A Joint Report by the World Bank and IMF

Why achieve the MDGs…

Key Messages

• Although the recovery is underway, the negative impact in developing countries, especially in Africa, will be long lasting. If the recovery weakens and poor countries slides into policy failures, the impact on human development outcomes could be immeasurable.

• Developing countries need to regain momentum in achieving the MDGs by being in the driver seat and by undertaking significant reforms and better service delivery.

• The international financial institutions and international community responded strongly and quickly to the current crisis, but more global responses will be needed:

– Meeting the aid commitments of Monterey and Gleneagles– Ensuring trade expansion, openness and access by completing the Doha round and

enhancing aid for trade and trade finance– Sustaining the strong support from IFIs

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Before the crisis, significant gains on poverty

• The number of poor was decreasing because of China’s and India’s progress

Source: World Development Indicators.

• Poverty rates were falling rapidly

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Source: World Development Indicators.

• Africa is the only region with high extreme poverty (red)

• But Africa’s poverty rate is falling

Initial conditions are more difficult in Sub-Saharan Africa

• Higher growth is needed when the initial poverty rate is high

• Depth of poverty or its incidence is also higher in poorer countries

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Gains were evident but mixed in other MDGs

• Clear progress for • universal primary education • gender equality in primary

education • maternal mortality (new findings)• access to water

Source: World Development Indicators.

• Weak progress for most human development MDGs• child mortality, • hunger and nutrition • HIV/AIDs • gender equality beyond

primary education

Why this crisis is different from past crises

• Not due to domestic policy failures. Pre-2008 gains were significant

• Faster growth • Lower inflation • Rapid trade expansion• Significant aid and reduced debt levels from HIPC/MDRI

• During crisis, social spending and safety nets were largely protected and built up

• The international community and the international financial institutions responded strongly and swiftly

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As a result… no large GDP contraction (red) for many low-income countries of Africa in 2009

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Even so, the impact on poverty will be long lasting

• In Sub-Saharan Africa

• 20 million fewer people will escape extreme poverty in 2015 as a result of the crisis

• Its poverty rate in 2015 will be higher at 38 percent instead of 36 percent

• At the global level

• The crisis will still leave an additional 53 million people in extreme poverty in 2015

• Poverty reduction will slow but still achieve the MDG1 goal

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The human cost will be very high

• Some costs are irreversible - an additional 265,000 infants and 1.2 million children under 5 might die from 2009 to 2015

• An estimated 350,000 more students might be unable to complete primary school in 2015

• Some 100 million less people may have access to improved source of water, which will affect health outcomes

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The crisis sharply reduced wage earnings in many middle-income countries

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Households above the $1.25 a day poverty line in higher-income developing countries coped by

• Buying cheaper food

• Delaying other purchases

• Meeting friends less

• Reducing visits to doctors

• Working longer hours or taking multiple jobs etc

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If the recovery weakens and developing countries slide, history says human cost could be immeasurable

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Trade and capital flows were important factors in past crises…

• Causal directions are not always clear, but trade performance is closely associated with economic cycles in past crises.

• In particular, exports as percent share of GDP dropped drastically during downturns

• Without access to foreign finance, imports and economic activity particularly in poor countries were curtailed severely

• The asymmetric performance is also evident with external capital flows

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Economic and policy environment tumbles during downswings

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It’s the frequency of downturns in Africa’s past that produces very negative results

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Frequency of growth acceleration and deceleration, growth rates, and GDP per capita

Not a time to be complacent

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• Developing countries will need to regain momentum in achieving the MDGs by

• Being in the driver seat • Implementing significant policy reforms• Ensuring better service delivery

• However, better policy will not be enough

• The shock is external, not due to widespread policy failure• Low-income countries have few options and resources

Spending strategy for poor countries in anadverse economic environment

(Maquette for MDG Simulations − MAMS)

• In a low case (low-aid) simulation with– low GDP growth– limited recovery in export prices,

foreign aid, FDI or remittances – government reductions in social

spending

poverty and other MDGs will deteriorate compared to a base case of economic recovery.

• With better expenditure management and increased domestic taxation (low-aid internal 1), MDGs will deteriorate less, except for poverty.

• The additional revenue eases the fiscal situation, enabling greater public spending or improving debt and fiscal sustainability.

• Taxes will however have negative effects on private spending and poverty, which need to be offset by better policy and service delivery. 19

More results will be provided in the report

Better service delivery and a global response are needed

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• Fiscal constraints bring the importance of ensuring that public spending is as efficient as possible.

• If productivity rises (low-aid-internal2), progress toward the MDGs improves relative to the low-aid-internal 1 and the low-aid cases.

• However, better policy and internal effort would not restore the MDG trajectory to that of the recovery (base case).

• Better MDG results will require strong global recovery, trade expansion and openness, affordable capital and aid flows, and sustainable strong responses from international financial institutions.

More results will be provided in the report

Crisis recovery and better MDGs through trade Doha Round, trade finance, and aid for trade

• Trade is recovering, but the recovery is fragile and uneven across regions

– Trade contracted by 12% in 2009 and is still below precrisis

– Trade is critical in view of the 70 percent drop in net private capital flows and weak growth in foreign aid in 2009.

