The Future of Multilateral Concessional Finance

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The Future of Multilateral

Concessional Finance

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The Future of Multilateral Concessional Finance

June 2014

Authors:

Helmut Reisen

SHIFTINGWEALTH Consulting, University Basel Christopher Garroway

United Nations Conference for Trade and Development

The study “The Future of Multilateral Concessional Finance” was commissioned as part of the Deutsche Gesellschaft fuer Internationale Zusammenarbeit (GIZ) GmbH sector project “International Positioning of the German Development Cooperation in Development Economics” on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ).

The authors are very grateful for comments received by Reinhard Palm (BMZ), Johanna Wohlmeyer (GIZ), Lukas Schlögl and Andy Sumner (both King´s College London), Ivar Andersen (World Bank) and Christian Mumssen (IMF). The views expressed in this paper are those of the authors and do not necessarily reflect the views or carry the endorsement of BMZ, GIZ or the United Nations or any of its Member States.

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List of Figures and Tables

Table 1.1: Concessional and Non-Concessional Gross Flows by IFIs, 2011 11

Table 1.2: When Do We Have a Donor Dilemma? 12

Box 2.1: Capital Market Access as IDA Eligibility Criterion 15

Table 2.1: Growth Engine China, 2000s 15

Figure 2.1: Unconditional Income Convergence in LICs and MICs, 1960-2010 16

Figure 2.2: Percentage Change in Real Income (2005 USD), 1980–2008 17

Figure 2.3: Marginal Tax Rate Required to Close Poverty Gap 19

Table 3.1: Poverty Baseline Scenarios 2025/2030 22

Table: 3.2: Shifting Distribution of IDS Eligible Countries Across Income Categories 23

Table 3.3: Projected Graduates from Operational Eligibility 23

Table 3.4: Projected Graduates from Historical Eligibility 24

Figure 3.1: Poor Populations in 2025 in Countries Projected to Have > 1 Million Poor 26

Table 3.5: Extreme and Relative Poverty Headcount Ratios in 2025 26

Table 3.6: Tax as a Share of GDP and its Determinants in IDA-Eligible Countries 29 Figure 3.2: Marginal Tax Rate Required to Eliminate Extreme Poverty and IDA Graduation Thresholds 30 Figure 3.3: Rising Cost of Natural and Technological Disasters, 1950-2013 31 Figure 3.4: Disaster Damage Cost Compared to Concessional Finance Demands for IDA Graduates 32

Table 5.1: Country Eligibility by Funding Mechanism, End 2013 38

Figure 5.1: Projected Number of Countries Eligible for PRGT 39

Figure 5.2: Multilateral Grant Elements per Country Group 41

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List of Abbreviations

ADB Asian Development Bank

ADF Asian Development Fund

AfDB African Development Bank

AfDF African Development Fund

ATF Asian Tsunami Fund

BMZ Federal Ministry for Economic Cooperation and Development

Bn Billion

BRICS Brazil, Russia, India, China, South Africa

CGD Center for Global Development

CPIA Country Policy and Institutional Assessment

CPF Country Partnership Framework

CRED Centre for Research on the Epidemiology of Disasters

DAC Development Assistance Committee

DCD Development Co-operation Directorate

Congo, D.R. Democratic Republic of the Congo

ECF Extended Credit Facility

EM-DAT database The International Disaster Database, Center for Research on the Epidemiology of Disasters

EU European Union

EUR Euro

EVI Economic Vulnerability Index

FSO Fund of Special Operations

FX Foreign Exchange

FY Fiscal Year

GDP Gross Domestic Product

GEF Global Environmental Facility

GIZ Deutsche Gesellschaft fuer Internationale Zusammenarbeit GmbH

GNI Gross National Income

GPG Global Public Good

HDI Human Development Index

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HIPC Heavily Indebted Poor Countries

IBRD International Bank for Reconstruction and Development

IDB Inter-American Development Bank

IDA International Development Association

IDS Institute of Development Studies

IFI International Financial Institution

IMF International Monetary Fund

ICP International Comparison Program

LICs Low-Income Countries

MDB Multilateral Development Bank

MDGs Millennium Development Goals

MICs Middle-Income Countries

ODA Official Development Assistance

ODI Overseas Development Institute

OECD Organisation for Economic Co-operation and Development

OCR Ordinary Capital Resources

PBA Performance-Based Allocation

PCDR Post-Catastrophe Debt Relief Trust

PPP Purchasing Power Parity

PRGT Poverty Reduction and Growth Trust

PVCCI Physical Vulnerability to Climate Change Index

RCF Rapid Credit Facility

SCF Standby Credit Facility

UMIC Upper-Middle-Income Country

UN United Nations

UNECA United Nations Economic Commission for Africa

USD United States Dollar

WEO World Economic Outlook

WB World Bank

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effort calculations show little untapped potential for domestic resource mobilization for most Sub-Saharan African countries. In South Asian countries – in par- ticular Bangladesh, India, and Pakistan – where a higher domestic tax effort could be envisaged to help combat extreme poverty, challenges for fiscal federalism and cross-state revenue sharing remain nonetheless formida- ble and require technical support.

Climate change and natural disasters threaten to derail efforts to eradicate poverty over the next decade.

In Asia, disaster damage cost in selected IDA recipient countries is substantially higher than concessional IDA flows. In Africa, disaster costs are of about the same magnitude as IDA credits. A major political decision hence relates to the provisioning of global public goods through multilateral concessional finance, especially adaptation to and mitigation of climate change as well as disaster risk management. Mainstreaming climate change into development cooperation would require multilateral donors to integrate vulnerability to environmental and global risks into their allocation criteria for conces- sional funds.

Abovementioned uncertainties would suggest a gradual- ist, precautionary and insurance-oriented approach to the future of multilateral concessional windows.

Shrinking multilateral aid would ignore the option value of preserving the International Financial Institutions (IFIs) and their concessional windows in a world with considerable uncertainty about future poverty outcome.

Realistic options presented in this study are:

i. redefining eligibility criteria for concessional funds based either on relative or absolute poverty terms, e.g. as per capita income relative to per capita income in a specified grouping, or even as overall levels of extreme poverty; alternatively new and more comprehensive measures such as the United Nations Human Development Index or the Multidimensional Poverty Index could be considered;

ii. smoothing transition periods from IDA-only via blend to IBRD-status for upper-middle-income countries (UMICs), with similar graduation paths in the other multilateral windows; such an “IDA+

transitional window” would be available for countries with a per capita income between the current IDA threshold and its double, and funds could be directed towards measures of social in- clusion and redistribution;

Emboldened by a decade of poor-country convergence and poverty reduction, many are now imagining a world without extreme poverty (often defined as 3 percent of the world population living on USD 1.25 Purchasing Power Parity a day or less) in not too distant future. This paper presents the major determinants of the future demand for concessional finance and produces scenarios for multilateral concessional finance eligibility.

