Toward private investment funds for development aid

Abstract

Concessional aid from the developed world has been recognized as a constructive way of helping the least developed countries to escape the vicious circle of poverty and penury. A doubling or tripling of the present levels of contribution would be required. However, these requirements exceed donor countries' capacities under present institutional arrangements. This paper explores a way out of this dilemma. With the help of a scheme for recruiting investment funds directly from private investors, the choice of level and direction of development aid would be shifted from the public to the private sphere. Donor governments, instead of spending tax money directly on aid, could use this money to support interest rates on development aid bonds to be issued at a preferential rate to small investors. These bonds would be issued not by national governments, but by existing international banking institutions, such as the World Bank, etc. The scheme would operate as follows: 1) A large number of private investors would participate actively. This participation would be likely to increase investors' productivity and savings. 2) Investment bonds would be signed in favor of countries of one's choice, if so desired. 3) Recipient countries would not be bound to bilateral agreements. 4) The expertise of the banking institutions would ensure comparatively efficient loan disbursement. 5) The sum of individually committed development funds would exceed the amount that public choice is able to generate under majority rule.