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The International Finance Facility:
Development on Credit?By Jens Martens*
Global Policy Forum
July 21, 2005
In the run-up to the United Nations Millennium+5 Summit in September 2005, the deadlock in the debate about development finance has finally begun to ease. Hard-hitting reports by Kofi Annan (1), by the Millennium Project initiated by Annan and headed by Jeffrey Sachs (2) and by the World Bank (3) have come to the unanimous conclusion that the Millennium Development Goals (MDGs) can only be achieved by the year 2015 if Official Development Assistance (ODA) is increased drastically and immediately. Governments are now joining NGOs in this evaluation of the situation.
An increase in bilateral aid in the context of a binding timetable, and the introduction of new international financial instruments, have formed the two central threads of these discussions, with the British government's suggestion to introduce an International Finance Facility (IFF) playing a prominent role in both. On the basis of long-term donor pledges by member governments, the IFF would issue bonds in its own name on international capital markets, thereby leveraging in additional funds for development purposes in the poorest countries. This process is projected to raise $500 billion over the next 10-15 years.
The IFF initiative is certainly ambitious. According to the British government's advertising slogan, it will "double aid to halve poverty." Currently there appear to be no valid alternatives to this model, as the political support necessary for global taxes or for a radical increase in national aid budgets is unlikely to manifest in the near future. However, rather than focussing simply on considerations of its political feasibility, an evaluation of the IFF concept should examine the extent to which the model actually makes any sense within a development context.
More Harm than Good?
The starting point of an evaluation of the IFF must be the basic question of whether or not it will help to counteract the failings within international development finance identified by the Landau Report (4). Arising from the Landau report are the following four concrete questions:
- Will the IFF mobilise additional ODA?
In the short term, yes. In the long term, no. Frontloading ODA comes at a high price, as over the whole 30-year period of the IFF, significantly fewer funds would make their way to the Global South than without it – unless of course the costs of replenishing the IFF could themselves be covered through compensation from additional ODA funds.
- Will the steep transaction costs of development aid be reduced by the IFF?
No, quite the opposite. As payment of IFF funds is to be made using existing bilateral and multilateral channels, the transaction costs associated with aid (for example in connection with negotiating bilateral programmes between donor and recipient governments) won't change at all. Furthermore, the transaction costs thrown up by the new IFF bureaucracy will also need to be covered. So aid with the IFF would actually be more expensive than without it.
- Will the IFF help to ensure that more development funds go towards fighting poverty and actually arrive in the developing countries themselves?
Yes; the proposed conditions for donors ("Overarching Principles") are intended to ensure that all IFF funds are used in fighting poverty, and also that no aid will be tied.
- Will the IFF reduce volatility and increase predictability of ODA for recipient countries?
Despite this being one of the British government's main arguments for the IFF, it is only partially true. Donors' long-term payment pledges (of at least 15 years) to the IFF would not be complimented by parallel long-term pledges to recipient countries. The IFF funds are intended only for investment in development plans of a minimum length of 3 years. Funds are also tied to the so-called "high-level conditionality" of the IFF (above all the condition of remaining on-track with the IMF) and are also bound to a variety of conditions set by individual donors. If these are not fulfilled, payments can be suspended. Thus in fact the IFF would ensure hardly any greater predictability in terms of planning for individual recipient countries.Key Demands
A thorough analysis of the initiative indicates clearly that the success of the IFF would rely on it meeting a series of specific demands. The following four are of particular importance:
- Inclusion of those affected in decision-making:
So far, governments and civil society groups from the Global South appear in IFF plans only as passive recipients. If the IFF is to match even the very basic level of IMF and World Bank participatory processes, these governments and civil society groups must be fully integrated into the decision-making and working processes of the IFF. A possible example of a co-operative decision-making model is that used by the Global Environment Facility (GEF).
- No additional conditionalities:
Rather than burdening ODA recipients with further conditionalities, the IFF should work towards reducing the conditions associated with the awarding of IFF funds to the absolute minimum politically necessary for development.
- No negative effects on financial markets:
The introduction of the IFF risks an increase in interest rates within capital markets due to heightened demand for bonds. This must be addressed.
- Availability of additional funds from outside the IFF:
If the IFF is to be replenished from annual budgets, then 2015 will see a sudden cut in ODA which we can presume would have serious negative consequences for the poverty situation worldwide. For this reason it is imperative that alternative funding sources are secured for the IFF from the start, which could be raised through the introduction of global taxes, particularly on aviation fuel and currency transactions. The IFF and global taxes should thus be introduced in parallel, not least because even if the IFF plans are fully realised the facility will not by itself raise enough to achieve the MDGs.A strategy is necessary which contains three elements:
- A significant increase in national aid budgets
- Full realisation of the IFF plan
- Early introduction of global taxes, at least on aviation fuel and currency transactions
Only if these demands were met ex-ante could the negative aspects of the IFF be redressed, at least in part. Otherwise, the initiative is very likely to create more problems than it solves.
NOTES AND REFERENCES
- See UN Secretary-General, 2005: In larger freedom: towards development, security and human rights for all. New York: UN (UN Dok. A/59/2005). Website: www.un.org/largerfreedom/
- See UN Millennium Project, 2005: Investing in Development. A Practical Plan to Achieve the Millennium Development Goals. New York: UNDP. Website: www.unmillenniumproject.org.
- See World Bank, 2005: Global Monitoring Report 2005. Millennium Development Goals: From Consensus to Momentum. Washington, D.C.
- See Landau, Jean-Pierre (Ed.), 2004: New International Contributions to Finance Development. Paris: Groupe de travail sur les nouvelles contributions financiers internationals.
FURTHER READING
Atkinson, Anthony B. (ed.), 2004: New Sources of Development Finance. New York: Oxford University Press.
Department for International Development/HM Treasury, 2004: International Finance Facility. Double aid to halve poverty. London. (http://www.hm-treasury.gov.uk./media/1C7/AB/1C7ABBFE-BCDC-D4B3-115B84EA4BD07566.pdf
Department for International Development/HM Treasury, 2003a: International Finance Facility. A technical note. London.
Landau, Jean-Pierre (ed.), 2004: New International Contributions to Finance Development. Paris: Groupe de travail sur les nouvelles contributions financiers internationals.
Reisen, Helmut, 2004: Innovative Approaches to Funding the Millennium Development Goals. Paris: OECD (http://www.oecd.org/dataoecd/57/11/31430478.pdf).
Technical Group on Innovative Financing Mechanisms, 2004: Action Against Hunger and Poverty. Report of the Technical Group on Innovative Financing Mechanisms. Brasilia.
World Development Movement, 2005: The International Finance Facility. Boon or Burden for the Poor? London.
About the Author: Jens Martens is Director of Global Policy Forum's European office in Bonn, Germany.
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