State of Finance For Developing Countries 2014

1
Contact
FOR EVERY
$1
GAIN
Other official flows
DEVELOPING COUNTRIES
Eurodad
Rue dEdimbourg 18-26
1050 Brussels
Belgium
Tel: +32 (0) 2 894 4640
www.eurodad.org
Charitable
Portfolio equity (stocks & shares)
Aid
Remittances from migrant workers
Foreign direct investment
www.facebook.com/Eurodad
twitter.com/eurodad
Interest repayments on foreign debt
14
Profits taken out by foreign investors
42
Lending to rich countries
59
Illicit financial flows
93
3
3
6
10
34
44
THEY
LOSE
MORE THAN
$2
The State of Finance for Developing

Countries, 2014
An assessment of the scale of all sources of finance available to
developing countries
By Jesse Griffiths
Introduction
This is a condensed version of a detailed report
which provides the most comprehensive review of
the quantity of different financing sources available
to developing countries, and how they have changed
over the past decade. The report finds that developing
countries are losing twice as much money as they earn
because of issues like illicit financial flows, profits taken
out by foreign investors and interest repayments on
debt (as demonstrated in the figure above).
We have analysed the best available data produced by
international institutions, both from the point of view
of developing countries as a whole, and for low-income
(LICs), lower-middle-income (LMIC) and upper-middleincome countries (UMICs) separately. In this briefing,
we provide figures as percentages of Gross Domestic
Product (GDP) a good indicator of how important
they are to the developing country in question.
Unlike other recent analyses, we have not just
examined the resources flowing into developing
countries, but have also analysed the resources flowing
out, identifying the lost resources. We define losses
as resources that have either been directly lost by
developing countries, such as illicit financial outflows,

or resources that represent a lost opportunity, such as
lending by developing countries to rich countries.
This has allowed us to examine four very different
categories of resources:
Domestic resources, including domestic investment
and government revenue;
Lost resources, including illicit financial flows,
profits taken out by foreign investors, interest
payments on foreign debt and lending by
developing countries to rich countries.
Inflows of external resources, including:
international public resources (aid and other
official flows);
f or-profit private flows (foreign direct investment
and portfolio investments in stocks and shares);
n
ot-for-profit private flows (including charitable
flows and remittances from migrant workers).
Debt creating flows, both public and private
borrowing by developing countries.
Key findings
One key finding of the report is that losses of

financial resources by developing countries have
been more than double the inflows of new financial
resources since the financial crisis.
Figure 1 shows that lost resources have been close

to or above 10% of GDP for developing countries as
a whole since 2008 meaning that for every $100
the country makes, $10 are lost, flowing out of the
country. The main drivers of this are illicit financial
flows, profits taken out by foreign investors and
lending by developing countries to rich countries.
10
INFLOWS
Figure 2: Inflows vs losses,

developing countries, % GDP
Figure 1: Inflows vs. losses for

developing countries, % GDP
(2008-2011)
R
emittances from migrant workers
Charitable
Foreign direct investment
Aid
Other official flows
Portfolio Equity (stocks and shares)
0
Illicit financial flows
2008 2009 2010

2011
2008
2009 2010 2011
Lending to rich
countries
-5
-10
LOSSES
Interest payment on
foreign debt
Profits taken out by
foreign investors
-15
The full report and methodology can be found here: www.eurodad.org/finance_for_developing_countries
The State of Finance for Developing Countries, 2014
Domestic resources
We examined both domestic investment by private

firms and the government and the income available
to the government. We found that:

Domestic resources are far larger than all

external financing sources for developing
countries, with domestic investment reaching
over one third of GDP, and government revenue

almost one fifth of GDP in 2012.

