GLOBAL MONITORING REPORT 2009 A Development Emergency 48457 GLOBAL MONITORING REPORT 2009 GLOBAL MONITORING REPORT 2009 A Development Emergency © 2009 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 12 11 10 09 This volume is a product of the staff of the World Bank and the International Monetary Fund. The findings, interpretations, and conclusions expressed herein 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 MDGs: Crisis Impact and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 1 The Global Financial Crisis and Its Impact on Developing Countries . . . . . .23 2 Improving the Private Investment Climate for Recovery and Growth . . . . . .51 3 Leveraging the Private Sector Role in Human Development . . . . . . . . . . . . .85 4 Scaling Up Aid to Poor Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113 5 Pressing Ahead with Trade Openness . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137 6 International Financial Institutions: Crisis Response and Support for the Private Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193 Annex: Monitoring the MDGs: Selected Indicators . . . . . . . . . . . . . . . . . . . . . .203 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 v C O N T E N T S Boxes 1 Responding to a development emergency: priorities for action . . . . . . . . . . .5 1 New estimates of global poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 1.1 The financial crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 1.2 Increasing exchange rate volatility and the financial market crisis. . . . . . . .31 1.3 Commodity exporters: how to deal with increased price volatility? . . . . . .36 1.4 The quality of macroeconomic policies in low-income countries. . . . . . . . .39 1.5 The impact of the crisis on selected countries . . . . . . . . . . . . . . . . . . . . . . .40 1.6 Bailing out the world's poorest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 1.7 The Financial Sector Assessment Program . . . . . . . . . . . . . . . . . . . . . . . . .44 1.8 Common regulatory and supervisory shortcomings identified in recent FSAP reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 2.1 Independent Evaluation Group reviews Doing Business . . . . . . . . . . . . . . .54 2.2 Business environment reforms matter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 2.3 Adding a gender dimension to the measures of regulation . . . . . . . . . . . . .59 2.4 Relative impact of economic and financial development on MDGs. . . . . . .63 2.5 Microfinance: reaching out to the poor but with limits. . . . . . . . . . . . . . . .66 2.6 Access to financial services: evidence from the subprime mortgage market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67 3.1 Examples of innovative approaches to expand access to health services via the nongovernment sector . . . . . . . . . . . . . . . . . . . . .96 3.2 Systemic involvement of the private sector in the public provision of education: vouchers in Chile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101 3.3 Contracting out education programs: Bangladesh and Côte d'Ivoire. . . . .102 3.4 Public-private partnerships for specific education programs: Colombia and Pakistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103 3.5 The growing role of the Bill and Melinda Gates Foundation in global health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104 3.6 Leveraging corporate finance for disease control. . . . . . . . . . . . . . . . . . . .106 3.7 The Bangladesh Rural Advancement Committee: An emerging global NGO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107 3.8 The experience of the Global Education Alliance in Rwanda . . . . . . . . . .108 4.1 The indirect impact of the crisis on aid flows . . . . . . . . . . . . . . . . . . . . . .120 4.2 Contributions of private actors to development in Sub-Saharan Africa. . .126 4.3 Advanced market commitments: promoting private investments by leveraging public funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128 4.4 The Adaptation Fund: country ownership in adaptation finance. . . . . . . .130 4.5 Results from low-income country debt sustainability analyses . . . . . . . . .133 5.1 Trade policies: A taproot of the global food price crisis . . . . . . . . . . . . . .141 6.1 Stolen Asset Recovery Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .176 6.2 World Bank Group's Vulnerability Framework. . . . . . . . . . . . . . . . . . . . .178 6.3 MDBs and trade finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .179 vi G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 C O N T E N T S 6.4 IFC response to the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .180 6.5 MIGA's contributions to supporting investment in developing countries. .183 6.6 EBRD's micro- and small enterprise lending program . . . . . . . . . . . . . . . .185 6.7 World Bank's Sustainable Infrastructure Action Plan and the Infrastructure Recovery and Assets Platform . . . . . . . . . . . . . . . .187 Figures 1 MDGs at the global level: serious shortfalls loom on human development goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 2 Fragile states have made the least progress toward the MDGs . . . . . . . . . .17 3 Most countries are falling short of most MDGs . . . . . . . . . . . . . . . . . . . . .17 4 The decline in the number of people living in extreme poverty is largely attributable to East Asia, China in particular . . . . . . . . . . . . . . . . . . . . . . .19 1.1 World trade in goods and services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 1.2 Commodity price indexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 1.3 Bond spreads and issues of international bonds in emerging markets and developing countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 1.4 Daily spot exchange rates, national currency per U.S. dollar. . . . . . . . . . . .30 1.5 Vulnerabilities in emerging and developing countries . . . . . . . . . . . . . . . . .32 1.6 Terms-of-trade changes per quintile group . . . . . . . . . . . . . . . . . . . . . . . . .32 1.7 Real 2009 per capita growth rate adjusted for terms-of-trade changes . . . .33 1.8 Official current transfers, 2008­09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 1.9 Current account balances, 2008­09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 1.10 Government balances, 2008­09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 2.1 Key constraints on firms vary by country income level . . . . . . . . . . . . . . . .52 2.2 The ease of doing business varies widely. . . . . . . . . . . . . . . . . . . . . . . . . . .55 2.3 Most regions are improving their regulatory indicators over time. . . . . . . .55 2.4 Regulatory reform is more common in some areas than in others. . . . . . . .56 2.5 Access to finance varies by country income and size of firm . . . . . . . . . . . .64 2.6 Many firms say lack of access to financing hampers their growth . . . . . . . .65 2.7 Financial and economic development does not guarantee access to finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 2.8 Most financial systems are small . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 2.9 Availability of credit information varies greatly . . . . . . . . . . . . . . . . . . . . .70 2.10 Exponential growth of telecommunications services in all regions . . . . . . .73 2.11 Inadequate infrastructure constrains business . . . . . . . . . . . . . . . . . . . . . . .74 2.12 The business cost of inadequate infrastructure can be high. . . . . . . . . . . . .75 2.13 First priority corridors in West Africa: Checkpoints, bribes, and delays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77 2.14 The rise and fall of private investment in infrastructure . . . . . . . . . . . . . . .80 3.1 Private and out-of-pocket shares of health expenditure. . . . . . . . . . . . . . . .91 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 vii C O N T E N T S 3.2 Use of private maternal and child health care services, Sub-Saharan Africa and South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92 3.3 Public and private providers of TB services in 22 high-burden countries. . .94 3.4 Trends in the use of private providers in Sub-Saharan Africa and South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94 3.5 Probability of using private health care providers by whole population and the lowest two asset quintiles in Sub-Saharan Africa and South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . .95 3.6 Private spending on education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98 3.7 Private enrollment share by region, 2006 . . . . . . . . . . . . . . . . . . . . . . . . .100 3.8 Private enrollment share by national income, 2006. . . . . . . . . . . . . . . . . .100 4.1 DAC members' net ODA 1990­2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . .115 4.2 Increase in donor financing for infrastructure in Sub-Saharan Africa . . . .117 4.3 Gap between forward aid plans and required increases. . . . . . . . . . . . . . .117 4.4 Financial crisis and aid response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119 4.5 Ratios of public debt and ODA to gross national income for 22 DAC donors, 1980­2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119 4.6 Dependence on aid remains high in low-income countries . . . . . . . . . . . .121 4.7 Quality of PFM systems affects donors' use of those systems . . . . . . . . . .122 4.8 Private grants data: undercounting philanthropy . . . . . . . . . . . . . . . . . . .124 4.9 Trends in U.S. foundations' assets and giving . . . . . . . . . . . . . . . . . . . . . .127 4.10 Average debt service and poverty-reducing expenditures. . . . . . . . . . . . . .132 4.11 The DeMPA tool: assessing core functions of public debt management . .134 5.1 Robust trade growth turned negative in most regions by late 2008. . . . . .138 5.2 World trade will contract in 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139 5.3 Baltic Exchange Dry Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140 5.4 New insurance commitments (medium- and long-term) reported by Berne Union members on selected countries. . . . . . . . . . . . . .144 5.5 Cost of trade finance in selected emerging markets . . . . . . . . . . . . . . . . . .145 5.6 Growth of antidumping cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .148 5.7 OTRI and TTRI by income group, 2007 . . . . . . . . . . . . . . . . . . . . . . . . .152 5.8 OTRI and TTRI by region, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153 5.9 OTRI of the four largest traders, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . .153 5.10 Change of OTRI by income group and region, 2002­07 . . . . . . . . . . . . .154 5.11 MA-OTRI by region, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154 5.12 Change in MA-OTRI by region, 2002­07 . . . . . . . . . . . . . . . . . . . . . . . .155 5.13 Restrictiveness of services trade policies by region, 2008 . . . . . . . . . . . . .156 5.14 Restrictiveness of services trade policies by region and sector, 2008 . . . . .157 5.15 Aid-for-trade commitments: annual averages for 2002­05, and totals for 2006 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162 5.16 Commitments of aid for trade by region, income group, and category, average 2002­07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163 6.1 MDB gross disbursements, 2000­08. . . . . . . . . . . . . . . . . . . . . . . . . . . . .180 viii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 C O N T E N T S 6.2 MDB gross disbursements to nonsovereign borrowers, by region, 2000­08. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181 6.3 Financial Sector Assessment Program country coverage . . . . . . . . . . . . . .184 6.4 Effectiveness and future importance of donor institutions. . . . . . . . . . . . .189 Tables 1.1 Summary of world output. