The 2002 International Conference on Financing for Development adopted the Monterrey Consensus that includes a commitment to good governance, development and poverty reduction - both nationally and internationally. As part of the global partnership for development, it addressed official development assistance and the protection against international financial volatility, among other areas. We review progress on these two elements below.
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Official development assistance
To meet the MDGs, external financing will need to complement domestic resources, especially in low-income countries. Unfortunately, private flows to developing countries have fallen significantly in recent years. Their decline has not been offset by an increase in official flows, including official development assistance (ODA).
The aid picture gets particularly worrisome when the ODA effort is measured against the gross national income (GNI) of developed countries. The ODA/GNI ratio fell by one-third in the 1990s, from an average 0.33 per cent in 1990-91 to an average of 0.22 per cent in 2000-01; before increasing slightly to 0.23 per cent in 2002. Most notable is the low and falling ratio among G-7 members: from 0.31 per cent in 1990 to 0.18 per cent in 2002. This is considerably lower than the 0.7 per cent reaffirmed by the Monterrey Consensus. Only five countries have attained or surpassed the 0.7 per cent target: Denmark, Luxemburg, the Netherlands, Norway and Sweden. None of these "G-0.7 countries" belong to the G-7. Italy and the United States had the lowest ratio among the 22 DAC countries in 2002 - 0.20 per cent and 0.12 per cent, respectively.
ODA flows were lower in 2001 than in 1995 for all developing regions except South Asia. Most troubling is the decline in ODA to sub-Saharan Africa. Although it still gets the largest regional ODA share, its total ODA has fallen from nearly $18bn in 1995 to just over $12bn annually in 2001. As a result, its share of total ODA declined from 29 in 1995 to 24 per cent in 2001. The G-7 Summit in 2002 agreed to channel half of their additional ODA pledged in Monterrey to Africa. The UK plans to allocate Ј1 billion of its pledged 2005-2006 foreign assistance to Africa. These commitments express support for the New Partnership for Africa's Development (NEPAD), through which African leaders committed themselves to transparent governance and people-centred development. NEPAD was again on the agenda of the G-8 Summit in Evian, France in June 2003.
ODA pledges at Monterrey
At Monterrey, several developed countries pledged to increase their ODA:
- The US pledged to increase its annual ODA contributions by $5bn by 2006 to be channelled through the Millennium Challenge Account, and by about $2bn for combating AIDS.
- The EU committed to increase ODA to an average of 0.39 per cent of gross national income by 2006. By then, no EU member is expected to spend less than 0.33 per cent of GNI on foreign assistance. These efforts are expected to increase the EU's total ODA by about $7bn annually.
According to OECD/DAC estimates, fulfilling these promises will raise ODA in real terms by 31 per cent (about $16bn) and the ODA/GNI ratio to 0.26 per cent - but this is still well below the level achieved before 1992. While these increases would reverse a decade-long decline in aid efforts, the ODA promises made at Monterrey are not as significant as they are sometimes made out to be since they fail even to restore aid efforts to earlier levels (see diagram below).
Diagram: aid efforts in developed countries
(ODA as a percentage of their combined gross national income)
Source: OECD/DAC
Aid levels will have to increase much faster if they are to help achieve the MDGs by 2015. Globally agreed estimates indicate that the MDGs will require, at a minimum, a doubling of current ODA levels. Strong advocacy and lobbying will be required to double the current levels of ODA to over $100bn per year. Such efforts will have to concentrate on the G-7 member countries, given their large share (nearly three-quarters) in global ODA.
The International Financial Facility
The UK Chancellor of the Exchequer proposed the International Financial Facility (IFF) to raise and disburse funds for achieving the MDGs. The proposed scheme is intended to double annual ODA from its current level to more than $100bn through the use of long-term donor pledges for issuing bonds to cover the MDG needs of developing countries. Backed by donor countries' pledges and commitments, it is expected that these bonds will be given a high rating, allowing the IFF to borrow on favourable terms. The disbursal of funds, conditionalities and reporting procedures would be kept flexible.
The 20/20 Initiative
The initiative, born at the 1995 Social Summit in Copenhagen, is a practical way of fostering MDG progress. As a concrete example of partnership between developing and developed countries, it calls for the allocation of an indicative 20 per cent of the national budget in developing countries to basic social services - including basic education, primary health, reproductive health, water and sanitation, and nutrition. At the country level, the donor community would match that allocation by directing an indicative 20 per cent of ODA in support of the same services.
A detailed analysis indicates that about 12-14 per cent of the national budget is allocated to basic social services; while about 10-12 percent of ODA is directed to these services.
Both shares have shown a tendency to increase in recent years. Nonetheless, only a few countries allocate a fifth of their national budget to basic social services and receive a similar share of their aid in support of such services. Without faster progress from a 12/12 ratio to a 20/20 compact, most MDGs will remain elusive in the majority of countries.
It is fully recognised that the extra resources will need to be complemented by reforms to make spending more equitable and more efficient. The MDGs will only be achieved if more spending is accompanied by better spending. In many instances, however, the link between the two will be nearly automatic because insufficiencies all too frequently lead to inefficiencies and inequities.
Even though the primary source for financing basic services is the national budget, external support can play a critical role in overcoming obstacles to restructuring the national budget, which is never an easy task, especially in the least developed countries. Also, improving access to primary health care, basic education, water and sanitation are concrete ways of showing parliamentarians and the public in donor countries how aid can have a tangible impact on people's lives. A greater focus on basic services, therefore, can contribute to reversing the decline in ODA.
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Protecting against international financial volatility
The other relevant element of the Monterrey Consensus is to protect developing countries from international financial volatility. The 1990s showed the vulnerability of even emerging market middle income developing countries to short-term capital outflows. Severe financial crises affected a variety of countries and regions, ranging from East Asia to Latin America, Eastern Europe and Central Asia. These crises, at least in the short-term led to a significant deterioration in human and social conditions. The response by the international community was to push for a new international 'financial architecture' - prudential financial regulations and new international financial standards. These programmes are embodied in the Financial Sector Assessment Programme (FSAP) and the Financial Sector Reform and Strengthening (FIRST) initiative.
Strengthening the financial sector of developing countries is important, but it cannot be implied that developing countries were wholly at fault in bringing about the financial crises. The IMF recently acknowledged that opening up capital markets and financial sectors to international short-term flows can have harmful effects.
Based on this assessment, the merits of a Sovereign Debt Restructuring Mechanism (SDRM) have been considered. The mechanism would give indebted countries the right to call for bankruptcy and insolvency proceedings to protect their financial resources from massive outflows, thereby avoiding a regression in terms of human development and poverty reduction. The US, however, expressed its opposition to such a mechanism at the joint IMF/World Bank meeting in April 2003.
The international coalition of civil society groups - Jubilee Plus - had earlier called for such bankruptcy and insolvency proceedings but believes that the Bretton Woods institutions - being major creditors themselves - should not be involved in the filing of the insolvency cases and in their arbitration.
All in all, despite a series of serious financial crises in many different parts of the developing world over the last decade, little progress has been achieved in protecting developing countries against the impact of international financial crises.
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