The International Finance Facility—reaching the MDGS without spending more?

Journal of International Development

J. Int. Dev. 16, 887–895 (2004)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/jid.1133

THE INTERNATIONAL FINANCEFACILITY—REACHING THE MDGS

WITHOUT SPENDING MORE?

KAREN MOORE* and DAVID HULME

Chronic Poverty Research Centre and Institute for Development Policy and Management,

University of Manchester, UK

Abstract: This paper comprises a brief review of current debates around the potential

benefits and drawbacks of the proposed International Finance Facility (IFF). The IFF’s main

strength is clear: it recognizes the urgent need for significantly larger and more predictable aid

flows, and suggests a financial mechanism able to deliver such flows within existing political

constraints. However, several aspects of the proposal have the potential to exacerbate current

aid ineffectiveness and inequality in both the short and longer term. These factors include the

IFF’s governance structure; the ‘extra layer’ of conditionality added by the IFF; the potential

sharp decline in aid flows after the IFF’s initial phase; and the detraction of attention from

other important global agendas. More work on developing innovative mechanisms to deliver

social protection and basic services to poorly-governed or conflict-ridden areas is required, as

are more courageous actions on the part of the UK and other rich countries. Otherwise, the IFF

could mean mortgaging the future well-being of 900 million hard-to-reach poor people in

order to achieve—or come closer to achieving—the MDGs today. Copyright # 2004 John

Wiley & Sons, Ltd.

The IFF ‘ . . .would work by ‘frontloading’ donor commitments. Resources pro-

mised in the long-term would be invested in tackling the causes rather than the

symptoms of poverty today.’

Her Majesty’s Treasury (2004)

‘ . . . at its heart this scheme asks us to accept that the world’s richest governments

have reached the limits of their generosity.’

Barry Coates, Director of the World Development Movement (2003)

Copyright # 2004 John Wiley & Sons, Ltd.

*Correspondence to: K. Moore, Chronic Poverty Research Centre and Institute for Development Policy andManagement, University of Manchester, UK. E-mail: [email protected]

1 A THUMBNAIL SKETCH OF CONTEMPORARY

DEVELOPMENT ASSISTANCE

In 2004, ‘development’ means moving towards and meeting the Millennium Development

Goals (MDGs). Recognizing moral, economic and strategic reasons to do so, all UN

member countries—rich and poor—have made a commitment to reach the MDGs. The

apparent consensus is that this is best done through ‘nationally-owned’, inter-sectoral

Poverty Reduction Strategies (PRSs), based on national datasets and ideally incorporating

information gathered from poor people through Participatory Poverty Assessments. The

process of formulating and implementing PRSs is usually financed through international

aid. But securing sufficient resources is difficult. Aid flows fell significantly during the

1990s, and although there has been some recovery since 2000, the gap between donor

country income and aid per capita continues to widen. Developing country debt remains a

huge problem, especially in sub-Saharan Africa. Debt relief usually means rescheduling

and refinancing, rather than cancellation.

A handful of small, wealthy northern European countries1 have met a long-standing

commitment made by most donor countries—by allocating at least 0.7 per cent of gross

national income to their aid budgets. All told, however, aid from these five countries makes

up less than 15 per cent of international aid. Three other countries2 have given a firm date

to reach the 0.7 per cent target. The UK is barely halfway to 0.7 per cent and has not

committed to a deadline.

The United States has the largest aid budget (almost one-quarter of total aid) but spends

the lowest proportion of GNI on aid (less than 0.13 per cent in 2002). Here, policy-makers

are attempting to improve both the poverty focus and effectiveness of the US aid portfolio,

while still not losing sight of foreign policy goals, through a new unilateral aid

mechanism—the Millennium Challenge Account.3

In order to meet the MDGs, the British Treasury has proposed an International Finance

Facility (IFF)—a mechanism that would allow donors to borrow sufficient funds on the

international capital market to ‘frontload’ 30 years of aid into the next 15. So far, only

France has signed up—French and British aid together make up less than one-fifth of all

aid.

A highly-stylized picture, certainly. But in the end, there really is only one game in

town: donor governments need to find the money to meet the MDGs, and they need to do it

in a way that will not be perceived (by taxpayers and other powerful interest groups) as an

unwarranted attack on the national coffer. The IFF has been presented as a way to do

this—it offers a means of meeting the ‘moral target’ of the MDGs, while not actually

increasing aid budgets.

