54438 Global Monitoring Report 2010 The MDGs after the Crisis Global Monitoring Report 2010 The MDGs after the Crisis Global Monitoring Report 2010 The MDGs after the Crisis © 2010 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 13 12 11 10 This volume is a product of the staffs of The World Bank and The International Monetary Fund. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Board of Executive Directors of The World Bank, the Board of Executive Directors of The Interna- tional Monetary Fund, or the governments they represent. The World Bank and The International Monetary Fund do not guarantee the accuracy of the data included in this work. 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Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Goals and Targets from the Millennium Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvi Overview: MDGs after the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 Millennium Development Goals: Significant Gains before the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2 Lessons from Past Crises--and How the Current Crisis Differs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3 Growth Outlook and Macroeconomic Challenges in Emerging and Developing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 4 Outlook for the Millennium Development Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 5 The International Community and Development--Trade, Aid, and the International Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Appendix: Classification of Economies by Region and Income, Fiscal 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 GLOBAL MONITORING REPORT 2010 v vi CONTENTS GLOBAL MONITORING REPORT 2010 Boxes 2.1 Defining growth cycles in developing countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.2 Aggregate economic shocks and gender differences: A review of the evidence . . . . . 32 2.3 Crises as opportunities for reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2.4 Using safety nets to lower the cost of reducing poverty . . . . . . . . . . . . . . . . . . . . . . 47 2.5 Are external shocks becoming more important than internal shocks for developing countries? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 2.6 Human development suffered severely during crises in developing countries . . . . . . 53 2.7 Gender differences in impacts of the crisis: Evidence from East Asia . . . . . . . . . . . . 54 3.1 Quality of macroeconomic policies in low-income countries . . . . . . . . . . . . . . . . . . 83 3.2 Mobilizing additional revenue in developing countries: Key issues for tax policy and revenue administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 3.3 A fiscal rule for commodity exporters: The cases of Chile and Nigeria . . . . . . . . . . 87 4.1 Uncertainty and risk in projecting attainment of the MDGs . . . . . . . . . . . . . . . . . . 99 4.2 Estimating the impact of growth on human development indicators . . . . . . . . . . . 102 4.3 Assumptions for the archetype countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 4A.1 MAMS: A tool for country-level analysis of development strategies . . . . . . . . . . . 114 5.1 Facilitating trade through logistics reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 5.2 The allocation of aid from private sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 5.3 The IMF's engagement with low-income countries . . . . . . . . . . . . . . . . . . . . . . . . 138 5.4 Gender equality as smart economics: A World Bank Group action plan . . . . . . . . 143 5.5 Crisis-related initiatives of the International Finance Corporation . . . . . . . . . . . . 145 5.6 Action Plan for Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Figures 1 Serious global shortfalls loom for the human development MDGs . . . . . . . . . . . . . . 3 2 Key indicators plummet from their overall mean during growth decelerations, all countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 The long-run effect of slower growth on selected MDGs is worrisome . . . . . . . . . . . 7 1.1 But Africa's poverty rate is falling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.2 At the global level, serious shortfalls loom for the human development MDGs . . . . 14 1.3 Since the 1990s growth in developing countries has accelerated . . . . . . . . . . . . . . . 14 1.4 Poverty reduction is substantial in all regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.5 Another view: Poverty rates and the number of poor people are falling rapidly. . . . 15 1.6 Net enrollment rates are rising in many countries . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.7 Gender parity is close in primary education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.8 More people have improved sources of water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.9 Progress lacking on ratio of employment to population . . . . . . . . . . . . . . . . . . . . . 19 1.10 Female enrollment in tertiary education lags in Sub-Saharan Africa and South Asia, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 GLOBAL MONITORING REPORT 2010 CONTENTS vii 1.11 The contraceptive prevalence rate is low for low-income countries . . . . . . . . . . . . . 20 1.12 HIV prevalence rates and estimated deaths are showing signs of decline . . . . . . . . . 22 1.13 Improving access to antiretroviral treatment is still far from universal . . . . . . . . . . 22 1.14 Fragile states have made the least progress toward the MDGs . . . . . . . . . . . . . . . . 23 1.15 Progress in Sub-Saharan Africa is significant but still insufficient--partly because of low starting points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.16 Many countries are falling short of most MDGs, 2009 . . . . . . . . . . . . . . . . . . . . . . 25 1.17 Poverty responds less to growth when the initial poverty rate is high . . . . . . . . . . . 25 2.1 Key human development and gender indicators plummet from their overall mean during growth decelerations, all countries . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.2 Key human development and gender indicators also fall below their overall means during growth decelerations in Sub-Saharan countries, if less so . . . . . . . . . 34 2.3 During growth decelerations, economic and institutional indicators diverge far from the overall means . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.4 Health spending growth rate is more volatile than its per capita level or GDP growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.5 Public education spending is less closely tied to GDP growth than is health spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.6 Aid to education and health does not appear to be closely related to GDP growth, 1998­2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.7 Despite intense fiscal pressures, Mexico's federal funding for health and education is set to rise in 2009­10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.8 Average pharmaceutical expenditures fall in Eastern Europe, especially in the Baltics, before beginning to rise again . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2.9 Undisbursed HIV/AIDS grants from the Global Fund to Fight AIDS, Tuberculosis, and Malaria, Rounds 1­7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.10 Food-related safety net programs are more common in Africa than elsewhere . . . . 45 2.11 Economic performance and MDG outcomes are better with good policy . . . . . . . . 52 2.12 Spending cutbacks in crisis-affected households are jeopardizing future welfare in Armenia, Montenegro, and Turkey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 2.13 The crisis sharply reduced wage earnings in middle-income countries . . . . . . . . . . . 58 2A.1 Projected Global Fund to Fight AIDS, Tuberculosis, and Malaria and U.S. PEPFAR HIV/AIDS grants as of April 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 2A.2 Projected Global Fund to Fight AIDS, Tuberculosis, and Malaria and U.S. PEPFAR HIV/AIDS grants per AIDS patient as of April 2009 . . . . . . . . . . . . . . . . . 64 3.1 Short-term indicators of production and trade are recovering . . . . . . . . . . . . . . . . . 71 3.2 Commodity price indexes rebounded strongly in 2009 . . . . . . . . . . . . . . . . . . . . . . 71 3.3 Bond spreads have declined in emerging markets and developing countries . . . . . . 72 3.4 Share prices have recovered sharply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 3.5 Exchange rates have been less volatile: Daily spot exchange rates . . . . . . . . . . . . . . 73 3.6 The cost of external debt financing has come down . . . . . . . . . . . . . . . . . . . . . . . . 73 3.7 The share of nonperforming loans to total loans has been rising . . . . . . . . . . . . . . . 74 3.8 Bank financing to emerging markets dropped sharply in 2009 . . . . . . . . . . . . . . . . 75 viii CONTENTS GLOBAL MONITORING REPORT 2010 3.9 Changes in terms of trade have swung sharply since 2008 . . . . . . . . . . . . . . . . . . . 76 3.10 External imbalances have come down in emerging and developing countries . . . . . 76 3.11 Almost all countries rebuilt their international reserves in 2009 . . . . . . . . . . . . . . . 77 3.12 Deteriorating terms of trade sometimes reinforce contraction in economic activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 3.13 Monetary policy conditions became more accommodating in 2009 . . . . . . . . . . . . 78 3.14 Average year-on-year growth in money and the money gap in emerging markets . . 78 3.15 Fiscal deficits expanded in 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 3.16 Growth in real primary spending, 2010 projections . . . . . . . . . . . . . . . . . . . . . . . . 79 3.17 Most countries responded with expansionary fiscal and monetary policy . . . . . . . . 82 3.18 After previous crises, low-income countries recovered more slowly than the world economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 3.19 Growth of terms of trade and external demand in low-income countries in past and current crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 3.20 Output losses are highly persistent, especially under external demand shocks . . . . . 91 3.21 In Sub-Saharan Africa terms-of-trade shocks have larger and more persistent effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 3.22 In low-income countries, growth downbreaks are more associated with terms-of-trade shocks, giving hope for smoother recovery . . . . . . . . . . . . . . . . . . . 93 4.1 Framework linking policies and actions with development outcomes . . . . . . . . . . . 98 4.2 The long-run effect of slower growth on selected MDGs is worrisome . . . . . . . . . 104 4.3 The long-run effect of slower growth is especially worrisome in Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 4.4 Annual GDP growth for LIRP under four cases . . . . . . . . . . . . . . . . . . . . . . . . . . 109 4.5 Simulated MDG outcomes for the LIRP archetype under alternative cases . . . . . . 112 4.6 Simulated MDG outcomes for the LIRR archetype under alternative cases . . . . . . 113 5.1 Trade has bottomed out and started to recover . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 5.2 Baltic Dry Index points to a fragile rebound in shipping by sea . . . . . . . . . . . . . . . 122 5.3 Short-term trade finance messages increased steadily from Jan. 2009 to Feb. 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 5.4 Tariff rates fell except in upper-middle-income countries, 2008­09. . . . . . . . . . . . 124 5.5 About 350 trade-restrictive measures and 80 trade-liberalizing measures have been implemented or initiated since the onset of the crisis, but some have already been removed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 5.6 Net official development assistance rose in real terms in 2008 and 2009 . . . . . . . . 129 5.7 Significant amounts of official development assistance are in debt relief and humanitarian assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 5.8 Trends in gross official development aid from bilateral donors, by type, 2000­08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 5.9 Gross official development aid from bilateral donors, 2008 . . . . . . . . . . . . . . . . . 130 5.10 Fragile states received $21.3 billion net official development assistance in 2008 . . 131 5.11 Net official development assistance from all sources, by income group, 2000­08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 GLOBAL MONITORING REPORT 2010 CONTENTS ix 5.12 Net ODA varies widely as a share of GNI in Sub-Saharan Africa . . . . . . . . . . . . . 136 5.13 Debt stock of heavily indebted poor countries is expected to come down by 80 percent in end-2009 NPV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 5.14 Multilateral development banks substantially increased their disbursements, 2000­09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Maps 1.1 Africa is the only region with high extreme poverty . . . . . . . . . . . . . . . . . . . . . . . . 12 1.2 Proportion of population living with HIV is still high but declining in Sub-Saharan Africa, 1990, 2001, and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.1 Around 9 million young children die before their fifth birthday . . . . . . . . . . . . . . . 40 2.2 An infant in a developing country is ten times more likely to die than a newborn in a developed country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3.1 How the crisis undermined GDP growth in 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3.2 Across the world, 884 million people lack access to safe water--84 percent of them in rural areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 4.1 In 2007, 72 million children worldwide were denied access to education . . . . . . . 100 4.2 Tuberculosis kills around 1.3 million people a year, or 3,500 a day. . . . . . . . . . . . 110 5.1 Each year of a girl's education reduces, by 10 percent, the risk of her children dying before age five . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 5.2 Emissions in high-income countries overwhelm those in developing countries . . . 140 Tables 1 Global output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2 Poverty in developing countries, alternative scenarios, 1990­2020 . . . . . . . . . . . . . . 7 1.1 Poverty reduction is more difficult in poor countries . . . . . . . . . . . . . . . . . . . . . . . . 26 1.2 Poverty reduction is several times more difficult in Sub-Saharan Africa. . . . . . . . . . 26 1.3 Poverty gaps and ratio of mean income of the poor to the $1.25-a-day poverty line are worse for low-income regions or countries, 2005 . . . . . . . . . . . . . . . . . . . . 26 2.1 Correlation coefficients between growth acceleration and deceleration and human development indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.2 Frequency of growth acceleration and deceleration, growth rates, and GDP per capita, 1980­2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.3 Correlation coefficients between economic cycles and economic and institutional indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.4 World Bank lending for safety nets before and since the food, fuel, and financial crises, 2006­11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.5 World Bank portfolio allocations to social safety nets, by region, 2009­10 . . . . . . . 46 2A.1 Differences between sample averages: Human development and gender indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 2A.2 Differences between sample averages: Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . 60 2A.3 Differences between sample averages: Economic and institutional indicators . . . . . 61 x CONTENTS GLOBAL MONITORING REPORT 2010 3.1 Global output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 3.2 Net financial flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.3 Inflows of international remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 3.4 Growth regression results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 4.1 Poverty in developing countries, alternative scenarios, 1990­2020 . . . . . . . . . . . . 102 4.2 Trends for other MDG human development indicators by region and alternative economic scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 4A.1 Alternate scenarios for poverty reduction, based on a poverty line of $1.25 a day, by region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 4A.2 Alternate scenarios for poverty reduction, based on a poverty line of $2.00 a day, by region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 4A.3 Detailed data for archetypes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 5.1 World Bank Group trade-related activities, 2007 and 2008 . . . . . . . . . . . . . . . . . 128 5.2 Distribution of debt distress by country group, end-July 2009 . . . . . . . . . . . . . . . 137 5.3 Gross commitments by IFIs, 2007­09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Foreword T he world is five years from the target responses adopted by many advanced, emerg- date for the Millennium Development ing, and developing countries, as well as the Goals (MDGs). We are still recover- swift and sizable assistance provided by inter- ing from a historic financial and economic national financial institutions and multilat- crisis. The recovery is uncertain and likely eral development banks. Policy responses and to be uneven. We know from past crises that international cooperation have been better the harms to human development during bad than in previous crises. times cut far deeper than the gains during The postcrisis MDG scorecard is still being upswings. tallied. Numbers can only be gathered with Under these conditions, it is especially time-lags and are often incomplete. It is there- important to consider actions to achieve the fore difficult to take a sharp snapshot of the MDGs by the 2015 deadline. We need to learn developing world and to analyze the effective- lessons from MDG experiences to date. This ness of international aid in real time. 2010 Global Monitoring Report can contrib- Despite these measurement challenges, we ute to that assessment, as part of an MDG will certainly see significant harm to educa- review led by the United Nations. tion, health, nutrition, and poverty indica- How has the world performed in overcom- tors, especially in low-income countries. This ing poverty and fostering human development is not a time for complacency. It is a time for since the onset of the crisis? This year's report, exceptional efforts. For example, timely and The MDGs after the Crisis, aims to answer well-designed conditional cash transfer pro- this and other critical questions. It highlights grams not only increase household incomes, lessons from the crisis and presents forecasts but also help children--boys and girls--stay about poverty and other key indicators. in school and learn. To beat major diseases We learned from the 1990s crises that and reduce maternal mortality, we need to macroeconomic stabilization is not enough. work on health systems in a holistic manner. If strong safety nets are not in place when This means addressing issues ranging from crises hit, malnutrition and school dropouts financing, service delivery systems, regulation, increase, potentially leading to the loss of an to governance of the systems. To mitigate the entire generation. damaging effects of the crisis, we must ensure A key lesson from this financial crisis is that inclusive and sustainable global growth, main- the economic and social impact of the down- tain and expand an open international trade turn would have been far worse if not for the and fi nancial system, deliver on aid commit- effective--and often extraordinary--policy ments, and encourage the private sector. GLOBAL MONITORING REPORT 2010 xi viii FOREWORD GLOBAL MONITORING REPORT 2010 To meet the MDGs, the developing world secondary education by 2015. More girls must revive its growth and reinforce its resil- than ever in history complete primary school. ience to shocks. Countries that sowed in times Almost two-thirds of developing countries of plenty were able to reap in times of loss. reached gender parity at the primary school Fiscal policy buffers must therefore be rebuilt level by 2005. However, at higher levels of to allow for future countercyclical responses. schooling, female enrollment lags seriously. Effective and efficient social safety nets--the And the quality of secondary and tertiary edu- fi rst line of defense against adverse shocks to cation needs significant improvement. the poor--must be strengthened. Progress in reducing maternal mortality Progress on Goal 1--halving extreme pov- is advancing more quickly than we had esti- erty and hunger--is advancing in fits and mated earlier. This report includes the new starts. Poverty rates are forecast to continue findings just reported in The Lancet that the falling in the wake of the crisis, but will do maternal death toll worldwide dropped from so more slowly. The global rate for extreme 526,300 in 1980 to around 342,900 in 2008, poverty is projected to be 15 percent in 2015, far below the latest UN estimates of some down significantly from 42 percent in 1990. 500,000 for the same year. These signs of Much of the progress in reducing extreme pov- erty has taken place in East Asia, where pov- improvement are encouraging. But the prog- erty dropped from 55 percent in 1990 to 17 ress is fragile and we are still far from reach- percent in 2005. If this report's baseline projec- ing the global target of a 75-percent reduction tion for a recovery holds, the developing world in maternal deaths by 2015 from the ratio that will reach the poverty reduction goal by 2015. prevailed in 1990. As we emerge from the cri- However, the crisis has harmed many sis, we must also renew our efforts to achieve people. By the end of this year, we estimate universal access to reproductive health. that an additional 64 million people will fall The World Bank Group and the Interna- into extreme poverty due to the crisis. And tional Monetary Fund have stepped up to the by 2015, 53 million fewer people will have challenge posed by the crisis. We have taken escaped poverty. We estimate the poverty rate numerous initiatives to limit the slide in global for Sub-Saharan Africa will be 38 percent by economic growth and avert the collapse of the 2015, rather than the 36 percent it would have banking and private sectors in many countries. been without the crisis. The continent will We have also provided financing to govern- therefore fall short of Goal 1. ments and the private sector, helping to soften Goal 1 also encompasses the aim of halv- the impact of the crisis on the poor. And we ing the proportion of people who suffer from have scaled up our support for social safety hunger. The developing world is off track to nets. meet this goal. Reducing malnutrition deserves With the deadline for the MDGs fast more attention, because nutrition has a mul- approaching, we must recognize and over- tiplier effect on the success of other MDGs, come obstacles in reaching the targets for including infant mortality, maternal mortality, tackling extreme poverty, hunger, and disease. and education. Child malnutrition accounts Business as usual will not work. At a time of for more than a third of the disease burden of uncertainty, we need to extend our limited children under five. And malnutrition during resources further. We must build upon the pregnancy accounts for more than 20 percent progress made in improving gender equality, of maternal mortality. education, and environmental sustainability. We will likely meet the Goal 3 target The actions we take today will shape future of achieving gender parity in primary and opportunities and challenges. Robert B. Zoellick Dominique Strauss-Kahn President Managing Director The World Bank Group International Monetary Fund Acknowledgments T his report has been prepared jointly by Ariel Fiszbein, Ann Harrison, Mohammad the World Bank and the International Zia Qureshi, Martin Ravallion, Augusto de la Monetary Fund (IMF). In preparing Torre, and Dominique van der Mensbrugghe. the report, staff also consulted and collabo- Several staff members also made valuable rated with the African Development Bank contributions, including the following from (AfDB), the Asian Development Bank (ADB), the World Bank: Luca Bandiera, Uranbileg the European Bank for Reconstruction and Batjargal, Shaohua Chen, Sie Chow, Lire Development (EBRD), and the Inter-American Ersado, Elisa Gamberoni, Julien Gourdon, Development Bank (IDB). The cooperation Hiau Looi Kee, Maria Hazel Macadangdang, and support of staffs of these institutions are Andrew Mason, Aaditya Mattoo, Israel gratefully acknowledged. Osorio-Rodarte, Claudio Enrique Raddatz Delfin S. Go was the lead author and man- Kiefer, Prem Sangraula, Nistha Sinha, Stacey ager of the report. Richard Harmsen led the Tai, Carolyn Turk, Marijn Verhoeven, and team from the IMF. Principal authors of the var- Hassan Zaman. ious parts of the report included Jorge Arbache, Other contributors from the IMF included Jean-Pierre Christophe Chauffour, Stefano John Brondolo and Mario Mansour; research Curto, John Elder, Vijdan Korman, Maureen assistance was provided by Emmanuel Hife Lewis, Hans Lofgren, and Mariem Malouche and Ioana Niculcea. (World Bank); Andrew Berg, Chris Papageor- Contributors from other institutions giou, Catherine Pattillo, and Jarkko Turunen included Gaston Gohou and Timothy Turnere (IMF); Malvina Pollock, Sherman Robinson, (AfDB); Indu Bhushan, Valerie Reppelin-Hill, William Shaw, and Karen Thierfelder, (consul- Gina Marie Umali, and Edeena Pike (ADB); tants). Sachin Shahria and Song Song were key Yannis Arvanitis, Gary Bond, and James Ear- members of the core team and assisted with the wicker (EBRD); and Susana Sitja Rubio and overall preparation and coordination of the Luis F. Diaz (IDB). report. Guidance received from the Executive The work was carried out under the gen- Directors of the World Bank and the IMF eral guidance of Justin Lin, Senior Vice Presi- and their staffs during discussions of the draft dent and Chief Economist, and Hans Timmer, report is gratefully acknowledged. The report Director, Development Economics (DEC) also benefited from many useful comments Prospects Group, both of the World Bank. and suggestions received from the Bank and The circle of advisers included Shantayanan IMF management and staff in the course of its Devarajan, Shahrokh Fardoust, Deon Filmer, preparation and review. Additional informa- GLOBAL MONITORING REPORT 2010 xiii xiv ACKNOWLEDGMENTS GLOBAL MONITORING REPORT 2010 tion and data, including background papers, Keane and Jorge del Rosario. are available on the dedicated Web site, www Bruce Ross-Larson was the principal edi- .worldbank.org/gmr2010. The multilingual tor. Martha Gottron did the final copyediting. Web sites accompanying the report were pro- From the World Bank's Office of the Publisher, duced by Roula Yazigi, Rebecca Ong, Swati Stephen McGroarty, Susan Graham, Aziz Priyadarshini Mishra, and Mohamed Has- Gökdemir, and Denise Bergeron managed the san. Rebecca Ong and Merrell Tuck-Primdahl design, production, printing, and distribution managed the dissemination activities. The of the report. translation process was coordinated by Sheila Abbreviations and Acronyms ADB Asian Development Bank AfDB African Development Bank AIDS acquired immune deficiency syndrome AfDF African Development Fund AsDF Asian Development Fund CIS Commonwealth of Independent States CPIA Country Policy and Institutional Assessment DAC Development Assistance Committee EBRD European Bank for Reconstruction and Development EU European Union FDI foreign direct investment G-8 Group of Eight G-20 Group of Twenty GDP gross domestic product GNI gross national income HIPC heavily indebted poor country/countries HIV human immunodeficiency virus IBRD International Bank for Reconstruction and Development IDA International Development Association (World Bank Group) IDB Inter-American Development Bank IFC International Finance Corporation (World Bank Group) IFI international financial institution IMF International Monetary Fund MCI Monetary Conditions Index MDGs Millennium Development Goals MIGA Multilateral Investment Guarantee Agency (World Bank Group) NGO nongovernmental organization ODA official development assistance OECD Organisation for Economic Co-operation and Development OPEC Organization of the Petroleum Exporting Countries PEPFAR President's Emergency Plan for AIDS Relief PPP purchasing power parity SDR special drawing rights UN United Nations WTO World Trade Organization GLOBAL MONITORING REPORT 2010 xv Goals and Targets from the Millennium Declaration GOAL 1 ERADICATE EXTREME POVERTY AND HUNGER TARGET 1.A Halve, between 1990 and 2015, the proportion of people whose income is less than $1.25 a day TARGET 1.B Achieve full and productive employment and decent work for all, including women and young people TARGET 1.C Halve, between 1990 and 2015, the proportion of people who suffer from hunger GOAL 2 ACHIEVE UNIVERSAL PRIMARY EDUCATION TARGET 2.A Ensure that by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling GOAL 3 PROMOTE GENDER EQUALITY AND EMPOWER WOMEN TARGET 3.A Eliminate gender disparity in primary and secondary education, preferably by 2005, and at all levels of education no later than 2015 GOAL 4 REDUCE CHILD MORTALITY TARGET 4.A Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate GOAL 5 IMPROVE MATERNAL HEALTH TARGET 5.A Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio TARGET 5.B Achieve by 2015 universal access to reproductive health GOAL 6 COMBAT HIV/AIDS, MALARIA, AND OTHER DISEASES TARGET 6.A Have halted by 2015 and begun to reverse the spread of HIV/AIDS TARGET 6.B Achieve by 2010 universal access to treatment for HIV/AIDS for all those who need it TARGET 6.C Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases GOAL 7 ENSURE ENVIRONMENTAL SUSTAINABILITY TARGET 7.A Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources TARGET 7.B Reduce biodiversity loss, achieving by 2010 a significant reduction in the rate of loss TARGET 7.C Halve by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation TARGET 7.D Have achieved a significant improvement by 2020 in the lives of at least 100 million slum dwellers GOAL 8 DEVELOP A GLOBAL PARTNERSHIP FOR DEVELOPMENT TARGET 8.A Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system (including a commitment to good governance, development, and poverty reduction, nationally and internationally) TARGET 8.B Address the special needs of the least-developed countries (including tariff- and quota-free access for exports of the least-developed countries; enhanced debt relief for heavily indebted poor countries and cancellation of official bilateral debt; and more generous official development assistance for countries committed to reducing poverty) TARGET 8.C Address the special needs of landlocked countries and small island developing states (through the Programme of Action for the Sustainable Development of Small Island Developing States and the outcome of the 22nd special session of the General Assembly) TARGET 8.D Deal comprehensively with the debt problems of developing countries through national and international measures to make debt sustainable in the long term TARGET 8.E In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries TARGET 8.F In cooperation with the private sector, make available the benefits of new technologies, especially information and communications Source: United Nations. 2008. Report of the Secretary-General on the Indicators for Monitoring the Millennium Development Goals. E/CN.3/2008/29. New York. Note: The Millennium Development Goals and targets come from the Millennium Declaration, signed by 189 countries, including 147 heads of state and government, in September 2000 (http://www.un.org/millennium/declaration/ares552e.htm) and from further agreement by member states at the 2005 World Summit (Resolution adopted by the General Assembly­A/RES/60/1). The goals and targets are interrelated and should be seen as a whole. They represent a partnership between the developed countries and the developing countries "to create an environment--at the national and global levels alike--which is conducive to development and the elimination of poverty." Overview: MDGs after the Crisis W hat is the human cost of the global mortality, the number of children who will be economic crisis? How many people denied education, and the increase in discrim- will the crisis prevent from escap- ination against women. Based on that assess- ing poverty, and how many will remain hun- ment, the report identifies key policies nec- gry? How many more infants will die? Are essary for the developing countries, donors, children being pulled out of schools, not get- and the international financial institutions ting the education they need to become more (IFIs) to reestablish progress toward the Mil- productive adults and making it virtually lennium Development Goals (MDGs). impossible to reach 100 percent completion The MDGs provide powerful benchmarks in primary education by 2015? What are the for measuring global progress on key devel- gender dimensions of the impacts? These are opment outcomes, calling attention to the some of the questions as the global economy enormous challenges in low-income coun- comes out of the worst recession since the tries. The goals have likely contributed to Great Depression. the progress itself, galvanizing governments, The questions do not have immediate donors, civil society, private agencies, and answers--partly because the data to assess the media to support human development. development outcomes are incomplete and But uniform goals--reducing poverty by collected infrequently but also because half, infant mortality by two-thirds, mater- impacts can take several years to emerge. For nal mortality by three-quarters--can under- example, deteriorating health and nutrition estimate progress in poor countries. Why? today could lead to higher mortality rates Because the greater the distance to the goals in subsequent years. Lower investments will from low starting points in poor countries, hamper future progress in sanitation and the greater the improvement needed to reach water supply. Fewer children in school will the targets. While the extent to which coun- lower completion rates in later years. And tries are on track to achieve the MDGs in household incomes that fall far below the 2015 varies widely, recent improvements have poverty line will delay escapes from poverty. been widespread, as have the losses caused by This report uses indirect evidence to assess the crisis. the impact of the crisis on several indica- From the 1990s until the onset of the crisis tors, including the number of people who in 2008, developing countries, including low- will not escape poverty, the increase in infant income countries, made significant progress GLOBAL MONITORING REPORT 2010 1 2 OVERVIEW GLOBAL MONITORING REPORT 2010 in human development. However, the cri- be required to confront the challenges in the sis attacked two critical drivers of progress new global economic environment. toward the MDGs: faster growth and better Ten years after the adoption of the MDGs, service delivery. The impact was undoubt- the international community is intensifying edly negative because of the severity of the its monitoring of the progress toward these recession and the tendency for indicators of goals. The United Nations has called on human development to decline much more in member states to convene a formal summit bad times than they improve in good times. on the MDGs in 2010 to review implementa- But these asymmetric effects are estimated tion of the agreement, and the leaders of the from past crises, which were often driven by Group of Eight (G-8), meeting in L'Aquila internal shocks, such as domestic policy fail- in 2009 renewed their commitment to miti- ures, conflict, and institutional breakdowns. gate the impact of the crisis on developing By contrast, the current crisis was driven by countries. an external shock, and policies and institu- tions in developing countries have improved considerably in the past 15 years. Moreover, The MDG indicators showed many countries have maintained social safety significant progress before the nets in the face of the income decline. That is crisis why the impact on the MDGs could be more When the crisis hit, many countries had moderate than in past crises. already made considerable progress in Even so, the analysis and projections dis- reducing extreme poverty. Globally, pov- cussed in this report indicate that the dete- erty had fallen 40 percent since 1990, and rioration in human development is severe, the developing world was well on track to with effects likely to last for several years. reach the global target of cutting income This grim outlook has been taken seriously poverty in half by 2015. Thanks to rapid by the international community. The Inter- growth, especially in China, East Asia had national Monetary Fund (IMF), the World already halved extreme poverty. Although Bank, and the regional multilateral develop- Sub-Saharan Africa was unlikely to reach the ment banks have sharply boosted their assis- target, poverty had been falling rapidly since tance to developing countries. Despite some the late 1990s. The goal was more ambitious increase in protectionist measures, develop- for Africa than for other regions, because the ing countries have largely maintained their 1990 incomes of a large part of the African access to markets, and the very real danger population were far below the poverty line. of widespread beggar-thy-neighbor policies And Africa implemented reforms later than has been avoided. Although aid expanded other regions and therefore benefited later through 2008, it was at levels far below from accelerating income growth. what is needed to meet donor commit- Progress on MDGs outside poverty was ments for total aid and aid to Sub-Saharan uneven. Developing countries were on track Africa. to achieve gender parity in primary and sec- Policy responses to the crisis have repercus- ondary education and access to safe water, sions that must be dealt with. The expansion although countries were falling behind on of fiscal deficits--required to sustain demand gender parity in tertiary education and in the depths of the recession--must be reined empowerment of women. Progress was in by developing and advanced countries good on primary school completion, nutri- alike. Additional resources will be required tion, maternal mortality and (less so) sanita- so that the frontloading of concessional assis- tion, even if results at the global level were tance and the rapid expansion in lending by expected to fall short of targets (figure 1). The the multilateral development banks do not health goals appeared most challenging. Most result in a sharp decline in multilateral flows regions were off track, with East Asia, Latin in the coming years. And shifts in the orga- America, and Europe and Central Asia doing nization and staff expertise of the IFIs may better than other regions. GLOBAL MONITORING REPORT 2010 OVERVIEW 3 FIGURE 1 Serious global shortfalls loom for the human development MDGs 100 80 60 percent 40 20 0 MDG 1.a MDG 1.c MDG 2 MDG 3 MDG 3 MDG 4 MDG 5 MDG 7.c MDG 7.c extreme hunger primary gender gender child maternal access to access to poverty completion parity parity mortality mortality safe water sanitation rate (primary) (secondary) under five distance to goal achieved distance to goal to be on track to achieve the target by 2015 Source: Staff calculations based on World Development Indicators database. Note: Based on available data as of 2009, which can range from 2005 to 2009. The crisis interrupted this progress, but Several factors produce the asymmetric the effects will not be apparent for many response. more years. Data needed to assess the degree of deterioration in development indicators · Economic indicators and quality of insti- will not be available for two or more years, tutions and policy, such as political stabil- and some impacts--for example, on mortal- ity, voice and accountability, regulatory ity rates and school completion rates--will framework, rule of law, and government materialize only after several years. So this effectiveness, tend to decline sharply in report uses historical examples and indirect downturns. Distinguishing cause and con- evidence to assess the effects of the crisis on sequence is difficult, but vicious circles dur- progress toward the MDGs. ing crises are stronger than virtuous ones during prosperous times. · Public and private spending on social ser- Past crises generated vices can easily be disrupted during eco- exceptionally poor outcomes nomic crises, just when people need them The impact of economic cycles on MDG most. indicators is highly asymmetric. The dete- · Safety nets were uncommon in developing rioration in bad times is much greater than countries in previous crises. the improvement during good times (figure · Donor funding also came under pressure if 2). Vulnerable groups--infants and children, the crisis was global or if aid effectiveness especially girls, particularly in poor countries declined during crises. But there is some of Sub-Saharan Africa--are disproportion- evidence that official development assis- ately affected during crises. For example, tance has provided countercyclical support during contractions, female enrollment in since 2003. primary and secondary education drops more than male enrollment. And the consequences of this disproportionate impact persist long Why this crisis may be different into the future. Once children are taken out for low-income countries of school, future human capital is perma- Policies and institutions improved before nently lowered. the crisis. The economic performance of 4 OVERVIEW GLOBAL MONITORING REPORT 2010 FIGURE 2 Key indicators plummet from their overall mean during growth decelerations, all countries a. Life expectancy at birth b. Mortality rate 8 50 6 40 4 30 deaths, thousands years gained/lost 20 2 10 0 0 ­2 ­10 ­4 ­20 ­30 ­6 ­40 ­8 ­50 women men total infant mortality child mortality under 5 growth acceleration growth deceleration (per 1,000 live births) (per 1,000) growth acceleration growth deceleration c. Primary completion rate d. Gender equality, ratio of girls to boys 30 45 35 percentage point change percentage point change 20 25 10 15 5 0 ­5 ­10 ­15 ­25 ­20 ­35 ­30 ­45 girls boys total primary secondary tertiary enrollment enrollment enrollment growth acceleration growth deceleration growth acceleration growth deceleration Source: World Bank staff calculations based on data from World Development Indicators database. See chapter 2 for more details. Note: The panels show differences of averages during growth accelerations and decelerations from overall averages. developing countries is highly correlated in developing countries mean that they are with the quality of policies. Many countries better prepared to cope with shocks. Thus entered the crisis with better policies and fis- the impacts on human development outcomes cal positions than they had in previous epi- may be less severe if conditions do not deteri- sodes of contraction. orate and lead to widespread policy failures. Unlike many previous crises, the current Spending on social safety nets has been crisis was not caused by domestic policy relatively protected so far. Lower initial fis- failure. Historically, almost 90 percent of cal deficits and higher priorities for social the output volatility in low-income coun- spending have protected education and health tries has been generated by internal condi- spending in most countries. Up-to-date infor- tions and shocks, such as policy failures and mation is incomplete, but scattered informa- conflicts. Since the 1990s output volatility tion provides some examples. For example, of in low-income countries has lessened, and 19 programs initiated and monitored by the the relative frequency of external shocks has IMF and implemented in collaboration with increased. Stronger institutions and policies the World Bank in 2008­09, 16 budgeted GLOBAL MONITORING REPORT 2010 OVERVIEW 5 higher social spending for 2009. Of these, conditionality frameworks. By the end of 9 were countries in Sub-Saharan Africa: February 2010, the IMF had committed a Burundi, Republic of Congo, Côte d'Ivoire, record high $175 billion (including precau- Liberia, Malawi, Mali, Niger, Togo, and tionary financing) to emerging and other Zambia. Several African countries with pov- developing countries with balance of pay- erty reduction strategies have protected their ments difficulties; the commitments included funding for social sectors. And some coun- a sharp increase in concessional lending to tries with fiscal space (Kenya and Nigeria) the world's poorest countries. The IMF also have protected capital expenditure, mainly implemented a general allocation of special for infrastructure. But there are also exam- drawing rights equivalent to $250 billion, ples of forced contractions in social spending. including almost $100 billion to emerging Countries with precrisis fiscal and debt issues market economies and developing countries, (such as Ethiopia and Ghana) had to under- $18 billion of it to low-income countries. take fiscal tightening. HIV/AIDS (human Standard access to IMF fi nancing has been immunodeficiency virus/acquired immune doubled, a new flexible credit line without ex deficiency syndrome) funding has been post policy conditions for countries with very largely sustained, but with a new concern for strong track records has been adopted, and the efficiency of resource use. the provision of exceptionally large loans has become easier, while safeguards have been preserved. The international community Responses by multilateral development responded strongly to the crisis banks have sought to protect core develop- Despite widespread fears, developing ment programs, strengthen the private sec- countries' market access was not signifi- tor, and assist poor households. More than cantly reduced. At the end of 2009, 350 $150 billion has been committed since the trade-restrictive measures had been put in beginning of the crisis (two-thirds from the place around the world, some 20 percent of World Bank Group). International Bank for them nontariff measures, such as quantita- Reconstruction and Development (IBRD) tive restrictions, import licenses, standards lending almost tripled in fiscal 2009, and requirements, and subsidies. Trade remedies the fi rst half of fiscal 2010 shows the stron- were also on the rise. But in the aggregate, gest IBRD commitments in history ($19.2 protectionism has been contained. The trade- billion, up from $12.4 billion in the same restricting or -distorting measures introduced period in fiscal 2009). Commitments by the since October 2008 have amounted to only regional multilateral development banks also about 0.5 percent of world merchandise increased sharply, by more than 50 percent trade. Governments and multilateral develop- from 2007 to 2009. Low-income countries ment institutions supported developing coun- tapped more deeply into multilateral con- tries' exports by bolstering trade finance. The cessional resources in 2009, in part through Group of Twenty leaders pledged $250 bil- frontloading multiyear allocations. lion in support of trade at their April 2009 Donors increased aid volumes in real London Summit; the World Bank Group terms through 2009. Following an 11.7 per- provided guarantees and liquidity for trade cent increase in 2008, total net official devel- finance through the International Finance opment assistance (ODA) from the OECD's Corporation's Global Trade Finance Program Development Assistance Committee (DAC) and Global Trade Liquidity Program. And countries rose slightly by 0.7 percent in real export credit agencies stepped in to prevent a terms in 2009. But in current U.S. dollars, complete drying up of trade finance. it actually fell from $122.3 billion in 2008 A massive IMF rescue was designed to to $119.6 billion in 2009. The 2009 figure limit economic contraction and contagion. represents 0.31 percent of members' com- The global nature of the crisis led the IMF bined gross national income (GNI). Aid from to act swiftly to boost lending and modify non-DAC donors, led by Saudi Arabia, rose 6 OVERVIEW GLOBAL MONITORING REPORT 2010 63 percent in real terms in 2008 to $9.5 bil- supported commodity exporters, but com- lion. Development assistance from China modity prices remain below their precrisis will likely more than double in the next three levels. years. Private aid, also substantial, is rising Trade is recovering unevenly across rapidly. And progress continued in reduc- regions. World trade contracted by 12 per- ing poor countries' debt burden through the cent in 2009, and all regions experienced Highly Indebted Poor Countries (HIPC) Ini- deep declines in imports. Signs of recovery are tiative and the Multilateral Debt Relief Initia- evident, but trade remains fragile. At the end tive. For 35 post-HIPC-decision-point coun- of 2009 global trade was still below its pre- tries, the debt burden will be reduced by 80 crisis level. Almost a year into the recovery, percent. the dollar value of global trade remains 20 percent lower than it was before the crisis. The impact of the crisis on poverty will be The recovery is stronger than long lasting. Poverty rates will continue to fall expected, but the outlook for the after the crisis, but more slowly (table 2).1 By MDGs remains worrisome 2015 the global poverty rate is projected to be GDP growth in emerging market and devel- 15 percent, not the 14.1 percent it would have oping economies is projected to accelerate to been without the crisis. The crisis will leave an 6.3 percent in 2010. Most economies show additional 64 million people in extreme pov- signs of recovery (table 1), although many erty by the end of 2010. The recovery will not countries remain dependent on exceptional make up all the lost ground. And as a result policy stimulus, and in most countries growth of the crisis, 71 million fewer people will have is not strong enough to undo the damage escaped poverty by 2020. For Sub-Saharan caused by the sharp deceleration in incomes Africa, the poverty rate is expected to be 38 and social conditions in 2009. Fiscal deficits percent by 2015, rather than the 36 percent it in emerging market and developing economies would have been without the crisis, lifting 20 rose by almost 3 percent of GDP in 2009 and million fewer people out of poverty. are projected to remain high in 2010. Finan- The medium-term impact on other MDGs cial market conditions for these economies may also be considerable. Illustrative and are improving and capital flows are returning, indicative results from growth analyses2 sug- although international bank financing and gest persistent gaps between precrisis and foreign direct investment flows are projected postcrisis trends in 2015 (figure 3): to remain weak in 2010. The rebound of commodity prices in tandem with the global · An additional 55,000 infants might die in recovery in manufacturing production has 2015. And 260,000 more children under TABLE 1 Global output percent change Projections Region 2007 2008 2009 2010 2011­13 World output 5.2 3.0 ­0.6 4.2 4.4 Advanced economies 2.8 0.5 ­3.2 2.3 2.4 Emerging and developing economies 8.3 6.1 2.4 6.3 6.6 Central and Eastern Europe 5.5 3.0 ­3.7 2.8 3.8 Commonwealth of Independent States 8.6 5.5 ­6.6 4.0 4.1 Developing Asia 10.6 7.9 6.6 8.7 8.6 Middle East and North Africa 5.6 5.1 2.4 4.5 4.8 Sub-Saharan Africa 6.9 5.5 2.1 4.7 5.7 Western Hemisphere 5.8 4.3 ­1.8 4.0 4.2 Source: IMF World Economic Outlook. See chapter 3 for further discussions. GLOBAL MONITORING REPORT 2010 OVERVIEW 7 TABLE 2 Poverty in developing countries, alternative scenarios, 1990 ­2020 Scenario 1990 2005 2015 2020 Global level Percentage of the population living on less than $1.25 a day Postcrisis 41.7 25.2 15.0 12.8 Precrisis 41.7 25.2 14.1 11.7 Low-growth 41.7 25.2 18.5 16.3 Number of people living on less than $1.25 a day (millions) Postcrisis 1,817 1,371 918 826 Precrisis 1,817 1,371 865 755 Low-growth 1,817 1,371 1132 1053 Source: World Bank staff calculations. FIGURE 3 The long-run effect of slower growth on selected MDGs is worrisome b. MDG 3: Gender parity in primary a. MDG 2: Primary completion rate and secondary education 96 98.0 94 97.0 92 percent percent 90 96.0 88 95.0 86 84 94.0 2007 2009 2011 2013 2015 2017 2019 2007 2009 2011 2013 2015 2017 2019 low-growth postcrisis precrisis low-growth postcrisis precrisis c. MDG 4: Child mortality under five d. MDG 7c: Access to safe drinking water 75 17 73 15 deaths per 1,000 13 percent 71 11 69 9 67 7 65 5 2007 2009 2011 2013 2015 2017 2019 2007 2009 2011 2013 2015 2017 2019 low-growth postcrisis precrisis low-growth postcrisis precrisis Source: World Bank staff calculations. five could have been prevented from dying in Developing countries must 2015 in the absence of the crisis. The cumu- maintain good policies and lative total from 2009 to 2015 could reach effective service delivery 265,000 and 1.2 million, respectively. · An estimated 350,000 more students might Growth and institutional quality rein- be unable to complete primary school in force each other. Before the crisis, policy 2015. reforms triggered an impressive acceleration · Some 100 million more people might of growth in the developing world, which in remain without access to an improved turn helped to strengthen institutions and source of water. economic fundamentals. One of the dangers 8 OVERVIEW GLOBAL MONITORING REPORT 2010 of the crisis is that reforms might be aban- resist protectionist pressures and keep mar- doned, leading to policy reversals and a kets open as expansionary policies unwind. deteriorating economy. It is important that Beyond Doha, there is a need to broaden all countries adopt credible medium-term cooperation on cross-border policy mat- fiscal adjustment plans to bolster confidence ters that are not on the Doha Development in macroeconomic policies and that they Agenda (climate change, and food and energy undertake policy reforms to secure long- security). The crisis has also revealed the term growth. importance of strengthening monitoring and The effectiveness of safety nets should be public reporting of government measures to enhanced given their importance in cush- increase transparency in the trading system ioning the effects of crises and in reducing (Global Trade Alert, Global Antidumping poverty. Safety net programs in low-income Database, World Trade Organization [WTO] countries are often small and fragmented, monitoring reports). covering only a small percentage of the poor Better monitoring of trade finance is and vulnerable. There are real concerns about needed. Although recent data indicate that whether they are affordable and administra- trade fi nance is recovering, a mechanism is tively feasible in light of the various negative needed to collect data and monitor the mar- incentives they might create. Understanding ket systematically and reliably--to assess what kind of safety nets will serve social assis- how current interventions influence the sup- tance best, what their implementation chal- ply of credit and trade flows, and to provide a lenges are, and how to develop such programs useful early warning of stress in trade credit. for maximum effectiveness should inform Developing countries' trade logistics policy reforms in developing countries. need further support. Lowering trade costs If the global recovery remains weak, through better trade regulations, trade logis- spending shifts, internal resource mobiliza- tics, and infrastructure can make a criti- tion, and better service delivery can help, cal contribution toward development. The but these tools have limits. In the face of Second Global Review of Aid for Trade in declining external revenues, shifting expendi- Geneva in July 2009 found that donors were tures to protect social services and increasing offering more and better aid for trade and domestic tax collections can keep the MDG that cooperation between developing coun- indicators from deteriorating to a worst-case tries is engaging new partners. Sustaining level. But higher taxes can also retard prog- efforts to deliver on the commitments at the ress on the poverty MDG by reducing house- 2005 WTO Ministerial Meeting (in Hong hold income and spending. The negative Kong, China) to expand aid for trade should effects of a tax increase need to be offset by continue to be a priority. And more such aid better policies and service delivery. Even so, needs to be directed to low-income countries, better development outcomes hinge critically which receive only about half the total. not only on a better policy environment but Aid has to expand to meet previous com- also on a rapid global recovery that improves mitments. The expected medium-term impact the export conditions, terms of trade, and of the crisis on low-income countries has capital flows for low-income countries. heightened the urgency to scale up aid. But current donor spending plans leave a $14 bil- lion shortfall in the commitments to increase The global community must aid by $50 billion by 2010 (in 2004 dollars). continue to support developing And the Group of Eight Gleneagles commit- countries ment to double aid to Africa by 2010 has yet Multilateral cooperation in trade must to be reflected in core development aid to the be strengthened. Completion of the Doha region. Aid to Africa has grown 5 percent Round is important in the aftermath of the annually since 2000, but much of it has been crisis, because it would help governments in the form of debt relief or emergency and GLOBAL MONITORING REPORT 2009 OVERVIEW 9 humanitarian assistance, not new finance. increase aid. All countries should adopt cred- Reaching the 2010 target requires a further ible medium-term fiscal adjustment plans to increase of $20 billion. Donor spending plans bolster confidence in macroeconomic policies indicate that only an additional $2 billion is and undertake policy reforms to secure long- programmed, leaving a gap of $18 billion. term growth. Moreover, considerable scope remains for The international financial institutions strengthening aid effectiveness by making aid need to adapt to the new global environ- more predictable; rationalizing the division ment. In the absence of increased resources of labor among donors; untying aid from the from donors, the crisis-induced frontloading provision of goods and services in the donor of concessional resources by the International country; increasing reliance on need and merit Development Association and other multilat- to guide aid allocations; and addressing the eral agencies implies that concessional flows problem of countries that receive too little aid. from these institutions must decline in the near future. Similarly, the sharp rise in IBRD commitments highlights the need for discuss- Necessary reactions to the crisis ing a capital increase to avoid an eventual raise further policy challenges falloff in lending. Changes in responsibilities Developing countries' fiscal positions dete- and organization of the IFIs are on the hori- riorate. Several developing countries main- zon: increased demand for technical services tained spending and expanded fiscal deficits will shift requirements for staff expertise; to support domestic demand during the crisis. coordination among the IFIs will need to be Indeed, more than one-third of these coun- strengthened; and proposals to improve the tries introduced discretionary fiscal stimu- responsiveness of the multilateral develop- lus plans in 2009. Absent such support, the ment banks (such as decentralization at the impact on individual countries' growth and World Bank) are under consideration. The the shortfall in global demand would have rapid response of the global economic com- been even greater than they were. But the munity to the downturn helped avoid a new rapid expansion of fiscal deficits and greater Great Depression, but decisive leadership still reliance on domestic fi nance in many coun- is required to ensure a rapid and sustainable tries may not be sustainable. The deteriora- recovery. tion in debt ratios in low-income countries is particularly worrisome. Optimal exit policies from policy support Notes depend on country circumstances. Countries 1. This projection is based on household surveys with weak private demand should continue in more than 100 countries and on the effect of policy support if they have the fiscal space. growth on household consumption. But countries facing financing constraints 2. These analyses are based on the estimated cannot delay adjustment. Donors should relationships between GDP growth and the assist them by meeting their commitments to MDGs, which can vary by country. 