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 1.2 Net capital flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 1.3 Inflows of international remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 1.4 Measures implemented during financial turmoil, by country. . . . . . . . . . . .45 1.5 Short-term poverty outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 1.6 Longer-term poverty outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 2.1 Weak implementation and enforcement can increase the regulatory burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60 2.2 Access to infrastructure is improving but still lags seriously in some regions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 2.3 Africa's infrastructure deficit is widening compared with other regions. . . .73 2.4 Water and electricity services are often underpriced . . . . . . . . . . . . . . . . . .76 2.5 Closing the infrastructure financing gap in Sub-Saharan Africa . . . . . . . . .77 2.6 Overview of experience with private participation in infrastructure in Sub-Saharan Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 3.1 Matrix of financing and delivery arrangements in health and education . . .88 3.2 Matrix of government capacities needed to manage various finance and delivery models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90 3.3 Private enrollment shares in education, selected countries, 1990 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99 4.1 Current dedicated resources for climate change in developing countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 5.1 Trade distorting actions taken in selected countries . . . . . . . . . . . . . . . . .147 5.2 Measures of domestic trade costs (averages by country group) . . . . . . . . .158 5.3 Effects of convergence by low-income countries to middle-income average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .159 5.4 Aid-for-trade commitments: annual averages 2002­05 and totals for 2006 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161 6.1 Selected elements of IFI support to the private sector . . . . . . . . . . . . . . . .171 6.2 Examples of IFI crisis response programs in 2008. . . . . . . . . . . . . . . . . . .177 6.3 Paris Declaration survey results, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . .190 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 ix Foreword T he title of this year's Global Monitor- countries will be affected through reduc- ing Report is "A Development Emer- tions in export volumes, commodity prices, gency." Appropriately so. We are in remittances, tourism, foreign direct invest- the midst of a global financial crisis for which ment, and possibly even foreign aid. These there has been no equal in over 70 years. It shocks will hurt public revenues, constrict- is a dangerous time. The financial crisis that ing fiscal space for public programs. grew into an economic crisis is now becom- Economic growth in developing countries ing an unemployment crisis. It risks becom- has declined sharply to the lowest rates for ing a human and social crisis--with politi- some decades; per capita incomes will fall cal implications. No region is immune. The in many countries. Sub-Saharan Africa will poor countries are especially vulnerable, as see a rise in the poverty count in 2009, with they have much less cushion to withstand the more fragile and low-growth economies events. This poses serious threats to the especially at risk. Globally, we estimate hard-won gains in boosting the economic that because of the crisis there will be more growth of many developing countries, espe- than 50 million additional people living cially in Africa, as well as achieving progress in extreme poverty in 2009 than expected toward the Millennium Development Goals before the crisis, compounding the impact (MDGs). It also poses a threat to global from soaring food and fuel prices of recent recovery, because developing countries can years. provide a growth platform to help the global These numbers have a human face. We economy pull out of the crisis. estimate that as a result of sharply lower Middle-income countries were the first economic growth rates, about 200,000 to among developing countries to feel the 400,000 more babies may die each year. impact of the financial crisis, given their School enrollments will suffer--especially heavier reliance on private capital flows. Pri- for girls. The prospect of reaching the vate capital flows to the developing world MDGs by 2015, already a cause for serious are seeing their sharpest decline in many concern, now looks even more distant. decades. Both middle- and low-income A global crisis requires a global solution. countries will be hit hard in 2009 by a sec- The crisis began in the financial markets ond wave of effects reflecting the global of developed countries, so the first order of recession and declining world trade. Poor business must be to stabilize these markets G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 xi F O R E W O R D and counter the recession that the financial We can do this not only by strengthening turmoil has triggered. This calls for timely, key public programs for health and educa- adequate, and coordinated actions by devel- tion, but also by better leveraging the private oped countries to restore confidence in the sector's role in the financing and delivery of financial system and counter falling demand. services. At the same time, we need strong and urgent In support of these efforts to help devel- actions to counter the impact of the crisis oping countries, the report emphasizes three on developing countries by helping them to key global priorities. Donors must deliver on boost growth while protecting the poor. The their commitments to increase aid. Indeed, report sets out six priority areas for action the increased needs of poor countries hit to confront the development emergency that hard by the crisis call for going beyond now faces many of these countries. existing commitments. National govern- First, we must ensure an adequate fiscal ments must hold firm against rising pro- response in developing countries to protect tectionist pressures and maintain an open the poor and vulnerable groups and to sup- international trade and finance system. port economic growth. Priority areas must Completing the Doha negotiations expedi- be strengthening social safety nets and pro- tiously would provide a much-needed boost tecting infrastructure programs that can in confidence to the global economy at a create jobs while building a foundation for time of high stress and uncertainty. Finally, future productivity and growth. The pre- multilateral institutions must have the man- cise fiscal response needs to be tailored to date, resources, and instruments to support individual country circumstances, consistent an effective global response to the global cri- with maintenance of macroeconomic stabil- sis. The international financial institutions ity. Second, we must provide support for will need to play a key role in bridging the the private sector and improve the climate large financing gap for developing countries for recovery and growth in private invest- resulting from the slump in private capital ment, including paying special attention to flows, including using their leverage ability strengthening financial systems. Helping to help revive private flows. small and medium enterprises get access to World leaders made important progress finance for trade and investment is vital for in coordinating a global response to the cri- job creation. But the crisis has also under- sis at the recently held summit of the Group scored the importance of broader reforms to of Twenty countries. This must be followed improve the stability and soundness of the by strong, concerted actions. The need for financial system. Third, we must redouble international cooperation has never been efforts in human development and recover greater. lost ground in progress toward the MDGs. Robert B. Zoellick Dominique Strauss-Kahn President Managing Director The World Bank Group International Monetary Fund xii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 Acknowledgments T his report has been prepared jointly Vice President and Chief Economist, World by the staff of the World Bank and Bank. the International Monetary Fund. A number of other staff and consul- In preparing the report, staff have collabo- tants made valuable contributions, includ- rated closely with partner institutions-- ing the following from the World Bank: the African Development Bank, the Asian Philippe Ambrosi, Uranbileg Batjargal, Development Bank, the European Bank Amie Batson, Iwona Borowik, Penelope for Reconstruction and Development, the Brooks, Andrew Burns, Shaohua Chen, Inter-American Development Bank, the Robert Cull, Susan Davis, Asli Demirgüç- OrganisationforEconomicCo-operationand Kunt, Shanthi Divakaran, Simeon Djankov, Development, the World Trade Organization, Sharon Felzer, Ariel Fiszbein, Vivien Foster, the United Nations Conference on Trade and Caroline Freund, Boris Gamarra, Alan Development, and other UN agencies. The Gelb, Navin Girishankar, Neil Gregory, cooperation and support of staff of these Juliana Guaqueta, April Harding, Masako institutions are gratefully acknowledged. Hiraga, Bernard Hoekman, Ludwina Zia Qureshi was the lead author and Joseph, Johannes Sebastian Kiess, Stephen manager of the report. The core team for Knack, Gerard Martin La Forgia, Gina the report included Felipe Barrera, Peter Lagomarsino, Benjamin Loevinsohn, Berman, Jean-Pierre Chauffour, Punam Knut Lonnroth, Mattias Lundberg, Frank Chuhan-Pole, Stefano Curto, Mary Lysy, Mariem Malouche, Aaditya Mattoo, Hallward-Driemeier, and Homi Kharas Dominique van der Mensbrugghe, Inez (World Bank) and Stijn Claessens, Richard Mikkelsen-Lopez, Dominic Montague, Harmsen, Laura Kodres, Andrea Maechler, Marisela Montoliu-Munoz, Joyce Msuya, and Axel Palmason (IMF). Other signifi- Richard Newfarmer, Israel Osorio-Rodarte, cant contributions were made by Katharina Harry Patrinos, Emilio Porta, Abha Prasad, Gassner, Arthur Karlin, and Linda Alexander Preker, Martin Ravallion, Lulu Lee (World Bank) and Alberto Espejo, Shui, Eric Swanson, Nigel Twose, Marilou Emmanuel Hife, and Ioana Niculcea (IMF). Uy, Daniel Villar, Dileep Wagle, and Sachin Shahria assisted with the overall Elizabeth White. preparation and coordination of the report. Other contributors from the IMF included The work was carried out under the gen- Elif Aksoy, Alexandre Chailloux, Peter eral guidance of Justin Yifu Lin, Senior Dattels, and Deniz Igan. