411

451.6

723.5

United Republic of Tanzania

5.3

5

1.9

5.8

9.1

9

8.3

9.3

Table: Workers’ remittances, receipts (BoP, current US$ million) Least-developed countries

2001

2002

2003

2004

2005

2006

2007

2008

Vanuatu

15.8

0.1

0.1

0.1

0.1

0.1

1.2

0

Yemen, Rep.

1294.6

1294

1269.9

1282.6

1282.6

1282.6

1322

1410.5

Zambia

6076.8

0

36.3

48.4

52.9

57.7

59.3

68.2

Source: World Bank, WDI 2010

40

SECTION II

EFFECTIVE MOBILIZATION OF DOMESTIC RESOURCES BY LDCs Introduction Domestic savings have a critical role to play in financing development. They are needed to provide resources for investment, boost financial market development, and stimulate economic growth. Yet, most LDCs have difficulties mobilizing adequate domestic resources to meet their investment needs.

This is mainly due to the predominance of subsistence activities which barely generate enough resources to meet basic consumption needs and the overall high levels of poverty, with extreme poverty exceeding 50 percent on average in LDCs. Resources for investment in most LDCs are predominantly foreign especially ODA, FDI and remittances. However, the high dependence of LDCs on external resources limits their policy space and creates some dependency. Their eeconomic vulnerability is further exacerbated by indebtedness, which remains a challenge despite major write-offs in the recent past, especially since global interest rates are expected to increase in upcoming years. In a similar vein, many LDCs run large deficits in the current and trade accounts, financed by official grants and loans. Even a small reversal in external capital flows may therefore cause domestic contraction. Mobilizing domestic resources will help reduce vulnerability arising from dependence on fragile external income. Domestic resource mobilization provides the only viable long-term financing basis for development expenditures.

The BPoA recognizes that the most important financing of development comes from domestic resources. Specifically it calls for the promotion and enhancement of effective measures, including fiscal and financial sector reforms for better domestic resource mobilization (Paragraph 29 (l)). The importance of domestic resource mobilisation for example for infrastructure development is stressed at various occasions in the BPoA but there are little concrete measures and no explicit goals on this issue. There is only the general goal to increase the ratio of investment to GDP to 25 percent per annum which could not be reached so far despite considerable efforts. As there has been also very limited progress in this important area there is a need to review the factors behind the slow resource mobilisation and build on best practices.

Recent developments in domestic resource mobilisation Government revenue The ability to generate domestic revenue is one of the core roles of governments and a precondition to establish a developmental state, which actively designs and implements development strategies.

On average, LDCs’ level of tax revenue per GDP is two to three times lower than in OECD countries and less than half of the average for upper-middle income countries. Studies on the optimal level of taxation for development vary, but mostly suggest that revenues in the vicinity of 25 percent of GDP are desirable. It is therefore safe to say that at only around 10 percent of GDP on average, LDCs are far short of collecting adequate budgetary resources to provide much needed public investment and services.

There are also considerable differences among LDCs, with five countries even reporting rates below 10 percent and another 9 countries showing rates between 10 and 15 percent in recent years, out of 18 countries for which data exist for 2002 to 2008 (see Appendix). The low level of taxation would appear to suggest that LDCs have considerable room for improvement in this area.

Some exceptions notwithstanding, LDCs as a group have not seen a significant rise in tax revenues per GDP in recent decades. Where such a rise has occurred, it was mainly due to an increase in resourcerelated taxes, sometimes with the effect of crowding out more traditional sources of tax revenue.

41

SECTION II

Many commodity-exporting LDCs have seen sizable increases in revenues as the prices of these commodities rose over the past years. However, revenue from taxing extractive industries is even more volatile and pro-cyclical than tax revenues in general, so it is crucial to administer the proceeds well and account for this volatility when designing resource tax policy. Besides being volatile, LDCs also seem to be under-taxing extractive industries, foregoing significant and easily accessible revenue as a result. Part of the perilous nature of taxing extractive industries is that it allows governments to shy away from more politically demanding taxes such as corporate and personal income taxes. Indeed studies have shown that higher income from resource taxes was regularly accompanied by stagnating or even declining revenues from other tax sources for several African LDCs. Revenues from trade taxes have declined in recent years but account still for a significantly higher share in tax revenue than in other developing countries. Further trade liberalization suggests a continuation of the declining trend in the medium term, albeit with a prospect of increased revenues if trade volumes expand as a result of liberalization in the long run. Whether the net effect will be positive or negative eventually, the immediate consequence of this development is that lost revenues have to be replaced in the short run.

A number of LDCs have made attempts to compensate for the shortfall in trade taxes by establishing or increasing value-added taxes VAT. However in the context of LDCs VAT is not likely to be as efficient as in developing countries, in part because of the need for extensive bookkeeping and the prevalence of a large informal sector.

The financial and economic crisis affected tax revenues mainly negatively. While public spending remained at relatively high levels, government revenue decreased, reflecting shortfalls in customs collection due to weakened imports and lower tax collection, in the context of the tapering off in economic activity. Thus, tax revenues were well below the targets set by many countries and fiscal deficits increased. This countercyclical policy was mainly possible to to increased macroeconomic stabilisation over the past decade.

Large parts of the economy in LDCs are informal, and by definition the “informal economy� comprises workers and companies operating outside the reach of the law or public administration.

Thus a large informal sector is a major obstacle to broadening the tax base and collecting direct taxes. However, better integrating them into the tax process is important for two reasons. First, these usually small enterprises and income earners are sources for additional revenue that have not been tapped so far. However, tax authorities have to be cautious in comparing the administrative costs to the benefits in revenue, and make sure that presumptive taxes, for example, are imposed only where sensible revenues are to be expected and economic distortions are not too big. Second and maybe more important, sensible taxation turns small enterprises into stakeholders of a developmental state designing and implementing industrial policies for structural transformation.

Domestic resource mobilization is critical to reducing LDCs’ vulnerability to external shocks. For instance, many LDCs are highly reliant on exporting a small set of commodities and suffer from large swings in revenues as the prices of these commodities fluctuate on world markets. While taxation does not sufficiently address this lack of economic diversity, it may help mitigate its consequences in two ways. On the one hand, a better design of resource taxes would allow governments to generate adequate revenues when prices are high. Saving and investing some of these proceeds would then enable LDCs to reduce macroeconomic instability by smoothening the path of government expenditure. On the other hand, a more balanced tax mix that draws on a wider range of contributors may reduce dependence on resource taxes altogether and could help stabilize public revenues in LDCs. For raising revenues not only tax rates are important but the revenue administration is playing a crucial role. There has been substantial progress in the tax administration of LDCs. The time needed to 42

SECTION II

prepare and pay taxes per year is, on average, not much higher in LDCs (258 hours) than in OECD countries (216 hours) according to World Bank statistics.

Some LDCs, for instance Rwanda, have implemented modern administration structures for their tax authorities, replacing geographical organization by functional departments that cover different tax segments or tax payer groups or specialize in certain aspects of the taxation process such as analysis, audit or appeals.

Likewise the government of Bangladesh has taken measures to increase domestic resources through better compliance, collecting arrears, and extending VAT. It plans to introduce full automation of tax and customs administration, shorten the list of tax exemptions, expand the existing tax base, and improve and strengthen the monitoring of tax collection, among others.

Profound improvements in generating domestic revenues will not come quickly. Instead, the scope of several key underlying problems such as limited tax administration capacity, narrow tax bases, and attitudes towards taxation suggests that in order to bring about such change, many years of sustained efforts will be required on the part of governments and citizens alike. So donors should not see domestic resource mobilization as a substitute for urgently needed increases in ODA. In the long run, however, LDCs should see taxation as an opportunity to shift accountability back from donors to their own citizens, creating a more stable and more legitimate state in the process.

Indeed if LDCs are to reassert ownership of their development paths – ultimately a necessity for successful development – they need to increasingly rely on domestic rather than external public resources. LDCs should work towards a fair, simple, and efficient tax system to allow for a better provision of government services, which in turn would make tax payers more compliant and governments more accountable.

Tax preferences granted to certain groups of tax payers can have many reasons. Sometimes they are plainly political, but tax incentives for foreign investors or domestic businesses are not negative per se. However, tax exemptions tend to make tax systems more complex, undermine the tax base, reduce fiscal legitimacy, and create opportunities for corruption. Granting preferential tax treatment should thus be the exception, not the rule.

Relying more on income tax and exemptions on basic consumer items would enable more redistribution of resources. But where administrative capacity is weak, personal income tax is less progressive than expected. Firstly, only wages, mostly earned in large private firms and in the public sector, are taxed. Secondly, personal income earned on capital is typically not taxed. Capital, real estate income and other revenues of high earners in the informal sector are thus outside the reach of tax administration.

The ability to collect and administer taxes and to detect and prosecute tax fraud requires considerable administrative capacity, which many LDCs lack. At the same time, inefficient bureaucracies make paying taxes costly and often deter smaller potential tax payers such as small and medium enterprises from contributing altogether.