The poorest countries (classified as low-income

countries) have desperately low levels of
investment: only $165 per person per year.
Figure 2: Domestic Investment Trends (%GDP)
Figure 3: Government Revenue trends (%GDP)
% GDP equivalent
% GDP equivalent
40
25
35
20
30
25
15
20
10
15
10
5
0
LIC
LMIC
UMIC
Total developing country
LIC
LMIC
UMIC
2011
2010
2009
2008
2007
2006
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Other important characteristics of available resources

In the report that this briefing is based
on, we focus on the scale, distribution
among countries and volatility of different
financing resources. However, the quality
of different resources matters as much
as, if not more than, their quantity.
We will focus on these issues in future
editions of the report. Previous Eurodad
research highlighted several of these, as
summarised below.
Macro-economic risks
Inflows and outflows of resources affect
a countries exchange rate directly, but
also affect the confidence of investors
in the country. For example, hot money
outflows of short-term investment and
lending caused by perceived problems in
the host economy, or issues in the home
economy, can trigger severe crises in the
currency market and financial sector.
Accountability and transparency
All of the resources discussed would
benefit from significant improvements
in their accountability and transparency.

Civil society organisations have often
focused on public flows aid and
domestic public resources precisely
because some notion of accountability
and transparency is expected of the
actors involved, even though they
may not live up to those expectations.
Efforts made to make private resources
more accountable and transparent,
such as working on minimum social or
environmental standards, have been
less successful.
Impacts on domestic politics
The domestic political impacts of
resource flows can be extremely
important for poverty reduction and
sustainable development. For example,
the conditionalities attached to lending
by International Financial Institutions
proved highly controversial. In addition,
the strong influence of external actors
on domestic policy-making undermines
the space for developing countries to
set their own policy agendas, and for
citizens of those countries to hold their

governments to account. The process
of international economic liberalisation
over recent decades, and the growth in
the offshore economy, have provided
incentives for governments to engage
in a race to the bottom on taxation and
standards expected of companies.
Contributions to sustainable
development
Ultimately, the impacts of different
resources on poverty reduction depend
on the overall macro-economic, political
and environmental conditions in each
individual country. It may be worth
distinguishing between two spheres
where resources may be needed. In the
first sphere of public goods including
basic services, the environment, natural
resources and security there is a greater
demand for public sources of finance.
However, in the area of productive
development the financing of
infrastructure, business expansion and
so on the debate is highly contested.
Losses of domestic resources

Here we have focused on outflows of finance
that represent a genuine loss of resources that
would have been better invested in the developing
country.

LICs are particularly badly affected, losing more

than 18% of GDP in 2011.
The largest loss was illicit financial flows

money which was illegally earned, transferred or
used, mostly linked to commercial tax evasion
which totalled $634 billion in 2011.
We are not able to estimate the lost resources

due to legal, but morally dubious tax avoidance
due to lack of data, but indications are that
they would also be very significant losses for
developing countries.
Figure 4: Illicit financial flows (% GDP)
The second largest loss was profits repatriated

by international investors which totalled $486
billion in 2012. In fact, since 2010, profits taken
out of developing countrie have exceeded new
inflows of Foreign Direct Investment (FDI), with
the poorest countries worst affected.
The third biggest loss was the $276 billion

that was lent by developing countries to rich
countries in 2012.
The fourth biggest loss was $188 billion paid in

2012 by developing countries to service interest
on their external debts.
Figure 6: Lending to rich countries by developing

country governments (% GDP)
% GDP equivalent
0
% GDP
2
1
-5
0
-1
-10
-2
-3
-4
UMIC
LIC
LMIC
UMIC
2012
2011
2010
2009
-5
2008
2011
2010
2009
LMIC
2008
2006
LIC
2007
2005
2004
2003
-15
Figure 5: Profits repatriated (%GDP)
Figure 7: Interest repayments on foreign debt (%GDP)
% GDP equivalent
0
-2
-0.5
-4
-1
-6
-1.5
-8
-2
-10
LMIC
UMIC
LIC
LMIC
UMIC
2112
2011
2010
2009
2008
2007
2006
2005
2004
2112
2011
2010
2009
2008
2007
2006
2005
2004
LIC
2003
-2.5
-12
2003
Inflow of external resources 1
International public resources