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 xiii A C K N O W L E D G M E N T S Contributors from other institutions Bank and Fund management and staff in the included: Gaston Gohou, Ellen Goldstein, course of its preparation and review. Josephine Kiyenje, and Timothy Turner The World Bank's Office of the Publisher (AfDB); Indu Bhushan, Christopher managed the editorial services, design, pro- Maccormac, Manju Senapaty, and Gina duction, and printing of the report, with Marie Umali (ADB); Yannis Arvanitis, Susan Graham anchoring the process. Gary Bond, and James Earwicker (EBRD); Others assisting with the report's publication Nathaniel Jackson and Max Pulgar-Vidal included Denise Bergeron, Martha Gottron, (IDB); Yasmin Ahmad, Simon Scott, and Nancy Lammers, Stephen McGroarty, Suzanne Steensen (OECD); and Alessandro Santiago Pombo-Bejarano, Kirsten Dennison Nicita (UNCTAD). and associates of Precision Graphics, and Guidance received from the Executive Bill Pragluski of Critical Stages. Directors of the World Bank and the IMF The report's dissemination and outreach and their staff during discussions of the was coordinated by Merrell Tuck-Primdahl, draft report is gratefully acknowledged. working with Prianka Nandy, Kavita Watsa, The report also benefited from many useful and Roula Yazigi. comments and suggestions received from the xiv G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 Abbreviations ACP African, Caribbean, and Pacific FDI Foreign direct investment countries FSAP Financial Sector Assessment ADB Asian Development Bank Program AfDB African Development Bank G-8 Group of Eight AIDS Acquired immune deficiency G-20 Group of Twenty syndrome GAVI Global Alliance for Vaccines AMC Advanced Market and Immunizations Commitment GDP Gross domestic product CCT Conditional cash transfer GEF Global Environmental Facility CDM Clean Development GFATM Global Fund to Fight AIDS, Mechanism Tuberculosis, and Malaria CERs Certified emissions reductions GHG Greenhouse gases COMPAS Common preference assessment GNI Gross national income system HIPC Heavily indebted poor country/ CPA Country programmable aid countries CPIA Country Policy and HIV Human immunodeficiency Institutional Assessment virus CRS Creditor Reporting System (of IBRD International Bank for the OECD DAC) Reconstruction and CSR Corporate social responsibility Development DAC Development Assistance ICP International Comparison Committee Program DRF Debt Reduction Facility (of the IDA International Development World Bank) Association (of the World EBRD European Bank for Bank) Reconstruction and IDB Inter-American Development Development Bank EC European Commission IEA International Energy Agency EITI Extractive Industries IFC International Finance Transparency Initiative Corporation FAO Food and Agriculture IFI International financial Organization (of the UN) institutions G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 xv A B B R E V I A T I O N S IFFIm International Finance Facility OECD Organisation for Economic for Immunizations Co-operation and Development IHP International Health OTRI Overall Trade Restrictiveness Partnership Index ILO International Labour PFM Public financial management Organization PPIAF Public-Private Infrastructure IMF International Monetary Fund Advisory Facility ITC International Trade Centre PPP Purchasing power parity LDCs Least-developed countries PTA Preferential trade agreement MDBs Multilateral development SIAP Sustainable Infrastructure banks Action Plan MDG Millennium Development Goal SME Small and medium enterprises MDRI Multilateral Debt Relief SWF Sovereign wealth fund Initiative TTRI Tariff Trade Restrictiveness MFIs Microfinance institutions Index MSE Micro- and small enterprise UN United Nations NAMA Nonagricultural market access UNDP UN Development Programme NEPAD New Partnership or African UNFCCC UN Framework Convention on Development Climate Change NGOs Nongovernmental WFP World Food Programme organizations WHO World Health Organization NTM Nontariff measure WTO World Trade Organization ODA Official development assistance xvi G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 Overview T he global financial crisis, the most development emergency then, there surely is severe since the Great Depression, one now. The financial crisis threatens seri- is rapidly turning into a human and ous further setbacks and greatly increases development crisis. The financial crisis origi- the urgency for action. nated in the developed world, but it has spread quickly and inexorably to the devel- A Crisis upon Crisis oping world, sparing no country. Increas- ingly it appears that this will not be a short- For poor countries, this is a crisis upon cri- lived crisis. The poor countries are especially sis. It comes on the heels of the food and vulnerable, as they lack the resources to fuel crises. The triple jeopardy of the food, respond with ameliorative actions. The crisis fuel, and financial crises is pushing many poses serious threats to their hard-won gains poor countries into a danger zone, imposing in boosting economic growth and achieving rising human costs and imperiling develop- progress toward the Millennium Develop- ment prospects. ment Goals (MDGs). Poor people typically With the seizing-up of the international are the hardest hit, and have the least cush- financial markets in 2008, emerging market ion. For millions of them, the crisis puts at countries were the first among developing risk their very survival. countries to feel the impact of the financial At high-level meetings held in 2008 to crisis, given their heavier reliance on private mark the MDG halfway point, world lead- capital flows. Private capital flows to the ers expressed grave concern that the world developing world are seeing their sharpest was falling behind most of the MDGs, with slump ever, with net flows likely turning the shortfalls especially serious in human negative in 2009--a more than $700 bil- development, and issued an MDG Call lion drop from the peak in 2007. Many low- to Action to step up development efforts. income countries are also affected by the The UN secretary general noted that "we private credit crunch; private flows to these face nothing less than a development emer- countries, including several in Africa, that gency." The U.K. prime minister spoke of a had increased in recent years are now fall- "global poverty emergency." These concerns ing. But these countries are expected to were expressed before the onset of the full- be hit particularly hard in 2009 by a sec- blown global financial crisis. If there was a ond round of impacts reflecting the global G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 1 O V E R V I E W recession and declining world trade: world also is projected to be negative in 2009. The gross domestic product (GDP) is projected current growth projections, adjusted for to decline in 2009 for the first time since terms-of-trade changes, imply declining real World War II and world trade is projected per capita incomes for more than 50 devel- to register its largest decline in the post-war oping countries in 2009. period. Low-income countries will be affected Impact on Poverty Reduction through reductions in export volumes, com- and Other MDGs modity prices, remittances, tourism, foreign direct investment, and possibly even foreign The sharp slowdown in growth can seriously aid. These shocks in turn will hurt pub- set back progress on poverty reduction and lic revenues, adding to the sizable negative other MDGs. Food price increases between fiscal impact of the food and fuel crises on 2005 and 2008 pushed around 200 mil- many countries and putting further pressure lion more people into extreme poverty, and on public expenditure programs. In addi- about half of them will remain trapped in tion, financial systems in low-income coun- poverty in 2009 even as food prices recede tries, even when relatively shielded from the from their peaks. While food prices have international financial contagion because of fallen since mid-2008, they remain high by less exposure to international financial mar- historical standards, and the food crisis is kets, may be hit by second-round effects as by no means over. The slowdown in growth the economic downturn increases problem resulting from the financial crisis will add to loans, limiting the availability of domestic the poverty impact of high food prices. The financing to businesses. International Labour Organization projects The impact of the global financial crisis that some 30 million more people around on developing countries is reflected in sharp the world may be unemployed in 2009, of reductions in their projected GDP growth whom 23 million could be in developing to rates that are the lowest since the 1990s. countries. A worse-case scenario envisages Average projected GDP growth in develop- as many as 50 million more people becom- ing countries in 2009 is now only about a ing unemployed in 2009. Estimates of the quarter of what was expected before the poverty impact of the growth slowdown financial turmoil intensified into a full- range from 55 million to 90 million more blown crisis in the latter half of 2008 and a extreme poor in 2009 than expected before fifth of that achieved in the period of strong the crisis. These numbers will rise if the cri- growth up to 2007. For developing coun- sis deepens and growth in developing coun- tries as a whole, growth is now projected tries falters further. to fall to 1.6 percent in 2009, from an aver- In Sub-Saharan Africa and South Asia, age of 8.1 percent in 2006­07. Growth in which have high poverty rates, the growth Sub-Saharan Africa is projected to slow to slowdown essentially eliminates the pre- 1.7 percent in 2009, from 6.7 percent in crisis prospect of continued reductions in the 2006­07, breaking the momentum of the poverty count in 2009. Indeed, the poverty region's very promising growth revival of count is likely to rise in Sub-Saharan Africa recent years. Even these low projections are in 2009, with the more fragile and low- subject to further downside risks. Countries growth economies especially at risk. While in Eastern Europe and Central Asia that poverty rates on average are much lower entered the global crisis with weaker mac- in Europe and Central Asia and in Latin roeconomic fundamentals are most severely America and the Caribbean, these regions hit, with average growth in the region in could also see an increase in the number 2009 now projected to be negative. Average of the poor in 2009. Overall, on current growth in Latin America and the Caribbean growth projections, more than one-half of 2 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 O V E R V I E W all developing countries could experience a extreme poverty in the developing world is rise in the number of extreme poor in 2009; still expected to decline, but at a slower pace this proportion is likely to be still higher than envisaged before the crisis because of among low-income countries and countries the slowdown in economic growth. in Sub-Saharan Africa--two-thirds and The food crisis, and now the global finan- three-quarters, respectively. cial crisis, are reversing past gains in fighting Experience suggests that growth collapses hunger and malnutrition. Before the onset are costly for human development outcomes, of the food crisis in 2007, there were about which tend to deteriorate more quickly dur- 850 million chronically hungry people in ing growth decelerations than they improve the developing world. This number rose to during growth accelerations. Countries that 960 million people in 2008 and is expected suffered economic contractions of 10 per- to climb past 1 billion in 2009, breaking the cent or more between 1980 and 2004 expe- declining trend in the proportion of hungry rienced more than 1 million additional people in the developing world and seriously infant deaths. It is estimated that the sharply jeopardizing the goal of halving this propor- slower economic growth resulting from the tion by 2015. These trends call for maintain- current financial crisis may cause as many as ing the momentum of recent efforts to boost 200,000 to 400,000 more infant deaths per agricultural investment and productivity. year on average between 2009 and the MDG The goal of gender parity in primary target year of 2015, which translates into and secondary education has seen rela- 1.4 million to 2.8 million additional infant tively good progress and is expected to be deaths during the period. In poor countries, achieved at the global level. However, pros- education outcomes, such as school enroll- pects for gender parity in tertiary education ment, also tend to deteriorate during eco- and other targets that empower women-- nomic crises--especially for girls.1 such as increased participation of women The long-run consequences of the crisis in wage employment in the non-agricultural for human development outcomes may be sector--are less promising. The gender goals more severe than those observed in the