OECD Guidance on Reducing Poverty and Inequalities through Development Co‑operation

Chapter 3.  Targeting and mobilising resources for sustained poverty and inequality reduction

Abstract

This chapter examines how development partners can align their financing with poverty and inequality reduction goals. It outlines how the most concessional finance can be targeted primarily to the countries and people furthest behind, especially in a context of constrained resources. It then explores how development finance can be used as a catalyst to strengthen domestic revenue mobilisation and steer private capital towards equitable outcomes. Finally, it explores options for supporting L&MICs in better harnessing the broader global development finance ecosystem for enhanced social outcomes, through debt restructuring and debt-for-development swaps and enhanced access to Special Drawing Rights and resources from international solidarity levies, diaspora financing and philanthropic capital.

Development partners fund support to low- and middle-income countries (L&MICs) through official development assistance (ODA) and other resource flows. ODA refers to concessional public finance provided with the primary objective of promoting the economic development and welfare of developing countries. It includes both grants and loans with a strong grant element. In contrast, other official flows are public flows that do not primarily aim at development or are not concessional enough to qualify as ODA, such as export credits or certain non-concessional instruments provided by development finance institutions.

Development partners face a combination of increasingly constrained resources and proliferating development objectives, with important consequences for poverty and inequality outcomes. Trade-offs have become more acute in recent years, with many ODA budgets tightened in 2024 followed by unprecedented cuts in 2025 which are projected to deepen in 2026 and beyond (OECD, 2026[1]). This context of increasingly constrained concessional finance has coincided with a widening set of development objectives, as discussed in Section 2.1, alongside rising development and humanitarian needs driven by compounding climate, health and economic crises. These pressures are expected to persist, intensifying the need for more strategic and deliberate use of the financing available.

This chapter provides guidance for development partners on strengthening the poverty and inequality reduction focus of ODA and other resource flows. Section 3.1 focuses on how to better direct the most concessional resources to the contexts and populations facing the greatest poverty and inequality challenges. The rest of the sections explore how to mobilise additional resources, emphasising the catalytic role of ODA in both leveraging public and private finance and helping align these flows with poverty and inequality reduction objectives. Section 3.2 examines how development partners can support domestic revenue mobilisation (DRM), particularly through the strengthening of equitable tax systems in L&MICs. Section 3.3 analyses how they can help leverage private finance and steer it towards inclusive economic development. Finally, Section 3.4 considers how development partners can support L&MICs in better harnessing the broader development finance ecosystem, including through debt restructuring and debt-for-development swaps, improved access to Special Drawing Rights (SDRs) and greater mobilisation of resources from global solidarity taxes, diaspora finance and philanthropic capital.

Ensuring resource targeting and mobilisation efforts are firmly anchored in the core objective of fostering sustainable poverty reduction and inclusive economic development is critical to help guard against mission drift. Two central themes across all the sections that follow are ensuring that the most concessional resources are directed where they are most needed to tackle poverty and inequalities, and how financing can strengthen national systems and capacities in ways that reduce aid dependence over time.

3.1. Targeting concessional resources where they are most needed to tackle poverty and inequalities

A gap between development co-operation’s stated poverty and inequality reduction objectives and actual ODA allocations has opened up in recent years. Growing pressures on ODA – due to both expanding objectives and declining overall volumes – are further intensifying this trend (OECD, 2026[2]; OECD, 2025[3]). Further projected cuts to Development Assistance Committee (DAC) members’ ODA in 2026 and beyond are likely to contribute to this growing misalignment with poverty and inequality reduction objectives (OECD, 2026[1]). Uncoordinated and indiscriminate cuts to the multilateral system compound these risks further, threatening system-wide delivery failures – disproportionately affecting low‑income, fragile and humanitarian contexts – and undermining the concessional resources that remain central to supporting the countries most impacted by poverty (OECD, 2026[4]).

Prioritising the most concessional resources for countries and populations most in need, as well as interventions with proven poverty and inequality impacts, is critical to maximising the effectiveness of limited ODA budgets. This has always been important but becomes more pressing in a context of tightening resources, reinforcing both the strategic case and the moral imperative to focus ODA on these issues. Quality, implementation and absorption capacity matter for ODA effectiveness, but getting allocation right is an essential prerequisite.

This section examines ways to achieve this. It first encourages development partners to prioritise the countries where poverty, inequality and financing needs are greatest for grants and highly concessional finance and explores how less- or non-concessional resources can be used strategically across other country contexts. It then highlights the need for sustained concessional support in sectors that are central to the provision of essential public goods and services. It underscores how safeguarding country programmable aid can help support nationally driven poverty and inequality reduction efforts and emphasises the importance of better understanding how spending related to global public goods supports inclusive development results. This section also discusses how to manage ODA cuts responsibly to protect those furthest behind. Finally, it outlines practical approaches and tools to strengthen the alignment of allocation decisions with poverty and inequality reduction objectives, as well as increasing transparency and accountability.

The considerations set out in this section aim to guide development partners in placing poverty and inequality reduction more firmly at the centre of ODA allocation decisions. They are not intended as strict criteria for prioritisation, but as a flexible framework to inform approaches to allocations. They ought to be considered at both the individual and collective levels to help ensure that resources are aligned with the global distribution of need. Without co-ordination, the risk is that support is concentrated in a limited number of contexts, leaving others – “donor orphans” – underfunded. Importantly, within this framework, support ought to be aligned with locally determined priorities (Chapter 4) and tailored to countries’ unique challenges and commitment to reducing poverty and inequalities, grounded in robust context analysis (Section 2.4.1).

3.1.1. Prioritising grants and highly concessional finance where poverty, inequalities and financing needs are greatest

Grants and highly concessional finance should be directed primarily towards countries that are most affected by poverty and inequalities while at the same time in the greatest need of concessional finance. This is first and foremost a matter of solidarity, reflecting high-income countries’ (HICs) commitment to supporting countries and people facing poverty and to reducing inequalities between and within countries. Limited access to alternative sources of capital means that these countries are likely to need concessional finance for the foreseeable future. Nonetheless, it ought to be deployed in ways that progressively strengthen domestic capacities and expand access to a broader and more diversified set of financing options over time.

ODA allocations are increasingly misaligned with the global distribution of poverty, making it both a strategic and moral imperative to prioritise the most concessional resources where they are most needed, typically in least developed countries, sub-Saharan Africa and context facing high to extreme fragility.

The countries facing some of the highest and fastest-growing concentrations of extreme poverty and deep income inequality are seeing declining shares of ODA. These are typically the partially overlapping groupings of the least developed countries (LDCs), sub-Saharan African (SSA) countries and countries facing high to extreme fragility (World Bank, 2024[5]). Although still significant, the share of ODA going to these countries has declined in recent years and is expected to drop further, as ODA cuts are projected to affect them disproportionately (OECD, 2025[3]; OECD, 2026[1]). In 2024, the share of total ODA from DAC members reaching the most vulnerable contexts remained well below historical peaks: 17.5% went to LDCs (down from a peak of 31.6% in 2010), 18.3% to sub-Saharan Africa (down from 36.5% in 2006) and 24.5% to contexts facing high and extreme fragility (down from 57.1% in 2005) (OECD, 2026[6]).

Trends in allocations of ODA per person in extreme poverty from DAC members also show a growing disconnect from the global distribution of extreme poverty. LDCs receive less ODA per person in extreme poverty than middle-income countries (MICs), SSA receives less than other regions, and contexts facing high to extreme fragility receive less than those with low to moderate levels, with gaps increasing over time (OECD, 2025[3]). In 2024, ODA per person in extreme poverty1 was substantially lower in LDCs, at one-third the level in lower-middle-income countries (LMICs) and one-fifth the level in upper-middle-income countries (UMICs).

Box 3.1. Poverty and inequality challenges in contexts of high fragility

In contexts facing the highest levels of fragility, poverty and inequalities are particularly acute: in 2024 these contexts accounted for 25% of the world’s population but 72% of those in extreme poverty, with the share projected to rise to 92% by 2040. This suggests that poverty reduction challenges are increasingly concentrated, with implications for how to prioritise scarce resources (OECD, 2025[7]).

Exposure to conflict or fragility can reinforce poverty and inequalities, and vice versa. Armed conflict can reduce household income, destroy physical assets, erode human capital, disrupt markets and weaken access to, and provision of, public services. It also creates opportunities for elite capture and other forms of rent-seeking and can intensify political exclusion by shrinking opportunities for representation. Horizontal inequalities can contribute to conflict risks and can deepen further as conflict unfolds. These dynamics are often uneven across territories, with some regions experiencing sharper losses in services and opportunities than others during conflict.

Institutional and fiscal constraints significantly reduce what partner country governments can do. Contexts exposed to the highest levels of fragility face limited fiscal space, low tax-to-GDP ratios, high debt pressures and depleted macro-fiscal buffers to sustain public spending during shocks. These constraints limit the scope for service delivery and redistribution of resources, which in turn increases the importance of external financing to support basic services and vulnerable groups, including as a conflict mitigation measure. In the long run, supporting investments in the core economic functions and systems of the state can help strengthen channels for responding to a variety of crises and support macroeconomic stability, which in turn can act as conflict prevention and poverty alleviation measures (OECD, forthcoming[8]).

Because of its effect in increasing incomes, economic development has been a primary driver of global poverty alleviation over the last 30 years. Yet, poverty, grievances and a lack of opportunity are interlinked, potentially reinforcing each other and creating conflict traps. When growth is not based on inclusive economic development and fails to bring decent jobs and livelihoods or strengthen local markets, it may contribute to, rather than reduce, conflict dynamics and poverty (OECD, 2026[9]).

Prevention and resilience building is integral to achieving poverty reduction in contexts exposed to the highest levels of fragility. This is increasingly urgent as rising humanitarian needs coincide with shrinking ODA budgets, sharpening the trade-off between meeting immediate needs and investing in the resilience that reduces future caseloads. Through a Humanitarian-Development-Peace Nexus approach, aligning instruments around these shared objectives can help reduce exposure to violence, protect livelihoods and contribute to preserving essential service delivery and productive capacity when shocks occur. This matters because, in such settings, poverty is not only a condition to be addressed but a channel through which cycles of conflict and violence reinforce each other.

Note: The OECD multi-dimensional fragility framework considers fragility to be universal and varying in intensity across contexts, rather than as a label applied to a narrow group of states. It defines fragility as the combination of exposure to risks and insufficient resilience to manage or absorb those risks. Fragility is assessed across six dimensions: economic, environmental, human, political, security and societal. In the States of Fragility 2025 (OECD, 2025[7]), of the 177 contexts analysed, 61 are identified as being exposed to high or extreme fragility.

Development partners can conduct regular analyses to identify where needs are greatest and inform resource allocation. Table 3.1 provides recent data on poverty and inequality metrics for comparing country groupings (as discussed in Section 3.1.6, these income-based indicators can be complemented by multidimensional indicators capturing other vulnerabilities to inform allocation decisions). An estimated 40.4% of the population of LDCs live below the extreme poverty line, and these countries are home to over 60% of people living in extreme poverty. Income inequality is also high in LDCs, with a population-weighted average Gini coefficient of 37, higher than LMICs and close to the UMICs average of 39. At the same time, LMICs account for around one-third of people living in extreme poverty, highlighting the scale of poverty beyond LDCs.

These statistics point to the need for differentiated approaches. While LDCs face the most acute combination of high poverty and high income inequality, reinforcing the case for sustained grant-based and highly concessional support, the scale of poverty in LMICs and persistent inequalities across country groupings underscore the need for strategic and catalytic use of concessional finance in LMICs and UMICs, as further explored later in this section. These income group aggregates and other country groupings may also mask important disparities across countries within each category, reinforcing the need for more granular, country-level analysis to inform allocation decisions.

Table 3.1. Using poverty and inequality data to identify areas of greatest need and inform resource allocation

Development partners can draw on a wide range of poverty and inequality measures to assess relative needs across country groupings and inform resource allocation decisions. This table presents a selection of commonly used monetary measures with broad country coverage.

	LDCs	LMICs	UMICs	Contexts facing high and extreme fragility	Sub-Saharan Africa	Small island developing states	All L&MICs
Extreme poverty measures (2025 estimates)
Extreme poverty rate (%)	40.4	9.4	1.7	33.8	44.1	21.6	12
Average country extreme poverty rate (%)	37.7	14.1	3.3	32.9	36.9	11.1	17.5
Population in extreme poverty (millions)	491.6	266.2	43.7	705.6	584	13	808.7
Share of people in extreme poverty across L&MICs (%)	60.8	32.9	5.4	87.3	72.2	1.6	NA
Income inequality measures (latest available data)
Population-weighted bottom 40% income share (%)	18.6	22.1	17.6	18.8	17.4	16.8	19.7
Population-weighted top 10% income share (%)	29.8	24.9	30.4	29.1	31	29.7	27.9
Population-weighted Gini coefficient	37	30.1	38.5	36.5	39.2	39.1	34.6
Share of countries with high inequality (Gini coefficient > 40) (%)	29.3	32.4	37.5	33.3	43.5	28	33.1
Number of countries with high inequality (Gini coefficient > 40)	12	11	18	18	20	7	41

Note: This table is not exhaustive, and many other indicators and data sources can help assess needs and inform decision making (see Chapters 2, 5.1 and 5.2). LDCs = least developed countries; LMICs = lower middle-income countries (excluding LDCs); UMICs = upper middle-income countries (excluding LDCs). OLICs (other low-income countries) are omitted from the table. All country groupings use DAC income classifications for 2025. Country groupings are not mutually exclusive and may overlap. Totals and averages include all L&MICs with available data (excluding six countries for poverty and 17 for inequality measures). Calculations for the Gini coefficient, bottom 40% income share and top 10% income share are population-weighted averages, reflecting the average experience of a person within the region rather than country averages. Poverty estimates are for 2025 and draw on nowcast projections based on interpolated and extrapolated data. Extreme poverty is defined as living on less than USD 3 per person per day. Inequality estimates use the most recent available observation for each country.

Source: World Bank (2026[10]), Poverty and Inequality Platform (version 20260922_2021_01_02_PROD), https://pip.worldbank.org/.

Within the broad considerations related to poverty and inequality levels across country groupings, allocation decisions involve several trade-offs as countries face different degrees and profiles of need, and require careful, country-level analysis to inform partner country selection (see Section 3.1.6). Such trade-offs include:

• Supporting countries with the highest levels of extreme poverty versus those with the highest levels of income inequality. Based on analysis using the most recent data available for each country in 2025, there is significant overlap between these groups but not complete alignment. Almost half of the countries in the top 50 for extreme poverty rates also rank among the most unequal, as measured by the Gini coefficient (World Bank, 2026[11]).

• Prioritising countries with the highest poverty rates versus those with the largest numbers of people in extreme poverty. The countries with the highest share of their population living in extreme poverty are not necessarily those where the greatest number of people live in extreme poverty: smaller countries can have very high poverty rates but fewer people facing poverty than larger countries with lower rates.

Countries’ ability to afford investments to end poverty is another important measure of need for grants and highly concessional ODA. The OECD’s RAPID tool offers a way of guiding allocation by comparing ODA, tax revenue and debt servicing in each country with the annualised cost of closing the poverty gap at different poverty lines (see Box 3.2). Without sufficient fiscal space, countries cannot sustain the investments required to address poverty and inequalities: affordability should therefore constitute a preliminary consideration guiding allocations, especially in a context of shrinking concessional finance. Other important considerations – including the effectiveness and absorptive capacity of countries’ systems as well as their commitment to prioritising poverty and inequality reduction – also merit careful attention, and the risk of crowding out domestic spending in social sectors needs to be carefully managed, as further discussed in Section 3.1.2.

Box 3.2. The Resource Allocation and Poverty Investments Diagnostic (RAPID) Tool

The RAPID tool offers a novel approach to inform concessional resource allocation by comparing a country's available fiscal resources – domestic tax revenue net of debt service, plus a bounded share of country programmable aid – against the estimated cost of closing its monetary poverty gap through social transfers. By reframing the challenge of ending poverty from global resource scarcity to fiscal configuration, debt burden and ODA allocation, RAPID can help development partners and governments identify where additional ODA could change the financing arithmetic, where debt relief would unlock more fiscal space than any plausible increase in ODA, and where the binding constraint lies in domestic revenue mobilisation (OECD, forthcoming[12]).