It then discusses general strategic implications for the future orientation of multilateral concessional finance and presents actionable options for the development of each the International Development Association (IDA), the Asian Development Fund (ADF), the African Development Fund (AfDF), and the concessional facilities of the International Monetary Fund (IMF).

This report considers four major determinants of the future demand for concessional finance: (i) national productivity and welfare, (ii) the extent of poverty and deprivation, (iii) the capacity to mobilize domestic financial resources, and (iv) the vulnerability to exogenous shocks and global public “bads”.

The paper finds that recent studies on poverty and growth projections have been overly optimistic. The 2000s may well have been a special decade, and growth rates in the coming decades may hardly approach the past high levels. This paper projects the number of coun- tries eligible for multilateral soft finance to decline to 26 in 2025, down from 39 in 2012 (based on Gross National Income per capita simulations).

The population of extreme poor will have been halved globally by 2025, estimated at still more than half a billion according to the basic scenario of the study.

Prospective graduates India and Nigeria as well as Democratic Republic of the Congo are likely to constitute half of global poverty ten years from now. At the same time, the distribution of income has blurred the distinction between poor people and poor countries.

Projected relative poverty headcount ratios indicate that even if the number of extreme poor population is strongly reduced globally by 2025, most countries will face sizeable problems with social exclusion and relative deprivation.

Higher domestic resource mobilization may reduce reliance on concessional flows. However, marginal tax rates required to close the poverty gap remain prohibi- tively high in most developing countries. Moreover, tax

Executive Summary

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focusing the performance-based allocation on direct poverty reduction outcomes and including vulnerability to environmental and global risks in the allocation criteria. The division of labor between IDA and the AfDF needs to be sharpened in the conceivable case of a largely overlapping client group. The report concludes that the provision of regional public goods in the form of trade development may become an AfDF focus while IDA could concentrate on climate-change related finance.

The AfDF may further consider departing from an IDA- pegged to a specific allocation mechanism tracking the AfDF’s performance; recent changes to its loan policy in its core fields of infrastructure development might be extended to regional integration by the means of struc- tural indicators. The ADF on the other hand, with its largely different client base, is already on a good track with its current effort to merge the ADF with ordinary capital resources, thereby increasing the institution’s lending and leveraging capacity; the latter would be greatly enhanced by raising China´s and India´s capital shares.

iii. strengthening sub-sovereign allocation to take account of the rural-urban duality of inequality and higher disaster risks in certain provinces;

iv. opening the multilateral soft windows for re- gional and global public goods, with climate change mitigation and disaster risk management as tracer sectors; this could take the form of turn- ing multilateral development banks (MDBs) into global/regional public goods facilities or the greening of MDB projects.

Finally, this paper presents strategic options for the four soft windows covered in the analysis. It suggests for the IMF to increase its share of blended finance, increase its grant element for Poverty Reduction and Growth Trust (PRGT)-only countries and add an insurance-type instrument to the PRGT lending facilities. For IDA, often a lead institution in defining rules for concessional finance, it recommends increasing the grant element of its loans, considering a two-window approach with the second window focusing on transitional support,

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In 2011 (last year reported by the Organisation for Economic Co-operation and Development (OECD)), USD 19bn total gross disbursements of concessional flows¹ were disbursed by International Financial Institutions (IFIs). As current multilateral concessional resources may be insufficient to fully address poverty challenges, future graduations will not automatically lead to lower amounts of concessional finance. Yet, graduation of MICs (such as India) raises a range of conceptual, political, and operational issues for multilateral donors: The conceptual side – the nature of global responsibility towards the poor in countries that are (only just) non-poor on average – can strongly conflict with political considerations that shy away from providing concessional finance to countries whose multinationals are buying up donor- based companies, have accumulated high reserves and have turned into emerging donors (partners) themselves.

Hence, the double donor dilemma extends to multilateral institutions as well.

The demand for concessional funds from the IFIs may well shrink as a number of countries (often so far big recipients) are scheduled to graduate from multilateral aid.

This raises questions about the (future) roles, mandates, and appropriate instruments in the governing bod- ies of the African Development Bank (AfDB), the Asian Development Bank (ADB) and the World Bank (WB) with regards to their respective soft windows, the African Development Fund (AfDF), the Asian Development Fund (ADF) and the International Development Association (IDA)². In addition, the International Monetary Fund (IMF) also offers concessional finance and thus needs to be included in an analysis of the respective concessional instruments.

Looking beyond 2015, the target year defined by the Millennium Goals, international organizations and their leaders have increasingly joined a chorus of euphoric

“We-Can-End-Poverty” declarations. While macroeconomic observers are now buzz with secular stagnation, China´s forthcoming crash, or emerging market taperi- tis, this has not yet affected the End-of-Poverty banner

1 Defined as official flows with a grant element of at least 25 percent using a discount rate of 10 percent, except for the IMF which has used a discount rate of five percent since October 2013.

2 The Inter-American Development Bank and its soft window, the Fund of Special Operations (FSO), shall not be considered since the FSO has already been reformed and considerably reduced in size.

What if global poverty is increasingly focused either in countries which do not really need aid or in countries that cannot absorb aid easily and quickly? Emboldened by a decade of poor-country convergence and poverty reduction, many are now imagining a world without extreme poverty (with less than 3 percent living on USD US 1.25 Purchasing Power Parity (PPP) or less) in not too distant future, say by 2025. The Economist (2013) described the implication for aid agencies as the double donor dilemma: “Middle-income countries do not really need aid, while fragile states cannot use it properly. A dramatic fall in poverty requires rethinking official assistance”. The changing geography of poverty is indeed an important factor affecting the future role and provision of aid. Currently, around three quarters of the world’s poor live in middle-income countries (MICs) and a quar- ter in the remaining 35 low-income countries (LICs).

Some believe that this will be a transitory phenomenon and that by 2025 poverty will increasingly be concentrated in fragile and conflict-affected states (Kharas and Rogerson, 2012). Others argue that a significant amount of world poverty could easily remain in stable MICs, or that it could become more concentrated in fragile MICs such as Pakistan and Nigeria (Edward and Sumner, 2013).

The depth of poverty is also significant; many people in Africa and South Asia live a long way below the poverty line and will need greater effort and resources to be helped out of poverty.