short face added risks as evidence from past cri- run. For example, the decline in health status ses shows that women are in general more among children who suffer from reduced (or vulnerable to impact--heightening the need inferior) food consumption can be irrevers- for attention to the gender aspects in policy ible, retarding growth as well as cognitive responses. and learning abilities. Estimates suggest that Of greatest concern are the human devel- the food crisis has already caused the num- opment goals. Based on current trends, most ber of people suffering permanent damage human development goals are unlikely to be from malnutrition to rise by 44 million. The met at the global level. Despite substantial financial crisis will exacerbate this impact improvements in primary school enroll- as poor households respond to decreases in ment and completion rates, the world is income by further cutting the quantity and likely to miss the goal of universal primary quality of food consumption. school completion, although it could come The overall outlook for the MDGs, close. Prospects are gravest in health. Large already a cause for serious concern, has shortfalls are likely in reducing child and become still more worrisome. Strong eco- maternal mortality. There have been some nomic growth in developing countries in the encouraging gains in halting and beginning past decade had put the MDG for poverty to reverse the spread of major communica- reduction within reach at the global level, ble diseases, such as HIV/AIDS and malaria, but the triple punch of the food, fuel, and but progress must be accelerated if the financial crises creates new risks. In the MDG targets are to be met. Large shortfalls medium term, the proportion of people in are also likely in improving access to basic G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 3 O V E R V I E W sanitation, although there is greater progress of the crisis and the policy response in on the related goal of improving access to developed countries and in major emerging safe drinking water. market countries that are closely integrated At the regional level, Sub-Saharan Africa with international financial markets. But as lags on all MDGs, including the goal for the crisis has engulfed other, lower-income poverty reduction. South Asia lags on most countries, it has become truly global. It has human development MDGs; it will likely become clear that the impact on these coun- meet the poverty reduction goal, although tries, and the resulting grave risks to devel- barely. At the country level, a majority of opment prospects, must be addressed as countries will fall short of most MDGs. part of a global response to the crisis. The Middle-income countries have made the challenge for the international community is most progress toward the MDGs. Many of to overcome the global financial crisis and these countries, however, continue to have respond to the deepening human and devel- large concentrations of poverty and face opment crisis in poor countries. major challenges in achieving the non-income The development emergency that now human development goals. Overall progress confronts many poor countries calls for toward the MDGs has been weaker in low- commitment to a set of actions that signal income countries, although performance var- a clear resolve to avert the potentially large ies considerably across countries within this human costs of the crisis and assist these group. Progress has been slowest in countries countries to lay the ground for a recovery in fragile situations. Wracked by conflict and of strong growth and accelerated progress hampered by weak governance and capaci- toward the MDGs. The stakes are high, and ties, fragile states present difficult political the need for action urgent. and governance contexts for effective delivery Leaders of the Group of Twenty (G-20), of development finance and services. at their summit held in London on April 2, Even at the MDG halfway point, around 2009, made important progress in coordi- 75 million children of primary school age nating a global response to the crisis. The were not in school; 190,000 children under summit's outcome showed a clear concern five died every week from preventable dis- with the serious development dimension of ease; 10,000 women died every week from the crisis. Agreements reached at the summit treatable complications of pregnancy; more have laid a good foundation for follow-up. than 2 million people died from AIDS annu- Other major meetings in the period ahead-- ally, close to 2 million from tuberculosis, and the Spring Meetings of the World Bank and about 1 million from malaria; around 1 bil- the International Monetary Fund (IMF), the lion people suffered from hunger and twice UN International Conference on the Global as many were undernourished; and about Financial Crisis and its Impact on Develop- half of the developing world lacked access to ment, and the G-8 summit--can build on basic sanitation--grim numbers that would the progress made at the G-20 summit by be far lower if the world were on track on elaborating a fuller agenda and developing the MDGs. The world can, and should, do momentum in implementation. better. Acceleration of progress requires a The crisis calls for a reaffirmation of the shared commitment to pursue this develop- world's commitment to the promise of the ment agenda with greater vigor and urgency. MDGs, in the spirit of the international cooperation that gave birth to the MDGs at A Development Emergency the turn of the century and to the Monterrey framework for the mutual accountability of A global crisis must be met with a global both developing and developed countries for response. Much of the attention initially the achievement of these goals. It is fitting, was understandably focused on the impact therefore, that the G-20 leaders stated in 4 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 O V E R V I E W their London summit communiqué that "we ground in their progress toward the MDGs. reaffirm our historic commitment to meeting The report sets out six priorities for action the Millennium Development Goals." In the (box 1). current context, international cooperation for development is needed more than ever. Ensuring an Adequate Fiscal Response Priorities for Action A global slowdown in growth calls for a global fiscal stimulus. Those developing Because the global crisis originated in the countries with strong fiscal and external financial markets of developed countries, positions should make use of the room for the first order of business is to stabilize these fiscal stimulus that they possess. How- markets and counter the recession that the ever, most developing countries faced with financial turmoil has triggered. This calls for sharply declining growth and consequent timely, adequate, and coordinated actions by major social disruptions lack the resources developed countries to restore confidence in to mount any fiscal response, and will in the financial system and unfreeze the flow of fact experience a further erosion of their fis- credit and to counter falling demand. Major cal space as public revenues fall and exter- actions have been taken by these countries nal financing dries up. Let alone implement on both counts as they have responded with a fiscal stimulus, many may be forced to financial sector rehabilitation measures and cut valuable infrastructure spending and fiscal stimulus packages. The challenge ahead social programs. Additional financing, on is to ensure that the actions are commensu- appropriate terms, would help them support rate with the scale and depth of the crisis and growth and protect the poor and vulnerable are appropriately coordinated internationally. from the impact of the crisis. Enabling an Action is also needed to deal with the flaws adequate fiscal response in developing coun- in financial sector regulation and supervision tries would be a win-win for all. If financing revealed by the crisis and to establish a more were available, many of these countries have solid foundation for stability in a world of the opportunities for high-return invest- globalized financial markets. ments that break bottlenecks to growth, At the same time, strong and urgent quality of economic management, and insti- actions are needed to counter the impact of tutional capacity to increase spending that the global crisis on poor countries and help would both benefit their future growth and them restore strong growth and recover lost contribute to global demand and hence BOX 1 Responding to a development emergency: priorities for action Ensure an adequate fiscal response to support economic growth and protect poor and vulner- able groups from the impact of the crisis--consistent with maintenance of macroeconomic stability Shore up the private sector and improve the climate for recovery and growth in private invest- ment, including paying special attention to strengthening financial systems Redouble efforts toward the human development goals, including leveraging the private sector role Scale up aid to poor and vulnerable countries hit hard by the crisis Maintain an open trade and finance system--including quick action on the Doha Round Ensure that the multilateral system has the mandate, resources, and instruments to support an effective global response to the global crisis G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 5 O V E R V I E W recovery in developed countries. Easing the stimulus will catalyze sustainable economic fiscal constraint on developing countries growth only if there is a vigorous private sec- should thus be part of the equation as the tor response. The private sector, in turn, will world fashions a coordinated fiscal response rebound only if supported by an appropriate to the global crisis. enabling environment. Access to finance and As many as 90 percent of developing infrastructure and the quality of business countries are assessed to be highly or mod- regulation are three key determinants of the erately exposed to the impact of the crisis, as private sector enabling environment. they face slowing growth, high levels of pov- In the current credit crunch, particular erty, or both. Three-quarters of the exposed urgency attaches to shoring up the private countries lack the fiscal capacity to finance sector's access to finance for investment programs to curb the effects of the down- and trade, both of which have contracted turn. Those among them with good mac- sharply. Governments, working with devel- roeconomic management and institutional opment partners, need to move quickly on capacities should be assisted with financing this front, with a special focus on access to to enhance their fiscal space to respond to finance for small and medium enterprises the crisis. Thanks to their efforts over the that are critical for job creation and that past decade to improve macroeconomic are finding themselves particularly squeezed policies and governance, at least one-half by the credit contraction. At the same time, of developing countries today have the mac- the crisis has underscored the importance of roeconomic conditions (taking into account broader reforms to improve financial system fiscal and external sustainability consider- stability and soundness, including strength- ations) and institutional capacities to under- ening financial regulation and supervision. pin some fiscal expansion were financing Some countries will likely face the need to on appropriate terms available. At the indi- recapitalize distressed financial institutions vidual country level, fiscal response will of and must prepare for that in advance. course need to be tailored to specific coun- The most urgent issues with respect to try circumstances. infrastructure development in the current Countries must also use available scope