John Paul

IFC Sees Greater Role in BOP Investment & Development

The International Finance Corporation turns 50 this year. To mark the occasion, the group released an article that talks about the IFC’s investments–past, present, and future. Its prognosis for 2006? Emerging markets are headed for a banner year.

Lars Thunell, executive vice president of IFC notes that the flow of private capital into the developing countries–at roughly $350 billion–is now more than four times the amount of international aid. What isn?t clear is how much of this money is actually flowing to BOP industries or creating BOP jobs. My guess–based on the hype surrounding large-scale manufacturing in China and back-office outsourcing in India–is relatively little.

In the news release, Thunell himself notes that the development community needs to do a better job of using market-based solutions to reduce poverty, address social needs, and preserve the global environment.

?More and more development and aid organizations–multilateral banks, foundations, nonprofits–are looking at an entrepreneurial approach to development. They are asking how they can harness the power of private capital, free enterprise, and social entrepreneurship to bring about needed change,? Thunell said. ?This is where IFC, with 50 years of experience in this area, can play an even larger role.?

In other words, the goals of the development and aid agencies are beginning to overlap in a big way with the goals of the private sector. It’s a marriage that seems to be getting stronger after a long courtship that began in the early 80s, at which point ?there was practically no foreign portfolio investment in the emerging markets.? The article goes on to point out a number of other indicators of the growing potential for the private sector approaches to play an increasing role in development:

  • Macroeconomic growth rates for developing nations continue to be roughly double those of developed nations.
  • Cross-border capital flows into the emerging markets are approaching the record levels last witnessed a decade ago.
  • Emerging market equity funds have been reporting record inflows, and the growing interest of institutional investors is likely to lift the capitalization of emerging stock markets above $5 trillion for the first time in history.
  • The scale of emerging market mutual funds, whether measured by assets or as a percentage of emerging markets GDP, is now more than double the levels seen in 1997.

The IFC plans a number of specific activities in the next year. First, it will broaden economic participation by people in the ?informal? economy by both helping to reduce bureaucratic red tape and significantly increasing investment. The IFC has also taken a leadership role in deepening and diversifying capital markets in developing nations; more than a third of IFC’s investment portfolio is devoted to strengthening and diversifying the financial sector. The IFC also plans to implement a new set of environmental and social performance standards this year, stronger than its current Equator Principles that already function as the global industry benchmark.

While it remains to be seen how much of these efforts will translate into new jobs and sustainable livelihood creation at the base of the pyramid, the investment trends are encouraging. No doubt the flexing of the IFC’s financial muscles will only encourage further private sector investment in these markets.