Concessional finance can also be deployed strategically and catalytically in MICs and small island developing states (SIDS) to advance social outcomes. Many of these countries face persistent pockets of poverty, high levels of inequality or heightened vulnerability to shocks, including climate-related risks. Although ODA is less significant relative to other sources of development in these contexts – accounting, for example, for 1% of external finance in UMICs compared to 60% in low-income countries (LICs), development partners can still play a key role in improving social outcomes through technical assistance and finance with lower levels of concessionality than that extended to the poorest countries. Careful analysis to determine the appropriate mix of concessional and non-concessional instruments allows support to be deployed strategically and catalytically (Oxfam, 2019[13]; OECD, 2021[14]).

• Strategic use, in this context, refers to deploying concessional finance where it can have the greatest impact on poverty and inequality reduction relative to other available sources of finance – for example, by targeting areas that are critical for the poorest but underfunded by governments or unlikely to attract market-based finance – while also supporting transformational interventions that address structural barriers to inclusive development, such as those rooted in gender inequality.

• Catalytic use focuses on mobilising and enabling additional sources of finance over time – for example, by strengthening domestic revenue mobilisation (Section 3.2) or using blended finance instruments to crowd in private investment for inclusive development outcomes (Section 3.3).

Persistent poverty, high inequality and climate vulnerability in many middle-income countries and Small Islands Developing States call for a smart, catalytic use of concessional finance to advance social outcomes.

The OECD Transition Finance Toolkit provides a framework to help countries and development partners anticipate and manage evolving financing needs as income per capita rises. Rising incomes can mean reduced access to concessional finance which is often not fully offset by increases in domestic resources and private investment (OECD, n.d.[15]). This can create financing gaps, including in sectors such as health and education, disrupting development progress. These considerations are particularly relevant for countries nearing high-income status and approaching ODA graduation. In such contexts, co-ordinated graduation strategies are critical to help prevent funding gaps, identify alternative financing sources and enable countries to address remaining vulnerabilities – including persistent poverty and inequalities – while repositioning development co-operation towards more forward-looking and transformative partnerships. Reflecting these challenges, the DAC agreed at its 2025 High-Level Meeting to strengthen ODA graduation processes and is pursuing efforts to modernise its graduation frameworks through the DAC Review.

3.1.2. Sustaining concessional support in sectors that are central to the provision of essential public goods and services

Concessional support should be sustained in sectors that are central to the provision of essential public goods and services – particularly where market-based financing is neither viable nor appropriate. When aligned with nationally identified priorities, investments in food security, basic health and education, water supply and sanitation, social protection, decent work, and justice and human rights protection are critical to lifting people out of deprivation and reducing inequalities (OECD, 2024[16]). These sectors underpin core public functions: they deliver essential services, protect rights and livelihoods, and support income (re)distribution. While delivery models vary across contexts – public provision, private delivery or mixed systems – they typically rely on public financing and oversight to ensure equitable access, particularly for people living in poverty and marginalised groups.

In many L&MICs, these sectors continue to require external concessional financing to ensure adequate coverage and quality. They are generally characterised by high social returns but limited commercial viability, and therefore depend largely on public spending and subsidies, with only partial or context-specific scope to attract domestic or international private investment. However, recent trends indicate a declining share of ODA allocated to these areas, which – apart from food security and health – already only receive a relatively small portion (OECD, 2025[3]). ODA shares across the sectors of all three dimensions of the global Multidimensional Poverty Index (MPI) – health, education and living standards – have declined from a peak of 36% of sector-allocable ODA in 2017 to 28% in 2023. Furthermore, within the health sector, ODA is increasingly oriented towards the provision of global public goods targeting the needs of L&MICs – such as pandemic preparedness and response – while support for primary health care and other basic services has declined, raising concerns about the implications for universal health coverage and long-term resilience (Penn et al., 2025[17]).

Sustained concessional financing to these sectors can be designed to support and strengthen domestic systems and public financing over time, rather than substitute for government expenditure or weaken accountability (Opalo, 2026[18]). This implies, wherever possible, delivering concessional support to these sectors through modalities that align with national policy frameworks, use and strengthen country systems, and support a gradual transition towards sustainable domestic financing. The latter requires aligning financing with medium- to long-term domestic resource mobilisation trajectories – for example, by linking external support to credible fiscal strategies, including plans to expand tax revenues or reprioritise expenditure, introduce progressive co-financing arrangements, and define clear timelines for the transfer of financing responsibilities to national budgets. This can help mitigate risks of crowding out national public spending and reduce the likelihood of prolonged aid dependency.

Sustained concessional financing for essential public goods and services is critical to tackle poverty and inequalities, provided it strengthens domestic systems and accountability over time.

ODA can also play a strategic role in supporting partner countries to integrate poverty and inequality considerations into other policy areas where the need for concessional support may be lower. These include climate and environmental action, economic and productive infrastructure, trade and private sector development. For example, in productive sectors such as transport, energy or parts of economic infrastructure, investments can generate financial returns and therefore, in many contexts, attract domestic resources, private investment or other forms of non-concessional finance. While concessional resources can still play an important role in these sectors – particularly to address market failures or ensure inclusive more outcomes – they are generally less dependent on grant-based financing than core social and public service sectors. Section 2.4.3 provides further guidance on using a poverty and inequality continuum approach to ensure that all interventions – regardless of sector – have a positive impact on poverty and inequality reductions or at a minimum do no harm.

3.1.3. Safeguarding country programmable aid to support nationally driven poverty and inequality reduction

Country programmable aid (CPA) is a critical enabler of nationally led poverty and inequality reduction efforts. CPA refers to ODA programmed for long-term sustainable development and over which partner countries have a significant say, a large share which supports social infrastructure and services (OECD, 2025[19]). It channels resources directly to partner countries and supports their ability to advance social outcomes through country-owned plans.

Yet, CPA has declined as a share of total ODA, accounting for less than half in 2024. This reflects, in part, the growing share of ODA allocated to activities that are not directly programmable at country level, such as regional and global programmes as well as financing that tends to fluctuate year to year (e.g. humanitarian assistance and expenditures in provider countries).

The increase in in-donor refugee costs, which are excluded from CPA, has been a key driver of this trend. These expenditures, which reflect the cost of assisting refugees within provider countries, peaked at nearly 15% of total ODA in 2022 and remained over 13% in 2025. Their scale and volatility can affect both the level and predictability of resources available for CPA, which in turn may disrupt the continuity of support to poverty- and inequality-reducing sectors. In addition, where accounting practices vary and rely on estimated costs, this may raise broader questions around transparency and the alignment of ODA with its core development objectives. Recent DAC guidelines and reviews have highlighted the importance of managing these risks – for example, by adopting conservative accounting approaches and, in some cases, introducing safeguards such as a cap on the share of ODA that can be spent domestically – to help protect the integrity and poverty focus of development co-operation (OECD, 2024[20]).

3.1.4. Ensuring that spending related to global public goods supports poverty and inequality reduction

A growing share of ODA is directed towards addressing the impacts of global challenges in L&MICs, thereby contributing to global public goods (GPGs). These challenges include climate change, pandemic preparedness and global food security, reflecting development co-operation’s growing focus on managing global risks and interdependencies. These investments can play an important role in reducing poverty and inequalities, particularly by addressing shared risks and shocks that disproportionately affect the poorest countries and populations.

The contributions of GPG-related spending for L&MICs to poverty and inequality lie along a spectrum, depending on how resources are allocated and delivered. At one end are interventions directly supporting country-level resilience and capacity – such as strengthening pandemic preparedness, improving food security or supporting climate adaptation – thereby generating immediate and tangible benefits for the populations most at risk. At the other end lie interventions contributing more broadly to global-level outcomes, including climate mitigation efforts, investments in global health research and development, or agricultural market monitoring, where the benefits are more diffuse and accrue over time. Many interventions fall between these two ends of the spectrum, generating both national and global benefits. Delivery channels also differ: while some GPG-related financing is implemented through country-level programmes, other interventions are channelled through multilateral or global initiatives, which may influence how directly benefits reach developing countries (Elgar et al., 2024[21]).

Better understanding how these different forms of spending translate into tangible benefits for poverty and inequality reduction in L&MICs will be important going forward. This requires improving transparency on resource flows and greater attention to how GPG-related financing aligns with national development priorities and reaches those most in need. From an equity perspective, this also raises questions about the governance of GPG financing, including the need to enhance partner countries’ access to and influence over global financing mechanisms, enabling more inclusive decision-making and a fairer distribution of financing responsibilities (Elgar et al., 2024[21]).

3.1.5. Managing ODA cuts responsibly to protect social outcomes

Abrupt or uncoordinated cuts in ODA can disproportionately affect people living in poverty and those facing intersecting inequalities, particularly where ODA supports access to basic services, social protection and humanitarian assistance. This can directly undermine the human rights of people living in poverty and marginalised groups and in some cases lead to loss of life. The impact falls most heavily on communities already facing systemic discrimination or exclusion – for example, people living with HIV or LGBTIQ+ individuals who lose access to life‑saving care when development partners withdraw funding from community‑based and non‑governmental programmes (HRW, 2026[22]).

Managing ODA reduction as a distributional and risk-management challenge, rather than solely a budgetary adjustment, is important to mitigate negative impacts. Before reducing or withdrawing support, this entails assessing potential impacts on vulnerable groups to identify risks and inform mitigation strategies. Such approaches can help protect programmes with high social impact where alternative financing is weakest and reduce the risk of lasting disruptions to poverty- and inequality-reducing outcomes. Where cuts are unavoidable, development partners can manage disengagement and transitions so as to minimise harm. This requires greater transparency, co-ordination and sharing of forward plans among development partners, as well as close dialogue with governments, affected communities and civil society actors (OECD, 2025[23]). Clear communication of the rationales and discussion about potential accompanying mitigation measures can support partners’ ability to adapt, strengthen trust and enable more effective transition planning.

More broadly, embedding exit and transition strategies into programme design from the outset can further support more responsible disengagement. This involves outlining at the earliest planning stages how national and local capacities will be mobilised, how future system financing will be sustained, and what institutional legacy the intervention is intended to leave. Exit intentions can be made explicit through time‑bound programme designs with clearly defined end dates, enabling partners, institutions and communities to anticipate and manage transitions to the extent possible.

3.1.6. Practical approaches to strengthening the alignment of ODA allocations with poverty and inequality reduction goals

Most DAC members report considering poverty and/or inequality reduction as an explicit objective when allocating ODA, but few systematically monitor how much of their aid actually targets these goals (OECD, 2024[16]). To strengthen the alignment between allocations and goals, development partners can adopt more explicit, systematic and transparent approaches to decision making and tracking. The following tools and practices can be applied at different stages of the allocation process – from setting portfolio-level targets to assessing the impacts of allocation decisions and ensuring accountability – and be used in combination.

Setting explicit allocation targets at portfolio level

Development partners can strengthen alignment by setting explicit allocation targets linked to poverty and inequality reduction. These may include spending targets for:

• Least developed countries, in line with the UN target of providing 0.15–0.20% of gross national income (GNI) as ODA to LDCs. For example, the United Kingdom aims to spend at least 50% of all bilateral ODA in LDCs (FCDO, 2023[24]).

• Core social sectors. For example, the EU has committed to allocating at least 20% of its ODA to social inclusion and development (EU, 2017[25]), including basic social services such as health; education; nutrition; water, sanitation and hygiene; and social protection, particularly for the most marginalised.

• Poverty- and inequality-related objectives tracked through policy markers. For example, many development partners have adopted gender equality targets, and AFD has committed to targeting 50% of its interventions towards inequality reduction and inclusion for the period 2025–2026, using its inequality and inclusion marker (see Box 2.8). Even where no quantitative targets are attached, policy markers can play an important role in steering and tracking allocations, thereby enhancing transparency and accountability. See Section 2.4.4 for more information on policy markers – including those developed by both DAC and individual members – and their role in embedding a poverty and inequality lens at the design stage.

Targeting countries most in need through bilateral partner selection and multilateral concessional channels

Development partners can use poverty and inequality criteria more systematically when selecting priority partner countries. While a range of considerations may inform where they choose to engage – including historical ties, diplomatic priorities and strategic interests – it is essential that these decisions also take into account countries’ needs, especially when allocating the most concessional resources (see Section 3.1.1). The use of poverty and inequality criteria support this objective.

Income-based indicators can offer straightforward criteria to inform decision making. These include countries’ income classification (e.g. low-income country status), levels of monetary poverty incidence and measures of income inequality (e.g. Gini or Palma ratios). However, as noted in Section 3.1.1, countries with the most severe income poverty are not always those with most entrenched income inequalities. Selection can also take into account countries’ access to alternative sources of finance and whether they can afford to close their poverty gap, using the RAPID Tool (see Box 3.2).

Multidimensional indicators capturing vulnerabilities beyond income can help better capture the multiple and intersecting dimensions of poverty and inequality in partner countries. These include whether a country belongs to the group of LDCs (defined using a GNI per capita threshold, the Human Assets Index and the Economic and Environmental Vulnerability Index) or using one of the multidimensional poverty indicators listed in Table 1.2. The emerging UN Framework for measuring equitable, inclusive and sustainable well-being and progress proposes indicators under an "Equity and Inclusion" pillar – covering wealth and income inequality, poverty, work inclusion, regional inequalities and overlapping deprivations – could similarly inform how partner country needs are assessed (UN, 2026[26]). While there is broad recognition of the limitations of income-based metrics, consensus remains limited among stakeholders on how such multidimensional measures should be applied in practice for allocation decisions. The Beyond GDP Global Alliance aims to advance these discussions within the context of international co-operation and financing frameworks (OECD, 2025[27]).

In applying these criteria, the severity, scale and intersection of poverty and inequalities are all relevant considerations, alongside countries’ capacity to respond. This implies moving beyond a checklist approach to indicators and instead using them in combination to identify contexts where needs are most acute, while recognising that trade-offs may arise in partner country selection.

Allocation decisions can go beyond income measures alone to reflect multidimensional vulnerabilities (including fragility, climate shocks, debt distress and social exclusion), while also accounting for countries' fiscal capacity to finance their own poverty reduction.

Bilateral development partners can also channel ODA through the concessional financing windows of multilateral development banks (MDBs) that are dedicated to countries most in need. These windows provide grants and highly concessional finance to countries with the greatest development needs and least access to alternative sources of finance. Eligibility is typically based on income levels and creditworthiness, with flexibility for structurally vulnerable contexts such as fragile states and small island developing states. Allocations are generally determined through transparent, formula-based systems combining measures of need – such as country income level and population – with policy and institutional performance, and financing terms are adjusted according to debt distress. Some of the largest windows include the World Bank’s International Development Association (IDA), the African Development Bank’s (AfDB) African Development Fund and the Asian Development Bank’s (ADB) Asian Development Fund.

Assessing, tracking and ensuring accountability for poverty and inequality

Development partners can strengthen alignment with poverty and inequality objectives by more systematically assessing the distributional impacts of their spending decisions at portfolio level, both ex-ante and ex-post. Such assessments can help identify potential adverse effects on deprived and marginalised groups, inform mitigation measures and support more equitable allocation choices over time. Applying a distributional lens to allocation decisions can also improve the quality of decision-making by making trade-offs more explicit and ensuring that the implications for different population groups are considered throughout the process. For example, the United Kingdom’s Foreign, Commonwealth and Development Office (FCDO) conducts equality impact assessments of its ODA allocations, which are used iteratively to inform decisions and identify risks of disproportionate impacts (see Box 3.3).

Robust tracking and transparent reporting systems are essential to monitoring whether allocations align with poverty and inequality objectives. The OECD Creditor Reporting System (CRS) – the DAC’s activity-level database on development co-operation – provides detailed and standardised information on ODA and other official flows reported by DAC members and other providers. Combined with other data sources, CRS data enable analysis of whether ODA is directed to the countries most in need, core sectors for poverty and inequality reduction, and relevant policy markers (OECD, 2025[3]; Desai, 2024[28]). In addition, public reporting of provider-specific markers can strengthen transparency and enable scrutiny of how resources are allocated (see Table 2.7 in Section 2.4.4 for an overview of existing markers relevant to poverty and inequality reduction).

Better measures of how well ODA is targeting poverty and inequality reduction could be developed to further improve monitoring and accountability. Development partners could consider working towards shared approaches to determine the extent to which ODA is directed to these goals, for example through the OECD DAC, building on existing analysis (OECD, 2025[3]). This could include exploring methods to capture whether ODA actually targets people living in poverty, greater use of measures such as ODA per person in extreme poverty to assess alignment with the global distribution of poverty and subnational tracking to assess whether ODA reaches the poorest locations.