1 Millennium Development Goals: Significant Gains before the Crisis W hat is the human cost of the global enormous challenges in low-income coun- economic crisis? How many peo- tries. The goals have likely contributed to ple will the crisis prevent from the progress itself, galvanizing governments, escaping poverty, and how many will remain donors, civil society, private agencies, and hungry? How many more infants will die? the media to support human development.1 Are children being pulled out of schools, But uniform goals--reducing poverty by half, making it virtually impossible to reach 100 infant mortality by two-thirds, maternal mor- percent completion in primary education by tality by three-quarters--can underestimate 2015? What are the gender dimensions of the progress in poor countries. Why? Because the impacts? These are some of the questions as pace of progress is inversely related to initial the global economy comes out of the worst conditions, particularly the greater distance recession since the Great Depression. to the goals from low starting points in poor The questions raised here are hard to countries.2 And although the extent to which answer immediately, partly because the data countries are on track to achieve the MDGs to assess development outcomes are incom- in 2015 varies widely, recent improvements plete and collected infrequently but also have been widespread. So, too, are the losses because impacts can take several years to caused by the interruption in progress. emerge. For example, deteriorating health This chapter offers an overview of prog- and nutrition now will lead to higher mortal- ress in the decade before the crisis. It serves as ity rates later. Lower investments will ham- the starting point for a more forward-looking per future progress in sanitation and water analysis and explains what is at stake when a supply. Fewer children in school will lower period of strong growth in many developing completion rates in later years. And house- countries, including the low-income countries hold incomes that fall far below the poverty in Africa, is interrupted.3 Subsequent chapters line will delay escapes from poverty. examine economic forecasts, how develop- The Millennium Development Goals ment indicators responded to previous crises, (MDGs) provide powerful benchmarks for and how the current crisis differs, thus pro- measuring global progress on key devel- viding the building blocks to answer the ques- opment outcomes, calling attention to the tions about the human costs of the crisis. GLOBAL MONITORING REPORT 2010 11 12 MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 MAP 1.1 Africa is the only region with high extreme poverty Poverty rate: Share of population living on less than $1.25 a day, % (2005) Green (De 50 25­49.9 10­24.9 2­9.9 <2 Canada no data United States Bermuda (UK) The Bahamas Cayman Is. (UK) Cuba Turks and Caicos Islands (UK) Mexico Haiti C Belize Jamaica Guatemala Honduras El Salvador Nicaragua Costa Rica Panama R.B. de Guyana Venezuela Suriname Colombia French Guiana (Fr) Ecuador Kiribati Peru Brazil Samoa Cook Is. (NZ) French Polynesia (Fr) American Samoa (US) Bolivia Fiji Tonga Dominican Puerto British Virgin Paraguay Republic Rico (US) Islands (UK) Anguilla (UK) U.S. Virgin Antigua and Barbuda Islands (US) St. Kitts Guadeloupe (Fr) Chile Uruguay and Nevis Argentina This map was produced by the Netherlands Dominica Map Design Unit of The World Bank. Antilles (Neth) Montserrat (UK) Martinique (Fr) The boundaries, colors, denominations St. Lucia Aruba St. Vincent and and any other information shown on Barbados (Neth) The Grenadines this map do not imply, on the part of The World Bank Group, any judgment Grenada on the legal status of any territory, or Trinidad any endorsement or acceptance of and Tobago such boundaries. R.B. de Venezuela Source: PovcalNet, the World Bank. Because the MDGs are more nutrition, and sanitation--was lagging at the ambitious for poor countries, global level (figure 1.2). global progress is mixed Before the global economic crisis in 2008­09, But substantial progress is overall progress on the MDG targets were evident in many areas particularly strong on poverty reduction, even Economic growth is a key driver in reducing in Africa (figure 1.1). Progress was also made poverty and achieving other desired develop- on gender parity in primary and secondary ment outcomes, and it is there that progress education, maternal mortality, and on reli- has been most evident (figure 1.3). Economic able access to improved water. Progress was growth in developing countries has acceler- less encouraging on gender parity in tertiary ated, thanks to improved macroeconomic pol- education and other targets for the empow- icies and a hospitable global environment-- erment of women. Of greatest concern were rapidly expanding world trade, favorable the human development goals. Progress on commodity prices, more foreign aid and debt most of them--especially for child mortal- relief, abundant low-cost capital, and large ity but also for primary school completion, remittance flows. The 12 years before the GLOBAL MONITORING REPORT 2010 MILLENNIUM DEVELOPMENT GOALS 13 IBRD 37731 APRIL 2010 nland en) Faeroe Norway Iceland Islands Finland (Den) Sweden The Netherlands Russian Federation Estonia Isle of Man (UK) Denmark Russian Latvia Fed. Lithuania United Ireland Kingdom Germany Poland Belarus Channel Islands (UK) Belgium Ukraine Luxembourg Moldova Kazakhstan Liechtenstein Mongolia France Italy Romania Switzerland Andorra Bulgaria Georgia Uzbekistan Kyrgyz Azer- Rep. D.P.R. Portugal Spain Turkey Armenia baijan Turkmenistan of Korea Monaco Greece Tajikistan Japan Cyprus Syrian Rep. of Gibraltar (UK) Arab Islamic Rep. Afghanistan China Tunisia Malta Lebanon Korea Rep. Iraq of Iran Morocco Israel Jordan Kuwait West Bank and Gaza Bahrain Pakistan Bhutan Nepal Algeria Libya Arab Rep. Qatar Former Spanish of Egypt Saudi Sahara Arabia United Arab Bangladesh Emirates India Myanmar Lao Mauritania Oman P.D.R. Cape Verde Mali N. Mariana Islands (US) Niger Rep. of Thailand Vietnam Senegal Chad Eritrea Yemen Guam (US) The Gambia Burkina Sudan Djibouti Cambodia Philippines Federated States of Micronesia Marshall Islands Guinea-Bissau Guinea Faso Benin Sri Sierra Leone Côte Ghana Nigeria Central Ethiopia Lanka Brunei Liberia D'Ivoire Cameroon African Rep. Somalia Palau Togo Malaysia Maldives Equatorial Guinea Uganda Kiribati Kenya São Tomé and Príncipe Gabon Congo Rwanda Singapore Nauru Dem. Rep. of Burundi Seychelles Papua Solomon Congo Indonesia New Guinea Islands Tanzania Comoros Tuvalu Timor-Leste Angola Malawi Zambia Mayotte Fiji (Fr) Vanuatu Zimbabwe Mauritius Namibia Madagascar Botswana Mozambique Réunion (Fr) New Poland Caledonia Australia (Fr) Swaziland Ukraine Germany Czech Rep. Slovak Rep. South Lesotho Africa Austria Hungary Slovenia Romania Croatia New Zealand Bosnia and San Herz. Serbia Bulgaria Marino Montenegro Kosovo FYR Macedonia Vatican Italy Albania City Greece Figure 1.1 But Africa's poverty rate is falling Source: World Development Indicators. 14 MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 FIGURE 1.2 At the global level, serious shortfalls loom for the human development MDGs 100 80 60 percent 40 20 0 MDG 1.a MDG 1.c MDG 2 MDG 3 MDG 3 MDG 4 MDG 5 MDG 7.c MDG 7.c extreme hunger primary gender gender child maternal access to access to poverty completion parity parity mortality mortality safe water sanitation rate (primary) (secondary) under five distance to goal achieved distance to goal to be on track to achieve the target by 2015 Source: Staff calculations based on latest available data as of 2009 from the World Development Indicators database. FIGURE 1.3 Since the 1990s growth in developing countries has accelerated a. Growth in developing countries has been b. Average incomes in Sub-Saharan Africa have rapid relative to rich countries risen in tandem with those in other regions 10 8 8 6 6 % annual change growth rate, % 4 4 2 2 0 0 ­2 ­2 ­4 ­4 1975 1980 1985 1990 1995 2000 2005 2010 1990 1992 1994 1996 1998 2000 2004 2006 2008 2010 developing countries GDP growth developing countries Sub-Saharan Africa developing countries trend GDP growth developing countries high-income high-income countries GDP growth (excluding China and India) countries high-income countries trend GDP growth Source: Staff calculations based on World Development Indicators database. crisis capped a remarkable period of sustained been greater for the goals most influenced by economic growth, technological advances, and economic growth, such as income poverty. globalization that started in 1950, and spread Extreme poverty is falling rapidly. Despite to a widening number of developing coun- growing populations, the number of poor tries in Asia and Latin America and finally people living on less than $1.25 a day in to low-income countries in Africa.4 Since the developing countries fell from about 1.8 bil- mid-1990s growth in Sub-Saharan Africa lion in 1990 to 1.4 billion in 2005--from 42 has been comparable to that in other regions. percent of the population to 25 percent. The As a result, progress toward the MDGs has global MDG target of 21 percent poverty is GLOBAL MONITORING REPORT 2010 MILLENNIUM DEVELOPMENT GOALS 15 FIGURE 1.4 Poverty reduction is substantial in all regions Poverty headcount ratio at $1.25 a day 70 60 50 percentage 40 30 20 10 0 East Asia Europe and Latin America Middle East South Sub-Saharan and Pacific Central Asia and the and Asia Africa Caribbean North Africa 1990 2005 Source: PovcalNet, World Bank. Note: Poverty rate is given as purchasing power parity (PPP) rate. FIGURE 1.5 Another view: Poverty rates and the number of poor people are falling rapidly 80 2.0 1.8 1.6 proportion of people below population, billions 60 1.4 1.2 poverty line, % 1.0 40 0.8 0.6 0.4 20 0.2 0 1981 1984 1987 1990 1993 1996 1999 2002 2005 0 Sub-Saharan Africa 1981 1984 1987 1990 1993 1996 1999 2002 2005 South Asia (excluding India) Sub-Saharan South Asia East Asia and Pacific (excluding China) East Asia and Pacific India China other regions Source: PovcalNet, World Bank. the one most likely to be exceeded, but the growth, the number of poor people actually economic crisis adds new risks to prospects rose from 436 million to 456 million. for reaching the goal. With the precrisis surge of growth in Sub- Much of the progress is attributable to East Saharan Africa, the proportion of Africans Asia, which reduced the incidence of poverty living on less than $1.25 a day fell from 58 from 55 percent in 1990 to 17 percent in 2005 percent in 1990 to 51 percent in 2005, but (figure 1.4). China reduced its poverty rate the absolute number of poor people rose from 60 percent to 16 percent, as the absolute from 296 million to 388 million (figure 1.5). number of extremely poor fell from 683 mil- Despite Africa's recent progress, the pace of lion to 208 million. India reduced the share of economic growth is still not fast enough there its population living in poverty from 51 per- to cut the 1990 poverty rate by half in 2015. cent to 42 percent, but because of population In almost every other region, it is. 16 MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 FIGURE 1.6 Net enrollment rates are rising in many countries Higher enrollments are shrinking the gen- der gap in education. Gender equality and Turkmenistan 76 99 female empowerment, the third MDG, are São Tomé and Principe important not only in themselves but also 84 94 because they improve progress on the other Mongolia 79 97 MDG targets related to poverty, hunger, dis- Rwanda 75 86 ease, and education. As more girls than ever Nepal 66 84 complete primary school, many countries have reached gender parity in primary educa- Lao PDR 62 79 tion (figure 1.7). All told, almost two-thirds Tanzania 49 73 of developing countries reached gender parity Burundi 47 71 at the primary school level by 2005, and the Sierre Leone 41 69 MDG 3 target of achieving gender parity in Central African Republic primary and secondary education can be met 43 59 by 2015. Sub-Saharan Africa is making good Guinea-Bissau 39 54 progress but is far behind the global target. Guinea 39 51 Burkina Faso 27 46 Access to safe drinking water is on track glob- Ethiopia 31 45 ally and in most regions. Rapid expansions Somalia 12 22 of infrastructure spending account for part of this increased access. Progress on this part of 0 20 40 60 80 100 MDG 7 remains vital for child survival and percentage various health improvements. Between 1990 2000 2006 and 2006 more than 1.6 billion people gained access to improved sources of drinking water, Source: UNICEF 2007. raising the proportion of the population with Universal primar y education is within such access from 76 percent to 86 percent (fig- reach. Many countries are close to provid- ure 1.8). As many as 76 developing countries ing universal primary education. In more are on track to hit the target. But 23 develop- than 60 developing countries, over 90 per- ing countries have made no progress, and 5 cent of primary-school-age children are in others have fallen behind. school; the number of children out of school fell from 115 million in 2002 to 72 million New findings suggest a significant drop in 2007, even with growing populations. In worldwide in the maternal mortality. New 2007 the primary school completion rate analysis of maternal deaths in 181 countries reached 86 percent for all developing coun- from better data found a significant decline tries together--93 percent for middle-income globally.5 Aggregate maternal deaths decreased countries but just 65 percent for low-income by over 35 percent from about 526,300 in countries. Net enrollment rates are rising in 1980 to 342,900 in 2008. More than half of several poor countries (figure 1.6). Because of all maternal deaths were concentrated in six the substantial improvements, the world will countries--India, Nigeria, Pakistan, Afghani- come close to the goal of universal primary stan, Ethiopia, and the Democratic Republic school completion in 2015 (MDG 2) but still of Congo. All told, maternal deaths for every fall short. For Sub-Saharan Africa and South 100,000 live births decreased markedly from Asia the lower rates of 60 percent and 80 per- 422 in 1980 to 320 in 1990 and to 251 in cent in 2007 still constitute advancement over 2008. The yearly rate of the decline in the the 51 percent and 62 percent, respectively, in global maternal mortality ratio since 1990 1991. But with 41 million primary-school- was 1.3 percent (with an uncertainty range of age children in Sub-Saharan Africa and 31.5 1.0­1.5). Progress is still varied. The Arab million in South Asia out of school, the task Republic of Egypt, China, Ecuador, and of meeting the target remains challenging. Bolivia have been achieving rapid gains, and GLOBAL MONITORING REPORT 2010 MILLENNIUM DEVELOPMENT GOALS 17 FIGURE 1.7 Gender parity is close in primary education 100 primary enrollment, % 80 ratio of girls to boys, 60 40 20 0 East Asia Europe and Latin America Middle East South Sub-Saharan World and Pacific Central Asia and the and Asia Africa Caribbean North Africa 100 secondary enrollment, % 80 ratio of girls to boys 60 40 20 0 East Asia Europe and Latin America Middle East South Sub-Saharan World and Pacific Central Asia and the and Asia Africa Caribbean North Africa 1991 2007 Source: World Development Indicators. 23 countries are on track with this MDG 5. FIGURE 1.8 More people have improved sources of water In Sub-Saharan Africa, central and eastern regions showed some improvement since World 1990, but southern and western regions showed deterioration because of the signifi- Sub-Saharan Africa cant number of pregnant women who died from HIV infection. In southern Africa, the South Asia maternal mortality ratio increased from 171 in 1990 to 381 in 2008. Middle East and North Africa Where progress has been mixed Latin America and the Caribbean or lacking Europe and Central Asia The recent food crisis has complicated prog- ress on fighting malnutrition and hunger. East Asia and Pacific The developing world is not on track to halve the proportion of people who suffer from 0 20 40 60 80 100 hunger. Because reducing malnutrition is population with access, % essential to success on several other MDGs, 1990 2006 including infant mortality, maternal mortal- ity, and education, it has a multiplier effect. Source: World Development Indicators. 18 MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 Child malnutrition accounts for more than a adequate sanitation. In Sub-Saharan Africa third of the disease burden of children under the proportion with access rose from 26 per- age five. And malnutrition during pregnancy cent in 1990 to just 31 percent in 2006, and accounts for more than 20 percent of mater- in South Asia, from 18 percent to 33 percent. nal mortalities. MDG 7 also calls for integrating sustainable The proportion of children under five who development into country policies and pro- are underweight declined from 31 percent in grams and reversing the losses of environ- developing countries in 1990 to 26 percent mental resources. Progress on this broader in 2007, a much slower pace than needed to environmental agenda, although fairly slow, is halve malnutrition by 2015. Progress has been picking up as the world focuses on environ- slowest in Sub-Saharan Africa and South mental sustainability and climate change.6 Asia, with severe to moderate stunting affect- ing as many as 46 percent of children under Prospects are worst for most MDGs relat- five--more than 140 million children. ing to health, such as infant mortality. The under-five mortality rate in developing coun- Progress on full and productive employ- tries declined from 101 deaths per 1,000 to ment, especially for women, was lack- 74 between 1990 and 2007, showing notable ing even before the crisis. (figure 1.9). but insufficient progress to meet MDG 4 for The employment-to-population ratio is reducing child mortality under five by two- the proportion of a country's working-age thirds. In 2006, 10 million children died population (ages 15 years and older) that before age five from preventable diseases, com- is employed. Considerable underemploy- pared with 13 million in 1990. The human ment in informal sectors and subsistent immunodeficiency virus/acquired immune activities of rural areas are of course hard deficiency syndrome (HIV/AIDS) epidemic to account for in developing countries. The and civil conflicts have impeded Sub-Saharan female employment ratios have consistently Africa's progress. Its under-five mortality rate been lower than male ratios, particularly in stood at 144 deaths per 1,000 in 2008, down the Middle East and North Africa and in from 185 in 1990. Sub-Saharan Africa has 20 South Asia. Nonetheless, progress is noted percent of the world's children under age five in the female ratios for Latin America and but 50 percent of all child deaths. Progress in the Caribbean and to a slight extent in the reducing infant mortality is also well short of Middle East and North Africa (figure 1.9). the target in South Asia. The situation is similar for universal Gender parity is weak beyond primary access to reproductive health (MDG 5.b). For education. MDG 3 also calls for gender par- example, the contraceptive prevalence rate ity in tertiary education (figure 1.10), gender has increased for all income groups between equality in employment, and greater political 1990 and 2007 but is still quite low at only representation of women. Progress toward 33 percent for low-income countries in 2007 these targets has been slower and less even. (figure 1.11). The gender targets face added risk from the current crisis because evidence from past cri- Progress in halting the spread of major com- ses suggests that women in general are more municable diseases has been mixed (MDG vulnerable. 6). An estimated 33.4 million people were living with HIV/AIDS in 2008; there were Access to sanitation has been elusive. Sani- 2.7 million new infections and about 2 mil- tation coverage, another important target lion AIDS-related deaths. The rapidly rising of MDG 7 on environmental sustainability, trends of HIV spread and related deaths that rose from 43 percent in 1990 to 55 percent in were recorded in the 1990s were halted in 2006, in low- and middle-income countries. the 2000s and were showing some signs of But the global target will be missed. Almost decline in recent years (figure 1.12). However, half the people in developing countries lack further actions are still necessary to achieve GLOBAL MONITORING REPORT 2010 MILLENNIUM DEVELOPMENT GOALS 19 FIGURE 1.9 Progress lacking on ratio of employment to population a. Men 100 employment to population ratio, % 90 80 70 60 50 40 30 20 10 0 East Asia Europe and Latin America Middle East South Asia Sub-Saharan and Pacific Central Asia and the and North Africa Caribbean Africa b. Women 100 employment to population ratio, % 90 80 70 60 50 40 30 20 10 0 East Asia Europe and Latin America Middle East South Asia Sub-Saharan and Pacific Central Asia and the and North Africa Caribbean Africa 1991 2007 Source: World Development Indicators. significant reversals. Sub-Saharan Africa about 1 million people annually, 80 percent of remains the region most heavily affected by them children in Sub-Saharan Africa. HIV worldwide, accounting for over two- thirds of all people living with HIV and for More attention should be given to achieving nearly three-fourths of AIDS-related deaths in environmental goals. According to the World 2008. HIV prevalence has declined in recent Bank's 2010 World Development Report on years in Sub-Saharan Africa (map 1.2), but it development and climate change, develop- has risen in other regions, albeit from much ing countries can shift to lower-carbon paths lower levels. while promoting development and reducing Antiretroviral treatment (ART) now poverty, as long as they receive financial and reaches almost a third of people living with technical assistance from high-income coun- HIV/AIDS in developing countries (figure tries. High-income countries, which produced 1.13). But few countries will meet the target of most of the greenhouse gas emissions of the universal access to treatment anytime soon. past, must act to shape our climate future, tak- The prevalence of tuberculosis, which killed ing actions quickly to reduce their own carbon 1.3 million people in 2008, has been declin- footprints and boost development of alterna- ing in all regions except Sub-Saharan Africa. tive energy sources. The costs for getting there Mortality from malaria remains high--at will be high but still manageable. A key way 20 MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 FIGURE 1.10 Female enrollment in tertiary education lags in Sub-Saharan Africa and South Asia, 2007 140 enrollment, ratio of girls to boys, % 120 100 80 60 40 20 0 East Asia Europe and Latin America Middle East South Sub-Saharan and Pacific Central Asia and the and Asia Africa Caribbean North Africa primary secondary tertiary Source: World Development Indicators. FIGURE 1.11 The contraceptive prevalence rate is rose during 2003­05 but fell in both 2006 low for low-income countries and 2007, dropping from 0.33 percent of donor gross national income (GNI) in 2005 100 to 0.28 percent in 2007. The ratio of ODA 90 to GNI reached 0.31 percent in 2009, but to 80 married women ages 15­49 meet donors' aid commitments, aid increases using contraception, % 70 will have to be larger and sustained. Donors 60 need to shield aid budgets from the fiscal 50 impact of the financial crisis. In trade the 40 largest implementation gap is the failure to 30 conclude the Doha Round of negotiations. 20 Progress has been greater in providing debt 10 relief to poor countries, thanks to the Heav- 0 all developing low-income middle-income ily Indebted Poor Countries Initiative and the countries countries countries Multilateral Debt Relief Initiative. The lack 1990 2007 of specific targets is hampering the transfer of technology to developing countries and their Source: World Development Indicators. access to essential drugs.8 to slow climate change is to ramp up funding for mitigation in developing countries, where Progress varies by type of most future growth in emissions will occur.7 country Inside the global picture is considerable More progress is needed on developing a variation across income groups, regions, and global partnership for development. MDG 8 countries. Middle-income countries have covers cooperation in aid, trade, debt relief, progressed fastest toward the MDGs. As a and access to technology and essential drugs. group, they are on track to achieve the tar- Net disbursements of official development get for poverty reduction. But many of them assistance (ODA) from the Development still have large concentrations of poverty, in Assistance Committee of the Organisation part reflecting great income inequality. These for Economic Co-operation and Development concentrations of poverty, together with GLOBAL MONITORING REPORT 2010 MILLENNIUM DEVELOPMENT GOALS 21 large populations in some countries, mean MAP 1.2 Proportion of population living with that middle-income countries remain home HIV is still high but declining in Sub-Saharan Africa, 1990, 2001, and 2007 to a majority of the world's poor in absolute numbers. Many middle-income countries also continue to face major challenges in 1990 Mauritania Mali Niger achieving the nonincome human develop- Cape Verde The Gambia Senegal Burkina Chad Sudan Eritrea Faso ment goals. Guinea-Bissau Guinea Sierra Leone Ghana Nigeria Central Ethiopia Liberia Cameroon African Rep. Progress has been weaker in low-income Côte D'Ivoire Togo Uganda Somalia countries, with considerable variability. It has Benin Equatorial Guinea GabonCongo Rwanda Kenya Dem. Rep. Burundi Seychelles São Tomé and Príncipe of Congo been slowest in fragile and confl ict-affected Tanzania Comoros states (figure 1.14). Wracked by confl ict and Angola Zambia Malawi Mayotte (Fr) Mozambique hampered by weak capacities, these states-- Zimbabwe Namibia Botswana Madagascar Mauritius more than half of them in Sub-Saharan Swaziland South Lesotho Africa--present difficult political and gov- Africa ernance contexts for the effective delivery of development finance and services. Frag- ile states account for close to a fi fth of the 2001 population of low-income countries but more Mauritania Mali Cape Verde Niger than a third of their poor people. Much of The Gambia Senegal Burkina Chad Sudan Eritrea Guinea-Bissau Guinea Faso the challenge of achieving the MDGs will be Sierra Leone Ghana Nigeria Central Ethiopia Liberia Cameroon African Rep. Somalia concentrated in low-income countries, espe- Côte D'Ivoire Togo Uganda Benin GabonCongo Rwanda Kenya cially fragile states. Equatorial Guinea São Tomé and Príncipe Dem. Rep. Burundi of Congo Seychelles Tanzania Comoros Angola Zambia Malawi Mayotte Most regions are progressing rapidly toward Mozambique (Fr) Zimbabwe Madagascar the goals. Thanks to rapid economic growth, Namibia Botswana Mauritius especially in China, East Asia has already South Swaziland Lesotho Africa halved extreme poverty. South Asia is on track to do the same, but it is seriously off track on most human development goals. For 2007 the health goals most regions are off track, Mauritania Mali Niger Cape Verde Chad Eritrea although the rate of progress varies substan- The Gambia Senegal Burkina Sudan Guinea-Bissau Guinea Faso tially, with East Asia and the Pacific, Latin Sierra Leone Ghana Nigeria Central Cameroon African Rep. Ethiopia Liberia Somalia America and the Caribbean, and Europe Côte D'Ivoire Togo Uganda Benin Equatorial Guinea GabonCongo Rwanda Kenya Dem. Rep. Burundi and Central Asia doing better than the other São Tomé and Príncipe of Congo Seychelles Tanzania Comoros regions. Angola Zambia Malawi Mayotte (Fr) Mozambique Zimbabwe Madagascar Sub-Saharan Africa is a special case. It is Namibia Botswana Mauritius easy to see that Sub-Saharan Africa lags on South Swaziland Lesotho Africa all the MDGs, including poverty reduction. IBRD 37740 APRIL 2010 But that is only half the story--because the region has made progress. Practically all the Prevalence of HIV in Sub-Saharan Africa: % of population ages 15­49 MDG curves for Sub-Saharan Africa (figure 25 13­24.9 6.0­12.9 1.15) have been headed in the right direc- 1.0­5.9 less than 1 no data tion for more than 10 years, but the progress required looks steeper in direct compari- Source: United Nations 2009. sons with other regions because of Africa's lower starting points. Achievements are more Many countries are likely to fall short of apparent when viewed against the severe eco- most of the goals. Among countries for nomic stagnation that afflicted the region which there are data, the proportion off from the 1970s to the early 1990s. track exceeds that of countries on track for 22 MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 FIGURE 1.12 HIV prevalence rates and estimated deaths are showing signs of decline 1.2 5 4 % of adults, ages 15­49 0.9 deaths, millions 3 0.6 2 0.3 1 0 0 1990 1993 1996 1999 2002 2005 2008 1990 1993 1996 1999 2002 2005 2008 estimates high and low estimates Source: UNAIDS/WHO. Note: The HIV adult prevalence rate is defined as the proportion of people ages 15 and above who are infected with HIV. FIGURE 1.13 Improving access to antiretroviral with respect to economic growth depends on treatment is still far from universal how the incomes of poor people move with average growth; whether growth is in broad 10 45 9 terms reaching poor people; and how any 40 8 increase in incomes interacts with the income 35 7 distribution and the poverty line. How- 30 6 ever, when a common poverty goal like the millions percent 25 5 MDG 1 is applied to all developing countries 20 4 against a uniform poverty yardstick (such as 15 3 $1.25 a day), starting points or country cir- 2 10 cumstances matter greatly. Starting points 1 5 thus help explain why, despite the precrisis 0 0 people people ART progress in growth and poverty reduction, receiving needing coverage low-income countries are still far from reach- ART ART (right axis) ing the poverty MDG. (left axis) (left axis) Recent empirical analysis reveals that a Dec. 2007 Dec. 2008 high initial poverty incidence slows progress against poverty at any given growth rate.9 Source: UNAIDS/WHO. Note: ART - antiretroviral treatment. Analysis of more than 600 household sur- veys in 116 countries since 1980 confirms the all MDGs except poverty reduction and gen- story: in two countries with the same eco- der parity in school (figure 1.16). This result nomic growth rate, poverty reduction will likely comes from low starting points in poor be slower in the country that begins with the countries. higher poverty rate (figure 1.17). There are some data and observation issues to consider. At low poverty rates, there is considerable How starting points affect results noise, and elasticity becomes volatile, espe- Progress varies positively with income growth cially at the $1.25-a-day poverty threshold. but is conditioned by starting points or coun- Some more advanced countries have no com- try circumstances. This phenomenon is best putable observations in this range. Twelve illustrated for poverty reduction. In general, countries with zero poverty rates in the initial the elasticity, or responsiveness, of poverty period have zero or irregular elasticity; seven GLOBAL MONITORING REPORT 2010 MILLENNIUM DEVELOPMENT GOALS 23 FIGURE 1.14 Fragile states have made the least progress toward the MDGs 100 progress toward goal to date, % 80 60 40 20 0 MDG 1.a MDG 2 MDG 3 MDG 3 MDG 3 MDG 4 MDG 7.c MDG 7.c extreme primary gender parity gender gender child mortality access to access to poverty completion (primary and parity parity under five safe water sanitation rate secondary) (primary) (secondary) middle-income countries low-income countries fragile states Source: Staff calculations based on World Development Indicators database. Note: Most recent data as of 2009. other countries with nonzero poverty rates line. One explanation is that the poverty gap, have zero elasticity. Almost all these outliers which reflects the depth of poverty as well belong to transitional economies in Eastern as its incidence, is greater in poor countries. Europe and include the turbulent years in A related "distance" measure is the percent the 1990s when their economies, incomes, ratio of the average income of the poor to the and income distributions were undergoing poverty line; the distance between the aver- fundamental changes. Even at a $2.00-a-day age income of the poor and the poverty line poverty line, seven countries have zero elas- is greater in many low-income countries. In ticity. When the initial poverty rate is greater 2005 Sub-Saharan Africa's poverty gap and than 10 percent, the pattern becomes broadly its mean ratio of the average income of the more regular.10 poor to the $1.25-a-day poverty line are 20.1 At the aggregate or regional level, the percent and 59.7 percent, respectively. These responsiveness (median elasticity) of poverty numbers are worse than comparable figures to growth is generally lower in low-income for other regions (table 1.3). Middle-income countries, which tend to have higher initial countries tend to have better numbers. The poverty rates for both the $1.25-a-day and the two large countries, China and India, are $2.00-a-day international thresholds (table exceptions in the sense that, despite their 1.1). Elasticity also depends on the choice starting points in income and poverty rates, of a global poverty threshold, although the poverty reduction has been rapid not just pattern holds in general. For middle-income because of the high growth rates but also countries, particularly upper-middle-income because the poverty gap and the average ones, the lower $1.25 threshold becomes less income distance from the poverty line have meaningful as the median poverty rate falls been relatively low. For all these countries, below 4 percent. The regional numbers are many of the poor are already close to the summarized in table 1.2. $1.25-a-day threshold and growth can more The pattern clearly reflects the more dif- easily raise their incomes over the poverty ficult circumstances in poor countries and line. In contrast, in African countries like fragile states. For example, in fragile states Liberia, Mozambique, Rwanda, and Tanza- the median elasticity of extreme poverty to nia, which have very high poverty gaps and growth is lowest at the $1.25 a day poverty greater distance to the thresholds, the same 24 MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 FIGURE 1.15 Progress in Sub-Saharan Africa is significant but still insufficient--partly because of low starting points a. Extreme poverty b. Gender parity 70 110 58 100 60 100 51 50 % of population 90 88 40 37 82 percent 80 30 29 70 20 10 60 0 50 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 actual $1.25/day path to goal actual goal projected $1.25/day c. Child mortality under five d. Access to water and sanitation 200 185 90 74 69 144 150 deaths per 1,000 % of population 60 51 100 42 37 30 26 50 62 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 actual goal without water access actual without sanitation access actual without water access goal without sanitation access goal e. Primary completion rate 110 100 100 90 80 percent 70 67 60 57 57 50 47 40 1990 1995 2000 2005 2010 2015 actual girls goal girls actual boys goal boys Source: World Development Indicators. Note: PPP is purchasing power parity. GLOBAL MONITORING REPORT 2010 MILLENNIUM DEVELOPMENT GOALS 25 FIGURE 1.16 Many countries are falling short of most MDGs, 2009 100 percentage of developing countries 50 0 MDG 1.a MDG 2 MDG 3 MDG 3 MDG 4 MDG 5 MDG 7.c MDG 7.c extreme primary gender gender child births access to access to poverty education parity parity mortality attended safe water sanitation (primary) (secondary) seriously off track off track on track achieved no data Source: Staff calculations based on World Development Indicators database. Note: The data cover 144 developing countries and the latest available information as of 2009. FIGURE 1.17 Poverty responds less to growth when the initial poverty rate is high 1 1 0 0 elasticity to growth ($1.25/day) elasticity to growth ($1.25/day) ­1 ­1 ­2 ­2 ­3 ­3 ­4 ­4 ­5 ­5 ­6 ­7 ­6 ­8 ­7 ­9 ­8 ­10 ­9 ­11 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 headcount, % ($1.25/day) headcount, % ($2/day) Source: Staff calculations from PovcalNet, the World Bank. Note: There are data or observation issues especially when the poverty rate is low; see text for details. level of growth would be unlikely to push than in a richer country of comparable popu- many households above the poverty line in a lation size, the number of people to move out short period of time. of poverty will be much larger in the poor Another explanation is simply arithmetic, country. having to do with the way the poverty MDG All this simply means that a long period is defi ned.11 It is easier for a middle-income of sustained and shared growth will be cru- country to halve its poverty rate from, say, 10 cial to meet the poverty MDG in many poor percent to 5 percent than for a poor country countries. To really achieve rapid progress, to cut its rate by even less than half, say, from growth may have to reach the rates in China 50 percent to 35 percent. Although the rate and India. Although a pro-poor growth rate of reduction is lower in the poorer country will raise the income of the poor, the high 26 MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 TABLE 1.1 Poverty reduction is more difficult in poor countries Median poverty headcount at initial Median growth elasticity of poverty year with respect to poverty line with respect to poverty line (%) Country group $1.25 a day $2.00 a day $1.25 a day $2.00 a day Low-income countries ­1.01 ­0.53 66.02 85.77 Fragile states ­0.81 ­0.54 51.46 74.99 Lower-middle-income countries ­1.65 ­0.88 15.11 29.54 Upper-middle-income countries ­1.04 ­1.41 3.60 11.32 Source: World Bank staff calculations from PovcalNet. Note: The values in the table are the medians of {ln(H2/H1/ln(M2/M1} in each category. TABLE 1.2 Poverty reduction is several times more difficult in Sub-Saharan Africa Median poverty headcount at initial Median growth elasticity of poverty year with respect to poverty line with respect to poverty line (%) Region $1.25 a day $2.00 a day $1.25 a day $2.00 a day East Asia and Pacific ­1.43 ­0.79 48.6 77.9 Europe and Central Asia ­2.00 ­1.12 3.7 10.2 Latin America and the Caribbean ­2.03 ­1.44 8.8 20.9 Middle East and North Africa ­2.89 ­2.06 4.6 19.6 South Asia ­1.05 ­0.48 66.5 88.1 Sub-Saharan Africa ­0.76 ­0.36 66.0 83.9 Total ­1.18 ­0.81 18.4 39.4 Source: World Bank staff calculations from PovcalNet. Note: The values in the table are the medians of {ln(H2/H1/ln(M2/M1} in each category. TABLE 1.3 Poverty gaps and ratio of mean income of the poor to poverty gaps imply that it will take longer or the $1.25-a-day poverty line are worse for low-income regions or more effort for the poor to cross the poverty countries, 2005 line. In light of the fi nding that the poverty Ratio of mean income rate itself may take more time to evolve, what Poverty gap with of those below $1.25 a respect to $1.25 a day day to the poverty line low-income countries achieved before the cri- (%) (%) sis is indeed remarkable. Sub-Saharan Africa 20.1 59.7 South Asia 9.2 75.9 East Asia and Pacific 5.6 71.3 Latin America and the The full impact of the global Caribbean 4.9 65.1 economic crisis still lies ahead Middle East and North Africa 1.4 84.1 Europe and Central Asia 1.1 67.8 It is likely that the world has not yet seen the full impact of the crisis on the MDG indica- Middle-income countries tors. A slow global recovery could imply that Albania 0.1 91.7 Brazil 2.8 65.6 progress on MDG indicators will stray fur- Mexico 0.1 89.6 ther from the path it was on before the cri- Thailand 0.01 96.4 sis. Will economic growth and development Large countries China: urban 0.2 90.2 deteriorate because of a less hospitable global China: rural 6.5 75.2 economic environment brought about by the India 10.0 76.1 global economic crisis? Chapters 2, 3, and 4 African countries look at lessons from past crises, the current Tanzania 48.6 45.1 Mozambique 42.0 48.1 economic situation, the prospects for growth, Liberia 40.7 50.7 and the outlook for the MDGs. Chapter 5 Rwanda 38.2 49.9 focuses on the actions and policies for attain- Source: PovcalNet, World Bank. ing the MDGs--and beyond. GLOBAL MONITORING REPORT 2010 MILLENNIUM DEVELOPMENT GOALS 27 Notes Expectations of Aid and Development Suc- cess." World Development 35 (5): 735­51. 1. See, for example, Sachs 2005. Easterly, W. 2009. "How the Millennium Devel- 2. A point raised by Clemens and Moss (2005); opment Goals Are Unfair to Africa." World Clemens, Kenny, and Moss (2007); Easterly Development 37 (1): 26­35. (2009); and Vandemoortele (2009). Go, D., and J. Page, eds. 2008. Africa at a Turn- 3. This observation is documented in several ing Point? Washington, DC: World Bank. recent studies. See, for example, World Bank Hogan, M., K. Foreman, M. Naghavi, S. Ahn, M. (2008) on the decoupling of trend growth Wang, S. Makela, A. Lopez, R. Luzana, and for developed and developing countries. For C. Murray. 2010. "Maternal Mortality for 181 Africa, see IMF (2008), Go and Page (2008), Countries, 1980­2008: A Sytematic Analysis Ndulu (2008), and World Bank (2000). of Progress towards Millennium Development 4. Rodrik 2009. Goal 5." Lancet. www.lancet.com, April 12, 5. Hogan and others 2010. Weak vital registra- 2010. tion systems in developing countries make IMF (International Monetary Fund). 2008. the maternal mortality ratio one of the hard- Regional Economic Outlook: Sub-Saharan est things to measure, and previous estimates Africa. Washington, DC (October). showed very little change over time. The new Ndulu, B. J. 2008. The Political Economy of Eco- study supplemented national vital registra- nomic Growth in Africa, 1960­2000. Cam- tion data with other sources, such as sibling bridge, U.K.: Cambridge University Press. histories in household surveys, census data, Ravallion, M. 2009. "Why Don't We See Poverty and death surveys. It also carefully examined Convergence?" Policy Research Working Paper uncertainty in the expected maternal death 4974. World Bank, Washington, DC. rate from five sources--stochastic variance Rodrik, D. 2009. "Growth after the Crisis." Paper in the input data, nonsampling error in data prepared for the Commission on Growth and systems, errors in the covariates (such as GDP Development, Harvard Kennedy School, Cam- per capita, educational attainment, HIV sero- bridge, MA. prevalence, and the like), and estimation error Sachs, J. 2005. The End of Poverty. New York: from using simulation methods. Penguin Books. 6. Environmental sustainability and its links UNICEF 2007. Progress for Children, A World to the MDGs were a major focus of Global Fit for Children, Statistical Review (6, Decem- Monitoring Report 2008 (World Bank and ber). New York. IMF 2008). The 2010 World Development United Nations. 2008. "Delivering on the Global Report also focused on development and cli- Partnership for Achieving the Millennium mate change (World Bank 2010). Development Goals." MDG Gap Task Force 7. See World Bank (2010) for an in-depth discus- Report. New York. sion and treatment of this issue. ------. 2009. The Millennium Development 8. United Nations 2008. Goals Report. New York. 9. Ravallion 2009. Vandemoortele, Jan. 2009. "The MDG Conun- 10. T he $1. 25 -a- day relat ionsh ip c a n be drum: Meeting the Targets without Missing approximated by a logarithmic regression: the Point." Development Policy Review 27 (4): log(elasticity) = ­1.0634 + 0.4725 (initial pov- 355­71. erty rate), n = 101, which is significant at 1 per- World Bank. 2000. Can Africa Claim the 21st cent (t = 5.13). See Ravallion (2009) for care- Century? Washington, DC: World Bank. ful estimation and testing of convergence. ------. 2008. Global Development Finance 11. Easterly 2009. 2008: The Role of International Banking. Vol. 1. Review, Analysis, and Outlook. Vol. 2. Summary and Country Tables. Washington, DC: World Bank. References ------. 2010. World Development Report 2010: Clemens, M. A., and T. J. Moss. 2005. "What's Development and Climate Change. Washing- Wrong with the Millennium Development ton, DC: World Bank. Goals?" Brief. Center for Global Development, World Bank, and IMF. 2008. Global Monitoring Washington, DC. Report 2008: MDGs and the Environment: Clemens, M. A., C. J. Kenny, and T. J. Moss. 2007. Agenda for Inclusive and Sustainable Devel- "The Trouble with the MDGs: Confronting opment. Washington, DC: World Bank. 2 Lessons from Past Crises--and How the Current Crisis Differs H istorically, periods of sharp con- How growth volatility affects traction have been extremely harm- human development and gender ful for human development. Social indicators indicators tend to deteriorate rapidly during economic downturns and improve slowly dur- It is commonly observed that human devel- ing economic booms. Moreover, vulnerable opment indicators deteriorate during growth groups, such as children and women, are more downturns. Also true, but more difficult to exposed to the effects of growth volatility. calculate, is that deteriorations in human The asymmetric response of social indica- development indicators during downturns tors to the growth cycle likely results from tend to exceed improvements during eco- contractions associated with conflict or weak nomic booms (box 2.1 explains the definition institutions that impair government services. of growth cycles used here). For example, life With global crises, donor spending may also expectancy is 2 years longer during growth come under pressure. accelerations than the overall average, but 6.5 There are several reasons, however, why years shorter during decelerations (figure 2.1). this crisis may be different from previous cri- Infant mortality is 8 per 1,000 lower during ses for low-income countries--social spending accelerations, and 24 per 1,000 higher during has been largely protected so far; precrisis pol- decelerations. The primary school completion icies and institutions were better; and external rate is 4 percent higher during accelerations shocks, not domestic policy failures, were the but 25 percent lower during decelerations. main cause of the current crisis for developing Further evidence for asymmetry is the size of countries. correlation coefficients relating social indica- Nonetheless, the impact on the Millennium tors with upturns and downturns (table 2.1). Development Goals (MDGs) is worrisome. In general, the correlation between social indi- In particular, several rapid and qualitative cators and periods of deceleration is stronger assessments find that households are already than the correlation between social indicators making painful adjustments, particularly in and periods of acceleration (for details, see middle-income countries. annex 2A.1). GLOBAL MONITORING REPORT 2010 29 30 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 BOX 2.1 Defining growth cycles in developing countries The historical growth patterns considered in this that the growth acceleration episode is not a recov- study are derived from a dataset for 163 countries ery from a recession. covering 1980­2008. A growth acceleration episode meets three conditions for at least three consecutive A growth deceleration episode meets these three con- years: ditions in reverse. The framework is from Arbache and Page (2007), which extends the methodology in · The four-year forward-moving average growth Hausmann, Pritchett, and Rodrik (2005) by examin- rate minus the four-year backward-moving aver- ing both accelerations and decelerations and by mak- age growth rate exceeds zero for each year. ing each country's long-run growth rate endogenous. · The four-year forward-moving average growth rate Testing the sample means of development indicators exceeds the country's average growth rate, mean- for significant differences during periods of growth ing that the pace of growth during accelerations is acceleration and deceleration can show whether faster than the country's trend. Thus the defi nition countries that experience more growth fluctuations of episodes of growth acceleration (or deceleration) face slower progress on the MDGs and identify is endogenous to each country's long-run rate of how growth cycles affect changes in development growth. indicators. · Average GDP per capita during the four-year for- ward-moving period exceeds the average during Source: Arbache and Page 2007; Arbache, Go, and Korman the four-year backward-moving period, ensuring 2010. Economic downturns also have a dispro- participation of women and men, with impor- portionate impact on girls relative to boys. tant implications for how families adjust to Life expectancy of girls and boys increases by economic crises (box 2.2). two years during good times but decreases by Despite some commonalities, the relation- about seven years for girls and six years for ship between growth volatility and develop- boys during bad times. The primary educa- ment outcomes varies across countries and tion completion rate rises 5 percent for girls regions. Initial conditions, regional spillovers, and 3 percent for boys during good times but trade arrangements, economic geography, and decreases 29 percent for girls and 22 percent other factors are associated with how countries for boys during bad times. The female-to-male and regions respond to economic downturns. enrollment ratios for primary, secondary, and For example, human development indicators tertiary education rise about 2 percent dur- in Sub-Saharan Africa are among the lowest in ing growth accelerations but fall 7 percent the world: infant and under-five mortality rates (primary), 15 percent (secondary), and 40 are almost three times higher than the global percent (tertiary) during decelerations. These average, life expectancy is 29 percent lower, differences may result from household time primary school completion is 66 percent lower, and resource allocations that favor boys over and the ratio of female to male tertiary enroll- girls when household budgets shrink.1 The dif- ment is about half the global mean. But the ferential impact on child schooling and child difference between the average level of social survival is greatest in low-income countries, indicators in good and bad times is smaller for while gender differences are smaller in mid- Sub-Saharan Africa than it is for developing dle-income countries. Economic downturns countries as a whole (compare figures 2.1 and also have different effects on the labor force 2.2). This finding may imply that at low levels GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 31 FIGURE 2.1 Key human development and gender indicators plummet from their overall mean during growth decelerations, all countries a. Life expectancy at birth b. Mortality rate 8 50 6 40 4 30 deaths, thousands years gained/lost 20 2 10 0 0 ­2 ­10 ­4 ­20 ­30 ­6 ­40 ­8 ­50 women men total infant mortality child mortality under five growth acceleration growth deceleration (per 1,000 live births) (per 1,000) growth acceleration growth deceleration c. Primary completion rate d. Gender equality, ratio of girls to boys 30 45 35 percentage point change percentage point change 20 25 10 15 5 0 ­5 ­10 ­15 ­25 ­20 ­35 ­30 ­45 girls boys total primary secondary tertiary enrollment enrollment enrollment growth acceleration growth deceleration growth acceleration growth deceleration Source: World Bank staff calculations based on data from World Development Indicators. See annex table A2.1 for levels and Arbache, Go, and Korman (2010) for more details. Note: Differences of sample averages during growth accelerations and decelerations from overall sample means. TABLE 2.1 Correlation coefficients between growth acceleration and deceleration and human development indicators Growth acceleration Growth deceleration Indicator Coefficient Significance level Coefficient Significance level Life expectancy at birth, women (years) 0.13 ** ­0.22 ** Life expectancy at birth, men (years) 0.12 ** ­0.25 ** Life expectancy at birth, total (years) 0.13 ** ­0.23 ** Infant mortality rate (per 1,000 live births) ­0.17 ** 0.21 ** Child mortality under five rate (per 1,000) ­0.15 ** 0.22 ** Primary completion rate, girls (% of relevant age group) 0.16 ** ­0.26 ** Primary completion rate, boys (% of relevant age group) 0.13 ** ­0.23 ** Primary completion rate, total (% of relevant age group) 0.16 ** ­0.26 ** Ratio of girls to boys, primary enrollment 0.17 ** ­0.22 ** Ratio of girls to boys, secondary enrollment 0.1 ** ­0.19 ** Ratio of women to men, tertiary enrollment 0.06 ­0.18 ** Source: World Bank staff calculations based on data from World Development Indicators. Note: Tests for differences in the means of these variables among growth accelerations, decelerations, and all country-year observations show that they are almost all statistically significant at the 1 percent level (**). 32 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 BOX 2.2 Aggregate economic shocks and gender differences: A review of the evidence The labor market for nonagricultural wage work by analyzing the impact of crises (see the figure below), women (often used as a proxy for women's access to it is important to take into account the response of decent work) tends to behave very differently from women who are not in the labor force. In some crises, the market for nonagricultural wage work by men. for example, in Indonesia in 1997, women entered While the unemployment rate rarely differs between the labor force to maintain household consumption men and women, a much smaller proportion of work- (called the added-worker effect). In the Republic of ing-age women are in the labor force (whereas most Korea during the 1997 crisis, some women left the men of working age are either working or unem- labor force (the discouraged-worker effect). ployed, women may be working at home). Thus in Possible transmission channels of economic crisis First-round impacts Second-round impacts IMPACT 1 Loss of employment Drop in aggregate for women in export- demand/exports oriented industries IMPACT 3 Vulnerable households' IMPACT 2 Drop in household coping strategies can Fall in microfinance income, increased push women into work, Tightened institutions' (MFI) lending affecting human capital credit markets risk of poverty resources affects women of women and producers (MFI borrowers children are typically women) Drop in remittances Food price shocks of income, the ability to improve social indica- tractions and the lack of social safety nets; and tors is particularly limited--and therefore so is declines in aid during crises that also affect the likely deterioration. high-income countries. Explaining the pattern of Poor countries suffer from frequent past crises economic contractions and high growth volatility Several factors contributed to negative human development outcomes during past economic One reason for the low levels of human devel- downturns, including the high frequency of opment in low-income countries is that they downturns in low-income countries; the poor experience numerous crises. Of all country- policy environment in many countries during year observations for low-income, Interna- past crises, particularly in low-income coun- tional Development Association (IDA)-eligible, tries; shrinking social spending during con- and Sub-Saharan African countries, nearly GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 33 BOX 2.2 (continued) The table below summarizes country studies of the impact of crises on women's labor market participation and health and education outcomes. Previous crises: Available evidence by country Income level Labor market at time of crisis Country effects for women Schooling Health Low-income Côte d'Ivoire Decline in student enrollment Deteriorating child health country for both boys and girls. for both boys and girls. Pooled survey data Girls' infant mortality more from several low- sensitive than boys' infant income countries mortality to fluctuations in GDP. Lower-middle- Indonesia Added-worker effect in Decline in student enrollment Higher neonatal mortality, income 1997­98. for young boys and girls and but overall not much country older girls. effect on child health. Lower body mass index for adults. Peru Added-worker effect in Increase in student Higher infant mortality Lima. enrollment for both boys rate. and girls. Philippines Added-worker effect. Drop in high school enrollment for both boys and girls. Drop in elementary school enrollment, more for girls than boys. Increase in child labor, more for boys than girls. Upper-middle- Argentina Added-worker effect in income urban areas during 1990s. country Brazil Both added- and discouraged-worker effect in São Paulo during 1980s. Costa Rica Decline in student enrollment for both boys and girls in rural areas; higher for girls than boys in urban areas. Mexico Added-worker effect Increase in student Higher child mortality during 1980s. enrollment in 1995­96, during crises. stronger for boys than girls. Russian Federation Deterioration in weight for height for both boys and girls. High-income Korea, Rep. Discouraged-worker effect country in Seoul in 1997­98. United States No effect. Increase in student Improved child health enrollment during Great outcomes. Depression. Source: Sabarwal, Sinha, and Buvinic 2009. 