When Resources Come from 'Partners' Instead of 'Donors'

Major emerging market economies scaling up development financing activities

Financing has helped alleviate supply constraints, boost trade and investment

Opportunities come with challenge of maximizing benefits, minimizing risks

Unlike aid from advanced-economy donors, financing from the major emerging market economies excluding Russia focuses on mutual benefits without involving policy conditions on how the funding is used.

A new IMF study examines the philosophies and methods of development financing by the major emerging market economies, and examines the implications for low-income economies and for future engagement between low-income countries and emerging market countries.

Competing paradigms

The major emerging market economies, with the exception of Russia, provide financial assistance based on the principle of “mutual benefits” and in the spirit of South-South cooperation.

Brazil, China, and India see themselves as development partners, not donors. Their experience as recipients of traditional development assistance and their identification with other recipients also contribute to their sensitivity to the term ‘aid’. Indeed, the term is sometimes contentious: China does not regard itself as providing aid.

In addition, these major emerging market economies do not attach to their financing any conditions related to governance, economic policy and performance, or institutional reforms. Conditionality, they argue, would undermine the principle of respecting national sovereignty and promoting solidarity. Partly reflecting China’s own recent development history and its policy of noninterference, it believes that the long-term development of a country is ultimately the responsibility of the recipient and not of the development partners—as noted by African Development Bank economist Richard Schiere.

While traditional donors attempt to improve governance by attaching policy conditions to aid, China argues that “tied aid”—financing that is tied to purchases from the source country—helps lower the risk of financial mismanagement and misappropriation of funds.

Though conditionality has often been criticized as intrusive and weakening country ownership of reforms, tied aid has reportedly not been able to address concerns about transparency and corruption, especially given the general lack of comprehensive, meaningful, and timely statistics. The IMF’s Nkunde Mwase finds that these countries lend more to countries with weak...