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Innovation in Development Finance

ROME – More than four decades ago, the world’s wealthiest countries pledged that at least 0.7% of their GDP would be devoted to official development assistance (ODA). But fewer than a half-dozen countries have actually met this goal. In fact, ODA disbursements have not been stable, reliable, or reflective of need, and doubts about their effectiveness linger.

ODA declined significantly after the Cold War, dropping to 0.22% of developed countries’ combined GDP in 1997-2001, before rising again after the September 11, 2001, terrorist attacks in the United States and the International Conference on Financing for Development in Monterrey, Mexico, the following year. Then, as developed-country governments imposed strict fiscal austerity in the wake of the global economic crisis, ODA fell again, to 0.31% of GDP in 2010-2011.

But, since the Monterrey conference, major additional development-finance needs have been identified, including aid-for-trade schemes and financing for climate-change mitigation and adaptation. And, while the Leading Group on Innovative Financing for Development – which includes 63 governments, as well as international organizations and civil-society groups – has contributed to significant progress in the last decade, the definition of innovative development finance remains in dispute. Indeed, critics contend that the international taxes – for example, on carbon emissions – that the Leading Group has identified as a potential source of finance infringe on national sovereignty.

Moreover, the sources of finance do not necessarily determine how the funds are allocated, let alone how they are ultimately used. For example, although the so-called Tobin tax (a small levy on financial transactions) was originally intended to fund development assistance, a version of it was recently adopted in Europe in order to supplement national budget revenues.