In this short paper, we review current debates around the potential benefits and

drawbacks of the proposed IFF, with particular emphasis on those we feel will have the

most important repercussions—positive and negative, and in both the short and longer

term—on the lives of the poorest people. We recognise the proposal’s strengths—

particularly its recognition of the urgent need for significantly larger, more regular and

more predictable aid flows, and the design of a financial mechanism able to deliver such

1Norway, Denmark, Netherlands, Luxembourg, Sweden.2Ireland (2007), Belgium (2010), and France (2012).3See Radelet (2003) for details.

888 K. Moore and D. Hulme

Copyright # 2004 John Wiley & Sons, Ltd. J. Int. Dev. 16, 887–895 (2004)

flows. As a commitment to help more of the world’s poorest people sooner, the IFF cannot

be faulted.

At the same time, however, we find several aspects of the proposal to be both ambiguous

and potentially problematic. The Treasury recognizes that the IFF, like many current and

proposed aid instruments, does not address many underlying issues around aid volumes,

distribution and effectiveness—indeed, as an adviser to HM Treasury pointed out, ‘The

IFF is just a financing mechanism’ (Rogerson, 2004). However, no finance mechanism is

completely politically neutral, particularly when it involves resource reallocation between

countries and programmes, and over time. The IFF has the potential to exacerbate aid

inequalities and ineffectiveness, both during the lifetime of IFF disbursements and after

IFF bonds have been retired.

2 FRONTLOADING AGAINST POVERTY

The MDGs are notable because they are universally-accepted, wide-ranging, and time-

bound. As the 2015 deadline nears, however, it has become clear that most of the global

goals will not be met. Some countries—particularly transitional and sub-Saharan African

countries—are not only failing to improve sufficiently to meet goals by 2015 but are

deteriorating on some indicators. It has been estimated that in order to turn this situation

around, additional aid of at least US$50 billion per year is required. In 2002, donors

promised an extra US$16 billion per year—less than one-third the minimum required.4

The premise of the IFF is that the international capital market can mobilize resources

much faster than national-level aid budgets are likely to rise (HMT, 2004). Thus, through

issuing bonds against donors’ aid commitments, the funding gap can be filled, the MDGs

met, and hundreds of millions more people delivered from extreme poverty and depriva-

tion. Because donors would have a legal responsibility to fulfil their IFF pledges, it is

surmised that aid flows would not only be substantially larger, but also more predictable

and stable. Reliable, recurrent funds would enable recipient governments to make regular

and significant multi-sectoral, mutually-reinforcing investments, capable of attacking

poverty and deprivation on several different fronts at once, and enhancing the sustain-

ability of achievements (HMT, 2004). In particular, ‘frontloading’ has the potential to

interrupt the immediate, long-term and intergenerational consequences of childhood

poverty. Investing in health, education, and social protection now can lay the groundwork

for the present and future well-being of a child, as well as that of her/his own children

(CPRC, 2004).

And, we are told, it is possible that IFF-channelled funds could be earmarked to be used

exclusively for anti-poverty programmes in low income countries (HMT, 2004). This is

crucial. At present, combined international aid flows are not very progressive, in terms of

reaching the poorest countries or populations (Baulch, 2004a, CPRC, 2004) or meeting the

MDGs (Baulch 2004b). While aid distribution from the UK, Netherlands and World Bank

4Based on estimates prepared by the Zedillo Panel for the 2002 Finance for Development summit in Monterrey.Many consider this to be an underestimate. The World Bank suggest that the additional amount required is closerto US$70–100 billion/year (Devarajan et al., 2002). While this paper cannot examine this argument in anydetail, the extent to which the long-term future of aid will be further undermined if the MDGs are not metdespite the IFF is discussed below.

The IFF 889


is broadly progressive, other donors—particularly the United States and the European

Commission—are regressive at both ends of the global poverty distribution. That is, they

give disproportionately large amounts of aid to middle income countries with relatively

small populations, and disproportionately small amounts to least developed countries with

large numbers of people living on less than US$1/day, and large numbers of children who

are underweight, out of school, and struggling to survive until their fifth birthday. If,

through the IFF, donors are peer-pressured into reallocating aid budgets to countries and

populations most in need, then the chances of meeting the MDGs at the national level will

be significantly enhanced, particularly in sub-Saharan Africa, even without a substantial

increase in aid amounts.5

Further, the IFF proposal suggests that funds could be distributed predominantly in the

form of grants and debt relief (HMT, 2004). Thus, borrowing would be financed by donors

through the IFF, not by recipient countries, ensuring that the debt burdens of the poorest

countries are not exacerbated. Finally, it could be the case that all resources committed

through the IFF would have to be untied, enhancing the value of aid to the recipient’s

economy.