Table 1.1:

Concessional and Non-Concessional Gross Flows by International Financial Institutions, 2011 - USD bn, at current prices and exchange rates -

Concessional Non-

concessional Total

AfDB 2.4 3.1 5.4

ADB 1.9 5.6 7.5

IDA-IBRD 11.7 4.0 15.7

IDB 1.7 7.2 9.9

IMF* 1.5 - 1.5

All IFIs 19.3 44.0 63.3

* IMF Concessional Trust Funds Source: OECD (2013b)

1. Introduction: The Multilateral Donor Dilemma

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Case 1: There will be a multilateral donor dilemma when “we beat” poverty by 2025 without changing IFI mandates. History suggests, however, that the absence of institutional change is unlikely for a number of reasons: first, the concept of official development assistance (ODA)-eligibility is “elusive” (Schlögl, 2013) as it does not have hard legal force; second, there have been exceptions (such as currently the small islands, or Israel before);

third, rent-seeking by affected bureaucracies; and fourth, divergent paradigms with respect to poverty (absolute vs relative).

Case 2: This is the old, Paul Collier´s (2007) Bottom Billion.

Should poverty be concentrated in a few countries la- belled “fragile” by 2025⁴, aid volume targeted at poverty might have to shrink as the absorptive capacity in those countries is too limited relative to current aid volumes – bar any improvements in the modalities for operational implementation and monitoring. Except for small island economies, there are 25 countries currently in that category, of which 20 are located in Africa (OECD, 2014) with only 24% of the world poor living there. Moreover, one third of this country group is considered resource rich, intensifying the donor dilemma.

Case 3: It cannot be ruled out that the majority of the world´s poor will live in MICs by 2025. This is the new, Andy Sumner´s (2013a) Bottom Billion. They constitute another side of the donor dilemma, mainly because of the widespread presumption that MICs can take care of themselves, given their tax and redistribution capacity, but also their other assets (foreign exchange (FX) reserves, sovereign wealth funds) and their own donor activities.

Case 4: This is the “easy” case for donors, as the category of “stable”´ LICs is thought to have the governance and institutions that allow for efficient aid allocation and ab- sorption. The problem is that there are not many countries currently in that category, according to the OECD:

15. But it could be that aid to the fragile LICs catalyzes governance reform so that some of these countries move to “stable” before graduation.

Case 5: This is the “uneasy” case for donors as it has be- come increasingly difficult to explain to voters at home.

Still, a large part of chronic poverty is likely to be located in MICs that have only little capacity to redistribute.

These are the MICs with annual consumption per capita under USD 2,000. The tax burdens required to close the national poverty gaps are prohibitive in these countries, according to Ravallion (2012). Kanbur and Sumner (2011) 4 As defined by OECD (2013).

waving. The “We Can End Poverty” refrain seems quite detached now from what can be expected from future growth and seems to extrapolate a trend of global poverty reduction that may have been special to the past decade.

In considerable contrast to the “official” optimism, the range of scenarios for future developing-country growth and poverty reduction has been widening recently (see section 3 for a review). Prudence would suggest approaching strategic changes of multilateral concessional windows with a precautionary, rather than a determinis- tic, perspective to enable flexible institutional response.

That perspective should not only watch the prospect of future graduation for countries today eligible for multilateral soft windows, but also the prospect of reverse graduation resulting from “disasters, military conflict, and governance failures”³. Don´t allow the shareholders of multilateral soft windows “to sleepwalk into the future” (Séverino and Moss, 2012) – yes; but don´t either allow them to ignore the option value of preserving the financial and institutional strength of the soft windows by “declaring success” and letting them shrink.

The configuration of poverty scenarios and strategic options is such that there may be a multilateral donor dilemma; but then there may be not... Consider Table 1.2 and try to attach probabilities to the sum of outcomes that would constitute a donor dilemma (left column) and to those where a donor dilemma would not exist (right column).

Table 1.2: When Do We Have a Donor Dilemma?

Donor Dilemma No Donor Dilemma

1 Poverty ended in LICs &

MICs

4 Poverty in “stable”

LICs 2 Poverty only in “fragile”

LICs

5 Poverty in MICs with little capacity for redistribution 3 Poverty also in MICs

with good capacity for redistribution

6 Redefinition of eligibility status and of IFI mandates

* Poverty is defined as extreme poverty below USD 1.25 PPP.

3 For example, since IDA´s inception, 36 countries have graduated, of which 11 became “reverse graduates” subsequently; another 17 IDA-only countries were, at one point in time, assessed as creditworthy for IBRD financing and classified as a blend country, but subsequently reversed to IDA-only status. For detail, see IDA (2012).

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Banks (MDBs); introducing sub-sovereign allocation;

and opening the soft windows for GPGs.

An important parallel concern – boosted by the Typhoon Haiyan that struck the Philippines in late 2013 – relates to the “greening” of multilateral concessional finance.

Jim Yong Kim, the World Bank President stated at the recent IMF-WB Spring Meetings 2014: “We know we cannot end extreme poverty by 2030 without tackling climate change”. Dr. Kim´s statement, to be sure, begs the question whether and how concessional finance by the MDBs can be used to tackle climate change and disaster- risk management and adaption. This report discusses ways to integrate vulnerability to environmental and global risks into their allocation criteria of concessional flows.

provide some arguments for aid to poor people in MICs rather than only to poor countries: chronic poverty calls for common humanity⁵; concessional finance facilitates working on global public goods (GPGs) with strong ex- ternalities for donors and creating a common knowledge base for policy lessons to combat poverty in poor countries. While uneasy for donors, these MICs do not necessarily constitute a donor dilemma.

Case 6: Strategic options exist for the shareholders of IFIs to attenuate the donor dilemma (if there is one) up to 2025. These options will be presented below: shrinking multilateral aid; complementing/redefining the current IDA cutoff (GNI per capita); smoothening transition periods from IDA-only via blend status to International Bank for Reconstruction and Development (IBRD)-only and correspondingly for the other Multilateral Development

5 The German philosopher Thomas Pogge (Yale) is a prominent representative of that school of thought which has challenged Rawls´ A Theory of Justice that applies only within a nation state:

See Kanbur (2014).

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Box 2.1). “Capital market access”, however, should not be conflated with the IBRD “graduation creditworthiness”

criterion. The latter refers to a fundamental assessment of a country´s economic prospects and vulnerabilities to ensure orderly debt service, in order to defend the IBRD AAA rating for refinancing on global capital markets.

While the assessment of a country’s fundamentals that helps form the decision on access to IBRD financing can differ from a country´s potential for market access, the distinction between the two is not always sharp.

Following IDA's example, all of the major concessional finance windows currently measure the "relative poverty" of potential recipients with gross national income (GNI) per capita, as calculated with the Atlas method.

This provides a basis for international comparison of national productivity and welfare levels in USD using market exchange rates that are smoothed out to account for year to year volatility and fluctuations. This was first established in the case of the IDA of the WB, but has been more or less adopted across the board by the other windows such as the IMF concessional facilities, the ADF, the AfDF and others.

