Implications for International development financing

The lackluster performance of the BWIs in advancing international development as well as the rise of the South are starting to transform how international development is financed.

The major portion of development funding generally comes from the countries themselves. Between 2000 - 2015, developing countries have increased domestic revenues by an annual average of 14% - the domestic revenues of developing economies amounted to USS7.7 trillion in 2012, USS6 trillion more than in 2000 (UNDP, 2015). Important challenges remain. In the least developed countries, tax revenues amount to just 13% of GDP on average - about half the level in many other developing countries (UNDP, 2015). Nevertheless, as more countries become MICs, their ability to generate domestic revenues continue to increase diminishing the need for external funds.

The external financing sources include international trade, foreign direct investment and other private flows including remittances, aid and external debt.

International trade

International trade increased by more than 50% percent between 2005 - 2015, with about 60% of the increase tied to rising exports from developing countries (UNCTAD, 2016). South-South trade has grown even faster over the same period - more than tripling to reach 57% of all developing country exports (US$9.3 trillion) in 2014 (UNCTAD, 2016). The rapid growth in South-South trade reflects a lessening of dependency on Northern markets. The labor- intensive production stages of many industries have relocated from countries like China and India to lower-wage economies (Subramanian and Kessler, 2013). A host of new institutions such as China’s Belt and Road Initiative (BRI) and the Asian Infrastructure Investment Bank (AIIB) are supporting South-South trade and investments. Overall, many countries have gone from being aid dependent to trade reliant over the last three decades.

FDI and remittances

In 2016, more than 40 percent of the nearly $1.75 trillion of global FDI flows was directed to developing countries (World Bank, 2018a). FDI by Southern firms accounted for nearly one-fifth of global FDI flows in 2015, up from just 4 percent in 1995. The BRICS (Brazil, Russia, India, China, South Africa) investors are the key drivers, accounting for 62 percent of total developing country FDI stock in 2015 - with China alone accounting for 36 percent (ibid (2018a). In 2015-16, the ten leading foreign investors in Africa, by number of new projects, included China, India, Kenya and South Africa (The Economist, 2018). While both Northern and Southern investors respond to the same type of locational determinants (market size, income level, distance, common language, colonial links). Southern investors are more willing to target smaller and closer economies (World bank, 2018a). In addition, managers of developing country MNCs may be more accustomed to uncertainty and more adept in dealing with unpredictable regulatory practices and less transparent administrative procedures (World Bank, 2018a)

Remittances: Remittance inflows reached US$529 billion in 2018. India (S79 bn, 2.9% of GDP) and China (S67 bn, 0.4%) were the top recipients followed by Mexico (S36 bn, 3%), The Philippines (S34 bn, 10.2%), and Egypt (S29 bn, 11.6%). The official remittance channels remain expensive (global average cost of sending $200 - 7%; Banks -11%) and unofficial channels dominate the flow. Remittances reduced poverty rates modestly in some countries and can act as insurance against disasters or economic downturns, allowing households to better smooth their consumption (Schaeffer, 2009; Castles, de Hass and Miller, 2014). The impact of remittances on education may be particularly important for economic development in the long run. Remittances also appear to finance entrepreneurial activity.

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