Covid-19 has increased the number of poor people in the world The COVID-19 pandemic has underscored the urgent need for results-based financing in addressing the surge in global poverty.. Even more so, it triggered a global humanitarian crisis, putting both lives and livelihoods at risk. According to the World Bank, global extreme poverty rose in 2020 for the first time in over 20 years as the disruption of the COVID-19 pandemic compounds the forces of conflict and climate change, which were already slowing poverty reduction progress. The estimated increase in global poverty in 2020 was truly unprecedented, with COVID-19-induced new poor estimated to be between 119 and 124 million. NGOs and governments have been particularly active and have stepped up to provide relief. These relief packages will continue to be important as the pandemic stretches out, with recovery likely to be a long-drawn process. Official development assistance (ODA) from members of the OECD’s Development Assistance Committee (DAC) rose to an all-time high of USD 161.2 billion in 2020, up 3.5% in real terms from 2019, boosted by additional spending mobilized to help developing countries grappling with the COVID-19 crisis. Bilateral ODA to Africa and least-developed countries rose by 4.1% and 1.8% respectively. Humanitarian aid rose by 6%. The world is off-track to ending poverty in 2030 Poverty eradication, especially in developing countries, is one of the greatest challenges facing the world today, and an indispensable requirement for sustainable development. This explains why in 2015, the international community enshrined the aim of ending extreme poverty by 2030 in the Sustainable Development Goals. According to the most recent estimates, in 2019, 8.2 percent of the world’s population lived on less than $1.90 a day. Even before COVID-19, baseline projections suggested that 6 percent of the global population would still be living in extreme poverty in 2030, missing the target of ending poverty. [caption id="attachment_7649" align="aligncenter" width="545"] Source: Lakner et al. (2020) (updated), PovcalNet, World Bank (2020)[/caption] According to UN data, the share of the world’s population living on less than $1.90 per day was between 9.1% and 9.4% in 2020. These estimates are close to the global poverty rate of 9.2% in 2017, implying a three-year setback in the poverty reduction goals. Projected estimates for 2030 incorporating the COVID-19 pandemic suggest a 6-to-7-year setback in the poverty reduction goal relative to the projections without the pandemic. Accounting for COVID-19 suggests a global extreme poverty rate between 6.7% and 7.0% in 2030, which translates to between 573 and 597 million poor people. This suggests that the COVID-19 pandemic is likely to set back progress towards the World Bank’s poverty goal by 6 to 7 years. Aid and economic growth are not enough to end extreme poverty Historically, efforts to alleviate poverty have focused on economic growth and targeted redistribution of wealth towards individuals living in poverty, facilitated through national policies or international aid. Lucy Page and Rohini Pande (“Ending Global Poverty: Why Money Isn’t Enough, 2018” published by Journal of Economic Perspectives) argue that growth and aid, at least as currently constituted, are unlikely to suffice to end extreme poverty by 2030. They added that the total volume of aid has increased substantially over time, rising nearly fivefold between 1960 and 2016, from about $32 billion to $158 billion in 2016—both in constant 2016 US dollars (OECD 2018). Indeed, if overcoming poverty was merely about bridging the gap between daily consumption and the international poverty line of $1.90, then the issue would seem resolved, as official development assistance has surpassed this gap since 2006. Economic growth may not help reduce poverty because growth often discriminates. But poverty can have a long half-life in the presence of inequality. In India, which in 2013 contained the largest share of the world’s extremely poor, over 100 billionaires lived alongside 210.4 million people in extreme poverty. This imbalance arises from unequal growth. These trends in inequality suggest that growth does not reduce poverty as quickly as the equitable distribution of resources might permit. Results-Based Financing (RBF) vs traditional funding mechanisms The complexity and interconnectedness of the variables that drive poverty reduction and inclusion outcomes call for the use of different approaches other than the traditional approaches that have yielded very few results. To sustainably and swiftly eradicate extreme poverty, governments in regions with significant low-income populations must enhance funding by adopting innovative financing models. These models should be directly responsive to and capable of addressing the needs of individuals living below the poverty line. Traditional development funding approaches, where payments are made based on inputs and activities have perpetuated unsatisfactory results. This is because traditional funding rewards implementers for delivering the activities of development programs according to pre-established plans and timelines and not based on the results or impact made by the intervention. Results-based financing responds to these limitations through a simple but fundamental change in the way poverty reduction