Combating corruption Combating corruption is crucial for increasing the effectiveness and transparency of government revenue and expenditure. To date, 32 of 49 least developed countries are States parties to the United Nations Convention against Corruption (UNCAC), and 6 are signatories. Haiti, Lao Peoples Democratic Republic and Timor Leste have ratified the Convention in 2009. Of the least developed countries who are States parties, 14 completed the original UNCAC self-assessment checklist, which considered 15 Articles of the Convention.

43

SECTION II

The Extractive Industries Transparency Initiative (EITI), which has been endorsed by the General Assembly in 2008, is also gaining momentum in least developed countries. 15 least developed countries have been candidate countries as of April 2010, having completed the sign-up phase and working towards full implementation of all EITI principles and criteria, which will make revenues from extractive industries more transparent.

Private savings and investment In addition to public investment financed mainly through taxes and ODA private savings can also increase private domestic investment in LDCs. However, household savings are generally low due to the high poverty rates. Furthermore savings are often held in the form of assets like gold. In addition, domestic capital markets which would channel savings into productive investment remain underdeveloped in most LDCs. Ttraditional banks, with their high fixed costs, are poorly placed to cater to the majority of the population, as they remain concentrated in urban areas with high minimum deposit requirements putting them out of reach for most. Deepening domestic finacial systems can also enable households to smooth consumption and investment more efficiently thus reducing risks.

As experience from more advanced countries shows capital markets can play an important role in the mobilization of domestic resources even at low average income levels. By protecting investors, ensuring fair, efficient and transparent markets and reducing systemic risk, efficient capital market regulation increases operators’ confidence and attracts investors.

By protecting investors, ensuring fair, efficient and transparent markets and reducing systemic risk, efficient capital market regulation increases operators’ confidence and attracts investors. The development and expansion of capital markets in LDCs is constrained by factors such as limited market size and capacity, lack of trained human capital, market fragmentation, shortage of equity capital, information inefficiency, inefficient regulatory regimes and lack of investor confidence in stock exchanges.

Banks in LDCs tend to hold large amounts of excess liquidity, charge high lending rates of interest, and prefer short-term, risk free government securities. Moreover, the spread between deposit and lending rates of interest has remained wide. Risk is one explanation for such wide spreads. The market power exercised by the small number of large and often foreign-owned banks that dominate the financial sector in LDCs is another. Unfortunately, as long as such high real rates of interest prevail and interest rate spreads remain wide, there is little prospect for accelerated capital accumulation, which has to be the driving force for long-term growth and development.

Development banks, which have been abolished in many LDCs, were often effective at performing the essential function of mobilizing and allocating long-term investment-focused development finance. Domestic commercial banks have been unwilling to undertake this function, particularly in the wake of financial liberalization.

Micro-finance institutions also have a role to play in the mobilization and allocation of domestic resources. The emergence of micro-finance institutions in a number of LDCs in the last decade has created opportunities for smallholder farmers in rural areas and small businesses and households in urban areas to access credit for business development and employment generation. Strengthening the capacity and operational outreach of such institutions could accelerate the pace of financial sector development as well as poverty reduction by reducing the number of credit-constrained individuals and entrepreneurs.

However, only a few African countries have an appropriate legal provision and regulatory framework that enable micro-finance institutions to function smoothly. Thus, experience sharing and dissemination of good practices on micro-finance within the continent could significantly improve the mobilization of savings and its transmission into investment.

44

SECTION II

Capital Flight Despite low savings rates many LDCs especially in Africa continue to experience massive capital flight, some financed by borrowed funds. Indeed, empirical evidence suggests quite ironically that Sub-Saharan Africa is a “net creditor” to the rest of the world—in the sense that the private assets held abroad by Africans exceed the continent’s liabilities to the rest of the world. This capital flight, which is very difficult to measure as it is partly illicit, deprives LDCs of a sizable portion of the resources they need for development financing. Some estimates indicate that capital flight exceeds the stock of external debt in a number of LDCs. It also undermines domestic investment and thus reduces long-term growth.

Policy recommendations Actions by LDCs Tax revenues should not be seen as an alternative to foreign aid, but as a component of government revenues that grows as the country develops. One of the development dividends of effective tax systems is greater ownership of the development process, whereby the government shapes an environment that is more conducive to foreign and domestic private investment, sustainable use of debt and effective foreign aid. The challenge is therefore for LDCs and their partners to reverse the vicious circle of aid dependence shifting government accountability away from citizens towards donors, and trigger a virtuous circle of aid becoming redundant by supporting public resource mobilisation.

The most effective way of increasing public revenue is through policies that increase the tax-base through sustained economic growth. Efficient tax collection also strengthens public resource mobilization without over-taxing the economy. Any increases in taxation should ideally be growth-neutral, without harming the already weak private sector in many LDCs. In designing tax policy, LDCs should aim to administer a broader range of taxes in order to minimize economic distortions by equalizing marginal rates, increase revenues, and enhance fiscal legitimacy. A wide tax base is more stable because it relies on a diversified set of taxes, with a mild burden on each type of taxpayer and each type of economic activity. A wide base engages a bigger range of stakeholders in the national political process.

Specifically domestic indirect taxes need to be increased at a faster rate taking into account concerns about distribution. Reducing VAT exemptions could contribute to this goal. Raising VAT rates on luxury consumption items would help to augment revenues and to enhance the equity of the tax structure. Such a change in policy would also help to move some of the tax burden onto higherincome households that can better afford to pay such rates.

An area of tax policy that has been neglected in LDCs is property taxes, which often finance local Government. Such taxes mainly cover urban areas, where most of the rich and the middle class are concentrated. Strengthening property taxes would help make the general tax structure more progressive. Property taxes can also help to boost domestic production, if they are used to finance the urban infrastructure on which many countries’ manufactured export sectors rely.

Short-term tax policy options in most LDCs are constrained by the tax administration capacity.

In particular, there are fewer redistributive tax policies available than in industrialized countries.

Therefore, upgrading tax administration is a pre-requisite to reducing income inequality through progressive taxation.

Effectiveness in tax administration also requires that tax authorities are endowed with greater powers of intervention to follow up and sanction tax evasion, for instance by granting them more autonomy.

45

SECTION II

The relationship between tax payers and authorities needs to be improved. Tax payers should be seen and treated as stakeholders rather than suspects, and public education campaigns can enhance understanding of the significance of taxation in the wider population.

Implementing advanced IT systems will help boost analytical capacities of tax administrations as well as making it easier to pay taxes through e-filing. Some developing countries in Asia and Latin America have successfully embraced information technology for this purpose and LDCs should follow their lead where appropriate.

Improvement of capital markets is most urgent in the following areas: improving access to financial services, both for potential savers and potential borrowers; expanding the portfolio of savings and investment products available, and improving information systems, which can help reduce the risk and uncertainty of lending and investing, and help make better informed decisions about what the most productive use for financial resources might be.

Expanding the provision of micro-savings, micro-insurance, venture capital and long term financing would help provide the products best suited for the needs of savers and investors in LDCs. Especially the re-establishment of development banks, rural and agricultural banks and other institutions which fill the gaps in service provision needs to be pursued to foster private investment. In addition to extending micro credit the increasing use of technological tools, such as mobile phone banking could reduce costs for financial services and increase access.

To increase also private savings capital markets need to be strengthened through improved regulation.

One way to increase the viability of capital markets is to promote regional equity markets, especially by drawing on existing economic regional integration. Encouraging illicit capital flow repatriation is another identifiable source for increasing financial resources in developing countries.

It is important for Governments to institute some forms of management of the capital account in order to safeguard the resources for development, including the reduction of capital flight.

While some degree of macroeconomic stabilisation is beneficiall for long-term investment and growth very low inflation rates should not always be the sole aim of monetary policies. LDCs should also aim at ensuring moderately low real rates of interest and enhanced supply of credit to stimulate private investment.

Actions by development partners/international community Development partners should support LDCs in their efforts to raise domestic resources through revenue generation and capital market developments. Support is especially needed in the area of capacity building. Thus it is important to try to direct ODA more towards building the domestic capacities of LDCs to mobilize domestic sources of development finance. This implies much greater emphasis on mobilizing domestic savings.

ODA could play a pivotal role in increasing domestic investment. If it is allocated to key economic infrastructures with large spillovers, ODA may crowd in additional investment and trigger large supply responses. In turn, this would spur income growth, thereby strengthening the capacity of financial institutions to mobilize domestic savings. ODA could also directly and indirectly strengthenthe revenue mobilizing capacities of LDCs. To reverse and prevent capital flight a more transparent international financial system and concrete measures to repatriate LDC assets from abroad are needed.

46

SECTION II

SOURCES IMF (2010) Reaching the MDGs – Macroeconomic prospects & Challenges in Low-Income Countries UNECA (2010), Economic Report on Africa 2010, Addis Ababa UNCTAD (2009), LDC Report 2009, New York and Geneva OECD African Economic Outlook 2007, Paris OECD African Economic Outlook 2010, Paris UN (2005) Millennium Project World Bank (2009), Statistical Database

APPENDIX Table: Tax revenue (percent of GDP) for LDCs with available data Least-developed countries

1990

1995

2000

2001

2002

2003

2004

2005

Afghanistan

2006

2007

2008

6.0

5.1

5.8

8.1

8.8

Bangladesh

7.6

7.7

8.1

8.1

8.2

8.2

Benin

15.5

15.7

15.7

16.4

15.5

16.0

11.8

11.6

12.0

Burkina Faso Burundi 0.9

4.9

3.5

4.4

6.3 10.2

Lao People’s dem. Rep.