Finally, independent oversight mechanisms can further reinforce accountability. Specialised bodies such as the United Kingdom’s Independent Commission for Aid Impact (see Box 3.3) can provide external scrutiny of ODA allocations, assess alignment with poverty and inequality objectives, and enhance transparency and accountability to parliaments and the public. More broadly, strengthening the combination of internal analytical tools and external oversight can help ensure that allocation decisions remain aligned with poverty and inequality reduction goals.

Box 3.3. Combining internal tools and independent oversight: The United Kingdom’s approach

The United Kingdom provides an example of how internal analytical tools and external independent scrutiny can be combined to help strengthen the alignment of ODA allocations with poverty and inequality objectives, while enhancing transparency and accountability.

The FCDO’ s approach: Integrating poverty and equity considerations into allocation decisions

The United Kingdom’s legal and policy framework establishes poverty reduction as the central objective of ODA. The International Development Act (2002) requires all UK ODA to have as its principal aim to contribute to poverty reduction, while policy commitments include an ambition to allocate at least 50% of bilateral ODA to LDCs and to aim for at least 80% of bilateral ODA programmes to have a focus on gender equality (FCDO, 2023[24]). These commitments are supported by a range of internal tools used to inform allocation decisions. At the design stage, the United Kingdom includes “equity” as a dimension in all programme value for money assessments and has developed guidance on how to promote value for money in programmes where inclusion may carry extra costs.

FCDO is also required to conduct an “Equality impact assessment of ODA programme allocations”, which consist of a proportionate assessment of equalities impacts at every stage of decision making, in line with its policy and legal commitments (FCDO, 2026[29]). This assessment considers how spending decisions affect people with protected characteristics – including age, disability (including HIV status), gender reassignment, pregnancy and maternity, race, religion or belief, sex and sexual orientation, as well as broader characteristics such as economic status and geography. To understand potential impacts, the assessment tracks three dimensions of spending: i) programmes explicitly focused on equalities (using DAC gender and disability inclusion markers); ii) spending on key social sectors such as health, education and social protection; and iii) the geographic concentration of ODA in the poorest and most fragile countries. Reductions in any of these areas are assumed to have negative implications for equalities and disproportionate harm is assumed when reductions exceed the average cut across the portfolio. By identifying risks of disproportionate impacts and recommending mitigation measures, these assessments help ensure that allocation decisions better account for their distributional effects.

Transparency and accountability to taxpaying citizens through the Independent Commission for Aid Impact (ICAI)

ICAI’s objective is to ensure that UK ODA is spent effectively for the people who need it most while also ensuring accountability for UK taxpayers who fund the programme. ICAI fulfils this by independently scrutinising all UK government ODA, conducting credible and well‑evidenced thematic reviews and supporting Parliament in holding the government to account. It ensures transparency and accountability by operating independently of government, reports to Parliament through the International Development Committee, and makes all its findings publicly available.

A 2026 ICAI review examined whether ODA allocations aligned with UK legislation requiring aid to contribute to poverty reduction and, where possible, to reducing gender inequality (ICAI, 2026[30]). While the United Kingdom has established a range of tools and commitments to support these objectives, the review found limited evidence of consistent priorities or structured processes guiding ODA spending across departments, making it difficult to demonstrate a coherent, results-based rationale for budget allocations. It also highlighted that the inclusion of in-donor refugee costs in ODA spending can affect transparency and public confidence in the extent to which ODA is directed towards poverty reduction in the poorest countries.

3.2. Strengthening equitable domestic revenue mobilisation through support to tax systems in L&MICs

When designed with equity in mind, carefully implemented and aligned with country capacities and economic contexts, tax systems can contribute to reducing poverty and inequalities in two complementary ways. First, they can raise revenue equitably, by expanding the tax base while reducing the burden on low-income households and ensuring those with greater ability to pay contribute appropriately. Second, they can generate the fiscal resources needed to finance public services and social transfers that benefit groups facing poverty and marginalisation. Equitable taxation can support a virtuous cycle of growth: by broadening the tax base, strengthening human capital and improving tax morale, they incentivise individuals and firms to operate formally and contribute to revenue. Conversely, insufficient or poorly designed taxation can generate vicious cycles, where low revenues undermine public services, weaken perceptions of fairness and trust in tax systems and government and policymakers more widely, and drive informality, constraining the growth needed to expand the tax base further (OECD, unpublished[31]).

Allocating ODA to domestic revenue mobilisation (DRM)2 can be used to leverage more public resources for development, strengthening country ownership and reducing long-term aid-dependency. Where domestic revenues fall short, ODA can play a catalytic role in supporting partner countries to strengthen their tax systems, and both development partners and partner countries have shown increased interest in this approach. Building on commitments under the Addis Ababa Action Agenda and the Addis Tax Initiative (ATI), development partners have committed to doubling their support to DRM as part of the Sevilla Commitment, prioritising partner countries striving to meet the 15% tax-to-GDP threshold.3 Despite the potentially catalytic effect of this commitment, ODA for DRM has been unstable and declined in recent years (ATI, 2025[32]).4 The impact of existing support nonetheless demonstrates what is possible: the Tax Inspectors Without Borders programme alone helped governments raise USD 2.4 billion globally through peer-to-peer assistance between 2015 and 2025 (OECD/UNDP, 2025[33]) and tax transparency standards and related technical assistance helped identify EUR 45 billion in additional revenues for L&MICs between 2009 and 2023 (OECD, 2025[34]).

While development co-operation has concentrated primarily on mobilising more revenue, there is scope to widen the focus to raising it more equitably, where aligned with partner countries’ priorities and social preferences. The impact of fiscal systems on poverty and inequalities varies widely across country income groups. Evidence suggests income taxes and tax transfers lower income inequality by 32% in HICs, but only by 8% in UMICs, 6% in LMICs and 3% in LICs; while in some L&MICs fiscal policy is regressive and can actually increase poverty (Lustig, 2022[35]; Granger, Abramovsky and Pudussery, 2022[36]). Only about 36% of ODA for DRM from ATI development partners was found to focus on promoting equity outcomes in 2023 (see Box 3.4 for information on how this was calculated) and some development partners have highlighted that their DRM-focused operations do not consistently emphasise tax progressivity across the board (IEG, 2023[37]; ADB, 2026[38]; ATI, 2025[32]).

There is a growing interest in using DRM as a lever for poverty and inequality reduction. Partner countries are increasingly pursuing reforms and practical initiatives to strengthen equitable taxation – for example, many African countries are initiating reforms targeting high-net-worth individuals (HNWIs) (ATAF, 2026[39]). ATI development partners have committed to grounding their DRM support in equitable tax policies and have successfully supported ATI partner countries in developing significantly more equitable tax systems and higher tax-to-GDP ratios than non-ATI partner countries. The Sevilla Commitment has also reinforced this growing focus on equity in DRM, committing countries to promote progressivity and efficiency across fiscal systems, signalling growing international impetus behind more equitable taxation (UN, 2025[40]).

In the long run, tax is the cornerstone of independent and resilient financing, providing a sustainable exit from ODA. As external support becomes increasingly constrained, using it to strengthen the systems and capacities necessary for equitable DRM is therefore a strategic investment (Tax Platform, 2025[41]). However, DRM is not a silver bullet. Enhanced DRM cannot substitute for ODA in the short term and tax reforms can take time to deliver results. Further, the tax potential of many L&MICs is inherently limited by structural contextual factors such as lower incomes, smaller formal sectors and limited institutional capacity, particularly in LICs and contexts of extreme fragility. Even with strong tax effort, these countries cannot realistically raise revenues proportionally comparable to advanced economies (McNabb, Danquah and Tagem, 2021[42]; Gallien et al., 2025[43]).

Investing in equitable DRM strengthens country-led, resilient financing and supports a sustainable exit from ODA. It advances poverty and inequality reduction by raising revenue equitably and generating resources for inclusive development.

This section explores how development partners can support L&MICs in developing equitable domestic tax systems through financial and technical assistance, capacity strengthening and partnerships. The section first covers how development partners can embed a stronger equity focus into their DRM support frameworks, from goals to results indicators. It then outlines the considerations involved in supporting L&MIC governments in the design of equitable tax policies. These include understanding the particular context and supporting improvements to tax data and distributional analysis to understand the impact of potential tax measures, as well as supporting the capacity of partner countries to design of context-appropriate tax policy mixes and choices related to tax rates and base that simultaneously advance revenue mobilisation, equity and growth objectives. Finally, it provides guidance on supporting tax administrations for effective, accountable and enforceable implementation and strengthening the broader ecosystem of tax accountability and transparency for more equitable outcomes.

Two critical elements of equitable DRM fall beyond the scope of this section. First, progress in international tax co-operation and policy coherence is critical – especially against a backdrop of constrained ODA. Second, it excludes non-tax components of resource mobilisation, including user fees and service charges, fines and extractive industry revenues as well as non-revenue domestic resources like public spending efficiency savings and public debt financing, although these can be significant components of domestic resources in L&MICs.

Note that throughout this section, "progressive taxation" refers to tax systems in which effective tax rates increase with taxpayers' ability to pay, placing a heavier burden on higher-income individuals and firms. In contrast, "equitable taxation" is used more broadly to refer to taxation that is fair in its overall distributional impact. References to the broader fiscal system encompass both the revenue side (i.e. how taxes and other public revenues are raised) and the expenditure side (i.e. how public resources are allocated through spending, transfers and public services).

3.2.1. Embedding a stronger equity focus into domestic revenue mobilisation support frameworks

Integrating equity considerations more systematically into development partners’ DRM goals and strategies can strengthen its contribution to poverty and inequality reduction. Efficiency and equity are often perceived as a trade-off in DRM – the assumption being that making tax policies and systems more progressive may come at the cost of revenue generation or administrative efficiency. This perceived trade-off dissolves when equity is embedded into core reform efforts rather than treated as a separate objective: well-designed tax systems integrate efficiency and equity as complementary dimensions.

In line with global commitments (UN, 2025[44]; ATI, 2025[45]), development partners can consider rebalancing their DRM strategies to give greater weight to equity and inclusion. This means going beyond setting quantitative targets such as levels of ODA to DRM, amount of domestic revenue mobilised and objectives around strengthening the efficiency of tax policy design and administration capacity to encompass more explicit support for tax progressivity, equity and inclusion (MFA Finland, 2020[46]; MEFA France, 2018[47]; Norad, 2020[48]). Where aligned with national priorities and domestic political processes, such support can enhance the equity and legitimacy of tax systems and reinforce institutional accountability, while improving citizen tax morale. Development partners’ DRM strategies also benefit from stronger alignment and institutional coherence with their social policy and governance strategies to ensure they support equitable outcomes across the overall fiscal system (see Box 3.4 and Sections 3.2.3 and 3.2.4).

Making equity visible and measurable in results frameworks helps translate these strategies into practice. Practical entry points include embedding results indicators covering gender equity, non-discrimination and the progressivity of the tax mix. Interventions can also be expected to include – and be grounded in – supporting analytical capacity to carry out distributional analysis of tax and fiscal policy. When designing results frameworks, it is important to recognise that tax progressivity is highly context-specific and shaped by countries’ tax and economic structure, underscoring the need for flexible, country-adapted approaches.

Box 3.4. Strengthening the equity focus of domestic revenue mobilisation support

Norway’s support to equitable DRM through a holistic governance approach

Norad’s approach to DRM sits within its broader Governance and Public Finance portfolio and focuses on strengthening the core systems that enable countries to raise, manage and allocate public resources effectively and equitably for country-owned evidence-based policymaking (Norad, 2020[48]; Norad, 2025[49]). This includes strengthening tax systems and administrations, national statistical systems, and public financial management, to ensure transparent and targeted use of resources. It also emphasises accountability, integrity and anti-corruption efforts to address revenue losses from tax evasion and illicit financial flows (IFFs). Knowledge development is central to Norway’s approach, with support for research and tools co-created with local and international partners on topics including HNWIs and wealth taxation, tax burdens on low-income households, social protection and IFFs. Norad also strengthens the wider DRM ecosystem by supporting public institutions, civil society, research organisations and independent media. For example, support to the International Budget Partnership contributed to fiscal reforms in Nigeria, including strengthened grievance mechanisms and a reduction of the regressive tax burden on informal female workers. At the international level, Norway promotes greater inclusion of L&MICs and civil society in global tax co-operation processes.

Spain’s initiative to advance tax justice in Latin America and the Caribbean

Within its Democracy Programme, the Spanish Agency for International Development Cooperation (AECID) launched the Initiative to Advance Tax Justice in Latin America and the Caribbean in 2025 to strengthen dialogue, institutional capacities, democratic governance and stakeholder engagement to enable fiscal reforms (AECID, 2022[50]). The initiative promotes tax justice as a means to reduce inequalities, finance sustainable development and restore confidence in democratic institutions, defining tax justice as fair, progressive, efficient and transparent tax systems in which revenues are collected and spent legitimately, reinforcing social cohesion and democratic sustainability. It reflects persistent regional challenges, including low tax revenues (21.5% of GDP versus the OECD average of 33.9%), high tax evasion (around 30%), regressive tax systems and limited trust in public spending (AECID, Placeholder[51]). The Initiative’s objectives are to strengthen tax administration capacities, promote informed citizen engagement, support progressive tax reforms, enhance transparency and accountability in public finance, and foster regional co-operation to advance democratic tax governance. AECID pursues these goals by promoting political and technical dialogue, countering anti-tax narratives through education and awareness campaigns, and providing technical assistance and comparative analysis to support fairer fiscal models. The Initiative combines regional and bilateral approaches, leveraging regional co-operation, platforms and partnerships with other partners including the OECD and civil society, while tailoring support and interventions to national priorities and contexts.

ATI’s method for assessing equity in ODA to DRM

ATI’s approach (2021[52]) assesses how much ODA to DRM supports equitable tax systems by combining three simple checks: i) whether projects explicitly mention keywords related to equity or gender equality; ii) whether they focus on progressive tax areas (such as corporate income, extractives, personal income, wealth, property or tax incentives, which are assumed to improve fairness); and iii) whether further review of major projects reveals hidden equity impacts. These elements are then aggregated to show the share of ODA-funded projects contributing to overall equity objectives. This approach offers entry points for development partners that wish to strengthen the equity lens of their results frameworks.

3.2.2. Supporting L&MICs in designing equitable tax policies

Contextual factors in equitable tax policy design

The impacts of tax policies on poverty and inequalities are complex, highly context-specific and depend on both their design and how revenues are used within the broader fiscal system. In general, direct taxes – such as personal and corporate income taxes – are easier to design to be progressive, meaning that effective tax rates increase with the taxpayer’s ability to pay and that the burden falls more heavily on higher‑income taxpayers. By contrast, indirect taxes on consumption such as value-added tax (VAT) tend to be regressive when measured as a share of income (as lower-income households spend a larger share of their income on consumption) but may appear proportional or slightly progressive when assessed as a share of consumption, particularly where basic goods are taxed at lower rates (Lustig, 2022[35]). In highly informal economies limited participation from low-income households in formal markets can mitigate the regressivity of VAT, as high-income households account for a larger share of taxed consumption. Thus, in practice, the poverty and inequality impact of different taxes varies depending on several contextual factors and policy mixes.

L&MICs often rely significantly on indirect taxes such as VAT, excise and trade taxes, while corporate income tax (CIT) can also represent a relatively important share of revenues, especially in resource‑rich countries (World Bank, 2023[53]; OECD, unpublished[31]). Other potential revenue sources remain under-utilised: recurrent taxes on immovable property (i.e. real estate), personal income tax (PIT) and taxes on capital income levied at the individual level often play a limited role.

There are three important contextual factors for development partners to consider when supporting L&MICs in designing equitable tax policy.

• First, the degree of informality in the economy matters: in highly informal economies, PIT can have limited progressive impact because large shares of workers and businesses fall outside the tax net, concentrating the tax burden on a narrow group of formal taxpayers (Bachas, Jensen and Gadenne, 2024[54]). Weak income and statistical data in informal contexts also often cause exclusion errors, limiting the effective targeting of fiscal transfers.

• Second, equity outcomes depend on the overall fiscal system, i.e. both how taxes are collected (the revenue side) and how they are spent and redistributed (the expenditure side). For example, coupling a potentially regressive tax like VAT with well-targeted cash transfers and social spending can result in progressive outcomes overall (Lustig, 2022[35]) although the usefulness of this approach can be limited where social protection systems are less established, as is common in LICs (Granger, Abramovsky and Pudussery, 2022[36]). See below for a focus on VAT.

• Third, tax design choices and administration effectiveness are critical: property taxes, for instance, are progressive in principle but can have adverse effects on households which are both low-income and asset-rich if there are no ability-to-pay mechanisms such as exemptions in place. The effectiveness of the tax administration – including revenue collection capacity and the extent of leakages or corruption – also plays a key role in shaping equitable outcomes.

