The Least Developed Countries Report 2019:The present and future of external development finance – old dependence, new challenges
Key facts and figures from UNTAD’s Least Developed Countries Report 2019 released today.
Structural transformation, Sustainable Development Goals and external development finance
- LDCs generate barely 1% of global GDP and their stake in the global economy remains marginal. Still, they account for over 13% of the world’s population.
- Least developed countries (LDCs) are dependent on significant amounts of external finance. In 2015–2017, the resource gap (defined as the difference between domestic savings and gross fixed capital formation) in LDCs, as a group, averaged 8% of gross domestic product (GDP). For nearly half of the LDCs, resource gaps were above 15% of GDP.
- The financing to be made available to developing countries as envisaged by the Addis Ababa Action Agenda has not materialized. Total external finance, instead, declined by 12% in real terms between 2013 and 2016.
- LDC export revenues (both goods and services) increased at an average rate of 2.7% per year between 2010 and 2017.
- LDC export growth was outpaced by burgeoning merchandise import volumes, which since 2000 have expanded by a factor of 3.5.
- Inflows of foreign direct investment (FDI) to developing countries were 3% lower in 2018 than in 2015. LDCs experienced an even sharper contraction at 37% over the same period.
- For LDCs, undergoing structural economic transformation is a condition to both escape aid dependence and realize the right to development through the pursuit of sustainable development.
Official flows and the evolving terms of development aid
- Donors’ commitment to allocate the equivalent of 0.15–0.20% of their gross national income (GNI) in aid to LDCs remains unmet by most OECD Development Assistance Committee (DAC) members. This commitment dates back to 1981 and was reaffirmed in target 17.2 of the Sustainable Development Goals or SDGs.
- Had donors honoured their commitment in 2017, LDCs would have received an additional US$33 billion to $58 billion. This signifies a considerable shortfall of external development finance for the SDGs.
- For most LDCs official development assistance (ODA) disbursements increased at a slower pace under the Istanbul Programme of Action (2011-2020) – 2% annually –, when compared to the decade of the Brussels Programme of Action (2001-2010), when they had expanded at 7% per annum.
- In 2017, total official flows to the 47 LDCs are estimated at $54.4 billion in gross disbursements; dwarfing both foreign direct investment and remittances, and confirming the prominence of ODA as a source of external finance for LDCs.
- Since 2003, improved economic growth in LDCs has resulted in the steady decline of the relative weight of aid flows in their sources of development finance. In 2017, the ratio of ODA relative to GNI in LDCs as a group was 7%, down from 13% in 2003.
- ODA modalities increasingly favour tied aid; averaging 15% of DAC donor total bilateral commitments between 2016 and 2017. Certain donors report up to 40% of their aid as tied, and with up to 65% of contracts commonly awarded to companies in the donor country, the practice of “informally” tying aid is widespread.
- More than 25% of ODA disbursements to LDCs are in the form of loans, particularly when financing investments in productive sectors.
- LDCs’ total stock of external debt more than doubled between 2007 and 2017, burgeoning from $146 billion to $313 billion.
- In some LDCs currently in debt distress or at high risk of debt distress, the weight of ODA loans in total ODA disbursements increased by more than 15 percentage points, compared to grants that expanded by only 1 or 2 percentage points per year in real terms between 2010 and 2012.
Private development cooperation
- As part of the international commitment to generate additional finance to meet the SDGs, donors initiated a new generation of private sector-led development action in 2014, giving their development finance institutions primary responsibility for supporting the private sector to undertake development cooperation. Of immediate concern is that the practice is not aligned to the accepted principles of development effectiveness.
- Use of private sector instruments backed by ODA in development cooperation weds ODA with commercial finance and investor strategies. In view of the prevalence of tied aid, ODA-backed private sector support strengthens donors’ strategic commercial interests.
- Universally agreed definitions of many of the concepts linked to private sector engagement and their application in development cooperation remain lacking. Consequently, understanding of private sector engagement in development cooperation is shallow in LDCs.
- The distribution of funds raised through private sector engagement is uneven and concentrated in a few countries. The top three recipients (Angola, Senegal and Myanmar) accounted for nearly 30% of all additional private finance and the top 10 countries almost 70%.
- From 2012 to 2017, multilateral organizations provided the largest share (52%) of privately mobilized capital flows for development in LDCs. Bilateral donors contributed 47% of private sector investments.
- Up to 36 LDCs received additional private capital inflows between 2012 and 2017. However, not all of them achieved additional financing every year. Up to 30% of LDCs do not attract additional private capital on an annual basis. This underlines the fact that private capital (even when backed by ODA) does not represent a viable source of development finance for many LDCs and is an unpredictable source for the majority.
- Investment guarantees (not currently assessed as ODA under the new generation of private sector-led development action by donors), remain the instrument most requested by private investors in LDCs.
- Private investors target revenue-generating sectors in LDCs, such as energy, telecommunications and banking and financial services.
- As numerous new actors, including the private sector, gain prominence and influence in development action around the SDGs and in the formulation of global and national development policies, LDC governments are faced with the challenge of avoiding total relegation to a bystander role.
Dependence on external development finance, fiscal space, and lack of alignment with national development plans
- Private investment drives economic activity but requires substantial complementary public investments in LDCs. Most LDCs face long-term fiscal deficits indicative of consistently low revenue but also increased expenditure on public goods and services. From 2000 to 2017 domestic public debt exceeded ODA in 40% of LDCs.
- LDCs’ tax revenues increased from an average of 11% of GDP in 2000 to 19% in 2017; above the 15% minimum threshold widely regarded as necessary to support sustainable growth and development.
- Many LDCs have tax bases that are narrow and highly susceptible to negative shocks, resulting in periods of expansion and contraction in fiscal space. Budget deficits widened from an average of 1.8% of GDP in 2013 to 3.6% in 2018.
- LDCs need to continue to improve tax efficiency and collection efforts, but weak progress on structural transformation constrains the expansion of tax bases and will sooner or later limit further enhancements in domestic revenue mobilization.
- LDC exposure to tax avoidance and illicit financial outflows by multinational enterprises was estimated at 36–115% of tax revenue in 2018. Other factors that reduce the tax potential in LDCs are weak institutions and policies, large informal sectors, tax evasion and corruption.
- In 2017 only 32% of donor initiatives had objectives drawn directly from national development plans. Most aid is delivered through parallel donor structures that tend to weaken the complementarity between external finance and domestic tax effort. Parallel structures also divert resources from planned national priorities.