10.1 37.4

43.8

14.0

13.6

13.2

14.0

13.0

Myanmar

6.2

3.7

3.0

2.3

2.0

Nepal

7.0

9.0

8.7

9.5

8.6

8.7

9.0

Madagascar Maldives Mali

35.6

38.9

36.5

39.0

44.7

45.9

57.5

54.4

11.3

9.7

7.7

10.0

10.9

10.1

10.7

11.4

13.8

13.7

13.3

14.3

16.6

18.0

19.9

21.5

13.8

15.3

15.7

15.7

15.6

2.2

3.3 9.2

8.8

9.8

10.3

10.7

11.5

Niger Rwanda

5.3

9.0

16.1

16.1

10.2

12.0

11.4

Swaziland Uganda

47

21.0

10.4

11.5

10.8

27.6

Togo 10.4

Vanuatu

21.5

19.1

Yemen, Rep.

10.9

8.6

Zambia

19.5

17.2

Source: World Bank database

58.9

8.8

Senegal Sierra Leone

12.5

6.2

Ethiopia Lesotho

12.5

16.7

Central African Republic Dem. Rep. of the Congo

17.3

14.4

13.9

14.7

16.4

16.3

10.4

11.2

11.3

10.7

11.8

12.3

12.4

12.8

18.6

17.4

16.7

17.6

17.2

16.4

17.1

SECTION II

Table: Gross domestic savings (percent of GDP) in LDCs Least-developed countries

2000

2001

2002

2003

2004

2005

2006

2007

2008

Angola

41.9

15.1

-19.4

-32.7

-29.9

-14.8

-8.3

-8.7

-7.9

23.9

19.2

25.1

37.9

49.1

45.1

37.3

Bangladesh

17.8

Benin

6.0

17.0

18.4

17.6

18.7

18.1

18.4

17.5

15.8

6.5

3.7

6.0

5.5

6.9

6.9

6.1

7.1

Bhutan

26.9

32.8

40.4

39.4

37.5

31.7

33.0

37.3

51.4

Burkina Faso

0.6

-0.1

3.7

4.5

1.8

4.8

2.8

Burundi

-6.0

-7.8

-9.7

-8.7

-11.0

-23.1

-19.9

Afghanistan

Cambodia

5.6

10.0

9.3

10.1

8.9

9.8

13.1

13.2

Central African Republic

5.2

3.9

4.3

1.6

0.0

0.1

1.4

1.5

-1.0

Chad

5.5

5.3

-40.8

18.0

24.5

35.1

36.4

20.5

19.6

Comoros

-5.7

-5.2

-4.0

-5.8

-10.6

-12.9

-14.0

-11.4

-8.1

Dem. Rep. of the Congo

4.5

3.2

4.1

5.0

4.0

6.0

-0.6

8.8

8.6

Djibouti

-6.5

-0.6

4.9

5.3

4.3

8.6

12.3

18.1

Equatorial Guinea

74.5

81.2

79.0

80.1

78.9

83.7

86.1

86.9

Eritrea

-42.9

-18.5

-27.4

-40.9

-41.5

-27.2

-17.2

-17.7

72.8

Ethiopia

8.3

9.7

9.9

7.8

8.8

2.6

1.5

4.2

0.4

Gambia, The

8.5

12.0

12.9

11.1

8.9

4.0

11.2

6.6

6.2

Guinea

15.4

14.7

11.8

21.5

18.4

18.3

13.9

9.7

10.2

Guinea-Bissau

-8.5

-19.4

-11.8

-1.6

14.1

11.5

-3.9

7.7

4.9

Haiti

6.6

2.1

1.2

-1.4

-1.3

3.4

0.6

2.7

-0.1

Lao People’s dem. Rep.

14.2

17.9

19.3

21.1

16.4

18.8

22.5

23.1

25.5

Lesotho

-23.8

Kiribati

Liberia

-20.6

-31.1

-24.7

-24.0

-26.7

-22.1

-25.6

-35.3

-3.4

-3.4

-3.2

-0.7

2.4

-34.6

-142.6

-121.5

7.7

8.9

8.5

8.0

14.1

10.8

10.3

-3.4

2.0

-1.1

-1.3

23.4

23.6

Madagascar

7.7

15.3

Malawi

3.8

3.8

Maldives

44.2

44.9

46.4

49.1

46.2

18.8

Mali

12.0

14.0

11.3

13.3

8.6

11.0

14.8

13.5

Mauritania

-8.6

3.1

-1.9

-5.0

-3.1

-15.0

18.8

18.7

Mozambique

11.5

3.8

13.1

4.1

5.2

7.6

10.3

7.2

6.2

Myanmar

12.4

11.5

10.2

11.0

12.1

Nepal

15.2

15.1

9.5

8.6

11.8

11.6

9.0

9.9

11.2

Niger

3.5

4.4

5.3

5.1

4.1

13.7

Rwanda

1.3

2.9

-0.5

0.4

4.4

5.2

2.6

3.0

7.8

Senegal

11.2

9.4

6.8

8.8

7.9

14.1

10.8

8.6

7.7

Sierra Leone

-14.3

-11.6

-8.2

-3.7

-0.4

4.1

7.6

6.1

1.7

Solomon Islands

-29.3

-42.7

-31.8

4.1

0.0

-6.8

-6.5

Sudan

15.9

9.8

13.3

15.7

18.7

13.8

13.9

20.5

24.3

Timor-Leste

-46.9

Togo

-2.2

1.0

0.6

5.3

4.5

1.5

Uganda

7.7

6.6

5.9

6.7

9.7

11.3

7.6

8.3

5.8

United Republic of Tanzania

10.2

8.8

11.8

12.0

11.2

9.7

10.7

Vanuatu

12.4

7.1

5.7

14.0

15.7

13.9

17.0

Samoa Sao Tome and Principe

Somalia

Tuvalu

18.7 48

SECTION II

Table: Gross domestic savings (percent of GDP) in LDCs 2000

2001

2002

2003

Yemen

25.18

20.05

20.18

20.93

Zambia

3.05

2.75

7.86

13.03

Source: World bank database.

49

2004

2005

2006

2007

2008

19.93

21.76 31.47

30.53

24.72

SECTION II

HARNESSING PRIVATE CAPITAL FLOW TO LDCs Introduction Foreign direct investors can play a critical role in reducing poverty in LDCs, by building roads, for example, providing clean water and electricity, and above all, providing jobs. By taking on these tasks, the private sector can help economies grow and avert the need for governments to use funds better spent on acute social needs, while taking advantage of the opportunity to make profitable investments.

Foreign direct investment (FDI) has been the most rapidly increasing resource flow to LDCs over the past decade, although total ODA remains the largest source of foreign resources for the least developed countries. In addition the source of FDI has shifted from predominantly developed countries to a majority of investments from developing and transition countries. Despite these developments the total share of FDI to LDCs in global FDI remains below 2 percent, reflecting the general trend that the majority of FDI has beengoing to very few countries. Furthermore many investments are concentrated in a small number of LDCs and have focused on resource extraction, which do not fully release the potential for developmental progress that FDI could deliver.

The BPoA recognises the role of foreign direct investment as an important source of capital, know -how, employment and trade opportunities for LDCs. It states: “A paramount objective of the actions

by LDCs and their development partners should be to continue to strengthen productive capacities by overcoming structural constraints. Access to finance by way of domestic resource mobilization, foreign direct investment and increased ODA resources will be critical in this regard.” (Paragraph 44). However despite considerable efforts the goal to increase the ratio of investment to GDP to 25 percent per annum could not be reached. Thus there is an urgent need to develop new strategies to attract FDI to LDCs in order to increase productive capacities and foster structural transformation.

Recent developments of FDI to LDCs From 2000 to 2008, total net foreign direct investment (FDI) inflows to least developed countries have seen tremendous increases. Within this period, FDI flows grew from US$4.1 billion to US$32.4 billion. This is attributed to rising commodity prices, economic growth and reform as well as increased openness to FDI, international production and increased participation from within the developing world [WIR 2010, WIR91]. By far the greatest fraction of these investments has been received in African LDCs, recording 86 percent of the 2008 value. During 1990-2008, FDI inflows rose to almost all LDCs, except Burundi, Eritrea, Nepal, Samoa and Timor-Leste. Nonetheless, the fraction of FDI flows to least developed countries of global FDI flows is minute. In 2008, 1.8 percent of world total FDI was directed at least developed countries.

The value of FDI stocks has seen strong increases during the past years. In African least developed countries, the total value of foreign investors’ capital and reserves increased by around 260 percent for the period of 2000 to 2009. The remaining LDCs recorded an average increase of around 155 percent during the same period. In 2009, the combined value of all LDCs FDI stock reached US$130.45 billion.

