Download Global Monitoring Report A Development Emergency

Financial crisis: private capital flows to
developing countries are in steep decline
• Net private capital flows to
developing countries will
likely turn negative in
2009―a more than $700
billion drop from 2007 peak
• Estimates of the financing
gap of developing countries
in 2009 reach as high as
$1 trillion
Net private capital flows to developing countries
US$ (billions)
800
700
600
500
400
300
200
100
0
-100
1991- 2002
2001
2003
2004
2005
2006
2007
2008
2009
Real crisis: economic growth in developing
countries is plummeting
• Severest crisis since the Great
Depression.
• World output to fall by 1.3% in
2009.
• Developing country growth will
fall to 1.6% in 2009―only a
quarter of precrisis projection.
Growth will be 1.7% in SubSaharan Africa and negative in
Europe & Central Asia and Latin
America & the Caribbean.
• Per capita income will fall in
more than 60 developing
countries.
GDP Growth (%)
10
8
6
4
2
0
-2
World
Advanced Economies
-4
Developing Countries
Sub-Saharan Africa
-6
2002
2003
2004
2005
Note: * Indicates a projection.
2006
2007
2008
2009* 2010*
No developing region is immune from crisis impact
High vulnerabilities in both middle- and low-income countries
Human crisis: poverty is rising in many countries
• Growth slowdown will trap 55-90 million more people in poverty in 2009
• Number of poor people will rise in more than half of all developing
countries, two-thirds of low-income countries, and three-quarters of
countries in Sub-Saharan Africa
• Food crisis is not over; it will continue to trap up to 100 million people in
poverty in 2009
Percent of countries experiencing a rise in poverty in 2009
Percent
90
80
70
60
50
40
30
20
10
0
77
66
54
27
26
Developing countries
Low-income countries
Rise in poverty rate
Note: Based on a poverty line of $1.25/day in 2005 PPP.
21
Sub-Saharan Africa
Rise in poverty headcount
Growth collapses are costly for human
development outcomes
• Food crisis caused the number of hungry people in developing
countries to rise from 850 million in 2007 to 960 million in 2008.
The economic slowdown will raise this number past 1 billion in
2009.
• Infant deaths could be 200,000 to 400,000 higher per year on
average for next several years.
• School enrollments will suffer―especially for girls. In Indonesia,
the number of children aged 7-12 years in rural areas not
enrolled in school doubled in a few years after the 1997 crisis.
• Such setbacks in nutrition, health, and education can have
serious irreversible effects on human development outcomes.
Implications for MDGs: the goals, many already
in jeopardy, face serious further setbacks
• Most human development MDGs are unlikely to be achieved on
current trends; prospects are gravest in health
• Sub-Saharan Africa is falling short on all MDGs
• South Asia lags on all human development MDGs. Achievement of
the poverty reduction goal also is now threatened
Most countries are falling short of most MDGs
•
At country level, a majority of developing countries are at risk of missing
most of the MDGs
MDG Shortfalls are more serious in low-income
countries, especially in fragile states
• The challenge to achieve the MDGs will increasingly be
concentrated in these countries
Responding to a development emergency:
priorities for action
• Ensure an adequate fiscal response to support growth and protect
the poor―consistent with maintenance of macroeconomic stability
• Improve the climate for recovery in private investment―including
paying special attention to strengthening financial systems
• Redouble efforts toward the human development goals―including
leveraging the private sector role
• Scale up aid to poor and vulnerable countries
• Maintain an open trade and finance system―including quick action
on the Doha Round
• Ensure that the multilateral system has the mandate, resources, and
instruments to support an effective global response to the global
crisis
High global excess capacity: even if growth
returns, GDP will remain below potential
Output gap (difference between actual and potential GDP) as % of potential GDP
6
4
Developing
2
0
-2
High-income
-4
Record levels of
spare capacity
-6
-8
09 10 11
1970
1975
1980
1985
1990
1995
2000
05
10
Avoiding a protracted recession calls for a
globally coordinated fiscal stimulus―in both
developed and developing countries
• Developing countries’ fiscal needs
are rising but fiscal space is
narrowing―fiscal positions will
weaken on average by more than
2% of GDP in 2009
• Expenditure priorities include social
safety nets and infrastructure
Deterioration in developing country
fiscal balances, 2009
Percent of
GDP
0
-1
-2
-3
• Enabling an adequate fiscal
response in developing countries
through appropriate financing will be
a win-win for all
• Fiscal response needs to be tailored
to country circumstances
-4
-5
-6
Middle East South Asia
Latin
East Asia &
& North
America &
Pacific
Africa
Caribbean
SubSaharan
Africa
Europe &
Central Asia
External financing from official sources will need to
rise substantially
• Developing countries face large external financing gaps in 2009, as
private flows will fall well short of financing needs
ECA
LAC
SSA
SAS
EAP
ECA
MNA
-50
-50
-150
-150
-250
-250
US$
(billions)
EAP
MNA
-350
External financing gaps
External financing needs
-450
SAS
Base case
Long-term debt due
Current account
SSA
Low case
Short-term debt due
-350
LAC
-450
US$
(billions)
ECA=Europe & Central Asia; LAC=Latin America & Caribbean; SSA=Sub-Saharan Africa; SAS=South Asia; EAP=East Asia & Pacific; MNA=Middle East
& North Africa.
