Development Cooperation and Finance


Photo: Gentil Adjinakou/UNDP

The ability of a country to reduce poverty and increase its development depends on a number of things: its physical geography, the policy choices it makes, and the resources, institutions and capacities it has access to. On top of these, money is also needed to enable a country to invest in infrastructure or programmes that support economic growth and development.

Countries can finance their development in several different ways. First and foremost are the domestic financial resources that countries already have - the taxes they collect on economic activity or government borrowing from the savings that people and companies make.

But for many developing countries, domestic resources are insufficient to meet the scale of investment necessary. So there is often a need to supplement them with financial resources that come from other countries. These can be private flows: foreign direct investment, capital flows and remittances. Or they can be public flows in the form of aid and debt relief. In 2005, many donor countries - from the European Union and G8 - committed to increasing the amount of money they give in aid by $50 billion by 2010. On the eve of that deadline, there is a danger that the financial and economic crisis will shift developed countries' resources away from aid, at a time when poor countries need additional support to boost their economies and help their people survive the global crisis.

UNDP advocates for donors to scale up aid and technical cooperation in developing countries, so as to make faster progress towards the Millennium Development Goals (MDGs). UNDP is actively engaged in the debate on how to effectively scale up aid, for example through our work on the Gleneagles scenarios. We work with countries to mitigate some of the negative consequences that may be associated with scaling up, such as how large inflows of aid can make their exports less competitive. UNDP also helps developing country governments to access new sources of finance like carbon markets.

Of equal importance, aid also needs to work better. For example, aid is sometimes given in support of donor rather than recipient priorities, or can be tied to the purchase of goods and services from the donor. This means that aid is not necessarily directed to the things that matter for poor people, or simply that the goods and services procured from donors are more expensive than those that could be bought locally. This undermines the effectiveness of aid, as measured by its ability to reduce poverty. The money doesn't go as far.

Making aid more effective is a responsibility shared by donor and recipient countries. The focus of UNDP's work in this area is on support to recipient governments to improve the national aid management architecture, ensure national leadership of aid coordination, and support monitoring arrangements that include the private sector and civil society. In addition to new aid, countries can also finance their development when creditors cancel their unpayable and unsustainable debts. UNDP advocates for debt cancellation and sustainability that safeguards the financing required to meet the MDGs, and advises developing countries on how to achieve debt sustainability consistent with reaching the MDGs.