The crisis stemming from the coronavirus disease (COVID-19) has turned a spotlight on financial vulnerabilities in developing countries and the limitations they face in mobilizing domestic financial resources to respond to the pandemic at the required scale.
This brief takes a step back from the COVID-19 crisis to highlight a longer-standing trend which is adding to the troubles facing developing countries.
For the past two decades, net financial resource transfers between developed and developing countries have typically favoured the former and disadvantaged the latter.
Overall, more financial resources have gone from developing to developed countries than have been returned. The policy brief looks at the main drivers of this net financial resource transfer to the developed world, including illicit financial flows from developing countries, and offers some policy proposals to address this problem.
Key points
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The COVID-19 pandemic comes after two decades in which net financial transfers have typically flowed from developing to developed countries, leaving many developing countries on a debt treadmill, financially exhausted.
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In 2000–2017, net transfers of financial resources from developing countries to developed economies grew steadily in the years prior to the global financial crisis, eventually peaking at $977 billion in 2012. If illicit financial flows are included, these figures increase considerably, and far exceed net ODA flows to developing countries.
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The measures proposed including a more proactive use of capital controls, recommitment to original ODA targets and a rules-based sovereign debt workout mechanism, will help to reverse this trend in net negative financial resource flows from developing countries.