More aid for poverty reduction in the poorest countries, sooner, more regularly

disbursed, and without increasing developing country debt—exactly what is needed to

reach the MDGs and sustain the achievement. However, several parts of the IFF story

remain uncertain. IFF-channelled aid will, by definition, be ‘more’ and ‘sooner’, but it is

arguable how much more regular, pro-poor, or effective it will be. The long-term effects of

the IFF on future aid flows are also an important issue for consideration.

3 DRAWBACKS OF FRONTLOADING

Analysts have identified two potential problems with the frontloading approach itself.

First, it has been argued that the rapid and large aid increases promised by the IFF may

foster damaging inflation, particularly in highly-indebted poor countries. We argue, along

with the Treasury and Mavrotas (2003), that this is not a fundamental obstacle to the IFF’s

success. ‘Dutch disease’ can be managed and survived if IFF aid is used exclusively for

poverty reduction—fostering pro-poor growth and funding social protection and the

provision of basic social services—and macroeconomic policies are sound.

Second, there are uncertainties about the extent to which the limited absorptive capacity

of some countries may undermine the initial positive effects of rapid and large aid

increases.6 This demands more consideration, not so much in terms of ‘absorptive

capacity’ itself, but in terms of broader questions about the architecture of aid—which

countries have limited absorptive capacity, why, and how can aid best reach the poor in

those countries? Does aid effectiveness only mean effectively reaching the easy to reach?

That many countries will find the effective use of frontloaded aid problematic is in itself

not controversial; HMT (2004, p. 9) recognises that ‘donors must help governments to

improve their systems’ in order to overcome these problems. At the same time, HMT (p. 7)

is encouraged by World Bank findings that ‘ . . . countries in Asia and sub-Saharan Africa

could effectively manage at least a 60–100 per cent increase in aid flows in the short term’.

5We take the point raised by Mosley (this issue) regarding the fate of large populations of extremely poor anddeprived people in middle-income countries.6Further, the effects of such immediate and significant aid increases on fiscal processes and resource fungibility indifferent country contexts are unclear (Mavrotas, 2003).



Rogerson (2004) concurs, citing ‘ . . . ample evidence that aid to poor countries that pursue

minimally sensible policies, or emerge from conflict and other shocks, reduces poverty

and improves lives’.

However, many, if not most, people suffering extreme poverty and deprivation live in

so-called weak, failing and failed states—poor countries (and states within countries)

that have not emerged from conflict or shocks, and where, for various reasons,

government is not pursuing ‘minimally-sensible policies’ (CPRC, 2004). Most of these

countries are unlikely to meet IFF conditions of good governance and good standing

with the IMF, and are therefore unlikely to get the chance to ‘test’ their absorptive

capacity. How to reach the poor and poorest in fragile and failed states, including how to

deliver basic services in poorly governed areas or conflict zones, remain the biggest

challenge to the international donor community, and one that is not confronted through

the IFF. Using parallel civil society disbursement mechanisms in poorly governed

countries, proposed by the Tobin Tax Network (2003) among others, is an option that

must be considered.

4 IFF GOVERNANCE AND CONDITIONALITY

‘ . . . setting the bar to entry to the IFF as low as possible to maximise donor parti-

cipation will only serve to perpetuate the present culture of aid.’

Tobin Tax Network (2003)

Over the initial 15 years of the IFF, its governance structure and ‘extra layer’ of

conditionality both have the potential to reinforce existing imbalances in international aid.

In order to garner the political commitment required to ensure the IFF’s success as a

financial mechanism, the rules of the aid disbursement game are unlikely to change.

According to the proposal, eligibility for IFF-directed aid will be dependent on several

overlapping layers of conditionality, determined by the same bodies that currently make

these decisions. First, the international capital market’s requirements will likely be

fulfilled through only providing IFF finance to recipient countries without ‘prolonged

IMF arrears’. According to many, including Jubilee Research (2003), this ‘effectively

gives the IMF . . .monopoly power’, and means that IFF funding will be conditional on

Doha-style trade liberalization and one-size-fits-all economic reforms. Second, ‘donor

pledges would be subject to recipient countries meeting a fundamental condition of good

governance, breach of which would make it impossible for the donor to continue to make

the committed annual payments to the IFF in respect of that recipient’ (HMT, 2004, p. 15).

Finally, these two sets of conditions would be distinct from and in addition to any imposed

by existing disbursement mechanisms (i.e. bi- and multilateral agencies). As noted above,

most of those countries excluded from IMF resource windows and HIPC status on the

basis of poor governance, corruption and conflict have high proportions and/or large

numbers of people living in extreme poverty. Like in the Millennium Challenge Account,

eligibility rules for IFF-aid recipient countries may be more transparent, but they are

unlikely to be very different.

