1. Plenary session 3: Innovation, technological development and the Millennium Development Goals Peter Gammeltoft

2. MDGs and external finance The most important prerequisite to achieve the MDGs is strong, effective and coherent local institutions and proper embeddednessin national development strategies But resources to finance long-term development goals are inadequate and more external finance is needed The World Bank has estimated the yearly financing gap of meeting the MDGs to between USD90 and USD140 billion (compared to the record USD120 billion ODA in 2008) There has been a general shift from official flows (ODA and lending) to private financial flows to developing countries. Private inflows constituted USD1.2 trillion in 2007. This brought about more but also more volatile international finance. Immediately before the crisis, one-quarter of developing countries’ total capital formation was funded by foreign capital FDI is generally a more developmentally virtuous source of development finance in being more stable and long-term oriented and bringing capital, technology, skills, know-how and market access Contributes revenue through salaries, corporate tax, use of natural resources, raising overall growth and tax base

3. The Crisis and international financial flows Through trade and financial linkages the crisis has impacted significantly on developing countries The effect occurred with some lag (after September 2008) spurring initial speculations of a more pronounced ‘decoupling’ of emerging economies Tightening of credit Collaps of export markets Increased cost of borrowing; increased interest rate spread Reversal of international capital flows as MNCs and investors abroad required liquid assets Increased competition for funds from high-income countries lending for stimulus packages (crowding out of developing countries) Difficulty of developing/emerging country corporations to raise finance in international debt markets (risk aversion) Crisis compounded by global synchronization; no strong regions to pull up weaker ones

4. The Crisis and international financial flows (cont’d) Private financial flows to developing countries fell by 40 percent in 2008 Global FDI inflows fell 14 percent in 2008 from a historic high in 2007 and will decrease further in 2009 In 2008 FDI inflows to developing countries increased (primarily to BRICs) but is likely to decrease in 2009 FDI inflows to high-income countries fell sharply (36 percent, primarily to Europe) Workers’ remittances increased in 2008 but are likely to decline in 2009 In developing countries investments fell sharply due to difficulties of obtaining capital and diminishing demand Investments, particularly in social and physical infrastructure, are crucial to fulfill the MDGs Significant fall of prices of commodities, energy, food (oil dropped 75 percent between July and December 2008) Some large emerging economies are less affected due to modest international exposure in relative terms, a large state sector in the economy, and effective stimulus packages

5. Net capital inflows to developing countries (USD billions) Global Development Finance 2009 & World Development Indicators

6. Net FDI outflows from developing countries (USD billions) World Development Indicators & World Investment Report 2009

7. Differentiated impacts An estimated 55 million to 90 million people more people will live in extreme poverty than estimated before the crisis (UN MDG Report 2009); also setbacks in hunger, health, employment, gender equality. Impact on the poor cushioned by drop in food and fuel prices and decline in inflation Most lending from international financial institutions will go to middle income countries Some developing countries have pursued prudent macroeconomic policies and can withstand the crisis Other countries have high external debt, large current-account deficits, shallow foreign reserves The latter countries are at risk of defaulting on debt and are forced to reduce imports and domestic consumption Net commodity exporting countries suffer from reduced commodity prices Remittances will play less of a counter cyclical role in recipient countries as the downturn is global

8. Responses Maintain commitment to international cooperation / multilateralism Maintain open markets and improve market access for agricultural products, textiles/clothing Maintain and step up debt relief (HIPC, MDRI) Increase ODA (‘aid for trade’, not ‘trade not aid’) Consider environmental taxes (‘carbon tax’), Tobin tax Strengthen domestic sources of revenues (e.g. taxation systems) Mobilize better migrants’ remittances for developmental ends (encourage repatriation, decrease transaction costs) Build stronger regional fora, which can respond broadly, timely and differentiated to crises