50

SECTION II

FDI flows to LDCs in US$ million, 2000-200924

Source: UNCTAD, WIR 2010

FDI stocks in LDCs in US$ million, 2000-2009

Source: UNCTAD, WIR 2010

FDI flows as a percentage of GDP in 2008 attributed 8.6 percent of GDP in African LDCs, 4.9 percent in island nations, yet only 2.4 percent in Asian LDC economies. Further, FDI is a key driver of LDC’s gross capital formation, which is very important for structural transformation, productive capacity building and growth. In 2008 FDI contributed to 41.6 percent in African LDC’s and Haiti’s gross capital formation, 17.2 percent in Island LDC’s and 10.8 percent in Asian LDC’s domestic investment.

24

51

Islands includes: Comoros, Kiribati, Maldives, Samoa, Sao Tome and Principe, Solomon Islands, Timor-Leste, Tuvalu, Vanuatu.

SECTION II

FDI flows to LDCs in percent of GDP, 2000-2009

Source: UNCTAD, WIR 2010

The majority of FDI inflows to least developed countries are in the form of greenfield projects.

In 2009, more than 60 percent of them originated from developing and transition economies.

Within these flows, the sectoral distribution is not well diversified. In terms of value, most of the flows are addressed to resource extraction industries. This provides an insight for the African magnitude in the statistics, as most of the FDI into African LDCs is in resources and commodity extraction.

Twelve oil- and mineral exporting least developed countries account for about 76 percent of total inward flows to least developed countries. Regarding the number of projects, however, the distribution of FDI flows is more dispersed. During 2003-2009, 39 percent and 44 percent of all greenfield investment projects were registered in the manufacturing and services sectors, respectively. These are partly labour-seeking investments using relatively cheap unskilled labour and partly market seeking including markets for which LDCs have preferential access. Often FDI in low-skilled manufacturing or agricultural exports employ a large share of women increasing their employment opportunities. In African LDCs, where investments into extraction are particularly strong, rising FDI in the telecommunications sector offers some diversification. In Asia, however, the investments are mainly in the manufacturing and services sectors, such as electricity.

The developmental impact of FDI in extractive industries is considered to be relatively low as resource extraction is mainly capital intensive and high skilled labour is brought in from outside. There are also limited linkages with the domestic industry and thus technology and knowledge transfer is limited. One of the main benefits from FDI in natural resource extraction are royalties and taxes which contribute to government revenue. In this respect the Extractive Industries Transparency Initiative (EITI), which has been endorsed by the General Assembly in 2008, is gaining momentum in least developed countries. 15 least developed countries have been candidate countries as of April 2010, having completed the sign-up phase and working towards full implementation of all EITI principles and criteria, which will make revenues from extractive industries more transparent.

Developing countries are increasingly gaining force in foreign direct investments. This can be explained with firms seeking relatively higher returns and profits than in the home markets, paired with lowering of cross-border investment barriers, improved macroeconomic conditions in the developing world as well as strengthening south-south links, increased global financial integration and standardisation.

52

SECTION II

In particular investments from China, India, Malaysia and South Africa are of increasing importance in FDI to least developed countries. For instance, 2008 has seen substantial increase in infrastructure investments from Asian countries to sub-Saharan Africa. A major contributor to FDI in African LDCs is China, which particularly aims at extractive industries and agriculture. However, investments also include manufacturing, construction and infrastructure, often in projects considered too risky by European and US Firms. India is a second major developing-country investor in Africa, even outnumbering China by the number of projects during 2003 and 2009. In this period, China invested a total value of US$29 billion, compared to US$25 billion by India. In addition, the Gulf Cooperation Council’s investments in Africa have recently increased in diversified sectors such as telecoms, tourism, finance, infrastructure, mining, oil and gas as well as agriculture. All major players in the telecommunications sector in Africa are from other developing countries, able to draw on their experience of operating in the particular environment of a less-developed economy. Furthermore, the banking sector in LDCs is target of FDI from developing countries. ‘Southern’ banks appear less riskaverse their developed-country counterparts, and thus more willing to invest in LDCs with weaker institutional foundations.

Besides multinationals, sovereign wealth funds (SWF) also present a strong and growing force of FDI for LDCs. In the past, SWF’s investments have largely been focused on developed countries, yet, with many of them incurring large losses early in the current crisis, they are reassessing their strategies and plausibly show greater interest in least developed countries in the future. As commodity prices are set to stabilise, and equity returns’ downturn halts, SWF will recover most of their funding and potentially increase their investments. The political motivations of governmentally controlled or backed investments can be manifold and may have a complex impact on the countries developmental progress.

There are specific benefits from investments of developing and transition countries. TNCs, government-backed investors such as SWFs and other investors of developing countries have a common advantage of cultural and physical proximity, are likely to engage in a knowledge transfer relevant and specific for developing countries. They are aware of the technology and business practices in developing countries’ markets and may thus be able to efficiently create and exploit comparative advantages.

For instance, investors from other developing countries may have a greater capacity to adapt products to poorer customers. Furthermore, there is some evidence that developing-country TNCs can be expected to use more labour-intensive intermediate technology than developed-country investors and thus create more employment. A further benefit of FDI from developing countries is the possible lower correlation with economic changes in the developed world, thereby reducing the volatility of FDI to least developed countries. Also, while the developed nations are very well integrated economically (i.e. are subject to greater co-movements of economic variables), the developing countries amongst each other are experiencing less similar changes in their economies (see for instance the different impact of the current crisis on BRIC economies). This caters for an additional diversification of FDI flows and reduces the FDI volatility experienced in least developed countries. An example is given by China, which even in the current crisis has thrived to make continued investments in LDCs. In terms of developmental progress, there is no clear distinction between developing and developed countries’ FDI. There is evidence that companies from developing countries employed less workers and paid lower wages on their investments in Africa than investors from more affluent countries.

However, they did employ a larger share of low-skilled workers, thereby increasing employment and hence aiding poverty alleviation. Increased technical and financial cooperation, as well as a new combination of FDI, ODA and trade within Southern countries present promising prospects for the economic and social development of least developed countries.

53

SECTION II

Effects of the financial and economic crises and prospects for FDI The current economic crisis has had a significant impact on FDI flows to least developed countries and ended eight years of consecutive growth. In the year from 2008 to 2009, FDI inflows to least developed countries decreased by 13.6 percent to a total value of US$28 billion. This drop is mostly accounted to a fall in global commodity prices in the second half of 2008, which is a major driver of FDI in many LDCs, as noted above. Further, there have been cancellations of certain mergers and acquisitions deals as well as some large divestments in West Africa which added further strains on FDI flows. Nonetheless, with these divestments coming to an end, cross-border mergers and acquisitions transactions rose to US$1.5 billion in the first five months of 2010, relaxing the downward FDI trend to some extent. The severe decrease in FDI flows highlights the vulnerability of LDC economies to external shocks and changes in economic conditions abroad. Given the great importance of FDI to capital accumulation in least developed countries, this implies a significant impact on the developmental progress. Further, it shows the high importance of resource extraction projects in LDCs. These investments seldom lead to the developmental advances that FDI is credited with.

For the next few years, the potential for FDI into least developed countries remains limited. The economic outlook for both advanced and developing economies in the current economic climate remains unclear. Although there are signs of recovery, the uncertainty of its quality adds strains on FDI prospects, as investors are more risk averse and markets are more volatile. Additionally, the structural problems of LDC economies affect the future development. These disadvantages include limited market size, weak business environment, high level of perceived risk as well as in-transparent and fragile governance and institutions. Many LDC economies have a low competitiveness compared to other, relatively more advanced developing economies. For instance, the UNCTAD World Investment Prospects Survey 2010-2012 does not rank any least developed country amongst the top 30 priority destinations for investors. Especially sub-Saharan Africa, which represents a major region for FDI flows to least developed countries, was given the lowest priority for future investment projects by that publication.

Way forward Actions by LDCs The objectives for least developed countries are two-fold. Firstly, they should use the present FDI inflows to strengthen the infrastructure as well as productive capacity and take as much as possible advantage of the potential in knowledge and capital gains. Secondly, they should seek to attract more FDI inflows for areas of dire need of development, possibly in combination with ODA. For all sectors of the economy, least developed countries should try to create an enabling policy and regulatory framework that is required for attracting domestic and foreign investment.

The least developed countries are lacking economic infrastructure, which is essential to take advantage of the economies’ potential. Infrastructure in the areas of transport, energy, communication etc. is a precondition for production and access to domestic and international markets. As investment needs are much larger than potential public investment or ODA in these sectors LDCs should encourage FDI in infrastructure. The telecommunication infrastructure has already seen great advances in the past, but especially broadband and a wider availability of telecommunications need to be promoted further. New resources made available in the context of climate change adaptation could encourage investment in renewable energy including through public-private partnerships and FDI. Through a revised Clean Development Mechanism there could also be additional resources of funding for such projects.

