Work on ‘Transition finance’ recently launched by the DAC/OECD aims to better understand financing challenges and opportunities faced by countries as they move along the development continuum. It includes an analysis of dynamics affecting domestic and external flows as countries transition, including official development finance, remittances, philanthropy and private investment, with the ultimate objective of defining the right policy and financing mixes that will ensure long-term effects and resilience of support, as well as maximise the contribution of development finance to the SDGs. It combines methodological papers, tools for transitioning countries and their partners, and country pilots.
This paper introduces the concept of transition finance and initiates research to advise the DAC on its role as a major provider of development assistance among other public and private providers of financing for the 2030 Agenda.
This paper identifies ‘transition’ as the journey towards the 2030 Agenda and the achievement of sustainable development, and ‘transition finance’ as the financing of that journey.
It introduces two key concepts to help the analysis: tipping points – where different sources of financing become more or less prevalent (suggesting the need for adjustment), and transition finance gaps or surpluses – measuring the net gains or losses in terms of finance when countries transition.
It suggests that the optimal transition finance mix is country specific, but provides a methodology for benchmarking allowing peer learning and facilitating the development of better tailored finance solutions.
It expands the scope of transition finance analysis beyond the DAC, suggesting that the emergence of new donors and their increasingly important role in financing development raises questions about the future of the DAC and its priorities.
Pilot case studies
Cabo Verde: This country pilot looks particularly at the transition challenges faced by countries graduating from the Least Developed Country (LDC) category.
Zambia: This country pilot examines the transition challenges faced by a country having moved from the low-income country (LIC) to the lower middle-income country (LMIC) category.
Lebanon: This country pilot examines the transition challenges faced by a UMIC country with a non-linear development trajectory that has recently faced a large external shock
Vietnam: This country pilot study explores the challenges of transition finance in a middle-income country in the Asia-Pacific region.