Country Programmable Aid has increased in

absolute terms to a high of $96 billion in 2011,
but has been falling relative to developing
country GDP, which has been growing at a
faster rate.
In the poorest low-income countries, however,

aid remains an important resource, accounting
for over 7% of GDP in 2012.
Figure 8: Country Programmable Aid (%GDP)
Figure 9: Other Official Flows (%GDP)
% GDP equivalent
% GDP equivalent
50
10
8
25
6
0
4
-25
UMIC
Developing Country total (inc. regional aid)
LMIC
UMIC
2112
LIC
2011
2010
2009
2008
2007
2006
LMIC
2004
2005
LIC
-50
1
2003
Innovative public finance

The report that this briefing is based on
focuses on the main existing sources of
finance. However, considerable efforts
have been made in recent years to
promote new, additional innovative
sources of public finance, some of
which are bearing fruit, although totals
mobilised so far are very low. Eurodad
examined these in detail in a previous
report. Below we summarise the findings.
Financial Transaction Taxes
Financial Transaction Taxes (FTTs) are
taxes on the trading of shares, bonds,
derivatives and foreign exchange. In a
sample of just seven G20 countries, the
IMF has estimated that FTTs are already
raising $15 billion per year, although this
is not allocated to development.
A group of 10 European countries
have agreed to adopt new FTTs in
stages, starting with shares and some
derivatives. In 2011, the European
Commission estimated that an EU-
implemented FTT across all asset classes

could raise between 16.4 billion and
400 billion depending on assumptions
on decrease in volume, the scope of
products covered and the tax rates
(0.01% for the first estimate and 0.1% for
the second).
levied on aviation and bunker fuels and

taxes paid by developing countries were
rebated, the same report estimates that
$22 billion per year could be raised, or
$14 billion if the rate was $15 per tonne.
Carbon and other Environmental Taxes
Special Drawing Rights (SDRs) are

an international reserve asset held at
the IMF by all member governments.
The main proposal is to agree regular
additional allocations of SDRs in effect
to create new reserve assets. In 2009,
a G20 agreement led to the issuance
of $250 billion in extra SDRs, showing
that such global quantitative easing
is possible. UNDESA suggests annual
allocations of $100 billion to 250 billion
per year and, if the majority of new SDRs
went to developing countries this would
yield them $100 billion to $167 billion
annually.
Airline ticket levy: This is already in

existence in nine countries, with the
proceeds from most countries earmarked
for UNITAID. It has raised over $1 billion
for UNITAID since 2006. If expanded to
more countries, or increased in scope,
the potential raised could increase
significantly.
Developed country carbon taxes: A 2011
joint report by the IMF, World Bank and
OECD estimated that a tax of $50 per
tonne in developed countries would yield
about $450 billion per year, or $250
billion ($25 per tonne) or $155 billion ($15
per tonne.) If a tax of $25 per tonne was
New SDR creation
Remittances from emigrants from developing

countries to their families back home
increased from just over $130 billion in 2003 to
more than $350 billion in 2012.
Remittances are particularly important in the

poorest countries, where they represented
7% of GDP in LICs in 2012. They are highly
concentrated in a small number of countries.
Charitable flows remain relatively small

around $30 billion in 2012, or 0.13% of
developing country GDP.
International for-profit private flows
For-profit flows can be highly volatile,

particularly foreign purchases and sales
of stocks and shares, which rose sharply
for developing countries before the global
financial crisis drove them into negative
figures in 2008.
International public resources
Figure 10: FDI (%GDP)
Figure 12: Remittances
% GDP equivalent
% GDP equivalent
9
7
6
3
2
UMIC
LIC
Figure 11: Portfolio Equity (%GDP)
LMIC
UMIC
2012
2011
2010
2009
2008
2006
2005
2004
2003
2012
2011
2010
LMIC
2009
2007
LIC
2008
2006
2005
2004
2003
0
2007
FDI to developing countries was badly hit by

the global crisis and remains below its 2008
peak. Rising GDP means it has fallen as a
percentage of GDP from 3.2% in 2008 to 2.1%
in 2012.
Figure 13: Charitable flows as a percentage of

developing country GDP
% GDP equivalent
% GDP
2.5
0.20
2
1.5
0.15
1
0.5
0.10
0
0.5
-0.5
UMIC
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
2012
2011
2010
LMIC
2009
2007
LIC
2008
2006
2005
2004
-1.0
2003
Debt creating flows
Since 2006, there has been a sharp increase in new

debt taken on by developing countries, meaning
developing country debt stocks reached their
highest level ever in 2012 $4.8 trillion, according
to the World Bank which was largely driven by
increases in indebtedness by private actors.
Figure 14: Public external borrowing, long term (%GDP)