34 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 FIGURE 2.2 Key human development and gender indicators also fall below their overall means during growth decelerations in Sub-Saharan countries, if less so a. Life expectancy at birth Sub-Saharan Africa b. Mortality rate, Sub-Saharan Africa 2.5 20 2.0 25 1.5 10 deaths, thousands 1.0 0.5 5 years 0 0 ­0.5 ­5 ­1.0 ­10 ­1.5 ­2.0 ­15 ­2.5 ­20 women men total infant mortality child mortality under five (per 1,000 live births) (per 1,000) growth acceleration growth deceleration growth acceleration growth deceleration d. Gender equality, ratio of girls to boys, c. Primary completion rate, Sub-Saharan Africa Sub-Saharan Africa 15 30 10 20 percentage point change percentage point change 5 10 0 0 ­5 ­10 ­10 ­20 ­15 ­30 girls boys total primary secondary tertiary enrollment enrollment enrollment growth acceleration growth deceleration growth acceleration growth deceleration Source: World Bank staff calculations based on data from World Development Indicators. See annex table A2.1.2 for levels and Arbache, Go, and Korman (2010) for more details . Note: Differences of sample averages during growth accelerations and decelerations from the overall sample means. a quarter are decelerations; for the middle- Differences in the frequency of economic income countries in East Asia, Europe and contraction explain a significant share of the Central Asia, and Latin America, less than 10 differences in the average growth rate of dif- percent are decelerations (table 2.2). Similarly, ferent groups of countries. Growth in GDP per the share of accelerations is 37­39 percent capita during 1980­2008 was 0.6 percent a for poorer countries but 43­53 percent for year in low-income countries and more than 2 middle-income countries.2 In addition, over- percent a year in middle-income countries. The all growth volatility is greater in low-income slower growth in low-income countries stems countries and in Sub-Saharan Africa than in from the greater frequency of decelerations,3 middle-income countries (see table 2.2). The not from a marked difference in growth rates regional pattern suggests growth spillovers during booms and busts. For example, during at the geographic level, which may be associ- periods of acceleration, low-income countries' ated with economic geography, regional trade per capita GDP rose 3.75 percent, slightly less arrangements, natural disasters, regional than the 4.5 percent growth rate for middle- migration, and regional conflicts. income countries. During decelerations, low- GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 35 TABLE 2.2 Frequency of growth acceleration and deceleration, growth rates, and GDP per capita, 1980­2008 GDP Growth acceleration Growth deceleration GDP per capita GDP per capita GDP per capita growth rate Standard deviation Frequency growth rate Frequency growth rate Region, income (%) of growth (country years) (%) (country years) (%) World 1.89 6.03 0.47 4.27 0.11 ­3.81 Region East Asia and Pacific 3.09 4.45 0.46 5.01 0.09 ­2.75 Europe and Central Asia 2.20 6.65 0.53 4.79 0.08 ­7.19 Latin America and the Caribbean 1.63 4.65 0.53 3.72 0.07 ­2.78 Middle East and North Africa 1.41 5.51 0.43 2.89 0.06 ­3.44 South Asia 3.72 2.87 0.36 4.69 -- -- Sub-Saharan Africa 1.02 7.28 0.39 4.19 0.22 ­3.17 Country Income category Developing countries 1.67 6.37 0.46 4.33 0.14 ­3.87 IDA countries 0.99 6.28 0.39 3.82 0.21 ­3.47 Low-income countries 0.63 6.74 0.37 3.75 0.23 ­3.50 Lower-middle-income countries 1.98 5.89 0.47 4.52 0.13 ­4.99 Upper-middle-income countries 2.34 6.43 0.55 4.54 0.08 ­2.76 High-income, non-OECD countries 3.02 7.41 0.42 5.90 0.02 ­4.62 High-income OECD countries 2.19 2.59 0.54 3.31 0.03 ­2.32 Source: World Bank staff calculations based on data from World Development Indicators. Note: -- = not available. OECD = Organisation for Economic Co-operation and Development. income countries' per capita GDP fell 3.5 all times (figure 2.3). Causality likely moves percent, somewhat less than in middle-income in both directions: a deterioration in institu- countries. Thus "defensive" policies that pre- tions impairs growth, which leads to further vent collapses should have substantial impacts institutional weaknesses, and so on. In many on average growth by avoiding multiple col- cases both institutions and growth are affected lapses and their negative outcomes.4 The find- by domestic violence or foreign wars. In Sub- ing that the elasticity of poverty to growth is Saharan Africa, for example, the frequency of lower in high-poverty countries (see chapter 1) major and minor conflicts is about 23 percent suggests that low-income countries, where pov- during growth deceleration and 13 percent dur- erty rates are high, need a long period of sus- ing growth acceleration. In oil- and mineral- tained growth to reduce poverty and improve dependent economies, defects in institutional other human development indicators. quality may be masked by the revenues gen- erated by favorable commodity prices. These defects become clear when prices turn down Contractions tend to occur in severely and revenues dry up. 5 unfavorable economic and policy Macroeconomic variables such as invest- environments ment, savings, exports, imports, external Contractions have a grave impact on human finance, and inflation deteriorate more during development because they are marked by an downturns than they improve during upturns overall deterioration in government effective- (see figure 2.3). During decelerations, both sav- ness. Similar to human development indicators, ings and investment, particularly fixed private indicators of institutional quality (political investment, decline relative to average levels stability, voice and accountability, regulatory (as a share of GDP) by much more than they framework, rule of law, and government effec- rise during accelerations. The increase in for- tiveness) in developing countries perform eign direct investment as a share of GDP during asymmetrically over the growth cycle. In other accelerations is twice as large as the drop dur- words, the deterioration during bad times is ing decelerations (relative to the sample mean). much greater than the improvement during The very high values for inflation during growth good times relative to the sample averages for decelerations reflect the incidence of hyperinfla- 36 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 FIGURE 2.3 During growth decelerations, economic and institutional indicators diverge far from the overall means a. GDP growth and inflation b. Savings and investment 6 250 6 200 percentage point change percentage point change 4 150 4 2 100 2 50 0 0 0 ­50 ­2 ­100 ­2 ­4 ­150 ­4 ­200 ­6 ­250 ­6 GDP per capita CPI inflation (%) Gross Gross fixed Gross growth rate (right axis) investment investment domestic (left axis) (% GDP) private sector savings (% GDP) (% GDP) growth acceleration growth deceleration growth acceleration growth deceleration c. Trade d. External capital flows 10 25 percentage point change percentage point change 15 5 05 0 ­05 ­5 ­15 ­10 ­25 exports (% GDP) imports (% GDP) foreign direct private capital flows, investment, total (% GDP) growth acceleration growth deceleration net inflows (% GDP) growth acceleration growth deceleration f. Frequency of conflicts and official development, e. Institutions (­2.5 to 2.5) assistance, Sub-Saharan Africa 0 0.08 1.5 0.06 percentage point change percentage point change percentage point change ­0.2 1.0 0.04 ­0.4 0.02 0.5 ­0.6 0 0 ­0.02 ­0.8 0.5 ­0.04 ­1 1.0 ­0.06 ­1.2 ­0.08 ­1.5 frequency ODA (% GDP) or y law ne nt bi cal ta d ew or Re lity un an ive e ss k m lat of conflicts (right axis) sta liti ct m y of bi lit co ce fe rn gu Po le ac Voi ef ve (left axis) Ru Go fra growth acceleration growth deceleration growth acceleration growth deceleration Source: World Bank staff calculations based on data from World Development Indicators. See annex table A2.3 for levels and Arbache, Go, and Korman (2010) for more details. Note: Differences of sample averages during growth accelerations and decelerations from the overall sample means. GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 37 TABLE 2.3 Correlation coefficients between economic cycles and economic and institutional indicators Growth acceleration Growth deceleration Indicator Coefficient Significance level Coefficient Significance level Final consumption (% GDP) ­0.1 ** 0.13 ** Government consumption (% GDP) ­0.07 ** 0.04 ** Gross capital formation (% GDP) 0.09 ** ­0.17 ** Gross domestic savings (% GDP) 0.1 ** ­0.13 ** Gross private fixed capital formation (% GDP) 0.19 ** ­0.19 ** Imports (% GDP) 0.06 ** ­0.09 ** Exports (% GDP) 0.09 ** ­0.11 ** Trade (% GDP) 0.08 ** ­0.11 ** Net foreign direct investment (% GDP) 0.03 ­0.04 * Private capital flows, total (% GDP) 0.04 * ­0.04 * Inflation (%) ­0.06 ** 0.13 ** Institutions Political stability ­0.07 ** ­0.12 ** Voice and accountability ­0.07 ** ­0.1 ** Regulatory framework ­0.06 * ­0.19 ** Rule of law ­0.1 ** ­0.18 ** Government effectiveness ­0.05 * ­0.21 ** Source: World Bank staff calculations. Indicators on institutions are from the World Bank Institute's Worldwide Governance Indicators database, which relies on 33 sources, including surveys of enterprises and citizens, and expert polls, gathered from 30 organizations around the world. * Significant at the 5 percent level; ** significant at the 1 percent level. tion during several growth collapses in Africa and private domestic spending on health and before the 1990s and incidents of high inflation public education for over 108 developing in the early 1990s (such as in Angola, Armenia, countries for 1995­2007.7 Azerbaijan, Belarus, Brazil, Democratic Repub- The analysis points to three key results. lic of Congo, Peru, and Ukraine).6 First, social spending growth rates tended to Aid to poor countries is procyclical, suggest- be volatile. Second, per capita social spending ing that donors respond to an emerging policy levels nonetheless showed a steady upward failure by giving less aid. Macroeconomic and trend. Third, social spending in poor countries institutional variables are more closely corre- was subject to more pressures than in richer lated with the incidence of deceleration than countries during contractions in GDP. The of acceleration (table 2.3)--further evidence last result confirms that it is the low-income of the asymmetric behavior of these indicators countries that are more likely to need help in over the economic cycle and of the extremely protecting social expenditures during crises. poor economic environment characterizing The volatility of public and private health downturns in developing countries. spending is evident from the unweighted aver- age of growth rates of social spending by coun- try over time, a calculation that gives equal Social spending under pressure weight to changes for each country and does Drops in spending on social services like edu- not allow the larger countries to dominate the cation and health care are an important reason pattern. In particular, changes in public health for the sharp deterioration in human develop- spending are more volatile than GDP growth ment indicators during crises. Cutbacks in trends over time (figure 2.4). Historically, a social spending are more worrisome during drop in GDP growth of 2 percent or more has crises because that is when people need these had a greater than proportional effect on the services most. Cutbacks during crises are also growth of public health spending. Growth harmful because such disruptions have long- of private health spending (insurance and lasting effects. This section draws on evidence out-of-pocket payments) responds in a simi- of the impacts of GDP downturns on public lar way, although the pattern is more vola- 38 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 FIGURE 2.4 Health spending growth rate is more volatile than its per capita level or GDP growth a. Government health expenditure b. Private health expenditure and GDP growth and GDP growth in developing countries 14 200 9 140 12 180 8 120 160 7 10 140 100 6 % change 120 % change 8 5 80 PPP $ PPP $ 100 6 4 60 80 3 4 60 40 40 2 2 1 20 20 0 0 0 0 1996 1998 2000 2002 2004 2006 1996 1998 2000 2002 2004 2006 Average of GDP growth, unweighted (left axis) Average of GDP growth, unweighted (left axis) Average of government health expenditure per capita Average of private health expenditure per capita by country, by country, unweighted (right axis) unweighted (right axis) Average of growth rates of government health Average of growth rates of private expenditure by expenditure by country, unweighted (left axis) country, unweighted (left axis) Source: Lewis and Verhoeven 2010. FIGURE 2.5 Public education spending is less closely tied to GDP ing level (which is also an unweighted average growth than is health spending across countries) suggests that the volatility of spending growth rates was affecting coun- 25 250 tries with lower levels of per capita spending more than countries with higher spending lev- 20 200 els. Indeed, the data confirm that the negative 15 150 impacts of crises on health spending are much % change stronger in the lowest-income countries, where PPP $ 10 100 growth in health spending is more likely to fall in response to a decline in GDP. 5 50 Education spending in developing countries appears to be less closely tied to GDP growth 0 0 1996 1998 2000 2002 2004 2006 than is health spending (figure 2.5). In abso- lute terms, the public sector spends more, on a Average of GDP growth, unweighted (left axis) per capita basis, on education than on health. Average of government education expenditure per capita by country, unweighted (right axis) There is also a modest rising trend. The data on Average of growth rates of government education expenditure by country, education spending are weak, however, so any unweighted (left axis) conclusions concerning cross-country trends Source: Lewis and Verhoeven 2010. are subject to considerable uncertainty.8 tile than for government spending, especially Donor funding under pressure before 2005. Does aid to developing countries rise during Despite the fluctuations in growth rates of crises? The sharp deterioration in human devel- GDP and health spending, the trends in abso- opment indicators and the decline in social lute per capita health spending continue to rise spending during growth decelerations highlight over time. In general, private health spending a potentially important role for donors. Aid's rises more slowly than public health spending. contribution to welfare in developing coun- The steady rise of the mean per capita spend- tries could be bolstered by increasing aid in GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 39 FIGURE 2.6 Aid to education and health does not appear to be closely related to GDP growth, 1998­2007 a. GDP and ODA in health trends b. GDP and ODA in education trends 500 7 1,200 7 GDP growth rate (right axis) GDP growth rate (right axis) 450 6 1,000 6 400 per capita ODA, US$ per capita ODA, US$ 350 5 5 800 growth rate, % growth rate, % 300 4 4 250 ODA health 600 spending (left axis) 3 3 200 ODA education 400 150 2 spending 2 (left axis) 100 200 1 1 50 0 0 0 0 1998 2000 2002 2004 2006 1998 2000 2002 2004 2006 Source: Lewis and Verhoeven 2010. bad times to compensate for shortfalls in gov- funding could deepen the economic deteriora- ernment resources. The evidence on whether tion in developing countries. aid plays such a countercyclical role is mixed. Two deviations from these aggregate trends Overall, aid to individual countries appears to are instructive--and encouraging. During the be procyclical, increasing when growth rises Southeast Asian crisis of 1997, donors (most and falling when growth slows. And growth notably the U.K. Department for Interna- in aid to health and education sectors does not tional Development) supported core social appear to be closely related to GDP growth in programs in Indonesia, slowing the declines developing countries (figure 2.6). However, in education and health spending and permit- after 2003, aid to education shows a small ting social services to continue.10 During the response to growth, with donor financing ris- current crisis, Mexico sought loans from the ing and falling as national education resources World Bank to compensate for budget reduc- fall and rise. This countercyclical financing tions and to expand temporary safety nets. suggests that donor spending is modestly com- Latvia, Lithuania, Poland, and Romania all pensating for GDP growth shifts. received policy loans or technical assistance Evidence on aid funding during financial from the World Bank to support reforms and crises in donor countries is limited. A recent continued financing of safety nets and educa- study that tracked donor allocations dur- tion and health programs. These aid responses ing and after banking crises (1998­2007) in provided necessary finance for income support developed countries suggests that donor fund- and social service programs--both critical for ing is tied to economic prosperity in those bridging financial gaps during a downturn. countries.9 Aid flows decline 20­25 percent during banking crises in member countries of Safety nets were uncommon in the Organisation for Economic Co-operation developing countries before previous and Development (OECD) and take signifi- crises cant time to recover. Not all donor programs are equally affected. But some combination of Few countries facing previous macroeconomic the fiscal costs of crises, debt overhang after and financial crises in Asia (1997­99), Europe the crisis ends, and perhaps erosion in public (Russian Federation 1998, Turkey 2001), and support reduces aid flows from affected donor Latin America (1980s, 1994­95, 1999, 2001­ countries. To the extent that aid recipients and 02) had strong safety nets in place before the donors are simultaneously affected by crises crisis. Countries had to scale up programs, (as in the recent crisis), cutbacks in donor regardless of the fit between the original target 40 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 MAP 2.1 Around 9 million young children die before their fifth birthday Child mortality under five rate: Deaths per 1,000 (2008) Green (De 100 35­99 20­34 10­19 <10 Canada no data United States Bermuda (UK) The Bahamas Cayman Is. (UK) Cuba Turks and Caicos Islands (UK) Mexico Haiti C Belize Jamaica Guatemala Honduras El Salvador Nicaragua Costa Rica Panama R.B. de Guyana Venezuela Suriname Colombia French Guiana (Fr) Ecuador Kiribati Peru Brazil Samoa Cook Is. (NZ) French Polynesia (Fr) American Samoa (US) Bolivia Fiji Tonga Dominican Puerto British Virgin Paraguay Republic Rico (US) Islands (UK) Anguilla (UK) U.S. Virgin Antigua and Barbuda Islands (US) St. Kitts Guadeloupe (Fr) Chile Uruguay and Nevis Argentina This map was produced by the Netherlands Dominica Map Design Unit of The World Bank. Antilles (Neth) Montserrat (UK) Martinique (Fr) The boundaries, colors, denominations St. Lucia Aruba St. Vincent and and any other information shown on Barbados (Neth) The Grenadines this map do not imply, on the part of The World Bank Group, any judgment Grenada on the legal status of any territory, or Trinidad any endorsement or acceptance of and Tobago such boundaries. R.B. de Venezuela Source: World Development Indicators. population and the population affected by the in response to the 2002 crisis and extended it crisis, or quickly start new ones. Mexico scaled to 2 million participants within a year. Inci- up retraining and employment programs and dence and coverage were good, with about 80 targeted food distribution in response to the percent of the benefits concentrated among the "tequila" crisis, even though these programs poorest 40 percent of the population. Argen- probably did not target the most affected tina benefited from extensive experience with populations. Safety net programs set up after an earlier, smaller workfare program. The a crisis starts often suffer from poor initial Republic of Korea was able to quickly intro- implementation, as with Indonesia's Labor- duce a public works program in response to Intensive Public Works (JPS Padat Karya) the Asian financial crisis, reaching more than program, or take too long to scale up, as with 400,000 people within six months.12 Colombia's Families in Action (Familias en Beyond emergency responses to natural Acción) program.11 disasters and humanitarian crises, safety nets Despite the difficulties, however, countries have been uncommon in low-income coun- have managed to start effective safety net pro- tries, partly because they were viewed as tak- grams in response to crises. Argentina estab- ing away from more productive expenditures. lished a new workfare (Jefes de Hogar) program But support for social safety nets in the poorest GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 41 IBRD 37743 APRIL 2010 nland en) Faeroe Norway Iceland Islands Finland (Den) Sweden The Netherlands Russian Federation Estonia Isle of Man (UK) Denmark Russian Latvia Fed. Lithuania United Ireland Kingdom Germany Poland Belarus Channel Islands (UK) Belgium Ukraine Luxembourg Moldova Kazakhstan Liechtenstein Mongolia France Italy Romania Switzerland Andorra Bulgaria Georgia Uzbekistan Kyrgyz Azer- Rep. D.P.R. Portugal Spain Turkey Armenia baijan Turkmenistan of Korea Monaco Greece Tajikistan Japan Cyprus Syrian Rep. of Gibraltar (UK) Arab Islamic Rep. Afghanistan China Tunisia Malta Lebanon Korea Rep. Iraq of Iran Morocco Israel Jordan Kuwait West Bank and Gaza Bahrain Pakistan Bhutan Nepal Algeria Libya Arab Rep. Qatar Former Spanish of Egypt Saudi Sahara Arabia United Arab Bangladesh Emirates India Myanmar Lao Mauritania Oman P.D.R. Cape Verde Mali N. Mariana Islands (US) Niger Rep. of Thailand Vietnam Senegal Chad Eritrea Yemen Guam (US) The Gambia Burkina Sudan Djibouti Cambodia Philippines Federated States of Micronesia Marshall Islands Guinea-Bissau Guinea Faso Benin Sri Sierra Leone Côte Ghana Nigeria Central Ethiopia Lanka Brunei Liberia D'Ivoire Cameroon African Rep. Somalia Palau Togo Malaysia Maldives Equatorial Guinea Uganda Kiribati Kenya São Tomé and Príncipe Gabon Congo Rwanda Singapore Nauru Dem. Rep. of Burundi Seychelles Papua Solomon Congo Indonesia New Guinea Islands Tanzania Comoros Tuvalu Timor-Leste Angola Malawi Zambia Mayotte Fiji (Fr) Vanuatu Zimbabwe Mauritius Namibia Madagascar Botswana Mozambique Réunion (Fr) New Poland Caledonia Australia (Fr) Swaziland Ukraine Germany Czech Rep. Slovak Rep. South Lesotho Africa Austria Hungary Slovenia Romania Croatia New Zealand Bosnia and San Herz. Serbia Bulgaria Marino Montenegro Kosovo FYR Macedonia Vatican Italy Albania City Greece countries has risen as their importance in pro- But if safety nets are not in place when shocks tecting the poor and vulnerable during crises strike, governments might respond with price has become evident. Low-income and fragile subsidies or other suboptimal policies, which countries are devoting a larger share of lend- can leave an unwanted legacy of fiscal bur- ing to public works programs and increasing den, economic distortions, lower growth, and cash transfers and in-kind safety nets, with a greater poverty. renewed focus on school feeding programs. A key lesson in previous crises is the importance of well-functioning safety nets in What is happening in the current responding to a crisis and promoting growth crisis--and what is different? and development afterward. When already There is some hope that human development in place, safety nets can be scaled up to meet indicators have not deteriorated as much dur- increased needs and then scaled back as the ing the current crisis as in previous crises. crisis subsides. They can provide temporary Because the current economic crisis did not protection for households by cushioning unem- reach most developing countries until 2009, it ployment, contractions in public services, and is too early to arrive at a definitive conclusion falling demand for formal and informal work. on its impact. However, rapid surveys and dis- 42 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 FIGURE 2.7 Despite intense fiscal pressures, Mexico's federal funding for health and education is set to rise in 2009­10 a. Health b. Education 400 12 600 17 300 11 16 Mex $, thousands 400 Mex $, thousands percent percent 200 10 15 200 100 9 14 0 8 0 13 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010 total health spending (left axis) total education spending (left axis) health spending as a % of federal education spending as a % of federal spending (right axis) spending (right axis) Source: Mexican government statistics. Note: Data are estimated for 2005­07, approved for 2008 and 2009, and projected for 2010. cussions with governments have yielded pre- employment and transfers to vulnerable pop- liminary evidence showing that social spending ulations. Chile's Social and Economic Stabili- may have held up better during this crisis than zation Fund provided a countercyclical boost in previous ones and that there has been more in spending, blunting the effect of the exter- reliance on social safety nets. Moreover, policy nal shock.13 In Mexico, the severe contraction regimes in developing countries had improved imposed intense fiscal pressure, but educat- considerably before the crisis, so governments ion and health funding are nevertheless set to might have had greater success in protecting rise 10 percent in 2009­10 (although spend- their populations from the worst effects of the ing on education is expected to fall sharply growth downturn. as a share of total government expenditures; figure 2.7). El Salvador is not cutting educa- tion funding despite the severe recession, but Social spending held up in some regions health spending is expected to fall from 3.4 Impacts on social sector budgets for 2008­10 percent to 3.0 percent of GDP, largely because varied by country circumstances, specifically of reductions in the Social Security Institute's according to how the global downturn affected health expenditures.14 the economy and public revenues and whether countries prepared for a possible contraction. Eastern Europe and Central Asia. Because Eastern Europe was the hardest hit of emerg- Latin America and the Caribbean. In Latin ing market regions, countries there were the America social spending has remained strong, first to cut all areas of public spending. Nei- partly because of the relatively modest size ther education nor health has necessarily been and scope of the downturn in much of the spared. However, aggregate trends in social region and partly because of efforts to protect spending alone are not an accurate indication social spending. Some of the larger econo- of the impact of the crisis on outcomes. Some mies (such as Brazil and Chile) instituted countries have directed spending reductions social measures aimed at financing temporary to sectors with overcapacity, thus improving GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 43 BOX 2.3 Crises as opportunities for reform Crises can present opportunities to achieve reforms and prioritized the fi nancing of effective health care in social sector spending that will improve efficiency procedures by adjusting the list of ineligible health and welfare over the long term. The current crisis services. The crisis made all these needed reforms sharply reduced GDP in many countries in East- possible, and policy research informed strategic ern Europe--by more than 15 percent in Latvia-- investment decisions, largely avoiding across-the- making it impossible to sustain social spending at board reductions or random cuts in social programs. precrisis rates. Across-the-board cuts in education Romania responded to declining school enroll- spending would have greatly impaired access to edu- ments and tighter budgets by substantially reducing cation, with dismal implications for the quality of education personnel (teaching and nonteaching posi- the workforce and long-term productivity. Instead, tions) in 2009 and by curtailing supplements to base Latvia and Romania directed spending cuts at areas salaries. Some 18,000 teachers (6 percent) were laid of overcapacity, through reforms that previously had off following adjustments in teaching norms and sub- been blocked by political opposition. stantial cuts in the funds allocated to each county. Latvia is using the stringencies imposed by the cri- The Ministry of Education, Research, and Innova- sis to right-size its teaching force. By shifting teacher tion cut 15,000 additional public positions, consoli- financing and management to local governments dated schools, and reduced the number of scholar- and providing them with per capita student trans- ships for higher education. The staffi ng reductions fers, the central government is tackling overcapac- will allow much needed adjustments to class size and ity. This reform translates into an average 34 percent better alignment of teachers, students, and budgets. reduction in the number of teachers and a 45 percent The ministry also has reduced the number of fee- reduction in teacher salaries. In the health sector, the paying students, which shrinks the overall resource government has embraced sources of efficiency gain envelope for higher education at the same time that through restructuring. Drawing on diagnostic work budgets are being cut. with the World Bank, the government has eliminated excess hospital beds, invigorated outpatient care, Source: Lewis and Verhoeven 2010. long-term efficiency and limiting the welfare large increases in minimum wages and social impact of expenditure cuts (box 2.3). standards throughout 2009­10. Public wages By contrast, some countries had increased were adjusted accordingly at the end of 2009, planned spending heading into the crisis, but the subsequent wage hikes have not taken necessitating painful reductions as govern- place because of challenges to the law in the ment resources dwindled. In Moldova, edu- Constitutional Court. More recently, the Cabi- cation sector employees make up about 60 net of Ministers approved salary top-ups for percent of public employees. During two elec- secondary, vocational, and university teach- tion campaigns in 2009, the outgoing govern- ers (equivalent to 20 percent of base salary). ment raised teachers' salaries 25­30 percent to With no budget yet in place for 2010, budget align entry-level salaries with average national operations are being executed on the basis earnings but made no commensurate increases of an operational budget that limits current in class size or shifts in teaching loads. Other monthly spending to one-twelfth of the 2009 measures were contemplated that would fur- appropriations. ther raise real wages if implemented. The new One indicator of the impact of the crisis government's challenge will be to implement on health expenditures is that pharmaceuti- corresponding increases in class size or shifts cal spending (a good proxy for health sec- in teaching loads. Ukraine adopted a social tor spending) has declined sharply in Eastern standards law in November 2009 that calls for Europe. World demand continued to rise from 44 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 FIGURE 2.8 Average pharmaceutical expenditures fall in Eastern Europe, especially in the Baltics, before beginning to rise again 1.30 1.24 average pharmaceutical expenditure 1.20 index (based on Q1 2008) 1.10 1.10 1.08 1.00 0.99 0.95 0.92 0.91 0.91 0.90 0.90 0.88 0.80 0.70 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2007 2008 2009 Europe Estonia Latvia Lithuania Global Source: Laing and Buysse 2010. the first quarter of 2007 through the last quar- had to undertake fiscal tightening.16 The ter of 2009 (with the first quarter of 2008 con- effects of the crisis have been relatively mod- sidered the last quarter before the worldwide est in East Asia, although qualitative evidence financial crisis), but expenditures in Eastern in six countries suggests that informal work Europe declined in the first quarter of 2009 has surged and that migrants have returned before beginning to rise again. The decline home temporarily, lowering overall income was most dramatic in the Baltics, with Latvia and reducing households' ability to pay for cutting back pharmaceutical expenditures by social services. Households have responded more than 25 percent between the fourth quar- by transferring children from private to pub- ter of 2008 and the end of 2009 (figure 2.8). lic schools and reducing food consumption, Information on social sector spending in although parents contend that they have tried other regions is extremely limited, but scat- to shield children's nutrition.17 tered information provides some examples. For Spending to combat HIV/AIDS (human im- example, 16 of 19 country programs initiated munodeficiency virus/acquired immune defi- and monitored by the International Monetary ciency syndrome) is a special case. Big increas- Fund and implemented with the World Bank es in funding have made HIV/AIDS one of in 2008­09 budgeted higher social spending the most important items on the development for 2009; 9 of those countries were in Sub- agenda. Funding for HIV/AIDs programs dur- Saharan Africa (Burundi, Republic of Congo, ing the current crisis has been largely sustained. Côte d'Ivoire, Liberia, Malawi, Mali, Niger, The uptick in donor spending in 2008­09, Togo, and Zambia.15 Several African coun- when the economic crisis was accelerating in tries with poverty reduction strategies have donor countries, is encouraging. The Global protected funding for social sectors. Some Fund to Fight AIDS, Tuberculosis, and Ma- countries with adequate fiscal space (Kenya laria (the Global Fund) disburses quickly once and Nigeria) have protected capital expendi- allocations are decided, but recipient country ture, mainly for infrastructure. But there are spending has been slow. So the issue is sluggish also examples of forced contractions in social disbursement and a new concern for efficiency spending. Countries with precrisis fiscal and of resource use (see annex 2.2 for a detailed debt problems (such as Ethiopia and Ghana) discussion). Almost 40 percent of the Global GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 45 FIGURE 2.9 Undisbursed HIV/AIDS grants from the Global Fund to Fight AIDS, Tuberculosis, and Malaria, Rounds 1­7 60 50 0.49 % of total active grants 0.41 not yet disbursed 40 0.37 0.39 0.38 0.35 0.37 30 0.29 0.24 20 10 0 East Asia Europe and Latin Middle East South East Southern West Central World and Pacific Central America and Asia Africa Africa Africa Asia and the North Africa Sub-Saharan Africa Carribbean Source: Lewis 2009. Fund resources remain undisbursed, a pos- place before the crisis that could be scaled up sible source of additional resources if there is (table 2.5). Less funding to Africa and South a shortfall or delay in funding flows. Almost Asia reflects the fact that existing safety nets half the allocations to Sub-Saharan Africa are were smaller and less able to absorb funds. undisbursed (figure 2.9). The $900 million al- Thus, where capacity was in place, lend- located in late 2009 under Round 9 is also un- ing could be quickly leveraged. Some coun- likely to have been disbursed yet.18 tries have been reluctant to introduce safety net programs because of the costs involved, The recent buildup of social safety nets although reducing across-the-board subsidies Safety nets have been a crucial part of the response to the crises in the hardest-hit coun- FIGURE 2.10 Food-related safety net programs are more tries. Many countries that responded most common in Africa than elsewhere effectively already had safety nets, which gov- ernments were able to quickly modify and 0.7 expand. Evidence on the distribution of safety net programs shows that programs vary con- 0.6 siderably across regions. For example, food- 0.5 percentage of countries based programs are more common in Africa than in other regions (figure 2.10).19 0.4 Another sign of the importance of safety 0.3 nets in responding to the crisis is the dramatic increase in World Bank lending for safety nets 0.2 after the crisis struck--topping $3 billion in 0.1 29 countries in fiscal 2009. Elevated activity is expected to continue in 2010­11, particu- 0 larly in low-income countries and fragile and cash transfer food for work food rations/ school feeding stamps postconflict settings (table 2.4).20 The regional distribution of lending activities reflects the Africa rest of the world dominance of Latin America, which had the Source: Wodon and Zaman 2010. greatest number of effective safety nets in Note: Based on a March 2008 survey of 120 World Bank country teams. 46 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 TABLE 2.4 World Bank lending for safety nets before and since the planning for a pilot conditional cash trans- food, fuel, and financial crises, 2006­11 fer program (Pantawid Pamilyang Pilipino US$ billions Program, or 4Ps) in 2007. It was launched International Bank International in February 2008 for 6,000 households. As for Reconstruction Development and Development Association the crisis unfolded, the government acceler- Period Loans Loans Grants Total ated and augmented the program, rolling it out to 376,000 households by March 2009. 2006­08 (precrisis) 0.57 0.62 0.03 1.23 In mid-2009, the government announced 2009­11 (postcrisis) 4.48 1.38 0.03 5.89 plans to expand the program to as many as Source: Data from the World Bank Business Warehouse project database for projects classified as social safety nets (54). 1 million households by the end of 2009. Note: Data do not include interventions funded under the Global Force Crisis Response · Before the crisis, the government of Brazil Program. had established a highly successful condi- tional cash transfer program, Bolsa Famil- TABLE 2.5 World Bank portfolio allocations to social safety nets, ia, to protect poor families. When the crisis by region, 2009­10 hit, the government expanded the program Amount Number to more than 12 million families, using a Region (US$ millions) of projects new methodology of poverty maps and Latin America and the Caribbean 2,917 21 an income volatility index, and raised the Europe and Central Asia 926 21 benefit level 10 percent to compensate for East Asia and Pacific 618 9 higher food prices. The program was ex- Sub-Saharan Africa 574 23 panded in regions where poverty reduction South Asia 373 9 has been slow--in urban municipalities and Middle East and North Africa 19 8 in the mid-south region--reaching 1.3 mil- Source: Data from the World Bank Business Warehouse project database for projects classified as social safety nets. lion families in those areas in 2009. Anoth- Note: Data do not include interventions funded under the Global Force Crisis Response er 600,000 families within poverty belts or Program. in specific vulnerable groups are expected to join the program in 2010. while augmenting targeted safety nets can help · In response to the food, fuel, and financial reduce poverty without a significant drain on crises, Chile announced in April 2009 the revenues (box 2.4). strengthening of multiple safety net pro- Several countries expanded existing or grams. Family allowances of about $45 were planned safety net programs in response to distributed to 1.4 million families, including the crisis. all families in the Chile Solidario program (around 300,000), families in the Fam- · The Republic of Yemen, hard hit by the glob- ily Subsidy program, and families whose al food crisis (drought has forced imports of monthly income was $555 or less. In all, more than three-quarters of its food), ex- some 5.6 million people in the bottom 40 panded safety net programs with support percent of the income distribution will ben- from the World Bank and the European efit, at a cost of $62 million. Union. The cash-for-work program was · The government of Ethiopia established the extended to an additional 22,000­26,000 Productive Safety Net Program in 2005 to households in communities most affected by pay for participation in labor-intensive pub- higher food prices, the share of cash transfers lic works and provide direct support to el- to the poorest beneficiaries was increased, derly or incapacitated household members. and 40,000­50,000 more households were The program has been expanded since, pro- added to the cash transfer program. viding immediate assistance to 1.5 million · The food and fuel price shocks in 2008, households when the food and fuel crises the global economic crisis, and a recent struck, and providing additional transfers typhoon have sharply increased poverty in to 4.4 million people as the crisis deepened. the Philippines. The government had begun Evaluations find a positive impact on use of GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 47 BOX 2.4 Using safety nets to lower the cost of reducing poverty Some countries have hesitated to establish safety gram. The response was easy, fast, and affordable nets because of the cost. Safety net expenditures in because of the earlier investment. developing countries average 1­2 percent of GDP. In 2005 Indonesia cut its fuel subsidies by $10 Expenditures on programs that are to scale and billion, using a quarter of the released funds for a that have been evaluated as delivering significant pos- targeted cash transfer that more than compensated itive impacts, such as Mexico's Oportunidades and poor recipients for their losses. Another quarter of Brazil's Bolsa Familia, average 0.4 percent of GDP. the savings went to basic health and education pro- Ethiopia's largest safety net program, the Productive grams for the poor. Safety Net, costs about 1.7 percent of GDP. In 2008 the Philippines found itself short of effec- The introduction of a well-targeted safety net can tive policy instruments to protect the poor against provide the political space to reduce or eliminate escalating rice prices. A key part of its multipronged expensive and poorly targeted general price subsidies, response package, which cost some 1.3 percent of freeing up resources to fund the targeted programs. GDP, was a program of loosely targeted and distor- The potential for such reallocations is considerable tive rice subsidies. Realizing that this approach is because many countries have large and costly price expensive and regressive, the government is working subsidies. More than a third of countries recently on better safety net options--unifying administra- surveyed by the International Monetary Fund raised tion under a new umbrella program, scaling up a subsidies an average of 1 percent of GDP in response proxy means test for targeting households, reform- to higher food and fuel prices. Several examples illus- ing and expanding the school feeding program, and trate successful country experiences in switching accelerating rollout and scaling up of a conditional from universal subsidies to targeted safety nets. cash transfer program. In the late 1990s Mexico progressively moved funding from price and in-kind food subsidy pro- grams to the Oportunidades conditional cash trans- Source: Data for 87 countries for which data on safety net fer program, probably the most positively evaluated expenditure were available from World Bank public expendi- ture reviews, safety net assessments, social protection strategy safety net program in a developing country. Fifteen notes, and other studies. Data coverage is low for Sub-Saharan years later, as food prices rose dramatically, the gov- Africa, where government spending on safety nets may be low, ernment was able to protect the poor by issuing a but where donor funding may compensate considerably. See one-time top-up benefit to those already in the pro- also IMF 2005. health services and caloric availability and and administratively feasible or desirable, con- reductions in negative coping behaviors, sidering the negative incentives they might cre- such as child labor and withdrawal from ate. Thus a part of policy reforms in developing school. countries should be understanding what kind of safety net program best serves various social Safety nets are important not only in cush- assistance activities, what the implementation ioning the effects of the crisis but also as part challenges are, and how to develop programs of a broader poverty reduction strategy inter- for maximum effectiveness.21 acting with social insurance; health, education, and financial services; the provision of utilities Informal safety nets and remittances and roads; and other policies for reducing poverty and managing risk. Many challenges Households manage risk through informal remain, however. Safety net programs in low- safety nets (such as crop diversification), infor- income countries are often slight and frag- mal savings and credit associations, burial mented and cover only a small percentage of societies, labor exchange arrangements, migra- poor and vulnerable populations. There are tion, and emigration. Informal safety nets are real concerns over whether they are affordable generally more effective against idiosyncratic 48 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 MAP 2.2 An infant in a developing country is ten times more likely to die than a newborn in a developed country Infant mortality rate: Deaths per 1,000 live births (2008) Green (De 100 70­99 40­69 10­39 <10 Canada no data United States Bermuda (UK) The Bahamas Cayman Is. (UK) Cuba Turks and Caicos Islands (UK) Mexico Haiti C Belize Jamaica Guatemala Honduras El Salvador Nicaragua Costa Rica Panama R.B. de Guyana Venezuela Suriname Colombia French Guiana (Fr) Ecuador Kiribati Peru Brazil Samoa Cook Is. (NZ) French Polynesia (Fr) American Samoa (US) Bolivia Fiji Tonga Dominican Puerto British Virgin Paraguay Republic Rico (US) Islands (UK) Anguilla (UK) U.S. Virgin Antigua and Barbuda Islands (US) St. Kitts Guadeloupe (Fr) Chile Uruguay and Nevis Argentina This map was produced by the Netherlands Dominica Map Design Unit of The World Bank. Antilles (Neth) Montserrat (UK) Martinique (Fr) The boundaries, colors, denominations St. Lucia Aruba St. Vincent and and any other information shown on Barbados (Neth) The Grenadines this map do not imply, on the part of The World Bank Group, any judgment Grenada on the legal status of any territory, or Trinidad any endorsement or acceptance of and Tobago such boundaries. R.B. de Venezuela Source: World Development Indicators. shocks that affect only one or a few households to developing countries; they reached $338 than against systemic shocks that affect whole billion in 2008 before the full impact of the communities. Thus it is not clear whether such financial crisis was felt. 23 risk-mitigation strategies were any more effec- The global nature of the current crisis has tive during the recent crisis than they had been likely reduced the support that remittances can previously. provide. Remittance flows to developing coun- Remittances have played an important tries are estimated at $317 billion for 2009, countercyclical role in crises that affected indi- a 6.1 percent decline from 2008. Analysis of vidual developing countries.22 Because remit- the first nine months of 2009 shows that the tances are unaffected by idiosyncratic shocks financial crisis has affected remittance flows or even local or national systemic shocks, they unevenly. Remittances to Latin America and are an important part of the household safety the Caribbean have suffered large declines net for many poor households. More than tri- (down 13 percent in Mexico, for example), pling since earlier in the past decade, remit- mainly because of the early effects of the crisis tances constitute important monetary flows in the United States and Spain. Similarly, remit- GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 49 IBRD 37733 APRIL 2010 nland en) Faeroe Norway Iceland Islands Finland (Den) Sweden The Netherlands Russian Federation Estonia Isle of Man (UK) Denmark Russian Latvia Fed. Lithuania United Ireland Kingdom Germany Poland Belarus Channel Islands (UK) Belgium Ukraine Luxembourg Moldova Kazakhstan Liechtenstein Mongolia France Italy Romania Switzerland Andorra Bulgaria Georgia Uzbekistan Kyrgyz Azer- Rep. D.P.R. Portugal Spain Turkey Armenia baijan Turkmenistan of Korea Monaco Greece Tajikistan Japan Cyprus Syrian Rep. of Gibraltar (UK) Arab Islamic Rep. Afghanistan China Tunisia Malta Lebanon Korea Rep. Iraq of Iran Morocco Israel Jordan Kuwait West Bank and Gaza Bahrain Pakistan Bhutan Nepal Algeria Libya Arab Rep. Qatar Former Spanish of Egypt Saudi Sahara Arabia United Arab Bangladesh Emirates India Myanmar Lao Mauritania Oman P.D.R. Cape Verde Mali N. Mariana Islands (US) Niger Rep. of Thailand Vietnam Senegal Chad Eritrea Yemen Guam (US) The Gambia Burkina Sudan Djibouti Cambodia Philippines Federated States of Micronesia Marshall Islands Guinea-Bissau Guinea Faso Benin Sri Sierra Leone Côte Ghana Nigeria Central Ethiopia Lanka Brunei Liberia D'Ivoire African Rep. Somalia Palau Togo Cameroon Malaysia Maldives Equatorial Guinea Uganda Kiribati Congo Kenya Singapore Nauru São Tomé and Príncipe Gabon Rwanda Dem. Rep. of Burundi Seychelles Papua Solomon Congo Indonesia New Guinea Islands Tanzania Comoros Tuvalu Timor-Leste Angola Malawi Zambia Mayotte Fiji (Fr) Vanuatu Zimbabwe Mauritius Namibia Madagascar Botswana Mozambique Réunion (Fr) New Poland Caledonia Australia (Fr) Swaziland Ukraine Germany Czech Rep. Slovak Rep. South Lesotho Africa Austria Hungary Slovenia Romania Croatia New Zealand Bosnia and San Herz. Serbia Bulgaria Marino Montenegro Kosovo FYR Macedonia Vatican Italy Albania City Greece tances to the Middle East and North Africa increasing in some cases (up 24 percent in Paki- have declined more than expected, plunging stan, 16 percent in Bangladesh, and 13 percent 20 percent in the Arab Republic of Egypt and in Nepal). In East Asia and the Pacific, flows Morocco. The situation is even more serious in were also stronger than expected (up 4 percent Europe and Central Asia, where many coun- in the Philippines). tries are among the top recipients of migrant A study by the World Food Programme remittances as a percentage of GDP. Tajikistan, found that families that rely on remittances where remittances make up 50 percent of GDP, from abroad were among groups most affected experienced a decline of more than 30 percent by the current financial crisis.24 In Armenia, in the first half of 2009. Many other countries where remittances make up 20 percent of in the region have experienced similar declines. GDP and are the main source of income for By contrast, in Sub-Saharan Africa the decline 25 percent of households, the impact was felt has been less steep and in some countries, such immediately, with remittances slumping 30 as Uganda, flows have increased. In South percent in the first quarter of 2009. In Nica- Asia, remittances have remained strong, even ragua, a country highly dependent on remit- 50 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 tances and vulnerable to economic downturns of the current crisis--a first for the region. By in the U.S. economy, food consumption pat- contrast, in Europe and Central Asia middle- terns are changing and families are spending income countries that were unable to halt large less on health and education. increases in private sector credit growth were the hardest hit by the current crisis. They had higher growth rates before the crisis but also This crisis is not about domestic larger declines after the crisis, and on balance policy failure they experienced lower average growth rates Improvements in developing countries' poli- than countries with more modest increases in cies since the 1990s may blunt the impact of private sector credit growth. the crisis on human development. Crises in Comparing the economic performance low-income countries have often been driven of countries according to the quality of their by poor governance, civil conflicts, or severely policies and institutions shows the importance distorted macroeconomic policies. (Internal of policy reform. Although there is no perfect shocks accounted for 89 percent of output vol- measure of the quality of the policy and insti- atility in low-income countries from the early tutional environment in developing countries, 1960s to mid-1990s.) The failure of domestic the World Bank's Country Policy and Institu- institutions has been an important reason for tional Assessment (CPIA) provides a consis- the severity of past crises on human develop- tent framework for assessing country perfor- ment, macroeconomic variables, and the qual- mance (on a scale from 1, worst, to 6, best).25 ity of institutions. Countries with better policies or initial fiscal But some indirect evidence suggests that positions have generally done better in the cur- this situation may be changing and that the rent crisis (see chapter 3). And before the crisis impacts of the current crisis on human devel- (2001­07), developing countries with 2008 opment could be less severe than in previous CPIA scores of 3.2 or better grew faster than crises. Since the 1990s output volatility in low- countries below this cutoff (figure 2.11). Per income countries has lessened, and the influ- capita GDP growth averaged 3.9 percent for ence of external shocks has intensified (box countries with good policies and 1.9 percent 2.5). To the extent that lower volatility and a for fragile states with poorer policies. Coun- reduced importance for internal shocks indi- tries with better policies also had lower infla- cate improved policies, governments should tion, at 5.2 percent a year, compared with 6.6 be better placed to protect their people from percent for countries with poorer policies. The the most severe impacts of the crisis. pattern is the same for countries in Sub-Saha- Assessing the quality of policies and insti- ran Africa.26 Before the current crisis, coun- tutions over time is difficult, but external evi- tries with better policies tended to have better dence does indicate an improvement in many outcomes for MDG indicators such as under- developing countries since the 1990s. Inflation five mortality, gender equality in primary and rates have declined substantially, fewer coun- secondary education, primary school comple- tries have unsustainable debt positions, more tion, and access to an improved water source. countries have access to private capital markets Several empirical studies also showed that bet- and have attracted substantial foreign direct ter policies and institutions improve the mar- investment, financial intermediation has risen ginal contribution of growth to progress on as a share of output, trade barriers have come human development indicators.27 down, black market exchange rate premiums have shrunk, and civil conflict has subsided The impact of the current crisis is in many countries. The pace of policy reform still worrisome has varied. In Latin America weak currencies, banking sectors, and poor fiscal management The crisis has generated predictions of rising tended to amplify the impact of past crises, mortality rates and closed schools as govern- whereas improvements in the policy and insti- ments reduce services in response to falling tutional framework have cushioned the impact output and public revenues. These fears are GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 51 BOX 2.5 Are external shocks becoming more important than internal shocks for developing countries? Historically, developing countries have endured External shocks have become more important since greater macroeconomic volatility than have indus- the 1990s trial economies. A simple look at the data shows that 40 output volatility (measured as the standard deviation of real GDP growth) has been two to three times 35 greater in developing countries than in industrial % long-run output volatility 30 countries in the last 20 years. Because developing countries are highly dependent 25 on primary commodities and foreign capital and have 20 greater exposure to natural disasters, policy makers often blame external shocks, such as terms-of-trade 15 fluctuations, natural disasters, and aid volatility, for 10 countries' uneven macroeconomic performance. However, research shows that external shocks 5 account for only a small fraction of the variance 0 in real per capita GDP in low- and middle-income Latin America East Asia other Sub-Saharan and the and middle-income Africa countries. Among low-income countries, external Caribbean Pacific countries shocks, including terms-of-trade fluctuations, global earlier years later years economic growth, international fi nancial conditions, natural disasters, and aid volatility, explain no more than 11 percent of output volatility. The 89 percent agement, and control of corruption have improved residual is probably related to internal conditions, since the early 1990s. Many middle-income coun- such as the volatility of macroeconomic management. tries have also strengthened their fi scal position by Among middle-income countries, external shocks reducing deficits and accumulating reserves; tamed account for about 20 percent of output volatility. inflation through independent central banks; and Since the 1990s, however, many developing coun- promoted local bond markets after the Asian and tries have undergone structural transformations that Russian fi nancial crises of 1997­98. may have calmed internal volatility and increased the importance of external factors. Research shows that external shocks have become more important for developing countries in several regions during Source: Raddatz 2007, 2008a, 2008b. the past two decades (see the figure at the right). In Note: The data for Latin America and the Caribbean, East African countries this shift has resulted not from Asia and Pacifi c, and other middle-income countries corre- spond to 1974­1985 (earlier) and 1986­2004 (later). The bars an increase in the volatility of external shocks, or for Africa correspond to 1963­89 (earlier) and 1990­2003 in countries' vulnerability to them, but rather from (later). External shocks explaining long-run output volatil- the taming of internal sources of volatility. In these ity include the state of the world business cycle, international countries--among the most volatile--standard indi- fi nancial conditions, terms of trade, natural disasters, and aid cators of democratic accountability, economic man- flows. grounded in the experience of past crises, development point to serious problems. An when, as noted earlier and in box 2.6, pov- important reason is the size of the shock--it erty, hunger, health outcomes, and access to is the largest global downturn since the Great education deteriorated sharply. Despite policy Depression. Thus while developing countries' improvements and efforts to sustain social efforts have been important in mitigating the spending and ramp up safety nets, preliminary impact of the crisis, the crisis nevertheless has indications of the impact of the crisis on human been a severe setback to poverty reduction. 