Development finance institutions, or DFIs, such as multilateral development banks and bilateral aid ministries currently pay scant attention and devote few resources to helping countries implement basic safety nets and adequate investor, antibribery, consumer, and environmental protections. The foreign aid community acknowledges that these institutions are important to broad-based economic progress, but it has yet to translate this recognition into serious action. Aid statistics indicate that less than 6 percent of official development assistance is devoted to social safety nets (2.91 percent) and capacity building (2.80 percent).
Even these modest numbers are an overstatement of the aid community’s emphasis on economic institution building, and social insurance systems in particular. For example, World Bank lending for pension systems averaged only $400 million per year between 2002 and 2007, and much of these funds were devoted to helping countries restructure or rationalize their systems in line with demographic challenges, rather than creating or expanding coverage. Two-thirds went to upper-middle income countries.
In addition, most institutional capacity-building assistance provided by DFIs takes the form of technical assistance “pilot” projects that tend to recommend legal frameworks and outline best practice rather than finance the actual institutional capacity necessary to scale implementation of such frameworks and practices. Yet financing public administrative capacity to close the gap between law and practice is precisely what DFIs need to do to help countries achieve a more inclusive pattern of economic growth through robust private sector investment and formal job creation on the one hand, and basic safety nets to support a minimum standard of living for the poor on the other. This shift in focus will be necessary for DFIs to remain relevant in middle-income developing countries that no longer rely on their loans or qualify for their concessional assistance, yet continue to experience substantial poverty and inequality.
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