context also pertain to financing, as both for domestic resource mobilization. The governments and private investors face crisis calls for an even sharper focusing of increased financial constraints. Multilat- expenditures on core priorities--infrastruc- eral financial institutions will need to play ture for growth, key investments in human a stronger supporting role, including most capital, and social safety nets. Investment immediately in shoring up viable ongoing projects for new spending must be carefully public-private partnership projects facing chosen to address key bottlenecks to growth financial distress. However, more financ- and maximize development impact. Spend- ing is only part of what is needed to meet ing on social safety nets must be targeted to the longer-term infrastructure challenge reach the intended beneficiaries--through in developing countries. For example, it is programs such as conditional cash transfers estimated that Sub-Saharan Africa could to poor households, workfare schemes, and reduce its infrastructure financing gap of maternal-child or school feeding programs. about $40 billion annually by as much as 45 percent through improved management of investments, reduction of operating ineffi- Supporting the Private Sector ciencies, and better cost recovery. Also, even Economic growth is central to poverty reduc- with the tighter financing conditions, coun- tion and to the achievement of the MDGs tries implementing reforms of the regula- more broadly. A vibrant private sector is key tory and institutional framework for public- to economic growth and job creation. Fiscal private partnerships in infrastructure can 6 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 O V E R V I E W expect to attract more private investment-- the Fast Track Initiative in education. It also and enhance its development effectiveness. creates pressing short-term challenges, as it Investments in energy-efficient infrastruc- calls for a special focus on social protection ture offer the dual benefits of contributing to programs and services that shield poor and economic recovery and growth and mitigat- vulnerable households from the likely severe ing climate change. Going forward, carbon human impacts, such as a rise in child mor- markets can play an increasingly important tality. This implies a high priority for pri- role in mobilizing private financing in sup- mary health care and nutrition programs port of investments that promote environ- in rural areas and in poor urban neighbor- mental sustainability. hoods, including paying special attention to Measured by the World Bank Group's gender needs. A strengthening of the social Doing Business and Enterprise Surveys, safety nets will bring immediate relief but, developing countries have implemented sig- in concert with improvement of key services nificant reforms to improve their regulatory in health and education, it will also help environments for private sector activity. safeguard health and education outcomes in However, progress has been uneven, and the medium term. Financing these needs will much scope for regulatory improvements require increased donor support, but coun- remains. The crisis has reinforced findings tries will also need to create fiscal space by from research that the aim should be better, pruning lower-priority spending and seeking not necessarily fewer, regulations. Simplifi- efficiency gains in existing programs. cation of regulations--to make them more The crisis also calls for better leverag- efficient and streamlined--must ensure ade- ing the role of the private sector in human quate protection of public interests. The cri- development. Governments are key actors sis has underscored the role of appropriate in the financing and delivery of human regulatory oversight. development services, but the private sec- Research also finds complementarity tor (for-profit and non-profit) is playing an between regulatory reforms and broader increasingly significant role. For example, improvements in governance. Regulatory one-half of health spending in many devel- reforms have greater impact in better insti- oping countries comes from private sources. tutional environments. Weak institutional Recent surveys in Sub-Saharan Africa and capacities for enforcement undermine the South Asia find that more than half of the effectiveness and credibility of the regula- MDG-related maternal, reproductive, and tory framework. In many countries, firms child health services used are privately pro- report corruption as a major constraint to vided. In South Asia, the share of private business. Strong institutions and good gov- enrollment in primary and secondary educa- ernance, therefore, are an important under- tion averages about 30 percent. The scale of pinning of a conducive environment for the MDG challenge calls for mobilization of private activity--and of development effec- resources from all sources, and there is sig- tiveness more broadly. nificant potential for greater private sector contributions--not only of more resources but also innovation, flexibility, and improve- Redoubling Efforts toward ments in quality that private participation Human Development Goals can bring. There are successful examples Progress toward the human development of different combinations of government goals must be accelerated. The crisis gives and private partnerships in service delivery added urgency to reinforcing key programs and financing, and countries can consider in health and education, such as control of options that best suit their circumstances. major diseases including HIV/AIDS and To work effectively with the private sec- malaria, health systems strengthening, and tor, governments need to develop requisite G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 7 O V E R V I E W capacities for regulation and oversight, use the needs of poor countries have increased incentives judiciously, and improve gover- sharply. One option for additional support nance and accountability arrangements. is the proposal by President Zoellick of the The expanded potential of private inter- World Bank that developed countries invest national financing (from non-governmental 0.7 percent of their stimulus packages, or organizations, foundations, and business about $15 billion based on the packages corporations) for human development in announced to date, in a Vulnerability Fund poor countries and related innovations in to help developing countries. The fund would financing modalities and delivery vehicles support three crisis-response priorities in also needs to be effectively tapped. Impor- developing countries that lack the resources tant examples of private giving include to act on their own--strengthening social sizable contributions, from the Bill and safety nets, funding investments in essential Melinda Gates Foundation, for example, infrastructure, and supporting financing for into the Global Alliance for Vaccines and small and medium enterprises and microfi- Immunization and the Global Fund to Fight nance institutions. The resources would be AIDS, Tuberculosis, and Malaria. The channeled through multilateral and bilateral Advanced Market Commitment mechanism agencies, in programs backed by safeguards represents an innovative way to leverage cor- to ensure that they are well spent. porate finance in development of treatments As donors pick up the pace in delivering for diseases in poor countries. aid, progress on the Accra Agenda for Action to improve aid effectiveness--better aid alignment and harmonization, improved aid Scaling Up Aid to Poor Countries predictability and timeliness, and a stronger The urgency for donors to deliver on their focus on results--should also be expedited. aid commitments cannot be overemphasized Improving the effectiveness of the use of in the current context. Official development resources is even more important in times of assistance (ODA) from members of the Devel- crisis and related budget constraints. More- opment Assistance Committee (DAC) of the over, as the aid landscape changes with a Organisation for Economic Co-operation and growing role of non-DAC official donors Development (OECD) rose by about 10 per- and private sources of aid and an increas- cent in real terms in 2008. This is a welcome ing array of aid modalities, aid coordina- development, following declines in ODA in tion frameworks will need to encompass a both 2006 and 2007. In real terms, ODA from broader range of development partners. DAC donors in 2008 was about $29 billion Private aid has emerged as an increasingly short of the Gleneagles target of $130 billion important player in development finance. per annum by 2010. ODA to Sub-Saharan The OECD estimated private international Africa was about $20 billion short of the giving at $18.6 billion in 2007, but this is 2010 target of $50 billion per annum. Donors widely considered to be an underestimate. should scale up rapidly to deliver on these Alternative estimates place private interna- commitments. Although the crisis has put tional giving from the United States alone at donors' fiscal positions under increased pres- $34.8 billion in 2006. The sources of pri- sure, the additional sums needed to meet the vate giving are various--foundations, cor- Gleneagles commitments amount to a fraction porations, and civil society organizations of the support they have provided to rescue of different types. The rising role of private individual financial institutions in their coun- assistance has spawned innovative public- tries and a miniscule proportion of the fiscal private partnerships in development activi- stimulus packages they have announced. ties, especially in health, education, and Indeed, the crisis calls for going beyond climate change. There is some concern that the commitments made at Gleneagles as the financial crisis may interrupt the rising 8 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 O V E R V I E W trend in private aid. Nonetheless, private aid open, and strengthen the rules-based multi- today represents a source that, if effectively lateral trading system. It would also provide deployed, can be an important complement a much-needed boost in confidence to the to public aid and a partner in development. global economy at a time of high stress and uncertainty. Trade has been a powerful force for Maintaining an Open Trade growth and poverty reduction, and in turn and Finance System for progress toward the MDGs, in devel- It is vitally important to maintain trade open- oping countries. Maintaining and improv- ness and resist the recent rise in protectionist ing developing countries' access to interna- pressures. The food, fuel, and financial cri- tional markets is therefore a key element of ses have put great strain on the world trad- the development agenda. A complementary ing system. In early 2008, sharp increases priority is the strengthening of support for in food prices triggered some harmful trade trade facilitation to address behind-the- policy responses, including the imposition of border constraints to trade--improvement trade taxes, quotas, and even outright export of trade-related infrastructure, finance, bans.2 Protectionism risks have intensified regulations, and logistics such as customs with the financial crisis as economic activity services and standards compliance. To take collapses and unemployment rises. A num- advantage of trade opportunities, developing ber of countries have raised border barriers countries need to enhance their competitive- or subsidized export or import-competing ness by reducing the high trade costs asso- industries such as automotive and steel, and ciated with the behind-the-border barriers. there has been a rise in inward-looking "buy The ease of moving goods internationally national" policies. Such responses retard has become