Supporting tax data, research and distributional analysis capacity

Strengthening tax data and statistical capacity in L&MICs is a foundational step towards evidence-based, context-appropriate designs of equitable tax policies. Development partners have played a significant role in supporting the fundamental data and statistical systems needed in L&MICs for effective taxation. They can help further strengthen data systems and capacity, with particular attention to improving data on high-income earners, gender-disaggregated data and data on informal workers who are typically absent from tax records. Support for data sharing across government agencies – such as the tax authorities, customs and social security institutions – can also help reduce information gaps and strengthen compliance and enforcement.

Development partners can also support governments and research institutions in designing and using diagnostic and analytical tools (see Table 3.2 for examples). Strengthening the production of distributional evidence can help move debates beyond aggregate revenues to show who pays and who benefits under different scenarios and enable a clear weighting of advantages, disadvantages and potential synergies (UNU-WIDER, 2026[55]). Development partners can help fill critical knowledge gaps by supporting research capacity development and outputs across local and international institutions, tax administrations and civil society. Support for analytical tools assessing taxes’ impact across income groups can uncover implicit or explicit gender biases that reinforce gender inequality (ATAF, 2022[56]) and detect potential regressive impacts on marginalised groups.

Strengthening analytical capacity within tax administrations and other relevant ministries and bridging the research-policy divide is particularly valuable, as it enables context‑specific investigation of both the intended and unintended equity implications of specific measures and reforms. Sustained impact and the institutionalisation of both the production and integration of distributional evidence depend on local champions who continuously build expertise, promote their use and embed them in routine policymaking (UNU-WIDER, 2026[55]). This feeds into the design of policies, discussed in the next section.

Table 3.2. Diagnostic and analytical tools to assess the equity impacts of tax measures and wider fiscal systems

Tool/category	Examples of usage supported by development partners
Simplified distributional analysis: provides a relatively accessible indication of tax measures’ progressivity, using household expenditure survey data.	This type of analysis can be conducted with limited data and technical capacity, making it well-suited to lower-capacity settings. Analysis in Rwanda, supported by TaxDev, showed for example that a VAT exemption on hybrid vehicles was regressive, informing the government’s subsequent decision to reform (Granger, 2025[57]).
Fiscal incidence analysis (FIA): measures how fiscal systems impact income distribution, poverty levels and overall progressivity.	The Commitment to Equity® method is supported or commonly used by development partners including the World Bank, AFD, Norad, Canada, and GIZ. For example, in Columbia, AFD support for FIA estimated different scenarios looking at the impact of potential fiscal reforms of tax and social spending (Núñez and Lasso, 2024[58]).
Tax-benefit microsimulation: models household-level impacts of reform to simulate the distributional and poverty impacts of fiscal policies.	In Bolivia, officials from the national statistical office and other ministries were given intensive training to use a tax modelling tool, alongside policy dialogue with academics and the Vice Minister on tax-benefit reform stimulations (LSE, 2026[59]).
Public finance review (PFR): analyses the efficiency and effectiveness of public expenditure, including how the progressivity of the tax system can be enhanced.	This is a core diagnostic tool used by development partners. The World Bank recently added equity as a core consideration of its PFRs (World Bank, 2025[60]), after development partners strongly advocated for it (MFA Finland, 2023[61]). PFRs are now required to analyse and report on equity impacts, including gender equity, in their core recommendations.
Inequality diagnostics: diagnoses levels of inequality based on economic and revenue structures, labour markets and access to service through inequality diagnostics tools aimed at supporting tax reform and policy design.	Germany’s inequality diagnostic guidelines provides guidance to assess different types of taxes to examine if tax structures and revenue collection match the pattern and concentration of wealth/income (GIZ, 2023[62]). For cross-country comparisons, Oxfam’s Commitment to Reducing Inequality Index includes a pillar assessing the tax progressivity of overall country systems (Kamande et al., 2024[63]).
DRM framework: discusses advantages, challenges and trade-offs of different taxes to finance social spending in L&MICs.	The OECD’s DRM framework identifies country-specific tax policy measures and estimates their potential to increase DRM. It includes a tool to assess taxes’ progressivity and whether they add burden to the least well off. This framework has been applied to social protection financing and can also be applied to other financing priorities, such as education (Brys et al., 2025[64]).
Citizen participatory research: analyses the total formal/informal burden, impact and "on-the-ground" realities of citizens through surveys or interviews.	UK support for Total Tax Burden Survey revealed in Democratic Republic of the Congo that formal and informal taxes disproportionately impact the livelihoods of low-income households and small businesses (Paler et al., 2017[65]).

Box 3.5. Strengthening capacity to analyse and use evidence for equitable tax policy

Supporting the systematic use of evidence for policymaking in Uganda

UNU-WIDER support to UGAMOD, a tax–benefit microsimulation model developed for Uganda, has strengthened the integration of distributional evidence into tax policy processes (UNU-WIDER, 2026[55]). By enabling detailed analysis of how reforms affect poverty and inequalities, it has shifted policy discussions beyond aggregate revenue towards understanding who pays and who benefits, making trade-offs between equity and revenue more explicit. Its integration with administrative tax data through UGAMOD‑TAX has further improved the accuracy of revenue baselines by incorporating administrative data into the model. Collaboration with the Ugandan Revenue Authority, the Ugandan Ministry of Finance and academic partners has strengthened both the institutionalisation of evidence and the capacity to use evidence, including increased skills among staff to translate tax laws into operational rules, strengthen data capabilities and lead data updates, fostering ownership among local revenue staff. It has strengthened the use of evidence in decision making and enhanced its credibility and legitimacy among political and public stakeholders.

Lessons from the World Bank’s FIA capacity strengthening experience

The World Bank’s experience with FIA shows mixed results. Although there is high demand for building the skills to assess poverty and inequality impacts of fiscal systems, technical complexity often leads to these skills being lost if they are not regularly used, especially in lower-capacity settings (World Bank, 2022[66]). Training has proved more successful in MICs where staff possess stronger baseline coding skills. In other contexts, developing user-friendly microsimulation tools may be more effective than teaching highly technical and complex FIA methods. Training senior staff to interpret the policy implications of FIAs can nurture “local champions” who can advocate for equitable policy reform backed by a strong understanding of evidence. A successful programme must thus go beyond technical assistance to ensure that FIA is translated into actionable advice and policy reform; it should stimulate the entire policy ecosystem and contribute to broader dialogue.

Supporting the design of tax policies for equitable outcomes

A critical enabling investment is strengthening tax policy capacity within L&MIC ministries of finance. While tax or revenue administrations focus on implementation, compliance and revenue collection, finance ministries are responsible for designing tax policy, including formulating policies, driving reforms and assessing trade-offs. Yet many L&MICs lack dedicated tax policy units with the analytical capacity, data access and technical expertise needed to assess reform options, model distributional impacts and adapt general principles to their specific economic and institutional context. Development partners can support the establishment and strengthening of such units through long‑term technical assistance, peer learning, improved data and analytical tools, while also supporting broader capacity within finance and other relevant ministries (e.g. planning, education and health) and stronger co-ordination between policy and administration. Building on the analytical tools described in the previous section, development partners can also support governments in institutionalising the use of distributional evidence to enable a clear weighing of impacts across different groups to guide the design and refinement of tax reforms. These including identifying ways to mitigate adverse effects and ensure that equity considerations are integrated across all policy decisions (UNU-WIDER, 2026[55]).

Development partners can support L&MICs in designing context-appropriate tax policy mixes that simultaneously advance revenue mobilisation and equity. This includes support in strengthening equity considerations across the overall tax structure, which requires attention to both tax rates and the tax base (ATI, 2023[67]). On the tax rate side, progressivity can be enhanced by increasing rates at the top of the income distribution and reducing them at the bottom. On the tax base side, equity considerations relate to who pays taxes. At the lower end of the income distribution, this can mean ensuring that tax liabilities are zero or minimal for low-income earners; at the upper end, it can involve expanding the tax base across income, corporate, wealth and property taxes so that wealthier individuals and firms are adequately taxed. Table 3.3 provides an overview of design and reform considerations for major tax types, reflecting how adjustments to rates or bases can contribute to more equitable tax policies while generating more revenue.

Development partners can draw on the following cross-cutting considerations to integrate equity into tax design support:

• Not every tax needs to be progressive for the overall fiscal system to be equitable. For instance, excise taxes on goods such as fuel or tobacco may have regressive effects but can still contribute to progressive outcomes. They can generate significant revenue and support broader objectives such as improved health or environmental outcomes, particularly when paired with well‑targeted public spending and complementary measures to limit regressive impacts.

• Strengthened coherence between revenue and expenditure policies can help ensure the progressivity of the overall fiscal system so that people living in poverty are net beneficiaries, not net payers. This means supporting a whole-of-government approach that integrates spending, tax, social and economic policy to contextualise DRM within the broader fiscal policy landscape and establishes it as a sustainable revenue source for social spending. Capacity strengthening in FIA and tax-benefit microsimulation (described in Table 3.2 and Box 3.5) can enable tax officials to estimate tax impacts within the broader fiscal system.

• Careful sequencing of policy reform based on institutional capacity and country context and priorities is needed. In LICs, priorities may centre on building core systems and administrative capacity, while in UMICs, the focus may shift toward modernisation and structural reforms that promote fairness, resilience and sustainability (ADB, 2026[38]). Taking into account broader economic constraints and transition impacts can help ensure reforms are feasible, coherent and maintain public support (OECD, unpublished[31]). Without careful sequencing, there is a risk of overloading weak systems with multiple development partner priorities (e.g. gender, disability and biodiversity), which can complicate DRM reforms and limit effectiveness and sustainability (World Bank, 2022[66]).

Table 3.3. Considerations for development co‑operation support to equitable tax policy design

Type of tax	Poverty- and inequality-related considerations
Personal income tax (PIT)	Consider supporting progressive design of PIT (basic exemptions, rising rates, inflation indexation) to strengthen pro-poor impacts and to take into account tax burdens on low-income taxpayers; recognise constraints from informality, weak enforcement and narrow tax bases that concentrate burdens on formal taxpayers; consider strengthening taxation of capital income; consider simplifying PIT as a transitional measure in relevant contexts; invest in tax policy analysis capacity and data to improve design and targeting; strengthen compliance and enforcement for high-income and self-employed taxpayers.
Corporate income tax (CIT)	Consider supporting CIT to tax concentrated capital while acting as a backstop to PIT; balance revenue, equity and growth by avoiding excessively narrow bases and distortive incentives; evaluate whether incentives are likely to attract additional investment that would not have occurred otherwise; review and rationalise tax expenditures and investment incentives that erode the base and weaken equity; consider impacts on formalisation and investment; support transparency (e.g. tax expenditure reporting); consider interactions with international tax rules (e.g. GloBE), ensuring that large multinational enterprises pay a minimum effective tax rate of 15%; ensure CIT complements taxation of capital income at the individual level.
Consumption taxes (VAT)	Identify potential regressive impacts of VAT relative to income, particularly where basic goods are taxed; identify the potential distortive or regressive impacts of exemptions or reduced rates and assess if they are targeted; consider broad, efficient bases that address equity through targeted transfers rather than exemptions which can be poorly targeted and distortive; consider the administrative feasibility of compensation mechanisms in informal contexts; analyse compliance costs for small firms; ensure VAT design accounts for the affordability of tax payments for low-income households, particularly in meeting basic consumption needs, especially in informal contexts; recognise the political economy and sequencing challenges of base broadening; ensure revenues support redistribution.
Excise taxes	Consider increasing excises on potentially harmful goods (e.g. alcohol, tobacco or fuel) to address externalities; assess impacts on lower-income households and informal markets and weigh up broader health, environmental and fiscal benefits against potential regressive impacts; consider pairing excise reforms with targeted compensatory measures.
Property tax	Consider progressive property tax structures as a stable revenue source for local service provision; consider including relief and ability-to-pay mechanisms to protect low-income households; establish or strengthen property valuation systems, data and administrative capacity; recognise these taxes’ underutilisation in many L&MICs and potential for diversifying of the tax mix.
Wealth taxes	Consider supporting taxation of wealth to target HNWIs to increase the overall progressivity of the tax system, recognising political, administrative, data and compliance constraints; consider support to implementing inheritance taxes; strengthen transparency, asset registries and enforcement capacity; assess interaction with capital income taxation; strengthen international data sharing and information exchange to improve the identification, valuation and taxation of offshore assets held by HNWIs.
Natural resource taxation	Consider using rent-based taxation to capture concentrated resource wealth for public goods; ensure strong governance, transparency and redistribution mechanisms (e.g. sovereign wealth funds, intergovernmental transfers); address volatility and ensure revenues translate into improved public services to strengthen tax morale.
Trade taxes (tariffs)	Recognise mixed and context-specific distributional effects of trade taxes; balance administrative simplicity and short-term revenue needs with long-term inefficiencies and distortions; consider impacts on domestic production, consumption patterns and inclusive growth.
Informal payments	Account for informal and quasi-fiscal payments that disproportionately burden low-income households and consider these in assessments of overall fiscal impacts; support reforms to reduce reliance on informal payments and improve trust in formal systems.

Note: These are general equity considerations; tax impacts are highly context-specific and dependent on details of both tax design and administration. Tax policy design requires alignment with partner country priorities and policy preferences.

Source: Authors’ adaption from OECD (unpublished[31]), Brys et al. (2025[64]), Granger, Abramovsky and Pudussery (2022[36]), Abramovsky and Selwaness (2023[68]), ATAF (2022[56]), GIZ (2020[69]), ATI (2023[67]) and EC (2021[70]).

Depending on context, development partners can support tax measures targeting wealthy taxpayers and profitable companies with high revenue potential. These may include eliminating ineffective and regressive tax exemptions across tax types, strengthening enforcement and compliance for high earners (including on capital income such as dividends and capital gains) and supporting the design and implementation of taxes such as capital and property taxes that often underperform in L&MICs (see Box 3.6 on property taxes) (Gallien et al., 2025[43]; ATI, 2023[67]). Targeted support, including the establishment or strengthening of HNWI units, can further help tax authorities to increase tax compliance, raise additional resources and curb inequalities (ATAF, 2026[39]).

Development partners can support VAT reforms that balance revenue generation and equity considerations. VAT is widely used in L&MICs for its revenue potential and ease of enforcement and will continue to account for the majority of revenues in L&MICs, at least in the medium term (World Bank, 2023[53]). It applies at a flat rate on purchases, but lower-income households spend a greater share of their income on consumption than wealthier ones and therefore bear a heavier tax burden relative to their income. This potential regressive impact can be offset in practice when low-income households largely purchase goods and services from informal vendors, where VAT does not apply. The revenue generated can also be directed to well-targeted spending, like social transfers to people experiencing poverty.

Supporting governments in critically reviewing and rationalising VAT exemptions can improve transparency and broaden the base where appropriate. Exemptions for basic goods are intended to reduce the burden on those experiencing poverty, but when poorly targeted can disproportionately benefit higher-income households with greater formal consumption. Exemptions can also introduce economic distortions by breaking the VAT chain and embedding irrecoverable input costs in prices, potentially disadvantaging domestic producers. Development partners can support targeted transfers alongside such exemption reforms to mitigate regressive impacts, recognising this may be constrained where social registries and delivery systems are limited (Warwick et al., 2022[71]; ATI, 2023[67]).

Supporting equitable tax reforms requires adaptation in contexts of high informality. In economies with large informal sectors, raising more revenue risks concentrating the burden on a narrow formal tax base. This can create negative feedback loops by increasing incentives for formal businesses and workers to operate informally, further eroding the tax base and constraining revenue. Development partners can help by supporting broad-based formalisation that extends compliance across formal and informal activities over time, with differentiated treatment reflecting taxpayers' capacity to pay – including lower compliance costs for lower-income groups and higher liabilities for those with greater capacity to pay (Gallien et al., 2025[43]).

For lower-income informal operators, simplified tax regimes – i.e. special tax arrangements designed for small businesses and informal sector operators who would struggle to comply with the standard tax system – can play an important role. When appropriately designed, they can gradually foster a culture of compliance and facilitate entry into the tax system. Such regimes can also avoid placing undue burdens on subsistence workers, although these workers are often best exempted from tax through appropriately designed thresholds (e.g. minimum VAT registration or PIT thresholds), which require careful administration to avoid under-reporting risks.

At the other end of the distribution, DRM support can also target higher-income informal earners and undeclared income in the formal sector, so that those with greater capacity to pay contribute accordingly. Effective formalisation combines clear benefits – such as access to social protection – with stronger enforcement and efforts to build tax morale, while avoiding excessive burdens that could disincentivise work or enterprise.

