The donor community has enthusiastically embraced the concept of microfinance as a promising mechanism to attain the objectives of poverty alleviation and microenterprise development. Amid the high expectation, a myth has been inadvertently created that they could be the ultimate solution to poverty reduction. The objective of the paper is to examine the nature of support rendered by the donor community to microfinance programmes and the effectiveness of this particular outlet of official aid for microenterprise development and poverty alleviation. To this end, the paper first examines economics of microfinance as an instrument of microenterprise development and poverty reduction as well as its delivery mechanisms. The paper then assesses empirical evidence of the performance of microfinance institutions and their impacts on poverty alleviation and microenterprise development. Given this background, the paper discusses main features and trends in donor support and policy implication of the analysis for the donor community.

The paper presents a comprehensive survey of the ‘shopping list ’ of sources of external finance that are directly channelled to the business sector of developing countries. Generally, our analytical survey covers the 1970-2000 period, and includes the distribution of foreign resources classified according to the different income-based and geographical breakdown of developing countries. We examine aggregate net resource flows in the form of the saving-investment gap and current account surplus in the balance-of-payments of developed countries. Also examined is the institutionalized component of this aggregate, which encompasses both official and private flows. In addition, we discuss the different components of private flows, including unrequited private transfers (grants by NGOs and workers ’ remittances) and commercial capital flows (private flows to multilateral institutions and bilateral private capital flows in the form of foreign direct investments and portfolio capital flows) to developing countries.

Documents made available through this series result from the work of IDRC’s program initiative on “Globalization, Growth, and Poverty ” (GGP). They are intended to contribute to the knowledge base and debate around critical issues on the inter-linkages among growth, poverty, inequality and globalization, and on the generation of capacities for evidence based policy making. Canada’s International Development Research Centre (IDRC) is one of the world’s leading institutions in the generation and application of new knowledge to meet the challenges of international development. To fulfill its mission of “Empowerment through Knowledge”, IDRC works in close collaboration with researchers from the developing world in their search for the means to build healthier, more equitable, and more prosperous societies. The papers in this series have been developed in the context of GGP’s work and include literature reviews, scoping studies and, occasionally, issue-oriented evaluation studies. They are written primarily by IDRC staff, hired consultants and interns. The papers are not subject to peer review, nor reviewed or edited for style and content. The views expressed are those of the author(s) and do not necessarily represent those of the International Development Research Centre or its Board of Governors. IDRC’s Working Papers on Globalization, Growth and Poverty are published and distributed primarily in electronic format via www.idrc.ca/ggp, though hardcopies are available upon request. Working papers may be copied freely for research and educational purposes and cited with due acknowledgment.

The popular application of project finance (PF) for private infrastructure projects (PIPs) in developing countries (DCs) in the 1990s has highlighted a number of issues and constraints, when arranged through bank-dominated financial systems with comparatively weak economic institutions in DCs. Multilateral and bilateral agencies' participation in PIPs works to ease these constraints and create an enabling environment for private financing of infrastructure in DCs. Their intervention gives incentives for mobilization of private capital for PIP finance. Based upon this premise, this paper empirically examines implication of donor-intervention on the debt capacity of PIPs arranged through PF arrangements. Econometric results confirm that the development agencies' instruments, namely credit support/enhancement and guarantees function to improve the debt capacity of PIP finance and thereby improve the viability of PIPs in weak legal, political and financial environments. These results shed light into the structuring of PF arrangements into PIPs and effectiveness of development agencies' participation towards a sustainable PIP finance in DCs.

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