52 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 FIGURE 2.11 Economic performance and MDG outcomes are better with good policy a. Economic performance of countries b. Selected MDGs by quality of policy, by quality of policy, 2001­2007 averages of 2000­06 7 6.6 120 100 6 100 90 5.2 5 80 80 percentage 3.9 per 1,000 4 percent 60 70 3 1.9 40 60 2 1 20 50 0 0 40 GDP per capita growth inflation child mortality ratio of girls to primary access to under five boys in primary completion improved water CPIA < 3.2 CPIA 3.2 (per 1,000, and secondary rate, total (of source (of left axis) education relevant age population group) with access) CPIA < 3.2 CPIA 3.2 Source: World Bank staff calculations. Note: CPIA is the World Bank's Country Policy and Institutional Assessment framework for assessing country performance; ratings range from 1 (worst) to 6 (best). Countries with a CPIA score of 3.2 or better have better policies than countries that score under 3.2. The recent deterioration in human devel- number there would have been without the opment indicators began with the food and economic crisis. fuel price shocks of 2007. In some countries The problems were compounded by the food prices almost doubled with no adjust- global economic crisis. A poverty monitoring ment in earnings.28 In Mozambique incomes study of 13 countries suggests that in countries were almost halved and food consump- like the Central African Republic and Ghana, tion fell by a fifth; children's weight for age parents were forced to take their children out and body mass index were reduced with no of school and that in other countries they change in height for age, indicating that the scrambled to finance their children's continu- price rise has seriously compromised nutri- ing attendance.30 In Serbia, Roma children tion. The effects spilled over into the efficacy dropped out of school because of a lack of of HIV/AIDS treatment, with lower-income clean clothes and soap. Poor households in households showing slower improvements Cambodia and the Philippines reported cutting than households with higher incomes and overall consumption in response to income better access to adequate nutrition, which shocks to protect children's school attendance. reinforces the beneficial effects of antiret- Although little information exists on the dif- roviral therapies. Recent analysis finds that ferential impact of the crisis on women and the 2008 global food price spike may have men, recent surveys of East Asia do not show increased global undernourishment by some that women have been disproportionately 6.8 percent, or 63 million people, relative to affected (box 2.7). 2007.29 Moreover, the analysis shows that Recent surveys in Armenia, Montenegro, the sharp slowdown in global growth in 2009 and Turkey give a sense of how declines in might have contributed to 41 million more income induced by the crisis are reducing undernourished people compared with the household consumption. GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 53 BOX 2.6 Human development suffered severely during crises in developing countries Household studies from past crises suggest that the both rural and less educated women are at higher risk impact on human development can be serious. In the of losing their infants. lowest-income countries, poverty rises, people eat For middle-income countries the picture is less lower-quality food, school enrollments fall, health consistent. In Latin America school attendance has care use drops, and infant mortality rises. Even increased during crises, possibly because children are modest reductions in food consumption for children not needed for economic activity, but infant mortal- between birth and age two can have lasting deleteri- ity appears to have risen. In Indonesia the crisis of the ous effects on cognitive and physical development. In late 1990s had little measurable impact on schooling South Africa and Zimbabwe, the nutritional depriva- or health, possibly because the country was better off tion of young children led to lower height for age and and perhaps because education and health services shorter stature in adulthood. were better protected. But the impacts of recession Analysis of the effects of downturns on infant mor- are far more severe for child health than for educa- tality in Sub-Saharan Africa shows that a 1-percent tion, even in middle-income countries. reduction in per capita GDP is associated with a rise in the infant mortality rate of 0.34­0.48 per 1,000 live births, or 34­39 percent of the average annual Source: Wodon and Zaman 2010; Ferreira and Schady 2009; change in the infant mortality rate. Infant girls are Dinkelman 2008; Alderman, Hoddinott, and Kinsey 2006; more likely than boys to die during downturns, and and Gottret and others 2009. Food consumption in Armenian households of poor households did, and the same percent- has fallen 41 percent, and health care spend- age of poor households canceled health insur- ing is down 47 percent. Some 50­60 percent ance. In education the wealthiest households of households in the four lowest income quin- cut back the most--20 percent compared with tiles have cut back on health care services and 11 percent for the lowest-income households. drug purchases. Household reductions in food In Turkey, the poorest households have ex- consumption are inversely related to income, perienced the largest reductions in wages and with 20 percent of the wealthiest households self-employment income. Some 91 percent of cutting back (noteworthy in itself) and more the poorest 20 percent of households lost in- than 55 percent of the poorest 20 percent do- come, but even the wealthiest 20 percent ex- ing so. Even bigger cuts are seen in spending perienced some income loss. Safety nets cover on entertainment and expensive foods. There only 20 percent of the poorest households, is some evidence that these cutbacks have requiring the rest to sell assets, draw down helped protect education spending. savings, and find other informal sources of In Montenegro unemployment figures sug- support. Among the poorest households, 75 gest that cutbacks affect almost a quarter of percent have reduced children's food consump- households. Safety nets cover only 18 percent tion, 29 percent have curtailed health care use, of the poorest 20 percent of households, and and 14 percent have cut back on education informal private transfers are disappearing as spending. Even middle-class households have remittances shrink and informal safety nets un- trimmed spending, especially in education. ravel. Private investments in education, health The data now available on the impact of the insurance, and preventive health care have crisis on human development are still much fallen, reducing resilience to further shocks too limited to draw any conclusions on the (figure 2.12). Overall, 9 percent of households overall impact. But there is certainly evidence reduced preventive care visits, but 25 percent of suffering as a result of the severe global 54 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 BOX 2.7 Gender differences in impacts of the crisis: Evidence from East Asia Although the effects of the crisis have clear gender rapid qualitative assessments (including focus group dimensions, it is not clear that women in East Asia discussions), ex ante simulations using precrisis have been disproportionately affected. Gender- household survey data, analysis of labor force sur- specifi c impacts would be expected because of the vey data as available, and triangulation across data gender division of labor in the labor market and in sources. the home, gender disparities in access to produc- Data indicate that unemployment in East Asia tive resources, and gender dimensions of household has barely changed during the crisis, for men or resource allocation. But precise impacts are unclear women, but that women's participation has tended because they depend on multiple factors including to rise. In some countries unemployment has fallen the size of the shock, the economic structure of the more for women than for men, while increases in country, the nature of government responses, and the labor force participation have been more marked for speed of economic recovery. Identifying the gender women than for men (see the fi gures below), par- impacts of the crisis is thus an empirical issue. ticularly in poorer countries, where female labor Empirical analysis is complicated by a lack of has shifted from unpaid work to self-employment. data. High-frequency data on the social impacts of Both quantitative and qualitative data indicate lon- the crisis is generally not available, and the lack is ger working hours as men and women take on addi- particularly intense for gender-disaggregated data. tional jobs to compensate for falling earnings from Thus multifaceted approaches are needed, such as primary jobs. Labor force participation by gender in selected East Asian countries, 2007­09 Cambodia Philippines 90 85 men 85 80 men 80 75 women 75 70 percent percent 70 65 65 60 60 55 55 women 50 50 45 45 2007 2008 2009 2007 2008 2009 Indonesia Thailand 90 85 85 men men 80 80 75 75 70 percent percent 70 women 65 65 60 60 55 55 women 50 50 45 45 2007 2008 2009 2007 2008 2009 Source: World Bank staff calculations. GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 55 BOX 2.7 (continued) The impact of labor market shocks is driven by that women's total work burden (paid plus unpaid several factors, of which gender is only one. Both domestic work) has increased over the past year. In quantitative and qualitative findings suggest that urban Thailand, women explain that their time on simple interpretations of labor market data may be unpaid domestic work has declined a little but not misleading. As an example, well-publicized data enough to offset rising labor market hours. In rural show layoffs from enterprises producing garments Cambodia and the Philippines, research teams noted and other products for export to shrinking markets, that an increased dependence on common property sectors where female employment tends to dominate. resources, including fi rewood, has increased women's Less well-documented is the contraction in hours and time on domestic chores. earnings in sectors serving domestic markets, where The welfare impacts of the crisis, by gender, purchasing power is closely linked to the health of also appear to be nuanced. Microsimulations of the the export sector. These sectors may be dominated poverty impacts of the crisis in Cambodia suggest by men. Women laid off from formal sector work that male-headed households were more affected in may be better off than men facing highly restricted urban areas, while female-headed households were earnings in informal sector jobs. Quantitative and more affected in rural areas (see the fi gure below). qualitative evidence from Cambodia suggests that For urban male-headed households, this finding more male workers in the construction sector have likely reflects the impacts of the crisis on male jobs been affected by the crisis than female workers in the in construction and tourism. The effects for rural garment sector. Moreover, male construction work- female-headed households appear to reflect the loss ers are more likely to be poor and have fewer eco- of remittance income in addition to more direct cri- nomic fallbacks than female garment workers. sis impacts on household earnings. Findings from There is no consistent cross-country pattern in rapid assessments in rural Cambodia indicate that differences in hours of paid work by gender. In some female-headed households commonly cut back con- countries, such as Cambodia, both men and women sumption sharply and increased their indebtedness to have greatly increased their hours of paid work. In cope with loss of income as remittances from urban other countries, such as Indonesia, women have areas fell. Male migrant workers--often migrant overtaken men in hours of paid work in the past two spouses--reported being unable to return home as years. And in other countries, such as the Philippines, often as before because of increased transportation men and women appear to work the same number of costs and reduced earnings, meaning less male labor paid hours. However, focus group discussions suggest on the farm during peak periods. Impacts of the global financial crisis on male- and female-headed households in Cambodia Poverty headcount 8 7.1 7 percentage point changes 6 due to crisis impact 5 4.6 4.3 4.0 4 3.6 3.7 3 2 1 0.5 0.4 0 Phnom Penh other urban rural Cambodia male head of household female head of household Source: Bruni and others forthcoming. 56 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 FIGURE 2.12 Spending cutbacks in crisis-affected households are jeopardizing future welfare in Armenia, Montenegro, and Turkey a. Armenia less use of entertainment 64 70 fewer meetings with friends 59 cheaper instead of more expensive food items 58 60 reduced or stopped visits to healthcare centers 47 reduced or stopped buying medicines 41 50 reduced amount of food consumed 41 percent stopped buying some nonfood items 40 40 stopped visiting increased use of public transport or walking 33 health centers 30 work odd jobs 13 stopped buying increased own food production 12 medicine 20 migration for work 10 decreased bought second-hand items 9 food 10 other mitigation measures 3 consumption withdrew or postponed admission to school 2 0 0 10 20 30 40 50 60 70 1 2 3 4 5 (poorest) (richest) percent income quintile Source: Armenia Integrated Living Conditions Survey 2009. See Ersado, forthcoming. b. Montenegro delayed purchase of durables 49 30 replaced expensive items with cheaper ones 44 less use of communication services 40 25 % households affected by crisis stopped buying some nonfood items 34 made less use of information services 33 reduced decreased total food consumption 31 20 training restricted vacations 30 met friends less 23 reduced 15 preventive changed means of transportation 17 care replaced private medical care with public care 16 reduced playing sports/exercising 15 10 canceled increased agricultural production for own use 13 insurance took a job although not working before 12 started to buy second-hand products (more) 12 5 reduced visits to doctor for preventive care 9 left or postponed training 8 0 0 10 20 30 40 50 60 1 2 3 4 5 (poorest) (richest) percent asset quintile Source: Montenegro Crisis Monitoring Survey 2009. See Hirshleifer and Azam, forthcoming. downturn. Even if the deterioration in human Early evidence in 41 middle-income countries development indicators has not been as severe indicates that the impact on the labor market as in previous crises (as speculated above), the has been severe, especially in wealthier middle- human suffering will be considerable. income countries of the Europe and Central Although many people in middle-income Asia region. Although the number of jobs and countries are above the threshold of the poverty their growth have been negatively affected, MDG, they are also the hardest hit by adjust- the impact has been mostly on the quality and ments in wage earnings and employment.31 earnings of employment (figure 2.13). GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 57 FIGURE 2.12 (continued) c. Turkey 80 substituted into cheaper food items 73 substituted into cheaper nonfood items 65 decreased the amount of food consumption 53 60 met with friends less 49 stopped buying non-food products 48 percent changed transportation type 31 40 32 less use of information services 30 reduced visits to the doctor for prevention control 26 20 reduced the use of health services 21 14 left courses of language, computer, others 10 5 withdrew or postponed the 6 admission to school 0 0 20 40 60 80 poorest middle richest 20% 20% 20% % households that adopt this asset quintile coping mechanism (out of respondent households) decreased food consumption reduced use of health services reduced education expenditures Source: TEPAV, UNICEF, and World Bank 2009; Turkey Welfare Monitoring Survey. · Three-quarters of the labor market adjust- growth. But fixed exchange rates worsen the ment stems from slower growth in take-home labor market impact. On average, countries pay, only one-quarter from less job creation. with fixed currency regimes witnessed a de- · Earnings in most middle-income coun- cline in employment of 1.7 percentage points, tries are falling mainly because people are compared with only 0.4 in countries with working fewer hours. Hourly wages have floating rates. The slowdown in the wage-bill changed little except in Europe and Central growth was also less severe for the countries Asia, where they have declined. with moderate levels of development. · The crisis severely affected labor markets, The nature of recent labor market adjust- with few countries spared. It caused a sharp ments in these countries suggests that effective slowdown in wage-bill growth, which fell policy packages should also focus on support- by an average of 8 percentage points. The ing earnings and household income, not just exceptions were Argentina, China, and the generating employment. Responses taken in former Yugoslav Republic of Macedonia, developed European countries--such as par- where wage-bill growth accelerated. tial unemployment insurance, expanded cash · Employment has shifted away from indus- transfers to poor workers, and temporary trial employment into services, where jobs wage subsidies--may be priority interventions tend to be of lower productivity and offer in those countries where hours and earnings lower wages. adjustments dominated. · For a given decline in GDP growth, the labor market impact was more severe in upper-middle-income countries and in Conclusions countries with fixed exchange rates. Because crises have very negative effects on human development indicators, good poli- The large impact in Europe and Central cies and institutions are essential in develop- Asia resulted mainly from sharp drops in GDP ing countries to avert downturns in the first 58 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 FIGURE 2.13 The crisis sharply reduced wage earnings in middle-income countries a. Wage-bill growth b. Employment growth Latvia Bosnia and Herzegovina Latvia Ukraine Lithuania Lithuania Bulgaria Dominican Republic Russian Federation South Africa Sri Lanka Russian Federation Jamaica Serbia Mauritius Mexico Ukraine Egypt, Arab Rep. Armenia Serbia Turkey Moldova Romania Poland Mexico Poland Kazakhstan Ecuador (urban) Peru Chile Venezuela, R.B. de Belarus Bulgaria Colombia (urban) Indonesia South Africa China (urban) Colombia (urban) Brazil (urban) Venezuela, R.B. de Belarus Georgia Moldova Romania Argentina (Urban) Indonesia Armenia Thailand Ecuador (urban) Kyrgyz Republic Peru Thailand Brazil (Urban) Trinidad and Tobago Macedonia, FYR Philippines Malaysia Kazakhstan Philippines Chile Albania Tajikistan China (urban) Montenegro Argentina (urban) Sri Lanka Morocco Macedonia, FYR Turkey ­35 ­25 ­15 ­5 5 15 ­20 ­15 ­10 ­5 0 5 percentage point change percentage point change Source: Khanna, Newhouse, and Paci, forthcoming. place, dampen their negative effects when they There are some reasons for hope that the do occur, and reduce the potential for reversal current crisis may be different for low-income of reforms. Policy failures, particularly in low- countries. A great deal of social spending has income countries affected by corruption and been protected so far. Policies and institutions violent conflict, have been a major reason for had improved before the crisis. And external the sharp deterioration in human development shocks, not domestic policy failures, were the indicators in past crises. main causes of the current crisis. Nonetheless, GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 59 sharp that a long period of strong growth is the impacts on progress toward the MDGs are needed to undo the damage inflicted on devel- already worrisome. opment outcomes. The next chapter examines While recovery of the global economy the growth outlook and macroeconomic chal- appears to be stronger than expected, small lenges, including the fiscal tensions created by reductions in growth could still have last- temporary stimulus measures and protection of ing negative consequences for poverty and social spending. human development. The contraction was so 60 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 Annex 2.1 Human and economic indicators during growth cycles This annex presents more detailed information The conclusion that these indicators tend to on the asymmetric impact of growth decel- deteriorate more in bad times than they improve erations on human development indicators, in good times does not stem from composition macroeconomic variables, and institutional effects. It is important to examine these effects quality in developing countries. Tables 2A.­ because the averages for each period (accelera- ­2A.3 show the average level of each indicator tions, decelerations, and other) do not reflect during growth accelerations, growth decelera- the same number of observations or equal par- tions, other periods, and across all times. Tests ticipation by different income groups--there for differences in the means of these variables are more accelerations than decelerations, and between growth accelerations, decelerations, low-income countries have greater represen- and all country-year observations show that tation in the sample means during bad times they are all statistically significant at the 1 per- because of the higher frequency of decelera- cent level. tions in these countries (see main text). Because TABLE 2A.1 Differences between sample averages: Human development and gender indicators Otherwise Growth Growth (not in acceleration Sample Variable acceleration deceleration or deceleration) period Life expectancy at birth, women (years) 72.1 63.4 69.4 70.0 Life expectancy at birth, men (years) 66.6 58.1 64.2 64.7 Life expectancy at birth, total (years) 69.2 60.7 66.7 67.3 Infant mortality rate (per 1000 live births) 27.7 59.7 39.9 35.9 Child mortality under-five rate (per 1,000) 42.4 96.3 59.3 54.3 Primary completion rate, girls (% of relevant age group) 83.2 49.8 76.3 78.6 Primary completion rate, boys (% of relevant age group) 84.5 59.6 80.2 81.4 Primary completion rate, total (% of relevant age group) 84.4 54.8 78.1 80.2 Ratio of girls to boys, primary enrollment 95.6 86.1 92.5 93.6 Ratio of girls to boys, secondary enrollment 96.9 80.7 94.8 95.3 Ratio of women to men, tertiary enrollment 107.3 65.1 106.2 105.4 Source: World Bank staff calculations based on data from World Development Indicators. Note: Tests for differences in the means of these variables between growth accelerations, decelerations, and all country-year observations show that they are all statistically significant at the 1-percent level. TABLE 2A.2 Differences between sample averages: Sub-Saharan Africa Otherwise Growth Growth (not in acceleration Sample Variable acceleration deceleration or deceleration) period Life expectancy at birth, girls (years) 55.2 52.3 53.4 54.0 Life expectancy at birth, boys (years) 52.2 48.9 50.1 50.8 Life expectancy at birth, total (years) 53.7 50.5 51.7 52.3 Infant mortality rate (per 1.000 live births) 80.7 106.6 97.3 91.9 Child mortality under-five rate (per 1,000) 133.5 161.3 154.3 146.2 Primary completion rate, girls (% of relevant age group) 55.1 33.8 42.1 47.4 Primary completion rate, boys (% of relevant age group) 59.8 48.4 50.9 55.0 Primary completion rate, total (% of relevant age group) 57.4 41.0 46.5 51.1 Ratio of girls to boys, primary enrollment 89.7 77.9 82.4 85.0 Ratio of girls to boys, secondary enrollment 82.3 63.6 76.1 77.7 Ratio of women to men, tertiary enrollment 60.2 32.5 64.4 58.7 Source: World Bank staff calculations based on data from World Development Indicators. Note: Tests for differences in the means of these variables between growth accelerations, decelerations, and all country-year observations show that they are all statistically significant at the 1-percent level. GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 61 TABLE 2A.3 Differences between sample averages: Economic and institutional indicators Otherwise Growth Growth (not in acceleration Sample Variable acceleration deceleration or deceleration) period Final consumption (% GDP) 81.45 88.78 83.74 83.30 Government consumption (% GDP) 15.41 16.68 16.61 16.10 Gross capital formation (% GDP) 23.76 18.57 23.35 23.10 Gross domestic savings (% GDP) 18.58 11.23 16.26 16.70 Gross fixed capital formation private sector (% GDP) 16.35 10.43 13.75 14.40 Imports (% GDP) 45.80 37.45 43.85 44.10 Exports (% GDP) 40.43 30.05 36.52 37.60 Trade (% GDP) 86.23 67.50 80.37 81.70 Foreign direct investment. net inflows (% GDP) 4.48 2.07 3.56 4.00 Private capital flows, total (% GDP) 2.99 1.40 2.03 2.40 CPI inflation (%) 14.88 251.32 37.90 43.90 Institutions (­2.5 to 2.5) Political stability ­0.16 ­0.65 0.03 ­0.10 Voice and accountability ­0.07 ­0.47 0.09 ­0.02 Regulatory framework ­0.03 ­0.82 0.15 0.01 Rule of law ­0.14 ­0.90 0.12 ­0.07 Government effectiveness ­0.04 ­0.96 0.14 0.00 Frequency of conflicts (Sub-Saharan Africa) 0.13 0.23 Aid to poor countries (Sub-Saharan Africa) ODA (% GDP) 13.80 12.10 ODA per capita (US$) 69.50 41.80 Source: World Bank staff calculations. Data for Sub-Saharan Africa from Arbache, Go, and Page (2008). Indicators on institutions are from the World Bank Institute's Worldwide Governance Indicators database, which relies on 33 sources, including surveys of enterprises and citizens, and expert polls, gathered from 30 organizations around the world; they each range from ­2.5 (worst) to 2.5 (best). Note: Tests for differences in the means of these variables between growth accelerations, decelerations, and all country-year observations show that they are all statistically significant at the 1 percent level. ODA = official development assistance. human development indicators are generally tions with their own sample means when not in lower in low-income than in middle-income growth decelerations (the column "otherwise" countries, the greater frequency of low-income in the three tables), decelerations still have an country observations drops the averages for asymmetric effect.32 Furthermore, the averages decelerations, which could account for the for periods not in acceleration or deceleration asymmetric relationship. However, even after (normal times) are close to the averages for the controlling for the sample composition effects entire sample (the last column in each table), by comparing the sample means of countries providing evidence that the economic cycles undergoing growth decelerations and accelera- are being correctly identified. 62 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 Annex 2.2 The special case of HIV/AIDS spending Large increases in funding have made HIV/ billion in 2008, and then declined to $2.6 bil- AIDS (human immunodeficiency virus/acquired lion in 2009. In the last funding cycle (Round immune deficiency syndrome) one of the most 9), demand from countries also fell.34 The U.S. important items on the development agenda. In PEPFAR program increased its contributions less than a decade the international community from $4.5 billion in 2007 to $6.2 billion in has mobilized talent and financing to address 2008 and has subsequently increased its annual HIV/AIDS with new institutions and long-term budgets. The 2010 fiscal year allocation is just financial commitments to countries suffering shy of $7 billion, suggesting that U.S. support from an established and growing epidemic. is continuing.35 This attention and financing have produced Fueled largely by increased donor resources, data that outstrip that available for health care public health spending in the high-prevalence generally, allowing a more thorough examina- countries of eastern and southern Africa has tion of trends. The 2008­09 recession is the risen rapidly in absolute and per capita terms first global crisis to affect international support (see map 1.2). As a share of GDP, the increases for HIV/AIDS spending, and the responses are have gone disproportionately to people with instructive. HIV/AIDS.36 Government spending in coun- Roughly 33 million people have HIV/AIDS, tries that formerly had high HIV/AIDS preva- but only a third of those are on antiretroviral lence, like Brazil and Thailand, has financed therapy that will extend their life. There is no both prevention and treatment. Other coun- cure for AIDS. Discontinuities in treatment tries, such as Ghana, have legally binding create resistance to the basic ("first line") anti- commitments ensuring treatment for people retroviral treatment, which can lead to broader with AIDS. drug resistance. The alternative "second line" Of 77 countries recently surveyed, most treatment is 10­20 times more expensive. indicated that they had adequate funding Thus antiretroviral therapy is central to meet- from governments, donors, and other sources ing the MDG 6A to combat HIV/AIDS. Equally to finance their current HIV/AIDS programs, important to treating those who have con- but they raised concerns about the future.37 tracted HIV/AIDS is strengthening preven- Prevention was identified as the likely vic- tion--the only way to stem the pandemic. tim if funding fell. A further concern was the increased cost of imported drugs and supplies resulting from currency devaluations in some Likely short-term effects of the crisis countries.38 The Clinton Foundation recently Funding for HIV/AIDS has risen sharply over obtained price concessions from manufactur- the past decade. During 2001­05, aid commit- ers that could compensate for the exchange ments for HIV/AIDS programs rose almost 30 rate penalty. percent ($4.75 billion), fueled by the establish- The impact of the current downturn is not ment of the Global Fund and by philanthropic entirely clear, but the uptick in donor spending efforts by the Clinton Foundation, the Bill & in 2008 and 2009, when the economic crisis Melinda Gates Foundation, and others. New was accelerating in donor countries, is encour- sources of funding have come onstream since aging. The Global Fund disburses quickly once 2005 with the U.S. President's Emergency Plan allocations are decided, but recipient country for AIDS Relief (PEPFAR) and UNITAID, spending has been slow. Almost 40 percent of which disburses much of its resources through the Global Fund resources remain undisbursed, the Global Fund. a possible source of additional resources if there In 2008 public and private entities allocated is a shortfall or delay in funding flows. Almost $15.8 billion for global HIV/AIDS programs, half the allocations to Sub-Saharan Africa are $6.7 billion of it from bilateral and European undisbursed (see figure 2.9). The $900 mil- Union contributions.33 Pledges to the Global lion allocated in late 2009 under Round 9 is Fund rose from $2.5 billion in 2007 to $3.0 unlikely to have been disbursed yet.39 GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 63 Although countries may appear to have And what of prevention? "adequate" funding for HIV/AIDS, the situ- ation is more nuanced: Some donor funds Most international resources are earmarked cannot be applied flexibly, leaving countries for treatment. But the only way to stem the with important gaps even when they appear need for treatment and save lives is to expand to be highly funded in aggregate terms. This is prevention initiatives. where the unearmarked flexibility of the Inter- An in-depth evaluation of the U.S. PEPFAR national Development Association becomes program concluded that it reduced deaths by 5 critical. percent but had no effect on prevention.40 The The highest-prevalence regions of Africa recent multimillion dollar evaluation of the receive the bulk of external funding (figure Global Fund noted the organization's neglect 2A.1), but financing per current AIDS patient of prevention.41 A more modest assessment of paints a different picture (figure 2A.2). Although the programs of the World Bank, Global Fund, there is a general correlation between the num- and PEPFAR also concluded that prevention ber of patients and funding across countries, was the weak link.42 The challenge is that for financing available for each patient still lags in every HIV/AIDS patient placed on treatment, the highest-prevalence regions of Africa. two or three newly infected people will need Greater efficiency is imperative because the treatment for life.43 agenda has broadened and the pace of infec- Countries that have prioritized preven- tion has not slowed. Targeting high-risk groups tion--Brazil, Rwanda, and Thailand--have and improving management and efficiency in seen prevalence decline or remain low, despite delivery can raise quality and efficiency. The spiraling levels in the early 1990s. Prevalence Bahamas plan greater use of generic drugs, bet- rates in these countries contrast with those in ter patient adherence to treatment protocols, Botswana and Swaziland, which have strug- and a sharper focus on the cost effectiveness of gled to initiate effective prevention programs purchases and service delivery. While not cost- as prevalence reached epidemic proportions. less, such improvements will boost effective- The long-term trends reflect lack of attention to ness and reduce waste, which are equivalent to prevention 5­10 years ago. But current preven- reducing costs. They also raise the quality of tion efforts remain inadequate, and the crisis services including health care services. could further curtail such efforts if constrained FIGURE 2A.1 Projected Global Fund to Fight AIDS, Tuberculosis, and Malaria and U.S. PEPFAR HIV/AIDS grants as of April 2009 2,500 2,000 US$, millions 1,500 1,000 500 0 East Asia Europe and Latin America Middle East South East Southern West Central and Pacific Central Asia and the and North Asia Africa Africa Africa Carribbean Africa Sub-Saharan Africa Round 8 approved grants Rounds 1­7 active grants not yet disbursed Project fiscal 2009 Source: Lewis 2009. 64 L E S S O N S F R O M PA S T C R I S E S GLOBAL MONITORING REPORT 2010 FIGURE 2A.2 Projected Global Fund to Fight AIDS, Tuberculosis, and Malaria and U.S. PEPFAR HIV/AIDS grants per AIDS patient as of April 2009 12 10 US$, millions 8 6 4 2 0 East Asia Europe and Latin Middle East South East Southern West Central World and Pacific Central Asia America and North Asia Africa Africa Africa and the Africa Sub-Saharan Africa Carribbean Source: Lewis 2009. budgets force cutbacks in prevention. It is a schools during covariate shocks. However, dynamic problem; new infections occur daily, some of these more adverse effects may be oc- and so a continuous, uninterrupted response is curring in conflict or disastrous situations with required. It may take 7­10 years for a person to institutional breakdowns so that microstudies are not available. become symptomatic, but even people without 2. For the entire sample of developing countries, evident symptoms can pass on the virus and 47 percent of the 4,415 country-year obser- infect others. Actions now will reduce the rate vations are classified as growth accelerations at which people with the virus can pass it on, while 11 percent are classified as growth de- underscoring the importance of antiretroviral celerations. The remaining 42 percent of ob- therapy as a prevention measure. servations are for years in which countries The Bill & Melinda Gates Foundation and experienced neither growth acceleration nor others are financing extensive efforts in pre- deceleration episodes. vention technologies, and considerable ongo- 3. To some extent this pattern may be endoge- ing research is exploring how to discourage nous, because average income per capita tends risky behaviors. But equal attention must go to rise in countries with more frequent growth to actually promoting behavior change and accelerations and fall in countries with more rolling out promising approaches where pre- frequent collapses. 4. Arbache and Page 2007. vention lags. Because programs for prevention 5. Arbache and Page 2010. are dwarfed by those for treatment, the bal- 6. Arbache, Go, and Page 2008. The inflation ance deserves some recalibration to spare those figure would have been higher had Zimbabwe not yet infected. While neither simple nor easy, been included; it was excluded from the analy- a push to expand prevention is warranted if sis because of missing data for other variables. there is to be progress on Goal 6A: halting the 7. The analysis is taken from Lewis and Verhoev- spread of HIV/AIDS by 2015. en (2010) and relies on data from the Interna- tional Monetary Fund (IMF), the World Bank, United National Educational, Scientific, and Notes Cultural Organization (UNESCO, education 1. Arbache, Go, and Korman 2010. Although spending), and the World Health Organization the aggregate figures show girls' education is (WHO) National Health Accounts (health affected by growth cycles, there is still a lack spending). of microstudies that show girls are dispro- 8. The absence of a consistent time series in portionately more likely to be pulled out of education spending data required the integra- GLOBAL MONITORING REPORT 2010 L E S S O N S F R O M PA S T C R I S E S 65 tion of data from UNESCO, the IMF, and the 34. The Global Fund has initiated a new $2.6 bil- World Bank. This is in contrast to the consis- lion funding window for the next two years, tent and much higher quality data from WHO which it estimates is insufficient. These re- National Health Accounts. quirements are not addressed here because the 9. Dang, Knack, and Rogers 2009. focus is on financing HIV/AIDS prevention 10. Gottret and others 2009. and treatment. 11. Grosh and others 2008. 35. Kaiser Family Foundation (2009) and www. 12. Blomquist and others 2002. KKF.org provide updates of spending. 13. Ferreira and Schady 2009. 36. Case and Paxson 2009. 14. World Bank forthcoming. 37. A survey of UNAIDS and WHO country of- 15. IMF 2009. fices by the World Bank, UNAIDS, and WHO 16. 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Rome (June the Impacts of the Economic Crisis: Overview 11). 3 Growth Outlook and Macroeconomic Challenges in Emerging Economies and Developing Countries T he recovery of the global economy countries off their track of solid growth? has been more robust than expected. The question is especially important for low- Driven by strong internal demand in income countries because poverty is so much many emerging economies and the recovery more pressing there than in countries with of global trade, GDP growth in emerging and higher incomes. History does not suggest that developing countries is projected to accelerate low-income countries can uniformly escape to 6.3 percent in 2010, from 2.4 percent in global shocks without absorbing long-lasting 2009. Supporting the economic recovery are damage to both growth and welfare. In past expansionary macroeconomic and, especially, crises, it has often taken several years for low- fiscal policies. Fiscal deficits in emerging and income countries to bring growth rates back developing countries, up by almost 3 percent into positive territory. Even so, the turnaround of GDP in 2009, are projected to remain high in low-income countries this time is projected in 2010. More than in previous crises, many to be faster than in previous crises, thanks to countries sustained spending plans and raised countercyclical fiscal policies and better mac- social spending to mitigate the effects of the roeconomic fundamentals in place at the be- downturn on the poorest people, although the ginning of the crisis. Commodity exporters differences among countries are wide. While are helped by the fairly quick recovery of com- financial market conditions for emerging and modity prices. And financial systems in low- developing countries are improving and capital income countries have been less affected by flows are returning, international bank financ- turmoil than those in advanced economies. ing and foreign direct investment are projected The recovery is still vulnerable, however, to remain weak in 2010. and the rapid expansion of fiscal deficits and Although the short- and medium-term the greater reliance on domestic sources of fi- growth prospects for most emerging and de- nancing in many countries may not be sustain- veloping countries are positive, the question able. External debt ratios in low-income coun- arises: to what extent does the current shock tries, deteriorating in the short run, should be have longer-run implications that could knock watched. GLOBAL MONITORING REPORT 2010 69 70 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 Optimal exit policies from policy support tion and investment, private demand growth should depend on country circumstances. in emerging Europe is expected to remain sluggish, and several countries remain depen- · Countries where private demand is still dent on exceptional policy stimulus. Com- weak should continue supporting activity if modity exporters are benefiting from firmer policy space is available. global demand for raw materials and higher · Some countries, however, are facing financ- commodity prices. Even so, the recovery re- ing constraints--they cannot delay adjust- mains vulnerable, most notably in advanced ment. Donors should assist them by follow- countries and the economies of Eastern Eu- ing up on commitments to increase aid. rope, where high unemployment, moderate · All countries should adopt credible medium- income growth, and weaker household bal- term fiscal adjustment plans to bolster con- ances are dampening consumption growth, fidence in macroeconomic policies and un- posing risks for the global outlook. In addi- dertake policy reforms to secure long-term tion, in the medium­term, growth rates in growth. some groups of countries, especially low- income countries, are not expected to reach the high levels recorded before 2008. The economic recovery Because the recovery is in an early stage and Global economic activity is recovering from the unemployment rates are still elevated, global deepest recession since the Second World War, inflation has remained low, although some albeit at a moderate pace. According to the economies, especially in Asia, are showing the International Monetary Fund's (IMF) World first signs of price pressures. Inflation risks are Economic Outlook, growth of global output rising in Latin America as well, where output will increase to 4.2 percent in 2010, from a gaps in some countries are closing rapidly. decline of 0.6 percent in 2009 (table 3.1). The recovery, supported by improving financial Commodity prices are recovering conditions and rising world trade (figure 3.1), is led by emerging economies in Asia, where Following the sharp drop in commodity prices growth rates now exceed precrisis levels. The in late 2008, prices for most commodities re- prospects for developing countries, including bounded sharply in 2009 and are continuing the poorest, are improving as well, although their upward trend in 2010 as the global re- growth rates have not yet recovered to the lev- covery gains momentum (figure 3.2). The in- els seen in the years before the crisis.1 creases are helping to mitigate the impact of The underlying factors driving the expan- the crisis on commodity exporters. Food prices sion differ from country to country. While are the exception, because good harvests in economies in Asia and Latin America are Sub-Saharan Africa and elsewhere have given bolstered by a recovery of private consump- an opportunity to rebuild stocks. But food TABLE 3.1 Global output percent change Projection Region 2007 2008 2009 2010 2011­13 World output 5.2 3.0 ­0.6 4.2 4.4 Advanced economies 2.8 0.5 ­3.2 2.3 2.4 Emerging and developing economies 8.3 6.1 2.4 6.3 6.6 Central and Eastern Europe 5.5 3.0 ­3.7 2.8 3.8 Commonwealth of Independent States 8.6 5.5 ­6.6 4.0 4.1 Developing Asia 10.6 7.9 6.6 8.7 8.6 Middle East and North Africa 5.6 5.1 2.4 4.5 4.8 Sub-Saharan Africa 6.9 5.5 2.1 4.7 5.7 Western Hemisphere 5.8 4.3 ­1.8 4.0 4.2 Source: World Economic Outlook. GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 71 FIGURE 3.1 Short-term indicators of production and trade are recovering 130 a. Exports and imports (value) 115 b. Industrial production 120 110 emerging markets 105 110 index (June 2008 = 100) index (June 2008 = 100) G3 countries 100 100 95 90 G3 countries 90 80 85 emerging markets 70 80 60 75 50 70 Jan. May Sept. Jan. May Sept. Jan. May Sept. Jan. May Sept. Jan. Jan. May Sept. Jan. May Sept. Jan. May Sept. Jan. May Sept. Jan. 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Source: IMF International Financial Statistics; Bloomberg; Haver Analytics; central banks. Note: Data are weighted by PPP-GDP, 2006. FIGURE 3.2 Commodity price indexes rebounded strongly in 2009 600 500 index (2001 Q1 = 100) 400 copper 300 fuel all commodities 200 food non-fuel 100 cereals 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1a Q3a 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011 Source: IMF. Note: Indexes are in U.S. dollars. a. Projected and commodity prices, relatively high by his- ably since the onset of the crisis. Bond spreads torical standards, are projected to remain so, have declined, stock markets in both emerg- given the prospects for further medium-term ing and developing countries have recovered demand growth and continuing supply con- sharply, and exchange rate volatility has come straints in many sectors. down considerably (figures 3.3­3.5). Some borrowers--sovereigns and prime corpora- tions in particular--quickly regained market Financial conditions are improving, access following a brief interruption at the but financial flows remain below end of 2008. Financial market access for sub- precrisis levels investment-grade borrowers in emerging and Financial market conditions for emerging and developing countries has also improved. But developing countries have improved consider- access to international bank financing remains 72 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 FIGURE 3.3 Bond spreads have declined in emerging markets and developing countries 100 1,000 90 900 80 EMBI Global issues of 800 (right axis) international 70 bonds (left axis) 700 spreads, basis points US$, billions 60 600 50 500 40 400 30 300 20 200 10 100 0 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Dealogic; Bloomberg. Note: Bond issues and spreads as of end-March 2010.. FIGURE 3.4 Share prices have recovered sharply 800 700 600 developing countries index (January 2000 = 100) 500 400 300 emerging markets 200 100 0 Jan. Sept. May Jan. Sept. May. Jan. Sept. May Jan. Sept. May. Jan. Sept. May. Feb. 2000 2000 2001 2002 2002 2003 2004 2004 2005 2006 2006 2007 2008 2008 2009 2010 Source: IMF International Financial Statistics. Note: Prices are in the local currency. limited as banks in advanced economies con- such as liquidity support, deposit insurance, tinue deleveraging. bank interventions, and recapitalizations. Financial policies, such as improved finan- Banking sectors in many emerging economies cial sector regulation and crisis measures, have have also benefited from higher financial mar- contributed to avoidance of widespread bank- ket resilience, including less volatility in ex- ing crises in emerging and developing coun- change and interest rates,2 and therefore have tries. The public response to the financial crisis avoided negative dynamics from balance sheet has been broad, covering several instruments, effects. GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 73 FIGURE 3.5 Exchange rates have been less volatile: Daily spot exchange rates 180 160 index (Jan. 1, 2008 = 100) 140 120 100 80 60 40 Jan. Mar. May July Sept. Nov. Jan. Mar. May July Sept. Nov. Jan. Mar. 2008 2009 2010 Mexico Brazil Indonesia Thailand South Africa Kenya Poland Source: Bloomberg. Note: Exchange rates are in national currency per U.S. dollars. FIGURE 3.6 The cost of external debt financing has come down 12 900 a. Yields (left axis) b. Spreads (right axis) 11 10 700 9 basis points percent 8 500 7 6 300 5 4 100 composite high grade high yield composite high grade high yield Jun. 30, 2007 Sept. 1, 2008 Apr. 12, 2010 Source: Bloomberg. Even so, concerns about systemic risks to has also affected bank loan portfolios in many the solvency of banks and corporations linger. countries, as evidenced by the rising shares of The cost of external debt financing remains el- nonperforming loans (figure 3.7). evated in some emerging and developing coun- Despite the general improvement in market tries, where spreads on high-yield external cor- conditions, financial flows to emerging and porate bonds are still substantially above those developing countries have not recovered to before the collapse of Lehman Brothers in Sep- those seen in the years preceding the financial tember 2008 (figure 3.6). In addition, some crisis (table 3.2). In emerging economies, net countries in Eastern Europe and the Common- inflows of foreign financial resources (capital wealth of Independent States (CIS) continue to flows and transfers) are not expected to ex- face uncertainties as a result of high external ceed 8.2 percent of GDP this year, down from debt refinancing needs and private sector for- an average of about 12 percent in 2007­08, eign currency debt. The fallout from the crisis mainly because of the sharp drop in bank 74 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 FIGURE 3.7 The share of nonperforming loans to total loans has recovery of workers' remittances (table 3.3). been rising Although remittances to countries in Latin America, North Africa, and the Middle East 12 were weaker than expected in 2009, they ap- 10 pear to have reached a bottom toward the end of the year. At the same time, remittance flows 8 to South and East Asia, largely originating in percent 6 the Gulf countries, surprised on the upside 4 in 2009, with particularly strong increases in Bangladesh and Pakistan. Overall, remit- 2 tances to emerging and developing countries 0 are projected to increase by 2 percent in 2010, 2003­07 2008 2009 following a 6 percent decline in 2009. emerging markets developing countries Current account imbalances in emerging advanced countries and developing countries have been shifting in recent years, mainly as the result of the sharp Source: IMF 2009b. swings in world trade and terms of trade since late 2008 (figure 3.9). Fuel-exporting coun- TABLE 3.2 Net financial flows tries have been most hit by fluctuations in percent of GDP the external accounts, a reflection of the high Flows 2007 2008 2009 2010 volatility of oil prices and insufficient export diversification. Nonfuel primary product ex- Emerging market economies 12.6 11.4 8.7 8.2 Private capital flows, net 8.0 7.0 3.2 3.1 porters face strong fluctuations as well, but of which: private direct investment 5.4 5.1 3.3 3.3 less so than fuel-exporting countries. Despite Private portfolio flows 0.8 ­0.5 ­0.3 0.1 these fluctuations, there have been reductions Private current transfers 4.1 3.7 3.8 3.6 in external imbalances in the past two years Official capital flows and transfers, net 0.4 0.7 1.7 1.6 within the group of emerging and developing Memorandum item: Reserve assets ­3.9 ­1.6 ­2.5 ­1.9 countries. The number of emerging economies with high balance of payments deficits and the Developing countries 14.0 17.7 13.9 13.9 number of high surplus emerging economies Private capital flows, net 6.6 7.7 5.2 5.3 and developing countries declined in 2009 of which private direct investment 6.6 6.2 4.8 4.7 (figure 3.10). Private portfolio flows ­0.7 ­0.6 ­0.4 ­0.2 Private current transfers 5.6 5.8 5.2 5.1 Even with the large differences in external Official capital flows and transfers, net 1.8 4.2 3.6 3.5 conditions among emerging and developing Memorandum item: countries, there has been a remarkable simi- Reserve assets ­4.0 ­2.3 ­1.6 ­1.0 larity in international reserve developments Source: World Economic Outlook. across groups of countries and regions. Helped Note: Equally weighted. by the recovery in international trade and cap- financing (figure 3.8), especially in Asia and ital flows, and the allocation of IMF special drawing rights, almost all countries rebuilt Latin America, and foreign direct investment. international reserves (as measured by reserve Developing countries are facing weak foreign coverage in months of imports) in 2009, after direct investment activity as well, because a decline in 2008 (figure 3.11). At the end of overcapacity in extractive industries remains 2009, 80 percent of emerging markets and 75 considerable despite rising global demand for percent of developing countries had reserves commodities. Overall, net financial flows are that could be considered adequate (equivalent projected to decline to 13.9 percent of GDP in to three months of imports of goods and ser- 2010, from 15.9 percent in 2007­08. vices). For emerging economies, reserves as a The drop in foreign direct investment in share of short-term debt also increased, and at developing countries is partly offset by the the end of 2009 about 70 percent of emerg- GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 75 FIGURE 3.8 Bank financing to emerging markets dropped sharply in 2009 20 15 % change from previous quarter 10 5 0 ­5 ­10 ­15 ­20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2006 2007 2008 2009 Asia emerging Europe Latin America Middle East/Africa Source: Bank for International Settlements (BIS). Note: Adjusted for exchange rate changes. Changes are calculated as flow adjusted for exchange rate changes as a share of the stock in the previous quarter. TABLE 3.3 Inflows of international remittances US$billions Annual average Annual average 1992­2002 2003­07 2008 2009a 2010b 2011c Emerging market economies 58.9 177.2 283.3 266.0 271.7 279.1 Developing countries 8.4 26.1 47.1 46.4 47.5 48.8 Fragile states 2.2 5.1 9.7 8.6 8.8 9.1 Source: World Bank remittances data. a. Remittances include workers' remittances, compensation of employees, and migrant transfers. b. Estimate. c. Forecast base case scenario. ing economies had reserves that exceeded the often not an option in previous crises. Further, stock of short-term debt.3 stronger balance sheets and continued access to financing, especially for prime borrowers, helped private corporations in emerging and Thanks to good policies, the recovery is developing countries to deal better with ad- stronger than in past crises verse conditions than they had in the past. Lo- Overall, emerging and developing countries cal bond markets have also benefited some of weathered this global crisis better than past these countries, with larger enterprises in Asia ones. Their financial markets and exchange and Latin America able to rely on local mar- rates have not shown the sharp fluctuations kets for their refinancing needs. of past crises, and the rebound in economic activity is stronger than expected. Healthier Nonetheless, the crisis has depressed fiscal accounts, reduced debt, better debt ma- disposable incomes in many countries turity structures, low inflation, and higher international reserves gave many countries The crisis and the pace of recovery have deeply room for countercyclical policies that were affected disposable incomes in many coun- 76 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 FIGURE 3.9 Changes in terms of trade have swung sharply since have differed. In general, most emerging and 2008 developing countries first focused on address- ing weakening confidence and containing the 25 2009 impact of the financial market crisis on the 20 15 2008 real economy. In a second stage, these policies 2006 10 have been followed by comprehensive efforts 5 2010 2006 2008 2006 2008 to support domestic demand and growth in % change 2010 2007 2009 2010 0 2007 the medium term--mainly through expansion- 2007 ­5 ary macroeconomic policies. In most countries ­10 these policies are still in place, and the start ­15 of the third stage--exiting from extraordinary ­20 ­25 2009 policy support--has been gradual thus far. lowest-quintile highest-quintile all countries countries countries Monetary policy provided support in Source: IMF staff calculations. most countries Note: Quintile groups are based on the average of terms-of-trade changes in 2008­09 and 2009­10. Aided by moderate inflation trends and less volatile exchange rates, central banks in most tries, where a contraction in real activity was emerging and developing countries reduced sometimes reinforced by a deterioration in the policy interest rates in 2009. About 70 percent terms of trade (figure 3.12). In 2008­10, about of emerging economies and close to 60 percent a third of emerging and developing countries of developing countries followed a path toward were experiencing declines in disposable in- lower rates last year. In some countries, higher comes, with potentially serious adverse effects policy interest rates were initially needed to on poverty. Central and Eastern Europe has preserve market confidence. These increases been particularly hard hit, with nine countries were more modest than in previous crises, facing cumulative income declines, in total av- however, and in many cases were quickly re- eraging more than 8 percent. versed. In most countries, lower interest rates were associated with depreciations of nominal effective exchange rates. As a result, monetary Macroeconomic policy trends conditions in most emerging and developing Reflecting cross-country differences in initial countries--as measured by a simple summary conditions and the international transmission indicator incorporating nominal interest rates of the crisis, macroeconomic policy responses and nominal effective exchange rates4--ap- FIGURE 3.10 External imbalances have come down in emerging and developing countries a. Current account deficit > ­5% of GDP b. Current account surplus > ­5% of GDP 70 16 60 14 number of countries number of countries 50 12 10 40 8 30 6 20 4 10 2 0 0 emerging markets developing countries emerging markets developing countries 2008 2009 2010 2008 2009 2010 Source: World Economic Outlook. GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 77 FIGURE 3.11 Almost all countries rebuilt their international reserves in 2009 7 2.5 6 external short-term debt 2.0 in terms of the stock of months of imports 5 4 1.5 3 1.0 2 0.5 1 0 0 2006 2007 2008 2009 2006 2007 2008 2009 emerging markets developing countries Source: World Economic Outlook. Note: The median ratio is shown. "Stock of the external short-term debt" = outstanding (on remaining maturity basis) plus amortization scheduled on medium- and long-term debt. pear to have become more accommodating in FIGURE 3.12 Deteriorating terms of trade sometimes reinforce 2009 (figure 3.13).5 contraction in economic activity The financial crisis resulted in a sharp de- 30 cline in money growth in emerging and devel- 8 25 oping countries (figure 3.14). The decline was 20 largest in countries that had seen the strongest 15 10 % change growth in the precrisis years. But as a result 14 10 28 17 5 of the even stronger decline in nominal GDP 5 growth rates, measures of excess liquidity, 0 such as the nominal money gap, increased. ­5 9 2 4 11 4 This suggests that despite the fall in money ­10 9 ­15 growth, additional liquidity remained avail- Africa Middle East Asia Western Central CIS able to support corporations and households and North Hemisphere and Africa Eastern during the crisis period. Europe positive terms of trade effects negative terms of trade effects Expansionary fiscal policies support the recovery Source: IMF Staff calculations. Note: The figure shows, by region, average real per capita GDP growth rates adjusted for the per capita value of net terms-of-trade changes. The numbers above and below the bars show the Measured by the median general govern- number of countries. ment balance, fiscal deficits in emerging and developing countries expanded by almost 3 percent of GDP in 2009 (figure 3.15) and are corporate tax revenue as the contribution of projected to increase further in 2010 in more key sectors in the economy (such as natural than one-third of the countries, despite some resources and other export sectors) declined. decline in the median balance. Some coun- Moreover, tax administrations may be facing tries, especially emerging economies, have put bigger enforcement challenges during the cri- stimulus plans in place. But in most countries sis and its aftermath as tax planning becomes the widening deficit is the result of weaken- more aggressive. Many countries are more ing revenue, including the disproportionate exposed to such challenges because of their impact of the crisis on trade--and thus on weak administrative capacity, large informal revenues from import tariffs--and on con- sectors, and the constrained cash positions of sumption taxes. Some countries have also lost taxpayers. 