54

SECTION II

Long-term development also requires the development of strong human resources, These human resources would also help to attract further FDI in non-extractive industries as foreign investors need local knowledge and partners to be successful. Therefore measures to increase knowledge transfer and skill development from FDI should be emphasised. A special focus on vocational education in partnership with foreign enterprises could increase the pool of people with scarce technical and managerial skills needed for entrepreneurship. Public-private partnerships have a great potential in this area, as well as combined ODA and FDI efforts.

To increase the developmental impact of FDI in extractive industries, strengthening LDCs governments’ capacity to negotiate with multinationals should be envisioned. The rise of more advanced developing countries has increased competition for resources, thus raising the bargaining power for negotiation of contracts and enabling greater possibilities for regional spill-over from extraction.

Agricultural production in least developed countries is in need of private and public investment, which would boost productivity and enhance food safety and affordability. Governments should formulate an integrated strategic policy and regulatory framework for FDI in agricultural production.

This should include vital policy areas such as infrastructure development, competition, trade and trade facilitation, and R&D. Governments could also promote contract farming between TNCs and local farmers which could enhance farmers’ predictable income, productive capacities and benefits from global value chains.

In order to address some concerns related to the recent increase of FDI in agriculture a set of core principles is being developed by FAO, IFAD, UNCTAD and the World Bank. These principles need to be implemented jointly by host and home countries: (1) Existing rights to land and associated natural resources are recognized and respected; (2) Investments do not jeopardize food security but rather strengthen it; (3) Processes relating to investment in agriculture are transparent, monitored, and ensure accountability by all stakeholders, within a proper business, legal, and regulatory environment; (4) All those materially affected are consulted, and agreements from consultations are recorded and enforced; (5) Investors ensure that projects respect the rule of law, reflect industry best practice, are viable economically, and result in durable shared value; (6) Investments generate desirable social and distributional impacts and do not increase vulnerability, (7) Environmental impacts of a project are quantified and measures taken to encourage sustainable resource use, while minimizing the risk/ magnitude of negative impacts and mitigating them (see Appendix 2 - TD/B/C.II/CRP.3). To ensure food security in host countries as a result of export-oriented FDI in food production, home and host countries could consider output-sharing arrangements.

Actions by development partners and the international community A transition to export-oriented FDI, thereby exploiting preferential market access could improve the developmental impact of the FDI recorded through gaining exporting experience and increasing employment. Least developed countries’ exports benefit from a number of preferential trading schemes such as the European Union’s Everything But Arms (EBA) initiative, which provides dutyfree quota-free (DFQF) market access to all products from all least developed countries. Many other developed countries also provide DFQF market access for 97 percent of products originating from least developed countries as called for in the 2005 Hong Kong declaration. More recently a number of developing countries such as China, India and Brazil have also been providing preferential treatment to least developed countries’ products. However as the supply capacity of most LDCs is small the effects of these trade preferences have been limited. Thus FDI in sectors with higher employment and value addition could play a catalytic role in promoting exports.

There is potential in ODA to address structural problems of LDCs and support attracting export-oriented FDI. Furthermore, ODA can stabilise LDC’s foreign capital inflows in times of FDI volatility.

55

SECTION II

ODA and FDI have a close relationship with regard to LDC’s development but the sectoral allocation of ODA has to take this relationship into account. Especially Aid for Trade, can serve to improve conditions in these areas and make FDI more effective and accessible. These provisions include investments in human capital, in infrastructure, and assistance to regulatory reform. Specifically ODA for technical capacity of domestic firms would enable them to partner with foreign investors. In this respect multilateral agencies which support FDI in LDCs like the Multilateral Investment Guarantee Agency (MIGA) need to be strengthened.

For foreign investors, there exist more opportunities than the sole exploitation of current potential, whether resource, labour or market-based. This could arise from engaging with an LDC as its development advances over time. The private sector could seek potential business opportunities in development processes itself or work in conjunction with the public sector in PPPs. These efforts can include various projects of infrastructure development, in sectors including energy, telecommunications, and transportation, as well as improving efficiency in the financial services industry. Particularly promising prospects for PPPs lie in public sector areas such as health, education and other social services.

Activities in this area could include productive capacity building for domestic enterprises.

Outward investment promotion strategies should be directed at fostering a lasting impact of the investments for LDCs development. Thus development partners should adopt an investment preference regime for encouraging their corporations to invest in infrastructure and productive capacity in LDCs. These incentives could take various forms some of which are listed here: • tax exemptions for firms that invest in priority sectors in LDCs, • investment guarantees and credit risk guarantees • partnership programmes for technology transfer by fostering linkages between foreign and domestic firms to maximize spillover effects • enhancing local firms capacities to be part of global value chains • include productive capacity and infrastructure related provisions in International Investment Agreements (IIAs) • disseminate information about investment opportunities in LDCs to suitable home country firms • encourage Multinationals to disclose corporate information about their investments in LDCs • Such incentives need to be further developed in close cooperation between home and host countries.

SOURCES Organisation for Economic Co-operation and Development (2010), Perspectives on Global Development 2010 – Shifting Wealth, Paris United Nations Conference on Trade and Development (2009), The Least Developed Countries Report 2009 – The State and Development Governance, New York and Geneva United Nations Conference on Trade and Development (2009), World Investment Report 2009 – Transnational Corporations, Agricultural Production and Development, New York and Geneva United Nations Conference on Trade and Development (2010), World Investment Report 2010 – Investing in a low-carbon economy, New York and Geneva United Nations Conference on Trade and Development (2010), FDI Flows and Stocks United Nations General Assembly, Economic and Social Council (2010), Report of the Secretary-

56

SECTION II

General: Implementation of the Programme of Action for the Least Developed Countries for the Decade 2001-2010, New York United Nations Office of the Special Advisor on Africa (2010), Africa’s Cooperation with the New and Emerging Development Partners: Options for Africa’s Development, New York.

UNCTAD (2010) World Investment Prospects Survey 2010-2012 UNCTAD, Trade and Development Board (2010): Principles for Responsible Agricultural Investment that Respects Rights, Livelihoods and Resources – A discussion note prepared by FAO, IFAD, the UNCTAD Secretariat and the World Bank Group to contribute to an ongoing global dialogue (TD/B/C.II/CRP.3).

ANNEX 1 FDI inflows to LDCs Least-developed countries

57

Current US$

Percent of GDP

2000

2009

2000

2009

Afghanistan

0.17

185.00

0.01

1.24

Angola

878.62

13100.57

9.62

45.62

Bangladesh

578.70

716.00

1.27

0.81

Benin

59.74

92.55

2.53

1.40

Bhutan

0.00

36.37

0.00

2.74

Burkina Faso

23.11

171.41

0.88

2.11

Burundi

11.68

9.90

1.65

0.79

Cambodia

148.50

532.50

4.05

4.97

Central African Republic

0.84

42.25

0.09

2.10

Chad

115.17

461.81

8.31

6.75

Comoros

0.09

9.09

0.05

1.71

Dem. Rep. of the Congo

72.00

951.40

1.37

6.33

Djibouti

3.29

100.00

0.59

9.55

Equatorial Guinea

154.50

1636.22

13.12

13.79

Eritrea

27.88

0.04

3.95

0.00

Ethiopia

134.64

93.57

1.66

0.33

Gambia

43.52

47.35

5.56

5.07

Guinea

9.94

140.85

0.32

3.27

Guinea-Bissau

0.70

13.96

0.33

3.49

Haiti

13.25

37.95

0.38

0.53

Kiribati

17.60

2.20

38.36

2.93

Lao People’s dem. Rep.

34.00

156.70

2.06

2.78

Lesotho

31.50

48.00

4.02

2.94

Liberia

20.80

378.00

3.94

44.17

Madagascar

82.95

542.63

2.14

6.41

Malawi

39.63

60.45

1.65

1.26

Maldives

13.00

9.60

2.08

0.71

Mali

82.44

109.10

3.10

1.24

Mauritania

40.10

-38.30

3.73

-1.36

Mozambique

139.20

881.23

3.23

8.82

Myanmar

208.00

322.98

2.86

1.02

SECTION II

Nepal

-0.48

38.56

-0.01

0.27

Niger

8.44

738.90

0.51

14.51

Rwanda

8.10

118.70

0.46

2.40

Samoa

-1.54

1.35

-0.67

0.25

Sao Tome and Principe

3.80

35.80

4.95

18.01

Senegal

62.94

207.55

1.34

1.63

Sierra Leone

38.88

33.40

4.20

1.51

Solomon Islands

1.36

172.98

0.40

26.12

Somalia

0.27

108.00

0.01

Sudan

392.21

3034.12

2.99

Timor-Leste

18.34

4.61 2.73

Togo

41.47

50.13

3.20

Tuvalu

-0.92

2.23

-7.51

1.77

FDI inflows to LDCs Current US$ Least-developed countries

Percent of GDP

2000

2009

2000

2009

Uganda

180.81

798.77

2.85

4.89

United Republic of Tanzania

282.00

645.00

2.71

2.80

Vanuatu

20.26

27.18

8.26

5.01

Yemen

6.40

129.20

0.06

0.45

Zambia

121.70

959.43

3.76

7.50

All LDCs

4151.08

27786.00

FDI inflows to LDCs % of Gross Capital Formation

Percent of World FDI

Least-developed countries

2000

2008

2000

2009

Afghanistan

0.04

8.26

0

0.02

Angola

79.44

392.73

0.06

1.18

Bangladesh

5.53

5.69

0.04

0.06

Benin

14.05

12.92

0

0.01

Bhutan

0

5.64

0

0

Burkina Faso

4.59

8.19

0

0.02

Burundi

21.83

9.34

0

0

Cambodia

22.12

34.68

0.01

0.05

Central African Republic

0.79

57.54

0

0

Chad

54.66

18.52

0.01

0.04

Comoros

0.46

10.53

0

0

Dem. Rep. of the Congo

13.07

61.42

0.01

0.09

Djibouti

4.84

51.06

0

0.01

Equatorial Guinea

21.21

-19.78

0.01

0.15

Eritrea

17.94

-0.15

0

0

Ethiopia

8.19

1.99

0.01

0.01

Gambia

15.13

15.08

0

0

Guinea

1.69

54.19

0

0.01

Guinea-Bissau

2.16

9.46

0

0

58

SECTION II

Haiti

2.92

3.27

0

0

Kiribati

76.35

3.24

0

0

Lao People’s dem. Rep.

