European Network on Debt and Development

Eurodad advocates for greater development effectiveness of financial flows to developing countries. In recent years, development institutions have dramatically increased their lending and investments to the private sector and so Eurodad’s work has begun to increasingly focus on these flows.

While at the beginning of the decade, private sector finance accounted for 10 percent and public sector for almost 90 percent of all Multilateral Development Bank (MDBs) portfolios; by 2007, the ratio between public and private sectors had shifted to 30 percent and 60 percent respectively. Also, during the decade of the 2000s, European countries increased the financing capacity of their bilateral institutions specialised in private sector lending by 20 percent.

These increases have taken place despite the lending institutions’ unclear development mandates and poor track records for delivering pro-poor development results.

A good share of these funds is channelled through financial intermediariesand private equity funds, and other opaque investment vehicles thus increasing the lack of transparency over the use and effectiveness of public development finance.

Why the turn to private finance? 

This turn is based on the uncontested assumption that greater private financial flows to developing countries is an effective way to support development, regardless of the terms and conditions under which they take place. Indeed, a vibrant private sector is crucial for development, as it creates jobs, provides essential goods and services, and is a source of tax revenue. However, not all private sector activities have a positive developmental impact.

Is the private sector really best equipped for development?

Existing research shows that public flows supporting private sector investments have in the past failed to deliver positive development outcomes. Moreover, all too often these development finance institutions support investments by large transnational companies from rich countries as opposed to smaller companies in poor countries. These institutions also fail to ensure that the companies that they invest in comply with a minimum set of responsible finance standards, which would ensure that these companies pay a fair amount of taxesin the developing countries where they operate.

Eurodad believes that certain conditions need to be in place to make sure that private investments have a positive impact on the poor. It works to put forward proposals to increase the development effectiveness of increasingly diversified North-South financial flows, and to ensure that all North-South financial flows comply with responsible financing standards.