Increasingly, however, the notion of poor countries does not dovetail nicely with the location of the world’s poor people. The developing world is becoming increasingly heterogeneous. Some developing countries are catching up to the productivity frontier of the developed world, while other countries are left behind. At the same time, individual circumstances may also threaten to retrench prior poverty reduction progress and countries face new risks of economic damage from exogenous shocks threatening the global commons, such as climate change, deadly diseases, the food and energy crises, and global security concerns. To document these changing circumstances and to examine possible scenarios of demand for concessional finance going forward, we shall consider the following key determinants of demand for soft lending with respect to individual countries:

– National productivity and welfare – Extent of poverty and deprivation

– Capacity to mobilize domestic financial resources – Vulnerability to exogenous shocks and global

public "bads”.

In the remainder of Section 2, we shall consider each of these determinants in turn. The subsequent sub-sections Demand for concessional resources differs from coun-

try to country and changes over time, as well. Future demand for concessional finance will depend on the external macroeconomic environment faced by developing countries, as well as the changing structure of their economies, as they respond to these external conditions and continue to develop themselves. Countries seek assistance from the concessional finance windows for many reasons. These include a genuine lack of access to the international financial markets and the attractiveness of the soft financial terms that concessional finance windows offer, as well as the technical assistance that often accompanies soft loans or grants. In addition, as the ex- perience of the global financial crisis demonstrates, sudden events, such as a downturn in the external environment, also increase the need for concessional resources at relatively short notice and in relatively large magni- tudes. For more than 50 years, concessional finance windows have generally served as an international recourse for “poor countries”. As the WB Operational Manual (O.P 3.10 Annex D) puts it: “Countries are eligible for IDA on the basis of relative poverty and lack of creditworthi- ness”. This succinct statement obscures the fact that in practice "relative poverty" as described here is a loaded term⁶.

For the purpose of forecasting future demand for concessional finance in this report, we shall focus on this

"relative poverty" criterion, rather than market access.

The implicit assumption is that as countries’ national income per capita rises they become more capable to meet higher debt service costs, and achieve greater access to market sources of finance. At the same time, a strong case can also be made for discarding a criterion of capital market access altogether for gauging countries' needs to take recourse to the concessional finance windows (see

6 It is important to not confuse "relative poverty" as an eligibility criterion with relative poverty lines which are drawn relative to the mean or median income for a given population. The "relative poverty" of countries as a key criterion to avail of IDA resources is repeatedly referred to in available IDA documentation.

Notably, however the IDA Articles of Agreement only vaguely refer to financing "less-developed areas of the world." This con- fusing usage, which to modern ears confuses poor countries with poor individuals, illustrates how out of date the IDA eligibility criteria have become. In a sense, what the IDA eligibility criteria describe as "relative poverty" is in fact something more akin to "level of development", i.e. something closer to what the World Bank Group analytical classifications describe.

2. The Future Demand for Concessional Finance:

Major Determinants and Projections

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In 1960, private capital flows to poor countries were unimportant relative to trade; they were fairly tran- quil and consisted mostly of direct foreign investment.

That year, IDA was established in recognition of the fact that, for many of the poorest countries, private capital and market-based multilateral sources of financing were not adequate. From the start, demand for IDA resources outstripped their supply. Hence, the need to ration demand for concessional finance through defining eligibility criteria. Apart from the concept of “relative poverty”, as measured by GNI per capita below an agreed threshold, IDA eligibility and graduation criteria were constructed around the absence of creditworthiness to tap private capital markets.

Five decades later, creditworthiness on financial markets (as opposed to IBRD “graduation creditworthiness”) has arguably lost any positive and normative value as an eligibility and graduation criterion for screening the access to multilateral concessional finance. It might equally be dropped. Moreover, capital market access has also been very difficult to predict since the early 1980s. It is an inappropriate determinant for graduation scenarios. These lessons are explained by the radically changed nature of private capital flows to developing and emerging countries, both LICs and MICs.

Notably the past three decades have witnessed an impressive range of capital flow cycles – surges (or bonanzas) being followed by “sudden stops”. Private capital flows, and – by implication – creditworthiness or capital market access have no predictive value for scenario analysis.

A recent IDA warning (IDA 2012) should be taken se- riously: “History has shown that pushing countries into market-based borrowing before their economies are sufficiently robust to absorb the associated higher debt servicing costs is counter-productive and likely to lead only to situations where countries have to reverse graduate into IDA”.

For more detailed documentation, see http://www.

shiftingwealth.blogspot.de/2014/04/capital-market- access-as-ida.html

Box 2.1:

Capital Market Access as Eligibility Criterion

2.1 National Productivity and Welfare

The developing world has been booming during the past decade. Until quite recently, eighty developing countries were on a convergence path with the OECD. Even among the world’s poorest countries a third were also “convergers” with OECD income, defined as growing twice as quickly as OECD economies. Extreme poverty, measured by the share of population living on less than USD 1.25 PPP per day per capita, has dropped as a percentage of a growing world population – from 40 to 20 percent over the past two decades. This has encouraged a somewhat euphoric public discussion about the feasibility to end extreme poverty over the next decade or so, i.e. by 2025 or 2030.

However, the 2000s may well have been a special decade, following more than a century of divergence when during 1870 – 1990 the ratio of per capita incomes between the rich and the poor countries increased by a factor of five (Pritchett, 1997). Figure 2.1 shows that unconditional convergence is a new phenomenon in developing and emerging countries.

This special nature of the 2000s is largely attributable to the rise of China, as an engine of growth for the rest of the developing world. Since 2000, developing and emerging countries have become increasingly China-centric (Table 2.1). Before then, only gross domestic product (GDP) growth of oil-exporting developing countries was significantly (albeit quite weakly) correlated with China´s growth. In the last decade, however, one percentage point of GDP growth in China translated into roughly two thirds a percentage point of GDP growth in both LICs and MICs countries. During the last decade, one percent of GDP growth in China has been associated with 0.60 percent of GDP growth in countries with an annual GNI (Atlas method) below USD 1,035 per annum, which are classified by the WB as LIC. Applying the regression results presented in Table 2.1, a drop in China´s growth rate from, say, ten to seven percent would reduce GDP growth in LICs by two percentage points.

Table 2.1: Growth Engine China, 2000s

Percentage point GDP growth associated with 1 percent growth in China

LICs MICs Oil-X Oil-M

Pre 2000 -0.26 0.02 0.22* -0.30*

Post 2000 0.60* 0.64* 0.42* 0.94

*denotes a significance level of 90%

Source: Garroway, Chris et al. (2012) will describe their implications for developing countries’

demand for concessional resources.