78 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 FIGURE 3.13 Monetary policy conditions became more accommodating in 2009 a. Emerging markets with monetary b. Other developing countries with policy loosening monetary policy loosening 90 80 80 70 70 60 60 50 percent percent 50 40 40 30 30 20 20 10 10 0 0 MCI discount rate exchange rate MCI discount rate exchange rate 2008 2009 2008 2009 Source: IMF International Financial Statistics. Note: Monetary policy loosening is based on Monetary Conditions Index (MCI) calculations. FIGURE 3.14 Average year-on-year growth in money and the money gap in emerging markets 30 25 20 growth rate, % M2 15 10 5 money gap 0 ­5 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2003 2004 2005 2006 2007 2008 2009 Source: IMF International Financial Statistics; Haver Analytics. Note: The money gap is the difference between year-on-year growth rates of the M2 money supply and nominal GDP. The sample includes emerging- market countries that have data on both for the whole sample period shown. Despite falling revenues, emerging and de- exporting countries that faced sharp terms-of- veloping countries as a group have allowed trade deteriorations after the collapse of oil automatic stabilizers to work and have main- prices in the second half of 2008. Expendi- tained previous spending plans during the tures were less affected in other emerging and financial crisis. To some extent they have in- developing countries, especially nonfuel com- creased social spending related to the crisis, modity exporters. Thanks to higher oil prices, supporting domestic demand and sustain- many fuel-exporting countries will be able to ing the recovery. But the overall numbers on reverse these policies in 2010. spending conceal wide differences in policy stances and conditions. About half of emerg- But many countries are not on a ing and developing countries cut spending in sustainable fiscal path 2009 in reaction to the crisis, a pattern likely to be repeated to some extent in 2010 (figure Widening government deficits pose financ- 3.16). The steepest spending cuts were in fuel- ing challenges for many countries, especially GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 79 FIGURE 3.15 Fiscal deficits expanded in 2009 those with limited access to capital markets. Emerging markets rapidly regained access to 0.0 sovereign debt markets following the collapse ­0.5 of Lehman Brothers in September 2008, but ­1.0 developing countries with limited or no mar- ­1.5 ket access are more constrained in their op- ­2.0 tions. A country-by-country analysis of bud- % of GDP ­2.5 get financing shows that most countries in this ­3.0 group were able to finance rising deficits with ­3.5 increased domestic and foreign financing. On ­4.0 average, budget financing needs of develop- ing countries increased by about 3 percentage ­4.5 points of GDP in 2009, about half from do- ­5.0 emerging markets developing mestic sources (mainly domestic bank loans countries and the drawing down of government deposits 2008 2009 2010a in the banking system) and the rest from for- eign sources (mainly aid). In some countries, Source: World Economic Outlook. however, governments could not mobilize sig- a. Projected. nificant additional foreign resources despite FIGURE 3.16 Growth in real primary spending, 2010 projections a. Fuel exporters b. Nonfuel primary products exporters c. Other countries Madagascar Equatorial Guinea Guinea-Bissau Niger Burkina Faso Malaysia Chad Hungary Suriname Azerbaijan Colombia Zambia Lithuania Angola Mexico Mali Turkey Russian Federation Romania Guyana India Libya Chile Thailand Algeria Rwanda Sierra Leone Moldova Venezuela, R.B. de unweighted average unweighted average Latvia unweighted average Peru Poland Burundi Brazil Ecuador South Africa Mozambique Indonesia Yemen, Rep. Bangladesh Mauritania Nigeria China Uzbekistan Ghana Kazakhstan Pakistan Guinea-Bissau Kyrgyz Republic Sudan Argentina Malawi Uganda Gabon Congo, Dem. Rep. of Ethiopia ­30 ­20 ­10 0 10 20 30 40 50 60 ­30 ­20 ­10 0 10 20 30 40 ­20 ­15 ­10 ­5 0 5 10 15 20 25 30 % change % change % change Source: World Economic Outlook. 80 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 MAP 3.1 How the crisis undermined GDP growth in 2009 GDP real growth rate: Green % change (2009) (De < ­6 ­6 < ­3 ­3 <0 0 <3 Canada 3 <7 7 no data United States Bermuda (UK) The Bahamas Cayman Is. (UK) Cuba Turks and Caicos Islands (UK) Mexico Haiti C Belize Jamaica Guatemala Honduras El Salvador Nicaragua Costa Rica Panama R.B. de Guyana Venezuela Suriname Colombia French Guiana (Fr) Ecuador Kiribati Peru Brazil Samoa Cook Is. (NZ) French Polynesia (Fr) American Samoa (US) Bolivia Fiji Tonga Dominican Puerto British Virgin Paraguay Republic Rico (US) Islands (UK) Anguilla (UK) U.S. Virgin Antigua and Barbuda Islands (US) St. Kitts Guadeloupe (Fr) Chile Uruguay and Nevis Argentina This map was produced by the Netherlands Dominica Map Design Unit of The World Bank. Antilles (Neth) Montserrat (UK) Martinique (Fr) The boundaries, colors, denominations St. Lucia Aruba St. Vincent and and any other information shown on Barbados (Neth) The Grenadines this map do not imply, on the part of The World Bank Group, any judgment Grenada on the legal status of any territory, or Trinidad any endorsement or acceptance of and Tobago such boundaries. R.B. de Venezuela Source: World Economic Outlook. pressing needs. As budget deficits remain el- by higher private saving or reduced invest- evated in 2010, many governments will con- ment. That may occur if consumers and inves- tinue to borrow heavily in domestic markets. tors adapt their behavior to take into account This is not sustainable. While fiscal stimulus higher future tax liabilities. in many developing countries has supported the recovery, there are risks of crowding out The macroeconomic policy mix through higher interest rates. Recent Interna- tional Monetary Fund (IMF) research shows Most emerging and developing countries as significant effects of fiscal deficits on interest a group appear to have supported economic rates, which could dampen private investment activity in 2009 with a combination of expan- and force governments to spend more on debt sionary fiscal and monetary policies (figure service payments and less on social programs.6 3.17 and box 3.1). In some countries, expan- These effects will be stronger when initial defi- sionary fiscal policies were combined with less cits or debts are high. Expansionary fiscal poli- accommodating monetary conditions. Such a cies may also become counterproductive if the policy mix is not necessarily incoherent. In fact, positive demand effects are more than offset it may be useful in countries facing large capital GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 81 IBRD 37736 APRIL 2010 nland en) Faeroe Norway Iceland Islands Finland (Den) Sweden The Netherlands Russian Federation Estonia Isle of Man (UK) Denmark Russian Latvia Fed. Lithuania United Ireland Kingdom Germany Poland Belarus Channel Islands (UK) Belgium Ukraine Luxembourg Moldova Kazakhstan Liechtenstein Mongolia France Italy Romania Switzerland Andorra Bulgaria Georgia Uzbekistan Kyrgyz Azer- Rep. D.P.R. Portugal Spain Turkey Armenia baijan Turkmenistan of Korea Monaco Greece Tajikistan Japan Cyprus Syrian Rep. of Gibraltar (UK) Arab Islamic Rep. Afghanistan China Tunisia Malta Lebanon Korea Rep. Iraq of Iran Morocco Israel Jordan Kuwait West Bank and Gaza Bahrain Pakistan Bhutan Nepal Algeria Libya Arab Rep. Qatar Former Spanish of Egypt Saudi Sahara Arabia United Arab Bangladesh Emirates India Myanmar Lao Mauritania Oman P.D.R. Cape Verde Mali N. Mariana Islands (US) Niger Rep. of Thailand Vietnam Senegal Chad Eritrea Yemen Guam (US) The Gambia Burkina Sudan Djibouti Cambodia Philippines Federated States of Micronesia Marshall Islands Guinea-Bissau Guinea Faso Benin Sri Sierra Leone Côte Ghana Nigeria Central Ethiopia Lanka Brunei Liberia D'Ivoire African Rep. Somalia Palau Togo Cameroon Malaysia Maldives Equatorial Guinea Uganda Kiribati Congo Kenya Singapore Nauru São Tomé and Príncipe Gabon Rwanda Dem. Rep. of Burundi Seychelles Papua Solomon Congo Indonesia New Guinea Islands Tanzania Comoros Tuvalu Timor-Leste Angola Malawi Zambia Mayotte Fiji (Fr) Vanuatu Zimbabwe Mauritius Namibia Madagascar Botswana Mozambique Réunion (Fr) New Poland Caledonia Australia (Fr) Swaziland Ukraine Germany Czech Rep. Slovak Rep. South Lesotho Africa Austria Hungary Slovenia Romania Croatia New Zealand Bosnia and San Herz. Serbia Bulgaria Marino Montenegro Kosovo FYR Macedonia Vatican Italy Albania City Greece outflows and pressures on the exchange rate. best approach to exit from policy stimulus.7 In such a situation, rising interest rates may be The appropriate timing and nature of exit appropriate to avoid excessive exchange rate policies depend on individual country circum- volatility and ensure that sufficient external fi- stances. In many countries, where private de- nancing remains available for the economy. On mand components are still cyclically weak and average, growth in countries with this policy sufficient policy space is available, monetary mix in 2009 was not weaker than in countries and fiscal policy should remain geared toward that had expansionary policies on both the supporting activity. Governments in these monetary and fiscal front. countries should lay out a credible exit strategy to maintain confidence in the authorities' com- mitment to macroeconomic stability. Mon- Adapting monetary and etary and fiscal support should be gradually fiscal policies to changing removed when private demand is sufficiently circumstances strong to sustain growth. In addition, to sup- As the recovery in emerging and developing port fiscal consolidation, reforms to strengthen countries takes hold, questions arise about the fiscal institutions could be initiated now. 82 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 FIGURE 3.17 Most countries responded with expansionary fiscal strong downward pressures on the exchange and monetary policy rate (flexible regime) or reserves (fixed regime) emerge. a. Emerging markets b. Developing countries Several countries, mainly emerging econo- mies, face high or rising rates of inflation. The economic dynamics underlying these phenom- ena differ from country to country. In several countries, the first signs of rising inflationary expectations are becoming visible in the con- text of exceptional macroeconomic policy support. In some other countries, inflation rates remained stubbornly high in 2009, not- withstanding depressed demand conditions, monetary and fiscal loosening usually reflecting a lack of confidence in mon- monetary and fiscal tightening etary policy. In both categories of countries, a monetary loosening and fiscal tightening move toward a more restrictive monetary and fiscal loosening and monetary tightening fiscal policy stance would be warranted. Maintaining confidence in macroeconomic Source: IMF International Financial Statistics. stability remains a priority for all countries. Note: Fiscal conditions are defined based on the change in government balance as a percent of GDP in 2008­09. Monetary conditions are based on the change in the MCI from 2008Q4 to 2009Q3. Credible medium-term fiscal adjustment plans are important to manage expectations by re- ducing the risks of crowding out and unsus- A number of countries, however, are not tainable debt dynamics. To maintain the abil- in a position to delay adjustment and should ity of fiscal policy to respond to future crises, act in 2010 to reduce fiscal deficits. In some a preferable strategy would aim to reduce cases, this reduction should be accompanied debt ratios to their precrisis levels in the me- by a gradual tightening of the monetary policy dium term. In addition to phasing out tem- stance. Three broad groups of countries can be porary stimulus measures, this approach will distinguished. require some emerging economies to make Most developing countries financed widen- improvements in their structural primary bal- ing budget deficits in 2009 by increasing reli- ance.8 To enhance confidence that future fis- ance on domestic sources of financing. This cal adjustment will not lead to an appreciable financing policy, while appropriate when the increase in the tax burden, the medium-term global economy was facing the risks of a fur- ther sharp downturn, cannot be continued for adjustment plans could emphasize the follow- very long, especially in countries with weak ing elements. external payments positions, low reserves, or rapidly rising debt. Without higher aid inflows, · Phasing out temporary stimulus measures financing constraints and the need to maintain while strengthening well-targeted social fiscal sustainability will compel many countries safety nets. A large number of emerging to move to more prudent policies in 2010. and developing countries are supporting Some developing economies with fiscal domestic activity with ad hoc measures, sustainability problems may still be able to such as increased spending on public works finance deficits in the current environment. or reductions in tax rates. Medium-term But they could rapidly face external financ- fiscal consolidation plans should envisage ing pressures if the perception takes hold that public investment at levels consistent with fiscal discipline is not a priority. If there are fiscal sustainability and available financing, no signs of rising inflation, accommodating and phase out tax reductions presented as monetary policies can be maintained for some temporary stimulus measures. At the same time to support domestic demand, unless time, temporary social programs should be GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 83 BOX 3.1 Quality of macroeconomic policies in low-income countries As in previous years, IMF staff conducted surveys tion of the rapid response to the global crisis in many among mission chiefs to gauge their assessments of countries and governance in the public sector. At the the quality of macroeconomic policies in low-income same time, governance in monetary and financial countries. In 2009 low-income countries made good institutions showed deterioration, while little change progress in the quality of monetary policies, a reflec- was recorded in other areas. a. Fiscal policy b. Composition of public spending 90 90 % shares of those countries % shares of those countries 80 80 70 70 in each category in each category 60 60 50 50 40 40 30 30 20 20 10 10 0 0 unsatisfactory adequate good unsatisfactory adequate good c. Fiscal transparency d. Monetary policy 90 90 % shares of those countries % shares of those countries 80 80 70 70 in each category in each category 60 60 50 50 40 40 30 30 20 20 10 10 0 0 unsatisfactory adequate good unsatisfactory adequate good e. Consistency of macroeconomic policy f. Governance in monetary and financial institutions 90 90 % shares of those countries % shares of those countries 80 80 70 70 in each category in each category 60 60 50 50 40 40 30 30 20 20 10 10 0 0 unsatisfactory adequate good unsatisfactory adequate good g. Governance in the public sector h. Access to foreign exchange 90 90 % shares of those countries % shares of those countries 80 80 70 70 in each category in each category 60 60 50 50 40 40 30 30 20 20 10 10 0 0 unsatisfactory adequate good unsatisfactory adequate good 2003 2007 2008 2009 84 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 replaced with cost-effective, well-targeted, has helped to stabilize the macroeconomic ef- permanent social safety nets. fects of the crisis (box 3.3). · Structural cuts in nonpriority spending. Governments should continue their efforts to reduce nonpriority spending, through Strengthening international further improvements in public financial policy cooperation management and by eliminating expendi- The global crisis of confidence that eventually ture categories such as badly targeted fuel caused the collapse in world trade in 2008 re- and food subsidies. Although the decline quired a global response: a simultaneous fiscal in food and fuel prices since mid-2008 has and monetary policy stimulus in countries with allowed some countries to reduce spend- sufficient room to maneuver for such policies. ing on inefficient general subsidies, further The prospects of sustaining the current eco- progress could be made in replacing general nomic recovery will be enhanced if advanced, subsidies with programs better targeted to emerging, and developing countries continue the poor. to cooperate in the implementation of exit · Improving revenue performance. Many strategies and policies aimed at increasing emerging and developing countries have growth. The agreement among the Group of room for further improvements in tax sys- Twenty (G-20) leaders at Pittsburgh to create tems and revenue administration, including a new process for mutual policy assessments measures aimed at widening the tax base is an important step in the right direction, but to include informal sectors, further shifts policy cooperation cannot be limited to those away from trade taxes to domestic taxes, countries. Enhanced policy cooperation will and addressing governance problems. Well- be necessary in the following areas. functioning revenue administrations, in Avoiding protectionism. Restrictions on combination with tax systems that mini- international trade and services, government mize distortions, lay the basis for better rev- subsidies for domestic industries, distortions enue performance and create a more stable to foreign direct investment, informal pres- investment climate (box 3.2). sures on banks to give preference to domestic borrowers--all constitute serious threats to Countries with strong fiscal policies in the the economic recovery. Political pressures to period leading to the global crisis have been maintain financial support to domestic indus- better able to deal with its effects than coun- tries indefinitely and to take more far-reaching tries with weak policies. They regained faster protective measures could rise if unemploy- access to international financing on more fa- ment remains relatively high in the coming vorable terms--and were better able to offset years, in line with current expectations. Gov- the effects of falling world demand with coun- ernments should eschew such protectionist tercyclical fiscal policies in 2009 and 2010. policies and make strong efforts to reinvigorate This experience argues in favor of a counter- the Doha Round. An ambitious Doha Round cyclical, medium-term fiscal rule that aims to would constitute a major step toward a higher generate savings during good years and create growth path for the world economy: a recent room for countercyclical policies during cri- study puts potential annual GDP gains from sis periods. Although almost 60 emerging and multilateral trade liberalization at $300 billion developing countries have had some type of to $700 billion.10 fiscal rule since the 1990s,9 helping to main- Increasing aid levels and aid effectiveness. tain fiscal discipline, only some of these are de- Insufficient progress has been made in enhanc- signed to smooth out the effects of fluctuations ing aid effectiveness, and aid still falls well in commodity export prices and other external short of the 2005 Gleneagles commitments, in shocks. Chile and Nigeria are countries where particular for Africa. In addition, many donor a countercyclical fiscal rule on the basis of pru- countries have reduced their aid budgets, while dent projections of commodity export prices others face pressures to reduce aid in light of GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 85 BOX 3.2 Mobilizing additional revenue in developing countries: Key issues for tax policy and revenue administration The international financial crisis and its consequences reasons. Addressing these issues is key to improving for economic activity have put additional pressure on the equity of tax systems. an already fragile revenue situation in many develop- Some tax sources remain underexploited in many ing countries. Although the revenue situation in most countries--excise taxes on alcohol and tobacco, and countries is expected to improve as the effects of the environmental taxes (fuel and car taxes, for example) crisis dissipate and temporary stimulus measures are are important examples. phased out, some policy changes made in response The institutional framework for policy making, to the crisis, and during the precrisis period that saw including coordination at the country level between substantial increases in food and fuel prices, may have the various government entities with responsibility longer-term effects on revenues. An example is the for tax policy, is deficient in many developing coun- proposed change to the value added tax (VAT) direc- tries and often leads to fragmentation of policy deci- tive of the West African Economic and Monetary sions with negative consequences for revenues-- for Union to allow for broader exemptions and a second example, between trade and tax policy, industrial and (lower) rate on selected items. In addition, taxpayer tax policy, and central and local taxation. Countries compliance may have declined in many countries, should better integrate tax policy making into macro- posing challenges for revenue administration. economic management, and strengthen the coordina- The policy tools that developing countries can tion mechanisms across government entities. mobilize to deal with the potential revenue loss stem- Taxes on real property have historically yielded ming from the crisis and other ongoing challenges very little revenue for a number of reasons, including may be more limited today than in the 1980s and the lack of a proper framework for sharing taxation 1990s, and those that are left may involve stronger powers between central and regional levels of govern- political commitments. The vast majority of coun- ment. This revenue source remains underexploited in tries have already implemented broad-based con- many developing countries. sumption taxes (typically VATs) at rates that are not particularly low in general and with bases that are Revenue administration generally narrow. Moreover, corporate tax rates have Tax agencies should also develop a strategy to enhance fallen dramatically since the early 1990s (by about revenue administration. The primary objective of the one-quarter on average), and countries have intensi- strategy should be to contain the rise in noncompli- fied the use of tax incentives, further narrowing the ance often observed during periods of crisis. If left tax base. unchecked, rising noncompliance could lead to sub- Country experiences in addressing these chal- stantial forgone revenue and provide unfair competi- lenges differ, sometimes significantly, but common tive advantages to noncompliant businesses. areas for reform exist. To achieve this objective, the following four sets of measures could be considered. Tax policy Tax bases can be broadened, especially for VAT and · Assistance to taxpayers could be expanded by profit taxes. This is not an issue of improving tax adjusting advance payments, accelerating tax administration to better handle the informal sector refunds, and making greater use of payment (which is a separate and ongoing challenge); it pri- extensions. marily means rationalizing the use of income tax · Communication with the taxpayer population incentives (such as tax holidays) and reducing signifi- could be improved. An effective communication cantly the reliance on VAT exemptions as a (costly program for taxpayers and other key stakeholders and largely ineffective) social policy tool. in the tax system should aim at clearly conveying The taxation of individuals is, in many countries, to stakeholders and the public the various elements limited to the taxation of wages of the public sector of the tax agency's compliance strategy. and large enterprises. The taxation of unincorpo- · Legislative reforms that facilitate revenue admin- rated small and midsize enterprises remains largely istration could be enacted. Needed reforms vary elusive--both for technical and for political economy from country to country; they could include mea- continued 86 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 BOX 3.2 (continued) sures such as the strengthening of transfer-pricing face the prospect of declining budget allocations in rules or the introduction of default assessments an economic downturn as governments seek to cre- and indirect audit methods. ate fiscal room for high-priority social expenditures. However, it should be recognized that the task of tax Enforcement could be strengthened, including administration becomes more demanding during dif- the reassessment of controls over the largest taxpay- ficult economic times. In this situation, substantial ers, the intensification of arrears collection, securing cuts in tax agencies' budgets are likely to reduce the tax withholding, giving greater attention to loss- effectiveness of tax collection and further aggravate reporting businesses, and enhancing the scrutiny of a decline in revenue. cross-border transactions and offshore evasion. Tax agencies should align their near-term com- Early warning for shifts in taxpayer compliance is pliance strategies and medium-term modernization crucial for prevention. The sooner a tax agency can plans. Sustaining revenue collection over the medium identify an increase in noncompliance, the faster it term will require tax agencies to address their most can respond. Few tax agencies, however, have the fundamental weaknesses (such as poor organiza- capacity to estimate the precise level of the overall tional and staffing arrangements, weak taxpayer tax gap. In this situation, tax agencies should identify services and enforcement programs, and outdated and track compliance indicators that can be more information systems). By their nature, such problems easily measured, such as increases in late filing of tax can be addressed only over the medium term, but in returns and growth in tax arrears. developing a compliance strategy for the economic Government support for tax administration is crisis, tax agencies should not neglect their medium- critical. Like all government agencies, tax agencies term goals. tighter domestic fiscal constraints. These pres- has not been in the spotlight.11 Moreover, an sures must be resisted. A substantial increase in extensive theoretical literature explores the aid, at least in line with existing international possibility of low-income countries falling into commitments, is essential to allow developing prolonged periods of underdevelopment, com- countries, especially those in vulnerable debt monly known as poverty traps.12 Finally, cri- situations and with limited alternative sources ses can result in sharp declines in investment in of finance, to generate resources for higher education and health, declines that potentially growth, improve social protection for the most can have long-lasting effects.13 vulnerable, and enhance food security. Past growth The medium- and long-term This section thus puts the current crisis in economic effects of the crisis in historical perspective and examines the pros- low-income countries pects for growth in the medium to long run. Over the past few decades, a low-income coun- Although the uncertainties are enormous, and try's growth rate in one decade has generally the light that recent history can shed is limited, been a poor predictor of its growth rate in the some preliminary and conditional answers are next decade, while many policies and country possible. characteristics are more stable. An emerging and Transmission mechanisms from the global vibrant empirical literature points to growth crisis seem to vary considerably across coun- nonlinearities--accelerations (periods of high tries. While advanced economies have primar- growth) and growth decelerations (periods of ily suffered a financial and banking crisis, most abrupt and severe growth slowdowns)--as an developing countries primarily were hit by an important development fact that until recently external demand effect, although some, nota- GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 87 BOX 3.3 A fiscal rule for commodity exporters: The cases of Chile and Nigeria Several commodity exporters have in recent years zation Fund, creating a comfortable buffer to offset adopted medium-term frameworks for fi scal policy the sharp revenue declines in 2009. aimed at reducing the impact of commodity price fluc- Nigeria introduced an oil-price-based fiscal rule in tuations on the domestic economy. These frameworks 2004 as a framework for the annual budget process, allowed countries to build up sizable reserves during which was subsequently formalized in the 2007 Fis- the commodity price boom of 2007­08, helped to cal Responsibility Act. In the annual Medium-Term stabilize expenditures, and created additional space Fiscal Strategy presented to parliament, expenditures for countercyclical policies in 2009. Chile and Nige- are set on the basis of relatively prudent projections ria illustrate the benefits of such a fiscal rule. for oil prices and production. If actual oil revenues Since the beginning of the decade, fiscal poli- exceed the budgeted levels, the surpluses are trans- cies in Chile have been based on a structural fi scal ferred to accounts held by the federal, state, and surplus rule aimed at mitigating the effects of fluc- local governments at the central bank according to a tuations in prices for copper and molybdenum, the preset intergovernmental sharing formula. Balances country's main commodity exports. Each year, the accumulated in the accounts can be used as a source authorities make a calculation of structural revenue, of budget fi nancing at the various levels of govern- consistent with potential GDP and long-term projec- ment if the actual oil price falls below the reference tions of copper and molybdenum prices. The annual price for three consecutive months. spending budget is set on the basis of total structural The fiscal rule is supported by a limit on the fed- tax and nontax (mainly mining) revenue minus a eral government's fiscal deficit of 3 percent of GDP, structural surplus. Fiscal surpluses are used to feed enshrined in the Fiscal Responsibility Act. The fiscal two sovereign wealth funds established under the rule helped Nigeria stabilize expenditures and accu- 2006 Fiscal Responsibility Law: the Pension Reserve mulate sizable reserves during the oil price boom of Fund to cover the government's long-term pension 2007­08. Although the political backing for the new liabilities; and the Economic and Social Stabilization approach does not seem to be as strong as in Chile, Fund, established to smooth fi scal expenditure and and lower levels of government are not bound by the fi nance regular or extraordinary public debt amor- Fiscal Responsibility Act, the fi scal rule has served tization. The consistent implementation of the fiscal Nigeria well thus far. Notwithstanding extraordi- rule, which has received broad public support, and nary distributions from the central bank accounts the sovereign wealth funds have served Chile well in in response to political pressures during the oil price recent years. Rising copper prices since the middle boom, Nigeria accumulated suffi cient resources to of the decade have allowed Chile to accumulate sub- avoid a contraction of public spending in 2009, reduc- stantial reserves in the Economic and Social Stabili- ing the effects of the global economic downturn. a. Chile b. Nigeria 100 50 crude oil, copper, 40 price change 80 price change 30 60 growth rate, % 20 40 10 0 20 ­10 0 ­20 real public primary real public primary ­30 ­20 spending growth spending growth ­40 ­40 ­50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: World Economic Outlook. 88 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 MAP 3.2 Across the world, 884 million people lack access to safe water-- 84 percent of them in rural areas Access to water: Share of population with access to improved water source, % (2006) Green (D <50 50­69 70­89 90­99 100 Canada no data United States Bermuda (UK) The Bahamas Cayman Is. (UK) Cuba Turks and Caicos Islands (UK) Mexico Haiti C Belize Jamaica Guatemala Honduras El Salvador Nicaragua Costa Rica Panama R.B. de Guyana Venezuela Suriname Colombia French Guiana (Fr) Ecuador Kiribati Peru Brazil Samoa Cook Is. (NZ) French Polynesia (Fr) American Samoa (US) Bolivia Fiji Tonga Dominican Puerto British Virgin Paraguay Republic Rico (US) Islands (UK) Anguilla (UK) U.S. Virgin Antigua and Barbuda Islands (US) St. Kitts Guadeloupe (Fr) Chile Uruguay and Nevis Argentina This map was produced by the Netherlands Dominica Map Design Unit of The World Bank. Antilles (Neth) Montserrat (UK) Martinique (Fr) The boundaries, colors, denominations St. Lucia Aruba St. Vincent and and any other information shown on Barbados (Neth) The Grenadines this map do not imply, on the part of The World Bank Group, any judgment Grenada on the legal status of any territory, or Trinidad any endorsement or acceptance of and Tobago such boundaries. R.B. de Venezuela Source: World Economic Indicators. bly fuel exporters, were also hit by a terms-of- countries.14 The analysis consists of four ex- trade and, perhaps to a lesser extent, a capital ercises, each tackling the importance of exter- flows effect. From a methodological point of nal shocks from a slightly different angle. The view, this difference is quite important because first is a simple event study that illustrates the these types of external shocks are more famil- growth paths of past crises and compares these iar to low-income countries than the financial to the current crisis. The second and third ex- shock is to advanced countries, therefore per- ercises focus on the medium-run effects of mitting a more credible historical analysis of the crisis. Specifically, an impulse response the effects in low-income countries. analysis (a time-series analysis) is employed to The historical analysis that follows fo- estimate the effects over time, complemented cuses on external demand, terms of trade, and with five-year growth panel regressions. The capital flows as the three main transmission last exercise is concerned with the longer-run mechanisms of the crisis affecting low-income implications of the crisis using recently devel- GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 89 IBRD 37737 APRIL 2010 nland Den) Faeroe Norway Iceland Islands Finland (Den) Sweden The Netherlands Russian Federation Estonia Isle of Man (UK) Denmark Russian Latvia Fed. Lithuania United Ireland Kingdom Germany Poland Belarus Channel Islands (UK) Belgium Ukraine Luxembourg Moldova Kazakhstan Liechtenstein Mongolia France Italy Romania Switzerland Andorra Bulgaria Georgia Uzbekistan Kyrgyz Azer- Rep. D.P.R. Armenia baijan Portugal Spain Monaco Turkey Turkmenistan Tajikistan of Korea Greece Japan Cyprus Syrian Rep. of Gibraltar (UK) Arab Islamic Rep. Afghanistan China Tunisia Malta Lebanon Korea Rep. Iraq of Iran Morocco Israel Jordan Kuwait West Bank and Gaza Bahrain Pakistan Bhutan Nepal Algeria Libya Arab Rep. Qatar Former Spanish of Egypt Saudi Sahara Arabia United Arab Bangladesh Emirates India Myanmar Lao Mauritania Oman P.D.R. Cape Verde Mali N. Mariana Islands (US) Niger Rep. of Thailand Vietnam Senegal Chad Eritrea Yemen Guam (US) The Gambia Burkina Sudan Djibouti Cambodia Philippines Federated States of Micronesia Marshall Islands Guinea-Bissau Guinea Faso Benin Sri Sierra Leone Côte Ghana Nigeria Central Ethiopia Lanka Brunei Liberia D'Ivoire Cameroon African Rep. Somalia Palau Togo Malaysia Maldives Equatorial Guinea Uganda Kiribati Kenya São Tomé and Príncipe Gabon Congo Rwanda Singapore Nauru Dem. Rep. of Burundi Seychelles Papua Solomon Congo Indonesia New Guinea Islands Tanzania Comoros Tuvalu Timor-Leste Angola Malawi Zambia Mayotte Fiji (Fr) Vanuatu Zimbabwe Mauritius Namibia Madagascar Botswana Mozambique Réunion (Fr) New Poland Caledonia Australia (Fr) Swaziland Ukraine Germany Czech Rep. Slovak Rep. South Lesotho Africa Austria Hungary Slovenia Romania Croatia New Zealand Bosnia and San Herz. Serbia Bulgaria Marino Montenegro Kosovo FYR Macedonia Vatican Italy Albania City Greece oped methods to capture possible sharp and mediately after the crisis year, it took about very persistent drops in growth rates. three years for a turnaround to take place in low-income countries in previous global crises. The good news is that low-income countries Global shocks have tended to recover fully in the sense that In past global crises, growth declined sharply they have reached or surpassed their precrisis leading toward the crisis year, but low-income growth rate after about five years. countries experienced the worst of the crises The current crisis is distinguished by more about a year after the global low point was synchronization between low-income countries reached (figure 3.18). In addition, recovery and global cyclical growth movement. Also, seemed to be faster in the world economy IMF forecasts imply a more rapid V-shape re- than in low-income countries. More precisely, covery path out of the recession than in previ- while recovery in the world began almost im- ous crises. 90 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 FIGURE 3.18 After previous crises, low-income countries recovered on average moving around historical averages more slowly than the world economy (figure 3.19).15 8.0 year of shock Persistence of output loss over time 6.0 using time series or impulse response analysis growth rate, % 4.0 2.0 An impulse response function analysis, as in Cerra and Saxena (2008), examines whether 0.0 terms of trade and external demand have his- ­2.0 torically been associated with severe output losses and whether such output losses have ­4.0 ­5 ­4 ­3 ­2 ­1 0 1 2 3 4 5 been permanent in low-income countries.16 Fig- ure 3.20 presents impulse responses of output world (3 crises) world, 2009 world, 2009 projected losses, measured as the percentage change from low-income countries (3 crises) low-income countries, 2009 low-income countries, 2009 projected a linear growth trend to a terms-of-trade shock and an external demand shock, respectively.17 Source: IMF staff calculations. The solid orange line is the mean of output loss, Note: The figure plots the average per capita GDP growth in the world and in low-income countries and the dashed lines reflect one standard devia- five years before and five years after the global crises (centered at zero on the horizontal axis) of 1975, 1982, and 1991, and the current crisis. Also shown in dashed lines are IMF projections until 2013. tion from the mean. A key assumption is that countries will eventually return to the growth rate existing before the shock. This assumption FIGURE 3.19 Growth of terms of trade and external demand in is quite reasonable because most of the low- low-income countries in past and current crises income countries considered in these exercises tend to revert to their preexisting growth trend 6 year of shock in the five years following the shock. 4 The main message is that the impact on output is negative and highly persistent under growth rate, % 2 both types of shock, but especially under exter- 0 nal demand shocks. Output losses continue to rise without a sign of a reversal even 10 years ­2 after an external demand shock, mounting to ­4 a cumulative loss of over 6 percent of GDP. This result may stem from interactions of ex- ­6 ­5 ­4 ­3 ­2 ­1 0 1 2 3 4 5 ternal demand shocks with private and public average terms of trade external demand (3 crises) investment decisions or policy responses. The current terms of trade, 2009 external demand, 2009 output loss path eventually becomes flat as terms of trade, 2009 projected external demand, 2009 projected growth reaches its precrisis rate. But after a decade, lower growth and a substantial loss of Source: IMF staff calculations. output is likely to have detrimental effects on Note: The figure plots the terms of trade and external demand growth in low-income countries five years before and five years after the global crises (centered at zero on the horizontal axis) of 1975, tax revenues, income, and certainly welfare. 1982, and 1991, and the current crisis. Also shown in dashed lines are IMF projections until 2013. The impulse response analysis is replicated for Sub-Saharan Africa (figure 3.21). One no- table difference is that terms-of-trade shocks Unlike previous crises in which terms-of- seem to have had a larger and more persistent trade growth suffered a sharp downturn rela- effect than external demand shocks in the rest tive to external demand growth, the current of low-income countries. Many Sub-Saharan crisis is characterized by a sharp decline in countries are commodity exporters, particu- export demand, with terms-of-trade growth larly fuel exporters, and are thus more prone to GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 91 FIGURE 3.20 Output losses are highly persistent, especially under external demand shocks a. Terms of trade, low-income countries b. External demand, low-income countries 0 0 % deviation from baseline trend % deviation from baseline trend ­2 ­1 ­2 ­4 ­3 ­6 ­4 ­8 0 2 4 6 8 10 0 2 4 6 8 10 years after the shock years after the shock Source: IMF staff calculations. Note: Impulse response of output loss in low-income countries to terms-of-trade and external demand shocks. Dashed lines are 1 standard deviation from the mean output loss. FIGURE 3.21 In Sub-Saharan Africa terms-of-trade shocks have larger and more persistent effects a. Terms of trade, Sub-Saharan Africa b. External demand, Sub-Saharan Africa 0 2 % deviation from baseline trend % deviation from baseline trend ­2 0 ­4 ­2 ­6 ­4 ­8 ­6 0 2 4 6 8 10 0 2 4 6 8 10 years after the shock years after the shock Source: IMF staff calculations. Note: Impulse response of output loss in Sub-Saharan Africa countries to terms-of-trade and external demand shocks. Dashed lines are 1 standard deviation from the mean output loss. terms-of-trade shocks. This issue is explained sults are based on panel regressions that com- further below regarding growth downbreak. bine time-series and cross-country informa- tion,19 and the sample is restricted to nonfuel exporters. Fuel exporters are excluded from Regression analysis the baseline sample because these countries' A third exercise employs five-year panel growth experience has been heavily influenced growth regressions as an alternative approach by external demand for fuel. In the baseline to investigating the impact of terms-of-trade, specification, per capita growth is regressed on external demand, and foreign direct invest- lagged per capita GDP growth, and the three ment (FDI) shocks on medium-term per capita shock variables (growth in terms of trade and GDP growth.18 In particular, the estimation re- external demand and the lag of the difference 92 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 TABLE 3.4 Growth regression results Entire time period Before 1989 After 1989 (1) (2) (3) (4) (5) (6) (7) (8) (9) Low-income Other Low-income Other Low-income Other countries, countries, countries, countries, countries, countries, Variables All non-fuel non-fuel All non-fuel non-fuel All non-fuel non-fuel Lagged growth ­0.209*** ­0.167** ­0.237** ­0.577*** ­0.487*** ­0.662*** ­0.292*** ­0.287*** ­0.261*** (0.066) (0.077) (0.095) (0.092) (0.096) (0.110) (0.063) (0.080) (0.083) Growth in terms of trade 0.123*** 0.115* 0.111** 0.031 0.030 0.023 0.156** 0.131* 0.182*** (0.047) (0.064) (0.053) (0.028) (0.046) (0.028) (0.063) (0.077) (0.066) Growth in external demand 2.603*** 1.960*** 3.419*** 1.332** 0.617 2.599** 1.727*** 1.665* 1.769** (0.606) (0.736) (0.786) (0.609) (0.599) (1.135) (0.666) (0.938) (0.706) Lagged change in (FDI / GDP) 0.631*** 0.221 1.010*** 0.599 ­0.404 1.773*** 0.783*** 0.517* 0.953*** (0.187) (0.222) (0.270) (0.633) (0.732) (0.528) (0.243) (0.305) (0.319) Observations 529 281 248 181 92 89 348 189 159 Number of countries 88 48 40 86 47 39 88 48 40 Source: IMF staff calculations Robust standard errors in parentheses *** p < 0.01; ** p < 0.05; * p < 0.1. in FDI-to-GDP ratio) are all measured in five- ficient becomes positive and significant. That year averages.20 Columns 1­3 in table 3.4 may not be surprising given that FDI in low- present results for "All" nonadvanced nonfuel income countries has been plentiful only in the countries, nonfuel low-income countries, and past decade or so.21 The broad message of this nonfuel non-low-income countries. The com- exercise is that regression results seem to rein- parison between low-income countries and force the impulse response findings showing non-low-income countries is intended to pro- economically significant effects of the shocks vide some insights into the differential effects in the medium run. of these shocks to the two income groups. For low-income countries, terms-of-trade Growth downbreaks growth and external demand growth obtain positive and significant coefficient estimates, The analysis shows that external demand indicating a positive impact on medium-term shocks, such as those faced by low-income growth (column 2 of table 3.4). While the countries in 2009, cause growth to slow down coefficient estimate on FDI for low-income not just immediately but for several years. An countries using the entire time period in the even greater concern, though, is the risk that sample is insignificant, it is highly significant the global crisis may cause an essentially per- for "All" and non-low-income countries manent decline in growth in many low-income along with the coefficient estimates for terms countries--that is, a growth "downbreak." of trade and external demand (columns 1 and Many low-income countries have enjoyed 3, respectively). Columns (4­9) present results relatively strong growth over the past 10­15 from splitting the sample in the periods be- years, when a favorable external environ- fore and after 1989 (the median year in the ment prevailed. The concern is that, with the sample). Coincidentally, "after 1989" is the global shock, this could change. Underlying period when growth increased dramatically in this concern is the observation that, whereas most low-income countries. Note that most of output paths in the advanced countries tend to the effect of terms-of-trade and external de- be reasonably steady, in developing countries mand growth for low-income countries has they are often characterized by "mountains, been driven by variation in the period after cliffs, and plains."22 This exercise employs the 1989 (columns 5 and 8). Even more notable methodology by Berg, Ostry, and Zettelmeyer is that in the post-1989 sample the FDI coef- (2008) to obtain growth downbreaks (sus- GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 93 FIGURE 3.22 In low-income countries, growth downbreaks are more associated with terms-of-trade shocks, giving hope for smoother recovery a. Growth downbreaks vs. b. Growth downbreaks vs. persistent terms-of-trade shock persistent external demand shock 10 10 # GDP growth downbreaks # GDP growth downbreaks 5 5 0 0 ­5 ­4 ­3 ­2 ­1 0 1 2 3 4 5 ­5 ­4 ­3 ­2 ­1 0 1 2 3 4 5 year of shock year of shock Source: Berg and others forthcoming. Note: The left panel plots the number of GDP growth downbreaks in a large sample of low-income countries during the periods leading up to and following a large persistent terms-of-trade shock (year 0 on the horizontal axis). A large persistent terms-of-trade shock is defined as the worst 10 percent of the distri- bution of all terms-of-trade shocks, measured as the difference of the average three-year terms-of-trade growth before and after a year of shock. The right panel is the same, except that the shock is to external demand, measured as partner-country real growth weighted by export shares. tained declines in the rate of growth) in low- Notes income countries and to explore whether 1. In this chapter, the group of developing coun- terms-of-trade and external demand shocks tries includes mainly low-income countries and are correlated with such "cliffs." some middle-income countries that are not One pattern emerging from figure 3.22 is considered emerging economies. High-income that persistent negative terms-of-trade shocks oil-exporting countries are excluded from this have often coincided with growth downbreaks category. in the past. However, persistent negative part- 2. IMF 2009g, box 1.2; IMF 2009d. ner-country demand shocks have shown no 3. The adequacy of reserves depends on many association with growth downbreaks. This factors, including the volatility of exports and phenomenon may be related to the fact that imports, fluctuations in the terms of trade, the terms-of-trade changes are usually strongest level and maturity structure of external debt, and the vulnerability to sudden shifts in inter- in commodity sectors, and that these sectors national capital movements. While reserve ad- often find it more difficult to adjust to the new equacy should be assessed country by country, environment than do, for instance, industrial a level equivalent to three months of imports sectors. The supply factors that produce the is often used as a rule of thumb, especially for commodities in question cannot easily switch low-income countries. For a discussion on op- to other uses, such as satisfying domestic de- timal reserve determination, with a focus on mand or finding other export markets. The re- low-income countries, see Drummond and sulting decline in foreign income could squeeze Dhasmana (2008). imports and activity persistently, thus impeding 4. The evolution of monetary policy stance is ap- productive activities throughout the economy. proximated by the Monetary Conditions In- dex (MCI), a summary indicator of the impact This remarkable observation suggests that of policy rates and exchange rates on domestic if indeed the current crisis has affected primar- demand. The MCI combines nominal short- ily low-income countries through external de- term interest rates and the nominal effective mand and not through terms of trade, there exchange rate (with a one-third weight for the may be more reason for hope for a smoother latter) in a single index. The change in the in- recovery.23 dicator is calculated up to 2009Q3, except for 94 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES GLOBAL MONITORING REPORT 2010 Vietnam and Rwanda, which have data only 16. Daniel Leigh very helpfully provided his Stata until 2009Q1. The MCI is a useful indicator code and invaluable input. For methodological of direction in the monetary policy stance: it is details, see Cerra and Saxena (2008) and IMF simple to calculate and based on data readily 2009g, ch. 4. available. However, it also suffers from vari- 17. The shock dummy variable for both terms of ous caveats (including, for example, the use of trade and external demand was constructed as common weights across diverse countries), so follows: A restricted sample was constructed in detailed country results need to be interpreted which values below and above the 1st and 99th with some caution. percentiles were excluded to mitigate the effects 5. In many countries that reduced rates in 2009, from extreme values. The crisis periods belong inflation came down faster than nominal rates, to the left tail of the moving-average growth propping up real interest rates. Temporary (based in two periods) distribution, where the factors, such as commodity price movements, left tail is based on one standard deviation of may have contributed to the fall in inflation, the restricted sample defined above. Results are however, mitigating the impact of higher real qualitatively similar to two alternative shock rates on spending and investment decisions. definitions considered. 6. See IMF 2009e and Baldacci and Kumar, 18. A similar estimation methodology was fol- forthcoming. An increase in fiscal deficits of 1 lowed in Drummond and Ramirez (2009). percent of GDP is found to increase 10-year 19. Using a statistical estimation method called nominal bond yields by about 20 basis points generalized method of moments (GMM). in the medium term, and an increase in the 20. An alternative growth regression specification debt-to-GDP ratio of 1 percent increases rates would be the Barro-Solow type regression. by approximately 5 basis points. Although the This alternative was not considered, because econometric analysis is based on a sample of it suffers from the well-documented endogene- advanced and emerging economies, it is plau- ity and omitted variable problems, which the sible that low-income countries show similar specification used here is less subject to. relations between deficits, debt, and interest 21. The robustness of these results to alterna- rates. tive specifications and subsamples has been 7. For a detailed discussion of exit strategies see checked. IMF 2010a. 22. Pritchett 2000. 8. IMF 2010b. 23. The definitions of "persistent" and "large" can 9. IMF 2009a. be found in the note to figure 3.22. It turns out 10. This represents approximately 0.5­1.2 per- that large negative external demand shocks cent of 2008 world GDP. See Adler and others such as those experienced by many countries (2009). in 2009 are not unprecedented for many low- 11. Hausmann, Pritchett, and Rodrik 2005; and income countries. In the sample used for figure Berg, Ostry, and Zettelmeyer 2008. 3.22, there were 68 instances in which coun- 12. See the literature review in Azariadis and Sta- tries faced external demand shocks larger than churski (2007) and more specifically the debt trap they faced in 2009 (assuming IMF projections model in Kehoe and Levine (1993). for the out-years). 13. Benhabib and Spiegel 1994; Krueger and Lin- dahl 2001. 14. Data are from IMF. External demand is partner- country real GDP growth, 2000 = 100, weighted References by trade exports to all partner countries (APR Adler, M., C. Brunel, J. C. Hufbauer, and J. J. 2009 Global Economic Environment). Terms Schott. 2009. "What's on the Table? The Doha of trade are for goods (World Economic Out- Round as of August 2009." Working Paper look [WEO] latest update). Capital flows are 09-6. Peterson Institute for International Eco- proxied by direct investment in reporting econ- nomics. Washington, DC. omy in billions of U.S. dollars. Azariadis, C., and J. Stachurski. 2007. "Poverty 15. Data on foreign direct investment were not Traps." In Handbook of Economic Growth, available to produce a similar plot. This ob- Vol. 1, Ch. 5, edited by P. Aghion and S. N. servation is also shown in more formal growth Durlauf. Amsterdam: Elsevier Science. regression analysis in Berg and others (work Baldacci, E., and M. Kumar. Forthcoming. "Defi- in progress). cits, Debt, and Interest Rates." IMF working paper. Washington, DC. GLOBAL MONITORING REPORT 2010 GROWTH OUTLOOK AND MACROECONOMIC CHALLENGES 95 Benhabib, J., and M. Spiegel. 1994. "The Role IMF (International Monetary Fund). 2009a. "Fis- of Human Capital in Economic Development: cal Rules: Anchoring Expectations for Sustain- Evidence from Cross-Country Data." Journal of able Public Finances." Washington, DC (www. Monetary Economics 34: 143­73. imf.org/external/np/pp/eng/2009/121609.pdf). Berg, A., J. D. Ostry, and J. Zettelmeyer. 2008. ------. 2009b. "Global Financial Stability Re- "What Makes Growth Sustained." Working port." Washington, DC (October). Paper 08/59. International Monetary Fund, ------. 2009c. "Regional Economic Outlook- Sub-Sahara Africa." Washington, DC (Fall). Washington, DC. ------. 2009d. "Review of Recent Crisis Pro- Berg, A., C. A. M Pattillo, H. Weisfeld, C. Papa- grams." Washington, DC (September 14). georgiou, N. Spatafora, and S. P. Tokarick. ------. 2009e. "The State of Public Finances Cross Forthcoming. "The Short-Run Effects of the Country." IMF Staff Position Note, SPN/09/25. Crisis in Low-Income Countries." International Washington, DC (November). Monetary Fund, Washington, DC. ------. 2009f. World Economic Outlook. Wash- Cerra, V., and S. C. Saxena. 2008. "Growth Dy- ington, DC (Spring). namics: The Myth of Economic Recovery." ------. 2009g. World Economic Outlook. Wash- American Economic Review 98: 439­57. ington, DC (October). Drummond P., and A. Dhasmana. 2008. "Foreign ------. 2010a. "Exiting from Crisis Intervention Reserve Adequacy in Sub-Saharan Africa." Policies and Fiscal Consolidation in the Post- Working Paper WP/08/150. International Mon- Crisis World." Washington, DC (February). etary Fund, Washington, DC. ------. 2010b "Strategies for Fiscal Consolida- Drummond P., and G. Ramirez. 2009. "Spillovers tion in the Post-Crisis World." Washington, DC from the Rest of the World into Sub-Saharan (February). Kehoe, T., and D. Levine. 1993. "Debt-Constrained African Countries." Working Paper WP/09/155. Asset Markets." Review of Economic Studies International Monetary Fund, Washington, 60: 865­88. DC. Krueger, A. B., and M. Lindahl. 2001. "Education Erickson and others 2004<> Economic Literature 39 (4): 1101­36. Hausmann, R., L. Prichett, and D. Rodrik. 2005. Pritchett, L. 2000. "Understanding Patterns of "Growth Accelerations." Journal of Economic Economic Growth: Searching for Hills among Growth 10: 303­29. Plateaus, Mountains, and Plains." World Bank Economic Review 14: 221­25. 