an increasingly important deter- needed market corrections, distort trade, minant of competitiveness in the globalized and risk retaliation. The world can ill-afford marketplace. Research shows that in many competitive beggar-thy-neighbor policies low-income countries trade facilitation can that would only deepen the slump in global be at least as important as further reduction trade and undercut prospects for economic in trade tariffs in boosting trade. recovery for all. In support of trade facilitation, aid for At the London summit, G-20 leaders trade should be scaled up substantially. reaffirmed their commitment to refrain While rising overall, aid for trade from bilat- from raising new barriers to investment or eral sources declined in 2007. More of such trade in goods and services, imposing new aid needs to be directed to low-income and export restrictions, or implementing World the least developed countries, which cur- Trade Organization (WTO)-inconsistent rently receive only about one-half and one- measures to stimulate exports, and agreed quarter of the total, respectively. to rectify promptly any such measures. This It is also important to preserve the open- commitment must be followed through with ness of the international financial system. firm resolve--in contrast to a similar com- There are widespread concerns that gov- mitment made by the G-20 leaders at their ernment interventions in financial systems summit in Washington, DC, in November in advanced countries may be accompa- 2008 that was not adhered to by a majority nied by pressures on financial institutions of G-20 members. to curtail cross-border lending. A shift The crisis increases the urgency of bol- toward such financial mercantilism must be stering multilateral cooperation in trade. A resisted. It would particularly hurt finan- quick and successful conclusion to the Doha cial flows to developing countries, which Round of trade negotiations would help to are already under increasing stress as a ease protectionist pressures, keep markets result of the financial contagion and the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 9 O V E R V I E W potential crowding-out implications of the including using their leverage ability to help sharply increased borrowing requirements revive private capital flows. In this context, of advanced country governments. the G-20 leaders at their London summit The international community has rec- took timely action in agreeing to support a ognized the importance of addressing the sizable increase in resources available to the crunch in trade finance in a coordinated IMF and the MDBs. fashion. The G-20 leaders agreed at their The G-20 leaders agreed to support a tri- London summit to ensure the availability of pling of resources available to the IMF to at least $250 billion of trade finance over the $750 billion. They also supported a general next two years through their export credit allocation of the Special Drawing Rights and investment agencies and through the (SDRs) equivalent to $250 billion to increase multilateral development banks (MDBs)-- global liquidity, $100 billion of which will including up to $50 billion of trade liquidity go directly to emerging market and devel- support over the next three years through oping countries ($19 billion to low-income the new Global Trade Liquidity Pool intro- countries). The IMF has moved quickly to duced by the International Finance Corpo- strengthen its lending framework, includ- ration (IFC). ing establishing a new Flexible Credit Line to provide large and upfront financing to emerging market economies with strong fun- Empowering Multilateral Institutions damentals and policies, enhancing the flex- The international financial institutions (IFIs) ibility of the regular stand-by arrangements, have a crucial role to play in supporting an doubling access limits for emerging markets effective response to the global crisis and the and low-income countries, and reforming development emergency that now confronts conditionality to make it more focused and many poor countries. They are essential to tailored to country circumstances. The IMF forging a coordinated global response to a plans to step up its lending to low-income global crisis. Two key priorities are meeting countries to around $3 billion a year over the sharply increased needs of developing the next two years--triple last year's level. countries for balance of payments financ- The G-20 leaders also supported an ing and budget support for critical public increase in MDB lending of $100 billion spending such as social safety net programs to a total of around $300 billion over the and key infrastructure investments, and next three years and agreed to ensure that shoring up the private sector in these coun- all MDBs have the appropriate capital. tries through support for trade financing, They supported a 200 percent general capi- recapitalization of banks, and financing for tal increase at the Asian Development Bank small and medium enterprises. The IFIs are (ADB) and reviews of the need for capital responding with increased financing and increases at several other MDBs. They also facilities and processes designed to acceler- agreed to support, through voluntary bilat- ate the speed of response, including facilities eral contributions, the World Bank's Vulner- with a special focus on support to the poor ability Framework, including the Infrastruc- and vulnerable, such as the World Bank's ture Crisis Facility and the Rapid Social Vulnerability Financing Facility. But they Response Fund. The concessional windows will need more resources to meet the needs. of the African Development Bank, the ADB, The IFIs are facing an unprecedented rise and the World Bank have received signifi- in demand for financing. With the slump in cant increases in resources through recent private capital flows, estimates of develop- replenishments. Also, debt relief provided ing countries' financing gap in 2009 reach through the Heavily Indebted Poor Coun- as high as $1 trillion. The IFIs will need tries (HIPC) Initiative and the Multilateral to play a role in filling some of this gap, Debt Relief Initiative (MDRI) has increased 10 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 O V E R V I E W fiscal space in many poor countries. None- IFIs' role in warning against the risks of trade theless, the rise in the financing needs of protectionism and financial mercantilism is low-income countries hit hard by the crisis indispensable. Drawing policy lessons from will test the adequacy of available resources. the current crisis, especially but not only in An immediate need is for donors to honor financial regulation, will be another key area. existing pledges to the MDB concessional The IMF will have a particularly important windows and to the MDRI. role in enhanced surveillance of risk in the The MDBs will also need to review exist- globalized financial markets, in collaboration ing financing instruments and constraints with a new Financial Stability Board. on capital utilization to increase the flex- The crisis has highlighted the need to ibility of response and make the capital reform the IFIs--to align their governance go further. Areas that may be considered with today's economic realities--and more include increasing individual country limits broadly to reconfigure 20th-century global on lending; raising limits on the proportion institutions to match 21st-century global of quick-disbursing financing; front-loading challenges. As an old Chinese proverb says, commitments; accelerating disbursements a crisis is an opportunity riding the danger- on existing projects; and allowing low- ous wind. The present crisis can set the stage income countries access to non-concessional for a new multilateralism that supports sus- windows while ensuring debt sustainabil- tainable and inclusive globalization. ity. Increased demand for risk mitigation and public-private partnerships will call Notes for more fully exploiting the leverage of the MDBs' private sector arms, such as the IFC, 1. Currently available information provides and guarantee instruments. only a partial picture of the impact of the crisis The role of the IFIs, of course, extends on poverty and human development outcomes. A beyond financing. Knowledge is a core IFI recent proposal by the United Kingdom seeks to comparative advantage. A crucial role for establish a Global Poverty Alert to capture fuller, IFIs in the context of the current global cri- real-time information to underpin the design of policy responses. The communiqué of the recent sis is to inform policy making by analyzing G-20 summit in London called on the UN, work- the international spillovers of national pol- ing with other global institutions, to establish an icy actions and showing the interconnected effective mechanism to monitor the impact of the nature of the challenges, and to highlight the crisis on the poorest and most vulnerable. need to ensure that national responses are 2. Distorted trade policies are part of the rea- consistent with the global good. Amid ris- son for the emergence of the food crisis in the first ing pressures for policies to turn inward, the place. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 11 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." MDGs: Crisis Impact and Outlook A ssessment of the progress toward Crisis Impact on MDGs the Millennium Development Goals (MDGs) at the halfway point in 2008 The global financial crisis can seriously showed major shortfalls in several of them. retard progress toward the MDGs. The At high-level meetings held during the year, impact will be felt on all MDGs, including world leaders noted the substantial progress the goals for poverty reduction and human that had been made toward some of the goals, development. Poor countries that are vul- especially poverty reduction, but expressed nerable to shocks and have the least capac- grave concern at the prospect that most of ity to respond with ameliorative actions are the other goals, in particular the human at particular risk of falling further behind. development goals, would not be achieved A recent assessment by the World Bank if past trends continued. At the UN General found that almost 40 percent of developing Assembly's High-Level Event on the MDGs countries were highly exposed to the pov- held in September 2008, Secretary General erty effects of the crisis (with both declin- Ban Ki-moon noted that "we face nothing ing growth rates and high levels of poverty); less than a development emergency," and the most of the others were moderately exposed, meeting resulted in a call to action to scale with fewer than 10 percent facing little risk. up development efforts and put the world Three-quarters of the exposed countries back on track to achieve the MDGs.1 A simi- had limited fiscal capacity to expand pro- lar assessment was echoed in the report of grams to curb the effects of the economic the MDG Africa Steering Group comprising downturn. Within countries, the poor typi- all major multilateral development organiza- cally are more vulnerable and have the least tions that focus on the region facing the most cushion.4 serious shortfalls.2 Since then, the global Strong economic growth in developing financial crisis, coming on the heels of the countries in the past decade had put the food and fuel crises, threatens further set- MDG for poverty reduction (halving the backs, making the achievement of the goals proportion of extreme poor in the popula- still more challenging and the need for stron- tion between 1990 and 2015) within reach ger action still more urgent.3 at the global level. But the triple jeopardy of G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 13 M D G S : C R I S I S I M P A C T A N D O U T L O O K the food, fuel, and financial crises