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Responding to the crisis response

By Vinod Thomas and Marvin Taylor-Dormond
Posted on Monday, 21 December 2009 17:41

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Private financial flows to developing countries fell from $1.2trn in 2007 to $360bn in 2009 because of the global finance crisis. GDP growth in Sub-Saharan Africa is predicted to fall 1.7% in 2009, and the race is on to reverse this trend.

Vinod Thomas and Marvin Taylor-Dormond at the Independent Evaluation Group, which monitors the work of the World Bank, look at its response to the crisis for The Africa Report, arguing that money should be spent on high-productivity areas rather than non-targeted subsidies.

The current economic crisis could push 90 million more people into extreme poverty worldwide by the end of 2010. An additional two million children could die in the next five years if the crisis persists. In Sub-Saharan Africa, the global economic crisis could undermine recent progress through declines in commodity prices, tourism earnings, exports, remittances and private capital flows.

The region’s GDP had been growing at over 5% a year since 2004. Greater investor interest had contributed to this growth, with net FDI inflows increasing from $13bn in 2004 to about $29bn in 2007.

However, the global crisis has already made a heavy landfall in the region: growth is likely to fall to 1.7% in 2009. Thirteen countries could experience decline in per capita income of over 10% on average. Unemployment could rise further in a number of countries. In South Africa, for example, unemployment rose from 23.6% in the second quarter to 24.5 % in the third quarter, with the economy contracting by about 2% in 2009.

Dealing with the economic and human impacts of the crisis in Africa requires both reinvigorated financial flows and more effective use of funds. Similar volumes of spending in the past have produced vastly different development outcomes. The World Bank Group’s Independent Evaluation Group, based on reviews of countries, highlights factors driving the quantity and quality of the crisis response.

First, financial flows need to be well targeted, adequate and timely, especially in the face of growing fiscal gaps. During the current crisis, official flows from multilateral sources have reached record levels. At the same time, it is essential to recognise that sustained recovery depends not only on the volume of spending but also on its quality and how it is structured.

The World Bank Group is substantially increasing its country financing. Globally, commitments by the International Bank for Reconstruction and Development (lending to middle-income countries) for the 2009 fiscal year tripled to $33bn, and those of the International Development Association (lending to low-income countries) increased by 25% to $14bn, with $7bn for Sub-Saharan Africa. The World Bank’s private sector arm, the International Finance Corporation (IFC) invested $10.5bn in the 2009 fiscal year, focusing on strengthening the financial sector and facilitating trade. In Sub-Saharan Africa, the IFC’s investments reached a record $1.8bn.

To sustain the economic revival, private capital flows must be revived. Private financial flows to developing countries fell from $1.2trn in 2007 to $360bn in 2009, and reversing this trend is fundamental. Poorer developing countries face a $12bn financing gap this year and may not be able to cover even the most essential social spending.

Second, the macroeconomic implications of the crisis response, in particular the rise in government deficits, need to be handled well. Fiscal deficits in 2009 are estimated to be nearly 7% of GDP higher than in 2007 in G-20 states and about 5% higher in G-20 emerging economies. Meanwhile, the G-20’s public debt-to-GDP ratio could, by one estimate, rise by nearly 15% between these years. The biggest fiscal expansion is seen in high- and middle-income countries, but the need for careful management of fiscal policies applies just as much to low-income ones.

Equally, to generate economic growth, spending needs to be directed to high-productivity areas, such as projects in infrastructure and skills enhancement that produce higher payoffs, rather than toward providing non-targeted subsidies. But even here, just any spending on infrastructure will not automatically generate growth. During the crisis only a few countries have put in place the much-needed mechanisms for analysing, tracking and evaluating the costs and benefits of projects.

Third, considerations of poverty and unemployment are paramount. During past financial crises, poverty issues did not receive sufficient attention from the countries effected and the financing sources. Signals are that this time, social safety nets, such as conditional cash transfers, are better established and better protected, with support from sources such as the World Bank Group. In view of the long-term damages caused to the poor, it is vital that the protection of vulnerable groups be established early in the crisis.

Finally, the rising pressures of the financial crisis should not dilute the attention to the environment and climate change. Their global impacts are especially severe in low-income countries where the poor are the most vulnerable. Fiscal stimulus packages present unique opportunities to shift to sustainable investments in mitigating global warming and in adapting to emerging changes.

Every crisis is unique, yet lessons from past response to crisis are informative. The speed and scale of response needs to be matched by careful attention to the quality of the interventions. Together with improved coordination across organisations, the World Bank Group, drawing on these lessons, can be helpful to countries in Africa in mitigating the impacts of the crisis.

Vinod Thomas is the Director-General and Marvin Taylor-Dormond is the Director of the Independent Evaluation Group at the World Bank Group.

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