% GDP equivalent
LIC governments have remained heavy

net borrowers throughout the period, averaging
between 1.3% and 2% of GDP in additional
long-term borrowing between 2003 and 2012.
Figure 16: Short-term foreign borrowing

(public & private) (%GDP)
% GDP equivalent
2.5
2.0
2
1.5
1.5
1.0
0.5
0.5
0
-0.5
LIC
LMIC
UMIC
Figure 15: Long term foreign borrowing private (%GDP)

% GDP equivalent
2.5
2
LIC
LMIC
UMIC
2012
2011
2010
2009
2008
2007
2006
2005
2004
-0.5
2003
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
-1
Developing country debt stocks

reached their highest level ever
in 2012 $4.8 trillion, according
to the World Bank
1.5
1
.5
0
LIC
LMIC
UMIC
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
-0.5
Conclusion
This report does not tackle the extremely important
issue of the quality of these sources, which will be
examined in future editions. Important issues covered
in this series will include: macro-economic risks,
accountability and transparency; impacts on domestic
politics; and contributions to sustainable development.
As the United Nations gears up for its critically

important summit on financing for development (FfD)
in Addis Ababa in 2015, it will be important to have
a clear-eyed view of the current scale of all different
financing resources available. It is hoped that this
report will make a significant contribution to
that understanding.
The full report and methodology can be found here: www.eurodad.org/finance_for_developing_countries
www.eurodad.org
This briefing has been produced with the financial assistance of Diakonia.
www.diakonia.se

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1

Other official flows

Profits taken out by foreign investors

Lending to rich countries

Illicit financial flows

The State of Finance for Developing

developing countries, such as illicit financial outflows,

One key finding of the report is that losses of

Figure 1 shows that lost resources have been close

Figure 2: Inflows vs losses,

Figure 1: Inflows vs. losses for

2008 2009 2010

The full report and methodology can be found here: www.eurodad.org/finance_for_developing_countries

The State of Finance for Developing Countries, 2014

We examined both domestic investment by private

Domestic resources are far larger than all

over one third of GDP, and government revenue

The poorest countries (classified as low-income

Figure 2: Domestic Investment Trends (%GDP)

Figure 3: Government Revenue trends (%GDP)

Total developing country

Total developing country

Other important characteristics of available resources

in their accountability and transparency.

citizens of those countries to hold their

The State of Finance for Developing Countries, 2014

Losses of domestic resources

LICs are particularly badly affected, losing more

The largest loss was illicit financial flows

We are not able to estimate the lost resources

Figure 4: Illicit financial flows (% GDP)

The second largest loss was profits repatriated

The third biggest loss was the $276 billion

The fourth biggest loss was $188 billion paid in

Figure 6: Lending to rich countries by developing

Total developing country

Total developing country

Figure 5: Profits repatriated (%GDP)

Figure 7: Interest repayments on foreign debt (%GDP)

The State of Finance for Developing Countries, 2014

Total developing country

Total developing country

Inflow of external resources 1

International public resources

Country Programmable Aid has increased in

In the poorest low-income countries, however,

Figure 8: Country Programmable Aid (%GDP)

Figure 9: Other Official Flows (%GDP)

Developing Country total (inc. regional aid)

Total developing country

Innovative public finance

implemented FTT across all asset classes

levied on aviation and bunker fuels and

Carbon and other Environmental Taxes

Special Drawing Rights (SDRs) are

Airline ticket levy: This is already in

New SDR creation

The State of Finance for Developing Countries, 2014

Inflow of external resources 2

Inflow of external resources 3

Remittances from emigrants from developing

Remittances are particularly important in the

Charitable flows remain relatively small

Total developing country

Total developing country

Total developing country

Total developing country

Total developing country

Total developing country

Developing Country total (inc. regional aid)

Total developing country

Total developing country

Total developing country

Total developing country

Total developing country

Total developing country