4 Outlook for the Millennium Development Goals H ow will the global economic crisis numbers-- additional children dying or alter precrisis trends in the Millen- uneducated, additional people left without nium Development Goals (MDGs)? clean water--could be large because of the With only five years left until the target date size of the population underlying each rate. of 2015, it is obvious that several of the Countries can achieve better development MDGs will not be attained, globally or by a outcomes through improved policies, most majority of countries. Many of the goals are notably shifts in expenditures, increases in too high for low-income countries, given their domestic revenue, and better service deliv- low starting points. Many countries, includ- ery. Stronger policies are unlikely to com- ing low-income ones, have seen substantial pensate fully for the deterioration in human gains in recent years, however, and entered development indicators that result from the current crisis in a stronger position than slower growth, however. In the current con- in past crises (chapters 1 and 2). Important text, better development outcomes will thus questions are whether the gains will be pre- depend on the speed at which the global eco- served, and what happens if the fragile recov- nomic recovery supports increases in devel- ery slips into a prolonged stagnation. oping countries' export revenues and exter- The crisis is likely to have a lasting impact nal finance. on human development indicators that will This chapter looks at these issues in two not overcome even a robust economic recov- ways. It first presents alternative scenarios ery. Although growth in emerging and devel- for progress on some key human develop- oping countries is currently accelerating, ment­related MDGs based solely on dif- should growth slow or deteriorate, progress ferent forecasts of GDP growth, with the toward the MDGs will suffer even more. A results aggregated by regions. This relatively decline in growth would have a signifi cant limited approach provides a general sense impact on poverty and undernourishment. of the impact of the crisis and the potential The impact of a growth slowdown on some envelope for the MDGs looking ahead over of the other MDG indicators analyzed is the next five to ten years. The second part of more muted, although the cost in absolute the chapter then takes into account a broader GLOBAL MONITORING REPORT 2010 97 98 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 set of determinants of progress in the MDGs, economic growth and delivery of services including fiscal policy (public expenditures to the poor--the very two factors likely to and their composition plus revenue efforts), be most affected by global economic crisis. export revenues, terms of trade, aid flows, That is why the lessons of history regarding remittances, and foreign borrowing. This the effects of growth decelerations on various richer analysis allows a much more robust human development indicators are examined view of how the external economic environ- in chapter 2. Although not the only driver, ment and developing-country policies will growth will likewise be a key factor in pro- affect progress toward the MDGs. The scope jecting the postcrisis trends for the MDGs. of the analysis, however, and the variables The other key factor, effective service deliv- involved, make it extremely difficult to pro- ery, is difficult to assess even in the best of vide comprehensive forecasts of human devel- circumstances.2 opment indicators for developing countries. The current crisis has resulted in a deterio- Instead, this section illuminates the channels ration in human development indicators that that influence MDG outcomes through the will have important future effects even with a lens of two types of low-income developing- robust economic recovery. If growth were to country structure based on natural endow- stagnate or slow, the impact on human wel- ments--those that are resource poor and fare in developing countries would be severe. those that are resource rich.1 Projecting the aggregate outlook for the MDGs is fraught with difficulties (box 4.1).3 Nevertheless, it is essential to assess where Forward analysis of the MDGs things stand in the aftermath of the crisis, The original analytical framework under- as developing countries enter a new and less pinning the assessment of policies as devel- favorable external environment. oped by the World Bank and the Interna- The alternative scenarios of progress tional Monetary Fund (IMF) in the first toward the MDGs presented here are based Global Monitoring Report in 2004 remains on a simplified reduced-form analysis link- very valid today for organizing this policy ing economic growth--the key variable of assessment (figure 4.1). The two key pillars the crisis and the recovery scenarios--to the for achieving the development outcomes are MDG indicators.4 The simulations are based FIGURE 4.1 Framework linking policies and actions with development outcomes POLICIES AND ACTIONS KEY INTERMEDIATE OUTCOMES Agenda anchored in IN DEVELOPING COUNTRIES developing countries · Create a good enabling climate for economic activity · Empower and invest in poor people stronger and sustainable economic growth developed countries Achieving the · Enhance support to MDGs developing country reform efforts and global public goods improved delivery of services to poor people development agencies · Better align support to delivery of development results Source: World Bank 2004a. GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 99 BOX 4.1 Uncertainty and risk in projecting attainment of the MDGs There are many uncertainties and risks in projecting vate expenditures. Hence, fiscal adjustment and thus development outcomes. One is the strength and tim- the implications of slower growth for the MDGs will ing of the economic recovery. Another is the com- vary from country to country depending on circum- plexity of the relationships between the MDGs and stances and conditions entering the crisis. their determinants, which are still poorly understood. Several studies point to other problems in account- Among the MDGs the impact of economic perfor- ing for all of the influences on human development mance on poverty is better established, although the indicators. An increase in public expenditures does elasticity of poverty to growth can vary with country not necessarily improve education and health out- circumstances and initial conditions. Furthermore, comes; nor does economic growth alone. Links human development outcomes are influenced by between public expenditures and social sector out- a wide range of factors, including the evolution of comes are weak. Supply-side factors associated household incomes and public resources, as well as with effective service delivery are preconditions for the consequences of supply and demand for policies, improving basic service provision--school facilities, institutional actions, and microlevel services. Given books, health clinics, vaccination programs, qualified the complexity and differing assumptions about the teachers and health staff, and the like. Client demand recovery, assessments of human development out- for services and various other factors at the local comes can be wide ranging. level--household incomes, distance and opportunity Another important uncertainty in forecasting costs, voice and participation of clients, educational progress toward the MDGs is fiscal adjustment-- attainment of mothers, corruption, and cultural and public expenditures and their composition are key religious norms--also matter and may vary by com- determinants of human development indicators in munity. The empirical regularity of these potential low-income countries. A deterioration in the mac- determinants can become difficult to establish at the roeconomic environment may reduce government country, regional, and global levels. income, thus endangering public expenditures essen- tial for progress toward the MDGs. However, aid, external borrowing, and international reserves may Source: Dinh, Adugna, and Myers 2002; Adams and Bevan provide the fiscal space needed to protect social 2000; Filmer, Hammer, and Pritchett 2000, 2002; Devarajan spending, while remittances may help to support pri- and Reinikka 2004; World Bank 2004. on GDP growth because it is a major deter- surveys in more than 100 countries and minant of progress toward the MDGs, and it assumes that the underlying income or expen- is the only determinant that is projected for a diture distribution is relatively stable during large group of countries and that is anchored changes in economic growth. 5 The poverty by the short-, medium-, and long-term eco- analysis brings 31 new household surveys nomic outlook in the International Monetary to the 2010 Global Monitoring Report and Fund's (IMF) World Economic Outlook new projections of per capita income growth and the long-term growth projections that in the aftermath of the crisis. The analysis underpin the World Bank's Global Economic also considers four other MDGs--primary Prospects. Because of the many uncertainties education completion, infant mortality, described in box 4.1, these projections relat- gender equality in education, and access to ing progress in the MDGs to alternative sce- clean water--for which aggregate quanti- narios for GDP growth are necessarily subject tative analysis is currently feasible (future to large margins of error and should be taken reports will expand the analysis to other as illustrative. MDGs). The relationship between GDP The estimated relationship between growth and each indicator is estimated for poverty and growth is based on household each country. 100 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 MAP 4.1 In 2007, 72 million children worldwide were denied access to education Primary completion rate: % of relevant age group (2004-09) Green (De <50 50­69 70­84 85­94 95 Canada no data United States Bermuda (UK) The Bahamas Cayman Is. (UK) Cuba Turks and Caicos Islands (UK) Mexico Haiti C Belize Jamaica Guatemala Honduras El Salvador Nicaragua Costa Rica Panama R.B. de Guyana Venezuela Suriname Colombia French Guiana (Fr) Ecuador Kiribati Peru Brazil Samoa Cook Is. (NZ) French Polynesia (Fr) American Samoa (US) Bolivia Fiji Tonga Dominican Puerto British Virgin Paraguay Republic Rico (US) Islands (UK) Anguilla (UK) U.S. Virgin Antigua and Barbuda Islands (US) St. Kitts Guadeloupe (Fr) Chile Uruguay and Nevis Argentina This map was produced by the Netherlands Dominica Map Design Unit of The World Bank. Antilles (Neth) Montserrat (UK) Martinique (Fr) The boundaries, colors, denominations St. Lucia Aruba St. Vincent and and any other information shown on Barbados (Neth) The Grenadines this map do not imply, on the part of The World Bank Group, any judgment Grenada on the legal status of any territory, or Trinidad any endorsement or acceptance of and Tobago such boundaries. R.B. de Venezuela Source: World Development Indicators. The results show that growth generally Three global scenarios was significantly related to progress in the for progress on human human development indicators. However, development­related MDGs confi rming all the caveats mentioned above, the estimations using growth alone accounted Three global scenarios for GDP growth for only 30­40 percent of past variations of address the risks of the current global eco- the MDG indicators across countries and nomic crisis: a postcrisis trend; a high- time. These coefficients were then used to growth or precrisis trend; and a low-growth forecast each MDG indicator for each coun- scenario. try, based on alternative scenarios for GDP The postcrisis trend assumes a relatively growth. Although it is certainly possible to rapid economic recovery in 2010, with include other determinants of the MDG indi- strong growth continuing into the future, as cators in the estimation, it is not practical to described in chapter 2.6 This is essentially the forecast these other indicators on a country- base case forecast for growth in developing by-country basis (box 4.2). countries after the crisis. GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 101 IBRD 37741 APRIL 2010 nland en) Faeroe Norway Iceland Islands Finland (Den) Sweden The Netherlands Russian Federation Estonia Isle of Man (UK) Denmark Russian Latvia Fed. Lithuania United Ireland Kingdom Germany Poland Belarus Channel Islands (UK) Belgium Ukraine Luxembourg Moldova Kazakhstan Liechtenstein Mongolia France Italy Romania Switzerland Andorra Bulgaria Georgia Uzbekistan Kyrgyz Azer- Rep. D.P.R. Armenia baijan Portugal Spain Monaco Turkey Turkmenistan Tajikistan of Korea Greece Japan Cyprus Syrian Rep. of Gibraltar (UK) Arab Islamic Rep. Afghanistan China Tunisia Malta Lebanon Korea Rep. Iraq of Iran Morocco Israel Jordan Kuwait West Bank and Gaza Bahrain Pakistan Bhutan Nepal Algeria Libya Arab Rep. Qatar Former Spanish of Egypt Saudi Sahara Arabia United Arab Bangladesh Emirates India Myanmar Lao Mauritania Oman P.D.R. Cape Verde Mali N. Mariana Islands (US) Niger Rep. of Thailand Vietnam Senegal Chad Eritrea Yemen Guam (US) The Gambia Burkina Sudan Djibouti Cambodia Philippines Federated States of Micronesia Marshall Islands Guinea-Bissau Guinea Faso Benin Sri Sierra Leone Côte Ghana Nigeria Central Ethiopia Lanka Brunei Liberia D'Ivoire Cameroon African Rep. Somalia Palau Togo Malaysia Maldives Equatorial Guinea Uganda Kiribati Kenya São Tomé and Príncipe Gabon Congo Rwanda Singapore Nauru Dem. Rep. of Burundi Seychelles Papua Solomon Congo Indonesia New Guinea Islands Tanzania Comoros Tuvalu Timor-Leste Angola Malawi Zambia Mayotte Fiji (Fr) Vanuatu Zimbabwe Mauritius Namibia Madagascar Botswana Mozambique Réunion (Fr) New Poland Caledonia Australia (Fr) Swaziland Ukraine Germany Czech Rep. Slovak Rep. South Lesotho Africa Austria Hungary Slovenia Romania Croatia New Zealand Bosnia and San Herz. Serbia Bulgaria Marino Montenegro Kosovo FYR Macedonia Vatican Italy Albania City Greece The precrisis trend gives the forecast past responses to severe external shocks in path for the MDGs if developing countries developing countries. had continued their impressive growth per- formance during 2000­07, the period just The impact on the very poor before the global economic crisis. The impact of the crisis on the MDGs can thus be mea- Recent economic shocks have taken a toll on sured by comparing the postcrisis trend with the poor. The crisis left an estimated 50 mil- this one. lion more people in extreme poverty in 2009, The low-growth scenario assumes that and some 64 million more will fall into that the recovery projected for the postcrisis trend category by the end of 2010 relative to a pre- will not take place in the medium run. The crisis trend.7 New estimates suggest that the scenario assumes little or no growth for large global spike in food prices in 2008 may about five years, when it begins to slowly have led the incidence of undernourishment recover. This scenario follows the pattern of to rise by around 63 million people, while 102 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 BOX 4.2 Estimating the impact of growth on human development indicators The relationship between GDP growth and the jumps from 30­40 percent using growth as the sole MDGs was estimated taking into account a policy explanatory variable to 80 percent when the index of index reflecting the country's level of policy and policy and initial conditions are taken into account. institutions plus a set of initial conditions (for exam- These estimations help to refi ne the understanding ple, adult female literacy rate, urbanization, ethnic of the relationship between growth and the human fractionalization, level of income, and location by development indicators. However, it did not prove geographical region).a Several policy indexes had a possible to use the policy index or the initial condi- signifi cant relationship with the MDG indicators. tions in the alternative scenarios for future progress Among these, the World Bank's Country Policy and in the MDG indicators, given the difficulties involved Institutional Assessment (CPIA) rating was selected in forecasting these variables in many countries. because it is a broader measure than one based solely on governance indexes. It covers economic manage- a. The use of the policy index is similar to the empirical works ment, structural policies, policies for social inclu- of Wagstaff and Claeson (2004), Rajkumar and Swaroop sion and equity, and public sector management and (2002), and Filmer and Pritchett (1999). The CPIA is avail- institutions. The explanatory power of the equations able in the World Development Indicators. the crisis itself may have led to an additional reductions in the poverty rate, to 15 percent 41.3 million undernourished people, or 4.4 in 2015, well below the MDG target of 20.4 percent more undernourished people in 2009 percent (table 4.1). Nevertheless, the crisis has than would have been the case without the imposed a lasting cost on poverty reduction. economic crisis.8 Had the crisis not interrupted the rapid eco- A rapid economic recovery (the postcrisis nomic progress made by developing countries trend) would improve the situation for many through 2007 (the precrisis trend), the pov- of the extremely poor and lead to substantial erty rate at $1.25 a day would have fallen to TABLE 4.1 Poverty in developing countries, alternative scenarios, 1990 ­2020 Region and scenario 1990 2005 2015 2020 Global level Percentage of the population living on less than $1.25 a day Postcrisis 41.7 25.2 15.0 12.8 Precrisis 41.7 25.2 14.1 11.7 Low-growth 41.7 25.2 18.5 16.3 Number of people living on less than $1.25 a day (millions) Postcrisis 1,817 1,371 918 826 Precrisis 1,817 1,371 865 755 Low-growth 1,817 1,371 1132 1053 Sub-Saharan Africa Percentage of the population living on less than $1.25 a day Postcrisis 57.6 50.9 38.0 32.8 Precrisis 57.6 50.9 35.9 29.9 Low-growth 57.6 50.9 43.8 39.9 Number of people living on less than $1.25 a day (millions) Postcrisis 296 387 366 352 Precrisis 296 387 346 321 Low-growth 296 387 421 428 Source: World Bank staff calculations using the PovcalNet database. GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 103 about 14 percent by 2015, implying that an are projected to miss the poverty reduction additional 53 million people would have been MDG at poverty lines of both $1.25 and $2 lifted out of extreme poverty. Things could a day. However, the poverty rates in these be worse than the postcrisis trend, however. countries are very low to start with (about 4 If the economic outlook deteriorates to the percent at $1.25 a day and about 9 percent low-growth scenario, the poverty rate could at $2 a day in 2005), so a higher poverty line fall only to 18.5 percent, with an additional of $4 to $5 a day is more meaningful for this 214 million people living in absolute poverty group of countries. by 2015 (relative to the postcrisis trend). Overall, the projection for the $2 a day On current or postcrisis growth trends, poverty threshold is less promising. In the poverty in Sub-Saharan Africa is projected postcrisis trend, 2 billion people, or one-third to drop to 38 percent by 2015--more than of the population of developing countries-- 9 percentage points short of its target. Before more than half of the 1990s level--remain in the crisis the region had been on a path to poverty at $2 a day. reach a poverty rate of 35.9 percent, which would have lifted another 20 million people Impact on selected human development out of poverty by 2015. If growth stagnates indicators into the low-growth scenario, the trend gap could more than double, implying an addi- The crisis will have serious and lasting costs tional 55 million people remaining in extreme and gaps for other human development poverty by 2015. indicators as well (figure 4.2 and table 4.2). The long-term nature of the cumulative According to the projections for 2015, as a effects becomes clearer when global projec- result of the crisis: tions are extended 10 years forward. The postcrisis trend suggests that by 2020, 826 · The number of infants dying would increase million people (12.8 percent) in developing by 55,000. Without the crisis, 260,000 countries will be living on less than $1.25 a additional children under the age of five day, implying that 71 million more people could have been prevented from dying in will be living in absolute poverty in 2020 as 2015. The cumulative total from 2009 to a result of the crisis. The low-growth sce- 2015 could reach 265,000 and 1.2 million, nario would result in a rise of 227 million respectively. The consequences for infant living in absolute poverty compared with the mortality in Africa are grave, with some postcrisis trend. The corresponding increases 30,000­50,000 additional infant deaths in poverty for Sub-Saharan Africa in 2020 in 2009, virtually all of them girls.9 The are 31 million more people in poverty for tragedy is not just these added deaths-- the postcrisis trend and 76 million more for more than 3 million infants die in Africa the low-growth scenario. The five additional every year, a number that could be reduced years would leave Sub-Saharan Africa still through better policies and interventions. short of halving poverty, the MDG target for · Some 350,000 more students will fail to 2015. complete primary school. Poverty rates vary considerably among the · Some 100 million more people will lose other regions (annex tables 4A.1 and 4A.2). access to safe drinking water. Even in the low-growth scenario, the East Asia and Pacific region more than meets its The impact on gender equality in educa- poverty target, in large part because of Chi- tion and on access to safe water is muted na's success in reducing poverty. South Asia, in these scenarios (although even small on the strength of India's achievement, meets changes in these indicators can translate into the poverty target in the postcrisis trend but large numbers of people affected) because not in the low-growth scenario. Middle- these indicators are influenced by forces income countries in Europe and Central Asia that change only slowly. For example, the 104 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 FIGURE 4.2 The long-run effect of slower growth on selected MDGs is worrisome a. MDG 2: Primary completion rate a. MDG 2: Primary completion rate by 2015 96 100 100 94 96 92 percent percent 90 92 91.8 91.5 90.4 88 88 86 84 86 2007 2009 2011 2013 2015 2017 2019 target precrisis postcrisis low-growth low-growth postcrisis precrisis b. MDG 3: Gender parity in primary b. MDG 3: Gender parity in primary and secondary education and secondary education by 2015 98.0 100 100 99 97.0 98 percent percent 97 96.5 96.0 96 96 95.6 95.0 95 94 94.0 93 2007 2009 2011 2013 2015 2017 2019 target precrisis postcrisis low-growth low-growth postcrisis precrisis c. MDG 4: Child mortality under five c. MDG 4: Child mortality under five by 2015 75 80 68.1 68.6 69.5 73 deaths per 1,000 deaths per 1,000 60 71 40 33.7 69 67 20 65 0 2007 2009 2011 2013 2015 2017 2019 target precrisis postcrisis low-growth low-growth postcrisis precrisis d. MDG 7.c: Access to safe drinking water d. MDG 7.c: Access to safe drinking water by 2015 17 16 14 15 12 11 13 9.6 10.1 percent percent 11 8 9 4 7 5 0 2007 2009 2011 2013 2015 2017 2019 target precrisis postcrisis low-growth low-growth postcrisis precrisis Source: World Bank staff calculations. GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 105 TABLE 4.2 Trends for other MDG human development indicators by region and alternative economic scenarios 2015 MDG and region Target 1991 2007 Postcrisis Precrisis Low-growth MDG 2: Primary completion rate (%) East Asia and Pacific 100 101 98 100 100 99.3 Europe and Central Asia 100 93 98 99.9 100 99.9 Latin America and the Caribbean 100 84 100 97.9 100 97.7 Middle East and North Africa 100 78 90 94.9 95.6 93.6 South Asia 100 62 80 82.4 91.7 81.9 Sub-Saharan Africa 100 51 60 67.3 67.6 66.7 All developing countries 100 78 85 91.5 91.8 90.4 MDG 3: Ratio of girls to boys in primary and secondary education (%) Target 1991 2007 East Asia and Pacific 100 89 99 100 100 100 Europe and Central Asia 100 100 102 99.4 100 97.8 Latin America and the Caribbean 100 98 103 100 100 100 Middle East and North Africa 100 78 96 95.6 98.2 94.7 South Asia 100 70 89 92.7 94.4 92.1 Sub-Saharan Africa 100 79 86 89.7 89.9 89.1 All developing countries 100 83 95 96.0 96.5 95.6 MDG 4: Child mortality under five (per 1,000) Target 1990 2007 East Asia and Pacific 19 56 27 24.6 18.6 24.9 Europe and Central Asia 17 50 23 18.8 15.4 21.7 Latin America and the Caribbean 18 55 26 23.7 19.7 25.4 Middle East and North Africa 26 78 38 36.7 29.2 37.3 South Asia 42 125 78 76.0 62.7 76.6 Sub-Saharan Africa 61 183 146 139.5 138.7 141.0 All developing countries 34 101 74 68.6 68.1 69.5 MDG 7.c: Access to improved water source (% population w/access) Target 1990 2006 East Asia and Pacific 16 32 13 3.3 0.6 4.1 Europe and Central Asia 5 10 5 0 0 1.8 Latin America and the Caribbean 8 16 9 5.4 4.5 7.1 Middle East and North Africa 6 11 12 8.3 7.4 10.0 South Asia 13 27 13 9.3 5.1 10.2 Sub-Saharan Africa 26 51 42 39.1 38.8 39.8 All developing countries 12 24 14 10.1 9.6 11 Source: World Bank staff estimates. participation by girls in school reflects in In general, the impact of the low-growth part the educational level of the mother, and scenario on development outcomes will be access to safe water is affected by the degree cumulative and long term (figure 4.3). of urbanization. The impact of slower growth on the MDGs increases, however, as the time · If the baseline scenario (the postcrisis trend) horizon is extended further into the future holds up, human development indicators (for example, fewer girls being educated now will continue to improve albeit less rapidly means that eventually women of childbearing owing to the extended impact of the crisis. age will have less education). By 2015 the differences between the gains 106 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 FIGURE 4.3 The long-run effect of slower growth is especially worrisome in Sub-Saharan Africa a. MDG 2: Primary completion rate, Sub-Saharan Africa a. MDG 2: Primary completion rate by 2015, 70 Sub-Saharan Africa 100 100 69 90 68 80 percent percent 67 67.6 70 67.3 66.7 66 60 65 50 64 40 63 target precrisis postcrisis low-growth 2008 2010 2012 2014 2016 2018 2020 low-growth postcrisis precrisis b. MDG 3: Gender parity in primary and secondary b. MDG 3: Gender parity in primary and secondary education, Sub-Saharan Africa education by 2015, Sub-Saharan Africa 91.5 100 100 91 90.5 94 percent percent 90 89.9 89.7 89.1 89.5 88 89 88.5 88 82 target precrisis postcrisis low-growth 87.5 2008 2010 2012 2014 2016 2018 2020 low-growth postcrisis precrisis c. MDG 4: Child mortality under five, Sub-Saharan Africa c. MDG 4: Child mortality under five by 2015, Sub-Saharan Africa 147 160 138.7 139.5 141 145 deaths per 1,000 120 deaths per 1,000 143 80 141 61.1 139 40 137 0 target precrisis postcrisis low-growth 135 2008 2010 2012 2014 2016 2018 2020 low-growth postcrisis precrisis d. MDG 7.c: Access to safe drinking water, d. MDG 7.c: Access to safe drinking water by 2015, Sub-Saharan Africa Sub-Saharan Africa 41.5 45 41 38.8 39.1 39.8 40.5 30 25.7 percent 40 percent 39.5 39 15 38.5 38 0 37.5 target precrisis postcrisis low-growth 37 2008 2010 2012 2014 2016 2018 2020 low-growth postcrisis precrisis Source: World Bank staff estimates. Note: The precrisis period is 2000­07. GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 107 projected in the postcrisis trend and those each of the two representative economies are for the precrisis trend will become discern- given in box 4.3. ible, especially for human development These simulations use the World Bank's outcomes such as primary school comple- Maquette for MDG Simulations (MAMS), tion and infant mortality. a model that analyzes the implications of · Like the compounding effects of interest strategic choices for economic outcomes, rates, these gaps will intensify from 2015 to including changes in human development 2020. A look at the long-term impact reveals indicators (see box 4A.1 in the annex for that the projected slide in human develop- more discussion).11 MAMS' main contribu- ment outcomes will become damaging and tion is its integration of government services irreversible unless action is taken now. and their impact on the economy, including · The world needs to avoid economic stag- on the MDGs and the labor market, within a nation. If the growth trend in developing standard recursive dynamic computable gen- countries becomes sluggish for a long time, eral equilibrium framework. Several MAMS as in the low-growth scenario, development features are useful for assessing the impact of outcomes will deteriorate or stall, as hap- alternative scenarios on MDGs. The model pened in many low-income countries in incorporates a formal representation of the Sub-Saharan Africa during the 1970s and production of government services (educa- 1980s. tion, health, and infrastructure) that takes into account demand, supply, and efficiency. Spending strategies under less It allows for complementarity or synergy favorable circumstances effects across the MDGs--for example, bet- ter access to clean water may improve health, What can developing countries do if the exter- which may boost school attendance, labor nal economic environment remains unfavor- productivity, and economic growth. It shows able, and what impacts might their policy the economywide repercussions of scaling and spending strategies have on development up (or down) human development services, outcomes? The three global growth scenarios including the impact on economic growth, provided a broad picture of the likely impact relative prices, the exchange rate, and the of the crisis on poverty. But these scenarios allocation of resources between government cannot be used to explore the scope for miti- and nongovernment sectors. And it makes gating the effects of external shocks on pov- possible the consideration of sequencing and erty through appropriate policy adjustments. time-related trade-offs through a recursive For this purpose, the broad country cover- treatment of dynamics that tracks indicators age achieved in the scenarios given above is over time. set aside in favor of a richer analysis of the impact of policies. The low-income, resource-poor country To begin, low-income countries are divided into two groups--those that are resource rich The analysis for the low-income, resource- and those that are resource poor.10 A repre- poor archetype (LIRP) considers four cases sentative economy of each type is then con- (the reference year for the analysis is 2009, structed based on the average indicators for and the simulation period is 2010­20): all of the low-income countries in that group (tables 4A.1 and 4A.2 in the annex sum- · The base case is relatively optimistic. It marize the social and economic indicators assumes that GDP growth recovers by that characterize each country archetype; 2011 to the growth rate in 2008. The for the most part they correspond to the lat- annual growth rate in 2012­20 is slightly est median statistics from the World Bank's higher than in 2011 (see figure 4.4 for World Development Indicators database. The GDP growth under different LIRP cases). assumptions and data used in constructing Growth in foreign aid is slower after 2010 108 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 BOX 4.3 Assumptions for the archetype countries The low-income, resource-rich (LIRR) archetype has archetype and 61.8 percent for the LIRR--the a natural resource that it exports. The government median values for the countries in each group. The receives 70 percent of the income, and foreign inves- poorest statistics for the LIRR result partly from the tors get the rest. In 2009 government income from the "natural resource curse" associated with past con- natural resource was 8.4 percent of GDP. All output fl icts and corruption; see, for example, Collier and of the natural resource commodity is exported and Goderis (2007). Median GDP per capita is $598 for accounts for 56 percent of the value of total exports. the LIRP and $482 for the LIRR. Similarly, both the Government borrowing is 2.6 percent of GDP, and LIRP and the LIRR are assumed to have the median foreign debt is 49 percent of GDP. The country value of their group for share of the population with receives no debt relief during the simulation period. access to clean water (MDG 7); the under-five mor- The low-income, resource-poor (LIRP) archetype is tality rate (MDG 4); and selected education indica- more dependent than the LIRR on foreign aid, which tors, including the gross completion rate for primary equals about 6.5 percent of GDP, and its foreign debt school (MDG 2) and gross enrollment rates at all is higher, at 65 percent of GDP. Like the LIRR, it three levels (primary, secondary, and tertiary). The receives no debt relief during the analysis period. analysis looks especially at the evolution of MDGs The poverty headcount rate at $1.25 a day (the 1, 2, 4, and 7. indicator for MDG 1) is 49.6 percent for the LIRP Government and nongovernment payments and foreign debt of archetype countries, 2009 percent of GDP Low-income, Low-income, Payment resource-poor countries resource-rich countries Income from natural resource n.a. 8.4 Foreign aid 6.5 1.2 Taxes 20.2 16.0 Private borrowing 0.5 0.4 Foreign borrowing 4.0 2.6 Foreign debt 65.0 48.8 Foreign direct investment 1.9 1.7 Remittances 1.3 1.2 Source: Go and others, forthcoming. Note: n.a. = not applicable. than in the previous decade, reflecting in productivity growth. World prices, FDI, a decline in GDP growth in donor coun- and foreign aid all grow at slower rates tries.12 Remittance growth and foreign than in the base case (25 percent of base direct investment (FDI) fall relative to the case rates). The growth slowdown for for- previous decade, also reflecting a decline in eign aid and other government receipts GDP growth in the countries from which leads to reduced development spending the payments flow. By 2015 world prices (defined as spending on education, health, have recovered to 2008 precrisis levels. water and sanitation, and infrastructure), · The low-aid case represents an extreme, as the government fails to reduce spending negative case with a weak recovery in GDP in other areas. Remittances are assumed to growth (to just 40 percent of real GDP grow at the same annual rate as in the base growth in the base case), driven by a deteri- case because these payments are based on orating external environment and a decline personal connections, and there is little GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 109 reason to expect them to respond nega- FIGURE 4.4 Annual GDP growth for LIRP under four cases tively to slower growth in the developing countries. Low-income, resource-poor archetype · In the low-aid internal 1 case the govern- 8.0 ment makes internal adjustments to offset 7.0 GDP annual growth, % the effects on the MDGs of a weak recov- 6.0 ery in GDP and reduced growth in foreign 5.0 inflows. The government reduces growth in 4.0 nondevelopment spending (to 90 percent of 3.0 such spending in the base case), increases 2.0 receipts from domestic taxes (by half a 1.0 0.0 percentage point of GDP over the base 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 case), and uses the resulting fiscal space to base case low-aid case expand development spending. low-aid internal 2 case low-aid internal 1 case · In the low-aid internal 2 case, the govern- ment further improves policies and service Source: Go and others, forthcoming. delivery relative to the low-aid internal 1 case, resulting in a moderately higher GDP growth (55 percent of the base-case rate).13 the increase in taxes (predominantly indi- rect taxes in low-income countries) reduces Slow growth in the low-income, resource- expenditures or incomes of the poor. poor country results in a severe deteriora- Under the low-aid internal 2 case, a more tion in human development indicators. All substantial improvement in MDG indicators four of the MDGs covered by the analysis can be accomplished by combining improved (poverty, primary school gross completion fiscal policies with policies that improve over- rate, under-five mortality rate, and share of all productivity. Progress toward the MDGs population with access to safe water) decline improves relative to the low-aid internal 1 in the low-aid simulation relative to the base and the low-aid cases, although not enough case (figure 4.5). By 2020 the poverty rate is to catch up with the base case. more than 20 percentage points higher, the Thus policy adjustments to support devel- under-five mortality rate 15 points higher, opment spending and improve overall eco- and the share of the population with access nomic productivity are critical to limiting the to safe water 4 percentage points lower in the impact on human development indicators of low-aid case than in the base case. The gross an externally induced decline in GDP growth primary school completion rate improves in (for example, the current crisis). However, to all scenarios, as students enrolled in lower the extent that policies cannot maintain trend grades (reflecting recent strong expansion growth in the face of an external shock, then in primary enrollment) proceed through the a deterioration in human development indi- primary level. Because of a natural decline in cators is inevitable. This fact highlights the the intake of out-of-cohort students, progress importance of a global response to the crisis tends to level off.14 that focuses on ensuring strong flows of aid, With better expenditure management limiting the deterioration in developing coun- and internal effort in the low-aid internal 1 tries' access to external fi nance, and main- case, including a government shift in expen- taining open export markets to permit trade ditures to protect development spending and expansion at more attractive world prices. increased domestic tax collection, all the MDGs (except poverty reduction) do better The low-income, resource-rich country than under the low-aid case. The poverty rate in the low-aid internal 1 case is margin- The pattern of results for the low-income, ally higher than in the low-aid case, because resource-rich archetype (LIRR) is similar to 110 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 MAP 4.2 Tuberculosis kills around 1.3 million people a year, or 3,500 a day Tuberculosis rate: Incidence of tuberculosis per 100,000 people (2008) Green (De 500 250­499 100­249 50­99 <50 Canada no data United States Bermuda (UK) The Bahamas Cayman Is. (UK) Cuba Turks and Caicos Islands (UK) Mexico Haiti C Belize Jamaica Guatemala Honduras El Salvador Nicaragua Costa Rica Panama R.B. de Guyana Venezuela Suriname Colombia French Guiana (Fr) Ecuador Kiribati Peru Brazil Samoa Cook Is. (NZ) French Polynesia (Fr) American Samoa (US) Bolivia Fiji Tonga Dominican Puerto British Virgin Paraguay Republic Rico (US) Islands (UK) Anguilla (UK) U.S. Virgin Antigua and Barbuda Islands (US) St. Kitts Guadeloupe (Fr) Chile Uruguay and Nevis Argentina This map was produced by the Netherlands Dominica Map Design Unit of The World Bank. Antilles (Neth) Montserrat (UK) Martinique (Fr) The boundaries, colors, denominations St. Lucia Aruba St. Vincent and and any other information shown on Barbados (Neth) The Grenadines this map do not imply, on the part of The World Bank Group, any judgment Grenada on the legal status of any territory, or Trinidad any endorsement or acceptance of and Tobago such boundaries. R.B. de Venezuela Source: World Development Indicators. that of the LIRP, including GDP growth rates the MDGs but is not sufficient to bring the in figure 4.4. Under the optimistic base case, country up to the path of the base case (figure which, unlike the other scenarios, includes 4.6). A resource-rich country has the ability a strong recovery in the world price of the to draw down reserves accumulated from its natural resource export, all MDG indica- resource exports or to increase government tors continue to improve. Internal adjustment foreign borrowing, in both cases creating a (that is, the government reduces growth in capital inflow, captured by the government. nondevelopment spending, increases domes- This option, incorporated into the low-aid tic taxes, and uses the resulting fiscal space internal 2 simulation, can move progress on to expand spending on education, health, the MDGs closer to the base path. 15 But at water and sanitation, and infrastructure) in the level reported, the LIRR country cannot the context of stagnant export prices for the make up for the impact of the financial crisis natural resource improves progress toward on MDGs through internal adjustment alone. GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 111 IBRD 37732 APRIL 2010 nland en) Faeroe Norway Iceland Islands Finland (Den) Sweden The Netherlands Russian Federation Estonia Isle of Man (UK) Denmark Russian Latvia Fed. Lithuania United Ireland Kingdom Germany Poland Belarus Channel Islands (UK) Belgium Ukraine Luxembourg Moldova Kazakhstan Liechtenstein Mongolia France Italy Romania Switzerland Andorra Bulgaria Georgia Uzbekistan Kyrgyz Azer- Rep. D.P.R. Portugal Spain Turkey Armenia baijan Turkmenistan of Korea Monaco Greece Tajikistan Japan Cyprus Syrian Rep. of Gibraltar (UK) Arab Islamic Rep. Afghanistan China Tunisia Malta Lebanon Korea Rep. Iraq of Iran Morocco Israel Jordan Kuwait West Bank and Gaza Bahrain Pakistan Bhutan Nepal Algeria Libya Arab Rep. Qatar Former Spanish of Egypt Saudi Sahara Arabia United Arab Bangladesh Emirates India Myanmar Lao Mauritania Oman P.D.R. Cape Verde Mali N. Mariana Islands (US) Niger Rep. of Thailand Vietnam Senegal Chad Eritrea Yemen Guam (US) The Gambia Burkina Sudan Djibouti Cambodia Philippines Federated States of Micronesia Marshall Islands Guinea-Bissau Guinea Faso Benin Sri Sierra Leone Côte Ghana Nigeria Central Ethiopia Lanka Brunei Liberia D'Ivoire African Rep. Somalia Palau Togo Cameroon Malaysia Maldives Equatorial Guinea Uganda Kiribati Congo Kenya Singapore Nauru São Tomé and Príncipe Gabon Rwanda Dem. Rep. of Burundi Seychelles Papua Solomon Congo Indonesia New Guinea Islands Tanzania Comoros Tuvalu Timor-Leste Angola Malawi Zambia Mayotte Fiji (Fr) Vanuatu Zimbabwe Mauritius Namibia Madagascar Botswana Mozambique Réunion (Fr) New Poland Caledonia Australia (Fr) Swaziland Ukraine Germany Czech Rep. Slovak Rep. South Lesotho Africa Austria Hungary Slovenia Romania Croatia New Zealand Bosnia and San Herz. Serbia Bulgaria Marino Montenegro Kosovo FYR Macedonia Vatican Italy Albania City Greece Summary and conclusions are resource poor. While understanding the prospects for progress toward the MDGs is This chapter presented forecasts of MDG of crucial importance as the world looks for- outcomes at the global level and for Sub- ward to 2015 and beyond, it should be recog- Saharan Africa based solely on alternative nized that such analysis inevitably is fraught assumptions for growth in developing coun- with difficulties given data gaps and still- tries. It also explored the scope for policy limited knowledge about the processes that improvements to mitigate the impact of determine these outcomes. slower growth on progress toward the MDGs The projections given here indicate that through simulations using two archetypical the economic crisis will lead to a deteriora- low-income countries, one representing those tion across all MDGs, extending beyond that are resource rich and the other those that 2015. In all the growth scenarios, the world 112 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 FIGURE 4.5 Simulated MDG outcomes for the LIRP archetype under alternative cases a. MDG 1: Extreme poverty and hunger b. MDG 2: Primary completion rate 70 100 90 60 80 percent percent 70 50 60 50 40 40 30 30 2009 2011 2013 2015 2017 2019 2009 2011 2013 2015 2017 2019 base case low-aid case base case low-aid case low-aid internal 1 case low-aid internal 1 case low-aid internal 2 case low-aid internal 2 case c. MDG 4: Child mortality under five d. MDG 7c: Access to safe drinking water 145 68 67 140 deaths per 1,000 66 135 percent 65 130 64 125 63 120 62 2009 2011 2013 2015 2017 2019 2009 2011 2013 2015 2017 2019 base case low-aid case base case low-aid case low-aid internal 1 case low-aid internal 1 case low-aid internal 2 case low-aid internal 2 case Source: World Bank staff calculations using the Maquette for MDG Simulations (MAMS). See Go and others, forthcoming. will meet the MDG of halving its headcount rates and will have the most difficulty achiev- poverty rate using a poverty line of $1.25 a ing its regional poverty reduction targets. day. However, the poverty rate in 2015 is con- The projected impact of alternative sce- siderably higher in the low-growth scenario narios for growth on the other MDGs ana- (18.5 percent) than in the postcrisis trend lyzed here--completion of primary school, (15 percent), which assumes a rapid recovery under-five mortality rate, gender equality in from the crisis. The rough magnitude of the education, and access to safe water--is more projected effects on hunger is similar. Under- limited, although small changes in these per- lying these figures are considerable regional centages may involve large numbers of peo- variations. Sub-Saharan Africa poses the ple. This muted effect reflects the presence greatest challenge--it has the highest poverty of significant lags, perhaps most obviously GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 113 FIGURE 4.6 Simulated MDG outcomes for the LIRR archetype under alternative cases a. MDG 1: Extreme poverty and hunger b. MDG 2: Primary completion rate 80 90 75 80 70 70 percent percent 65 60 60 50 55 40 50 45 30 2009 2011 2013 2015 2017 2019 2009 2011 2013 2015 2017 2019 base case low-aid case base case low-aid case low-aid internal 1 case low-aid internal 1 case low-aid internal 2 case low-aid internal 2 case c. MDG 4: Child mortality under five d. MDG 7.c: Access to safe drinking water 140 66 135 64 deaths per 1,000 130 62 percent 125 60 120 58 115 56 110 54 2009 2011 2013 2015 2017 2019 2009 2011 2013 2015 2017 2019 base case low-aid case base case low-aid case low-aid internal 1 case low-aid internal 1 case low-aid internal 2 case low-aid internal 2 case Source: World Bank staff calculations using the Maquette for MDG Simulations (MAMS). See Go and others, forthcoming. in education. The negative effects of slower development and tax increases) lead to some growth will make themselves more strongly improvement in the MDGs compared with felt in the long run, however. a scenario with no improvement in policies. Country-level simulations for the two However, the improvement from internal low-income archetypes indicate that, if the efforts alone falls far short of that required global economic environment and domestic to achieve the base-case levels of the MDG GDP growth recover rapidly, continued prog- indicators. Thus, while policy matters, bet- ress will take place across the MDGs that ter development outcomes hinge critically on are covered here (poverty, primary comple- a rapid global recovery that improves export tion, under-five mortality, and access to safe conditions, terms of trade, and capital flows water). If the global recovery is weak, internal for low-income countries. Chapter 5 turns to efforts (including spending switches toward this subject. 114 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 Annex: Forecast, Tools, and Data BOX 4A.1 MAMS: A tool for country-level analysis of development strategies MAMS (Maquette for MDG Simulations) is an econ- education, students successfully complete their grade, omywide simulation model developed at the World repeat it, or drop out of their cycle. Student perfor- Bank to analyze development strategies. The model mance depends on educational quality (quantity of integrates a dynamic recursive computable general services per student), household welfare, public infra- equilibrium model with an additional module that structure, wage incentives, and health status. links specific MDG or poverty-related interventions A MAMS country database is a synthesis of infor- to progress on poverty and other MDGs. This link mation from a variety of sources, structured to meet is made possible by a disaggregation of government the requirements of the model. The model parameters activities into functions related to MDG services are defi ned using this data. The main components of (education, health, and water and sanitation) and the database are a social accounting matrix and other infrastructure as well as a residual for other govern- data that reflect the functioning of the economy, with ment activity. The government fi nances its activities some emphasis on human development and infrastruc- from domestic taxes, domestic borrowing, and for- ture. More specifically, the information is primarily eign aid (borrowing and grants). The private sector related to stock data (for labor and other production disaggregation varies between applications; where factors, students, and population) and elasticities private provision of MDG services is important, such (related to substitutability in production, consump- services are included, complementing the contribution tion, and trade as well as to responses in MDG indica- of government services to MDG progress. The factors tors to various determinants). For the simulations, it is of production in the model typically include three also necessary to provide assumptions about the evo- types of labor, each of which is linked to an educa- lution of policies and other factors that are exogenous tion cycle: those with incomplete secondary education to the model. (unskilled), those with completed secondary educa- The government policies that may be considered tion but incomplete tertiary (semi-skilled), and those include spending--its level and allocation across differ- with completed tertiary (skilled). The labor force ent areas, including education, health, and infrastruc- variable depends on the functioning of the education ture--and fi nancing--policies for taxation, domestic system in the model. The other factors of production and foreign borrowing, and foreign aid. Economic per- include public capital stocks by government activity formance is measured by the evolution of: and a private capital stock. Growth in the stock of government infrastructure capital contributes to over- · poverty and other MDG targets all growth by adding to the productivity of other pro- · macro-indicators, including GDP (split into pri- duction activities. vate and government consumption and investment, MAMS covers MDGs in the areas of poverty, edu- exports, and imports); the composition of the gov- cation, health, and water and sanitation. For poverty, ernment budget, the balance of payments, and the a log-normal distribution is assumed; other applica- savings-investment balance; total factor productiv- tions have used microsimulations. For other MDGs, ity; and domestic and foreign debt stocks a set of functions links the level of each indicator to · sectoral structure of production, employment, a set of determinants. The determinants include the incomes, and trade delivery of relevant services and other indicators, also · the labor market, including unemployment and the allowing for the recognition that achievements in one educational composition of the labor force MDG can have an impact on other MDGs. Other than education, service delivery for other MDGs is Note: For more information about MAMS, see www.world expressed relative to the size of the population. In bank.org/mams. GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 115 TABLE 4A.1 Alternate scenarios for poverty reduction, based on a poverty line of $1.25 a day, by region Scenario Region or country 1990 2005 2015 2020 1990 2005 2015 2020 Postcrisis Percentage of the population living on Number of people living on less than $1.25 a day less than $1.25 a day (millions) East Asia and Pacific 54.7 16.8 5.9 4.0 873 317 120 83 China 60.2 15.9 5.1 4.0 683 208 70 56 Europe and Central Asia 2.0 3.7 1.7 1.2 9 16 7 5 Latin America and the Caribbean 11.3 8.2 5.0 4.3 50 45 30 27 Middle East and North Africa 4.3 3.6 1.8 1.5 10 11 6 6 South Asia 51.7 40.3 22.8 19.4 579 595 388 352 India 51.3 41.6 23.6 20.3 435 456 295 268 Sub-Saharan Africa 57.6 50.9 38.0 32.8 296 387 366 352 Total 41.7 25.2 15.0 12.8 1,817 1,371 918 826 Precrisis Percentage of the population living on Number of people living on less than less than $1.25 (2005 PPP) a day $1.25 (2005 PPP) a day (millions) East Asia and Pacific 54.7 16.8 5.5 3.5 873 317 111 73 China 60.2 15.9 5.0 3.9 683 208 69 55 Europe and Central Asia 2.0 3.7 1.5 1.1 9 16 7 5 Latin America and the Caribbean 11.3 8.2 4.6 3.9 50 45 28 25 Middle East and North Africa 4.3 3.6 1.7 1.4 10 11 6 6 South Asia 51.7 40.3 21.5 17.9 579 595 367 326 India 51.3 41.6 22.7 19.6 435 456 283 259 Sub-Saharan Africa 57.6 50.9 35.9 29.9 296 387 346 321 Total 41.7 25.2 14.1 11.7 1,817 1,371 865 755 Low-growth Percentage of the population living on Number of people living on less than less than $1.25 (2005 PPP) a day $1.25 (2005 PPP) a day (millions) East Asia and Pacific 54.7 16.8 7.8 5.8 873 317 159 122 China 60.2 15.9 6.0 4.7 683 208 82 67 Europe and Central Asia 2.0 3.7 2.5 2.2 9 16 11 10 Latin America and the Caribbean 11.3 8.2 6.5 5.7 50 45 39 36 Middle East and North Africa 4.3 3.6 3.3 2.7 10 11 12 11 South Asia 51.7 40.3 28.6 24.6 579 595 489 447 India 51.3 41.6 29.4 25.2 435 456 367 333 Sub-Saharan Africa 57.6 50.9 43.8 39.9 296 387 421 428 Total 41.7 25.2 18.5 16.3 1,817 1,371 1,132 1,053 Source: World Bank staff calculations, using PovcalNet. 116 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 TABLE 4A.2 Alternate scenarios for poverty reduction, based on a poverty line of $2.00 a day, by region Scenario Region or country 1990 2005 2015 2020 1990 2005 2015 2020 Postcrisis Percentage of the population living on Number of people living on less than $2.00 a day less than $2.00 a day (millions) East Asia and Pacific 79.8 38.7 19.4 14.3 1,274 730 394 299 China 84.6 36.3 16.0 12.0 961 473 220 168 Europe and Central Asia 6.9 8.9 5.0 4.1 32 39 22 18 Latin America and the Caribbean 19.7 16.6 11.1 9.7 86 91 67 62 Middle East and North Africa 19.7 16.9 8.3 6.6 44 52 30 26 South Asia 82.7 73.9 57.0 51.0 926 1,091 973 926 India 82.6 75.6 58.3 51.9 702 828 728 686 Sub-Saharan Africa 76.2 73.0 59.6 55.4 391 555 574 595 Total 63.2 47.0 33.7 29.8 2,754 2,557 2,060 1,926 Precrisis Percentage of the population living on Number of people living on less than less than $2.00 (2005 PPP) a day $2.00 (2005 PPP) a day (millions) East Asia and Pacific 79.8 38.7 18.6 13.4 1,274 730 379 280 China 84.6 36.3 15.7 11.8 961 473 216 166 Europe and Central Asia 6.9 8.9 4.5 3.7 32 39 20 16 Latin America and the Caribbean 19.7 16.6 10.3 8.8 86 91 62 56 Middle East and North Africa 19.7 16.9 8.0 6.1 44 52 29 24 South Asia 82.7 73.9 55.5 49.0 926 1,091 946 890 India 82.6 75.6 57.2 50.9 702 828 715 674 Sub-Saharan Africa 76.2 73.0 57.6 52.4 391 555 555 563 Total 63.2 47.0 32.6 28.4 2,754 2,557 1,991 1,830 Low-growth Percentage of the population living on Number of people living on less than less than $2.00 (2005 PPP) a day $2.00 (2005 PPP) a day (millions) East Asia and Pacific 79.8 38.7 22.2 18.1 1,274 730 451 379 China 84.6 36.3 16.9 13.6 961 473 233 191 Europe and Central Asia 6.9 8.9 7.1 6.2 32 39 31 27 Latin America and the Caribbean 19.7 16.6 14.5 12.9 86 91 88 82 Middle East and North Africa 19.7 16.9 14.1 11.4 44 52 52 45 South Asia 82.7 73.9 63.9 57.8 926 1,091 1,089 1,049 India 82.6 75.6 64.6 57.9 702 828 808 766 Sub-Saharan Africa 76.2 73.0 65.1 62.5 391 555 627 671 Total 63.2 47.0 38.2 34.9 2,754 2,557 2,338 2,254 Source: World Bank staff calculations, using PovcalNet. GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 117 TABLE 4A.3 Detailed data for archetypes Median values by archetype, selected variables Low-income, resource-poor Low-income, resource-rich Variable (LIRP) (LIRR) Poverty headcount ratio at $1.25 a day (% of population) 49.6 61.8 Poverty headcount ratio at $2.00 a day (% of population) 76.7 80.5 Elasticity of poverty to income ­1.01 ­1.01 Poverty headcount ratio at national poverty line (% of population) 44.2 45.4 Primary school completion rate, total (% gross) 55.8 59.9 Primary school enrollment (% gross) 95.9 95.2 Secondary school enrollment (% gross) 31.6 35.5 Tertiary school enrollment (% gross) 3.2 4.7 Under-five mortality rate (per 1,000) 115.2 141.6 Maternal mortality ratio, modeled estimate (per 100,000 live births) 720.0 825.0 Maternal mortality ratio, national estimate (per 100,000 live births) 478.0 613.0 Improved water source (% of population with access) 65.0 60.0 Improved sanitation facilities (% of population with access) 30.0 31.5 Foreign direct investment, net inflows (% of GDP) 2.7 6.5 Foreign direct investment, net outflows (% of GDP) 0.0 0.0 Foreign direct investment inflow outflows (% of GDP) 2.7 6.5 Net current transfers, remittances (% of GDP) 8.9 4.5 Official current transfers, receipts, foreign aid (% of GDP) 2.5 1.7 External debt stocks (% GNI) 29.9 49.5 External debt stocks private (% GNI) 0.0 0.0 External debt stocks public (% GNI) 29.9 49.5 External debt stocks public, median (% GDP) 28.0 48.6 Gross fixed capital formation (% of GDP) 20.8 18.3 Gross fixed capital formation, private (% of GDP) 10.7 11.3 Labor force participation rate (% of total population ages 15­64) 74.3 71.4 Resource exports (% of GDP) 0.4 19.0 Resource exports (% of merchandise exports) 3.4 67.9 Mining value added (% of GDP) 0.7 3.3 Interest payment on private external debt (% of GDP) 0.0 0.0 Interest payment on public external debt (% of GDP) 0.3 0.5 Source: World Bank 2009b. 118 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS GLOBAL MONITORING REPORT 2010 Notes tendency for the indicator to level off would be weaker, especially for the base case. 1. Resource intensity is an important factor in 15. In the model this is done by increasing foreign the performance of low-income countries and borrowing, which reduces the net asset posi- has been used to classify developing countries tion of the country relative to the rest of the in several studies; see Collier and O'Connell world and is equivalent to drawing down for- (2006); IMF (2006); Ndulu and others (2007); eign exchange reserves or liquidating foreign and Arbache, Go, and Page (2008). investment financed by the natural resource in 2. World Bank 2004b. the past. Here, the annual growth rates in for- 3. Even short-term assessments are necessar- eign borrowing are assumed to be twice the ily projections because of the infrequency annual growth rates in the base. As a result, of the underlying data. Household surveys the foreign debt stock in foreign currency is of incomes and expenditures are generally 30 percent higher in 2020 for the low-aid undertaken only every five or more years in internal 2 case than for the other scenarios. many developing countries. Relative to GDP, the foreign debt stock is 4. The estimation uses a logistic function, simi- around 10 percentage points higher in 2020 lar to Clemens, Kenny, and Moss (2007) but for the low-aid internal 2 case than for the with per capita income as a key determinant low-aid internal 1 case (which has a slightly instead of a time trend. Income rather than slower rate of GDP growth and similar evolu- social spending is used as the independent tion for the exchange rate). References variable because of data and other difficulties with fiscal adjustment and public expendi- tures. The logistic curve was used for the pro- References jections because it has a smoother transition across income levels, although the elasticity Adams, C. S., and D. Bevan. 2000. "The Cash form (double-log regressions) by income level Budget as Restraint: The Experience of Zam- or region yielded similar results. bia." In Investment and Risk in Africa, ed. P. 5. World Bank PovcalNet database. Collier and C. Patillo. New York: St. Martin's 6. See also IMF (2010); World Bank (2010b). Press. 