9.85

11.6

0

0.01

Lesotho

9.95

12.09

0

0

Liberia

53.81

128.12

0

0.03

Madagascar

13.21

37.17

0.01

0.05

Malawi

9.42

16.47

0

0.01

Maldives

7.91

2.13

0

0

Mali

16.47

11.36

0.01

0.01

Mauritania

16.68

49.82

0

0

Mozambique

10.43

28.49

0.01

0.08

Myanmar

24.25

7.99

0.01

0.03

Nepal

-0.04

0.03

0

0

Niger

3.79

42.72

0

0.07

Rwanda

2.57

10.21

0

0.01

Samoa

-4.71

27.99

0

0

Percent of Gross Capital Formation

Percent of World FDI

Least-developed countries

2000

2008

2000

2009

Sao Tome and Principe

13.83

28.01

0

0

Senegal

6.01

6.67

0

0.02

Sierra Leone

52.52

15.71

0

0

Solomon Islands

2.19

91.28

0

0.02

Somalia

0.06

16.14

0

0.01

Sudan

24.72

21.17

0.03

0.27

FDI inflows to LDCs

Timor-Leste Togo

28.7 21.22

6.7

0 0

0

Tuvalu

-13.74

9.33

0

0

Uganda

16.03

20.86

0.01

0.07

United Republic of Tanzania

16.61

10.33

0.02

0.06

Vanuatu

29.03

20.38

0

0

Yemen

0.39

27.93

0

0.01

Zambia

21.8

25.86

0.01

0.09

0.3

2.51

All LDCs

Source: United Nations Conference on Trade and Development (2010), WIR 2010

ANNEX 2 Principles for Responsible Agricultural Investment that Respects Rights Livelihoods and Resources

59

SECTION II

ADDRESSING THE DEBT PROBLEMS OF THE LEAST DEVELOPED COUNTRIES (LDCs) Introduction The Brussels Programme of Action (BPoA) for the Least Developed Countries (LDCs) stresses that the external debt overhang in the majority of LDCs constitutes a serious obstacle to their development efforts and economic growth. Debt service takes up a large part of scarce budgetary resources that could be directed to productive and social areas, and the debt overhang harms the internal and external investment climate. The BPoA also calls upon the LDCs to initiate joint action with their development partners on the debt situation, including a comprehensive assessment of their debt problems and debt sustainability and to intensify efforts to improve debt management capability, inter alia, by regularly consulting with creditors and development partners on the debt problem.

The BPoA also calls on the development partners to effectively implementing the enhanced HIPC Initiative and to make expeditious progress towards full cancellation, in the context of enhanced HIPC, of outstanding official bilateral debt owed by HIPC LDCs. The development partners should also consider, on a case by case basis, debt relief measures for LDCs which are not HIPCs as an integral part of development processes. The Non-Paris Club official creditors are encouraged to participate in debt relief measures to assist LDCs. The external debt situation of the developing countries particularly that of LDCs, remains a major and serious concern. The cumulative debt of the developing countries and transition economies increased by 8 percent from 2007 to 2008, but stabilized at around US$3.7 trillion in 2009. This represents close to 40 percent of their combined GDP. For LDCs, the situation is far worse. Their cumulative debt of is over USD 155 billion. LDCs are stuck in a perpetual debt over-hang. For many LDCs, debt servicing accounts for a major portion of the ODA they receive.

External debt of LDCs The total external debt of 45 LDCs for which data is available stands at US$155 billion in 2008, which was US$144 in 2007 (see annex 1). The figure below shows the external debt owed by individual LDCs for the year 2008.

Figure 1: External Debt of 45 LDCs (for which data is available) in 2008 (million US$)

60

SECTION II

Source: Global Development Finance: External Debt of Developing Countries, 2010, World Bank, ISBN: 978-0-8213-8229-5

Domestic debt In recent years, many LDCs have been increasingly borrowing from domestic sources to meet their budget deficit and financing gap. For many LDCs, the volume, composition and terms and conditions of the domestic debt are not widely available. However, better data are necessary as the debt sustainability analysis should focus on total debt and study the implication of debt structure.

External debt servicing LDCs primarily borrow from official sources – from OECD countries and/or the multilateral agencies, such as the World Bank, IMF, and the regional banks. They often lack access to private capital markets. The debt problem of the LDCs, especially debt-servicing, is exacerbated by factors beyond their control. Uncertainty in domestic production, volatility in international prices & the exchange rate and deteriorating terms of trade often make their debt-burden unsustainable.

Despite significant debt relief under HIPC and MDRI, the total debt service burden of LDCs (both principle and interest payment) in the year 2008 reached US$6.03 billion of which US$4.18 billion was paid as principle and US$1.85 was paid as debt interest (see annex 1). It is projected that debt service burdens, both as a share of exports and as a percentage of government revenue, will remain more elevated into 2010 and beyond compared to the pre-crisis years25. In 2009, debt service in relation to government revenue increased by more than 17 percent in heavily indebted poor countries. This increase is due to both a rise in absolute debt service payments as well as a drop in government revenues.

The continued external debt burden greatly aggravates the poverty trap in LDCs. The indebted countries are home to the majority of the world’s poor. Debt servicing often crowd-out the much needed public expenditure on productive and social sectors. This affects the long-term productivity of their economies and their abilities to be debt-free. The external debt burden constrains the national policy space and policy independence in many LDCs and their ability to play the role of a developmental State.

Some features of debt to LDCs: Average interests on new debt commitments in LDCs vary from country to country. For instance, in the year 2008, Eritrea (5.54 percent interest), Angola (4.48 percent), Senegal (2.72 percent) and 25

61

Secretary General’s report on external debt sustainability and development, 2010

SECTION II

Mauritania (2.72 percent) were among the countries that were subject to high interest obligations from new debt commitment. Equally, grant elements in new debt commitments also vary from country to country. Afghanistan enjoyed an 80 percent grant element in their new debt commitments in 2008, while the figures for Eritrea and Angola were 14 percent and 17 percent respectively. The average grace periods on debt commitments for LDCs also differ with 14.04 years for Malawi and three years for Guinea-Bissau. (See annex 2 for details)

Impact of the financial crisis The debt burden indicators in many LDCs have deteriorated due to the global financial crisis as their economies declined and external and fiscal financing requirements widened. The flows of FDI and remittances have also reduced. Due to the financial crisis, the share of public sector borrowing has increased and private financial flows have dropped. These led to a shift in the trends towards more borrowing from private lenders and more external borrowing by the private sector.

To mitigate the negative impacts of the financial crisis, many least developed countries have increased public spending by using their savings made during the previous years. Reduced government revenues combined with sustained or increased public spending, against the backdrop of declining external assistance in some countries, increased budget deficits in most LDCs. They therefore had very little fiscal space to go for targeted programmes and stimulus measures. If the economic recovery takes a longer time, their fiscal space would be quickly exhausted.

Debt Sustainability and Debt Management Maintaining external debt at a sustainable level is critically important for a country. This also testifies to overall economic solvency of an economy and ensures high credit ratings in international financial markets. Prudent macroeconomic policies, responsible lending and borrowing and effective debt management can play a crucial role in maintaining debt sustainability. Improving debt management, in particular through institutional reform and capacity building, could help countries to reduce debt vulnerabilities.

Debt Sustainability Framework The debt sustainability framework compares long- and medium term projections of the evolution of various debt ratios with debt burden thresholds based on the quality of policies as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA). In the current Debt Sustainability Framework, no new lending is allowed for countries identified as being in debt distress. As a consequence, the Framework often tends to be overly restrictive in limiting countries’ capacity to borrow.