– Remittances also declined by 6.1% in 2009

• Need to ensure trade expansion and openness

– Strengthen the multilateral trading system (Doha)

– Ensure affordable trade finance – Deliver aid for trade

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Resisting protectionism• About 350 trade-restrictive measures and

80 liberalizing measures had been put in place since the crisis, but some have been removed (WTO).

• Despite the open trade rhetoric, all G-20 countries have imposed measures restricting trade since November 2008.

• Some 20% of trade-restrictive measures are nontariff measures, such as quantitative restrictions, import licensing, standards requirements, and subsidies.

• Yet, in aggregate, protectionism has remained circumscribed. The trade-restricting or -distorting measures introduced have amounted for only 0.5% of world merchandise trade (WTO).

Concluding the Doha Round

• The crisis revealed that trade rules matter and that WTO rules help constrain protectionism. Countries have been less able to resist protectionist pressures in areas not covered by multilateral disciplines (domestic subsidies, bail-out packages).

• Concluding the Doha Round will expand market access, strengthen the international trading system, constrain future increases in tariffs and subsidies, and help governments resist protectionist pressures, keeping markets open as they unwind expansionary policies.

• Beyond Doha, government responses to the crisis reveal a need to broaden cooperation on cross-border policy matters that are not on the Doha Development Agenda (climate change, food and energy security)

• The crisis has also revealed the importance of strengthening monitoring and public reporting of government measures to increase transparency in the trading system (Global Trade Alert, Global Antidumping Database, WTO monitoring reports).

Ensuring effective aid for trade

• Aid for trade has become more urgent as the world economy recovers. Developing countries will need to rely on international markets as a source of demand to revitalize economic growth.

• The Second Global Review of Aid for Trade in Geneva in July 2009 found that donors are offering more and better aid for trade and that cooperation between developing countries is engaging new partners.

• World Bank Group aid for trade lending has risen considerably, with concessional lending to low-income countries up from US$2.3 billion annually in 2002–05 to an average of US$3.9 billion in 2007–08

• The aid for trade program of the World Bank Group, as with other donors, is multifaceted: along with concessional lending commitments to low-income countries it includes nonconcessional trade-related lending to middle-income countries.

Easing trade finance

• With the global credit crunch, trade credit—the financial backbone of international trade transactions—contracted sharply.

• Trade finance contracted mainly in response to the fall in demand, but lower supply also contributed.

• To mitigate the effects of trade finance constraints, governments and multilateral development institutions responded with a range of trade finance programs.

• The most recent data suggest that recovery is under way but appear highly segmented.

Aid to poor countries need to increase

• Aid from DAC donors rose in real terms by 11.7% in 2008 but only 0.7% in 2009 (0.31% of donors’ GNI)

• But DAC aid is behind Gleneagles commitments to double aid to Africa by 2010.

• Aid from non-DAC donors (Saudi Arabia, China) and private sources are increasing rapidly

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Debt burdens of the poorest countries have fallen, but possible debt distress is a concern

• For 35 post-decision-point HIPCs the debt burden will be reduced by 80%

• New concerns about debt sustainability underscore the need for sound economic and borrowing policies

• Six post-completion-point countries are seen at high risk of debt distress

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IFI responded strongly to the crisis

•A massive IMF rescue was designed to limit economic contraction and contagion

― The IMF has responded with US$173 billion in commitments (including precautionary financing). Currently, 55 countries have an IMF arrangement.

―The IMF implemented a general allocation of SDRs equivalent to US$250 billion: US$32 billion to emerging markets and US$18 billion was allocated to low-income countries.

―A sharp increase in concessional lending to the world’s poorest countries amounting to US $3.4 billion since 2009 (versus $1.4 billion before)

―The global nature of the crisis has led the IMF to act swiftly to adapt its lending and conditionality frameworks, such as through the Flexible Credit Line.

―Standard access to IMF financing have been doubled, and flexibility to front-load access to resources has been increased, while adequate safeguards have been preserved.

MDBs also substantially increased lending

• Total commitments from multilateral development banks (MDBs) rose to US$115 billion in 2009 from $67 billion in 2007. Nonconcessional flows totaled $62 billion; concessional flows more than $16 billion.

• Of these, World Bank Group commitments reached $87.6 billion from July 2008 to December 2009, disbursing $59 billion.

• MDB responses have been designed to protect core development programs, strengthen the private sector, and assist poor households.

• To boost resource flows to poor countries, resources were front-loaded

IFIs need to continue strong assistance

• The IMF, the World Bank, and other IFIs responded with $234 billion in commitments (from $68 billion in 2007)

• Aid resources have been front-loaded

• More efforts, resources, and assistance needed to ensure strong recovery

• Protect the poor and vulnerable

• Maintain infrastructure investment

• Sustain private sector growth

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Recap

• Although the recovery is underway, the negative impact is long lasting on low-income countries

• If the recovery weakens and poor countries slides into policy failures, the impact on human development outcomes could be disastrous

• Developing countries need to regain momentum in achieving the MDGs with policy reforms, development assistance, trade access, and sustainable support from IFIs

• More information (including the full report and interactive maps) are available at: http://www.worldbank.org/gmr2010

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We can do better

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