Fighting Poverty during the Crisis: Africa’s challenge

The current economic crisis could push 90 million people more into extreme poverty worldwide by end of 2010. Some 2 million children could die in the next five years if the crisis persists. In Sub-Saharan Africa, the global economic crisis could undermine recent progress through declines in commodity prices, tourism earnings, exports, remittances, and private capital flows. Coming into the crisis, the region’s GDP had been growing at over 5 percent a year since 2004. Greater investor interest in the region had contributed to this growth, with net FDI inflows increasing from $13 billion in 2004 to about $29 billion in 2007. However, the global crisis has already made a heavy landfall in the region: growth is likely to fall to 1.7 percent in 2009. Thirteen countries could experience decline in per capita income of over 10 percent on average. Unemployment could rise further in a number of countries. In South Africa, for example, unemployment has climbed from 23.6 percent in the second quarter to 24.5 percent in the third quarter of 2009 with the economy contracting by about 2 percent this year. Dealing with the economic and human impacts of the crisis in Africa requires both re-invigorated financial flows and more effective use of funds. Similar volumes of spending in the past have produced vastly different development outcomes. The World Bank Group’s Independent Evaluation Group, based on reviews of countries, highlights factors driving the quantity and quality of the crisis response. First, financial flows need to be adequate and timely, especially in the face of growing fiscal gaps, and well targeted. During the current crisis, official flows from multilateral sources have been at record levels in response to country needs. At the same time, it is essential to recognize that sustained recovery depends not only on the volume of spending but also on its quality and how it’s structured. Currently, the World Bank Group is substantially increasing its financing for countries. . Globally, fiscal year 2009’s commitments by the International Bank for Reconstruction and Development (lending to middle-income governments) tripled to $33 billion, and those of the International Development Association (lending to low-income governments) increased by 25 percent to $14 billion ($7 billion in Sub-Saharan Africa). The International Finance Corporation (the private sector arm) invested $10.5 billion in fiscal year 2009, focusing on strengthening the financial sector and facilitating trade. In Sub-Saharan Africa, IFC’s investments reached a record $1.8 billion. To sustain the economic revival, private capital flows must be re-invigorated. Private financial flows to developing countries fell from $1,200 billion in 2007 to $360 billion in 2009, and reversing this trend is fundamental. The poorer developing countries worldwide face a $12 billion financing gap this year and may not be able to cover even the most essential social spending. Second, the macroeconomic implications of the crisis response, in particular the growing government deficits, need to be handled well. Fiscal deficits in 2009 are estimated to be nearly 7 percentage points of GDP higher than in 2007 in G-20 nations, and about 5 percentage points higher in G-20 emerging economies. Meanwhile, the ratio of public debt-to-GDP in the G-20 could, by one estimate, rise by nearly 15 percentage points between these years. The biggest fiscal expansion is seen in high and middle income countries, but the need for careful management of fiscal policies applies just as much to low income countries as well. Equally, to generate economic growth, the spending needs to be directed to high-productivity areas, such as projects in infrastructure or skills enhancement that have been seen to have produced higher payoffs, rather than to providing untargeted subsidies. But even here, just any spending on infrastructure would not automatically generate growth. Only a few countries worldwide have, during the crisis, put in place the much-needed mechanisms for analyzing, tracking, evaluating project costs and benefits. Third, considerations of poverty and unemployment are paramount. During past financial crises, poverty issues did not receive sufficient attention from the countries nor the financing sources. Signals are that this time, social safety nets, such as conditional cash transfers, are better established and better protected, with support from official sources such as the World Bank Group. In view of the long-term damages of crises for the poor, it is vital that the protection of vulnerable groups be confronted early on. Finally, the rising pressures of the financial crisis should not dilute the attention to the environment and climate change. Their global impacts are especially severe in low income countries where the poor are the most vulnerable. The fiscal stimulus presents a unique opportunity to shift to sustainable investments both in mitigating global warming and in adapting to the emerging changes. Every crisis is unique, yet lessons from past crisis responses are informative. The speed and scale of response needs to be matched by careful attention to the quality of the interventions. Together with improved coordination across organizations, the World Bank Group, drawing on these lessons, can be helpful to countries in Africa in mitigating the crisis impacts. Vinod Thomas is the Director-General and Marvin Taylor-Dormond is the Director of the Independent Evaluation Group at the World Bank Group. Ends

Opinions

Fighting Poverty during the Crisis: Africa’s challenge