adds new The poverty impact of the crisis would be challenges. The rise in food prices between even greater if the crisis deepens and growth 2005 and 2008 pushed an estimated 160 mil- in developing countries falters further than lion to 200 million more people into extreme currently anticipated. Severe financial cri- poverty. Falling food prices since mid-2008 ses in the past that caused growth to turn are helping to reduce this number. However, negative produced sharp increases in pov- because changes in local prices lag behind erty rates in the affected countries. During changes in international prices, not all of the the East Asian crisis of the late 1990s, for benefits of lower international prices have example, the sharp reversal in growth and been felt yet. Preliminary projections sug- the associated rise in unemployment and gest that as local prices come into line with decline in wages caused the poverty head- international prices, between 90 million and count index in Indonesia to rise by 11 per- 120 million people who were pushed into cent in 1997 and a further 19.9 percent in poverty by high food prices by 2008 may 1998. In Thailand, the increases in the same emerge from poverty in 2009. Still, up to crisis years were 9.8 percent and 12.9 per- 100 million people pushed into poverty by cent, respectively.6 the high food prices would remain poor in Progress in reducing hunger and malnu- 2009. trition, which along with poverty reduction The growth slowdown resulting from is part of MDG 1, has also been affected. the financial crisis will add to the poverty Although the proportion of people who impact of high food prices. Projected eco- suffer from hunger has fallen since 1990, nomic growth in developing countries in there are serious shortfalls in achieving the 2009 on average is now only about a quarter goal of halving the incidence of hunger and of that forecast before the onset of the finan- malnutrition. The recent food crisis is erod- cial crisis. Past trends show that a decline in ing some of the hard-won past gains. High the average GDP growth rate in developing prices have increased the number of people countries by one percentage point can trap without sufficient access to food because as many as 20 million more people in pov- the majority of the world's poor, particu- erty. Estimates of the poverty impact of the larly those who live in urban areas, are net growth slowdown in developing countries food buyers and spend over half of their as a result of the financial crisis range from income on food. About 1 billion people 55 million to 90 million more poor people now suffer from hunger, and about 2 billion in 2009 than anticipated before the crisis.5 are undernourished. The food crisis is esti- At current growth projections, overall pov- mated to have caused the number of people erty rates in the developing world are still suffering permanent damage resulting from expected to fall in 2009 but at a much slower early childhood malnutrition to rise by pace than before the crisis. The poverty 44 million in 2008. The financial crisis and impact of the crisis will vary across regions the resulting fall in economic growth are and countries. In Sub-Saharan Africa and likely to exacerbate this impact. Decreases South Asia (except India), the growth slow- in household incomes can reduce both the down essentially eliminates the prospect of quantity and quality of food consumption. continued reductions in the poverty count in Children and women are particularly vul- 2009. Within these regions, which already nerable to such impacts. have high poverty rates, rising poverty can With the world already off track on most be expected in some of the more fragile and of the MDGs in human development, the low-growth economies, which may expe- financial crisis threatens to further set back rience declines in per capita incomes as a progress. In the face of economic crises, both result of the growth slowdown. household and public investments in human 14 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 M D G S : C R I S I S I M P A C T A N D O U T L O O K capital tend to suffer. With falling employ- vary across countries, depending on their ment, wages, and asset values, and with initial conditions, exposure to crisis impact, weak social insurance systems, poor house- and policy response. holds in developing countries may not be The long-run implications of the cri- able to cope with the economic shocks with- sis for human development outcomes may out cutting investments in human capital. be more severe than those observed in the Faced with declining revenues and limited short run. When poor households withdraw financing options, government social sector their children from school, there is a signif- spending is also likely to come under pres- icant risk that they will not return once the sure. For example, Argentina and Indonesia crisis is over or that they will be unable to cut public health expenditures by two-thirds fill the learning gaps resulting from lack of during the crises of the 1990s. Experience attendance. And the decline in nutritional suggests that growth collapses from finan- and health status among children who suf- cial crises are costly for human development fer from reduced (or lower-quality) food outcomes. Countries that suffered economic consumption can be irreversible, retarding contractions of 10 percent or more between their growth and cognitive and learning 1980 and 2004 experienced more than abilities. 1 million additional infant deaths. During the crisis of the late 1990s, infant mortality Overall MDG Progress in Indonesia increased 1.8 percentage points. and Outlook In Peru, during the economic crisis of the late 1980s, the infant mortality rate rose by Even though the global economic crisis 2.5 percentage points for children born dur- will slow progress, the target for reducing ing the crisis, implying about 18,000 more income poverty remains within reach at the infant deaths.7 global level based on current growth projec- Human development outcomes tend to tions, which envisage a recovery in growth deteriorate more quickly during growth starting in 2010. The goals for gender parity decelerations than they improve during in primary and secondary education and for growth accelerations.8 The projected slow- access to safe water have also seen relatively down in growth in developing countries is good progress and are expected to be met likely to sharply slow progress in reducing at the global level by 2015, although pros- infant mortality. Based on current projec- pects for gender parity in tertiary educa- tions of lower growth, preliminary analysis tion and other targets about empowerment shows that infant deaths in developing coun- of women are less promising. Of greatest tries may be 200,000 to 400,000 per year concern are the nonincome human develop- higher on average between 2009 and the ment goals. Based on current trends, most MDG target year of 2015 than they would human development MDGs--especially for have been in the absence of the crisis; that child and maternal mortality, but also for translates into an additional 1.4 million to primary school completion, nutrition, and 2.8 million infant deaths during the period.9 sanitation--are unlikely to be met at the In poor developing countries, education out- global level (figure 1). comes such as school enrollment also tend Within this global picture, considerable to deteriorate during economic crises. Evi- variation occurs across regions and coun- dence indicates that fluctuations in income tries. At the regional level, Sub-Saharan have a larger impact on survival and school Africa lags on all MDGs, including the goal enrollment among girls than among boys. for poverty reduction, which on current The intensity of the impacts of the financial trends will be achieved or nearly achieved in crisis on health and education outcomes will all other regions. Thanks to rapid growth, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 15 M D G S : C R I S I S I M P A C T A N D O U T L O O K FIGURE 1 MDGs at the global level: serious shortfalls loom on human development goals % of goal 100 80 60 40 20 0 MDG 1.a MDG 1.c MDG 2 MDG 3 MDG 4 MDG 5.a MDG 7.c MDG 7.c Extreme Hunger Primary Gender Child Maternal Access to Access to poverty education parity mortality mortality safe water sanitation Achieved by 2007 Needed to be achieved by 2007 to be on track Source: Staff calculations based on World Development Indicators database. Note: Calculations are based on the most recent year for which data are available. MDG 1.a: Poverty headcount ratio (PPP2005 US$1.25 a day); MDG 1.c: Underweight under-five children (U.S. child growth standards); MDG 2: Primary education completion rate; MDG 3: Gender parity in primary and secondary education; MDG 4: Under-five mortality rate; MDG 5.a: Maternal mortality ratio (modeled estimates); MDG 7.c: Access to improved water source; MDG 7.c: Access to improved sanitation facilities. especially in China, the East Asia region has here too performance varies considerably already succeeded in halving extreme pov- across countries within the group. Prog- erty. South Asia is on track to achieve the ress toward the MDGs has been slowest in poverty reduction goal, but it is seriously off fragile and conflict-affected states (figure 2). track on most human development goals. On Wracked by conflict and hampered by weak the goals relating to health, most regions are capacities, these states--more than half of off track, though the rate of progress varies which are in Sub-Saharan Africa--present substantially across regions, with East Asia, difficult political and governance contexts Europe and Central Asia, and Latin Amer- for effective delivery of development finance ica in general doing better than the other and services. Fragile states account for close regions. to one-fifth of the population of low-income Middle-income countries have made the countries but more than one-third of their most rapid progress toward the MDGs. poor people. Looking ahead, the challenge These countries as a group are on track to to achieve the MDGs will increasingly be achieve the target for poverty reduction. concentrated in low-income countries, espe- Many of these countries, however, continue cially fragile states. to have large concentrations of poverty, in Review of data for individual countries part reflecting high levels of income inequal- reveals that many countries will achieve a ity. This factor, together with the large popu- few of the MDGs, but that on current trends lation size of some middle-income countries, a majority are likely to fall short of most of means that these countries remain home to the goals. Among countries for which data a majority of the world's poor in absolute are available, the proportion of off-track numbers. Many of these countries also con- countries exceeds that of on-track coun- tinue to face major challenges in achieving tries for all MDGs except those for poverty the nonincome human development goals. reduction and gender parity at school (figure Overall progress toward the MDGs has been 3). In many countries MDG data continue weaker in low-income countries, although to suffer from large gaps. 16 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 M D G S : C R I S I S I M P A C T A N D O U T L O O K FIGURE 2 Fragile states have made the least progress toward the MDGs Progress toward goal by 2007 (%) 100 80 60 40 20 0 ­20 MDG 1.a MDG 1.c MDG 2 MDG 3 MDG 4 MDG 5.a MDG 7.c MDG 7.c Extreme Hunger Primary Gender Child Maternal Access to Access to poverty education parity mortality mortality safe water sanitation Middle-income countries Low-income countries Fragile states Source: Staff calculations based on World Development Indicators database. Closer Look at Progress by Goal in