Fighting the crisis:The role of International finance institutions
The financial crisis grabs headlines about its impact on European economies, robbing the developing world of attention, financing and once strong growth outlooks. Tackling the crisis, development banks are filling the gap in private sector investment but have a long way to go.
International finance institutions (IFIs) must and are ready to play a crucial role. IFIs, including the International Finance Corporation (IFC) – a member of the World Bank Group – have quadrupled their financing of the private sector in developing countries in a decade, to over $40 billion a year. Every dollar we invest stimulates as much as three times more investment from commercial sources, according to the report “IFIs and Development through the Private Sector.”
But international investment in developing countries has plunged since the financial crisis struck in 2008—from eight percent of their GDP to around four percent. Latest figures published by the OECD show that major donors’ aid to developing countries fell by nearly 3% in 2011. It is likely to decline further in 2012, according to the study coordinated by IFC and 30 other IFIs. Moreover, growth is slowing, with potentially destabilizing effects globally.
Development institutions are also trailblazers, providing capital and expertise to the private sector in risky environments, thereby attracting other investors, the report notes. IFC, established in 1956, even coined the phrase "emerging markets." IFIs can also make private sector development more inclusive while promoting higher environmental, social, and corporate governance standards.
Of course in a time of scarce resources, some ask: can donor governments afford to support both the private and public sectors? The answer is yes, since development institutions are mostly self funded and plow their profits back into aid and investment. Just a small amount of initial capital, along with some well targeted advisory services, can have a powerful multiplier effect on the developing world.
By leveraging private sector investment, IFIs must be given a growing role in that coordinated effort, to help developing countries weather the turmoil and sustainably improve the lives of their people.