As several analysts have noted, the governance structure of the proposed IFF remains

highly tentative, although it is crucial to understanding how far the IFF may go in pushing

a redistributive aid agenda. It seems that the IFF would be governed by a body of ‘pledging

countries’ acting as a legal decision-making body, based on transparent policy constraints

The IFF 891


to be negotiated within the group7 (Rogerson, 2004). Voting rights within the governing

body would probably reflect donor participation as ‘shareholders’, but with an upper limit

(Mavrotas, 2004), such that large donors could dominate, but not control, decision-making

processes. A minority of recipient countries may be involved, but it is unclear whether

civil society organizations (including large NGOs that act as disbursement agents) would

be invited to participate.

Yet who controls this ‘huge synthetic aid agency’ (Rogerson, 2004), and how, is crucial

for the success of the IFF in terms of meeting the MDGs. Which donors commit to the

initiative; the extent to which aid is untied and directed towards poverty reduction in the

poorest countries; the levels and types of conditionality; and total aid volumes in the long-

term—each relies on the extent and management of donor coordination and donor

commitment. The need to link in with—or at least not undermine—current processes

of donor harmonization has been noted by Mavrotas (2004). Yet he argues that it is likely

that the US, and possibly other large donors such as Germany, will not sign up to the IFF,

undermining the overall sway of the IFF, reversing progress made in donor harmonization,

and increasing crowding-out as an issue. Either each donor country will be allowed to

direct its IFF-aid according to its own principles—setting the bar low—or the IFF will

limit its membership (and therefore its effectiveness) through setting strict rules that aim to

redistribute aid across countries, regions and sectors. In either case, it seems likely that

existing imbalances in global aid governance will be reinforced.

5 LIMITED EFFECTS ON AID EFFECTIVENESS

HMT proposes that the (possibly) more predictable, poverty-targeted and untied aid flows

that the IFF could secure would lead to ‘a step-change in aid effectiveness’ (HMT, 2004,

p. 11). At the same time, however, as noted, the IFF would use existing bilateral and

multilateral aid disbursement mechanisms. At best, these mechanisms have been de-

scribed as ‘enough reasonably well-managed and transparent channels to carry IFF aid to

where it is needed’ (Rogerson, 2004). It is clear that the IFF—‘just a finance mechan-

ism’—is not intended to address the underlying issues of aid system effectiveness. At the

same time, HMT feels it necessary to defend the role of aid more generally within the

context of the IFF proposal. ‘Evidence’ that aid works, and that the returns to aid can stay

high as aid levels increase, are cited, and examples of successful aid-driven poverty-

reducing growth in Mozambique, Uganda and Vietnam are provided.

As Mavrotas (2004) points out, there are many other factors at work in poverty

reduction that are not captured by a simple correlation between aid receipts and poverty

head count, even controlling for growth. Perhaps even more importantly HMT’s examples

draw attention to the very people for whom aid and growth have not worked. It is true that

in Uganda the rate of poverty fell by 20 per cent over the 1990s. However, this aggregate

figure hides the fact that 10 per cent of the population fell into poverty between 1992 and

1999, and that about 20 per cent of the population were poor in both years—the

chronically poor (Lawson et al., 2003 cited in CPRC, 2004). In Vietnam, most people

belonging to ethnic minorities remained trapped in poverty during a period of otherwise

pro-poor growth: while the poverty headcount among the majority fell from 54 to

7For example, while HMT promotes the IFF as a mechanism to deliver aid to poor countries, it notes that countryselection ‘would take account of donors’ preferences’ (HMT, 2004, p. 21).



31 per cent over the period 1992–93/1997–98, it only dropped from 86 to 75 per cent

among minorities, who make up about 14 per cent of the population but about 29 per cent

of the poor (Baulch et al., 2002 cited in CPRC, 2004). Clearly there are many households

that have failed to benefit from the impressive macroeconomic development experienced

in the two countries over this period—aid, growth and development need to be done

differently to reach the chronically poor.

6 PREDICTABILITY, ADDITIONALITYAND THE POST-2015 SCENARIO

The extent to which predictability of aid flows can be ensured through frontloading is a

further potential limitation of the mechanism. On one hand, it is argued that the

international market will keep coming up with capital, and donors will fulfil each pledge

and repay their debts to the IFF. First, the IFF will be able to secure high-rated bonds

because the perceived risks and returns of IFF debt will be considered to be comparable to

that of existing multilaterals (HMT, 2004; Mavrotas, 2004). Second, the international

capital market legally binds the IFF to bondholders, and donors (severally, but not jointly)

to the IFF. Thus, once a donor commits, in a regular (i.e. annual, triannual) pledging round,

to provide a stream of aid through the IFF, then that aid volume can be relied upon over the

medium term.