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Looking forward towards the decades to come the consensus view among economists on the growth prospects of the world economy now is bleaker than the public discussion about ending poverty suggests: the financial crisis and the euro crisis have damaged both demand and supply, although a gradual healing process has begun in some places (Pisani-Ferry, 2014). The hangover from pre-crisis private indebtedness and crisis-generated public indebtedness still weighs on domestic demand in advanced countries. On the supply side, the crisis has lowered potential output growth; because firms have invested less, impeding the adoption of new technolo- Growth of per capita income is a prerequisite necessary

(not sufficient, though) for graduating from aid. Thus, a close corollary to developing-country growth performance has been LICs´ eligibility for and graduation from concessional finance. Several countries have graduated from IDA borrowing since 1999, including populous countries such as China, Egypt and Indonesia, with India to graduate at the end of IDA 16, from when it will receive graduation support. By contrast, the 1990s saw more countries (seven) as “reverse graduates”, i.e. re-entering IDA concessional finance, than IDA graduates.

Figure 2.1: Unconditional Income Convergence in LICs and MICs, 1960-2010

Source: OECD (2013a) - 2%

- 1%

0%

1%

2%

3%

4%

5%

6%

0 1000 2000 3000 4000 5000 6000

GDP per capita

Convergence in non-OECD economies, 1960-2010

Average annual growth rate, GDP per capita

000

-1%

0%

1%

2%

3%

4%

5%

6%

0 5000 10000 15000 20000 25000

Convergence in the 2000s in emerging and developing economies (excluding least developed economies)

GDP per capita

Average annual growth rate, GDP per capita

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Given the dramatic growth performance of the developing world as a whole, the 2000s experienced unprecedented poverty reduction. The first Millennium Development Goal aimed to cut in half the share of the world’s population living in extreme poverty by 2015 from 1990 levels. Thanks largely to growth in China alone, this global target was achieved more than half a decade in advance as hundreds of millions of people moved out of poverty, mostly in Asia. Poverty reduction was slower elsewhere. Indeed, the bottom half of the global income distribution has made significant income gains in the past few decades, but real incomes of the poorest 5 percent of the world population – some 350 million people in abject poverty – have remained the same even in the recent Golden Age of emerging-country growth (Figure 2.2).

This divergence between the trajectories of different groups of poor people in the bottom half of the global interpersonal income distribution has blurred the distinction between poor people and poor countries.

Importantly, the poorest five percent who saw no improvement in their livelihoods over the recent boom period are a heterogeneous group and do not exclusively live in poor countries alone. They do include populations in fragile states, primarily in Africa, but they also include sizable populations in countries that may no longer be gies. As for China, the important growth engine for poor

countries in the 2000s, most observers would agree that it is neither desirable nor feasible for her to return to the trajectory of 10 percent annual growth that was achieved in the three decades after 1980 (Roach, 2014).

In such a world economy, it cannot be taken for granted that developing countries will enjoy five percent or more real annualized growth for the coming decade. Without strong medium-term growth in developing economies, graduation from concessional finance windows may indeed be less widespread than previously imagined.

2.2 Extent of Poverty and Deprivation

Just like for concessional finance eligibility, growth of per capita income is also a necessary – albeit insufficient – precondition for poverty eradication. Recent WB research suggests that over three-quarters of the improvement in the incomes of the poorest 40 percent over the recent period are attributable to improvements in average income, i.e., it comes mainly from growth (Dollar et al., 2013). WB estimates of poverty elasticity for LICs to growth vary between 1.2 and 3.1 for the 2000s (they are higher than the estimates for the 1990s)⁷.

7 Estimates of poverty elasticity at around two percent have been reported by Chibber and Nayyar, (2008).

Figure 2.2: Percentage Change in Real Income (2005 USD), 1980–2008

90 80 70 60 50 40 30 20 10 0

-10 5 15 25 35 55 55 65 75 85 95

Percentile of global income distribution

Real increase, percent

Source: Milanovic (2013)

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Current concessional finance eligibility criteria implicitly treat a poor person living in a poor country differently from a similarly poor person in a country that has graduated from concessional finance. Thus, the question natu- rally arises whether a poor person in a MIC can expect more from their own domestic governments and thereby rely less on the largesse of international donors. The presumption is that a country which graduates should be able to afford to redistribute domestic resources to combat poverty. Among concessional finance graduates, responsibility for the remaining poor populations effectively shifts from international donors to national governments, via income support or other poverty assistance measures.

However, there may be excessive optimism about poor countries´ capacity to mobilize their own resources via redistribution from the “rich” to the “poor” within developing countries continues in lieu of aid dollars. In fact, OECD donors would ignore more than half of the world´s extreme poor, if their presumption did not ma- terialize that the MICs could mobilize enough of their own resources to eliminate extreme poverty within their respective countries.

To be sure, MICs enjoy new sources of funding that can make up for decreased concessional flows. Foreign exchange reserves have been building massively in some countries, notably China. In principle, it could be envisaged that FX reserves were used to help fight poverty, but this policy would run quickly into complications: while spending reserves would appreciate the real exchange rate and trigger “Dutch Disease” effects, subsequently low reserves might raise the vulnerability to currency at- tacks; for exhaustible-commodity producers, moreover, intergenerational equity issues are also implied (Reisen, 2008).

An attractive measure of the potential for using domestic resources to reduce poverty in the absence of aid is a country´s capacity to generate tax revenues. Ravallion (2012) shows that there is a positive correlation between domestic capacity for redistribution (as indicated by a low required marginal tax rate to close the poverty gap) and a country´s average per capita income. His measure – marginal tax rates on the “non-poor by US standards”⁹ required to cover the poverty gap – finds that for most (but not all) countries with annual consumption per capita under USD 2,000 the required tax burdens are prohibitive – often calling for marginal tax rates of 100 9 The “non-poor” by Western standards are identified as those

living above the US poverty line of USD 13 a day in 2005.

so easily characterized as poor, such as the fast growing countries in East Asia and South Asia.

The uneven distribution of the benefits of growth within countries has held back many poor people, even in the fastest growing economies. Indeed, inequality has been on the rise in a large number of countries, not least in the dual economies of the large emerging countries. Current concessional finance eligibility rules tied to countries´

mean per capita income would obviate the need to consider intra-country inequality for determining future trends in concessional finance eligibility. But a concern for the poor – rather than for poor countries – might be reflected in future, revised eligibility rules.

The important consideration for demand for concessional finance in the decades to come will be to what extent this redrawn geography of poverty is a transitory phenomenon or not. If the fast growing countries in Asia continue to pull all of their citizens out of poverty, than, indeed, the demand for concessional finance will increasingly be concentrated in fewer and fewer poor countries.

