The Future of Multilateral Concessional Finance

Chris Garroway & Helmut Reisen

A REPORT PRODUCED FOR THE BMZ DISCUSSION SERIES ON THE FUTURE OF CONCESSIONAL FINANCE

The Future of Multilateral Concessional Finance

• Background:

• End-of-poverty prospects & declarations 2030• => corollary: IDA+++ eligibility• => as (large) countries would graduate• => demand for concessional funding (CF) down • => raises strategic questions for IFIs:

roles, mandates, & instruments.

• Our study aims at informing those questions

The Multilateral Donor Dilemma

• When Do We Have a Multilateral Donor Dilemma?

Donor Dilemma No Donor Dilemma

1 Poverty ends in LICs & MICs

4 Poverty only in ´stable´ LICs

2 Poverty only in ´fragile´ LICs

5 Poverty in MICs with little taxcapacity

3 Poverty also in MICs with goodcapacity for redistribution

6 Redefinition of eligibility status and of IFI mandates

*Poverty is defined as extreme poverty below $US 1.25 PPP.

The Future of Multilateral Concessional Finance

• Content:

• determinants of future CF demand, NOT supply • poverty scenarios for multilateral CF eligibility• general strategic implications for IFIs• actionable options for IDA, ADF, AfDF, IMF

• (IDB-FSO already reformed => no discussion)• (No supply analysis as too speculative)

Growth Optimism: Justified?• 1870-1990:

´divergence, big time´

• Exceptional 2000s?:

• China >10% in 2000s

• Drop to 7% =>

• LICs growth down 2%

• OECD money & flows?

• Crises => reducedOECD output potential

• Risk of stag-deflation

• IMF-WEO: too rosyduring 2007-2014

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

0 1000 2000 3000 4000 5000 6000

Aver

age

annu

al gr

owth

rate

, GDP

per

capi

ta

GDP per capita

Convergence in non OECD economies, 1960-2000

Persistent (extreme) poverty & growing relative deprivation

• Growth alone not enoughto 'end poverty', inequality optimismneeded too:– Edward-Sumner 2013

– Lakner, Negre & Prydz"shared prosperity" simulations

• "Globalisation" has leftbehind extreme poor(and some relative poor)

Source: Milanovic, 2013

Source: Lakner, Negre, Prydz, 2014

MICs : capacity to mobilise domestic resources &vulnerability to exogenous shocks and global public "bads”

• Marginal Tax Rate Required to Close Poverty Gap

- tax rates on the ´non-poor by US standards´ (>13$/day) -

Source: Garroway & Reisen (2014) based on Ravaillon (2012)

Disaster Hazards and

Poverty Hotspots

ODI (2013), The geography of climate change, disasters and climate extremes 2030

Demand for concessional financeDeterminants Measure/Proxy

National Productivity and Welfare• GNI per capita• GDP per capita, PPP• HH survey means

Extent of poverty and deprivation• <US$1.25 per day headcount• <60% mean headcount• Lorenz curve parameters

Capacity to mobilize domestic financialresources

• MTR to close poverty gap byredistribution from >US13 per day

• Tax effort

Vulnerability to exogenous shocks andglobal public "bads", like climate change

• Disaster damage costs• UN Economic Vulnerability Index• Physical vulnerability to climate

change index

We project a bi-modal distribution of concessional finance eligibility will persist

05

10152025303540

<US$1,035 <US$1,205 US$1,206 - $1,965 >US$1,965

Low income Lower middle incomeLower middle income Lower and uppermiddle income

operational historical

Below cutoffs Above cutoffs

2012 2025

36

20

6 14

<37

Number of eligible countries

Geography of poverty, 2025:poor countries or poor people?

India, 141.7

Democratic Rep of the Congo, 64.1

Nigeria, 62.3 Tanzania, 24.1

Madagascar, 23.0

Indonesia, 19.6

Kenya, 14.7

Zambia, 13.9

Pakistan, 9.9

Uganda, 9.8

32 other countries, 123.2

Millions of people living on less than US$1.25 per day

Mobilize domestic resources?

0%

5%

10%

15%

20%

25%

30%

Nig

eri

aN

icar

agua

Con

go, R

ep.

Sene

gal

Paki

stan

Mad

agas

car

Mal

iB

hut

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ajik

ista

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ambod

iaS

udan

Mal

div

es

Nepa

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ri L

anka

Yem

en

Sie

rra

Leon

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ent

rafr

ique

Lao

PD

RT

ogo

Afg

han

ista

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iger

India

Hon

dur

asB

angl

adesh

Eth

iopi

aC

ongo

, D

.R.

Uga

nda

Kyr

yz R

ep.

Arm

eni

aR

wan

da

Gui

nea

Cam

ero

on

Observed tax ratio Predicted, if tax effort =1

Source: Calculations based on World Bank, 2014

Tax revenues as a per cent of GDP

Magnitude of damage costsexceeds concessional flows in Asia

7.880

4.300

1.0990.9880.8400.5210.5010.3020.3000.1610.122

1.3261.567

1.982

0.0510.056

1.015

0.0710.1600.0370.0070.000

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

Disaster damage cost, 2012/2013

IDA borrowing FY13

Source: Calculations based on EM-DAT database, 2014

0

50

100

150

200

250

300

350

400

1950 1960 1970 1980 1990 2000 2010

Global cost in billions of current US$

General Implications for Multilateral Concessional Windows

We discuss…

1. Shrinking Multilateral Aid

2. Redefining Eligibility Criteria

3. Smoothening transition periods

4. Introducing Subsovereign Allocation

5. Opening Windows: Global Public Goods

Redefining Eligibility Criteria

• Current practice: IFIs pegged to IDA ´operational cutoff´ (USD 1,195 for FY13)

• From absolute (basic needs) to relative (OECD practice) poverty definition?

• => poorest 5 deciles of all extremely poor

• => extremely poor % of population/LICs

• => add new criteria to GNP/cap: (HDI, MPI)

• => CC => UN EVI; PVCCI.

Smoothening Transition Periods

• Bimodality: losing access to CF + repayments• => need for smoothening transition• from IDA-only via blend to IBRD-only status• Tax effort and suggested cutoff• Ca $2000 = 2x operational cutoff• but close to historical cutoff• + possible contingencies for transition CF:• - project types (GPGs); tax effort; social

inclusion; redistribution; federalism.

Introducing Subsovereign Allocation

• Rural-urban duality + disaster impoverishment =>

• direct CF to local governments (and NGOs).

• India: > ½ bn poor in seven states > IDA limit.

• Can donors justify disengagement?

• Excessive interference? Less for multilaterals (voice)

• EU Structural Funds and the Cohesion Fund : Lessons?

• Channels to local projects in the EU Member States via various national intermediary institutions.

• Risk: sub-state governments’ electoral concerns.

Opening the Windows for Global Public Goods

• Disaster damage cost suggest:

• CF windows target poverty + disasters jointly

• 2 ways 2 use replenishment systems/leverage:

• MDBs => global/regional public goods facilities

• Greening MDB projects -> low-carbon output

Strategic Options for Each Institution

• Some Leitmotivs:

• Option value of waiting

• Comparative advantages for efficient allocation, regional challenges, voice + inclusion of new partners

• Strengthened insurance elements

• => global challenges -> IDA

• => subsovereigns -> RDBs

• => differentiation -> less eligibility links to IDA