Neoclassical economic models are based on the
assumption that investment is financed from
household savings. Accordingly, capital accumulation
will be maximized by policies aimed at increasing
household savings rates and capital imports (“foreign
savings”). These models also predict that capital
should flow from rich to poor countries, attracted by
higher rates of return.

Background
In 1997, at the urging of the US government, in
particular, the World Bank designed the “Country Policy
and Institutional Assessment” (CPIA), to rate a
government’s policies, and the institutions it has in place,
to promote economic growth and poverty reduction.
The Bank uses its CPIA to prepare an annual scorecard
that rates its approximately 136 recipient countries, 82 of
which receive assistance from the IDA. At present, the
CPIA (or a close analog) is used in the aid allocation
formulas of some regional development banks and the
development agencies of the Scandinavian countries,
France and the UK. However, the African
Development Bank and other critics of the CPIA want
to abolish or redesign it, as discussed below.

With five short paragraphs, "external debt" is the
Cinderella of the "leading actions" in the Monterrey
Consensus. The Consensus highlighted that the
responsibility for debt crises should be fairly shared
between creditors and debtors, argued for the creation
of a mechanism for the resolution of sovereign debt
crises, and requested that debt relief should be
delivered expeditiously and should be additional to
existing aid flows. It also suggested that the debt
sustainability framework adopted by the Bretton
Woods Institutions should be kept under constant
review.

The Millennium Development Goals (MDGs) include
reducing, by half, extreme poverty as well as the
number of people who lack access to safe drinking
water by 2015. Between 1990 and 2004, the
proportion of people in Sub-Saharan Africa without
access to safe drinking water was reduced from 52%
to 44%.

Microfinance has been defined as the provision of diverse
financial services (credit, savings, insurance, remittances,
money transfers, leasing) to poor and low-income people.
The past quarter century has seen the emergence of a
range of microfinance providers but outreach has been
uneven. The higher cost of small transactions and the
higher risk perceived by lenders to lower income clients
limits the provision of financial services.

Lack of access to finance
In most developing countries, financial services are only
available to a minority of the population. Mainstream
for-profit financial institutions have largely ignored the
segment of the market that includes the low-income and
poor households, as well as small and medium-sized
enterprises, often called the “missing middle”. This is
because smaller transactions tend to be less profitable,
and assuring the creditworthiness of lower-income
borrowers and smaller firms, with little collateral, is
believed to be more difficult.

Financing climate change adaptation and
mitigation will need to be addressed by the
international community in the UN climate change
conference scheduled for the end of 2009 in
Copenhagen. Several economists and most
recently, the International Monetary Fund (IMF)1
,
have been advocating carbon taxation to mitigate
climate externalities, and the potential such a tax
might have in generating additional revenues for
public finances.

FDI flows to developing countries have grown strongly
in recent years, more than reversing the post-2001
decline. Total flows in 2006 were nearly double their
2001 level, and are estimated to have increased by a
further 20% in 2007. Around 30% of flows to
developing countries in 2005-6 took the form of mergers
and acquisitions (M&As). Total flows were 13.8% of
gross fixed capital formation in 2006; and inward FDI
stocks have increased from 9.6% of GDP in 1990 to
26.7% in 2006.

The Monterrey Approach to Systemic Issues
The financial and balance of payment crises of the mid-
1990s led many countries to realize that while
international financial integration promised developing
economies increasing capital inflows, such net inflows
have been temporary and have led to crises with often
devastating consequences.

The International Monetary Fund (IMF) plays a crucial
role in the international financial system, including through
provision of finance in the event of balance of payments
crises. The Fund’s influence on developing countries’
macroeconomic, developmental and social policy making
through conditionalities imposed on such borrowing has
been and is huge.