However, if this growth is derailed, or if its distribution is worsened, the prospects that extreme poverty becomes increasingly entrenched in MICs are very real. Currently, nearly half of the poor live in just two countries, according to most recent WB data: India (33 percent) and China (16 percent).

2.3 Capacity to Mobilize Domestic Financial Resources

From the point of view of the concessional finance windows, the choice between focusing on poor countries or poor people depends a great deal on institutional development and government capacity in individual countries. For analytical purposes, global poverty meas- urement based on the headcount ratio doesn’t distin- guish between a poor person in a large MIC with capable governance institutions and a poor person in a post- conflict state without functioning government services⁸. However, global redistributive mechanisms, like the concessional finance windows, must deal with governments rather than directly with individuals. And technical cooperation with MICs can help attenuate the poor people versus country dilemma, in particular through strengthening public finances and distribution.

8 This is also true with respect to the poverty gap measure, if the two people have the same welfare level in PPP. If they exhibit different levels, however, they can be distinguished by their shortfall from a common poverty line.

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Earlier studies have found that tax effort in developing countries can vary dramatically from country to country. Indeed, recent work on Africa conducted by the AfDB, the OECD, and the United Nations Economic Commission for Africa (UNECA) found that tax ratios on the continent have been increasing over the 2000s, and that tax effort calculations suggest a number of countries have significant scope to further mobilize additional resources (AfDB, OECD and UNECA, 2010). At the same time, however, Atsiphon et al. (2011) looked at developing countries as a whole and found that while the magnitude of potential additional resources available from improved tax collection was indeed sizable overall, on a country-by-country basis the scope for increased tax collection does not match up very well with individual country needs (Atsiphon et al., 2011).

Looking at both the capacity for redistribution and the potential resources that can be mobilized via improved tax effort therefore should be important benchmarks with which to assess potential graduates from concessional finance.

2.4 Vulnerability to Exogenous Shocks and Global Public “Bads”

In the first half of the twenty-first century, another important determinant of demand for concessional finance will be the risks posed to developing countries by various percent or more. By contrast, the required tax rates are

very low (one percent on average) among all countries with consumption per capita over USD 4,000, as well as some poorer countries. The tax ratio calculations thus demonstrate that LICs (and even upper-middle-income countries (UMICs)) have little or no prospect for increasing domestic resources in the medium term to meet these needs.

Of course, as countries develop, a progressive income tax may take time to implement and may only emerge after a series of political and institutional develop- ments. While most developing countries may yet lack the capacity to redistribute their way out of poverty, it is conceivable that they may have other growing sources of domestic tax revenue to turn towards domestic poverty reduction efforts. In that case, graduation from concessional finance could be seen as a transitory step towards improved redistributive capacity at a later date. Thus, developing countries could develop their own tax capacity, initially through indirect taxes, like value-added taxes, and then as capacity increases, shift towards direct taxes, like an income tax. But in order to begin this process, countries need to have some basic prospect for improv- ing tax collection.

An important measure of the shortfall of actual against potential domestic tax revenues is tax effort. The concept of tax effort stems from the observation that higher tax ratios result from higher levels of development, greater openness to trade flows, and less reliance on agriculture.

Figure 2.3: Marginal Tax Rate Required to Close Poverty Gap

Source: Ravallion (2012) 100

80 60 40 20

00 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Consumption per capita (USD per year, 2005 PPP)

Marginal tax rate on those living above the US poverty line needed to fill the poverty gap for USD 1.25 a day (percent)

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However, at the same time, climate change threatens to undo much of the development progress that has been realized over the past few decades. Rising global temper- atures threaten the livelihoods of those living in poverty, as well as those who have recently moved out of extreme poverty disproportionately. Arid and coastal regions, in which developing countries are overrepresented, are also most prone to the initial effects of global warming. One related area where development cooperation has already become a prominent player is natural disaster risk management. An Overseas Development institute (ODI, 2013) study, led by Andrew Shepherd, has warned that climate change and exposure to “natural” disasters threaten to derail efforts to eradicate poverty over the next decade.

Rising exposure to natural disasters as implied by the ODI scenario raises the prospects of reverse graduation from the concessional finance windows. The ODI study estimates that up to 325 million extremely poor people could be living in the 49 most hazard-prone countries in 2030, the majority in South Asia and Sub-Saharan Africa. These scenarios are not compatible with the goal to eradicate extreme poverty by 2030. The study provides evidence “that if the international community is serious about eradicating poverty by 2030, it must put disaster risk management at the heart of poverty eradication efforts. Without this, the target of ending poverty may not be within reach” (ODI, 2013).

exogenous shocks. In the fifty years since the creation of the concessional finance windows, the world has grown more interconnected and interdependent. In this way, economic shocks have been shown to propagate quickly from one part of the globe to another, most recently during the global crisis of 2008-09, which led to a substantial increase of demand for concessional finance windows.

At the same time, a number of global challenges are of increasing concern both to the international community, as well as to developing country policy makers. Global disease, global terrorism, and the vulnerability of individual countries to financial, energy, and food crises are increasingly at the forefront of concerns among concessional finance donors and recipients.

Chief among these concerns at present is undoubtedly the threat of climate change. The costs of mitigating, adapting to, and compensating losses and damage from climate change are currently subject to another set of ongoing international deliberations among the Conference of the Parties to the United Nations Framework Convention on Climate Change. Indeed, in the debate on international obligations vis-à-vis this treaty, much of the focus has been on how climate financing should be additional to, and not in lieu of, ODA.

The legal implications of using concessional development finance for climate change financing purposes are thus clearly complicated and beyond the scope of the present report.

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cast produced by Moss-Leo (2011), a shrinking client base for the soft windows of the IFIs would indeed imply the need to consider their gradual winding down if country classification and their poverty focus remained in place.

According to Kharas-Rogerson (2012), projected high per capita income growth and falling population growth in large and dynamic MICs shrink the global poverty pool drastically. Income stagnation and high fertility rates in selected low-income and fragile countries re-establish them as the main locations of global poverty.

The goal of eradicating extreme poverty, commonly translated to reducing extreme poverty to three percent of world population (as in Ravallion, 2012), would imply about 250 million living with less than USD 1.25 per day.

The Edward-Sumner (2013) study indicates that in such a world – where optimistic growth scenarios for the non- advanced countries coincide with a return to a more benign income distribution as witnessed before – just ten percent (or less) of the extremely poor would live in MICs. The same study, however, has also produced a pessimistic scenario – with half the growth rate projected in the IMF WEO and a continuation of rising equality – where more than a billion people live in extreme poverty, of which more than half reside in MICs.