7. World Bank 2003, p. 41. These calculations Arbache, J., D. Go, and J. Page. 2008. "Is Africa's update estimates found in Ravallion (2009) Economy at a Turning Point?" In Africa at and World Bank (2009a). a Turning Point? ed. D. Go and J. Page, pp. 8. Tiwari and Zaman 2010; World Bank 2010a. 13­85. Washington, DC: World Bank. 9. Friedman and Schady 2009. Bourguignon, François, Carolina Diaz-Bonilla, 10. The low-income countries are disaggregated and Hans Lofgren. 2008. "Aid, Service Deliv- into resource rich and resource poor using ery and the Millennium Development Goals data on exports of fuel ore and minerals as a in an Economywide Framework." In The share of merchandise exports. See table 4A.3 Impact of Macroeconomic Policies on Pov- in the annex for more details. erty and Income Distribution: Macro-Micro 11. See Bourguignon, Diaz-Bonilla, and Lofgren Evaluation Techniques and Tools, ed. Fran- (2008) and Lofgren and Diaz-Bonilla (2010) çois Bourguignon, Maurizio Bussolo, and Luiz as well as www.worldbank.org/mams. A. Pereira da Silva, pp. 283­315. Washington, 12. The growth rate is set at 3 percent, the DC: World Bank. assumed annual GDP growth in developed Clemens, M. A., C. J. Kenny, and T. J. Moss. countries from 2010 onward. 2007. "The Trouble with the MDGs: Con- 13. This is 15 percent higher than the annual fronting Expectations of Aid and Development GDP growth in the pessimistic scenario with Success." World Development 35 (5): 735­51. internal adjustment (low-aid internal 1 case). Collier, P., and S. O'Connell. 2006. "Opportu- 14. The primary gross completion rate (MDG nities and Choices." Explaining African Eco- 2) is defi ned as the total number of primary nomic Growth, ch. 2 of synthesis vol. Nairobi: school graduates (regardless of age) as a share African Economic Research Consortium. of the total population of the theoretical Collier, P., and B. Goderis. 2007. "Commodity graduation age. If MDG 2 were measured by Prices, Growth, and the Natural Resource the net completion rate (the number of grad- Curse: Reconciling a Conundrum." Oxford uates of the theoretical right age as a share University, Centre for the Study of African of the total population of the same age), the Economies, Oxford, U.K. GLOBAL MONITORING REPORT 2010 OUTLOOK FOR THE MILLENNIUM DEVELOPMENT GOALS 119 Devarajan S., and R. Reinikka. 2004. "Making Ndulu, B. J., L. Chakroborti, L. Lijane, V. Services Work for the Poor." Journal of Afri- Ramachandran, and J. Wolgin. 2007. Chal- can Economies 13 (Supp. 1): i142­66. lenges of Africa Growth: Opportunities, Con- Dinh, H., A. Adugna, and B. Myers. 2002. "The straints, and Strategic Directions. Washington, Impact of Cash Budgets on Poverty Reduc- DC: World Bank. tion in Zambia: A Case Study of the Confl ict Rajkumar, A., and V. Swaroop. 2008. "Public between Well-Intentioned Macroeconomic Spending and Outcomes: Does Governance Policy and Service Delivery to the Poor." Policy Matter?" Journal of Development Economics Research Working Paper 2914. World Bank, 86 (1): 96­111. Washington, DC. Ravallion, M. 2009. "The Crisis and the World's Filmer, D., J. Hammer, and L. Pritchett. 2000. Poorest." Development Outreach, World Bank, "Weak Links in the Chain: A Diagnosis of Washington, DC (December). Health Policy in Poor Countries." World Bank Tiwari, S., and H. Zaman 2010. "The Impact of Research Observer 15 (2): 188­224. Economic Shocks on Global Undernourish- ------. 2002. "Weak Links in the Chain II: A Pre- ment" Policy Research Working Paper 5215. scription for Health Policy in Poor Countries." World Bank, Washington, DC. World Bank Research Observer 17 (1): 47­66. Wagstaff, A., and M. Claeson. 2004. Rising to Filmer, D., and L. Pritchett. 1999. "The Impact the Challenges: The Millennium Development of Public Spending on Health: Does Money Goals for Health. Washington, DC: World Matter?" Social Science and Medicine 49 (10): Bank. 1309­23. World Bank. 2004a. Global Monitoring Report Friedman, J., and N. Schady. 2009. "How Many 2004: Policies and Actions for Achieving the More Infants Are Likely to Die in Africa as a Millennium Development Goals and Related Result of the Global Financial Crisis?" Policy Outcomes. Washington, DC: World Bank. Research Working Paper 5023. World Bank, ------. 2004b. World Development Report Washington, DC. 2004: Making Services Work for Poor People. Go, D., H. Lofgren, S. Robinson, and K. Thier- Washington, D.C.: World Bank. felder. Forthcoming. "The Impact of the ------. 2009a. "Protecting Progress: The Chal- Global Economic Crisis on MDGs in Arche- lenge Facing Low-Income Countries in the typical Developing Countries." World Bank, Global Recession." Background paper prepared Washington, DC. for the G-20 Leaders' Meeting, Pittsburgh, PA, IMF (International Monetary Fund). 2006. September 24­25. Regional Economic Outlook: Sub-Saharan ------. 2009b. World Development Indicators. Africa. Washington, DC. Washington, DC: World Bank. ------. 2010. World Economic Outlook. Wash- ------2010a. "Food Price Watch." Washington, ington, DC (January). DC (February). Lofgren, H., and C. Diaz-Bonilla. 2010. "MAMS: ------. 2010b. Global Economic Prospects 2010. An Economywide Model for Development Washington, DC: World Bank. Strategy Analysis." World Bank, Washington, DC. 5 The International Community and Development: Trade, Aid, and the International Financial Institutions T he global economic crisis severely progress is required to strengthen aid effec- reduced developing-country external tiveness and improve aid allocation. Reach- resources by drastically curtailing their ing agreement on the Doha Round would export revenues and their access to private support an open trading environment and capital flows. As elaborated in previous chap- generate substantial increases in market ters, the resulting decline in economic activ- access for developing countries. And the cri- ity sharply increased poverty and impaired sis has raised new development challenges, public services to the poor. To a degree, the including questions about the sustainability international system worked effectively to of the IFIs' policy responses and their policies support developing-country access to external and structure for dealing with the challenges resources and limit the rise in poverty. Despite in the future--questions that now need to be initial fears, increased trade restrictions in reac- resolved. tion to the crisis affected only a small part of international trade. Bilateral donors increased aid (at least through 2008), and the interna- Recovering from the crisis tional financial institutions (IFIs) dramatically through trade increased their lending. As the global recovery World trade contracted by about 12 percent has taken hold, developing-country export rev- in 2009, and all regions experienced deep enues have begun to recover, and their access declines in imports (figure 5.1). Although to external finance to improve, although both demand for exports declined significantly in remain well below precrisis levels. most developing countries, countries depen- Despite these positive signs, the global dent on durable goods exports felt the sharp- recovery remains fragile, and continuing est decline. Demand was more resilient for efforts of the global community to support nondurable consumer goods (such as clothing development are essential. Although aid has and food) and services (except the more vola- hit record levels, aid flows remain well below tile tourism sector). And continued growth those envisioned in donor promises, and the in China meant countries in East Asia faced more constrained fiscal environment is a smaller drops in export demand than else- serious threat to future aid efforts. Further where. Developing countries also had sharp GLOBAL MONITORING REPORT 2010 121 122 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 FIGURE 5.1 Trade has bottomed out and started to recover declines in external finance: net private capi- tal flows to developing countries in 2009 are 80 estimated to have fallen almost 70 percent 60 from their 2007 peak. Remittances, as much import growth by region, % as 20 percent of GDP in some countries, have 40 been more stable than capital flows and mer- 20 chandise trade but nevertheless declined by an 0 estimated 6.1 percent in 2009. All in all, by mid-2009, the collapse in developing-country ­20 external resources necessitated a sharp con- ­40 traction in import demand, which fell to 25 ­60 percent below precrisis levels. Jan. Mar. May Jul. Sep. Nov. Jan. Mar. May Jul. Sep. Nov. Almost a year into the trade recovery, espe- 2008 2009 cially in East Asia and the Pacific and Latin America, the dollar value of global trade 80 remains around 20 percent lower than its export growth by region, % 60 precrisis level and 40 percent lower than it 40 would have been had world trade continued 20 to grow at its 2002­08 trend. A number of advanced indicators of trade developments 0 underscore the fragility of the recovery. For ­20 instance, the Baltic Dry Index and air freight ­40 traffic point to a fragile rebound. The index, a ­60 measure of the cost of shipping bulk cargo by Jan. Mar. May Jul. Sep. Nov. Jan. Mar. May Jul. Sep. Nov. sea, picked up in February 2009 after a seven- 2008 2009 month drop but has been hovering since then East Asia and Pacific North America (figure 5.2). Given the uncertain recovery and Europe and Central Asia South Asia still-depressed investment activity, world trade Latin America and the Caribbean Sub-Saharan Africa is projected to expand by only 4.3 percent Middle East and North Africa in 2010 and by 6.2 percent in 2011.1 While Source: World Bank Development Economics Trade and International Integration, Trade Watch, a strong recovery in developing countries' January 2010 (www.wordlbank.org/research/trade). exports will depend on global macroeconomic Note: Trade volume is the 3-month over 3-month growth rate (rolling, seasonally adjusted 3-month moving average). developments, policies in both rich and poor FIGURE 5.2 Baltic Dry Index points to a fragile rebound in shipping by sea Baltic Dry Index 12,000 10,000 9,000 8,000 % change 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Jul. 10 Sep. 10 Nov. 10 Jan. 10 Mar. 10 May 10 Jul. 10 Sep. 10 Nov. 10 Jan. 10 2008 2009 2010 Baltic Dry Index Source: Baltic Exchange Information Services Ltd 2010. GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 123 countries can play an important role. In par- export insurance and guarantees suggest that ticular, expanding developing-country access export credit agencies prevented a complete to foreign exchange through supporting trade drying up of trade finance markets during the finance, aid for trade, and maintaining an crisis.3 open trading environment will continue to Lessons from past crises suggest that effec- play a critical role. These issues are taken in tive public actions in support of trade finance turn in the rest of this section. should be guided by several key principles, including the avoidance of moral hazard and the crowding out of commercial banks by Trade finance remains weak but shows setting clear time limits and exit strategies for signs of recovery intervention programs and by sharing, rather While the decline in developing-country than fully underwriting, risk.4 The substan- exports was largely driven by the collapse in tial resources committed by G-20 leaders global demand, there is some evidence that and multilateral institutions to support trade the global credit crunch and sharp contraction finance during the crisis underscore the criti- in trade credit also contributed to the trade cal importance of establishing a systematic decline. For example, although surveys found and reliable mechanism to collect data on that demand has been the major driving factor trade fi nance to monitor the market. Such a behind the contraction in trade credit, many system could be used not only to assess how respondents acknowledged that the reduced current interventions are influencing credit availability of trade finance instruments in supply but also to provide an early warning their institutions contributed to the fall in of stress in trade credit provision. trade finance volumes.2 As the financial crisis Recent trade finance data indicate slight deepened, trade finance tightened because of signs of improvement. According to a Septem- higher lending costs and risk premiums result- ber 2009 report of the International Cham- ing from rising liquidity pressures, capital ber of Commerce, banks' ability to provide scarcity, and heightened risk aversion among trade credit has improved, reflecting enhanced trade finance providers for counterparty and capacity and liquidity in the banking sector country risks. The drying up of the secondary and efforts by the international community to market for short-term exposure exacerbated support trade finance instruments.5 Data from the problem, as banks and other financial the Society for Worldwide Interbank Financial institutions deleveraged and such key players Telecommunication document that short-term as Lehman Brothers exited the market. In an trade finance messages sent between banks for environment of global recession, banks may letters of credit, guarantees, and documentary also have felt additional pressure to hold back collections collapsed in January 2009 and on trade finance following implementation of have gradually recovered since then, returning the Basel II Accord on banking laws and reg- to positive territories in January 2010 (figure ulations, which increased the risk sensitivity 5.3). Yet the number of trade messages during of capital requirements. January-February 2010 remained more than To mitigate the effects of these trade finance 10 percent below the number registered dur- constraints, governments and multilateral ing the same period in 2007 or 2008. development institutions responded with a range of trade finance programs, including a Maintaining an open trading pledge by the Group of 20 (G-20) leaders at environment is critical their April 2009 London Summit to ensure $250 billion in support for trade. The World World leaders acknowledged early on the Bank Group provided additional guarantees systemic risks stemming from protectionist as well as liquidity for trade finance through policy responses such as those used during the the International Finance Corporation's (IFC) Great Depression. The G-20 communiqués Global Trade Finance Program and Global at the Washington, London, and Pittsburgh Trade Liquidity Program. Recent data on Summits in 2009 provided assurances that 124 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 FIGURE 5.3 Short-term trade finance messages increased steadily percent higher than in 2007. According to the from Jan. 2009 to Feb. 2010 World Trade Organization's (WTO) quarterly monitoring report, some 350 trade-restrictive 10 measures had been put in place as of Decem- 5 ber 2009, although some of them have since been removed. Protectionist measures have 0 included tariff increases (although tariff rates % change ­5 fell in many countries--figure 5.4--and gen- ­10 erally remained below bounded limits set in multilateral trade agreements), various quan- ­15 titative restrictions, trade remedies (antidump- ­20 ing) and subsidies, and domestic purchase ­25 requirements in stimulus packages. 8 The Jan. Mar. May Jul. Sep. Nov. Jan. Mar. May Jul. Sep. Nov. Jan. fourth report of the Global Trade Alert, pub- 2008 2009 2010 lished in February 2010, confi rms that "low fever" protectionism continues, with several Source: SWIFTNET (www.swift.com). of the largest economies taking discrimina- tory measures.9 Meanwhile, some countries have reacted FIGURE 5.4 Tariff rates fell except in upper-middle-income to the crisis by reducing trade barriers-- countries, 2008­09 about 77 trade-liberalizing measures have been taken since the onset of the crisis--in 1.0 an effort to reduce costs for industries and 0.8 households (figure 5.5).10 Furthermore, the 0.6 newly adopted trade restrictions have been percentage points 0.4 applied mainly to specific sectors (such as 0.2 agriculture and iron and steel, followed at 0 some distance by consumer electronics and ­0.2 textiles, clothing, and footwear). The affected ­0.4 products account for only about 0.5 percent ­0.6 of world trade (although the backlog of ongo- ­0.8 ing investigations of requests for trade reme- high-income upper-middle- lower-middle- low-income dies may imply some increase in 2010). Also, countries income income countries countries countries many policies aimed at stimulating domes- tic demand and economic activity may have total trade agriculture manufacturing benefited trading partners when applied on a nondiscriminatory basis. Source: World Bank staff calculations. While protectionist measures taken during the crisis undoubtedly curtailed trade flows, governments would refrain from discrimina- they have affected a relatively small share of tory trade measures. Since the onset of the global trade, and their effect on international crisis, many countries have adopted policies trade has been secondary to the lack of aggre- that favored domestic over foreign prod- gate demand and the global credit crunch. So, ucts.6 In particular, all G-20 countries have while some countries and industries have seen imposed measures restricting trade since the their exports depressed by protectionist mea- November 2008 summit.7 The Global Anti- sures, the global trading system has largely dumping Database records a 19.7 percent rise weathered the threat of beggar-thy-neighbor in industry requests for trade barriers in 2009 policies that loomed large at the outset of the over 2008, when requests were already 35.0 crisis. Perhaps helping to moderate a resort to GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 125 protectionist measures is the interdependence FIGURE 5.5 About 350 trade-restrictive measures and 80 trade- of countries in global supply and production liberalizing measures have been implemented or initiated since the chains. Domestic producers rely on imported onset of the crisis, but some have already been removed parts, and exporters rely on foreign end-user Vietnam markets--and vice versa. The average trade- Venezuela, R.B. de Uzbekistan to-GDP ratio today is about 60 percent, up Uruguay United States from 27 percent in 1970, and trade in parts United Arab Emirates Ukraine and components, an indicator of the interna- Tunisia Turkey tionalization of supply chains, has more than Thailand Tajikistan doubled as a share of trade in manufactures. Switzerland Suriname WTO rules and disciplines have also helped, Sudan South Africa as have the monitoring, surveillance, and Serbia Saudi Arabia information exchange under its auspices. Saint Lucia Russian Federation The danger of more protectionist responses Philippines Peru during the global recovery--especially if Paraguay Pakistan it continues to be jobless--underlines the Morocco Montenegro importance of maintaining an open trading Mongolia Moldova environment. In particular, keeping trade Mexico Malaysia open will be key to counter the effects of the Lebanon Kyrgyz Republic withdrawal of expansionary fiscal and mon- Korea, Rep. Kazakhstan etary policies and to support the global eco- Jordan Israel nomic recovery. Indonesia India Honduras Ghana Gabon Keeping up with the Doha Macedonia, FYR El Salvador Development Agenda Egypt, Arab Rep. Ecuador European Commission The global economic crisis has confirmed Dominican Republic Croatia that trade rules matter and that WTO rules Costa Rica Colombia constrain protectionism. Indeed, it is worth Taiwan, China China noting that countries have been less able to Chile Chad resist protectionist pressures in areas not cov- Canada Cameroon ered by multilateral disciplines or with lim- Brunei Darussalam Brazil ited coverage. Examples include export sub- Bosnia and Herzegovina Bolivia sidies by the European Union and the United Belarus Bangladesh States, national bailout packages that call Bahrain Azerbaijan for preferential treatment for domestic firms, Australia Armenia more restrictive policies on workers provid- Argentina Algeria ing cross-border services, and discriminatory 0 5 10 15 20 25 30 35 40 45 procurement. number of measures Concluding the Doha Round remains an trade restrictive measures trade liberalizing measures important milestone. As the global economy gradually recovers, governments must ensure Source: World Bank calculations based on WTO (2009). that the long-run benefits of an open and transparent multilateral trading system are not compromised by short-run pressures to pro- tariffs and subsidies, help governments resist tect domestic markets. Concluding the Doha protectionist pressures as they unwind current Round would not only improve market access. expansionary policies, and provide a much It would also strengthen the international needed boost to keep markets open. trading system, constrain future increases in So what is on the table at the negotia- tions in Geneva matters. Based on current 126 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 proposals, the Doha Round would do as essential for cooperation among countries much as any previous round, if not more seeking to manage the crisis. Comprehensive to open trade.11 The gains in market access and timely notification of trade contingency would be considerable--even after factoring measures (public procurement, subsidies, in exceptions for special and sensitive prod- and other nontariff measures) to WTO bod- ucts. The round would lower tariff bindings, ies is needed to ensure proper monitoring. ban agricultural export subsidies, and cap agricultural and marine production subsidies. Expanding aid for trade It also offers scope for increasing the security of market access for services. It would lower Aid for trade has become more urgent with trade costs and enhance the competitiveness the global economic crisis. As the world of developing countries through an agreement economy recovers, developing countries will on trade facilitation. At the Seventh WTO rely on international markets as a source Ministerial Conference in Geneva in Novem- of demand to revitalize economic growth. ber 2009, ministers reiterated the importance Enhancing the competitiveness of firms in of trade and the Doha Round to economic developing countries by lowering trade costs recovery and poverty alleviation in develop- through better trade policies and regulations, ing countries. They reaffirmed the need to institutional support for trade, trade-related conclude the round in 2010 and to engage in infrastructure, and trade-related adjustment a stocktaking exercise in the fi rst quarter of is particularly important. Improving trade 2010. But at this stage, only strong leadership logistics is a priority for development (box and engagement by world leaders can revive 5.1). Sustaining efforts to deliver on the com- the round and bring it to closure. mitments made at the 2005 WTO Ministerial Beyond Doha, government actions in Meeting (in Hong Kong, China) to expand response to the crisis reveal the need for greater aid for trade should continue to be a priority. cooperation in the multilateral trading system The second global review of aid for trade, to ensure that the cross-border policy matters held in Geneva in July 2009, found that devel- that are not on the Doha Development Agenda oping countries are setting priorities for are appropriately addressed. Potential areas for trade in national development strategies; that negotiating new rules and disciplines include donors are offering more and better aid for food and energy security and trade-related cli- trade; and that new partners are engaging mate change such as the treatment of environ- in cooperation among developing countries. ment goods and services to increase the global Allocations to aid for trade have increased flow of clean, energy-efficient technologies and without reducing resources to other develop- renewal energy. The limited guidelines and ment priorities.12 Improving the effectiveness rules in these areas allow for discriminatory of aid for trade requires strengthening its actions to be imposed with impunity, and the regional dimension and the contribution of stalled Doha Round is preventing these issues the private sector, better evaluating its impact, from being properly addressed through nego- and mobilizing resources beyond 2010. tiated rules and norms. World Bank Group concessional aid-for- The crisis has also revealed the impor- trade lending has increased. Its concessional tance of strengthening monitoring and public lending to low-income countries rose from reporting of government measures to improve $2.3 billion annually in 2002­05 to $3.9 bil- transparency in the trading system so that lion in 2007­08 (table 5.1). The IFC invest- WTO-compatible policies can be readily ments in building new productive capacity distinguished from discriminatory policies. and infrastructure in low-income countries Transparency is critical in maintaining a pre- have added another $3.4 billion in private dictable and open trading system. Free-flow- investments. The aid-for-trade program of ing information on policies affecting trade is the World Bank Group, as with other donors, GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 127 BOX 5.1 Facilitating trade through logistics reforms Effi cient logistics contribute to trade and develop- focused on supporting trade infrastructure invest- ment. Evidence from the 2007 and 2010 World Bank ment and modernizing customs. Looking forward, Logistics Performance Index (LPI) indicates that, the focus will be extended to new areas, such as the for countries at the same level of per capita income, market for logistics services, coordination of border those with the best logistics performance do better: processes, and joint cross-border initiatives, espe- they can expect 1 percent additional growth in GDP cially for landlocked countries (World Bank 2006). and 2 percent additional growth in trade.a Efficient Some of these reforms can be implemented at the trade logistics systems support trade diversification country level. Others require bilateral and regional and attract foreign direct investment. cooperation, such as border and transit trade for The 2010 LPI points to modest but positive trends landlocked countries. in customs use of information technologies for trade Taking a more comprehensive approach to the and investment in private services. It fi nds that logis- clearance of goods is a key element in the new trade tics overperformers--countries with a higher LPI facilitation agenda. It requires better collaboration score than income would predict--have consistently among all border management agencies--including invested in reforms. Encouraging trends are emerg- standards, sanitary, phytosanitary, transport, and ing in infrastructure, reflecting successful trade facil- veterinary agencies--and modern approaches to itation projects. In port management, separation of regulatory compliance. It matters little that customs commercial activities from the regulatory missions agencies employ high levels of automation and exam- of the port authority is now the norm in developing ines goods selectively if other government agencies countries, and there are many examples of success- are not automated and continue to routinely inspect ful private participation in container terminal opera- all imported goods regardless of the risk they pose. tions. Automation of customs procedures is also common, with only a few countries lacking some a. The LPI summarizes the performance of countries in six form of automated customs system. But logistics areas: efficiency of the customs clearance process, quality of trade and transport-related infrastructure, ease of arranging professionals also confi rmed that the quantity and competitively priced shipments, competence and quality of performance of infrastructure, especially roads and logistics services, ability to track and trace consignments, ports, remain signifi cant bottlenecks in most low- and frequency with which shipments reach the consignee income countries--and, in relative terms, even more within the scheduled or expected time (Arvis and others so in middle-income countries. 2010). The LPI is based on more than 5,000 country assess- Transport reform has become a key development ments by more than 1,000 international freight forwarders. priority. Traditional efforts to facilitate trade have It provides trade profiles for 155 countries. goes beyond concessional lending commit- Nations Conference on Trade and Develop- ments to low-income countries--the conven- ment, United Nations Development Pro- tional definition used by the Organisation for gramme, and the International Trade Cen- Economic Co-operation and Development ter--has provided technical assistance and (OECD) and the WTO--and includes non- financing for trade capacity-building projects. concessional trade­related lending to mid- The significant progress in integrating trade dle-income countries. Promoting trade-led into development strategies reflects a collec- growth in middle-income countries generates tive effort by governments and donors and by market opportunities for neighboring low- the trade and development communities. One income countries and has positive spin-offs measure of this integration is that two-thirds for the world economy. of country assistance strategies, which part- The World Bank Group--working with ner governments and the World Bank forge, other organizations such as the WTO, United identify trade as a priority. 128 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 TABLE 5.1 World Bank Group trade-related activities, 2007 and 2008 commitments, US$ millions Public sector Private sector Year, income group, activity (loans and grants) (IFC) Total 2007 Low-income countries (IDA) 4,267 3,514 7,782 Country programs 3,313 3,020 6,332 Regional activities 954 495 1,449 Middle-income countries (IBRD) 4,905 6,302 11,206 Total 2007 9,172 9,816 18,988 2008 Low-income countries (IDA) 3,520 3,304 6,824 Country programs 3,245 2,770 6,016 Regional activities 275 533 808 Middle-income countries (IBRD) 8,263 5,772 14,035 Total 2008 11,782 9,076 20,858 Source: World Bank staff calculations. Note: This table uses the OECD-WTO definition of sectoral coverage for aid for trade. IDA = International Development Association; IBRD = International Bank for Reconstruction and Development. Bringing aid flows back on track DAC fell back slightly to 10 percent in real terms to $67 billion (44 percent of all DAC Global aid has risen, and donors are so far ODA). holding to their commitments to increase Other donors recording a sharp increase aid. But it remains only 80 percent of the in aid in real terms were Greece (up 28.7 per- 2010 level implied by donor promises, and cent), Portugal (22.3 percent), and Spain (22.6 the shortfall is particularly large for aid to percent). The four largest donors in 2008, Africa. Increasing aid must remain a politi- measured as a share of GNI, were Sweden cal priority to prevent the crisis from seri- (0.98 percent), Luxembourg (0.97 percent), ously damaging development prospects and Norway (0.88 percent), and the Netherlands to keep alive the hope of halving poverty by (0.80 percent). Non-DAC aid continues to 2015. grow in importance, rising 63 percent in real terms in 2008 to $9.5 billion (for non-DAC Aid volumes rose in real terms during donors reporting to DAC). Arab donors, led the crisis years, 2008­09, but greater by Saudi Arabia, were the largest and fastest- efforts are still needed growing component: their aid rose to $5.9 bil- lion, a real increase of 115 percent over 2007. Following an 11.7 percent increase in 2008, The rise in aid is encouraging, but there total net official development assistance is no room for complacency. DAC members (ODA) from the OECD's Development have reaffi rmed their aid commitments and Assistance Committee (DAC) countries rose agreed to maintain aid flows in line with slightly by 0.7 percent in real terms in 2009. these commitments. But in the current eco- (But in current U.S. dollars, it actually fell nomic climate, donor countries have difficult from $122.3 billion in 2008 to $119.6 billion budgetary choices to make and foreign aid in 2009.) The 2009 figure represents 0.31 could be at risk. Following the early 1990s percent of members' combined gross national recession, official development assistance income (GNI). ODA from the United States, from DAC donors fell from 0.33 percent of the largest donor, rose 5.4 percent in real their combined GNI in 1992 to 0.22 percent terms to $29 billion--0.20 percent of GNI, in 1997. And the 2010 targets are slipping up from 0.19 percent in 2008 (figure 5.6). Aid away. At the 2005 Group of Eight Summit from the United Kingdom rose to $11.5 bil- in Gleneagles, Scotland, donors aimed to lion, 0.52 percent of GNI. Combined ODA raise official development assistance by $50 from the 15 European Union members of the billion in 2010 over the level in 2004 (2004 GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 129 FIGURE 5.6 Net official development assistance rose in real terms in 2008 and 2009 140 120 US$/SDR, billions 100 77.40 80 72.50 77.54 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 constant 2007 prices, US$ current prices, US$ current SDR Source: OECD DAC. Note: SDR = special drawing rights. prices and exchange rates). And they pledged FIGURE 5.7 Significant amounts of official to increase official development assistance to development assistance are in debt relief and humanitarian assistance Sub-Saharan Africa by $25 billion by 2010, more than double the 2004 level. Achiev- 35 ing the global aid target implies an increase of more than $20 billion in real terms from 30 the 2008 level. The most recent OECD sur- 25 vey of donors' forward-spending plans indi- US$, billions 20 cates that after factoring in the aid increases already programmed, donors need to provide 15 an additional $14 billion to meet the 2010 10 target. Nor is the outlook for 2011 more 5 encouraging. Aid is programmed to increase only 3 percent in real terms in 2011 over that 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 programmed for 2010. humanitarian assistance debt forgiveness Meeting the pledge to Sub-Saharan Africa other ODA will require an even greater effort. Aid to the region has risen considerably since the start Source: OECD DAC. of the decade, growing at 5 percent a year. In Note: ODA = official development assistance. 2008 the region received 37 percent of global official development assistance--up from 30 percent in 1999­2000--with a much higher $2 billion allocation for Sub-Saharan Africa, share as grants. But much of the increase has leaving a gap of $18 billion. been in the form of debt relief and emergency Programmable aid in support of core devel- and humanitarian assistance (figure 5.7).13 At opment programs is critical to achieving the the 2002 Monterrey Conference on Financing MDGs, because it can be incorporated into for Development, donors pledged that debt developing-country budgets.14 Although the relief would not displace other components of share of programmable aid has risen, non- official development assistance. Meeting the programmable categories still commanded a Gleneagles target would require an increase large share of aid flows in 2008 (figure 5.8). of $20 billion over 2008, equivalent to a rise Nonprogrammable aid made up 35 percent in net official development assistance of 25 of gross official development assistance flows percent annually for 2009 and 2010. Donors' from bilateral donors in 2008. That was down forward-spending plans are for an additional from a peak of 47 percent in 2005­06, when 130 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 FIGURE 5.8 Trends in gross official development as well as for such middle-income countries aid from bilateral donors, by type, 2000­08 as Colombia, Indonesia, Serbia, and Turkey. Less encouraging: for 51 countries, mainly 120 in Africa and Asia, programmable aid is set 100 to fall. The single largest projected decrease is for Iraq, down $2.5 billion. China, Arab 80 Republic of Egypt, and Thailand are also US$, billions 60 expected to see aid fall in 2010 by more than $200 million each from 2005. But there is no 40 discernible reallocation of programmable aid 20 to poorer countries. Fragile states combined received a total of 0 $21.3 billion in net ODA flows in 2008 (figure 2000 2002 2004 2006 2008 5.10). Despite their weak capacity and insti- nonprogrammable aid programmable aid tutions, the share of total net ODA flows that goes to fragile states rose from 14 percent in Source: OECD DAC. 2001 to 16.5 percent in 2008. However, this aid is heavily concentrated in four recipients that account for more than 54 percent of the FIGURE 5.9 Gross official development aid from total. Almost one-quarter went to Afghani- bilateral donors, 2008 stan in 2008. If the flows going to Afghani- stan are excluded, the share of total ODA going to fragile states has actually declined 11.0% debt relief slightly, from 13.3 percent in 2001 to 12.7 humanitarian assistance 10.2% percent in 2008. Additionally a large share of administration costs 5.3% other nonprogrammable ODA to these countries has been in the form 65.3% 8.3% ODA of emergency assistance or debt relief. country programmable ODA Making aid more effective The Accra Agenda for Action, prepared by Source: OECD DAC. participants in the Third High Level Forum on Aid Effectiveness in Accra September large-scale debt relief operations were imple- 2008, is a roadmap for making aid more mented (notably in Iraq and Nigeria), but effective.15 It builds on the aid business model was still well above the 28 percent recorded of the Paris Declaration on Aid Effectiveness, in 2000. Debt relief and humanitarian assis- agreed in March 2005, and signals profound tance combined accounted for 21 percent of changes for donors and developing countries. gross bilateral flows in 2008 (figure 5.9). The agenda aims to strengthen country own- The outlook for country programmable ership of the development process and align aid is mixed. Based on information that donor priorities with those of the country by donors provide to OECD-DAC, 102 coun- building effective and inclusive partnerships. tries are expected to benefit from a $10.3 bil- To achieve these goals, it calls for donors to lion increase in country programmable aid by make aid more predictable, rationalize the 2010 (over 2005). Most likely to realize large division of labor among donors, untie aid increases are the priority aid partners for sev- from the provision of goods and services in eral DAC members, countries where the scal- the donor country, allocate aid according to ing up is firmly rooted in donor country strat- need and merit, and address the problem of egies. An increase of more than $100 million countries that receive too little aid. Efforts is programmed for 33 countries, including by donors to meet their commitments for Ethiopia, Kenya, Tanzania, and Vietnam, increased aid must also be matched by better GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 131 FIGURE 5.10 Fragile states received $21.3 billion net official development assistance in 2008 a. Net ODA flows, 2001­08 b. Net ODA flows to fragile states, 2008 140 120 100 23% US$, billions 80 46% 60 8% 40 11% 20 12% 0 2001 2002 2003 2004 2005 2006 2007 2008 Afghanistan Congo, Dem. Rep. other recipients fragile states Sudan West Bank and Gaza other fragile states Source: OECD DAC. policies in developing countries to absorb and accessible to developing-country policy mak- use aid more efficiently. ers to reduce information gaps. One option Predictable aid is fundamental to its effec- would be a forum for presenting and dis- tiveness. To smooth shortfalls from aid sur- cussing trends in future allocations in detail. prises, aid-dependent countries must rely on Under the recent International Aid Transpar- their limited scope for domestic borrowing, ency Initiative, a group of development part- which can increase inflation and crowd out ners, partner countries, and nongovernmental private investment. Without good informa- organizations (NGOs) will prepare a common tion on the resources that will be available, set of standards for all donors and countries to aid recipients cannot plan their own expen- report on aid, including forward-looking aid ditures or participate meaningfully in deter- plans. mining how aid is allocated and used. How- Reducing fragmentation and strengthening ever, recipients also need to improve their aid coordination is essential to enhancing aid own budget planning and programming to effectiveness. When aid comes in too many be able to use the forward-looking informa- small slices from too many donors, transac- tion from donors. tion costs go up and recipient countries have DAC donors have committed to making aid difficulty managing their own development more predictable so that developing countries agenda. In 2006, 38 recipient countries each can plan for long-term sustainable growth. received assistance from 25 or more DAC and But in many cases donors do not reveal their multilateral donors. In 24 of these countries, aid spending plans early enough for countries 15 or more donors collectively provided less to factor them into their medium- and long- than 10 percent of that country's total aid. term planning, or they fail to stick to their The number of aid agencies has also grown commitments. Although the OECD does pub- enormously, with about 225 bilateral and lish annual information on donors' forward- 242 multilateral agencies funding more than spending plans, these data are of limited use 35,000 activities each year. A recent OECD for developing countries: for reasons of con- survey revealed that in 2007 there were 15,229 fidentiality, the reports do not show country donor missions to 54 countries--more than breakdowns, do not represent firm aid com- 800 to Vietnam alone. The scope for reduc- mitments, and for some countries are incom- ing the number of donors operating in some plete. Donors need to agree on an acceptable countries without jeopardizing diversification way of making their planning assumptions or overall aid levels is thus considerable. 132 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 MAP 5.1 Each year of a girl's education reduces, by 10 percent, the risk of her children dying before age five Gender equality rate: Ratio of girls to boys in primary and secondary education, % (2005-09) Green (De <80 80­89 90­97 98­100 101 Canada no data United States Bermuda (UK) The Bahamas Cayman Is. (UK) Cuba Turks and Caicos Islands (UK) Mexico Haiti Ca Belize Jamaica Guatemala Honduras El Salvador Nicaragua Costa Rica Panama R.B. de Guyana Venezuela Suriname Colombia French Guiana (Fr) Ecuador Kiribati Peru Brazil Samoa Cook Is. (NZ) French Polynesia (Fr) American Samoa (US) Bolivia Fiji Tonga Dominican Puerto British Virgin Paraguay Republic Rico (US) Islands (UK) Anguilla (UK) U.S. Virgin Antigua and Barbuda Islands (US) St. Kitts Guadeloupe (Fr) Chile Uruguay and Nevis Argentina This map was produced by the Netherlands Dominica Map Design Unit of The World Bank. Antilles (Neth) Montserrat (UK) Martinique (Fr) The boundaries, colors, denominations St. Lucia Aruba St. Vincent and and any other information shown on Barbados (Neth) The Grenadines this map do not imply, on the part of The World Bank Group, any judgment Grenada on the legal status of any territory, or Trinidad any endorsement or acceptance of and Tobago such boundaries. R.B. de Venezuela Source: World Development Indicators. There is broad agreement on the need for a working together to reduce the number of coherent division of labor among donors, and diagnostic reviews and duplicative missions. the Accra Agenda for Action urges donors to It is critical that recipient countries take a concentrate on fewer countries and sectors. strong leadership role in coordinating donor Doing so would require coordinated alloca- activities. tion principles and aid monitoring across the whole donor community. But this is a sensitive The full benefit of untying aid remains unre- topic, touching on comparative advantage, alized. Untying aid and allowing developing specialization, and delegation. Some prog- countries to make their own procurement ress has been achieved with broader use of decisions are key to making aid more effec- program-based approaches, and elaboration tive. Untied aid procured through open inter- of principles, including the 2007 European national competition offers the best prospect Union Code of Conduct on Complementarity of good value for money and, when coupled and Division of Labor. Donors have started with sound procurement systems, supports GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 133 IBRD 37742 APRIL 2010 nland en) Faeroe Norway Iceland Islands Finland (Den) Sweden The Netherlands Russian Federation Estonia Isle of Man (UK) Denmark Russian Latvia Fed. Lithuania United Ireland Kingdom Germany Poland Belarus Channel Islands (UK) Belgium Ukraine Luxembourg Moldova Kazakhstan Liechtenstein Mongolia France Italy Romania Switzerland Andorra Bulgaria Georgia Uzbekistan Kyrgyz Azer- Rep. D.P.R. Portugal Spain Turkey Armenia baijan Turkmenistan of Korea Monaco Greece Tajikistan Japan Cyprus Syrian Rep. of Gibraltar (UK) Arab Islamic Rep. Afghanistan China Tunisia Malta Lebanon Korea Rep. Iraq of Iran Morocco Israel Jordan Kuwait West Bank and Gaza Bahrain Pakistan Bhutan Nepal Algeria Libya Arab Rep. Qatar Former Spanish of Egypt Saudi Sahara Arabia United Arab Bangladesh Emirates India Myanmar Lao Mauritania Oman P.D.R. ape Verde Mali N. Mariana Islands (US) Niger Rep. of Thailand Vietnam Senegal Chad Eritrea Yemen Guam (US) The Gambia Burkina Sudan Djibouti Cambodia Philippines Federated States of Micronesia Marshall Islands Guinea-Bissau Guinea Faso Benin Sri Sierra Leone Côte Ghana Nigeria Central Ethiopia Lanka Brunei Liberia D'Ivoire African Rep. Somalia Palau Togo Cameroon Malaysia Maldives Equatorial Guinea Uganda Kiribati Congo Kenya Singapore Nauru São Tomé and Príncipe Gabon Rwanda Dem. Rep. of Burundi Seychelles Papua Solomon Congo Indonesia New Guinea Islands Tanzania Comoros Tuvalu Timor-Leste Angola Malawi Zambia Mayotte Fiji (Fr) Vanuatu Zimbabwe Mauritius Namibia Madagascar Botswana Mozambique Réunion (Fr) New Poland Caledonia Australia (Fr) Swaziland Ukraine Germany Czech Rep. Slovak Rep. South Lesotho Africa Austria Hungary Slovenia Romania Croatia New Zealand Bosnia and San Herz. Serbia Bulgaria Marino Montenegro Kosovo FYR Macedonia Vatican Italy Albania City Greece developing-country ownership of aid. Numer- 2007, 79 percent of ODA was untied, 17 per- ous studies confi rm that goods, works, and cent was still tied, and the status of 4 percent services procured under tied aid regimes that was not reported. Donors have recommended restrict procurement to suppliers from the several changes, such as removing the thresh- donor country cost 15­25 percent more on olds below which untying is not required and average and are more influenced by supplier including highly indebted poor countries not interests and capacities. classified as least developed countries. Other Since the landmark agreement by DAC provisions invite non-DAC donors to untie donors in 2001 to untie fi nancial aid to the their aid as much as possible and to respect least developed countries, there has been good internationally agreed principles of environ- progress. DAC donor countries have formally mental sustainability and corporate social untied more than four-fifths of their ODA responsibility. to the least developed countries, and a wider Donors have committed to untying aid in process of untying aid is under way. As of categories traditionally regarded as difficult 134 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 to untie and outside the scope of the 2001 also suggests that donor aid allocation has agreement, such as food aid, technical coop- changed greatly over the past three decades, eration, and consultant costs. Several DAC with the influence of colonial ties, trade donors have already untied all or large relationships, political allies, and debt lev- amounts of their aid in these categories, and els diminishing as allocations become more others are moving toward this. Under the responsive to recipient country income and Accra Agenda for Action, all DAC donors performance.17 Aid allocation patterns also will elaborate their plans in 2010 to untie aid reflect greater attention to countries recover- to the maximum extent. They have agreed to ing from conflict and facing external shocks. resist pressures arising from the global eco- Aid from private sources, up in recent years, nomic crisis to retie aid or to introduce new also affects overall aid allocation (box 5.2). tied aid programs. They are also committed Considerable scope remains for a more to improving performance in advance notifi- rational, results-oriented, and needs-driven cations and reporting on contract awards. aid allocation mechanism. A substantial The case for untying aid is unequivocal share of aid goes to middle-income coun- on effectiveness and efficiency grounds. But tries, which received 46 percent of net ODA despite the marked shift to largely untied aid, from all sources in 2008 (figure 5.11). While there is very little evidence-based analysis of middle-income countries are home to many the impact of untying on recipient countries. poor people and may need to step up their Does it reduce or increase administrative efforts to achieve the MDGs, they usually costs? Are benefits realized in the absence of have options for funding not open to the an efficiently managed public finance regime? poorest countries. And why do opportunities for contract awards The distribution of aid among low-income to local suppliers remain limited? The high countries varies widely. Over the past decade share of contracts won by suppliers in some India received $1 per capita in aid, whereas donor countries highlights a gap between Bosnia and Herzegovina received $129 per untying aid and actual outcomes, suggesting capita. Aid as a share of recipient country the existence of informal constraints, such as GNI shows similar large divergence, rang- prequalification and procurement processes, ing from 0.1 percent for India to 189 percent that favor national companies and limit for Liberia. Some countries in Sub-Saharan opportunities for suppliers outside the donor Africa received net official development assis- country. DAC donors that report on contract tance flows in 2008 greater than their GNI awards indicated that in 2007 two-thirds of (figure 5.12). contracts (in number and value) were awarded While aid allocation undoubtedly could be to suppliers in OECD countries, the majority improved, defi ning an "equitable share" of to suppliers in the donor country. aid is problematic. Compared with financing needs, most developing countries would likely Many aid allocations are still driven by claim to receive insufficient aid, and costing factors other than need and merit. Aid allo- exercises for the achievement of the MDGs cation practices differ widely. Multilateral indicate large unmet financing needs for most development agencies have largely adopted developing countries. A recent World Bank aid allocation formulas aimed at ensuring study18 identified several normative bench- efficient and transparent allocation, but most marks for apportioning aid: bilateral donors still allocate aid not on need and merit but on geopolitical ties and self- · An egalitarian approach, in which each interest. A recent study using DAC data finds country receives the same amount of aid that almost half the predicted value of aid per capita or as a share of GDP. is still determined by donor-specific factors, · An average donor behavior approach, based one-third by need, a sixth by self-interest, on the relative weights donors attach to each and 2 percent by performance.16 But research recipient country's needs and performance. GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 135 BOX 5.2 The allocation of aid from private sources Aid from private sources has increased greatly in of scale and the tendency of NGOs to complement, recent years. The 2009 Index of Global Philanthropy not substitute for, bilateral aid. In that sense, NGOs and Remittances estimates that aid to developing may contribute to the problem of some countries countries from private foundations, nongovernmen- receiving an inequitably small share of global aid. tal programs, and donations in OECD countries A study in Sweden comparing aid allocation by amounted to $49 billion in 2007, while official devel- NGOs with the country's official development assis- opment assistance totaled $103 billion. Information tance shows that the NGOs are more selective. Aid on the allocation of private aid is limited, but recent from both official and private sources declines as studies suggest that allocations by nongovernmental recipient country income rises, but the trend is more organizations (NGOs) are driven by indicators of pronounced for aid from NGOs. A study of the recipient need. One study finds that nongovernmental impact of aid, measured per capita, fi nds a positive organizations exercise greater selectivity than official correlation between aid and the incidence of infant bilateral donors and provide, on average, more aid mortality and illiteracy for NGO aid but not for offi- per capita to countries ranked by the United Nations cial aid. as having the highest priority needs. Some countries receive large amounts of aid from NGOs and others relatively little. The factors driving Source: Hudson Institute 2009; Koch 2007; Dreher and others allocation include internal and external economies 2007; Masud and Yontcheva 2005. · A poverty-efficient approach that maxi- FIGURE 5.11 Net official development assistance mizes global poverty reduction. from all sources, by income group, 2000­08 · A performance-based approach, using 60 the mechanism that underpins the Inter- national Development Association (IDA) 50 allocation formula. 40 · The OECD approach, which ranks aid US$, billions receipts by ODA per capita and per capita 30 income to identify relative underfunding. 20 Behind each approach are implicit or explicit 10 value judgments on the relative importance of 0 need and the ability to use aid effectively. 2000 2001 2002 2003 2004 2005 2006 2007 2008 The countries considered to receive insuf- low-income countries ficient aid (aid receipts at least 1 percentage middle-income countries point of GDP below the benchmark alloca- tion) vary according to the allocation bench- Source: OECD DAC. mark selected. There are also wide disparities in the countries found to receive insufficient aid: extremely poor countries with low per for public service delivery. There is no evidence capita incomes, where needs are greatest; poor that fragile states have a greater or lesser pro- performers, where aid may not be used effec- pensity to receive insufficient aid than other tively; strong performers that could produc- low-income countries. Of the 61 low-income tively use higher volumes of aid; and countries countries examined, 37 received insufficient with a small population and high fixed costs aid according to at least one benchmark, 17 136 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 FIGURE 5.12 Net ODA varies widely as a share of GNI in demand and the relative merits or difficul- Sub-Saharan Africa ties of investing in a given country. But donor agreement to clarify defi nitions and bench- Angola marks would help set the stage for a best- Benin effort commitment from all donors to raise Burkina Faso ODA in some subset of countries faster than Burundi the average growth rate. Large-scale realloca- Cameroon Centrtal African Republic tion of current aid is neither feasible nor desir- Chad able, but donors should consider rebalancing Congo, Dem. Rep. future aid increases. Congo, Rep. Côte d'lvoire Ethiopia Debt relief: progress and challenges Ghana Since the Monterrey Conference on Financ- Guinea ing for Development in 2002, substantial Guinea Bissau progress has been made in implementing the Kenya Heavily Indebted Poor Countries (HIPC) Liberia Madagascar Initiative and the Multilateral Debt Relief Malawi Initiative (MDRI). Of 40 eligible coun- Mali tries, 35 have passed the decision point and Mozambique qualified for HIPC assistance. Of those, Niger 28 countries have reached the completion Nigeria point and qualify for debt relief as of Janu- Rwanda ary 2010. Several other countries are also Senegal well on their way to the completion point. Sierra Leone As a result, the debt burdens of many poor Sudan Tanzania countries have been markedly reduced. Togo The overall assistance committed to the 35 Uganda post-decision-point countries represents an Zambia average of 40 percent of their 2008 GDP 0 20 40 60 80 100 120 140 160 180 200 and, together with relief under traditional ratio of ODA to GNI, % mechanisms and additional relief from Paris ODA/GNI Club creditors, is expected to reduce their debt burden by more than 80 percent (figure Source: OECD DAC. 5.13). Poverty-reducing expenditures in these countries rose 2 percentage points of GDP according to two benchmarks, and 7--mostly between 2001 and 2008, while debt service in Sub-Saharan A frica-- according to obligations declined correspondingly. three or more benchmarks. Under the IDA Commercial creditors have also increased performance-based aid allocation formula, debt relief, largely through substantive debt the amount required to raise aid levels to the relief to Côte d'Ivoire and Liberia. Debt relief norm is estimated at $3.3 billion a year; under for Côte d'Ivoire was provided through a the poverty efficiency benchmark, the amount rescheduling agreement in 1998. In April rises to $12.5 billion. These are large amounts 2009 commercial creditors provided full debt representing roughly 7 percent and 25 per- relief to Liberia under a debt buyback opera- cent, respectively, of programmable aid from tion supported by IDA's Debt Reduction Facil- bilateral donors to countries excluding Sub- ity and contributions from bilateral donors. Saharan Africa. Litigation by commercial creditors, an Variations in aid are not just supply driven. impediment to delivering full debt relief to The decision to provide or withhold aid heavily indebted poor countries, appears to depends on many factors, including effective have lessened although a small number of GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 137 new lawsuits were initiated in 2009. Support FIGURE 5.13 Debt stock of heavily indebted poor countries is for countries facing litigation is available from expected to come down by 80 percent in end-2009 NPV the African Legal Support Facility, launched by the African Development Bank on June 29, 160 2009, and initiatives are under way in some 140 US$, billions at end 2008, NPV donor countries to introduce legislation cur- 120 36.4 tailing the scope of litigation against heavily 100 32.7 indebted poor countries. 