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GLOBAL RESEARCH AGENDA: DEVELOPMENT FINANCE
Research Themes

Background


Urbanization and Development


Development Finance


Agriculture, Development and Natural Resources


Inequality, Poverty, Social Protection and Social Policy


Rule of Law, Governance, Institutions and Development


Human Capital Formation, Education and Development


Labor Markets, Employment and International Migration

Development Finance

[H.E. Juan Manuel Santos, President of Colombia addressing the audience at the 12th Annual Global Development Conference themed: 'Financing Development in a Post-crisis World: The Need for a Fresh Look', held in Bogotá, January, 2011.]

There are two broad research areas under this category:

I. FOREIGN AID AND EXTERNAL CAPITAL FLOWS

In the aftermath of the global financial crisis there has been a revived interest in issues related to development aid and on how to learn from past experience in this important source of development finance for many countries in the developing world. It has been rightly argued that the macro-econometric investigation of aid-growth regressions will no doubt continue into the next decade since there are sufficient issues of data, of econometrics and of development doctrine to keep the debate alive (Kanbur, 2006). At the same time, aid to fragile states and the crucial issue of structural vulnerability are expected to attract further attention in the near future (Collier 2007; Guillaumont 2006, 2009; Fukuda-Parr 2010). A message emanating from recent work is that it is not sufficient to scale up aid efforts by raising and transferring more money (see Killick and Foster, 2007; Bourguignon and Sundberg, 2007a,b; Barder, 2009; Mavrotas, 2010). At least part of the blame for not making substantial progress with the MDGs falls on insufficient targeting of sector-specific aid; in this context, unless aid is better targeted, scaling up aid is unlikely to have the desired effects (Thiele et al., 2007). Furthermore, the ‘big push’ and ‘absorptive capacity’ approaches cannot be reconciled without a reform on the aid ‘architecture’ associated with recent calls for scaling up aid (Guillaumont and Guillaumont-Jeanneney, 2010). This is an important research area in which further work is needed in the new context that aid needs now to be re-evaluated, following the recent global financial crisis. Finally, there is an urgent need to know more about the overall relationship between aid and capital flows (including Foreign Direct Investment and Remittances).

Key research questions include: (non-exhaustive list)

  • What are the implications of the rise of new aid donors from the South for the current aid allocation policies and the existing aid ‘architecture’?
  • Does aid work in promoting growth and reducing poverty in the developing world?
  • What do we know regarding the political economy of the development finance ‘architecture’?
  • What do we know about the relationship between aid and human capital formation?
  • What is the importance of aid heterogeneity (and the use of different aid types in aid effectiveness empirical work) for our better understanding of how aid really works?

II. FINANCIAL SECTOR DEVELOPMENT FOR GROWTH AND POVERTY REDUCTION

Recent years have witnessed a new interest in the finance–growth relationship, both at the micro and macro level, and empirical research has blossomed. Yet, the relationship between domestic resource mobilization and financial sector development has not been fully explored. Indeed, while the important link between financial development and growth has been examined for many years (McKinnon, Shaw, 1973; De Gregorio and Guidotti, 1995; Wachtel & Rousseau, 1995; Demirguc-Kunt & Levine, 2001), recently research attention has focused on the ‘follow-up’ link between financial development and poverty reduction. In this context, it is crucial to shed more light on the channels through which financial development can promote poverty reduction. On top of the important, more ‘indirect’ link through the promotion of economic growth, one can think of trying to make financial development more pro-poor in a direct way, and/or make the economic growth resulting from it more pro-poor. Promising recent work in this area seems to confirm the extreme importance of strengthening the link between financial development and poverty reduction via access to finance (Banerjee, Duflo et al, 2010). As such, it is indeed extremely useful to have more in-depth analysis on this issue, including individual country case studies, and work that details the exact transmission mechanisms through which financial development can enhance pro-poor development, in order to draw useful policy lessons in this area. At the same time, issues related to the institutional and regulatory framework surrounding domestic financial markets as well as issues associated with financial structure are of particular importance in the developing world and call for further research in this crucial research and policy area.

Key research questions include: (non-exhaustive list)

  • How can we delve deeper into the relationship between financial sector development, domestic resource mobilization and poverty reduction?
  • What regulations of financial markets have a positive impact on economic growth in low-income countries?
  • What are the supervisory mechanisms that need to be enforced in this case?
  • How safety nets should be designed and implemented so as to mitigate the long-term costs to financial sector development and growth in low-income countries?
  • What do we know about the relationship between financial sector development and inequality? 
 
Related GDN Activities

GDN's 12th Annual Global Development Conference held in Bogotá, January 2011, and the Global Development Awards and Medals Competition 2010 were both designed to bring in a variety of perspectives on the theme 'Financing Development in a Post-crisis World: The Need for a Fresh Look', at a time in history when the world was reassessing the role of the financial sector and effectiveness of regulation.