As noted above, one of the most pessimistic studies is also the most recent and, perhaps consequently, the most realistic. Yoshida et al. (2014) specifically highlight the tenuous nature of eradicating extreme poverty by 2030:

“given how difficult it is to achieve the goal, even a small shock in currently good performing countries can derail the prospect of ending extreme poverty” (Yoshida et al.

2014).

To evaluate the observed scenarios and to put them in the context of the abovementioned studies we shall con- struct a new scenario specifically aimed at providing a realistic and unified view of the development challenges facing IDA graduates between now and 2025. Benchmark growth forecasts and some simple assumptions about poverty reduction, tax capacity and disaster-related costs will be used in the subsequent four sub-sections to look at IDA graduation, the distribution of poor populations, the prospects for domestic resource mobilization, and the possible economic costs of disasters facing these countries over the medium-term.

The previous section outlined four principal determinants of demand for concessional finance. This section will seek to consider some concrete scenarios about how those determinants will evolve in the period leading up to 2025. Given the lead role of IDA vis-à-vis the other concessional finance windows, as discussed above, the scenarios examined in this section will focus mainly on IDA graduation and IDA eligibility with the understanding that many of the implications hold for the other concessional finance windows without loss of generality.

The unprecedented growth and poverty reduction of the last decade taken together with the rapidly approaching deadline of the Millennium Development Goals (MDGs) in 2015 has led to a rash of studies postulating scenarios about the evolution of world poverty over the medium- term. A number of these studies also address the implications for the concessional finance windows. Table 3.1 lists the central scenarios of five important studies that have recently tried to assess growth and/or poverty trends going forward, either to 2025 or to 2030.

The first insight is that assumptions about real annual growth (either of GDP or GNI) are quite optimistic, none below five percent per annum except for the most recent study from Yoshida et al. In three cases, Moss-Leo, 2011;

Kharas-Rogerson, 2012; and Edward-Sumner, 2013, projected income growth is initially based on prolongations of GDP projections provided by the IMF in its World Economic Outlook (WEO).

The range of results is also substantial with respect to all poverty projections, reflecting the high level of uncertainty, and there is wild variance in the prospective number of people suffering from extreme poverty and of concessional finance-eligible countries projected by the present studies even by 2025 or 2030. A shortcoming of most studies is how projected GDP growth is translated into poverty projections. Those, which rely on the national accounts alone, take an optimistic approach as the projected GDP per capita growth rates are likely to be higher than the growth rates in survey consumption means.

Likewise, the number of IDA-eligible countries by 2025 is found to oscillate between 32 and 63 according to which study is chosen. With the fairly linear out-of-2000s fore-

3. Scenarios on the Demand for Concessional Finance

from LICs and MICs through 2025

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facing specific circumstances. On the one hand, there are the 35 low-income “civil preference” IDA eligible countries, while on the other hand, there are the 27 sol- idly middle-income (some even upper-middle-income) countries above the cutoff, most of which are blend and/

or small island states.

The distribution of IDA eligible countries across income categories does therefore preserve its bimodal distribution according to the 2025 projections with the important difference that there are fewer countries bunched in the lowest income category. Instead, and in particular depending on future transitional arrangements or exceptions similar to the small islands exception and blend status, the largest group of countries potentially could indeed become the middle-income group countries, as illustrated in Table 3.2.

Future IDA graduations can be projected following the work of Moss and Leo (2011). Like Moss and Leo, we assume that attaining the graduation thresholds also implies attaining creditworthiness, and therefore project IDA graduations contingent entirely on future GNI per capita levels. Our scenario differs from the Moss and Leo study in two respects – first, as pointed out above, earlier

3.1 IDA Eligibility, IDA Recipients, and Graduation Criteria

IDA graduation has been and is largely flexible in nature.

Over IDA’s history, expanded demand for limited IDA resources has resulted in adjustment of IDA eligibility thresholds. The initial ceiling for IDA eligibility, which is referred to as the historical ceiling, was established at USD 250 GNI per capita in 1964. It has been subsequently updated for inflation. However, a key adjustment took place in the 1980s during the IDA8 replenishment, when the ceiling was lowered to what is today known as the operational cutoff (IDA 2001). Both of these thresholds continue to be updated, presumably for comparison’s sake. In considering the effects of growth on IDA graduation going forward, it is illustrative to look at both graduation thresholds, particularly given the flexible nature with which IDA eligibility has been applied over the years.

In fact, less than half of currently IDA eligible countries are actually below the operational threshold. Table A1, in the appendix, clearly demonstrates the bimodal distribution of IDA eligible countries, attributable largely to exceptions that have been granted by shareholders to MICs Table 3.1: Poverty Baseline Scenarios 2025/2030

Study Annual growth Assumed trend in income

distribution based on

Poverty headcount

<USD 1.25/cap

IDA- eligible

Moss-Leo, 2011 6.1 (graduaters)^a n.a. n.a. 32

Kharas-Rogerson, 2012 8.2 (convergers)^b recent HH surveys 562mn 5/6

Africa Edward-Sumner, 2013 5.1 (moderate)^c current/static/historic 305-1309mn n.a.

Ravallion, 2013 5.6 (HH expenditure per capita)^d

2008 level & 1999 level 243mn (=3%)^e n.a.

Chandy et al., 2013 0.81xEIU private consumption growth

static 386mn n.a.

ODI, 2013 n.a. n.a. 624mn 63^f

Yoshida, Uematsu &

Sobrado, 2014^g

Country-specific growth rates (HH expenditure per capita) between 2002-2010

=4.7 on average

Observed changes in distribution between 2002-2010

695mn n.a.

Notes: a) IMF-WEO projections 2010: 6.1% p.a.; b) based on growth assumption for converging countries in Kharas 2010; c) IMF-WEO projections minus 1% for moderate scenario; d) household/capita consumption in baseline scenario (4.5%) + projected population growth (1.1%); e) USD 1.25/cap, central scenario; f) number of countries with highest, high and moderate poverty vulnerability (latter defined as >10% or >1mn <

USD 1.25 cap). g) reported results are from the baseline scenario which estimates a poverty headcount of 8.6% in 2030.

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which will cross the operational threshold of USD 1,205 and their per capita GNIs in 2012 and projected GNIs in 2025 are listed in Table 3.3. These countries are quite di- studies relied on overoptimistic IMF growth projections

from a few years ago. To better reflect the emerging consensus on the “new normal” of slower growth in the developing world, we simply adopt the more recent IMF WEO projections from October 2013, which are less optimistic than the 2009 projections used by Moss and Leo.

The second chief difference with the Leo and Moss study is that we do not automatically exclude consideration of the small-island states, and we also consider the results of the projections for countries above the operational threshold, which may still be below the historical IDA ceiling. This is intended to better highlight IDA graduation as a transition process.

