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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