Innovative finance for development - Instruments of social integration and responsibility in lower-middle-income countries (LMICs)

Existing proposals for transforming the system of development assistance and especially in relation to middle income countries are manifold. The idea of cutting assistance to middle income countries gained ground parallel with the questioning of the rationale to use only per capita income as an eligibility criterion for assistance. LMICs3 have much in common with LDCs but the operation and structure of their domestic economy and politics may be significantly different. My proposal is not to disregard middle income countries as potential targets of development assistance as a whole; rather my study argues that focus should be placed on lower-middle-income economies. The LMIC strategy would be different from the one that targets the least developed countries. I tend to coin this policy with the term of “convergence assistance” – an innovative allocation and spending mechanism. Convergence means the reduction of internal disparities and the elimination of the dual structure of these economies. Against this backdrop successful adaptation of development banking models of developing andadvanced economies can support the establishment of an economic incentive system based on efficiency requirements coupled with concentration, expertise, the knowledge of the local market and people. By incorporating the best practices of microfinance institutions from the developing world and those of the institutions with the objective of economic inclusion in advanced countries, a development bank may be a good choice in LMICs. This institution ideally may function as a window for all development or convergence financing independently from their origin and nature. The proposal is not meant to prefer LMICs to LDCs but a pilot project is more likely to be feasible in their case.