The development process requires substantial financing that cannot be provided from domestic resources alone. Countries therefore seek external financing, in forms that depend on their level of development. Emerging and middle-income countries have access to all the external financing instruments available, including foreign direct investment, borrowing on the financial markets or from commercial banks, and donor loans and grants. Low-income countries, however, can in many cases finance their development only through international aid.
These countries need huge amounts of financing if they are to achieve the Millennium Development Goals (MDGs) by 2015, particularly the goal on poverty reduction. To this end, the international community has pledged to double its official development assistance (ODA). In addition, developing countries are looking for new sources of finance, which they are finding in the form of emerging donors such as China and India, new aid operators such as foundations, or stimulation of the private sector via new instruments such as microfinance, migrants’ remittances and public-private partnerships.
The massive debt cancellations granted by the international community through the Heavily Indebted Poor Countries (HIPC) Initiative, launched in 1996, and the Multilateral Debt Reduction Initiative (MDRI), launched in 2005, are also aimed at facilitating achievement of the MDGs. These debt forgiveness operations have restored the solvency of the countries concerned, but the key question then becomes how quickly and on what terms these countries are re-indebting themselves. The international governance of debt needs to be adapted so as to avoid the errors of the past and, to the extent possible, prevent further debt crises.
All of these observations call on the AFD Research Department to study development financing and to reflect on the type of financial instruments that a bilateral donor could develop to support or accelerate the development process.
Work in progress
Several studies on various aspects of development financing are under way: monitoring of research and debates on aid allocation and aid effectiveness, as well as on the issue of scaling up and absorption capacity; research on general and sector budget supports, their effectiveness and the strengthening of countries ’ budget management capacity, and on measurement of fiduciary risk; research on the emergence of new donors (China, India, Brazil) and their impact on the aid strategies of Paris Club donors and on the granting of ODA; studies of the impact of microfinance projects; research on strengthening financial systems, mainly in sub-Saharan Africa and the MEDA region; research on mechanisms to hedge the vulnerable points of developing countries, such as a counter-cyclical financing tool that would help forestall further debt crises, smoothing mechanisms and mechanisms to insure against exogenous risk.
On the basis of these initial studies, AFD ’ s knowledge production activity seeks to inform policy making on the implementation of financing tools that meet the requirements of AFD as a financial institution as well as the need for financing mechanisms that are more closely matched to the requirements and opportunities of beneficiaries.
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