programs are funded: Shifting from paying for inputs and activities to paying based on measurable results being achieved and verified. RBF thus provides an additional guarantee of value for money compared to traditional funding. With RBF, payments are closely linked to the intended development results and hence bridge the gap between good intentions and results. By tying payments to results, RBF ensures that funding supports outputs or outcomes. Results based financing is the way to go In 2014, UNCTAD estimates that achieving the Sustainable Development Goals (SDGs) by 2030 will require $3.9 trillion to be invested in developing countries each year. It also notes that with an annual investment of only $1.4 trillion, the annual investment gap is $2.5 trillion. To fill this gap, countries have increasingly adopted results-based financing, or RBF, as an innovative and effective approach to funding poverty alleviation projects. This approach (RBF approach) has risen to the challenge. In the last decade alone, at least $25 billion of development spending has been tied to results, an increase from just a few billion the decade before. This growth has largely been led by the World Bank with its Program-for-Results Financing (PforR) instrument involving $19 billion tied to results. The World Bank’s Global Partnership for Results-Based Approaches (GPRBA) has tested RBF approaches in Africa, South Asia, and other developing regions which has benefited around 11 million people in 30 countries, improving services for low-income communities in a range of sectors. RBF is defined as a financing arrangement in which payment is contingent upon the achievement of predefined and subsequently verified results. To help eradicate poverty and ensure that no one is left behind, governments and donor groups can use results-based financing (RBF) approaches which can catalyze social impact for long-term structural change. RBF ensures that development funding is linked to pre-agreed and verified results, and that funding is provided when the results are achieved. Through a range of mechanisms, RBF drives both innovation and efficiency by aligning incentives to the welfare of program beneficiaries, providing flexibility to maximize results, and enhancing the accountability of the incentivized agent to the beneficiaries. By putting a portion of the funding at risk, or providing a bonus payment, RBF promotes alignment between the interest of the funder, the incentivized agent, and the welfare of the beneficiaries. It does so by rewarding the incentivized agents financially for delivering results, thus compelling them to implement activities that meet the beneficiaries’ needs. Evidence of the effectiveness of RBF Whilst the practice of RBF remains nascent, there is overwhelming evidence of its impact. In Burkina Faso, Trickle Up partnered with community-based organizations to deliver its program under a results-based financing model. The program is based on the graduation program, which combines seed capital, savings, skills training, coaching, confidence-building, and social support. Since 2007 Trickle Up has implemented the Graduation approach with approximately 5,450 households, effectively impacting over 27,000 beneficiaries. Results show that the Trickle Up program has contributed to increasing households’ income and daily spending on foods other than grains by 3 times, increasing participation in savings to up to 99%, up from only 34% at baseline, supporting the creation of livelihoods with 65% of participants in Burkina Faso reporting having two or more businesses, increasing the resilience of participant households to environmental shocks and market trends. As the number of poor people increases due to the COVID-19 pandemic with its resultant effect of more funds needed to eradicate poverty. Now more than ever is the time to use innovative financing models such as RBF to finance poverty alleviation projects to make sure that the desired results are achieved with limited resources deployed. Much progress has been made but much more is still required. Author: Jonathan Sumbobo Sources https://blogs.worldbank.org/opendata/updated-estimates-impact-covid-19-global-poverty-looking-back-2020-and-outlook-2021 https://documents1.worldbank.org/curated/en/765601591733806023/pdf/How-Much-Does-Reducing-Inequality-Matter-for-Global-Poverty.pdf https://sustainabledevelopment.un.org/content/documents/3770chapeau_clean.pdf https://mappingignorance.org/2018/12/19/when-money-is-not-enough-to-help-the-poorest/ https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.32.4.173 https://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/official-development-assistance.htm https://sdgs.un.org/goals/goal1 https://blogs.worldbank.org/opendata/projecting-global-extreme-poverty-2030-how-close-are-we-world-banks-3-goal https://www.worldbank.org/en/news/feature/2019/06/28/banking-on-impact-what-you-need-to-know-about-results-based-financing http://gpoba.org/sites/gpoba.org/files/publication/downloads/2018-11/Guide_for_Effective_RBF_Strategies.pd https://www.instiglio.org/impact/trickle-up-performance-based-contract-design-in-burkina-faso/ https://trickleup.org/wp-content/uploads/2020/03/OurWorkBurkinaFaso_2016_10.pdf