We apply the growth projections to 2012 GNI per capita figures to derive GNI per capita for 2025. The IMF projections cover the period 2013-2018 and we assume the projected 2018 per capita growth rates represent medium term growth estimates, which remain constant 2018- 2025. As the IDA operational threshold is set in nominal terms, and then subsequently revised for inflation, we can keep the USD 1,205 GNI per capita operational cutoff for the fiscal year (FY) 2013 (and the USD 1,965 GNI per capita historical ceiling) constant going forward to 2025.

Applying the real growth per capita projections provided by the IMF database therefore leads to 2025 GNI per capita values in constant 2012 dollars that can be compared with both, the FY2013 operational and historical thresholds.

Our initial projection considers the 39 countries below the operational threshold in 2012. According to our projections, this number declines to 26 in 2025. The 11 countries

Table 3.2: Shifting Distribution of IDA Eligible Countries across Income Categories Number of countries

Below cutoffs Above cutoffs

operational historical

Low-income

<USD 1,035

Lower-middle-income

<USD 1,205

Lower-middle-income USD 1,206 – 1,965

Lower- and upper- middle-income

>USD 1,965

2012 35 4 16 27

2025* 20 6 15 <39**

Note: *These 2025 totals exclude several countries for which 2012 base data is unavailable.

**This upper bound is based on the extreme assumption that all eligible countries maintain some type of transitional or exceptional eligibility, similar to blend status or the small island exclusion – which undoubtedly will not be the case.

Source: Calculations based on IMF WEO (2013)

Table 3.3:

Projected Graduates from Operational Eligibility Gross national income per capita, 2012 constant USD

2012 2025

Bangladesh 840 1,708

Cambodia 880 1,950

Cameroon 1,170 1,643

Guinea 440 1,592

Haiti 760 1,218

Kenya 860 1,275

Kyrgyz Republic 990 1,607

Mauritania 1,110 2,114

Senegal 1,030 1,346

Solomon Islands 1,130 1,353

Tajikistan 860 1,399

Note: Suitable GNI per capita data was unavailable for two countries below the operational cutoff, Somalia and Myanmar. Whether they would be above or below the cutoff in 2025 could therefore not be determined.

Source: Calculations based on IMF WEO (2013)

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This group is a much more sizable component of current IDA-eligible countries, including among them both the most populous South Asian and Sub-Saharan African countries, India and Nigeria, respectively, and accounting for a total of approximately USD 4.7bn – or 28.9 percent of IDA’s USD 16.3bn in approved FY2013 projects. In the 2025 projections, only one country – Mauritania – man- ages to cross the sizable lower-middle-income “gulf”

between IDA operational and historical thresholds, as it is projected to increase from a GNI per capita of just over USD 1,100 to just over USD 2,000 in the coming decade.

This is partly because its starting point is just shy of the operational threshold, but is also helped by a projected medium-term average growth projection of nearly 4.6%

from the period 2018 to 2025.

3.2 Extreme Poverty

It is indeed conceivable that global poverty could be eliminated by 2030, as discussed by Ravallion (2012), Edward and Sumner (2013), Kharas and Rogerson (2012), and others, but it is vital to keep in mind the ambition that such a goal entails, as pointed out by Yoshida et al. (2014). Future poverty trends are highly dependent on future trends in growth and the future shape of the income or consumption distribution. For poverty to be eliminated in 2030, both of these trends will need to follow almost an ideal trajectory, and it will need to be nearly eliminated by 2025. The past two decades of high growth will need to continue and inequality will need to decrease in many countries – in many cases through redistributive efforts.

The important issue for IDA shareholders to consider is how IDA resources can contribute to this ambitious agenda, as IDA itself is an important global redistributive mechanism. The key question is how to compare the poverty challenges faced by IDA’s low and lower-middle- income clients below the operational and historical cutoff to that of poverty in the higher income categories.

This becomes particularly important as the relative size of the higher categories grows. While today 12 IDA- eligible countries are small island states and therefore do not require substantial magnitude of resources to achieve growth and poverty reduction, as shown in Table 3.4, in 2025 that group potentially could grow to more than 30 countries, and would include the most populous countries in Africa and South Asia. Will those countries still face a significant poverty challenge in 2025 and exhibit significant “relative poverty” compared to other countries, therefore suggesting the need for continuing concessional finance?

verse geographically – five from Asia and the Pacific, five from Africa and one from the Americas. Interestingly, the projected 2025 GNI per capita values are all – with the exception of Mauritania – still below the historical IDA eligibility threshold of USD 1,965 – and in most cases, well below it. In terms of their share of IDA resources, together these 11 countries accounted for nearly USD 2.9bn – approximately 18 percent – of the USD 16.3bn in IDA projects, which were approved in FY2013.

Table 3.4:

Projected Graduates from Historical Eligibility Gross national income per capita, 2012 constant USD

2012 2025

Côte d'Ivoire 1,220 2,118

Ghana 1,550 2,744

India 1,580 2,857

Lao PDR 1,270 2,636

Lesotho 1,380 2,503

Mauritania 1,110 2,114

Nicaragua 1,650 2,378

Nigeria 1,440 2,343

Papua New Guinea 1,790 2,587

São Tomé and Príncipe 1,310 2,542

Uzbekistan 1,720 3,132

Vietnam 1,550 2,698

Note: Calculations do not yet include the 2014 rebasing of Nigeria´s GNI.

Source: Calculations based on IMF WEO (2013).

Given that the projected graduates from operational eligibility still mostly remain below the historical eligibility cutoff in 2025, it is natural to wonder whether this will lead to a shift in the bimodal distribution of IDA countries across income categories. If we then consider the broader group of 56 countries that include all IDA- eligible LICs and lower MICs below the historical cutoff of USD 1,965, we can further forecast how many countries will cross the historical IDA eligibility threshold by 2025. In fact, 12 IDA-eligible countries will eventually exceed the historical eligibility ceiling in 2025, as shown in Table 3.4.

The Future of Multilateral Concessional Finance

The Future of Multilateral

Concessional Finance

The Future of Multilateral Concessional Finance

Table of Contents

List of Figures and Tables

List of Abbreviations

Executive Summary

1. Introduction: The Multilateral Donor Dilemma

2. The Future Demand for Concessional Finance:

Major Determinants and Projections

2.1 National Productivity and Welfare

2.2 Extent of Poverty and Deprivation

2.3 Capacity to Mobilize Domestic Financial Resources

2.4 Vulnerability to Exogenous Shocks and Global Public “Bads”

3. Scenarios on the Demand for Concessional Finance

from LICs and MICs through 2025

3.1 IDA Eligibility, IDA Recipients, and Graduation Criteria

3.2 Extreme Poverty