The shift in development financing

Ben D. Kritz

Ben D. Kritz

LAST week, the Philippines – along with the Asia-Pacific region in general – was complimented by the United Nations Development Program (UNDP) for having made “great strides” in planning and funding sustainable development and improved public services on its own, in what may be one of the clearest acknowledgements yet that the country may finally be emerging from

A UNDP report said of the Philippines, “At a middle level in income and human development, with significant fiscal space, and where official development assistance now represents a small fraction of total financial flows, the country is committed to making more effective use of its internal resources to fulfill its development goals.”

The Philippines is not unique in that respect; the same report noted that the number of what are described as “middle income” countries in the Asia-Pacific region increased from 16 to 28 in just a decade, which is all the more remarkable when one considers that a significant part of that decade was compromised by the global financial crisis and its aftermath.

From the upper-income geopolitical perspective, that is largely good news. As UN Assistant Secretary-General and UNDP Director for Asia and the Pacific, Haoliang Xu, said in a statement accompanying the report, “These new sources of finance allow us to expand the existing development cooperation and partnership,” which basically means that more resources from the international community are being freed for use in places that need them more than countries like the Philippines.

The statement by the UN official, however, may have been a little more loaded than he intended, because while the obvious shift towards domestic development financing—official development assistance as a proportion of total financial inflows to the Asia-Pacific region dropped from 13.5 percent to 3.4 percent between 1990 and 2012—at first glance indicates greater independence for countries like the Philippines, it potentially subjects them to much broader soft influence on the part of the developed world.

Having largely graduated from the simple “do what we tell you to do in exchange for funds” model, the country is now subject to a much bigger set of global rules. The influence the developed world (i.e., the US and Europe) can impose on a country like the Philippines is now much more pernicious, because while the country may now be creating enough of its own financial resources to fund development, it has not yet necessarily created the capacity to carry it out. Thus, through the exchange of knowledge or technology, the donor can style the beneficiary’s internal policy as it sees fit.

A relatively simple example might be the target country’s tax regime; in order to maintain constant improvement of its credit standing and stable financial reserves to continuing funding increasingly sophisticated development, the government might be told by helpful foreign consultants, it should lower corporate tax rates, remove some exemptions on value-added tax, index its fuel excise to inflation, and so on. The target country, sensitive about its “sovereignty,” may choose not to do so, of course, but then it risks being bypassed by potential investors, or not being included in preferential trade agreements or financial system linkages.

The effect becomes even more pronounced when it comes to policy related to areas for which there are some form of “global” standards, such as public health, environmental regulation, or human rights. In order to enjoy the benefits of being a “middle-income” instead of “lower-income” country, the government has to adjust (and pay for) its policy in ways that may not be exactly relevant to the country, or for which the country is institutionally or socially unprepared.

Unfortunately, there is no easy way. Being a beneficiary of large amounts of direct financial aid is a carrot-and-stick proposition of one sort; reaching the level the Philippines seems to have reached now—having domestic resources, but not a lot of domestic know-how—is a compromised position of a different sort. Working through this phase requires foresight and broad thinking about the implications of policy choices, but it can be done. Whether the current crop of leaders considers that task popular enough to take it on is another question entirely.


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