Navigating political economy constraints

For many of these measures, the main barriers are not technical or feasibility constraints, but political economy constraints. Those with vested interests in existing tax arrangements may resist reform or subsequent enforcement (see Sections 3.2.3 and 3.2.4 for political economy constraints on tax administration and accountability). Partner governments may be reluctant to strengthen enforcement or remove tax exemptions due to political sensitivities, as these arrangements can form part of implicit elite bargains that help maintain stability. Development partners can help by strengthening evidence, transparency and dialogue on equitable taxation, but their role in this area is limited. Tax policy choices ultimately reflect national priorities and domestic political processes, and external support is most effective when it reinforces rather than substitutes for domestically driven reform momentum.

Tax policy choices ultimately reflect national priorities and domestic political processes, and external support is most effective when it reinforces rather than substitutes for domestically driven reform momentum.

Box 3.6. Co-ordinated development partner support for subnational DRM through property taxes in Freetown, Sierra Leone

Globally, local government finances rely heavily on property taxes, yet in LICs, they significantly underperform. In Sierria Leone, Freetown’s local tax system suffered from manual assessments and limited compliance, resulting in only half of properties being taxed and most being significantly undervalued (ATI, 2023[67]). To address this, the mayor convened a technical working group with development partners, research institutes and central tax authorities to design and pilot a comprehensive modernisation reform. Following consultations with the central government, 10% tax discounts for elderly and disabled property owners were introduced to ensure horizontal progressivity for these marginalised groups. After a successful pilot, the United Kingdom’s FCDO stepped in to support the scaling up of this reform. To manage backlash from wealthy taxpayers, the mayor implemented a communication strategy emphasising fairness, equity and accountability. After two years, the reformed property tax system had become more equitable; tax liabilities for the highest-value properties increased by 242%, while those for the lowest-value properties decreased by 70%. The transition to a transparent, modernised system tripled property tax revenue from USD 0.34 million in 2017 to USD 1.2 million in 2020. This outcome demonstrates that strong political leadership, a clear strategy to confront potential resistance and encourage buy in, and co-ordinated support from different partners are essential for advancing major tax reforms.

3.2.3. Enhancing tax administration for effective and accountable compliance and enforcement

Equitable tax policy and progressive taxes can only deliver results if matched by a strong tax administration and effective implementation, enforcement and compliance. Tax policy and administration form a single interconnected system, where administrative feasibility, compliance costs and taxpayer behaviour shape outcomes. Evidence suggests that improvements in administrative capacity can yield significant revenue gains, with sustained tax administration reforms associated with increases in tax revenues of around 2-3 percentage points of GDP over time (Adan et al., 2023[72]). Conversely, low tax revenues can create a vicious cycle by limiting investment in tax administration, leading to weak enforcement, poor services and low compliance (OECD, unpublished[31]) and ultimately constraining inclusive development.

Political economy constraints are especially pronounced in the enforcement of taxes on the wealthy. Weak and uneven tax enforcement can exacerbate inequities, as wealthier individuals are better able to evade and avoid taxation, while lower-income taxpayers bear the burden. Politically connected actors can also limit tax enforcement at the institutional level. They can make it harder for tax officials to perform their duties by restricting access to financial and ownership data and weaken administrative autonomy through pressure and intimidation (ATAF, 2026[39]). Where L&MICs already have progressive tax systems in place, focusing enforcement and compliance efforts on HNWIs and high-income earners is an efficient way to substantially increase revenue without policy reforms (Occhiali et al., 2025[73]). For example, in a year, Uganda’s dedicated HNWI unit boosted HNWI tax revenue almost 14-fold (Kangave et al., 2018[74]). However, these gains were later reduced by HNWIs adopting increasingly sophisticated tax avoidance strategies that tax officials lacked the resources and capacity to address (ATI, 2023[67]). This underscores the need for sustained investment in the tax administration’s capacity to keep pace with developments in taxpayer behaviour, alongside sustained political commitment.

Weak and uneven tax enforcement can exacerbate inequities, as wealthier individuals are better able to evade and avoid taxation, while lower-income taxpayers bear the burden.

In L&MICs, institutional administrative capacity is a significant constraint to equitable tax reforms. Progressive tax systems are inherently more complex than flat tax systems, requiring administratively realistic policies to balance trade-offs between equity, feasibility, efficiency and revenue generation (Baer et al., 2025[75]). Without adequate capacity, countries often rely on simpler instruments, such as VAT and poorly targeted subsidies, which can be regressive and distortionary depending on the context and design (World Bank, 2023[53]). Meanwhile, progressive taxes such as PIT or property tax may be underutilised or weakly enforced, which can limit their redistributive effect and reduce revenues, particularly when HNWIs evade taxes (ATI, 2021[52]; Bachas, Jensen and Gadenne, 2024[54]).

Development partners can help build the long-term institutional, human and systemic foundations needed for effective, equitable tax administration. Investments in tax administrative capacity, coupled with better access to data and technological advances that improve efficiency and reduce the cost of revenue collection, can potentially enable L&MICs to expand progressive taxation earlier in the development process than historical patterns suggest (World Bank, 2023[53]). A focus on strengthening capacity to administer taxes can help ensure that improvements can be sustained in the long term without reliance on external expertise (World Bank/IMF, 2024[76]). This can be supplemented by strengthening specialised capacity for equitable enforcement, such as auditing HNWIs and large firms; expanding access to – and strengthening the capacity to effectively use – international tools for automatic exchange of information between tax authorities to identify and tax cross-border income and assets; and supporting assessment frameworks such as the Tax Administration Diagnostic Assessment Tool, used to identify gaps in tax administration (OECD, 2021[77]; ATI, 2023[67]). See Box 3.7 for an example of the African Tax Administration Forum’s (ATAF) Southern led approach.

Development partners can also support better data and research on tax administration and compliance, helping to identify gaps, target enforcement more effectively and strengthen revenue collection. For example, in Zambia, tax gap analysis co-produced by the Zambian Revenue Authority and supported by development partners identified significant non‑compliance of CIT in the mining sector, leading to the creation of specialised units dedicated to mining and broader organisational improvements to reduce compliance gaps and risks (Ebrahim and Adu-Ababio, 2025[78]).

Box 3.7. Partnering with the ATAF to strengthen equitable DRM, wealth taxation and gender-inclusive tax administration

Engaging in long-standing, flexible and Southern-led partnerships with regional tax entities can support equitable DRM. Many development partners provide core funding for, and have longstanding co-operation partnerships with, ATAF, a pan-African network for tax co-operation, which represents African voices in global tax debates (ATAF, 2024[79]). ATAF’s mission to strengthen tax administrations through peer learning and the development of African-led tax standards has helped its members access over USD 5.13 billion in total new taxes during the period 2016-24. ATAF facilitates both development partner and African peer-to-peer technical assistance to create African-led solutions tailored to the local context.

This technical assistance includes support for strengthening the taxation of HNWI’s who remain under-taxed in many countries despite their significant revenue potential. To support reforms, ATAF has developed practical guidance for African administrations on designing and implementing HNWI regimes, including approaches to identification, compliance management, the use of data and analytics and navigating the political economy challenges associated with taxing wealthy and politically exposed individuals in Africa (ATAF, 2026[39]).The ATAF Women in Tax Network initiative works on furthering gender equality within tax administrations by fostering female leadership, mentorship programmes and support to reforming equitable workplace policies (i.e. maternity leave and flexible working arrangements). It also represents the region in global dialogues about gender and taxation. The network supports tax authorities to conduct gender-disaggregated research for gender-sensitive policies that removes biases burdening women and other marginalised populations, enabling more equitable tax systems, with Seychelles and Rwanda recently integrating gender disaggregated data into their tax operations.

Increasing perceptions of tax fairness can increase tax morale. Citizens are shown to resist tax reforms when the tax burden falls or is perceived to fall unfairly on the low- and middle-income population, which can lead to protests and political instability (Prichard, 2010[80]; Gallien et al., 2025[43]). Conversely, public support tends to be stronger for measures seen as improving fairness in tax enforcement (World Bank, 2017[81]). Poor trust in government provision of public services and goods can further drive tax avoidance from ordinary citizens to wealthy elites.

Development partners can support partner countries in strengthening public trust in tax systems – which in turn supports more equitable and sustainable revenue collection. This includes supporting taxpayer education initiatives that help citizens understand the progressive aspects of existing tax systems and see how their taxes translate into public goods and services, which can enhance tax morale and voluntary compliance even without new policy reforms (Hoy, 2025[82]; OECD, 2021[77]). Evidence from countries like Ghana and Kenya shows that prioritising enforcement on the wealthy can restore public trust and improve overall tax collection (Prichard, 2010[80]). Development partners can also support initiatives such as the publication of tax expenditure reports, which make the cost of tax incentives and exemptions more transparent, and enables more informed policy debates (Granger, Mcnabb and Parekh, 2022[83]). Wider measures to support accountability and transparency are covered below.

3.2.4. Strengthening the enabling environment for tax accountability and transparency

Development partners can strengthen the impact of their support to tax policy and administration by investing in the complementary areas essential for transparency and accountability. These include anti-corruption efforts, combating illicit financial flows (IFFs) and strengthening public financial management and inclusive governance (Granger, Abramovsky and Pudussery, 2022[36]; Oxfam, 2019[84]). Both corruption and weak tax enforcement allow elites and large businesses to evade taxes, which severely depletes national revenue and undermines the legitimacy of the tax system (Prichard, 2010[80]). Embezzlement or misappropriation of public funds effectively redistributes resources from citizens – including the poorest and most marginalised – toward elites. In most L&MICs, perceived corruption is a significant factor that impacts citizen attitudes towards tax, and most do not view their tax systems as fair or equitable (OECD et al., 2025[85]). Although the legitimacy of taxation remains broadly recognised, it has declined across Africa over the past decade, largely due to perceptions of corruption and lack of transparency, which have eroded public trust (Isbell, 2022[86]). Development partners can support efforts to prosecute corruption and financial crimes, help strengthen legal and institutional frameworks, improve reporting and information sharing and assist in the recovery of misappropriated assets (Norad, 2020[48]).

IFFs significantly limit DRM while weakening state capacity and legitimacy. In contexts of high poverty and fragility, IFFs can become embedded in local livelihoods, providing income, protection and basic services to marginalised groups in lieu of states (e.g. corruption, tax evasion and trade misinvoicing, money laundering, smuggling, drug trafficking and counterfeiting) (OECD, 2018[87]). Development interventions targeting IFFs therefore require going beyond enforcement to address local needs, strengthen state-community relations and support sustainable livelihoods.

Development partners can help analyse the strengths and weaknesses of partner country’s public financial management to engage in reform efforts for more transparent and accountable management of public finances (Norad, 2025[49]). It is worth considering that partner governments may be reluctant to strengthen enforcement or remove tax exemptions due to political sensitivities and feasibility, as these arrangements can form part of implicit elite bargains that help maintain stability. Coherence between development co-operation support to DRM and these complementary policy areas is critical for a fair and just tax system (see Box 3.4).

Development partners can support accountability stakeholders to make tax discussions more inclusive, including by protecting civic space and supporting independent actors such as academia, the media and the judiciary.

Development partners can also support accountability stakeholders in partner countries, so that they have the space and capacity to engage in tax and revenue matters, in line with the 2025 ATI commitment (ATI, 2025[45]). This includes protecting and promoting civic space (see Section 4.2.4) and supporting a wide range of actors, including civil society actors, women’s rights organisations, labour unions, universities, independent media, private sector actors, the judiciary and supreme audit institutions. Doing so can increase citizen participation or representation – particularly among marginalised groups – in fiscal policy decision making and dialogue spaces, helping to make tax discussions more inclusive (Oxfam, 2019[84]). Supporting civil society and investigative journalism in advancing tax justice, engaging in policy debates and uncovering corruption, IFFs and tax avoidance, contributes to greater accountability, policy change and public awareness. Moreover, other actors are likely to be more trusted than politicians on tax and may therefore be well placed to help build trust in tax and tax reforms (OECD et al., 2025[85]). Table 3.4 illustrates how development co-operation can foster a comprehensive accountability ecosystem by equipping these diverse actors with the support needed to increase fiscal governance and oversight and implement effective checks and balances.

Tax policy is often politically sensitive and shaped by complex stakeholder interests, requiring development partners to invest in understanding the political economy of equitable reform. Political economy analysis can provide the contextual understanding to help identify those resistant or supportive to change, as well as viable entry points to enable reform – enabling development partners to support strategic coalitions for change. Delivering difficult but equitable reforms requires building trust through dialogue between the government, citizens and other partners to overcome existing power dynamics and elite interests.

Table 3.4. Development co-operation support to broader accountability stakeholders

Type of actor and their role	Example of supporting actions development partners can take
Judiciary: independent pillar of the separation of powers responsible for fiscal laws and tax offenses.	Support partner countries through technical and financial assistance to strengthen judicial capacities for the investigation and prosecution of tax-related crimes, e.g. tax evasion and fraud.
Supreme audit institutions (SAIs): external oversight bodies of public financial management.	Support capacity strengthening of SAIs, including experience sharing, peer learning and technical assistance, particularly in the oversight of tax administration and revenue collection.
Civil society actors (CSAs) and social movements: engaged in civic tax advocacy, oversight of government action, citizen engagement, awareness-raising, tax policy analysis.	Provide flexible, long-term funding directly to local CSAs working on tax issues; support tax justice campaigns; support advocacy on equitable legislative, regulatory and administrative tax matters; support tax education including public awareness campaigns about equitable tax benefits; support engagement with marginalised groups on tax; support local tax analysis; expand CSAs’ access to, and participation in, multi-stakeholder platforms (e.g. ATI); support capacity strengthening on tax expertise and political capacity development.
Private sector associations: represent business interests; participate in tax policy formulation, administration and advisory services.	Support private sector associations’ role in taxpayer education (especially local/small firms); strengthen the knowledge base of private sector associations – prioritising local/small firms – to enable participation in tax policy formulation, oversight of tax administration and accountability.
Labour unions: represent payroll taxpayers through research, advocacy, campaigning and legal advice with a focus on equity and workers’ interests.	Facilitate labour union engagement in tax and fiscal policy reforms – particularly labour and employment taxation – through support for research, advocacy and legal assistance representing payroll taxpayers’ interests, especially low-income workers.
Media organisations: provide information, platforms for public dialogue, investigative reporting and watchdog functions on public finance.	Organise capacity-strengthening activities to strengthen journalists’ expertise in reporting on economic justice and equitable DRM matters. Support independent investigative journalism in contexts where reporting on tax or fiscal issues may face political pressure or hostility.
Academia and research and policy institutions: conduct research, policy analysis, advisory work and teaching on tax policy and reform impacts.	Provide financial support to researchers and think tanks engaged in equitable tax and fiscal policy research, including work on equitable, fair and transparent taxation, and support for teaching and knowledge dissemination on equitable tax issues.

Source: Author’s compilation based on ATI (2022[88]) and Sharp, Sweet and Rocha Menocal (2019[89]).

3.3. Mobilising and steering private finance for inclusive economic development

Development partners are placing a growing emphasis on private sector engagement (PSE)5 and private finance mobilisation,6 including blended finance (OECD, forthcoming[90]). This is the case for both development finance institutions and, increasingly, bilateral aid agencies and can take different forms. It can entail concerted efforts to mobilise private finance, for instance by using development finance instruments (e.g. guarantees, concessional loans) to spur the flow of private capital into development priorities. Development partners can also treat private sector development as a goal in its own right, working to strengthen the conditions under which private enterprise can thrive in L&MICs. They can also engage with private partners more broadly – whether in consulting on, co-designing or partnering in delivering programmes and projects. These approaches are not mutually exclusive: public-private partnerships for infrastructure, for instance, typically combine private co-financing with private service delivery. Across all approaches, where public finance is involved, safeguarding public value and ensuring equitable outcomes is essential.

A sharper focus on whether and how the private sector and capital can deliver equitable outcomes is critical if it is to catalyse poverty and inequality reduction. To date, attention has largely concentrated on the volumes of private finance mobilised: in 2024, bilateral and multilateral providers – with the latter being the main driver – mobilised a record USD 76.8 billion in private capital (OECD, n.d.[91]). It is important to ensure that development impact is at the heart of these efforts and is being sufficiently documented. In addition to questions of development impact, the opportunity cost of these interventions – that is, the development finance required to mobilise private capital – remains poorly understood. More fundamentally, without explicit distributional objectives and intentional design, efforts to mobilise private finance or develop the private sector will not automatically translate into improvements for people living in poverty and marginalised groups; it can instead leave them further behind and reinforce inequalities.