The use of the CPIA as the sole criterion for determining debt thresholds has been the object of criticisms. Historical series for the CPIA index are not publicly disclosed (only data for IDA countries starting from 2005 are disclosed). As a consequence, all analyses that link debt sustainability to the CPIA have been conducted by World Bank/IMF staff and external researchers have not been able to test the robustness of the links between the two variables. Moreover, it is not clear whether the CPIA is indeed a measure of policies or just a predictor of a debt crisis. While it may be reasonable to include the CPIA as one of the criteria used to define debt thresholds, it is harder to justify an approach that uses this variable as the only criterion26.

26

Report of the Secretary General on External debt and development, A/63/181

62

SECTION II

Debt relief: HIPC and MDRI By the end of March 2010, of the 40 countries (of which 31 are LDCs, see annex 3) that were eligible or potentially eligible for debt relief under the HIPC Initiative, 30 had reached their “completion point” and were accorded the full relief programmed for them. They then also qualified for additional relief from remaining multilateral obligations owed to participating institutions under the MDRI. Six countries were between “decision” and “completion” points, wherein they receive interim relief, making a total of 36 countries receiving at least some relief under the Initiative. In the year since June 2009, four LDCs—Afghanistan, the Central African Republic, Congo and Haiti—had fulfilled their conditions for the irrevocable debt relief granted at the completion point of the HIPC process.

Owing to the HIPC Initiative and MDRI, as well as traditional debt relief and other additional assistance, the debt burden of those 36 countries is expected to be reduced by over 80 percent compared to pre-decision-point levels.

Delivery of relief through the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative resulted in the cumulative total flows by the World Bank and IMF increasing from US$36.7 billion up to February 2009, to US$38.8 billion by February 201027.

It is a matter of concern that not all creditors have been delivering on the programmed relief, particularly, smaller multilateral institutions, non-Paris Club bilateral official creditors and commercial creditors (all together accounting for 33 percent of the total cost of HIPC debt reduction). Further more, a number of commercial creditors have initiated litigation against some of the HIPCs, aiming to collect fully on the original obligations. Over the past two years, at least 12 HIPCs have been targeted in at least 54 commercial creditor lawsuits28.

Debt Restructurings with Official Creditors Restructuring of intergovernmental loans and officially guaranteed export credits takes place under the aegis of the Paris Club. Agreements are conducted between the debtor country government and representatives of creditor countries. Debt restructuring treatments are formulated on a caseby-case basis within the context of the guiding principles of the Paris Club and with the consensus of all participating creditor countries. The Paris Club restructured US$3.1 billion in 2008 for six least developed countries, five of them (Democratic Republic of Congo, Djibouti, Gambia, Guinea, Liberia and Togo) being countries eligible for the HIPC initiative. This represents 46 percent of the combined stock of debt owed to Paris Club creditors by these countries prior to implementation of the agreements concluded in 2008. Of the debt restructured, just over half was cancelled and the remainder rescheduled.

Debt distress A recent study conducted by the IMF found that 11 countries (out of 39 examined) were debt distressed. Ten of these countries were LDCs and nine of them HIPC-LDCs. The IMF study classified another 16 countries as being at high risk of debt distress, nine of them LDCs. All together, 16 of the 40 HIPC countries are found either debt distressed or at high risk of debt distress (see annex 4).

27 Report of the Secretary General on the Implementation of the Programme of Action for the Least Developed Countries for the Decade 2001-2010, A/65/80–E/2010/77 28

63

MDG Gap Task Force Report 2010

SECTION II

Recommendations: Debt cancellation of LDCs Despite international efforts to address the debt problem, including through HIPC, MDRI and Paris Club initiatives, debt sustainability and indebtedness remain serious challenges for the least developed countries. It is therefore important to consider some more robust measures to address the debt problem. The proposal by LDCs to make full cancellation of multilateral and bilateral debts needs to be considered seriously. Development assistance in the form of grant and concessional financing can make important contributions to maintaining debt sustainability in those countries. It is also important to ensure that HIPC eligible countries get full debt relief from all their creditors, including multilateral, bilateral and commercial creditors.

Sovereign debt restructuring mechanism Sovereign debt crises have been a major source of the difficulties faced by the least developed countries in achieving sustained growth and development. The social costs of these crises have been very high. The existence of debt overhang depresses growth, contributes to poverty, and crowds out essential public services. The current “work-out” processes as being conducted under the “Paris Club”, HIPC and MDRI are insufficient for ensuring debt sustainability. Because of the adverse terms and high costs imposed by debt work-outs, often, countries are reluctant to default in a timely way, resulting in delays in dealing with the underlying problems. It is therefore important to devise institutions and policies that can reduce the costs of defaults and increase access to credit and reduce the overall costs of borrowing.

As recognized in the Monterrey Consensus and reiterated in the Doha Declaration on Financing for Development, initiative should be undertaken to prepare specific proposals of sovereign debt restructuring mechanism for consideration by the international community. The new mechanism should be efficient, equitable, transparent, and timely in handling debt problems of LDCs. Pending the creation of a strengthened international mechanism, innovative forms of debt crisis resolution should be considered. Setting up schemes of independent arbitration or mediation, or providing further support in organizing ad hoc meetings of a debtor with its creditors can be considered29.

New debt instruments There is now a consensus that the composition of debt is as important as its level. Other things being equal, a safer debt structure for borrowers can substantially reduce the probability of a debt crisis.

Under the right circumstances, safer debt instruments that may reduce the risks of sovereign borrowing include domestic currency debt, long-term debt and debt contracts which require payments that are linked to the borrower’s ability to pay.

GDP-indexed bonds could be an important initiative in this regard. This bond provides a mechanism for linking a country’s debt-servicing obligations to the level of economic activity, such that in times of high growth debt servicing would be higher, whereas the opposite would hold during recessions.

The GDP-indexed bond reduces the probability of default and thus the costs of expensive renegotiation, and they offer a valuable diversification opportunity. It also helps to maintain fiscal solvency and improves fiscal policy because during bad times Governments would have less debt-servicing costs and more “fiscal space”.

29

MDG Gap Task Force report 2010

64

SECTION II

There remains opportunity to develop domestic capital markets, particularly local currency bond markets in LDCs. This can serve as a means of creating a more stable source of local currency funding for both the public and private sectors, thereby mitigating the funding difficulties created by sudden stops in cross-border capital flows, reducing dependence on bank credit as a source of funding and, above all, lowering the risk of currency mismatches. Since private financial markets are unlikely to develop these instruments autonomously, LDCs need support from the international community, particularly multilateral development banks in this regard.

New forms of lending could also benefit LDCs, who have limited market access to credit. For instance, most lending by the international financial institutions is either in United States Dollars, Euro, Yen, or Special Drawing Rights. The international financial institutions can switch to a system in which they borrow and lend in the currencies of their client countries and hence help the development process with both their assets, through local currency loans and their liabilities, by helping to develop the international market for bonds in the currencies of LDCs. Any analysis of debt sustainability for LDCs should recognize the need to implement the internationally agreed development goals, including the Millennium Development Goals; particularly their economic and social development, poverty reduction, productive capacity building and environmental sustainability and resilience building needs; without increasing debt ratios. It is important to recognize that public expenditure may have a direct effect on the variables that determine debt sustainability. For instance, an increase in public investment may increase potential growth and thus have a positive effect on sustainability.

Debt management capacity of LDCs needs to be enhanced by building necessary institutional and human capacities.

Extending the HIPC sunset clause Recent studies have classified a number of HIPC countries as debt distressed or at high risk of debt distress. The debt problems of non-HIPC LDCs are also serious and have further worsened due to multiple global crises. It is therefore important to consider the possible extension of the sunset clause following adaptation of criteria and clauses for the potential inclusion of new countries.

65

SECTION II

ANNEX Annex 1: Total External Debt and debt servicing in LDCs (US$ Million) LDCs

2000

2004

2005

Angola

9408.0

9362.0

11822.0

Bangladesh

15740.0

20170.0

Benin

1590.9

Bhutan

203.8

Burkina Faso Burundi Cambodia

Principal Interest repayments payments

2006

2007

2008

929.0

1974.0

2200.0

4.0

8.0

9469.0

11516.0

15130.0

1132.0

443.0

18959.0

20535.0

21859.0

23644.0

772.0

218.0

1925.0

1841.5

813.3

859.0

986.3

54.2

42.6

593.3

649.2

713.3

775.0

692.4

43.5

38.0

1422.0

1990.0

1994.0

1123.0

1456.0

1681.0

30.0

14.0

1108.0

1390.0

1322.0

1412.0

1456.0

1445.0

31.0

10.0

2628.0

3439.0

3515.0

3527.0

3761.0

4215.0

19.0

21.0

Central African Republic 857.8

1065.1

1001.9

992.1

946.1

949.4

20.5

6.2

Chad

1091.0

1641.0

1585.0

1707.0

1797.0

1749.0

105.0

18.0

Comoros

236.6

307.4

291.2

296.1

291.0

281.3

8.1

4.2

Congo (DRC)

