Mohammad Zia M. Qureshi, Senior Adviser, Office of Senior Vice President and Chief Economist, World Bank
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 $700
billion drop from 2007 peak
Net private capital flows to developing countries
600 700 800
US$ (billions)
billion drop from 2007 peak
• Estimates of the financing
gap of developing countries
in 2009 reach as high as
$1 trillion
0Real 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
GDP Growth (% )
6 8 10
3
fall to 1.6% in 2009―only a quarter of precrisis projection. Growth will be 1.7% in Sub-Saharan Africa and negative in Europe & Central Asia and Latin America & the Caribbean.
• Per capita income will fall in more than 60 developing countries.
Note: * Indicates a projection.
-6 -4 -2 0 2 4
2002 2003 2004 2005 2006 2007 2008 2009* 2010*
World Advanced Economies
No developing region is immune from crisis impact
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
5
Note: Based on a poverty line of $1.25/day in 2005 PPP.
Percent of countries experiencing a rise in poverty in 2009
27 26 21 54 66 77 0 10 20 30 40 50 60 70 80 90
Developing countries Low-income countries Sub-Saharan Africa
Percent
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 • 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.
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
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
9
• 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
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
2 4 6
Developing
-8 -6 -4 -2 0
09 10 11
Record levels of spare capacity
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
Deterioration in developing country fiscal balances, 2009
-1 0
Percent of GDP
11
• Expenditure priorities include social safety nets and infrastructure
• 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
-6 -5 -4 -3 -2 Middle East & North Africa
South Asia Latin America & Caribbean
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
-50
ECA LAC SSA SAS EAP MNA
-50
ECA LAC SSA SAS EAP MNA
-450 -350 -250 -150
US$
Low case Base case
-450 -350 -250 -150
US$
Short-term debt due Long-term debt due Current account
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
13
finance as top
constraints
• Firms in MICs
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 role in infrastructure
investment is
significant but needs support in current credit crunch
Private Sector 22%
Official
Development Assistance 8%
Infrastructure needs are large
―
but more
financing is only part of the answer
• Infrastructure spending in developing countries is only half of estimated annual need of $900 billion (7-9% of GDP)
Closing the infrastructure financing gap in Sub-Saharan Africa
US$ (billions) annually
Financing gap +40
Reallocate spending across
15
• Infrastructure financing gap in Africa is $40 billion annually
– but it can be reduced by 45% through improved management, efficiency, and cost recovery
Reallocate spending across
categories –8
Raise capital budget execution –3
Reduce operating inefficiencies –3
Improve cost recovery –4
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
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
Niger 2006 Malaw i 2004 Mozambique 2003
17 0 20 40 60 80 100
Indonesia 2002 India 2005 Cameroon 2004 Vietnam 2002 Cambodia 2005 Nigeria 2003 Kenya 2003 Chad 2004 Benin 2001 Guinea 2005 Bangladesh 2004 Nepal 2006 Ghana 2003 Tanzania 2004 Burkina Faso 2003 Zambia 2001 Uganda 2006 Mali 2001 Rw anda 2005 Madagascar 2003 Ethiopia 2005 Niger 2006
Percent
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.
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
• 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
Largest post-war decline in world trade
November 2008 commitment
• Timely recent initiatives to counter the squeeze in trade financing
• Need to avoid a retreat into
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
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
• Tripling of available resources to $750 billion • SDR allocation equivalent to $250 billion
IMF
• SDR allocation equivalent to $250 billion • A new Flexible Credit Line
• Doubling of concessional lending capacity
World Bank Group
• 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