However, as Mavrotas points out, the predictability of aid depends on continuous donor

commitment to engage in regular pledging rounds. While medium-term investment

pledges and repayment are governed by the ‘hard’ international capital market, on-going

participation, as well as the poverty focus, untying of aid and some forms of conditionality,

are governed by ‘soft’ agreements between donors. Strengthening ‘soft promises made’

into ‘hard promises kept’ is about the very difficult process of institutionalizing account-

ability at an international level—an issue much wider than the IFF.8

HMT insists that the IFF does not replace the 0.7 per cent goal, but is complementary to

it, and Rogerson (2004) suggests that the IFF could actually act as a potential lock-in

mechanism to make it easier for lagging countries to meet their aid commitments. At the

same time, however, HMT notes that if the two or three largest donors do not reach the

0.7 per cent target immediately, the MDGs will not be reached even if all other donors do

increase aid flows to this level. It is arguable therefore whether frontloading aid without

buy-in from the largest donors would do much better. Plus, those countries that have

reached the 0.7 per cent target already and undertaken significant debt relief are under-

standably reluctant to commit more funds through the IFF to cover the failure of other

countries to fulfil their promises.

After the MDG deadline, an additional problem emerges. If we support the premise that

‘more aid sooner’ is ‘good’ (as this article generally does), then the possibility of ‘less aid

later’ (while hundreds of millions of people remain in extreme poverty) is unarguably

‘bad’. Whether we believe in the long-term (post-2015) success of the IFF depends largely

8See Box 5.4 (p. 56) of the Chronic Poverty Report 2004–05 for a discussion of the extent to which richcountries and their citizens are really committed to reducing poverty. It is argued that the bold MillenniumDeclaration has not yet been matched by bold actions (in terms of trade, debt reduction and aid) on the partof the developed world. MDG Goals 1 to 7—the primary responsibility of developing countries—haveagreed targets that are regularly monitored. There is less emphasis on quantifiable targets forMDGGoal 8,which is about what rich countries do. According to the UNDP’s MDG website, almost 50 low- andmiddle-income countries have prepared progress reports; one donor country, Denmark, has done so.

The IFF 893


on our assumptions about the future behaviour of the donor community. On one hand, we

could trust that while most donors are not able to make a long-term commitment to, for

instance, reaching the 0.7 per cent target today, that they will be happy to do so later. On

the other, we could wonder if the IFF heralds the end of aid. Will donors abrogate their

responsibilities after 2015, arguing either that promises have been kept and the contract

fulfilled (if the MDGs have been met), or that their best efforts have been unsuccessful (if

the MDGs have not been met)?

As noted by Mavrotas (2003), it is difficult if not impossible to guarantee additionality

through the IFF.9 Once bond repayment begins, the likelihood of a short, sharp downward

turn in aid flows, particularly to countries deemed politically or economically marginal, is

high. Yet even if the MDGs are met, 900 million people will be living on less than US$1/

day. Most of this poverty will be severe, chronic, and relatively intractable. Significant and

effective aid flows over the true long-term (e.g. two generations)—employed will

continue to be required.

7 CONCLUSIONS

Those of us on the academic side of development debates are often criticized for allowing

‘the best to become the enemy of the good’, or—perhaps more commonly heard in aid

recipient countries—the baby to be thrown out with the bathwater. This is not our

intention. We support the IFF as an innovative mechanism that attempts to harness the

strength of the international capital market to secure much-needed financial resources

now, in a world where it seems that they are not otherwise forthcoming. Our concerns are,

first, that rapidly increasing aid flows without sea changes in the global architecture of aid

and development may exacerbate current aid inequality and ineffectiveness; and second,

that the IFF may mean a decrease in overall aid volumes in the medium to long term. Other

aid instruments—including debt cancellation and the Tobin tax—and ways of getting aid

to those who are hardest to reach, must continue to be considered as complementary

options. Reaching the 0.7 per cent goal in the UK would act as a very strong signal to the

international community, increasing the chances of IFF success.

ACKNOWLEDGEMENTS

The views expressed in this paper are those of the authors and do not necessarily reflect

those of CPRC or IDPM.

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The International Finance Facility—reaching the MDGS without spending more?