This makes it important to consider the interconnection between the private sector – and associated capital – and levels of poverty and inequalities. The relationship runs in both directions. On the one hand, businesses and financial institutions fundamentally depend on people: human capital accounts for around 60% of the world’s wealth (World Bank, 2024[92]). The private sector needs healthy and skilled workers, prosperous consumers and social cohesion to thrive. High levels of poverty and inequalities erode these foundations by shrinking the talent pool, constraining demand and increasing social and political instability, which ultimately weakens competitiveness and raises operational risks. On the other hand, efforts to mobilise private finance or develop the private sector affects poverty and inequalities, whether positively and negatively. Businesses can create decent jobs, expand access to essential services and adopt inclusive models that integrate disadvantaged communities, such as the payment of living wages. At the same time, not all private sector development lifts workers out of poverty. In low-income countries, 40% of employed people remain in extreme poverty (ILO, 2025[93]). Moreover, the privatisation of public services can push up fees and out-of-pocket costs for those least able to bear them, while decisions on supply chains and market power can exacerbate the concentration of wealth.

Against this backdrop, this section focuses on how development co-operation can steer efforts to mobilise, develop and engage the private sector towards inclusive and equitable development outcomes. Central to all such efforts is the need to set clear poverty and inequality objectives, strategies and impact frameworks, and to guide investment and partnership selection for pro-poor and equitable outcomes. In the area of blended finance, public development finance ought to be deployed strategically and with deliberate attention to development additionality, as well as careful calibration of instruments to the country context, rather than simply where mobilisation is easiest. In the area of private sector development, the key is to support local ecosystems and an enabling environment for inclusive outcomes.

3.3.1. Embedding clear poverty and inequality reduction goals into private sector engagement strategies and impact frameworks

Embedding explicit poverty and inequality reduction goals into PSE and mobilisation strategies is a critical starting point for ensuring inclusive development outcomes. PSE and blended finance strategies are generally broadly anchored in a development rationale (OECD, 2016[94]; OECD, 2025[95]), but the extent to which they include specific poverty and inequality reduction objectives varies across bilateral agencies and development finance institutions (DFIs). These goals could be more intentionally spelled out in their strategies and theories of change – as could how they will be achieved, whether through decent job creation, affordable access to essential services for underserved populations, or inclusive business models that integrate people at the base of the pyramid as suppliers, workers, customers or shareholders (i.e. co-operative models). This includes being explicit about gender equality objectives: for example, initiatives such as 2X Global bring together DFIs, MDBs and private actors around shared investing criteria using a gender lens to help ensure investments actively advance women's economic empowerment (2X Global, 2026[96]). Moreover, embedding blended finance into mission-oriented frameworks can help organise public and private resources around clearly defined development objectives, using scare concessional capital to lead investment, and shape markets and crowd in private finance into areas of high social impact (Mazzucato, 2025[97]).

Impact frameworks can steer portfolios towards poverty and inequality reduction by incorporating indicators that capture effects across income groups, gender, geography and other dimensions of disadvantage. Table 3.5 highlights DFI frameworks that include such indicators, for instance tracking whether investments target low-income and fragile countries or underserved regions, and whether they support job creation, affordable services and value-chain participation by disadvantaged groups. Another example is the EC’s work to apply its Inequality Marker (I-Marker) to the European Fund for Sustainable Development to systematically assess the contribution of their guarantees and blending operations to reducing guarantees (see Box 2.8). In collaboration with the International Labour Organization (ILO), Sida has developed a dedicated impact framework for its guarantee instrument, including gender-disaggregated indicators and tools to track distributional outcomes for end beneficiaries such as smallholders, micro-enterprises and their employees (ILO, 2026[98]).

Table 3.5. Poverty- and inequality-related scoring systems used by development finance institutions to select and monitor projects

DFI	Scoring system	Goals	Indicators
British International Investment	Inclusive score	Sharing the benefits of higher productivity and greater sustainability with poor and marginalised sections of society.	Reach to: low-income populations, poor and fragile countries, and excluded groups based on gender and diversity.
Dutch Entrepreneurial Development Bank (FMO)	Reducing inequalities label	Reducing inequality between countries by investing in LDCs and reducing inequality within countries by investing in inclusive business.	Investment in LDCs; micro-financial services; financial services to underserved small and medium-sized enterprises (SMEs), smallholders and women in the value chain; and last mile delivery of power.
Proparco	Equity and inclusion indicator	Mobilising the private sector for greater equality, based on socio-economic and spatial inequalities.	Investments that i) improve access for disadvantaged populations to essential goods and/or services; ii) support employment for disadvantaged populations; iii) provide financing in disadvantaged territories; and iv) promote value chains that integrate disadvantaged populations.

Note: Proparco is the first DFI to adopt an equivalent to the EC’s I-Marker, enabling it to align its private sector operations with a structured approach to assessing inequality reduction.

Source: Authors’ compilation based on BII (2022[99]), FMO (2022[100]) and Proparco (2023[101]).

Frameworks can be further refined to more meaningfully assess distributional outcomes. For example, measurement could go beyond counting jobs created to capturing their quality – whether wages exceed national minimums and whether jobs grant access to social protection – and could track taxes and social contributions paid by investee companies to understand contributions to domestic revenue bases.

International frameworks could improve alignment. While the OECD-UNDP Impact Standards for Financing Sustainable Development (OECD/UNDP, 2021[102]) and the Operating Principles for Impact Management (GINN, n.d.[103]) promote stronger development impact, they offer limited guidance on targeting poverty and inequalities specifically. The Taskforce on Inequality and Social-related Financial Disclosures’ work to develop a global disclosure framework offers a promising avenue for financial institutions and businesses to integrate more consistent and comparable reporting (TISFD, 2025[104]).

Strategic external evaluations focusing specifically on distributional outcomes can also strengthen learning and accountability. These can complement the reflection of poverty and inequality considerations in yearly portfolio assessment and project completion reports. The independent evaluation of the Belgian Investment Company for Developing Countries’ contribution to reducing inequalities (BIO, 2022[105]) is one example.

3.3.2. Key considerations for pro-poor and pro-equity investment and partnership selection

A range of considerations can serve as core criteria in identifying private sector partners and projects, to ensure that efforts to mobilise private capital or develop the private sector benefit low-income and marginalised groups. These considerations include the affordability of goods and services; equitable access to quality jobs and informality; responsible business conduct (RBC) processes; environmental, social and governance (ESG) provisions; and community engagement (see Table 3.6 for an example of how these could be applied to energy investments).

When accompanied by strong safeguards and a deliberate focus on poverty and inequalities, private sector support can lift workers out of poverty and expand access to essential services.

Affordability and equitable access to essential goods and services

Affordability can be advanced through tailored pricing and service delivery models and safeguards that prevent exclusion. The former includes cross-subsidies or lifeline tariffs, progressive tariff structures or pay-as-you-go (PAYG) models. As for the latter, investments backed by public funds that overlook affordability safeguards while promoting the commercialisation of essential goods and services such health care, education or water risk excluding low-income households, pushing them further into poverty through high out-of-pocket costs and exacerbating inequalities (Marriott, 2023[106]; IEG, 2022[107])..

Equitable access can be fostered by directing investments toward underserved regions and groups, for instance by prioritising last-mile and inclusive infrastructure (EC, 2025[108]). Intentional geographic and social targeting ensures that investment flows do not bypass those most in need and that connectivity services and economic opportunities reach those left behind. Supporting equitable access to infrastructure and protecting local communities from the adverse impacts of mineral-centric development will be increasingly important as development partners scale up their investments in major transport corridors.

Quality jobs and informality

Private sector engagement and mobilisation efforts can intentionally focus on job creation as a pathway out of poverty. Jobs are critical to poverty reduction, as labour is the main source of income for low-income households. With the private sector generating around 90% of jobs in L&MICs, development partners are increasingly placing employment at the heart of their PSE and private investment mobilisation strategies. To ensure that investments translate not just into more jobs but into better ones, development partners can prioritise partners and projects that commit to adequate wages, decent working conditions, compliance with labour standards along value chains, skills development and lifelong learning, and opportunities that target workers in poverty, women, youth and others disadvantaged population segments. At the same time, development partners should manage the risk that PSE and mobilisation efforts favour larger and international companies, thereby crowding out smaller, informal, local businesses, which are the bedrock of inclusive job creation.

Attention to the livelihoods of informal workers is vital. Informal workers account for 60% of the workforce in L&MICs and are disproportionately exposed to poverty, income insecurity and unsafe working conditions. While investments that support formalised systems can improve service quality and efficiency, they can also displace or marginalise informal workers such as waste pickers or small-scale transport operators. To mitigate these risks, development partners can encourage private operators to integrate informal actors through subcontracting, engaging with informal co-operatives, employment pathways or feeder-service roles, while working with public authorities to promote accompanying measures such as compensation or buy-out schemes, transition support through access to fleet or equipment upgrades, social protection and targeted capacity-building (UNEP, 2024[109]; EC, 2025[108]). Voluntary, phased and negotiated integration can improve informal workers’ livelihoods. Coupling private sector engagement with measures such as support to national strategies for the extension of social protection to workers in the informal economy can be a viable way to promote equitable outcomes (Kolev, La and Manfredi, 2023[110]). At the same time, informality can be a part of a resilient and adaptive system responding to local needs – for instance as a countercyclical coping mechanism – rather than a problem to be eliminated outright. Hybrid approaches to formalisation that strengthen the social contract, such as making formal legal frameworks relevant and fair to informal workers (OECD, 2023[111]), offer promising ways forward (Arroyo-Arroyo, Finn and van Ryneveld, 2025[112]).

RBC processes, ESG provisions and community engagement

Aligning PSE and mobilisation efforts with strong RBC norms and ESG provisions7 can help promote equitable outcomes. Indeed, it is a key marker of quality for blended finance (OECD, 2025[95]). ESG frameworks help investors identify and manage risks with a view to protecting investment returns while RBC grounds investment decisions in internationally agreed standards and norms, including risk-based due diligence to identify and address potential adverse impacts on human rights, decent work, non-discrimination, fair value-chain practices, corruption, environmental risk and land impacts, which often fall disproportionately on vulnerable groups (OHCHR, 2011[113]; OECD, 2023[114]; IFC, 2012[115]). For many DFIs, however, human rights and RBC norms remain relatively new, and translating them into consistent operational practice remains a challenge (OHCHR, 2023[116]). This can be addressed in part by building on shared risk assessments and partnerships with more experienced actors.

Inclusive outcomes also require meaningful engagement with affected communities. Early consultations with communities can help ensure that investments reflect their priorities and are designed with the people they aim to serve from the outset. Simultaneously, when tailored to local communities and accessible to all, effective grievance and remedy mechanisms strengthen accountability by enabling concerns to be raised and addressed – including by those with limited voice or power. Independent accountability mechanisms such as the Compliance Advisor Ombudsman at the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency facilitate access to remedy and enhance social outcomes. Together, these measures increase the likelihood that investments generate broad-based benefits rather than deepening disparities.

Table 3.6. Examples of selection criteria for pro-poor and pro-equity energy investments

Theme	Select investments and partners that…	Avoid investments and partners that…
Affordability	Demonstrate built-in affordability safeguards, such as lifeline or progressive tariffs, cross-subsidies, PAYG models or targeted subsidies that protect low-income users’ access to electricity or clean cooking.	Rely on tariff or pricing models that prioritise cost recovery or returns without safeguards, leading to high household energy costs, disconnections or exclusion of low-income users.
Equitable access	Explicitly target underserved rural, peri-urban or informal areas through grid extension, mini-grids or off-grid solutions, with clear last-mile access commitments and service obligations.	Concentrate service provision in commercially attractive urban or industrial areas only, leaving last-mile, rural or informal settlements unserved.
Quality job creation	Demonstrate a commitment to creating formal, decent jobs, with safe working conditions, adequate wages, social protection, skills development, responsible subcontracting and support to workers affected by the energy transition.	Depend on informal or unsafe labour practices, weak oversight of contractors or employment models, short-term construction jobs without lasting skills, protection or transition pathways.
Informality and local livelihoods	Identify and address impacts on informal energy actors (e.g. electricity resellers, mini-grid operators, off-grid vendors, fuelwood value-chain workers) and include credible plans for integration, transition or livelihood support.	Displace informal providers or fuel-dependent livelihoods without transition support, compensation or viable alternatives.
Responsible business conduct (RBC)	Apply UNDP and OECD RBC standards, including human rights due diligence on labour conditions, land acquisition, resettlement, community health and safety and energy supply chains.	Treat renewable or “green” energy projects as inherently socially beneficial and fail to assess or manage labour, land or community impact.
ESG safeguards and quality	Have robust environmental and social risk assessments, mitigation plans and monitoring systems covering life-cycle risks such as land use, biodiversity, water use and waste (e.g. batteries, panels) and community health and safety.	Treat ESG requirements as a compliance exercise, rely solely on self-reporting or apply safeguards too late to influence project design.
Community engagement and remedy	Demonstrate early, continuous and meaningful engagement with affected communities, including ensuring free and informed prior consent with Indigenous communities and accessible grievance and remedy mechanisms for users, workers and communities.	Limit engagement to one-off consultations or lack effective mechanisms for complaints and remedy, especially for low-income or marginalised groups.

Source: Authors’ compilation based on IEA (2024[117]) and EC (2025[108])

3.3.3. Deploying blended finance strategically to support poverty and inequality reduction

Blended finance can play a key role in mobilising private capital for development, but it is neither universally appropriate nor inherently pro-poor. The viability of blended finance varies across geographies and sectors. It is, for instance, best suited to sectors where there is realistic potential for commercial viability over time and should be used when it is more effective than other financing approaches within the broader development co-operation toolkit. As highlighted in the OECD Blended Finance Guidance (OECD, 2025[95]), its deployment should be based on ex-ante assessments that consider the expected development outcomes and weigh it against alternative instruments, including in relation to fiscal implications for partner countries, especially where blending’s heavy reliance on senior debt and sovereign guarantees may constrain fiscal space and heighten debt vulnerability. The Guidance also highlights the need for development partners to do more to demonstrate investments’ development and value additionality, which remains insufficiently documented, assessed or publicly disclosed. Without deliberate design, blending risks reinforcing existing patterns of investment concentration rather than redirecting finance towards low-income countries, fragile contexts or underserved sectors or groups.

The distribution of blended finance reveals significant cross-country inequities. DAC members mobilise most private finance in MICs (28.5% in LMICs and 22% in UMICs over 2020-23), compared to 12% in LDCs and 15% in contexts facing high or extreme fragility, where poverty and inequalities are highest and structural constraints limit bankable project pipelines and private sector appetite (OECD, 2025[118]).

Directing blended finance into the areas where the development challenges are greatest, rather than where mobilisation is easiest, requires tailoring approaches to country contexts. In MICs, the use of less concessional instruments paired with explicit social mandates can help address persistent pockets of poverty, spatial and social inequalities, and exclusion from markets and services. Appropriate mobilisation in LDCs and contexts facing high and extreme fragility typically requires approaches with higher levels of concessionality and more flexible, patient and layered solutions than elsewhere. These are needed to tackle deeper market failures, institutional constraints and overlapping risks such as weak sponsors, high transaction costs and shallow capital markets. Instruments such as first-loss or subordinated capital, portfolio guarantees and concessional local currency loans can help derisk investments and improve affordability (OECD/UNCDF, 2020[119]; Attridge and Engen, 2019[120]). Even so, blended finance is not always the right approach in these contexts, and deliberate design and careful ex-ante assessment are especially important to ensure investments do not exacerbate existing inequalities or distort nascent markets.

Blending can be prioritised to unlock financing for underserved segments and excluded groups. Enhanced social impact can be achieved by directing blended finance toward sectors and actors that expand affordable access to essential and financial services for marginalised groups and generate decent employment and livelihoods for people living in poverty. Strengthening the governance of capital-intensive sectors can also help ensure gains from investments in these sectors are broadly shared. As further illustrated in Box 3.8, these sectors and actors include – but are not limited to:

• Agriculture: as the main source of livelihood for two-thirds of the labour force in LDCs and a critical sector for poverty reduction (UNCTAD, 2018[121]), mobilising private investment into inclusive agricultural value chains – in ways that benefit smallholder farms and agricultural micro, small and medium-sized enterprises (MSMEs) – can directly address poverty and inequalities.

