Introduction
The era of generous foreign aid is coming to an end. Wealthy countries are increasingly reluctant to commit to official development assistance (ODA). Shifts in national priorities, political polarization, and budgetary constraints in the United States and Europe have stalled or even reduced aid budgets. Climate financing, once hailed as a demonstration of global solidarity, now largely relies on pre-existing commitments without fresh funding to support it.
The Financial Drain
Beyond the retreat of aid, a more profound and corrosive issue persists: rich countries send pennies southward, while developing nations return dollars. A recent study by the Political Economy Research Institute at the University of Massachusetts Amherst reveals that between 1970 and 2022, sub-Saharan African countries experienced a staggering financial outflow of $2.7 trillion. Meanwhile, official development assistance and foreign direct investment only generated $2.6 trillion.
While much is spoken of mobilizing capital for development, the global financial system has allowed a net loss for Africa. Known issues like capital flight, tax evasion, and multinational corporations shifting profits to favorable tax jurisdictions have been exacerbated by rising interest rates, debt servicing costs, and waning private sector interest in southern investments.
Empowering National Development Banks (BND)
The harsh reality is that development financing isn’t just about releasing more aid; it’s also about curbing losses and equipping countries with tools to mobilize domestic capital under favorable conditions. This necessitates a fundamental reassessment of the development financing architecture.
The first step is to shift the conversation’s terms. Instead of solely focusing on dwindling G7 generosity or clinging to the hope that wealthy nations will honor their historical responsibilities, we must acknowledge the untapped potential of southern financial institutions.
Among them, national development banks (BND) remain vastly underutilized. Local public resources are the most reliable development financing source, with internal commitments typically more stable than international aid and more dependable than fickle private capital. However, to mobilize substantial resources, countries need robust and well-equipped public financial intermediaries.
Empowered BNDs are best suited for this role. Their deep understanding of local risks enables them to extend countercyclical loans when commercial banks withdraw and attract private funds by assuming early-stage project risks. Examples include Brazil’s Development Bank (BNDES), Southern African Development Bank, and Indonesia’s PT Sarana Multi Infrastruktur, which have demonstrated BNDs’ capacity to foster infrastructure development, innovation, and climate resilience.
Challenges and Solutions
However, scaling up these experiences faces challenges. In many countries, BNDs grapple with high borrowing costs due to country sovereign credit ratings limitations. High interest rates as debtors force them to charge even higher rates as lenders. Moreover, they face limited access to international funding, narrow mandates, and outdated governance structures.
Fortunately, multilateral development banks (BMD) like the World Bank, regional development banks, and institutions such as the New Development Bank can help address these issues. Instead of direct financing to individual countries or sectors, BMDs should focus on strengthening and capitalizing BNDs. By providing concessional financing, capital, loan guarantees, and technical support, they can assist BNDs in extending credit under better terms, expand operations, and assume more development risks.
A recent study by the Global Development Policy Center at Boston University advocates for this “base-up mixed financing” model. When BMDs assume risks early on (by injecting capital or subordinated debt into BNDs), they can unlock domestic savings, attract pension fund investments, and create project portfolios based on national development strategies rather than donor preferences.
Key Questions and Answers
- What are National Development Banks (BNDs)? BNDs are financial institutions in developing countries that can play a crucial role in mobilizing local resources for development.
- Why are BNDs underutilized? BNDs face high borrowing costs due to country sovereign credit rating limitations, limited access to international funding, narrow mandates, and outdated governance structures.
- How can multilateral development banks (BMDs) help? BMDs can strengthen and capitalize BNDs by providing concessional financing, capital, loan guarantees, and technical support.
- What is the “base-up mixed financing” model? This model involves BMDs assuming early risks by injecting capital or subordinated debt into BNDs, unlocking domestic savings, attracting pension fund investments, and creating project portfolios based on national development strategies.
