×

Our award-winning reporting has moved

Context provides news and analysis on three of the world’s most critical issues:

climate change, the impact of technology on society, and inclusive economies.

Can cash-strapped world find emergency funds for poor?

by Megan Rowling | @meganrowling | Thomson Reuters Foundation
Monday, 9 March 2009 13:34 GMT

Ahead of April's summit of the Group of 20 leading economies, aid agencies, poverty campaigners and researchers are thinking hard about what might be done to prevent the world's poorest bearing the brunt of the economic downturn.

Many are calling for emergency funding to help developing country governments keep up their spending on health, education and social safety nets as aid, commercial lending and export revenues fall.

"With likely declines in aid and the drying up of other sources of finance, poor countries are in a bind as to where they can get cheap finance," said Jesse Griffiths, coordinator of the London-based Bretton Woods Project, an advocacy organisation that monitors the World Bank and International Monetary Fund (IMF).

The World Bank says the global economic crisis is trapping up to 53 million more people in poverty in developing countries, threatening the achievement of internationally agreed targets to reduce poverty, with child mortality rates set to soar.

Almost 40 percent of 107 developing countries are highly exposed to the poverty effects of the crisis and the remainder are moderately exposed, with less than 10 percent facing little risk, according to the Bank. In response, governments need to finance job creation, essential services, infrastructure and safety net programmes for the vulnerable, it says.

Sam Worthington, president of InterAction, a coalition of 175 U.S.-based aid agencies, told AlertNet developing countries should not be left to cope on their own. "Any effort to jumpstart the global economy and reform global financial systems must take into account the severe impact of this economic recession on the world's poorest people ... We as the affluent part of the world bear a responsibility for these negative consequences."

Nick Highton, head of the Centre for Aid and Public Expenditure at the London-based Overseas Development Institute, urged donors to use existing aid mechanisms rather than inventing new initiatives to deal with the credit crunch, which would place an extra burden on recipient countries.

"I would argue it's...about getting quick injections of flexible money into government budgets so they can do their own fiscal stimulus package if they haven't got the resources already," he told AlertNet.

But will rich countries be prepared to offer this kind of support just as they're digging deep to bail out their own struggling economies and ailing banks?

"It's very hard to see how maintaining or increasing aid spending does - except by a rather long, tortuous route - generate a fiscal stimulus for the rich countries that are providing aid. So there's every reason to be not too optimistic about this," Highton said.

"And it's most unfortunate because...this an example of when you want aid to be exactly the reverse," he added.

On Sunday, the World Bank said developing countries face a financing shortfall of $270 billion to $700 billion this year, as private sector creditors shun emerging markets, and only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty. The rest cannot raise funds domestically or internationally to finance programmes to curb the effects of the downturn.

"Clearly, fiscal resources do have to be injected in rich countries that are at the epicentre of the crisis, but channelling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery," World Bank chief economist Justin Yifu Lin said in remarks prepared for a London conference on Monday.

Last month, Douglas Alexander, Britain's international development secretary, urged the World Bank to take rapid action to provide more, faster and better funding to help protect the world's most vulnerable people.

He said the bank should make sure it had learned lessons from the past. "By the Bank's own admission, it did not do enough in previous crises to help and protect the poorest," he said.

This time round, the World Bank has responded to rising demand for funds by launching a $2 billion fast-track facility to speed up grants and long-term, interest-free loans to help the poorest countries cope with the impact of the global financial crisis.

Democratic Republic of Congo was one of the first to benefit in late February, receiving a $100 million emergency grant to cover the costs of importing essential goods and commodities and paying teachers' salaries and state water and electricity bills. Its economy is under growing pressure from cutbacks in the mining sector and slower investment activity, which have already led to 200,000 job losses.

Yet, ahead of the G20 meeting, the World Bank has appealed to governments and the private sector to cooperate in finding a solution, arguing that international financial institutions cannot by themselves cover the shortfall in financing for developing countries.

Several proposals have been put forward:

  • The World Bank has suggested a "Vulnerability Fund" to which each developed country would devote 0.7 percent of its stimulus package. The fund would prioritise safety net programmes, infrastructure investments and support for small and medium-sized businesses and microfinance institutions.
  • Developed countries could increase donations to the IMF, which is seeking more cash. This could be used, for example, to boost the amount of money available through what are known as "special drawing rights", which can be transferred between members to obtain credit.
  • Britain's Department for International Development is supporting the creation of a "Rapid Social Response Fund" to help poor countries provide social protection for the poorest and most vulnerable in crises. It says the fund could be managed by the World Bank but should be accessible to the United Nations and countries that need urgent assistance for schemes like nutrition programmes, pensions and health care.
  • The British government also plans to seek agreement at the G20 summit for a "Global Poverty Alert" to capture real-time information about the impact of economic problems on the ground, such as the numbers of children being pulled out of school or people arriving at emergency feeding centres. It says an early-warning system like this would enable a quicker and better response.

Yet, despite the growing need for emergency financing, some activists are concerned it might lead to soaring debt levels. Others fear international financial institutions could place conditions on how recipient governments spend the money, or start demanding they privatise and deregulate their economies, as in the past.

"Bailing the IMF out so it can bail us out is like digging the same grave twice. It is no solution for us," Yash Tandon, former executive director of the Geneva-based South Centre think tank, told a recent conference in London.

The British government has called on the World Bank to relax conditions on its grants and loans, so it can disburse them more quickly. The development minister said the bank should remove the limit on the amount of lending it can offer to any one country, as well as a 30 percent ceiling on the proportion of funding that can be provided to the poorest countries as budget support.

ODI's Highton agrees that aid to help countries deal with the downturn should be provided without strings attached. "Whatever is different about this crisis has got nothing to do with the performance of recipient countries, so you don't need new conditionality," he argued.

Griffiths of the Bretton Woods Project urged G20 governments to apply the same flexible approach they have applied to their own economic and financial troubles to the predicament of poorer countries.

"It's obvious that the response of most countries is different from their policies in the past, and if that doesn't extend to the way the poorest countries are treated, there will be a huge outcry not just in the poorest countries but around the world," he warned.

Our Standards: The Thomson Reuters Trust Principles.

-->