This article will present the key findings of 2015 report about “Illicit financial integrity” prepared by Global Financial Integrity (GFI) -a non-profit, Washington, DC-based research and advisory organization, which produces high-caliber analyses of illicit financial flows, advises developing country governments on effective policy solutions, and promotes pragmatic transparency measures in the international financial system as a means to global development and security-. While discussing the development equation especially for the developing countries, we should take into consideration the massive outflows of money that are likely to adversely impact the domestic resources and illicit leakages of capital from the balance of payments and trade misinvoicing. Illicit financial flows can be defined as illegal movements of money from one country to another, the illegal attribution can be due to the illegal sources used to earn the money, transfer or utilize it. By their nature, illicit funds are difficult to estimate with precision taking into consideration the lack of economic data and methods that can help in framing and forming the scale of the problem. Among the top ten countries with the highest average illicit financial outflows, which stand for 62.3% of cumulative amount of illicit capital outflows from the entire developing world, the Asian presence is further emphasized as the top exporter of illicit capital with a representation of 5 countries out of the sample (10 countries) and a percentage of 38.8%. The Western Hemisphere represented by Mexico(3rd) and Brazil (6th) in the top ten countries accounted for 20% while Sub-Saharan Africa regions represented as well by two countries: South Africa(7th) and Nigeria (10th) accounted for 8.6%off cumulative illicit financial , Russia (2nd) alone appear in the global top ten representing Developing Europe with 25.5%. The main components of this illicit capital can be represented by trade misinvoicing which means export under invoicing (undervalues export sales) and import over-invoicing (raises import costs).According to statistics found on the “OECD, IMF, UNTCAD Statistics…and other databases” it has been proved that the amount of illicit financial outflows exceeded both official development assistance (ODA) and inward foreign direct investment (FDI) in all developing countries which shows the seriousness and gravity of the issue since the unrecorded illicit outflows are significantly much higher than the resources these countries might accumulate through ODA and FDI. US$1.1 trillion was recorded as the amount of illicit flows in 2013 from developing world, which represent 10 times the amount of official development aid received by these countries in the same year and the annual percentage of growth of these outflows is approximatively 6.5% Money laundering through trade transactions which can be done via various techniques including trade misinvoicing was defined by the financial action task force (FATF) as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.”. also an important link had been tied between illicit outflows and countries that are major drug producers and/or represent a transit point for drug trafficking since an appealing ratio of misinvoicing to total trade drug transiting countries and the other developing countries was identified (For 68% of the sample trade misivoicing outflows to total trade are significantly above the 6.7% which is the developing countries average. The opacity of global financial system that can be represented in the following issues-tax havens, secrecy jurisdictions, bribery and corruption- which make up the bulk of illicit financial flows from developing countries, even though there are some best practices that should be adopted and promoted at international and institutional level by all these countries such as: Anti-money laundering: by enforcing all anti-money laundering laws and regulations and penalizing employees of financial intuitions who are facilitating the money laundering operations. Beneficial Ownership: Government authorities should coordinate with banks in order to create public registries in order to maintain a database of the true owners of any account opened all over the financial institutions. Country-by-Country Reporting: Multinational companies should have the obligation to disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis. Tax Information Exchange: Encouraging the participation of all countries to contribute in the worldwide exchange of tax information. Trade misinvoicing: Preparation of well trained and equipped officers to enhance the ability to detect intentional misinvoicing of trade transactions through the ability to access real-time world market pricing information. The issue of illict finiancial flows is at the forefront international forums and agendas, national and international mobilization is required to tackle the issue and take serious actions on the fight against the phenomenon Fatima-Zahra Boukhari, Analyst at Infomineo Know more about Fatima-Zahra // Know more about Infomineo Sources : • Financial Action Task Force, “Trade Based Money Laundering” (Paris, France: Financial Action Task Force (FATF), June 23, 2006), 3, http://www.fatf-gafi.org/media/fatf/documents/reports/Trade%20Based%20Money%20Laundering.pdf. • “Illicit Financial Flows from Developing Countries 2004-2013” report issued by Global Financial Integrity in December 2015 : http://www.gfintegrity.org/wp-content/uploads/2015/12/IFF-Update_2015-Final.pdf