11692.0

11434.0

10600.0

11244.0

12359.0

12199.0

212.0

282.0

Djibouti

258.2

419.8

406.8

451.8

656.9

685.0

14.6

7.2

Eritrea

299.9

705.7

724.5

784.9

859.8

962.0

5.7

8.9

Ethiopia

5495.0

6663.0

6204.0

2273.0

2620.0

2882.0

71.0

39.0

Gambia

483.3

673.4

669.5

728.1

726.6

452.6

14.7

9.1

Guinea

3066.0

3136.0

2898.0

3046.0

3143.0

3092.0

89.0

34.0

Guinea-Bissau

947.0

1105.0

1044.0

1098.0

1158.0

1157.0

11.0

4.0

Haiti

1173.0

1311.0

1327.0

1505.0

1580.0

1935.0

22.0

20.0

2501.0

2616.0

2844.0

3377.0

4388.0

4944.0

132.0

67.0

Afghanistan

Equatorial Guinea

Kiribati Lao PDR Lesotho

671.8

766.6

662.0

649.9

677.6

682.3

24.5

7.8

Liberia

2820.0

3839.0

3928.0

4141.0

3692.0

3484.0

37.0

44.0

Madagascar

4691.0

3788.0

3490.0

1488.0

1703.0

2086.0

11.0

11.0

Malawi

2704.9

3427.3

3183.2

872.4

835.8

963.1

17.3

15.6

Maldives

206.0

365.8

389.6

484.2

576.3

986.8

41.2

13.9

Mali

2980.0

3320.0

3222.0

1643.0

1985.0

2190.0

43.0

24.0

Mauritania

2378.0

2324.0

2308.0

1618.0

1700.0

1960.0

38.0

21.0

Mozambique

7247.0

4782.0

4467.0

2931.0

3012.0

3432.0

17.0

21.0

Myanmar

5928.0

7171.0

6652.0

6839.0

7598.0

7210.0

152.0

15.0

Nepal

2867.0

3357.0

3180.0

3392.0

3602.0

3685.0

127.0

34.0

Niger

1712.7

2020.1

2023.4

867.9

966.7

965.5

19.7

6.9

Rwanda

1271.6

1660.9

1518.2

418.6

582.6

679.3

11.5

7.6

Samoa

147.3

185.7

177.3

205.9

234.8

256.8

10.5

3.5

Sao Tome and Principe

310.1

371.3

344.8

359.8

173.2

177.8

2.8

0.4

Senegal

3622.0

3942.0

3865.0

1923.0

2589.0

2861.0

126.0

49.0

Sierra Leone

1189.8

1627.6

1539.7

1265.5

312.0

388.8

2.4

2.8

Solomon Islands

155.4

177.0

166.4

173.4

176.2

164.8

10.8

4.3

Somalia

2562.0

2849.0

2750.0

2838.0

2944.0

2949.0

0.0

0.0

Sudan

16009.0

18199.0

17390.0

18220.0

19123.0

19633.0

236.0

71.0

Togo

1430.0

1834.0

1683.0

1795.0

1980.0

1573.0

141.0

51.0

66

SECTION II

Total External Debt and debt servicing in LDCs (US$ Million) 2000

2004

2005

2006

2007

2008

Principal Interest repayments payments

Uganda

3497.0

4745.0

4421.0

1260.0

1610.0

2249.0

52.0

15.0

U. R. of Tanzania

7136.0

8557.0

8335.0

4028.0

4974.0

5938.0

22.0

27.0

Vanuatu

74.5

120.7

82.1

83.1

94.1

138.1

2.6

0.8

Yemen

5125.0

5550.0

5439.0

5644.0

6089.0

6258.0

133.0

70.0

Zambia

5722.0

7450.0

5377.0

2277.0

2755.0

2986.0

114.0

39.0

Total

142659.6

162376.7

156292.3

131442.3

144166.7

155179.3

4183.6

1849.8

LDCs Timor-Leste Tuvalu

Source: Global Development Finance: External Debt of Developing Countries, 2010, World Bank, ISBN: 978-0-8213-8229-5

Annex 2: Average interests, grant elements, grace period for new debt commitments and Debt Service as percentage of GNI for LDCs for the year 2008 LDCs

Average interest on new debt commitments (%)

Grant elements on new debt commitments (%)

Average grace period on debt commitments (yrs)

Debt service as % of GNI

Afghanistan

0.4824

80.5234

9.9576

0.11

Angola

4.4867

17.4805

1.0162

2.33

Bangladesh

1.172

75.3607

9.5166

1.2

Benin

1.5143

68.5885

8.5691

1.46

Bhutan

0.75

79.6137

9.4167

6.26

Burkina Faso

1.0643

73.7776

9.0388

0.59

Burundi

1

61.4458

6.3514

3.65

Cambodia

1.2284

69.3999

8.5538

0.43

Central African Republic

0

0

0

1.78

Chad

0

73.653

6.5

2.05

Comoros

0

0

0

2.31

Congo, Dem. Rep.

0

0

0

6.17

Djibouti

2.2339

52.9708

4.5446

2.75

Eritrea

5.5413

14.3045

3

0.89

Ethiopia

0.8228

78.6672

9.6925

0.43

Gambia

0

0

0

3.26

Guinea

0

0

0

4.19

Guinea-Bissau

0

0

0

4.03

Haiti

1

61.2724

3

Lao PDR

1.3412

70.9209

10

3.81

Lesotho

1.7381

59.0399

6.2761

1.83

Liberia

0

0

0

135.22

Madagascar

1.2818

63.151

6.9462

0.25

Malawi

0.9891

79.0797

14.0444

0.77

Maldives

0.9263

36.3866

4.0329

5.43

Mali

1.1124

73.8574

9.2194

0.8

Mauritania

2.7247

53.0868

6.468

Mozambique

0.8656

80.5582

13.8072

Equatorial Guinea

Kiribati

67

0.47

SECTION II

Average interests, grant elements, grace period for new debt commitments and Debt Service as percentage of GNI for LDCs for the year 2008 LDCs

Average interest on new debt commitments (%)

Grant elements on new debt commitments (%)

Average grace period on debt commitments (yrs)

Debt service as % of GNI

Myanmar

0

0

0

Nepal

0.6301

76.5806

9.6604

1.27

Niger

1.294

72.8344

9.239

0.5

Rwanda

2.4527

59.2135

8.3328

0.4

Samoa

0.842

64.3468

5.942

2.75

Sao Tome and Principe

0

0

0

1.94

Senegal

2.7201

52.2152

6.7219

1.37

Sierra Leone

0.8092

75.8123

10.293

0.3

Solomon Islands

0

0

0

2.75

Somalia

0

0

0

Sudan

2.6453

50.9788

5.663

0.78

Tanzania

0.7305

81.4016

10.2709

0.32

0

0

6.79 0.53

Timor-Leste Tuvalu Togo

0

Uganda

0.7366

80.5456

9.9464

Vanuatu

2

53.1012

5

Yemen, Rep.

1.8893

64.8264

7.6484

1.16

Zambia

0.926

76.7764

9.4668

1.31

Source: World Development Indicators, World Bank

Annex 3: List of Countries That Have Qualified for, are Eligible or Potentially Eligible and May Wish to Receive HIPC Initiative Assistance (as of July 1, 2010) Post-Completion-Point Countries (30) Afghanistan*

The Gambia*

Mozambique*

Benin*

Ghana

Nicaragua

Bolivia

Guyana

Niger*

Burkina Faso*

Haiti*

Rwanda*

Burundi*

Honduras

São Tomé & Príncipe*

Cameroon

Liberia*

Senegal*

Central African Republic*

Madagascar*

Sierra Leone*

Republic of Congo

Malawi*

Tanzania*

Democratic Republic of Congo*

Mali*

Uganda*

Ethiopia*

Mauritania*

Zambia*

Interim Countries (Between Decision and Completion Point) (6) Chad*

Côte d’Ivoire

Guinea Bissau*

Comoros*

Guinea*

Togo*

Eritrea*

Kyrgyz Republic

Somalia*

Sudan*

Pre-Decision-Point Countries (4)

* Least Developed Countries Source: IMF website 15 September 2010

68

SECTION II

Annex 4: LIC at High Risk of Debt Distress, or In Debt Distress In debt distress

At high risk of debt distress

HIPCs

HIPCs

Pre-decision point Comoros*

Post decision point Cote d’Ivoire

Eritrea* Somalia* Sudan*

Post completion point Afghanistan* Burkina Faso*

Post decision point

Burundi*

The D.R.C.*

The Gambia*

Guinea*

Haiti*

Guinea-Bissau*

Sao Tome and Principe*

Liberia* Togo*

Non-HIPCs Djibouti*

Non- HIPCs

Grenada

Myanmar*

Lao, P.D.R.*

Zimbabwe

Maldives* St. Lucia St. Vincent and the Grenadines Tajikistan Tonga Republic of Yemen*

* Least Developed Countries Source: IMF staff paper on “preserving debt sustainability in Low-Income Countries in the Wake of the Global Crisis, April 1, 2010

69

UN-OHRLLS Room DC 1-1210 New York, NY 10017, USA Telephone: (917) 367-6006 Fax: (917) 367-3415 E-mail: OHRLLS-UNHQ@un.org

www.un.org/ohrlls