Working Papers

Lack of fiscal space and the risk of sovereign debt distress remain key stumbling blocks to achieving Sustainable Development Goals (SDGs) in developing countries. Because the allocation of concessional funds and debt relief is essentially reserved to Low Income countries (LICs), official financing strategies and mechanisms to support developing countries provide insufficient support to non-LICs that may need and deserve special consideration concerning official financing. This paper discusses how official financial support allocation could consider countries’ vulnerabilities in critical dimensions, with special reference to Small Island Developing States (SIDS). It explores how a…

The pandemic has progressed differently across the world. Using monthly data on COVID-19 cases and fatalities, we evaluate whether income inequality is an important factor in explaining cross-country differences in the spread and mortality of the virus. The results show that income inequality is positively correlated with the number of COVID-19 cases. Higher income inequality is associated with a more rapid spread of the virus and an increase in the number of cases, indirectly increasing mortality rates as well. Also, higher levels of inequality are associated with reduced effectiveness of social distancing measures in containing new infections. Thus, elevated inequalities place…

The pandemic-induced global economic crisis has contributed to the re-emergence of sovereign default risk, especially for emerging and developing economies, and has directed attention to the impact of the institutions that are tasked with attempting to predict defaults: the international credit rating agencies. This paper describes four main challenges posed by credit rating agencies, especially from a developing and emerging economies perspective: potential bias in ratings, pro-cyclicality of ratings, governance issues and conflicts of interest, and incorporation of climate risk. It concludes with potential policy solutions addressed at ratings agencies, regulators, and policy makers.…

It would be hard to fathom any Sustainable Development Goal (SDG) being achieved without either adequate human and financial resources and partnerships or institutions that are effective, inclusive and accountable. One would expect, therefore, that two of the most cross-cutting SDGs of the 2030 Agenda, SDG16 on Peace, justice and strong institutions and SDG17 on the Means of implementation and partnerships for development would receive ample attention in scholarly work and policy analysis. A quick overview of the literature reveals, however, that although SDG16 and SDG17 are examined quite extensively in and of themselves, linkages between the two seldom receive attention.

This…

The prolonged sluggishness in the world economy since the global financial crisis has led to growing calls for a reorientation of macroeconomic policies toward more supportive fiscal measures. Such calls inevitably invite the question of how much fiscal space governments actually have. This paper provides a systematic review of the most popular definitions and measures of fiscal space. It examines the evolution of fiscal space measures and discusses the pros and cons of each measure. It then outlines several key factors that could help to further strengthen existing approaches and allow a more comprehensive assessment of fiscal space. By illustrating how different measures paint…

In light of a cautious emphasis given to public-private partnerships (PPPs) as a mechanism to finance infrastructure projects and highlighting the need for capacity building and knowledge sharing at the Third International Conference on Financing for Development in Addis Ababa, this paper reviews the extant literature on the subject and identifies areas requiring better understanding and institutional innovation for ensuring value for money, minimizing contingent fiscal risk and improving accountability. An institutional capacity to create, manage and evaluate PPPs is essential to ensure that they become an effective instrument of delivery of important services, such as infrastructure.…

This paper explores the scope for Innovative Development Finance (IDF) to compensate for declining Official Development Assistance (ODA) and/or to enhance the efficiency of ODA. It shows that IDF has not helped much to increase the volume of aid. With regard to efficiency, the role of IDF-related mechanisms remains controversial. In view of the above, it may be more productive to focus on other resources available to Asia. The paper points to two such resources, namely the surpluses accumulated in the form of reserves, Sovereign Wealth Funds (SWFs), etc. and the migrant remittances. Efficient utilization of these two sources can vastly change the development finance landscape in Asia.…

From around 2000 onward, donors and recipient governments embarked upon a new aid paradigm. The most important elements include increased selectivity in the aid allocation, more ownership of recipient countries based on nationally elaborated PRSPs, and more donor alignment and harmonization via program-based approaches such as budget support. The paper assesses the theoretical merits of this new paradigm, identifying some contradictions and limitations, and then examines its implementation over the past decade and its results. The empirical results largely confirm the earlier identified weaknesses and limitations. The paper concludes with some suggestions for improving aid practices.

This paper recalls the history of proposed “innovative” mechanisms by which governments could strengthen financial cooperation for development. Such proposals sought more predictable and assured financial flows to facilitate recipient country programming, while also substantially adding to the volume of highly concessional international support for development. International discussions of these proposals mostly began in the 1960s and in many cases continue today, although implementation thus far has been modest. These discussions are contrasted with generally more recent proposals that proponents call “innovative” but that do not share the characteristics of the more radical thinking…

The international community has advanced in reforming the international aid system. Such reform comes at a time when there is a renewed skepticism about aid effectiveness and when the crisis sheds new doubts about the sustainability of donors´ commitments. At the same time, the international reality has changed as a consequence of the growing heterogeneity of the developing world, the new geography of global poverty, the emergence of new powers from the developing world, the presence of new aid players and, finally, the enlargement of the sphere of international public goods. Such changes demand a deeper reform in the development cooperation system.

The International Finance Facility for Immunization (IFFIm), which securitized future aid commitments by donor countries, has been successful in providing funds to immunize children in poor countries. Since capital is likely to remain scarce, the paper evaluates the prospects of setting up IFFIm-like mechanisms to fund a variety of objectives. Two broad conclusions emerge. First, replicating IFFIm could prove challenging because donor pledges will lack the desired credibility. Second, credit enhancements like third party guarantees, excess coverage, and channeling of pledges through a preferred creditor, could overcome this deficiency. Finally, Advance Market Commitments and Cash on…

This paper argues that the technical and political difficulties of using SDRs for development can be overcome. This requires an SDR-based reserve system and a fully SDR-funded IMF. The IMF would allocate SDRs counter-cyclically and treat them as deposits of countries, which could be used in lending to them. A substitution account is needed for a smooth transition from major reserve currencies to SDRs. To avoid the deficiency payments, a counterpart account – which would be credited when the substitution account is in surplus and debited when in deficit – is required. Alternatively, politically-feasible cost-sharing mechanisms could be designed.