• Financial inclusion: when financial services are affordable, responsibly delivered and embedded within broader strategies that address structural barriers to socio-economic inclusion, they can enable low-income households and MSMEs to save securely, participate more fully in markets and reduce their vulnerability to shocks (World Bank, 2023[122]; Ozili, 2021[123]). Easing MSMEs’ access to financial services is central for inclusive development: they account for 90% of businesses and over 70% of employment globally, stimulate local economies and expand access to goods and services for low-income populations (Nanziri and Wamalwa, 2021[124]; IFC, 2025[125]). Promoting entrepreneurship among women, youth and migrants further helps address horizontal inequalities.

• Co-operatives, community-based enterprises and the broader social and solidarity economy: these actors drive poverty reduction and inclusive growth by pooling resources, strengthening bargaining power and improving access to inputs and technology. Their collective ownership and democratic governance embed social purpose and fairer value distribution into their business, offering a more inclusive alternative to conventional models (UN SG/UNCTAD, 2024[126]).

• Natural resources and critical minerals: Many L&MICS – particularly in SSA – have significant endowments of natural resources and critical minerals that are attracting growing private investment flows. Without strong governance frameworks, capital-intensive extractive sectors tend to generate limited local employment and can concentrate benefits among investors while exposing communities to environmental and social risks. Blended finance can be structured to include safeguards (e.g. benefit-sharing arrangements) that translate resource wealth into broad-based gains (Johnson and Cimato, 2024[127]) .

Prioritising blending to unlock financing for underserved segments and sectors can expand access to essential services and generate decent employment. Support to governance frameworks can help ensure gains from these investments are broadly shared.

Finally, technical assistance can be critical in mobilising private capital to improve social outcomes. This includes support to help build bankable demand from underserved groups (e.g. strengthening micro-entrepreneurs’ financial literacy and ability to prepare business plans); to develop inclusive markets (e.g. through its support to Market System Development, Sida aims to enhance the ability of people living in poverty to participate in, contribute to and benefit from economic development); and to foster public reform enabling responsible business development and positive social outcomes (see next section). Such support helps prioritise the quality and impact of private finance over quantity, contributing to a shift from “filling gaps” to “shaping finance”, with public investment leading and attracting private capital (Mazzucato, 2025[97]).

Box 3.8. Directing blended finance towards underserved groups

Financing agricultural SMEs in Africa through support for inclusive agricultural development

The Financing for Agricultural SMEs in Africa (FASA) Fund is a “fund-of-funds” that provides catalytic capital to investment funds financing African agri-SMEs, which are critical connectors between small-scale farmers, rural development and the broader food system but tend to be excluded from commercial finance. The Fund provides first loss guarantees (i.e. subordinate capital mainly in the form of junior equity) and technical assistance, with a focus on three impact themes – enhanced food security and nutrition, improved livelihoods and climate-smart value – as well as on cross-cutting issues of gender and climate. Established by Norway, it mobilises both private and public capital, including from Korea, Norway, the United Kingdom and the Small Foundation, thereby serving as a multi-donor platform and limiting fragmentation (GDPRD, 2025[128]).

Using portfolio guarantees to enhance local financial institutions’ reach to underserved segments

Nasira is a risk-sharing facility managed by the Dutch DFI FMO that provides portfolio guarantees covering up to 95% of losses to local banks in partner countries to encourage them to lend to underserved segments who face higher perceived risks such as agricultural MSMEs and young, female and migrant entrepreneurs. It includes technical assistance to strengthen banks’ capacities to develop appropriate products and risk management for these clients. Supported by the EC and Dutch government, Nasira has been deployed across SSA and the EU neighbourhood and has, indirectly, supported more than 36 000 jobs in 5 countries. It is expanding globally under Nasira+ (FMO, 2022[129]).

Financing women’s economic empowerment through a gender bond in sub-Saharan Africa

Issued by NMB Bank in Tanzania, the Jasiri Bond finances businesses that are women-led or -owned, or whose services directly benefit women, with the aim of reducing gender income inequality and advancing women’s financial inclusion and economic empowerment. Bond proceeds are used primarily for loans and credit facilities, complemented by financial literacy and digital access initiatives. Aligned with the International Capital Market Association’s Social Bond Principles, the bond supports the Tanzanian government’s broader strategy to advance gender equality and women’s participation in the private sector, demonstrating how capital market instruments with clear social objectives and reporting can generate measurable inclusion outcomes. IFC subscribed to 31% of the bond, and the investment is supported by IDA’s Private Sector Window Local Currency Facility (NMB, 2023[130]).

Other relevant initiatives include Sweden’s guarantees instruments, which increase access to finance in many of the poorest countries from agriculture and energy through to health and media (OECD, 2023[131]); France's African Investment and Business Support Facility (FISEA), which provides direct equity investments in companies with higher risks but greater impact (OECD, 2024[132]); and Spain's Huruma Fund, which supports rural farmers both directly through equity investments in agri-businesses and indirectly through debt investments in rural financial institutions (OECD, 2022[133]).

3.3.4. Supporting local ecosystems and an enabling environment for an inclusive private sector

Development partners can invest in local financial institutions in ways that help them actively shape more inclusive markets. Support to local banks – public and private – through guarantees, equity and technical assistance can strengthen institutional capacity and market infrastructure, while enabling them to overcome risk perceptions and extend credit to clients they might otherwise exclude, such as MSMEs, smallholders and social and solidarity enterprises. In particular, development partners can strengthen support to national development banks, enabling them to operate as mission-oriented institutions, with mandates, governance and operational models explicitly aligned to inclusive and sustainable development goals. Acting as investors of first resort, these institutions can deploy patient capital in high-risk, high-impact areas, strategically using concessional finance to lead investment, co-create markets and crowd in private capital toward inclusive and transformative outcomes (Mazzucato, 2025[97]).

Box 3.9. Addressing structural barriers that limit inclusive growth in Ghana

Established in 2021 with government and DFI support, Development Bank Ghana was designed to correct a persistent market failure in Ghana’s financial system: the absence of long-term, local-currency finance for SMEs. By operating as a wholesale lender, it expands the capacity of local financial institutions to serve firms that are typically credit-constrained, particularly in agribusiness, manufacturing, information and communication technology and high-value services. These sectors have high potential for quality job creation and productivity gains, which are central to poverty and inequality reduction. The bank also integrates gender and youth lenses into its portfolio, helping to address horizontal inequalities in access to finance. With an initial USD 250 million capital base and over USD 500 million mobilised from development partners, it demonstrates how public development banks can leverage partnerships to strengthen domestic financial ecosystems and support more diversified, resilient and inclusive economies (DGB, unpublished[134]).

Where development partners promote their own domestic companies as part of their external engagement strategies, it is key to ensure this is not at the expense of local private actors or development impact. Engaging firms from provider countries and multinational enterprises can bring advantages, such as strong ESG standards and technological know-how to deliver complex projects. However, restricted procurement that promotes their use can undermine value for money (tied aid can lower the quality of projects and increase costs by 15-30%), crowd out local firms and weaken projects’ contribution to local private sector development (OECD, 2021[135]). Managing this trade-off requires safeguarding open and competitive procurement in line with the OECD DAC Recommendation on Untying ODA, aligning commercial participation with development and financial additionality, maintaining a clear distinction between development co-operation and export promotion, and ensuring that support to external firms complements rather than substitutes investments in partner countries’ domestic capacity and local ecosystems (OECD, 2025[136]).

Where development partners promote their own domestic companies as part of their external engagement strategies, it is key to ensure this is not at the expense of local private actors or progress on poverty and inequality reduction.

Finally, development co-operation can play a critical role in supporting an enabling environment in which private sector development translates into tangible social progress, particularly for low-income workers and consumers. This can be achieved through support for a broad range of policy measures, including:

• Sound macroeconomic, institutional and regulatory frameworks, which are critical for partner countries to attract and retain sustainable investment (OECD, 2022[137]).

• Strong public institutions that can steward private investment in the public interest, including through effective frameworks for public-private partnerships and the regulation of essential services, notably via tariff-setting and quality control (World Bank, 2017[138]).

• Financial sector regulation and consumer protection, which are key to ensuring that expanded access to finance does not expose low-income households and small firms to excessive risks.

• Inclusive trade and competition policies, which help distribute gains from trade integration more evenly and prevent monopolistic practices that concentrate wealth and market power, suppress wages and limit access to essential goods and services (WTO, 2024[139]; Oxfam, 2024[140]).

• Labour rights, social dialogue and social protection, which help private sector growth translate into decent work and fairer income distribution (ILO, 2016[141]).

• Complementary public investment in education and skill development, health and key infrastructure such as roads and ports, which underpins a productive workforce and inclusive economic development.

• Fair and effective tax systems that ensure private sector development generates sustainable public revenues to finance public services and human development (see Section 3.2).

3.4. Harnessing the broader development finance ecosystem for social outcomes

Other global financial resources can be used in the service of poverty and inequality reduction in L&MICs. Beyond the limited concessional resources, domestic resources and private capital discussed above, there is scope to tap into other resource pools and direct them towards inclusive development. For instance, accumulated global liquidity can be redistributed, existing debt stocks can either be restructured – freeing up fiscal space – or converted for development spending, revenue generated from internationally mobile activities can fill financing gaps, and transfers from diaspora communities and foundations can be a source of private development finance.

Tapping into these heterogeneous sources requires development partners to engage with the broader development finance ecosystem and act as enablers. Available instruments differ in their scope, mobilising different types of resources and actors; their scale, with leveraging potential varying from millions to billions; and their maturity, with some having been tried and tested while others are in their infancy. Yet for all of them, development partners can act as enablers – rather than direct providers – because the adoption, implementation or scaling up of many is contingent on bilateral and international negotiations and co-ordination. Development partners can influence the architecture, build coalitions and create the conditions for these pools of capital to work better for the least well-off, although the decision to spend the resources generated by some of these instruments on poverty and inequality reduction goals ultimately lies with L&MIC governments.

This final section explores a selection of available instruments. It does not aim to be exhaustive but focuses on a selection that holds significant potential, not only in terms of scale but also for poverty and inequality reduction outcomes. None are silver bullets, but each can play an important role in strengthening the overall development financing mix.

3.4.1. Creating fiscal space for social investment through debt relief

This subsection examines two complementary debt relief instruments for creating fiscal space: debt restructuring, which changes the terms on which existing debt is repaid, and debt-for-development swaps, which link debt relief to specific development or climate commitments. Where "debt relief" is used below, it refers broadly to the reduction in debt-servicing burden achieved through either instrument.

Debt restructuring offers a pathway to provide relief to developing countries where debt servicing obligations are crowding out public investment. It spans a spectrum of interventions: rescheduling or reprofiling that extends maturities and smooths repayments without reducing debt stock; measures such as interest rate relief or grace periods that reduce near-term debt service costs; and reductions in the nominal value of the debt itself (i.e. haircuts). Reduced or deferred obligations allow governments to retain resources that would otherwise flow to creditors. In principle, this fiscal space can be redirected toward poverty- and inequality-reducing expenditure.

However, sovereign debt restructuring is an institutionally cumbersome process. This partly reflects the diversity of creditors – each governed by different rules and incentives in negotiating debt relief. Debt owed to bilateral creditors within the Paris Club can be restructured through an established – though often slow – multilateral forum (Benjamin and Wright, 2019[142]). By contrast, private creditors are bound by contract law and face no formal obligation to participate in relief efforts. Debt owed to MDBs benefits from preferred creditor status and is typically excluded from restructuring, even in cases of acute debt distress. This heterogeneity gives rise to a collective action problem: individual creditors have an incentive to hold out in the expectation that others will bear the losses. While the G20 Common Framework was designed to address these co-ordination failures, its implementation has in practice been slow and uneven (Georgieva and Pazarbasioglu, 2021[143]).

Importantly, the fiscal space generated through debt restructuring efforts does not automatically translate into poverty or inequality reduction – or even into development spending more broadly. For instance, IMF‑supported programmes frequently facilitate debt restructuring by serving as a signal of policy credibility to creditors (Bai et al., 2024[144]). However, these programmes typically come with conditionalities that require participating countries to undertake policy reforms. The impact of such conditionalities on social spending is mixed, with outcomes varying across programmes, sectors and geographical areas (Sherry and Zeaiter, 2024[145]); (Kentikelenis, Stubbs and King, 2015[146]).

In contrast, sovereign debt swap programmes can help L&MICs not only free up fiscal space but also redirect resources toward poverty and inequality reduction goals. While debt swaps are not new, they have benefited from revived interest in recent years, as many countries face growing liquidity pressure. Bilateral sovereign-to-sovereign debt swaps – such as debt-for-development and debt-for-environment swaps – have been the most common form in past decades, primarily used on ODA debt. Through this instrument, a bilateral creditor agrees to reduce or restructure a sovereign debtor’s debt service obligations, with at least part of the resulting savings directed to agreed development or climate programmes. Debt-for-development swaps can help L&MICs ease short-term liquidity and foreign-exchange pressures by converting external debt service into domestically invested resources, while supporting targeted investments in sectors relevant to poverty and inequality reduction – such as basic infrastructure, education and health.

However, the overall development impact of debt swap programmes is often constrained. Their success can be limited by factors such as limited scale, weak additionality, modest effects on long-term debt sustainability, operational complexity and high transaction costs. Implementation approaches have also tended to rely heavily on project-based modalities, external delivery structures and donor-driven allocation choices that may prioritise visibility or rapid disbursement over sustained development outcomes. To strengthen their effectiveness, debt swaps can be designed as complementary instruments within broader debt restructuring and development financing strategies, with clear additionality safeguards, stronger co-ordination among borrowers to pool claims and reduce transaction costs, better alignment with national development priorities, greater use of on-budget and system-strengthening approaches, and a sharper focus on high-impact social and redistributive spending (PFDD, 2021[147]; Le Mounier, 2021[148]).

Commercial debt-for-development swaps have emerged as private creditors play an increasing role in L&MIC debt. The share of external debt LICs owed to private creditors rose from 8% in 1996 to 19% in 2021 (OECD, 2025[149]). In this context, development partners have recently engaged in large-scale commercial debt swaps, using credit enhancements such as guarantees or insurance to unlock more affordable, longer-maturity financing for governments in exchange for commitments to direct part of the resulting fiscal savings toward agreed development spending (Raih, 2025[150]). These transactions are typically structured through special purpose vehicles. Although most have focused on conservation and climate programmes to date, a major World Bank swap in Côte d’Ivoire has freed up investments in education (see Box 3.10). Unlocking the potential of commercial debt swaps requires a clear long-term vision for the use of swap resources, a focus on expenditures that benefit from long-term financing and mechanisms to ensure that swap-funded spending is genuinely additional (Ababou, 2025[151]).

Debt-for-development swaps can support investments in poverty and inequality reduction, but they are not a panacea; they cannot substitute for comprehensive debt restructuring or cancellation in heavily indebted countries.

Debt-for-development swaps are not a panacea: they are not appropriate in all contexts and cannot substitute for comprehensive debt restructuring or cancellation in heavily indebted countries. The World Bank and IMF’s Approach Framework to Debt-for-Development Swaps advises using swaps selectively – based on debt sustainability, fiscal conditions and development priorities – and identifies them as being most suitable for countries facing temporary liquidity pressures with otherwise sustainable debt trajectories. In countries with unsustainable debt, restructuring or write-offs remain the appropriate primary response, with swaps considered only as a post-restructuring complement. The Framework further recommends minimising transaction costs, aligning with national priorities and incorporating clear accountability arrangements to deliver measurable results (World Bank/IMF, 2024[152]). A related distributional concern is that swaps tend to concentrate in a subset of countries – typically biodiversity-rich middle-income borrowers with bond market debt that can be engineered into swap structures.

Box 3.10. Using a debt-for-development swap to free up funds for education in Côte d’Ivoire

In 2024, Côte d’Ivoire pioneered a debt-for-development swap by refinancing EUR 400 million of commercial debt. With partial credit enhancement from the new World Bank Group guarantee platform, the operation replaced high-interest debt with a lower-cost, longer-maturity commercial loan, improving market confidence and lowering borrowing costs by about 30 basis points. The transaction is expected to generate up to EUR 60 million in fiscal savings, two-thirds of which will be finance the construction of 33 schools, benefiting approximately 30 000 students. (World Bank, 2025[153]).

Unlike other recent swaps, and in line with the World Bank and IMF’s Framework, savings are kept within the national budget rather than in a separate special-purpose vehicle or trust fund, and investments are channelled through an existing education programme supported by the World Bank, reducing transaction costs, strengthening alignment with national education priorities and leveraging existing monitoring systems. This innovative approach can be replicated and scaled up, and the same mechanism can be applied to bilateral debt swaps (Raih, 2025[150]).

