The Long Rise of Private Finance in Development and the Implications for Policymakers

Industrialized countries have utilized risk-sharing and investment instruments, bilateral and multilateral organizations, and policy mechanisms to attract private finance to support their objectives in developing countries for longer than the current literature suggests. The research finds that the incorporation of private finance had its origins in the early twentieth century, found its legs after the Second World War, and grew throughout the Cold War. Its role accelerated in the 1990s and expanded thereafter through the liberalization of trade and finance, explicit support of private finance in development policy, and growth of blending public and private finance. The cumulative effect has diminished the role of official development assistance and catapulted private finance as the dominant external financing source for developing countries in the twenty-first century. This transformation has compelled policymakers to shift their focus to mobilizing large institutional investors, such as asset managers, pension funds, and insurers at scale, increasing domestic and regional sources of finance, and limiting illicit capital flight.