Domestic resource mobilization must also be
strengthened
• Even in Sub-Saharan Africa, with a relatively high dependence on
official assistance in many countries, domestic revenue on average
constitutes more than 70% of public resources for development
Development finance in Sub-Saharan Africa
US$ (billions)
350
300
250
200
150
100
50
0
2002
2003
2004
Domestic revenue
2005
Private flows
2006
ODA
2007
Access to finance and infrastructure and quality
of business regulation are key determinants of
private investment climate
• Firms in LICs
report access to
infrastructure and
finance as top
constraints
• Firms in MICs
report regulations
and governance
as key factors
Infrastructure investment: a win-win-win
• Win #1: contribute to economic recovery; highest multiplier effect
• Win #2: remove bottlenecks to future growth
• Win #3: contribute to a “green” recovery―energy-efficient infrastructure
Infrastructure investment by funding source
Private Sector
22%
• Private sector role in
infrastructure
investment is
significant but needs
support in current
credit crunch
Official
Development
Assistance
8%
Governments
or Public
Utilities
70%
Average for 2000-05
Infrastructure needs are large―but more
financing is only part of the answer
Closing the infrastructure financing gap
in Sub-Saharan Africa
• Infrastructure spending in
developing countries is only
half of estimated annual need
of $900 billion (7-9% of GDP)
• Infrastructure financing gap in
Africa is $40 billion annually
– but it can be reduced by
45% through improved
management, efficiency,
and cost recovery
US$ (billions)
annually
Financing gap
+40
Reallocate spending across
categories
–8
Raise capital budget execution
–3
Reduce operating inefficiencies
–3
Improve cost recovery
–4
Remaining gap
+22
Progress toward human development MDGs
must be accelerated
• Major shortfalls in human development MDGs, especially in health in
Sub-Saharan Africa
• Need to reinforce key public programs in health and education―control
of major diseases, health system strengthening, FTI, social protection
Sub-Saharan Africa: widening gap between target and actual MDG paths
Under-5 mortality rate
Maternal mortality rate
Leverage private sector role in human development
• In Africa and South Asia, half of MDG-related maternal and child health
services are privately provided; in South Asia, 30% of primary and
secondary education is delivered by private institutions
• There is potential for greater private sector contributions to financing and
delivery of services
Private sector share of diarrhea treatment
Private enrollment share by region, 2006
Mozambique 2003
Malaw i 2004
Niger 2006
Ethiopia 2005
Madagascar 2003
Rw anda 2005
Mali 2001
Uganda 2006
Zambia 2001
Burkina Faso 2003
Tanzania 2004
Ghana 2003
Nepal 2006
Bangladesh 2004
Guinea 2005
Benin 2001
Chad 2004
Kenya 2003
Nigeria 2003
Cambodia 2005
Vietnam 2002
Cameroon 2004
India 2005
Indonesia 2002
0
20
40
Private Formal
Percent
60
Private Informal
80
Public
100
The crisis increases the urgency of scaling up aid
• Despite an increase in 2008, total aid and aid to Africa are short of
Gleneagles targets for 2010 by $29 billion and $20 billion,
respectively. Need to expedite delivery on these commitments.
• Indeed, the crisis calls for going beyond existing commitments.
• Progress on Accra Agenda for Action to improve aid effectiveness also
needs to be expedited.
DAC members’ net ODA 1990-2008
Note: 2008 data are preliminary.
Private aid: an increasingly important partner
in development
• OECD estimates private international giving―by foundations,
corporations, CSOs―at $18.6 billion in 2007
• Alternative, more comprehensive estimates place private
international aid from U.S. alone at $36.9 billion
Private grants: undercounting philanthropy
Rising pressures for trade and financial
protectionism must be resisted
Largest post-war decline in world trade
• Firm resolve is needed to follow
through on renewed G-20 promise
to avoid trade protectionism―
given that a majority of G-20
members did not adhere to their
November 2008 commitment
• Timely recent initiatives to counter
the squeeze in trade financing
• Need to avoid a retreat into
financial protectionism―especially
measures that constrain capital
flows to developing countries
Scope for trade reform remains large―especially
in agriculture
• Agricultural protectionism – a taproot of global food crisis
• Crucial importance of quick, successful conclusion to Doha Round
Overall trade restrictiveness index, 2007
Alongside improved market access, trade
facilitation is key
• In LICs, trade facilitation to remove behind-the-border barriers can be at
least as important to boosting trade as reductions in trade restrictions
• In support of trade facilitation, aid for trade should be increased
substantially
Increase in trade if LICs converged to average policy indicators for MICs
Reduction of domestic barriers
Reduction of trade restrictions
Percent
16
12
8
4
0
Logistics
Doing Business, cost
Overall Trade
Tariff Trade
Performance Index
of trading indicator Restrictiveness Index Restrictiveness Index
International financial institutions must have
adequate resources for crisis response
• IFIs have a key role in bridging the large financing gap now faced by
developing countries
• Recent G-20 decisions are an important step in equipping IFIs with
the necessary resources
IMF
World
Bank
Group
• Tripling of available resources to $750 billion
• SDR allocation equivalent to $250 billion
• A new Flexible Credit Line
• Doubling of concessional lending capacity
• Near tripling of IBRD lending to $100 billion over next 3 years
• Fast-tracking of commitments within IDA15 total of $42 billion
• Scaled-up private sector support from IFC and MIGA
• WBG crisis response has three priorities: social safety nets;
infrastructure; and support to private sector, especially SMEs
• Further review of financial capacity, including capital adequacy
www.worldbank.org/gmr2009