About this Blog
At the IDB, we believe that together we can go farther. Our partnership network is making positive differences in Latin America and the Caribbean every day, and this blog is our channel for telling that story. Stay tuned for literature on partnership perspectives, stories from the field, changing trends, outlooks for development and the region, information on ways and opportunities to partner, and more. Thanks for stopping by.
Disclaimer

The views expressed in this blog are those of the author and do not necessarily reflect the views of the Inter-American Development Bank, its Management, its Board of Executive Directors or its member Governments.

Welcome to the Era of Good – Part I

By - Feb 5 2015

Good News_6_2

Flipping through network news, it seems we live in an era where bad news reigns supreme. But amidst all the stories of bad, could we actually be welcoming an era of good instead? YES. In development, it’s important to study trends—or realities—impacting the financing sources on which positive change relies. What is the impact of Official Development Assistance (ODA—I know, such a boring, technical-sounding term) in development? How is philanthropy contributing to our region’s growth? What innovative financing mechanisms should we embrace in this wave of new instruments? How is the private sector engaging in activities that generate financial, social, and environmental returns?

Though the trends we will discuss in this two-part analysis aren’t new, we believe that their ability to persist and consolidate over the past few years makes them not trends, but realities. And from where we stand, we believe these realities look not bad for development, but good, ushering in an age of continued growth, expanded collaboration, and bright futures for countries and people in Latin America and the Caribbean (LAC). To prove our point, in this Part I, we will walk you through the new realities that define development financing sources, touch on the bad news associated with them, and explain how these realities are actually good news, indeed. Beginning with both the most traditional source of development financing and the most innovative, we hope this first take shows you that the forecast for development is actually sunny in LAC, and explains the work that must be done to keep it that way.

 

Official Development Assistance (ODA)

Bad news: First, the bad news. Since about 2007, ODA contributions to Latin America and the Caribbean have diminished as the region’s countries increasingly improve among many economic indicators. Defined by the OECD as “those flows…provided by official agencies….with the promotion of the economic development and welfare of developing countries as its main objective,” the decline of ODA to LAC is no secret, with many regional countries entering the ranks of middle-income nations and thereby losing priority status among traditional donors. This curse of generalization, by which donors witnessing growth in certain corners of the region overlook persisting poverty in other areas that needs addressing, has significantly slowed ODA flows to LAC.  Combined with the fact that multilateral aid is under increased scrutiny, ODA to LAC now represents just 8 percent of global ODA and continues losing steam.

Good news: But what is the silver lining? We’ve identified three:

  1. First, though LAC is receiving less ODA from traditional donors, new actors are emerging on the scene with much to offer. This forces the region to diversify its donors and partners, coming into contact with new actors who bring new resources and expertise to the mix. Blazing the trail as increasingly valuable partners for LAC countries are their Asian counterparts, with China, Japan, and the Republic of Korea emerging as prized sources of not just financing, but knowledge as well. Additionally, Australia and Singapore are also increasing their presence in the region, expanding LAC’s network of non-traditional donors and partners.
  2. Secondly, this reduced reliance on traditional donors motivates LAC countries to ramp up collaboration with one another. As one of the world’s most homogenous regions, Latin America and the Caribbean is fertile ground for country-to-country teamwork, with cultural and linguistic similarities (even with Brazil as an odd man out) setting the stage for smooth cooperation. Yet despite this homogeneity, differing countries tout different strengths and are experiencing different rates of growth, meaning that LAC nations stand to share many lessons.  With this changing ODA landscape as prime motivation and Argentina, Brazil, Chile and Colombia as solid examples, we are seeing this manifest itself in triangular cooperation, the establishment of national development banks, and growing partnership across the region.
  3. Lastly, there is a strong increase of reimbursable resources flowing into the region. In the past five to seven years in particular, these reimbursable resources have had a catalytic effect, leveraging development resources from LAC countries themselves. While in 2007, reimbursable ODA to LAC comprised 17 percent of total ODA, that figure jumped to 40% by 2012. For proof, look no further than Canada, China, France, Spain, and other donors who have gone beyond grants to contribute to LAC through reimbursable financing mechanisms.

Innovative Finance

Bad news: Shifting now from this most traditional source of development financing to its younger, more pioneering counterpart, in discussing innovative finance we introduce the private sector players that will be the focus of Part II of this analysis. Though innovative finance, particularly in the form of impact investing and climate finance, has a growing importance in Latin America and the Caribbean, it has its share of bad news as well. In particular, it wants for mainstream investors to achieve its full market size potential. Though partnerships are growing in this space, further public-private collaboration is needed to tap into the full potential of innovative finance, and the scene in general continues to lack the framework and orchestration that is essential to its growth in the region.

Good news: The good news? As with ODA, it seems to trump the bad.

  1. In the world of impact investing, even a lack of standardization hasn’t slowed its growth, with this new mechanism’s importance to LAC continuously growing.  According to a survey by the Global Impact Investing Network and JP Morgan, 32 percent of respondents will focus their investments on LAC. With the impact investing market forecasted to hit US$1 trillion by 2020, this means impact investing stands to contribute substantially to LAC’s continued growth.
  2. In climate finance, LAC also has an opportunity to tap into a rapidly growing market. Sized at $331 billion in 2013 by the Climate Policy Initiative, this number is proof enough of the potential magnitude of this financing mechanism. And though building up climate finance will require work, doing so is a fantastic opportunity for national development banks (NDBs), local governments, and others to pitch in. Through public financing these actors can catalyze private investment, thereby increasing demand for funding in climate-friendly projects and incentivizing further climate-friendly investments from the private sector.
  3. In the case of innovative finance in general, perhaps the biggest obstacle is creating an ecosystem in LAC that allows these mechanisms to thrive and become mainstreamed sources of development funding. As creating these ecosystems will take a potent mix of hard work and good ideas, perhaps the best news of all is that, in Latin America and the Caribbean, creativity remains alive and well. As the region that birthed the samba, Frida Kahlo, and four Nobel Laureates in Argentina alone (can you guess where I’m from?), we must never underestimate the power of LAC’s creativity. It was this creativity that paved the way for pioneer microfinance institutions to take hold in the region in the 1980s and 1990s, and it is this creativity that, if applied to nurturing innovative finance, may make for a truly transformative result. It seems that we will just have to wait and see.

 

Today’s look at the old (ODA) and the new (innovative finance) of development financing, as well as a look at the bad and the good in them both, proves that despite our fixation on the negative, the forecast for development funding is actually quite bright. The consolidation of these trends over the past few years makes us confident that they are here to stay, indicating that Latin America and the Caribbean, and the developing world as a whole, can expect further support and continued growth in the years to come. In Part II, set to come next week, we will take a shot at discussing how the private sector is an important piece in this continued support of LAC’s development, and how business and philanthropy alike stand to play a critical role as we usher in this era of good.

 

Print Friendly, PDF & Email

One Response to “Welcome to the Era of Good – Part I”

Comment on the post

@IDBpartnerships