Global recession to shift aid focus

Economist says the private sector should fill the gap left by cutbacks in donor aid.

    More than a billion people will be 'chronically hungry' in 2009, according to the GMR [GALLO/GETTY]

    A Development Emergency is the sombre title of the 2009 Global Monitoring Report (GMR) released last week by the World Bank and IMF.

    "No region is immune" says the report, adding that poor countries are "especially vulnerable".

    According to the report, about 50 million people will be pushed into extreme poverty - defined as living on less than $1.25 a day - while 200,000 to 400,000 more babies may die each year, school enrolments, especially for girls, will fall and the prospects of reaching the international community's much-cherished Millennium Development Goals by the target date of 2015 "looks even more distant".

    The International Labour Organisation's worst-case scenario is for 50 million people to lose their jobs in 2009, three-quarters of them in developing and emerging markets.

    Before food prices took off in 2007, about 850 million people were estimated to be "chronically hungry". During 2009 this figure will surpass the billion mark, according to the GMR.

    Commodity price trends

    Although the global donor industry frets publicly about the dangers of aid disbursements being cut in the years ahead because of the global financial crisis, the greatest impact on emerging economies will come from weak commodity prices and exports, the collapse of private sector capital flows and a steep fall in remittances from diaspora workers.

    Special report

    Emerging and developing countries whose economic growth averaged 7.4 per cent  annually during the last five years, can expect growth of a mere 1.6 per cent in 2009, meaning incomes per head will fall, especially in Sub-Saharan Africa where 13 countries will experience a fall in incomes by an average of 11 per cent.

    Next year there may be a recovery with developing country growth of around 4 per cent, but that is far from certain.

    Much will depend on trends in commodity prices. The conventional wisdom is that commodity prices that have fallen sharply over the past year will flatten out in the latter half of 2009, but that recovery will be slow.

    Most prices will, however, remain above their lows of the 1990s, but well below their peaks of 2007-8.

    Food prices and those of precious metals - gold and perhaps platinum - are likely to remain relatively firm.

    Most poor countries will suffer from lower export prices on the one hand and firm food import prices on the other.

    Remittances are forecast to fall but only modestly - from, $62 billion for developing countries (excluding the more developed emerging markets) to $58 billion this year, rebounding strongly to $66 billion in 2010.

    Foreign investment decline

    The most serious impact of the global financial crisis will come from the slump in net private capital flows to developing countries.

    A fall in remittances will impact developing economies [GALLO/GETTY]

    These peaked in 2007 at some $750 billion; during the same year, aid flows were estimated at only $105 billion, underlining just how large the gap between the two is.

    By far the largest private sector flow was foreign direct investment (FDI) of over $390 billion, followed by bank lending of $190 billion and portfolio investment via stock exchanges of $135 billion.

    However, these numbers give a distorted picture because private capital bypasses all but a relatively small number of very poor countries.

    In fact, in about half of the world's poor countries - four-fifths of them in Sub-Saharan Africa - foreign aid accounts for over 10 per cent of gross domestic product, while aid provides 40 per cent of budget revenue in countries like Ghana and Mali.

    Aid cutbacks

    As global cheerleaders of the donor industry, the IMF and World Bank are urging rich countries not just to match existing disbursement pledges, which are not being met, but also to scale up their assistance in the years ahead.

    The desired "scaling up" of aid is unlikely to happen, however.

    Currently, aid disbursements are some $29 billion (22 per cent) short of the 2005 Gleneagles global target of $130 billion by 2010.

    In 2008, aid specifically to Sub-Saharan Africa was $20 billion (40 per cent) below the 2010 target of $50 billion.

    The GMR complains that the additional sums needed to meet already-pledged aid is only a fraction of the amounts rich countries have provided to stimulate their economies and bail out banks and automobile manufacturers.

    While this is true, it is also politically naïve to believe that foreign aid has anything like the same priority in industrialised countries as measures to save jobs - and win, or retain, votes.

    The reality is that most industrialised countries face very serious budget constraints. Spending cuts - possibly on an unprecedented scale - will be needed in a few years time and the least politically-painful budget cuts are those in foreign aid.

    There is some good news though. Because aid budgets are set some years in advance, the budget cuts will only come in 2012 and beyond.

    Hopefully, by that time, private flows will be recovering from the worst of the recession while private aid, a burgeoning industry, will take up some of the slack resulting from cutbacks in official development assistance.

    Private aid revolution

    In 2007, international private aid was estimated at some $18.6 billion, two-thirds of which came from the US.

    However, this is a huge underestimate; in the US alone in 2006 private donations amounted to $35 billion.

    This money comes from a variety of sources - foundations, corporations, civil society -and was spent mostly in the fields of education, health and climate change.

    There are signs that private donations are changing the face of the top-heavy, slow-moving, bureaucratic aid industry.

    Private donors think of themselves as "philanthrocapitalists" who are applying modern business and managerial techniques to an industry usually characterised as a model of bureaucratic incompetence and worse.

    The hope is that private sector involvement will make aid more relevant and more effective, in contrast to the current situation whereby donors - as the GMR itself shows – measure success in terms of the amounts disbursed, rather than tangible outcomes like rising incomes per head.

    Building stronger economies

    There is no doubt that poor countries are going to need more help.

    Just 13 per cent of low-income countries will run budget surpluses this year against 28 per cent last year and 34 per cent in 2007.

    Aid is measured in amounts disbursed rather than measurable outcomes [GALLO/GETTY]

    In Sub-Saharan Africa countries, the average increase in budget deficits this year will be nearly five per cent of their GDPs.

    Most of the aid (70 per cent) that goes to Africa targets social sectors.

    However, recognising that handouts alone are not the way to help people become more prosperous, the donors, albeit belatedly, are now shifting focus by raising the proportion devoted to infrastructure investment.

    For some years now, economists have been warning of the "tyranny of the MDGs" - a reference to the danger of putting vague social goals - such as reducing gender disparities and empowering women - ahead of hard economic goals like investment in infrastructure, agriculture and industry.

    Their point is that sustained poverty reduction will not be achieved by increasing donor aid, but by building stronger and, above all in Africa's case, more diversified economies, less susceptible to the vagaries of volatile commodity prices, fluctuating aid flows and adverse climatic conditions.

    Intervention threatens gains

    Greater private sector participation at all levels - net capital flows, including private giving - is more likely to pay off than more aid and more intrusive government interventions in poor economies.

    This is not a philosophical or political argument, but simple realism.

    Poor country governments are weak, partly because they lack resources but also because institutions - the public service, health and education systems, and the rule of law - are underdeveloped.

    Development is a difficult business, not least because business models and institutions cannot be transplanted but must be developed at home by local populations, not foreign donors.

    There is a huge irony here. Many in the industrialised world blame unbridled capitalism and free markets for their current misery. Many - probably most - people in developing countries share this distaste for deregulation and liberalisation, but increasingly those with their hands on the levers of power in such countries, in both the private and public sectors, fear that the pendulum may now swing back too far.

    The precious gains nations have made in transforming their economies could now be lost if governments return to the failed interventionist models of the 1960s and 1970s.

    Tony Hawkins is a professor of economics at the graduate school of management at the University of Zimbabwe and writes on African economics and business issues for the Financial Times.

    SOURCE: Al Jazeera


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