80 Important challenges remain. Some pre- 60 decision-point countries are beset by severe 104.4 16.2 16.2 40 84.2 political problems. Almost half the countries 42.2 have been affected by war in recent years, and 20 36.7 12.7 many are still at a high risk of conflict, politi- 10.1 0 before after after HIPC after after cal instability, or both. To reach the comple- traditonal traditional Initiative additional MDRI tion point, they will need to strengthen their debt relief debt relief debt relief bilaterial policies and institutions and receive continu- debt relief ing support from the international commu- 26 completion-point countries 9 interim countries nity. For post-completion-point countries, debt relief has greatly reduced debt vulnera- Source: HIPC Initiative country documents and IDA and IMF staff estimates. bilities (table 5.2). However, a few post-com- Note: Estimates based on decision-point debt stock documents. NPV = net present value. pletion-point countries remain vulnerable to debt-related problems, and six are still at high risk of debt distress.19 Although the risk Total commitments (including concessional of a major debt crisis in heavily indebted poor and nonconcessional loans plus grants) by countries appears limited, the current global the International Monetary Fund (IMF) and economic crisis has made debt sustainability the multilateral development banks (MDBs) more difficult and underscores the need to rose from $68 billion in 2007 to $234 bil- implement sound borrowing policies and to lion in 2009. The goals of this assistance were strengthen capacity to manage debt. to stabilize markets and avert the collapse of the banking and private sectors in develop- ing countries, to limit the slide in economic IFIs responded to the crisis growth and support the poor, and to mini- quickly and decisively mize any interruption in development prog- The IFIs boosted lending and adopted inno- ress. The main instruments included balance vative programs to confront the global crisis of payments support for macroeconomic sta- and the subsequent development emergency.20 bilization, budgetary support for government TABLE 5.2 Distribution of debt distress by country group, end-July 2009 percent Debt vulnerability Number of Country group countries Low Moderate High In debt distress (%) All low income countries 67 29.9 35.8 22.4 11.9 Non-heavily indebted poor countries 28 32.1 39.3 25.0 3.6 Completion point, heavily indebted poor countries 28 39.3 39.3 21.4 0.0 Pre-completion point, heavily indebted poor countries 11 0.0 18.2 18.2 63.6 Interim countries 7 0.0 14.3 14.3 71.4 Pre-decision point countries 4 0.0 25.0 25.0 50.0 Source: Data are from individual countries' debt sustainability analysis in joint World Bank-IMF. Note: Based on debt sustainability analyses as of end-July 2009. Low-income country group and non-heavily indebted poor countries exclude Azerbaijan, India, Kiribati, Maldives, Pakistan, Somalia, Timor Leste, and Uzbekistan. Pre-decision-point countries exclude Somalia. Countries that have passed the decision point qualify for full debt relief under the HIPC and MDRI Initiatives; interim countries are between the decision and completion points. 138 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 expenditures, guarantees to encourage invest- $250 billion), with more than $32 billion to ment in developing countries, technical assis- emerging market economies and $18 billion tance to strengthen development frameworks, to low-income countries. and traditional lending to maintain critical The global nature of the crisis led the investments in infrastructure and human IMF to take swift action to adapt its lend- development. ing and conditionality frameworks to the new circumstances. Standard access to IMF fi nancing have been doubled, and the provi- IFI financial support laid the basis for sion of exceptionally large loans has become sustained recovery easier, while adequate safeguards have been The IMF quickly scaled up its assistance preserved. The new flexible credit line, a to help meet countries' increased financ- facility without ex-post policy conditions for ing needs. By the end of February 2010, the countries with very strong track records, has IMF had committed a record high total of proven very effective. Colombia, Mexico, $175 billion (including precautionary financ- and Poland have received support under the ing) to emerging and other developing coun- facility, helping to stabilize their economies, tries with balance of payments difficulties. mitigating contagion effects, and laying the This fi nancing included a sharp increase in basis for a recovery. Costa Rica, El Salva- concessional lending to the world's poorest dor, and Guatemala are receiving support countries--with new commitments amount- under the High Access Precautionary Stand- ing to almost $3.4 billion since the begin- by Arrangement, a regular lending window ning of 2009, up from $1.4 billion for 2008. (box 5.3). The IMF's new conditionality Fifty-five countries now have an arrangement framework encourages greater focus on the with the IMF. The global financial safety net achievement of reform objectives in critical has also been strengthened with the general areas, while providing greater flexibility on allocation of special drawing rights (totaling the timing and content of policy measures. BOX 5.3 The IMF's engagement with low-income countries To make fi nancial support more flexible and tailored basis. In these respects it is similar to the non- to the diversity of low-income countries, the archi- concessional standby arrangement available to all tecture of the IMF's concessional facilities has been member countries. substantially revamped. The new Poverty Reduction · The Rapid Credit Facility provides limited fi nan- and Growth Trust, effective on January 7, 2010, pro- cial support in a single, up-front payout for low- vides support through three new lending windows: income countries facing urgent fi nancing needs; the facility replaces the Rapid Access Component · The Extended Credit Facility, which replaced the under the Exogenous Shocks Facility and the subsi- Poverty Reduction and Growth Facility, provides dized Emergency Assistance for Natural Disasters sustained engagement to address medium-term and the subsidized Emergency Post-Confl ict Assis- protracted balance of payments problems. tance. Successive drawings can be made by coun- · The Standby Credit Facility is available to low- tries in postconfl ict or other fragile situations. income countries that no longer face protracted balance of payments problems but may need occa- Programs under all three facilities emphasize pov- sional help. It provides support to address short- erty alleviation and growth linked to country-owned term fi nancing needs caused by shocks or policy poverty reduction policies and may include targets slippages. It can also be used on a precautionary to safeguard social and other priority spending. GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 139 FIGURE 5.14 Multilateral development banks substantially increased their disbursements, 2000­09 a. MDB gross disbursements by type, 1999­2009 b. MDB gross disbursements by location, 2000­09 50 30 45 25 40 35 20 US$, billions US$, billions 30 25 15 20 10 15 10 5 5 0 0 1999 2001 2003 2005 2007 2009 2000 2002 2004 2006 2008 concessional flows Africa Asia Europe America nonconcessional flows to sovereign noncessional flows to nonsovereign Source: Staff of the big five multilateral development banks. The multilateral development banks also The Asian Development Bank (ADB) substantially increased their lending. Total boosted its total commitments from $11.3 bil- MDB commitments rose from $67 billion in lion in 2008 to $16.1 billion in 2009. It also 2007 to $115 billion in 2009. The heavy reli- accelerated its disbursements by establishing ance on quick-disbursing support meant that the Countercyclical Support Facility in June increased commitments were translated into 2009 as a time-bound budget support instru- a sharp rise in disbursements, from under ment with funding of $3 billion. Consistent $50 billion in 2007 to about $79 billion in with the facility's quick-disbursing nature, $2 2009 (figure 5.14). Nonconcessional loans billion was disbursed by the end of 2009, and totaled about $62 billion, and concessional another $500 million was disbursed in March flows more than $16 billion. Latin America 2010. The Asian Development Fund (AsDF) and Asia remained the major recipients of provided almost $1.2 billion over 2008­10 to funds (32 percent each). Latin America and help low-income Asian countries cope with Europe witnessed the largest increases from the crisis, 85 percent in program loans and 15 2007, with jumps in lending of 54 percent percent in project loans. The high proportion and 35 percent, respectively. of AsDF program lending exceeded the ceil- All the multilateral development banks ing for 2007­09 based on a 3-year moving participated in the surge in lending. average. In June 2009 the ADB also approved The World Bank Group commitments the allocation of an additional $400 million totaled $87.6 billion from July 2008 to in Asian Development Fund commitments to December 2009. Its disbursements during this the most fiscally stretched countries with low period were $59.9 billion. The first half of fis- access to nonconcessional resources. cal 2010 shows the strongest IBRD (Interna- Commitments by the Inter-American tional Bank for Reconstruction and Develop- Development Bank (IDB) rose from $11.3 ment) commitments in history ($19.2 billion), billion in 2008 to $15.6 billion in 2009. and the surge in lending is set to continue: Disbursements rose to nearly $12 billion in for fiscal 2010 IBRD lending is on track to 2009, up from $7.6 billion in 2008. The IDB exceed $40 billion (table 5.3). IDA commit- also provided more incremental concessional ments reached $14 billion in 2009, more than financing than had originally been scheduled 20 percent above the previous year. for the 2009­10 cycle, in the form of both 140 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 MAP 5.2 Emissions in high-income countries overwhelm those in developing countries Greenhouse gases: Carbon dioxide emissions per capita, metric tons (2006) Green (De 15.0 10.0­14.9 5.0­9.9 1.0­4.9 <1.0 Canada no data United States Bermuda (UK) The Bahamas Cayman Is. (UK) Cuba Turks and Caicos Islands (UK) Mexico Haiti Ca Belize Jamaica Guatemala Honduras El Salvador Nicaragua G Costa Rica Panama R.B. de Guyana Venezuela Suriname Colombia French Guiana (Fr) Ecuador Kiribati Peru Brazil Samoa Cook Is. (NZ) French Polynesia (Fr) American Samoa (US) Bolivia Fiji Tonga Dominican Puerto British Virgin Paraguay Republic Rico (US) Islands (UK) Anguilla (UK) U.S. Virgin Antigua and Barbuda Islands (US) St. Kitts Guadeloupe (Fr) Chile Uruguay and Nevis Argentina This map was produced by the Netherlands Dominica Map Design Unit of The World Bank. Antilles (Neth) Montserrat (UK) Martinique (Fr) The boundaries, colors, denominations St. Lucia Aruba St. Vincent and and any other information shown on Barbados (Neth) The Grenadines this map do not imply, on the part of The World Bank Group, any judgment Grenada on the legal status of any territory, or Trinidad any endorsement or acceptance of and Tobago such boundaries. R.B. de Venezuela Source: World Development Indicators. grants and blended financing. Its concessional capital and the withdrawal of commercial resources, in the Fund for Special Opera- partners from projects, it set up a $1.5 billion tions, were severely constrained over the past Emergency Liquidity Facility for bridging several years because of debt relief. As a con- fi nance with fast-track approvals. The Afri- sequence, it stopped providing concessional can Development Fund's (AfDF's) allocable lending purely from that fund in 2007 and resources increased by 1.4 percent in 2009, implemented a blended loan structure with and nine fragile states received allocations ordinary capital to maintain resources and that were on average, 11 percent larger than concessionality. in 2008. The African Development Bank (AfDB) Commitments by the European Bank for almost doubled its commitments in 2009, Reconstruction and Development (EBRD) to $10.1 billion, while taking steps to front- increased more than 50 percent in 2009, to load disbursements, improve response times, $7.9 billion. Some 40 percent of the crisis introduce new instruments to meet clients' response activity was provided to early and evolving needs, and leverage its balance sheet. intermediate transition countries, which In response to the diminishing availability of include the poorest members of the ERBD GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 141 IBRD 37738 APRIL 2010 nland en) Faeroe Norway Iceland Islands Finland (Den) Sweden The Netherlands Russian Federation Estonia Isle of Man (UK) Denmark Russian Latvia Fed. Lithuania United Ireland Kingdom Germany Poland Belarus Channel Islands (UK) Belgium Ukraine Luxembourg Moldova Kazakhstan Liechtenstein Mongolia France Italy Romania Switzerland Andorra Bulgaria Georgia Uzbekistan Kyrgyz Azer- Rep. D.P.R. Portugal Spain Turkey Armenia baijan Turkmenistan of Korea Monaco Greece Tajikistan Japan Cyprus Syrian Rep. of Gibraltar (UK) Arab Islamic Rep. Afghanistan China Tunisia Malta Lebanon Korea Rep. Iraq of Iran Morocco Israel Jordan Kuwait West Bank and Gaza Bahrain Pakistan Bhutan Nepal Algeria Libya Arab Rep. Qatar Former Spanish of Egypt Saudi Sahara Arabia United Arab Bangladesh Emirates India Myanmar Lao Mauritania Oman P.D.R. ape Verde Mali N. Mariana Islands (US) Niger Rep. of Thailand Vietnam Senegal Chad Eritrea Yemen Guam (US) The Gambia Burkina Sudan Djibouti Cambodia Philippines Federated States of Micronesia Marshall Islands Guinea-Bissau Guinea Faso Benin Sri Sierra Leone Côte Ghana Nigeria Central Ethiopia Lanka Brunei Liberia D'Ivoire Cameroon African Rep. Somalia Palau Togo Malaysia Maldives Equatorial Guinea Uganda Kiribati Congo Kenya Singapore Nauru São Tomé and Príncipe Gabon Rwanda Dem. Rep. of Burundi Seychelles Papua Solomon Congo Indonesia New Guinea Islands Tanzania Comoros Tuvalu Timor-Leste Angola Malawi Zambia Mayotte Fiji (Fr) Vanuatu Zimbabwe Mauritius Namibia Madagascar Botswana Mozambique Réunion (Fr) New Poland Caledonia Australia (Fr) Swaziland Ukraine Germany Czech Rep. Slovak Rep. South Lesotho Africa Austria Hungary Slovenia Romania Croatia New Zealand Bosnia and San Herz. Serbia Bulgaria Marino Montenegro Kosovo FYR Macedonia Vatican Italy Albania City Greece community. EBRD's operations are targeting (instead of 30 percent) for programs or proj- the financial sector by strengthening bank ects that respond to the crisis. The Financial balance sheets and ensuring bank capacity Crisis Response Fast-Track Facility was set to continue lending for trade and the real up to fast-track up to $2 billion of IDA15 economy, especially small and medium-sized resources from existing country allocations enterprises, and by addressing fi rms' short- and shorten the review period for eligible term refinancing needs through the enterprise operations. By December 2009 more than response package and infrastructure projects $1.5 billion had been approved. AsDF-eligi- left unfunded by the dwindling of commer- ble borrowers were allowed to frontload up cial lending. to 100 percent of their biennial allocation To accelerate their response to the crisis, during 2009. AfDF assistance also has been the IFIs have boosted flows to the poorest heavily frontloaded. At the end of December countries by frontloading available resources. 2009, two years into the AfDF-11 cycle, 86 The standard IDA frontloading rule was percent of resources had been committed. The relaxed in fiscal 2009, allowing countries to current AfDF balance available for operations frontload up to half their annual allocation commitment for 2010 is only $1 billion, well 142 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 TABLE 5.3 Gross commitments by IFIs, 2007­09 US$ billions (as of December 31, 2009) Institution 2007 2008 2009 Jul. 2008­Dec. 2009 World Bank Group 36.5 47.0 65.0 87.6 International Bank for Reconstruction and Development 11.2 22.6 39.4 52.1 International Development Association 12.7 11.4 13.8 18.3 International Finance Corporation 10.3 11.5 10.5 15.3 Multilateral Investment Guarantee Agencya 2.3 1.5 1.3 1.9 Asian Development Bankb 10.8 11.3 16.1 24.5 African Development Bank 4.9 5.4 10.1 -- European Bank for Reconstruction and Development 5.6 5.1 7.9 10.0 Inter-American Development Bank 8.8 11.3 15.6 23.4 International Monetary Fundc 1.3 48.7 119.0 169.8 General Resources Account 1.1 47.7 116.4 166.6 Standby 1.1 47.6 35.9 86.1 Flexible credit line 0.0 0.0 80.4 80.5 Extended arrangement 0.0 0.0 0.0 0.0 Poverty Reduction and Growth Facility/Exogenous Shocks Facility Poverty Reduction and Growth Facility 0.3 1.1 1.9 2.0 Exogenous Shocks Facility 0.0 0.4 1.3 1.6 Memo: ENDA/EPCA 0.1 0.3 0.0 0.0 Source: Various IFIs. Note: ENDA ­ Emergency Natural Disaster Assistance. EPCA ­ Emergency Postconflict Assistance. -- = not available. a. The amount of the guarantee is both the commitment and disbursement amount. b. Data refer to approvals, net of cancellations, of sovereign and nonsovereign loans from ordinary capital resources, Asian Development Fund (ADF) loans, ADF grants, other grants, equities, guarantees, the Trade Finance Facilitation Program in 2009, and technical assistance. c. The commitments were taken from the "IMF lending arrangements" report and include the total amount agreed only for those programs with "Date of arrangement" falling in the calendar year. Standard Drawing Rights were converted to U.S. dollars using the average conversion rate for the year. ENDA = Emergency Natural Disaster Assistance. EPCA = Emergency Post-Conflict Assistance. below the fiscal 2010 pipeline of $2.3 billion. term, providing up to $17 billion through Absent increased resources, these essential 2014. This support will be frontloaded, mak- steps to provide desperately needed resources ing $8 billion available in the first two years, at the height of the crisis will imply a substan- when crisis-related needs are greatest. It will tial shortfall in concessional fi nancing over also be provided on enhanced terms: no inter- the next couple of years. est will be charged through the end of 2011 The IFIs have also increased their lend- on concessional loans, and thereafter a new ing to low-income countries by providing mechanism for updating interest rates will blends of concessional and nonconcessional ensure permanently higher concessionality. loans. To tap the considerable potential for To meet these new fi nancing commitments, commercially viable and fiscally attractive $14 billion in additional loan resources are foreign exchange­earning projects in many being mobilized from member countries, and IDA countries, the IBRD is expanding the use $2.3 billion in new subsidy resources secured of its resources for specific projects in IDA from the IMF's internal resources, including countries based on the IBRD Enclave frame- those from the agreed gold sales and bilat- work for loans and partial risk guarantees for eral contributions. In light of the increas- critical infrastructure and natural resource ing ability of some low-income countries to projects. support nonconcessional debt, the IMF has The IMF recently scaled up its concessional moved from a single design for concessional- financial assistance, drawing on bilateral con- ity requirements toward a menu of options tributions and on resources linked to agreed linked to country circumstances. At the same gold sales, consistent with a new income time, the Debt Sustainability Framework for model. The package doubles the Fund's con- low-income countries has been made more cessional lending capacity over the medium flexible through closer attention to the impact GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 143 BOX 5.4 Gender equality as smart economics: A World Bank Group action plan The World Bank Group adopted an action plan in operations. A transition plan is being prepared to 2007 to intensify and scale up gender mainstream- detail the modalities. ing in economic sectors, such as agriculture, private Some examples of initiatives funded by the Gen- sector development, finance, and infrastructure, der Action Plan include: where progress was lagging. The action plan aims to increase Bank Group lending and nonlending opera- · Labor markets. Developing employment orien- tions that promote women's economic participation tation tools and training for women and career and to build analytic evidence in support of gender ladders for domestic workers for a $350 million equality as smart economics. The Gender Action Heads of Household Transition Project, with some Plan promotes the collection, quality, and use of sex- 400,000 low-income women expected to benefit. disaggregated statistics and supports rigorous impact · Infrastructure. Increasing women's access to evaluation of Bank operations in economic sectors. infrastructure, particularly transport and energy. The four-year plan comes to a close in December A rural electrification project helped increase the 2010 and has to date fi nanced 220 initiatives in 74 connection rate of poor female-headed households. countries, with most operations taking place in low- Work has also addressed women's transport needs income countries. in a series of countries. The plan has tested innovative mechanisms to · Agriculture. Increasing women's agricultural pro- increase gender mainstreaming in traditionally dif- ductivity and access to markets through a range fi cult sectors. For example, small amounts of seed of interventions. A comprehensive sourcebook funding have helped leverage the initiative across to support women in agriculture has been devel- much larger Bank operations, and competitive calls oped in collaboration with the Food and Agricul- for proposals have attracted proposals from large ture Organization and the International Fund for numbers of Bank staff outside of gender units, Agricultural Development and is being used in five leading to learning by doing. One effect has been ongoing Bank operations. increased gender coverage in economic sector opera- · Adolescent girls initiative. Smoothing the transition tions. With the close of the action plan, the success- from school to work and entrepreneurship--a key ful mechanisms for raising gender coverage will be stumbling block on the road to earning a living-- applied to an increasing share of mainstream Bank with a focus on low-income, postconflict countries. of public investment on growth, the role of higher food and fuel prices. The World Bank remittances, and the treatment of external Global Food Crisis Response Program com- debt of state-owned enterprises. mitted about $1.2 billion to the purpose, with disbursements of $790 million in more than 30 countries, $380 million of it for Sectoral focus of MDB support safety nets and nutrition in 21 countries. The Much of the increase in MDB financing over MDBs later strengthened social safety nets the past two years took the form of budget and helped mitigate the social impacts of the support to quickly disburse funds to protect crisis, and they have supported economic and the most vulnerable against the fallout of social policy reforms essential for achieving the crisis, maintain planned infrastructure more pro-poor and gender-inclusive growth investment, and sustain private sector­led (box 5.4). World Bank lending to support economic growth and employment creation. social safety nets reached more than $3 bil- lion in 27 countries in fiscal 2009, includ- Protecting the most vulnerable. The MDBs ing support to middle-income countries and expanded their activities to protect the most grant funding for small, targeted projects in vulnerable, first by helping countries manage 17 low-income IDA countries (totaling $95 144 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 million). Building on lessons from the safety critical infrastructure left unfunded by the net programs, the World Bank launched the dwindling of commercial lending, with 1.3 Rapid Social Response Program to help coun- billion worth of signed investments in 2009. tries finance services for maternal and infant health and nutrition and school feeding pro- Sustaining private sector­led growth. The grams, build or scale up targeted safety net crisis has underlined the importance of quick programs, and provide income support to the and strong IFI support to private sector firms unemployed. to help achieve growth, employment, and pov- erty reduction. The multilateral development Maintaining planned infrastructure invest- banks' focus on access to finance for invest- ment. Support to planned infrastructure ment and trade, both expected to recover investment provides a short-term stimulus slowly, will be critical to preserve investments and addresses long-term development needs. by small and medium-size enterprises. The So far infrastructure spending accounts for IFC has launched a broad set of targeted ini- about two-thirds of the stimulus programs in tiatives, combining its funds with contribu- emerging economies. To address the funding tions mobilized from various sources (includ- gap for infrastructure projects in developing ing governments and other IFIs) to help private countries with fiscal constraints, the World enterprises cope with the global financial Bank launched an Infrastructure Recovery and economic crises (box 5.5). AsDB's crisis- and Assets Platform, an umbrella for mobiliz- related assistance to the private sector forcuses ing additional fi nance for energy, transport, on rebuilding business confidence, providing water, and information and communica- incentives for private sector investments, and tions technology infrastructure in developing facilitating trade fi nancing by expanding its countries beyond targets envisaged before the Trade Finance Facilitation Program (TFFP). crisis. Overall, the World Bank (IBRD-IDA) increased infrastructure lending by more than Coordination with other development part- 50 percent, from $11.9 billion in fiscal 2008 to ners. To ensure speedy implementation, the $18.3 billion in fiscal 2009; the International IFIs have facilitated regional implementation Finance Corporation contributed $3.1 billion; programs to channel support by building and the Multilateral Investment Guarantee a common platform for action among IFIs, Agency (MIGA), $0.1 billion. In addition, the regulators, and private groups in the banking IFC financed more than $800 million in gen- sector. The IFIs have worked closely to assess eral infrastructure and other projects.21 and address the refinancing and recapitaliza- The ADB's countercyclical support fund tion needs of banks, in collaboration with also helped fill the gaps of critical public home and host country authorities. infrastructure investments, including labor- Regional crisis initiatives include the joint intensive infrastructure projects and projects IFI Action Plan for Africa, to leverage an in support of social protection and poverty additional $15 billion of financing to protect reduction programs. For example, in Bangla- important ongoing programs and support desh $500 million in support sought to free investment-ready initiatives (box 5.6). The up fiscal space for financing other parts of joint IFI Action Plan for Central and Eastern the government's countercyclical development Europe, launched in March 2009, focuses on program--particularly the planned scaling-up meeting the region's financial sector needs for of infrastructure investment. The AfDB helped capital and liquidity. The largest multilateral develop the Action Plan for Africa, a regional investors and lenders in the region agreed to and continental strategy for 2010­15. Its rig- provide up to $32.5 billion, with the World orously ranked pipeline of operations requires Bank Group providing up to $8 billion. This $10.2 billion in resources, with $7.7 billion for innovative arrangement has been augmented infrastructure and $1.7 billion for agriculture in 2010 by the Vienna Initiative, which and food security. EBRD's projects support brings together IFIs, European institutions, GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 145 BOX 5.5 Crisis-related initiatives of the International Finance Corporation Over the past two years, the International Finance national Development, and Norway's Norfund. As Corporation (IFC) board approved several initia- a subfund of the IFC Capitalization Fund, it will tives that mobilized more than $10 billion in fi nanc- focus on supporting the capital needs of strategi- ing. While fund-raising continues, the initiatives are cally important banks in Africa. actively disbursing. · The Infrastructure Crisis Facility will provide short- to medium-term debt and equity funds to · The IFC Global Trade Finance Program, increased support private infrastructure projects affected from $1 billion to $3 billion in response to the by capital shortages caused by the global crisis. It financial crisis, provides unfunded support in guar- will also include advisory services to help govern- antees for trade transactions in emerging markets. ments design or redesign public-private partner- · The Global Trade Liquidity Program brings ship projects. The IFC has committed to invest up together governments, development fi nance insti- to $300 million, and other parties, including KfW, tutions, and international banks to provide liquid- Proparco, and the EIB, have already invested in ity for trade-related transactions through banks in debt and cofi nancing. developing countries. Having begun operations in · The Debt and Asset Recovery Program will make June 2009, it is expected to support more than $50 direct investments in strategically important pri- billion of trade finance assets through a network of vate entities that have a good business model but more than 500 issuing banks. require corporate debt restructuring and reprofi l- · The Microfi nance Enhancement Facility is a short- ing. The program will also make direct IFC invest- to medium-term facility expected to provide refi- ments in nonperforming loan pools and equity nancing to more than 100 strong microfinance investments in select distressed asset funds. With a institutions in up to 40 countries. target mobilization of $4 billion and the IFC con- · The Capitalization Fund aims to provide additional tributions of $1.5 billion, the program will reduce capital to ensure that banks in developing coun- the potential for fi nancial crises while enhancing tries can continue to lend and support economic the market environment. recovery and job creation during the crisis and · IFC Asset Management Company, LLC, was after. The fund is making subordinated loans and established to manage some IFC-crisis response equity or equity-linked investments in systemically facilities. It is managing the IFC Capitalization important private banks or state-owned banks on Fund and an equity fund under the Sovereign Fund a clear path to privatization, primarily in lower- Initiative. income countries. The Japanese government, a · The Global Food Fund seeks to shore up agribusi- founding partner, has invested $2 billion. IFC has ness and stabilize the global food supply chain with invested $1 billion of its own in the fund. a short-term liquidity facility to provide work- · The Africa Capitalization Fund is a partnership ing capital to agribusiness companies. A separate among the African Development Bank, the Euro- equity fund will support long-term growth in the pean Investment Bank (EIB), the Organization of sector. The IFC has approved $350 million for this the Petroleum Exporting Countries' Fund for Inter- initiative. regulatory and fiscal authorities, and bank IBRD, Andean Development Corporation, groups in an informal framework to discuss Caribbean Development Bank, and IDB. crisis management and resolution issues relat- Together they pledge to provide up to $90 ing to systemically important cross-border billion to support the private sector in Latin bank groups. The Multilateral Crisis Initia- American and the Caribbean. tive for Latin America and the Caribbean The IDB has also played a catalytic was organized to pool global financing from role in the flow of additional resources to public and private sources and scale up crisis Latin America through cofinancing agree- responses. Participating institutions are the ments between the World Bank and major 146 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 BOX 5.6 Action Plan for Africa The African financing partnership will pool resources pean Commission and managed by the EIB. It will and expertise to enable governments and institutions also offer cofi nancing in parallel with the IFC's to more effectively reduce the humanitarian toll in the infrastructure crisis facility. The EIB will further region. The participating institutions are the African support Africa's fi nancial sector through contri- Development Bank (AfDB) Group, the Agence Fran- butions to the Microfi nance Enhancement Facil- çaise de Développement (AFD) Group, the Develop- ity and other initiatives, lines of credit to banks ment Bank of Southern Africa, the European Invest- with more flexible guidelines, and the provision of ment Bank (EIB), German Financial Cooperation, equity. And it will continue to work on private sec- the International Islamic Trade Finance Corporation, tor initiatives with partner institutions. and the World Bank Group. The plan envisages the · Within the German Financial Cooperation with following goals and actions. Africa, the Federal Ministry for Economic Devel- opment and Cooperation through the KfW Ban- · The AfDB will use an emergency liquidity facil- kengruppe expects to contribute to initiatives and ity of $1.5 billion to provide financial support programs amounting to more than $1.4 billion in to eligible countries and operations that are suf- Sub-Saharan Africa to support the financial sector, fering from a lack of liquidity. It will introduce a the private sector, and infrastructure. The KfW new $500 million trade fi nance line of credit and Bankengruppe also expects to contribute to initia- consider committing $500 million to global trade tives and programs amounting to more than $1.1 fi nance liquidity programs to support commercial billion in Sub-Saharan Africa. banks and other institutions that fi nance trade. It · The Islamic Development Bank Group, through will contribute funds to support agribusiness and the Islamic Corporation for the Development of microfi nance. And it will coordinate a platform for the Private Sector, will contribute over the next cofi nancing projects in Africa through the African five years to investments and programs totaling Financing Partnership. up to $250 million. Despite the current crisis, the · The AFD Group will contribute to investments and Islamic Development Bank Group's Islamic Trade programs, totaling up to $3.1 billion, that focus on Finance Corporation, through its own resources, small and medium enterprises and infrastructure planned to maintain the same level of commitment projects in Africa through Proparco, the Fonds of $150 million to support and facilitate fi nancing d'Investissement et de Soutien aux Entreprises en for Africa in 2009. To scale up its intervention, it is Afrique, and loan guarantees. Launched with the intensifying its interaction with the IFC and AfDB AfDB, the International Fund for Agricultural to explore ways to leverage an additional $250 mil- Development, and Alliance for a Green Revolution lion by the end of 2009. in Africa, the African Agriculture Fund will raise · As part of the World Bank Group's support, the 200 million during its fi rst phase and 550 mil- IFC will contribute at least $1.0 billion to facilitate lion subsequently to target private companies and trade, strengthen the capital base of banks, improve cooperatives that increase and diversify agricul- infrastructure, increase microfi nance lending, and tural production. promote agribusiness companies. The World Bank · The Development Bank of Southern Africa will will frontload and fast-track its commitments boost its development fi nancing for priority infra- and increase access to its funds to fi nance high- structure projects by injecting more than $4 bil- priority, high-return infrastructure investments that lion into these and other development sectors, an facilitate regional integration, asset preservation, increase of more than 100 percent over the devel- and urban development. It will also assist part- opment fi nance disbursed in the past three years. ners in analyzing the impact of the crisis through The bank will also increase its technical and grant knowledge products and outreach. The Multilat- assistance for project development and training to eral Investment Guarantee Agency will provide up more than $50 million. to $2 billion in investment guarantees to support · The EIB will step up its support for infrastructure investor demand for African infrastructure invest- and energy projects, notably through enhanced ment, small and medium investments, and support use of the European Union­Africa Infrastructure for the African fi nancial sector, including banks Trust Fund established at the initiative of the Euro- and microfinance institutions. GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 147 international agencies. An agreement was Guarantee Fund to address the constraint to signed with Japan's Bank for International investment finance and capacity development Cooperation on building a framework to for financial institutions and such enterprises. provide long-term fi nancing for major infra- The fund is expected to have initial capital structure and critical social and economic of $300 million to $500 million, to mobilize investment projects. An agreement with loans worth $1.8 billion to $3 billion. The Japan's International Cooperation Agency AfDB recently started discussions with some will offer concessional loans and technical middle-income countries to consider issuing assistance resources for projects in economic bonds on international capital markets with and social infrastructure, environment, and an AfDB guarantee. A guarantee program climate change. The Korean government, is also being developed that would provide through Kexim Bank, signed an agreement to political risk mitigation and promote private cofi nance public and private sector projects investments in poor and high-risk countries. in the region that could be worth as much The AfDB continues to offer partial credit as $2 billion. China and the IDB signed two guarantees and partial risk guarantees for partnerships at the Bank's annual meeting in middle-income countries. The partial credit March 2009.22 guarantees support the mobilization of pri- vate funds for project finance, financial Other innovative ways to leverage the private intermediation, and policy-based finance. sector. Beyond countercyclical financing, the The partial risk guarantees cover a variety multilateral development banks have moved of government and government agency risks, forward with other programs to reduce risk in including contractual payment obligations emerging markets. MIGA issued $1.4 billion and the availability and convertibility of for- in guarantees in fiscal 2009 and is increasing eign exchange. its support to systemically important financial institutions seeking political risk insurance for cross-border investments in their subsidiar- Meeting the challenges of the ies in emerging markets, about 90 percent of postcrisis world them in Eastern Europe. In fiscal 2010, $0.5 Even as the recovery progresses, it is clear billion has already been signed, and MIGA that the crisis has dramatically altered is expected to issue an additional $2 billion the development challenges facing low- and to $3 billion in the context of the IFI Action middle-income countries and hence, those Plan. The World Bank Group continues to facing the international community. More- explore new ways to use its balance sheet to over, necessary short-term responses to the create the conditions for reestablishing private crisis have important implications for the capital flows. Recent efforts include formation ability of donors and the international finan- of lender coalitions23 and the expanded use of cial institutions to support developing coun- guarantees,24 insurance instruments, and risk tries going forward. Without analyzing these management products. The Bank is also con- issues in detail or providing a prescription for tinuing a dialogue with major underwriters of reform, this section raises some of the main emerging market bond issuance and liability issues facing the global economic community management experts to identify innovative as a result of the crisis. cofinancing opportunities. First, while dangers of competitive pro- The AfDB has stepped up efforts to lever- tectionist measures and a breakdown of the age private capital to maximize its impact world trading system were avoided, ensuring through innovative financial products. In an open trading system remains an impor- May 2009, in partnership with the Africa tant goal of international economic policy. Commission (launched by the Danish Gov- Completing the Doha Round would substan- ernment in 2008), the AfDB agreed to set up tially improve developing countries' market an African Small and Medium Enterprises access and enhance their competitiveness 148 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 through an agreement on trade facilitation. environment for private sector growth in light Beyond Doha, progress is needed in negotiat- of increased budgetary stringency; and cope ing new rules and disciplines in trade-related with increased debt burdens through adoption climate change and in food and energy secu- of sound borrowing policies and public debt rity. And increased support from donors management techniques. and policy reform in developing countries These challenges are likely to require fun- will be required to ensure their institutions damental changes in the international fi nan- are capable of taking advantage of trade cial institutions. Technical requirements for opportunities. staff will shift (for example in favor of finan- Second, the crisis has increased the impor- cial sector expertise). Bureaucratic structures tance of aid on addressing the rise in pov- may need to be redesigned (for example, erty. But the crisis has also led to substantial there are discussions of decentralization increases in government debt that will severely at the World Bank). Coordination among constrain fiscal resources in donor countries the IFIs will need to be strengthened. And for the foreseeable future. It remains doubtful more resources will have to be mobilized. whether donors can sustain recent increases The international community has begun to in aid, much less achieve the further increases respond to this agenda, as evidenced by the required to meet donor commitments. In this sharp increase in the IMF's lending resources context, it becomes more important than and the discussions of the replenishment of ever to make further progress in improving concessional windows at the MDBs. The aid effectiveness through harmonizing donor World Bank Group has initiated a postcrisis activities, reducing the share of tied aid, strategy or directions paper on development increasing the predictability of aid disburse- policy and is considering a proposed vot- ments, and improving aid allocations. ing reform; measures to increase the World Third, in the absence of increased resources Bank's paid-in capital; and internal reforms from donors, the crisis-induced frontloading to strengthen corporate governance, account- of concessional resources by IDA and other ability, and operational effectiveness. But the multilateral agencies implies that concessional urgency in establishing the appropriate poli- flows from these institutions must decline cies for dealing with the postcrisis interna- in the near future. It is unrealistic to expect tional economic environment leaves no room that the IFIs can continue to achieve com- for complacency. The danger of a new Great mitment and disbursement levels that exceed Depression has been averted. But decisive the resources set aside for concessional flows. leadership is still required to ensure a rapid However, the global recovery remains fragile, and sustainable recovery. and a sharp decline in concessional assistance could seriously jeopardize development pros- pects in many low-income countries. Manag- Notes ing the availability and allocation of conces- 1. World Bank 2010. sional resources will remain a major challenge 2. These included 88 major banks in 44 coun- for the IFIs as the recovery proceeds. Simi- tries conducted in December 2008, March larly, the sharp rise in IBRD commitments has 2009, and August 2009 by the International highlighted the need for discussing a capital Monetary Fund in cooperation with the increase to avoid an eventual falloff in lending, Bankers Association for Finance and Trade (IMF-BAFT 2009); a World Bank survey while the need for nonconcessional resources of 425 fi rms and 78 banks and other fi nan- is expected to remain high. cial institutions in 14 developing countries Fourth, the demand for technical support (Malouche 2009); and a survey by the Inter- is likely to rise as countries seek to strengthen national Chamber of Commerce of a sample their financial sector regulation and super- of 122 banks in 59 countries from March visory frameworks; focus on improving the 2009, updated in September 2009 (Interna- efficiency of public expenditures and the tional Chamber of Commerce 2009). GLOBAL MONITORING REPORT 2010 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT 149 3. Chauffour, Saborowski, and Soylemezoglu addition, the Bank of China has agreed to 2010. sign a cofinancing agreement with the IDB by 4. Chauffour and Farole 2009. the end of June. 5. International Chamber of Commerce 2009. 23. An example of how the World Bank Group 6. Gamberoni and Newfarmer 2009. is leveraging its balance sheet in a non-tradi- 7. See the Global Anti-Dumping/Safeguard tional way can be seen in the design of the Database and the Global Trade Alert website fi nancial support to Indonesia to help access http://www.globaltradealert.org/. capital markets. The Bank extended the gov- 8. McKibbin, Warwick, and Stoeckel 2009. ernment a $2 billion Development Policy 9. www.globaltradealert.org Loan­Deferred Drawdown Option, which 10. WTO, OECD, and UNCTAD 2009. formed the core of a larger $5 billion standby 11. Hoekman, Martin, and Mattoo 2009. package, with additional commitments from 12. WTO and OECD 2009. the ADB, Japan, and Australia. The mecha- 13. If a country is not servicing its debt because nism allowed Indonesia to raise private funds of an unsustainable debt burden and is clearly in subsequent issues under diffi cult market unable to meet its obligations to external conditions at 5- and 10-year maturities. creditors, debt relief amounts to an account- 24. The World Bank Group has programs that ing exercise for the recipient--it provides no provide partial risk guarantees to mitigate additional financial resources. risk for private lenders (and sponsors) to pri- 14. It excludes aid that is unpredictable by nature vate participation in infrastructure projects such as humanitarian assistance, emergency and partial credit guarantees for debt issu- relief, and debt relief; it includes no cross- ance by sovereign (or subsovereign) entities. border costs, such as administrative costs, stu- dent costs, and refugee costs in donor coun- tries; and is not programmable by the donor, References such as core funding of NGOs. Arvis, J-F., M. A. Mustra, L. Ojala, B. Shepherd, 15. For information on the Accra Agenda for and D. Saslavsky. 2010. Connecting to Com- Action, see www.oecd.org/dac/effectiveness/ pete 2010: Trade Logistics in the Global Econ- parisdeclaration. omy. Washington, DC: World Bank. 16. Hoeffler and Outram 2008. Chauffour, J.-P., and T. Farole. 2009. "Trade 17. Claessens, Cassimon, and van Camenhout Finance in Crisis: Market Adjustment or Mar- 2007. ket Failure?" Policy Research Working Paper 18. Utz 2009. 5003. World Bank, Washington, DC. 19. Burkina Faso, Burundi, The Gambia, Haiti, Chauffour, J.-P., C. Saborowski, and A. Soylem- and São Tomé and Principe. ezoglu. 2010. "Trade Finance in Crisis: Should 20. The IFIs covered in this section include the Developing Countries Establish Export Credit International Monetary Fund, the World Agencies." Policy Research Working Paper Bank Group, and the four big regional devel- 5166. World Bank, Washington, DC. opment banks (African Development Bank, Claessens, S., D. Cassimon, and B. van Camen- Asian Development Bank, European Bank for hout. 2007. "Empirical Evidence on the New Reconstruction and Development, and Inter- International Aid Architecture." World Bank, American Development Bank). Economy and Finance Research Program, 21. Data for general infrastructure include funds Washington (June 18). and investments through financial intermedi- Dreher, A., F. Moelders. and P. Nunnenkamp. aries that have infrastructure objectives; data 2007. "Are NGOs the Better Donors? A Case for "other projects" include chemicals and Study of Aid Allocation for Sweden." KOF mining. Working Papers 180. KOF Swiss Economic 22. The fi rst, with the China Exim Bank, signed Institute, Zurich (November). at the annual meeting, will promote cofinanc- Gamberoni E., and R. Newfarmer. 2009. "Trade ing and collaboration on infrastructure, trade Protection: Incipient but Worrisome Trends." finance, and other sectors hit in the crisis. The Trade Note 37. World Bank, Washington, DC. second, with the China Development Bank, Hoeffler, A., and V. Outram. 2008. "Need, Merit aims to cofi nance projects in infrastructure or Self-Interest: What Determines the Alloca- with or without a sovereign guarantee. In tion of Aid?" Working Paper Series 2008-19. 150 THE INTERNATIONAL COMMUNIT Y AND DE VELOPMENT GLOBAL MONITORING REPORT 2010 Centre for the Study of African Economics, post September 2008: A World Bank Survey." Oxford, U.K. (July). Policy Research Working Paper 5138. World Hoekman, B., W. Martin, and A. Mattoo. 2009. Bank, Washington, DC. "Conclude Doha: It Matters." Policy Research Masud, N., and B. Yontcheva. 2005. "Does For- Working Paper 5135. World Bank, Washing- eign Aid Reduce Poverty? Empirical Evidence ton, DC. from Nongovernmental and Bilateral Aid." Hudson Institute.2009. Index of Global Philan- IMF Working Paper WP/05/100. International thropy and Remittances 2009. Washington, Monetary Fund, Washington (May). DC. McKibbin, W. J., and A. Stoeckel. 2009. "The IDA (International Development Association) and Potential Impact of the Global Financial Cri- IMF (International Monetary Fund). 2009. sis on World Trade." Policy Research Working "Heavily Indebted Poor Countries (HIPC) Ini- Paper 5134. World Bank, Washington, DC. tiative and Multilateral Debt Relief Initiative Utz, R. 2009. "Will Countries that Receive Insuf- (MDRI): Status of Implementation." World ficient Aid Please Stand Up?" Paper for CFP Bank and the IMF, Washington DC. (Septem- research program on the International Aid ber 15). Architecture, World Bank, Washington DC. IMF-BAFT (International Monetary Fund­ World Bank 2006. "Needs, Priorities and Costs Bankers Association for Finance and Trade. Associated with Technical Assistance and 2009. "IMF-BAFT Trade Finance Survey: A Capacity Building for Implementation of a Survey among Banks Assessing the Current WTO Trade Facilitation Agreement: A Com- Trade Finance Environment." (http://baft.org/ parative Study Based on Six Developing Coun- content_folders/Issues/IMFBAFTSurveyRe- tries." Working Paper. World Bank, Interna- sults20090331.ppt). tional Trade Department, Washington, DC. International Chamber of Commerce. 2009. ------. 2010. Global Economic Prospects, 2010. "Trade Finance Survey: An Interim Report - Washington, DC: World Bank. Summer 2009." Document 470-1124 TS/WJ. WTO (World Trade Organization). 2009. "Trade Paris (September). Policy Review." Geneva (November). Koch, D-J. 2007. "Blind Spots on the Map of Aid WTO and OECD (Organisation for Economic Allocations: Concentration and Complementa- Co-operation and Development). 2009. Aid for rity of International NGO Aid." UNU-WIDER Trade at a Glance 2009: Maintaining Momen- Research Paper 2007/45. United Nations tum. Geneva. University­World Institute for Development WTO, OECD, and UNCTAD (United Nations Economics Research, Helsinki (August). Conference on Trade and Development). 2009. Malouche, M. 2009. "Trade and Trade Finance "G-20 Trade and Investment Measures." Joint Developments in 14 Developing Countries Report. Geneva (September 14). GLOBAL MONITORING REPORT 2010 APPENDIX 151 APPENDIX Classification of economies by region and income, fiscal 2010 East Asia and Pacific Latin America and the South Asia High-income OECD Caribbean economies American Samoa UMC Afghanistan LIC Cambodia LIC Argentina UMC Bangladesh LIC Australia China LMC Belize LMC Bhutan LMC Austria Fiji UMC Bolivia LMC India LMC Belgium Indonesia LMC Brazil UMC Maldives LMC Canada Kiribati LMC Chile UMC Nepal LIC Czech Republic Korea, Dem. People's Rep. LIC Colombia UMC Pakistan LMC Denmark Lao PDR LIC Costa Rica UMC Sri Lanka LMC Finland Malaysia UMC Cuba UMC France Marshall Islands LMC Dominica UMC Sub-Saharan Africa Germany Micronesia, Fed. Sts. LMC Dominican Republic UMC Greece Mongolia LMC Ecuador LMC Angola LMC Hungary Myanmar LIC El Salvador LMC Benin LIC Iceland Palau UMC Grenada UMC Botswana UMC Ireland Papua New Guinea LMC Guatemala LMC Burkina Faso LIC Italy Philippines LMC Guyana LMC Burundi LIC Japan Samoa LMC Haiti LIC Cameroon LMC Korea, Rep. Solomon Islands LMC Honduras LMC Cape Verde LMC Luxembourg Thailand LMC Jamaica UMC Central African Republic LIC Netherlands Timor-Leste LMC Mexico UMC Chad LIC New Zealand Tonga LMC Nicaragua LMC Comoros LIC Norway Vanuatu LMC Panama UMC Congo, Dem. Rep. LIC Portugal Vietnam LIC Paraguay LMC Congo, Rep. LMC Slovak Republic Peru UMC Côte d'Ivoire LMC Spain Europe and Central Asia St. Kitts and Nevis UMC Eritrea LIC Sweden St. Lucia UMC Ethiopia LIC Switzerland Albania LMC St. Vincent and the Grenadines UMC Gabon UMC United Kingdom Armenia LMC Suriname UMC Gambia, The LIC United States Azerbaijan LMC Uruguay UMC Ghana LIC Belarus UMC Venezuela, R. B. de UMC Guinea LIC Other high-income Bosnia and Herzegovina UMC Guinea-Bissau LIC economies Bulgaria UMC Middle East and North Africa Kenya LIC Georgia LMC Lesotho LMC Andorra Kazakhstan UMC Algeria UMC Liberia LIC Antigua and Barbuda Kosovo LMC Djibouti LMC Madagascar LIC Aruba Kyrgyz Republic LIC Egypt, Arab Rep. LMC Malawi LIC Bahamas, The Latvia UMC Iran, Islamic Rep. LMC Mali LIC Bahrain Lithuania UMC Iraq LMC Mauritania LIC Barbados Macedonia, FYR UMC Jordan LMC Mauritius UMC Bermuda Moldova LMC Lebanon UMC Mayotte UMC Brunei Darussalam Montenegro UMC Libya UMC Mozambique LIC Cayman Islands Poland UMC Morocco LMC Namibia UMC Channel Islands Romania UMC Syrian Arab Rep. LMC Niger LIC Croatia Russian Federation UMC Tunisia LMC Nigeria LMC Cyprus Serbia UMC West Bank and Gaza LMC Rwanda LIC Equatorial Guinea Tajikistan LIC Yemen, Rep. LIC São Tomé and Principe LMC Estonia Turkey UMC Senegal LIC Faeroe Islands Turkmenistan LMC Seychelles UMC French Polynesia Ukraine LMC Sierra Leone LIC Greenland Uzbekistan LIC Somalia LIC Guam South Africa UMC Hong Kong, China Sudan LMC Isle of Man Swaziland LMC Israel Tanzania LIC Kuwait Togo LIC Liechtenstein Uganda LIC Macao, China Zambia LIC Malta Zimbabwe LIC Monaco Netherlands Antilles New Caledonia Northern Mariana Islands Oman Puerto Rico Qatar San Marino Saudi Arabia Singapore Slovenia Taiwan, China Trinidad and Tobago United Arab Emirates Virgin Islands (U.S.) Source: World Bank data. Note: This table classifies all World Bank member economies and all other economies with populations of more than 30,000. Economies are divided among income groups according to 2008 GNI per capita, calculated using the World Bank Atlas method. The groups are low income (LIC), $975 or less; lower middle income (LMC), $976­3,855; upper middle income (UMC), $3,856­11,905; and high income, $11,906 or more. ECO-AUDIT Environmental Benefits Statement The World Bank is committed to preserving Saved: endangered forests and natural resources. · 19 trees The Office of the Publisher has chosen to · 6 million BTU of print Global Monitoring Report 2010: The total energy MDGs after the Crisis on recycled paper with · 1,768 pounds of CO2 25 percent post-consumer waste, in accord- equivalent of ance with the recommended standards for greenhouse gases paper usage set by the Green Press Initiative, · 8,515 gallons of a nonprofit program supporting publishers in wastewater using fiber that is not sourced from endan- · 517 pounds of gered forests. For more information, visit solid waste www.greenpressinitiative.org. hat is the human cost of the global economic crisis? This · 100 million fewer people will have access to safe drinking W year's Global Monitoring Report, The MDGs after the Crisis, examines the impact of the worst recession since the Great water in 2015. History tells us that if we let the recovery slide and allow the Depression on poverty and human development outcomes in crisis to lead to widespread domestic policy failures and developing countries. Although the recovery is under way, the institutional breakdowns in poor countries, the negative impact of the crisis will be lasting and immeasurable. The impact on human development outcomes, especially on impressive precrisis progress in poverty reduction will slow. No children and women, will be disastrous. household in developing countries is immune. Gaps will persist The international financial institutions and international to 2020. In 2015, 20 million more people in Sub-Saharan Africa community responded strongly and quickly to the crisis, but and 53 million more people globally will be in extreme poverty. more is needed to sustain the recovery and regain the Even households above the $1.25-a-day poverty line in higher- momentum in achieving the Millennium Development Goals income developing countries are coping by buying cheaper (MDGs). Developing countries will also need to implement food, delaying other purchases, reducing visits to doctors, significant policy reforms and strengthen institutions to working longer hours, or taking multiple jobs. improve the efficiency of service delivery in the face of fiscal The crisis will also have serious costs on human development constraints. Unlike previous crises, however, this one was not indicators: caused by domestic policy failure in developing countries. So · 1.2 million more children under age five and 265,000 more better development outcomes will also hinge on a rapid global infants will die between 2009 and 2015. economic recovery that improves export conditions, terms-of- · 350,000 more students will not complete primary education trade, and affordable capital flows--as well as meeting aid in 2015. commitments to low-income countries. Global Monitoring Report 2010, seventh in this annual series, is prepared jointly by the World Bank and the International Monetary Fund. It provides a development perspective on the global economic crisis and assesses the impact on developing countries--their growth, poverty reduction, and other MDGs. Finally, it sets out priorities for policy responses, both by developing countries and by the international community. ISBN 978-0-8213-8316-2 SKU 18316