compares to a total of US$80 billion in ODA for core development and emergency programs in the same year. Recent estimates of various segments of private giving suggest that the rapid growth in private giving for development activities was largely driven by foundations.<sup>8</sup> 2.6 **With the onset of the global economic crisis and the virtual seizure of capital markets in 2008, prospects for increasing private flows purely through market-based innovations have been severely dampened.** Private flows to developing countries were halved from US$929 billion in 2007 to US$466 billion in 2008, and fell further to US$200 billion in 2009. Middle income countries with large financing needs and highly levered financial systems have been hit most directly. Lower income countries also were impacted by sharp declines in private flows. The indirect impact is expected to be even more severe including reductions in export volumes, commodity prices, remittances, tourism, and possibly aid.<sup>9</sup> Given the prevailing financial environment, market-based innovations alone may not be able to counter reversals in capital flows to developing countries. Any robust response to the global crisis necessarily requires _increased official flows_ to developing countries and their better use. Described in subsequent sections, innovative uses of official flows can help developing countries respond to the crisis.

_Official Development Assistance and Innovative Finance_ 2.7 **Over the 2000s, official flows and in particular ODA underwent considerable evolution as well.** ODA, the other major component of external financing to developing countries (in particular, to lower-income countries), relies entirely on budgetary outlays from donor countries to mobilize concessional flows. Net ODA disbursements grew steadily between 1997 and 2005, reaching a peak of US$107 billion in 2005. Much of the increase in ODA over this period was due to debt relief and, to a lesser extent, to emergency assistance and administrative costs of donors. Even though official flows increased during this period, it was clear that achieving the MDGs required a significant acceleration in the growth of ODA. As they contended with this large and looming financing gap, developing countries also had to manage the transaction costs associated with the proliferation of aid channels and ODA fragmentation.

2.8 **In response to the MDG financing gap in 2000, development partners embarked on a decade-long search for “innovative” or alternative sources of ODA.** Soon after the declaration of the MDGs, noting likely shortfalls in achieving ODA levels of $50 billion per annum, the 2002 Zedillo report strongly advocated searching for innovative financing solutions. Over the 2000s, sovereign and private donors championed an array of _innovative fund-raising initiatives,_ from solidarity levies to frontloading of ODA commitments. Some of these have been implemented, including the airline ticket levy and the IFFIm pilot.

2.9 **Over this period, developing countries also started to demand not only increased financing but more effective** **_financial solutions_ to development problems.** The solutions sought to utilize a broader menu of financial instruments than traditional development loans and grants. For instance, new performance-based solutions, such as the credit buy-downs, aim to sharpen the results- and poverty-focus of traditional development lending in the health sector. Similarly, countries are seeking to reduce their fiscal exposure to weather-related and commodity price shocks and natural disasters through catastrophe risk finance.<sup>10</sup>

> 8 _Hudson Index of Global Philanthropy 2008._

> 9 World Bank. Global Monitoring Report 2009.

> 10 Cummins and Mahul, 2009.

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