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Luxembourg

The World's Top Donor

April 29, 2014 | by JUSTINE DOODY

Civil ensign of Luxembourg © Yui/veer

Luxembourg leads the world on global social policy. This has not only aided developing countries but also the diminutive nation’s financial sector and its international influence.

Tiny Luxembourg has a population of just over half a million people, the second smallest in the European Union after Malta. But it leads most of its bigger neighbours in providing public goods to countries in need. The latest edition of the Bertelsmann Stiftung’s Sustainable Governance Indicators (SGI) project ranks Luxembourg number one out of 41 countries on global social policy, along with Denmark, Estonia, New Zealand, Sweden, and the UK.

Luxembourg’s focus on development assistance has not just benefited recipient countries: it has also aided the expansion of the country’s important financial sector and helped the diminutive nation to earn a place among the world’s most powerful countries in global governance bodies.

Since 2000, Luxembourg has given more than 0.7% of its GDP to development assistance, exceeding the UN’s target for developed economies set in 1970. According to the Organization for Economic Cooperation and Development’s most recent figures, Luxembourg is the most generous donor country in the world. In 2012, Luxembourg deployed 1% of its gross national income as official development aid (ODA), enough to overtake 2011 leader Sweden, which spends 0.97% of its income on ODA. Luxembourg’s total contribution to ODA in 2012 was $399 million. The government has committed to maintaining an ODA rate of 1% of gross national income through 2014.

Official development cooperation is carried out through the state agency, Lux-Development. But according to an OECD review of development assistance in Luxembourg in 2012, about one-third of Luxembourg’s ODA goes through multilateral organisations, and a further 20% is channelled through NGOs. The OECD review noted that Luxembourg needs to be careful that the various programmes it supports complement rather than duplicate each other.

Luxembourg’s austerity policies are no justification to cut aid back

Mali, Burkina Faso and Senegal are the biggest recipients of Luxembourg’s ODA. The country’s contributions are particularly helpful at a time when global aid in general and sub-Saharan assistance in particular is declining. Campaigning organisation ONE says that in 2012, global aid declined for the second year in a row, the first time this has happened since the 1990s. And while total global aid fell by 3%, aid to sub-Saharan Africa dropped by 6%. Austerity policies in Europe were one contributing factor to the decline; as countries focused on cutting costs at home, aid programmes to less developed countries were among the first priorities to suffer. Luxembourg itself has seen public debt rise from 13.5% of GDP in 2008 to 20.9% in 2012, according to the SGI study, but unlike many of its European neighbours, it has not used its own economic difficulties as a justification for backsliding on its aid targets.

Luxembourg’s private sector is also heavily involved in development through the microfinance industry, in which Luxembourg is a major world player. Luxembourg is home to 31% of the world’s microfinance investment vehicles (MIVs) along with 52% of total global MIV assets. MIVs are a type of investment fund that help the microfinance institutions that lend to micro-entrepreneurs in developing countries to raise investment capital.

Luxembourg has attracted MIVs in such high numbers partly because of the dominance of the financial sector in the country’s economy, which makes the country a centre of expertise in financial management. Luxembourg’s banking and financial sector accounts for over 30% the country’s GDP, according to the SGI country report.

Investment funds are a key component of the financial sector: the country hosts 3,841 funds managing €2.4 trillion, making it the second largest investment fund centre in the world after the US. Favourable regulations and tax policies, as well as a large degree of banking secrecy, have contributed to the attractiveness of Luxembourg for non-resident customers; Luxembourg has played for time in implementing EU regulations on exchange of information, but is set to put these regulations in place by the end of 2014.

Microfinance is not without its critics as a means of ensuring development. Predatory lending practices on the part of some microfinance institutions have seen debt levels rise among those who were supposed to be helped by the schemes. In 2010, India’s Andhra Pradesh province was hit by tragedy when hundreds of people committed suicide as a result of over-indebtedness fuelled by over-zealous microfinance lenders, coupled with the outrageous pressure brought to bear by debt collectors acting on their behalf.

These practices aside, some argue that microcredit programmes create supply without demand, leading to hyper-competition among microenterprises over the same small pool of resources rather than to any real poverty alleviation. In this reading, MIVs simply provide (well-meaning) investors with a return on their investment at the expense of the poorest members of society. If so, ODA may be a more effective means of working towards the reduction of global poverty.

Development aid brought global influence

Luxembourg’s ODA has doubtless helped to encourage development in the areas on which it focuses, among them healthcare, water treatment, local development, and infrastructure. But it has also brought returns to the small nation on a geopolitical level.

Luxembourg was elected in 2012 to the UN Security Council as a non-permanent member for the session from 2013 to 2015, beating out fellow EU member Finland for the seat. Luxembourg announced its candidacy in 2001 and its deep commitment to multilateral cooperation formed the centrepiece of its campaign. Its advocates pointed to its ODA strength as the key evidence for its bid.

In 2013, Luxembourg took its place for the first time on the Security Council. The small country now has the opportunity to help set priorities on a global scale, and to boost its own reputation as a diplomatic force in the process.

Justine Doody is an editor at the European Council on Foreign Relations (ECFR). She is also a writer for the Bertelsmann Stiftung’s BTI Blog and SGI News.

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