3.4.2. Redirecting global liquidity to L&MICs through Special Drawing Rights

Special Drawing Rights (SDRs) are a promising source of financing for sustainable development. SDRs are international reserve assets created by the IMF and allocated to its member countries to supplement official reserves and provide liquidity. Countries can hold SDRs as reserves or exchange them for hard currency, which does not require repayment of principal but does require an ongoing interest payment if SDR holdings fall below allocations. Separately, SDRs can also be rechannelled as debt, in which case recipient countries receive conventional loans that add to public debt.

Originally designed to ease international trade and finance, they have emerged as a key crisis-response tool. They were used during the 2008-09 global financial crisis and the 2021 COVID-19 pandemic and are increasingly viewed as a potentially significant source of finance for development and the climate transition. SDRs can be deployed rapidly to provide liquidity, reduce reliance on costly borrowing and are free of policy conditionality, with their use determined by receiving governments (Cashman, Merling and Arauz, 2022[154]). During the COVID-19 crisis, many African countries chose to use them to finance critical health expenditures, build reserves and service debts.

However, because SDRs are allocated in proportion to countries’ IMF quota shares, which skews towards higher-income countries, their distribution is highly uneven. High-income countries receive the bulk of allocations, yet they generally have limited need for SDRs, resulting in large amounts left unused, with an estimated USD 992 billion in SDRs remaining idle (Africa Expert Panel, 2025[155]). Low-income countries receive far smaller shares, for example, of the IMF’s historic USD 650 billion SDR allocation in 2021, only USD 33 billion was allocated to African countries.

Rechannelling SDRs from high-income economies to L&MICs – for instance through the IMF – can help address this imbalance. IMF members can transfer SDRs through a bilateral voluntary agreement or recycle them as loans through IMF-administered trust funds, building on the successful experience of SDR rechannelling during the COVID-19 crisis. These include the Poverty Reduction and Growth Trust, which provides concessional financing to LICs and requires IMF-supported programmes to contribute to poverty reduction and growth, and the Resilience and Sustainability Trust, which focuses on long-term issues such as climate change and pandemic resilience (Georgieva, Lauwers and Pazarbasioglu, 2023[156]).

However, rechannelling through these funds presents notable challenges. A substantial share of rechannelled SDRs need to be held in reserve, subsidy and investment accounts to maintain the financial integrity of the trusts. As a result, the volume of resources actually available for lending is considerably lower than headline pledge figures suggest (Plant and Ward, 2025[157]). Moreover, rechannelling is slower than direct allocations, subject to restrictive eligibility criteria that exclude many L&MICs, and involves IMF policy conditionality that, in some instances, has been linked to increasing poverty and inequalities (Mutazu and Chikowore, 2023[158]). Reforms – such as expanding the objectives of the IMF’s Resilience and Sustainability Trust to explicitly include poverty and inequality reduction, or delinking access to the Trust from enrolment in an IMF programme centred on macroeconomic stabilisation – would facilitate the use of SDR‑backed financing for poverty and inequality reduction.

Re-channelling SDRs through MDBs with prescribed-holder status under the IMF framework is also gaining traction. In particular, hybrid capital instruments proposed by AfDB and Inter-American Development Bank – and approved by the IMF – offer innovative mechanisms using SDRs to unlock new lending by MDBs, with estimated leverage ratio of up to 1:4 (AfDB, 2024[159]). Recycling SDRs through MDBs – which often have explicit poverty and inequality reduction mandates – could help expand access to SDR-supported financing and enhance alignment with country priorities (Vasic-Lalovic, 2022[160]). However, such approaches face regulatory and institutional hurdles. For example, SDRs in the euro area are held by central banks, whose legal and reserve‑management constraints limit their ability to re-channel SDRs through MDBs.

In the longer run, more regular and equitable SDR issuance could help reduce inequality between countries and raise significant additional revenue that L&MICs could invest in poverty and inequality reduction efforts. There are growing calls for structural reforms to make SDR allocations more frequent – rather than exceptional allocations in times of crisis – and to revise IMF quotas so that a larger share of future SDR allocations reaches L&MICs directly (Oxfam, 2024[161]).

3.4.3. Leveraging solidarity levies to generate resources for poverty and inequality reduction

Solidarity taxes can play an important role in significantly and equitably expanding international public finance in support of sustainable development. Solidarity levies are targeted taxes or charges applied to specific sectors, activities or population groups to mobilise additional resources to address shared social or global challenges. In effect, they extend the logic of shared fiscal responsibility beyond national borders, mobilising resources from sectors and actors that domestic tax systems may not reach (see Section 3.2). While typically set at low rates, solidarity levies can raise substantial revenue – recent estimates suggest a potential of hundreds of billions of dollars annually across instruments (Table 3.7). They can also often be implemented relatively quickly, as they build on existing tax bases and administrative systems. From an equity perspective, these measures present several advantages. First, they are generally progressive, as they tend to target sectors that are highly profitable – often under-taxed or enjoying significant tax exemptions – or activities disproportionately consumed by wealthier segments of the population. Second, as “automatic” mechanisms, solidarity levies can help reduce power imbalances between development assistance “providers” and “recipients”, as revenues are generated through pre-defined rules rather than discretionary budgetary decisions by provider governments.

Table 3.7. Examples of solidarity levies

	Rationale from an equity and sustainability perspective	Potential revenue mobilised per year
Maritime shipping levy	High-emitting sector, enjoying significant tax exemptions, in which some segments – particularly container shipping – have experienced windfall profits during crises.	USD 10-12 billion, through the International Maritime Organisation’s Net Zero Framework (under discussion).
Aviation kerosene levy	High-emitting sector, in which demand is disproportionately driven by high-income groups (very high-income groups in the case of private jets).	USD 38 billion (if adopted by a coalition of the willing at a lower rate) to USD 140 billion (if adopted globally on all international flights).
Aviation private jet levy		USD 17 billion (if adopted globally on all private jet flights).
Aviation ticket levy		USD 5 billion (if adopted by a coalition of the willing for premium flights only) to USD 123 billion (if adopted globally on all international flights).
Fossil fuel extraction levy	Highly emitting and profitable sector, characterised by windfall profits during periods of price volatility.	USD 85 billion (through an oil extraction levy adopted by a coalition of the willing).
Fossil fuel profit levy		USD 20 billion (if a global minimum tax on the extractive sector is set at 15%) to USD 46 billion (if set at 30%).
Financial transaction tax	Highly profitable sector, with transactions and asset ownership concentrated among the wealthiest individuals and institutions.	A 0.50% tax on equity transaction could raise between USD 12 billion (if adopted by the EU) and USD 105 billion (if adopted globally). A green financial transaction tax – linking tax rates to environmental performance – could raise USD 163 billion.

Source: Adapted from GSLTF (2025[162]).

There is growing interest in both scaling up existing solidarity levies and introducing new ones. Their appeal lies in offering a source of predictable funding that is insulated from the volatility of annual aid budget cycles, but achieving global implementation has remained politically challenging. Some measures have been discussed for decades and, in certain cases, adopted by a growing number of countries. For example, financial transaction taxes have been adopted in around 40 countries – including the United Kingdom, France, Germany, Brazil, South Africa and India – either currently or in recent years. They are estimated to generate USD 17 billion per year globally (GSLTF, 2025[162]) and are considered to hold strong potential for scaling up (Sagasti, 2024[163]). Attention has also focused on levies in the transport (aviation and shipping) and fossil fuel sectors, as well as on a tax on ultra-high-net-worth individuals. For instance, a 2% minimum tax on billionaires could mobilise USD 200-250 billion, while affecting only around 3 000 taxpayers globally (Zucman, 2024[164]). Traction around such a global wealth tax increased notably under the Brazilian and South African G20 Presidencies and through an initiative to promote greater wealth taxation launched by Brazil and Spain at the Fourth International Conference on Financing for Development (La Moncloa, 2025[165]), reflecting concern that while the wealth and carbon footprint of the ultra-wealthy is significantly increasing, their effective tax rate has decreased.

Stronger international co-ordination and agreements on equitable revenue-sharing mechanisms are needed to ensure that the proceeds of solidarity taxes benefit LICs. As the tax bases for many solidarity levies are concentrated in HICs, co-ordinated approaches and revenue-sharing arrangements between HICs and LICs are essential to ensure meaningful development impact. Proposals include directing part of the proceeds to closing financing gaps for social protection in LICs (De Schutter, 2025[166]). Where levies are introduced by individual HICs at national level, governments and parliaments may choose to allocate a share of revenues to ODA budgets, as seen in France, Italy and Korea. While achieving global agreements remains politically challenging, “coalitions of the willing” offer a pragmatic pathway by allowing groups of countries to move ahead without universal consensus – as illustrated by the Coalition for Solidarity Levies for Premium Flyers, which brings together eight countries to enhance contributions from the aviation sector (GSLTF, 2025[162]). The Global Solidarity Levies Task Force, launched at COP28 in 2023 and co-chaired by Barbados, France and Kenya, has potential to accelerate progress through its efforts to build political coalitions for the adoption and implementation of solidarity levies to mobilise large-scale and equitable climate and development finance.

3.4.4. Leveraging diaspora finance to strengthen household and community resilience

Remittances sent by migrant workers and diasporas to their countries of origin represent a sustained and significant financial lifeline for many households and communities in L&MICs. At an estimated USD 685 billion sent to L&MICs through formal channels in 2024, remittances exceed ODA and foreign direct investment flows combined (Ratha, Plaza and Kim, 2024[167]). They have been shown to be countercyclical, generally holding steady or growing in times of crisis as migrants provide extra support to their home countries (IOM, 2022[168]). Remittances help reduce poverty and build household resilience through cash transfers that can support basic needs, improve health and education and provide capital to invest in small businesses. A study shows that a 10% increase in per capita remittances is associated with a 1.3% drop in poverty rates (Garcia-Fuentes, Lynn Kennedy and Ash, 2025[169]). The impact of remittances on inequality is more ambiguous – while it reduces gender and spatial inequalities, it may increase income inequalities depending on the income distribution of migrants sending remittances (Anwar, Mang and Plaza, 2024[170]; Abokyi, 2023[171]). From the perspective of inequality between countries, remittances also disproportionately benefit MICs, with LICs receiving just 1.7% of all money sent or brought back by migrants (van Teutem and Acisu, 2025[172]).

Remittances are a significant financial lifeline for households in L&MICs. Development partners can strengthen their impact by helping lower transfer costs and direct flows toward poverty and inequality reduction.

A key entry point for development partners is reducing the cost of sending remittances and improving the policy and financial environment for their transfer. This can be achieved through regulatory reforms (including measures to limit intermediary fees), strengthened competition among remittance service providers and expanded use of digital payment systems. Broader financial inclusion measures, including strengthening access to mobile and digital services – particularly among low-income and marginalised groups – can further increase the impact of remittance flows (UN DESA, 2025[173]). Conversely, policies that increase the cost of remittance transfers from high-income countries (e.g. remittance taxes) risk reducing flows to remittance-dependant households in L&MICS.

Development partners can also help redirect remittance flows toward investments with development impact, including poverty and inequality reduction (Asquith and Opoku-Owusu, 2020[174]). Supporting governments in designing diaspora engagement policies and issuing diaspora bonds can channel expatriate savings toward large-scale national development projects (Ratha et al., 2023[175]). Matching programmes that co-finance remittance-funded initiatives can further encourage diaspora investment in locally identified projects while strengthening ties between migrants and their communities of origin. Finally, more localised diaspora investment – including through microfinance initiatives – can support smaller-scale but high-impact community development (see Box 3.11.). It is worth noting the limitations of remittances as a development finance flow: they are fundamentally private transfers and evidence on their aggregate development impact is mixed (Swiss, Dicks and Kaida, 2026[176]) .

Box 3.11. Maximising the impact of remittances in rural areas

The International Fund for Agricultural Development’s (IFAD) multi-donor Financing Facility for Remittances supports projects that spur innovation and improvements to global and domestic remittance markets, with a focus on maximising the development impact of migrant financial contributions to their families, particularly in deprived and rural areas (IFAD, 2024[177]).

As part of this, the joint IFAD and EU Maximising the Impact of Global Remittances in Rural Areas Programme, which ran from 2015 to 2020, supported country-level projects across Africa, Asia, Europe and Latin America to reduce remittances costs, expand access to formal services in rural areas and link remittances to financial inclusion and local investment. It focused on supporting migrants and their families in rural low-income areas, with some projects targeting other intersecting inequalities such as rural youth and women. The programme increased access to cheaper and faster remittances by expanding payment networks and innovative services, such as e-wallets and rural financial access points, through partnerships with financial, mobile and postal operators. As a result, the number of remittance transfers through formal channels increased significantly and financial literacy and inclusion improved in rural areas. The programme also supported diaspora investment in MSMEs. Finally, through engagement and advocacy activities, the programme contributed to the adoption of 14 international and 32 national policies and strategies contributing to a more conducive policy and legislative framework for remittances.

3.4.5. Harnessing philanthropic capital to catalyse social finance

While smaller in scale than public or market-based instruments, philanthropic finance is growing, though with limited attention to low-income countries. Private philanthropy for development represents a growing share of development finance, averaging USD 17.1 billion per year between 2020 and 2023 (OECD, 2026[178]). Over the same period, philanthropic flows remain concentrated in sectors relevant to poverty and inequality reduction – health and education accounted for half of total philanthropic disbursements. The sectoral focus of philanthropic contributions, nonetheless, is susceptible to shift – for instance, due to policy decisions that limit the areas that philanthropies can support, such as climate and gender, which accounted for 10% and 17% of total philanthropic funding for development over 2020-23 (OECD, 2026[178]). However, they were not directed toward the poorest countries: middle-income countries accounted for approximately 40% (USD 9.5 billion) of all international philanthropic giving; low-income countries only received 20% (OECD, 2026[178]).

Development partners can strengthen their strategic engagement with foundations to leverage philanthropic finance for poverty and inequality reduction. They can draw on philanthropy’s comparative advantages – such as its flexibility, willingness to invest in areas with low or no economic rates of return, tolerance for risk, capacity for innovation, close engagement with local networks and organisations and ability to influence policy agendas through its dual role as civil society actor and funder. Many of these characteristics are particularly relevant to advance poverty and inequality reduction efforts. For instance, their ability to take risks and innovate allow foundations to test policy solutions through the financing of pilot programmes, that governments and development partners can then scale if successful. This approach was effectively implemented in support of BRAC’s Ultra-Poor Graduation Approach (see Box 4.7), which was scaled across eight countries with backing from the Ford Foundation, governments and development partners (OECD, 2021[179]).

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Notes

← 1.  See methodology to calculate ODA per person in extreme poverty in (OECD, 2025[3]). This analysis draws on data from (World Bank, 2026[11]) and (OECD, 2026[181]).

← 2.  Domestic revenue mobilisation refers to a government’s ability to raise public funds from within its own economy primarily through taxes, fees, social security contributions and other non-tax revenues. “Domestic resource mobilisation” (also abbreviated as DRM) is commonly used, and is broader, including non-revenue domestic resources such as borrowing in domestic sovereign debt markets and improved spending efficiency.

← 3.  The UN reports the Sevilla target for tax‑to‑GDP ratios using a definition of tax revenue that excludes social security contributions, while other sources, such as World Bank country scorecards, report tax‑to‑GDP ratios at or below 15% including social security contributions.

← 4.  ODA to DRM from DAC members fell from a peak of USD 490 million (constant 2024 prices) in 2020 to USD 298 million in 2023, before rising again to USD 366 million in 2024 (OECD, 2026[181]).

← 5. w

← 6.  Private finance mobilisation refers to unlocking and channelling commercial finance towards sustainable development objectives in developing countries, through official development finance. Blended finance uses public development finance to mitigate risks and create incentives for private investors to engage in projects that deliver both financial returns and measurable development outcomes in L&MICs. It deploys a wide range of financial tools – debt instruments (loans, bonds and credit lines), equity, guarantees, grants and technical assistance – and mobilises a broad range of actors such as bilateral donors, MDBs, development finance institutions, commercial finance providers (such as banks, institutional investors, and impact funds), L&MIC governments, civil society organisations and technical assistance providers (OECD, 2021[182]).

← 7.  The international RBC architecture is anchored in the UN Guiding Principles on Business and Human Rights (UNGPs), the International Labour Organization’s (ILO) Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, the Ten Principles of the UN Global Compact and the OECD Guidelines for Multinational Enterprises. The forthcoming OECD Guidance on RBC and development co-operation will provide another important resource for development partners. The IFC Performance Standards have served as the default environmental and social risk management framework for DFIs.