picking up the pace on economic growth and poverty reduction. For developing coun- New data on poverty show that the number tries as a whole, the proportion of extreme of people living in extreme poverty in devel- poor is projected to fall to 15 percent by oping countries fell from about 1.8 billion in 2015, below the MDG target of 21 percent, 1990 to 1.4 billion in 2005, decreasing from 42 percent to 25 percent of the population (box 1). Much of this progress is attribut- FIGURE 3 Most countries are falling short of most MDGs able to East Asia, which reduced the inci- dence of poverty from 55 percent in 1990 to 17 percent in 2005. In China, the propor- MDG 1.a Extreme poverty tion declined from 60 percent to 16 percent, MDG 1.c and the absolute number of extreme poor Hunger fell from 683 million to 208 million (figure MDG 2 4). The number of people living in extreme Primary education poverty in India rose between 1990 and MDG 3 2005, from 436 million to 456 million, but Gender parity their share in total population declined from MDG 4 51 to 42 percent. Thanks to a resurgence of Child mortality growth in this decade, Sub-Saharan Africa MDG 7.c also was able to reduce the proportion of Access to safe water poor people, from 58 percent in 1990 to MDG 7.c 51 percent in 2005, but the absolute num- Access to sanitation ber of poor people rose from 296 million 0 25 50 75 100 to 388 million. Of all developing regions, Percentage of developing countries Sub-Saharan Africa alone remains seriously No data Seriously off track Off track On track Achieved off track to achieve the poverty reduction MDG, and the global economic crisis threat- Source: Staff calculations based on World Development Indicators database. ens to interrupt the region's recent progress Note: The graph covers 144 developing countries. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 17 M D G S : C R I S I S I M P A C T A N D O U T L O O K BOX 1 New estimates of global poverty The Global Monitoring Report 2009 uses new estimates of global poverty based on recently released data on purchasing power parities (PPPs) compiled by the International Comparison Program (ICP) and on an expanded set of household income and expenditure surveys covering 115 developing countries. As part of this revision, the international poverty line has been reca- librated to $1.25 a day. This new poverty line, measured in 2005 prices, replaces the $1.08 a day poverty line, measured in 1993 prices, often described as "a dollar a day," which has been widely accepted as the international standard for extreme poverty. The new poverty line main- tains the same standard for extreme poverty--the poverty line typical of the poorest countries in the world--but updates it using the latest information on the cost of living in developing countries. 2005 ICP benchmark Proportion of people below old and new poverty lines (%) 100 80 90 80 60 70 60 50 40 40 30 20 20 10 0 0 0 20 40 60 80 100 1981 1987 1993 1999 2005 1993 ICP benchmark New poverty lines Old poverty lines Sub-Saharan Africa Sub-Saharan Africa Note: The diamonds represent old and new poverty South Asia South Asia rates for individual countries. East Asia & Pacific East Asia & Pacific The new estimates change our view of poverty in the world (see the two figures above). There are more poor people than previously estimated, and the incidence of poverty reaches further into middle-income countries. Previous rounds of the ICP underestimated average price levels in developing countries (perhaps because they did not fully adjust for quality differences) and thus overestimated their standards of living. By the new measurements, about 1,375 million people in developing countries (25 percent of the population) were living in extreme poverty in 2005, compared with the previous estimate of 935 million (17 percent) using the old measurements. The new, higher estimates for poverty imply that the target poverty rate to achieve the poverty MDG is 20.9 percent (half of the now higher estimate of 41.7 percent in 1990), rather than the previous 14.4 percent (half of the previous estimate of 28.7 percent in 1990). The upward revi- sion of the poverty level does not imply that the rate of poverty reduction since 1990 has been less rapid that estimated previously.a a. Chen and Ravallion 2008. 18 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 M D G S : C R I S I S I M P A C T A N D O U T L O O K but the economic crisis adds serious new FIGURE 4 The decline in the number of people living in extreme risks to the prospects for achieving the pov- poverty is largely attributable to East Asia, China in particular erty goal in many countries. Population (billions) The developing world is not on track to 2.0 achieve the target of halving the propor- 1.8 tion of people who suffer from hunger, and 1.6 the food crisis can slow progress further. 1.4 Reducing malnutrition has a multiplier 1.2 effect, because it is essential to success on 1.0 several other MDGs, including those relat- 0.8 ing to infant mortality, maternal mortality, 0.6 and education. Child malnutrition accounts 0.4 for 35 percent of the disease burden of chil- 0.2 dren under age five. More than 20 percent of 0 maternal mortality is attributable to malnu- 1981 1984 1987 1990 1993 1996 1999 2002 2005 trition during pregnancy. The proportion of Sub-Saharan Africa India under-five children in developing countries South Asia (excluding India) China who are underweight declined from 33 per- East Asia & Pacific (excluding China) Other regions cent in 1990 to 26 percent in 2006, a much Source: World Development Indicators, Poverty Data 2008. slower pace than needed to halve this pro- portion by 2015. While some regions have achieved stronger gains, progress has been slowest in Sub-Saharan Africa and South to improve progress on the other MDG tar- Asia. These regions have the highest inci- gets related to poverty, hunger, disease, and dence of child malnutrition, with severe education. Considerable progress has been to moderate stunting affecting as many made in reducing gender disparity in educa- as 35 percent of children under five. Cur- tion. Almost two-thirds of developing coun- rently, more than 140 million children under tries reached gender parity at the primary five in developing countries suffer from school level by 2005, and the MDG 3 target malnutrition. of achieving gender parity in primary and Despite substantial improvements in pri- secondary education can be met by 2015. mary school net enrollment and completion However, Sub-Saharan Africa is likely to rates, the world is likely to miss the goal of fall short, even though it is making notable universal primary school completion (MDG progress. MDG 3 also calls for gender par- 2), though it will come close. In 2006 the ity in tertiary education, gender equality in primary school completion rate reached employment, and increased political repre- 85 percent for all developing countries and sentation of women. Progress toward these 93 percent in middle-income countries but goals has been slower and more uneven. The was just 65 percent in low-income countries. gender goals face added risks from the cur- Even with rising enrollments, as many as rent crisis because evidence from past crises 75 million children of primary school age suggests that women in general are more were not in school in 2007. Whereas other vulnerable to impact. regions have shown good progress toward Prospects are gravest for the MDGs relat- MDG 2, sizable shortfalls are likely in Sub- ing to health. The under-five mortality rate Saharan Africa and South Asia. in developing countries declined from 93 Gender equality and female empower- to 72 deaths per 1,000 live births between ment are not only important in themselves as 1990 and 2006, showing notable but insuf- the third MDG, they are also effective ways ficient progress to meet the MDG 4 of G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 19 M D G S : C R I S I S I M P A C T A N D O U T L O O K reducing under-five mortality by two-thirds. a year. The HIV prevalence rate has shown In 2006, 10 million children died before age some decline in Sub-Saharan Africa, but it five from preventable diseases, compared has risen in other regions, albeit from much with 13 million in 1990. The HIV/AIDS lower levels than in Africa. The coverage of epidemic and civil conflicts have hampered antiretroviral treatment for HIV-infected Sub-Saharan Africa's progress in reducing individuals has improved significantly, and child mortality, adding to other contributory now almost one-third of people living with factors such as malnutrition, lack of access HIV in developing countries receive the to water and sanitation, and lack of moth- treatment. However, most countries are ers' education. The under-five mortality rate struggling to meet the target of achieving by in the region in 2007 was still as high as 146 2010 universal access to HIV treatment for deaths per 1,000 live births, though down those who need it. The prevalence of tuber- from the 1990 level of 183. Sub-Saharan culosis, a disease that killed 1.8 million peo- Africa accounts for 20 percent of the world's ple in 2006, has been declining in all regions children under age five but 50 percent of all except Sub-Saharan Africa. Mortality from child deaths. Progress in reducing infant malaria remains high--at about 1 million mortality is also well short of the target in annually, 80 percent of whom are children South Asia. under five in Sub-Saharan Africa--but lack Relatively little progress has been made in of data makes it difficult to monitor the inci- reducing maternal mortality. The maternal dence over time. mortality ratio declined by less than 1 per- Substantial progress has been made cent per year between 1990 and 2005, much toward the targets of halving the propor- slower than the 5.5 percent annual decline tion of people without access to clean water needed to achieve the MDG 5 of reduc- and basic sanitation, part of MDG 7 on ing maternal mortality by three-quarters environmental sustainability. On current between 1990 and 2015. Most regions are trends, the water access target is likely to off track on this goal, Sub-Saharan Africa be achieved at the global level and in most and South Asia most seriously. Sub-Saharan regions. However, the target for improving Africa has the highest maternal mortal- access to sanitation, where progress has ity ratio at 900 deaths per 100,000 births, been much slower, will be missed. Almost which is twenty times greater than the half of the developing world's population maternal mortality ratio in Europe and Cen- lacks sanitation. In Sub-Saharan Africa, tral Asia. Progress in reducing the region's the proportion of population with access to high maternal mortality rate has been negli- sanitation rose from 26 percent in 1990 to gible. Globally, the maternal health improve- only 31 percent in 2006. South Asia also ment goal has seen the least progress among lags far behind. MDG 7 also calls for inte- all the MDGs. As many as 10,000 women gration of sustainable development prin- die every week in developing countries from ciples into country policies and programs treatable complications of pregnancy and and reversal of the loss of environmental childbirth. resources. Progress on this broader environ- Progress toward MDG 6 targets for halt- mental agenda has been relatively slow but ing and beginning to reverse the spread of is picking up as the world focuses increased major communicable diseases has been attention on environmental sustainability mixed. An estimated 33 million individu- and climate change.10 als were living with HIV/AIDS at the global Progress has been made toward the level in 2007, about two-thirds of them in MDG 8 goal of developing a global part- Sub-Saharan Africa. Annual deaths from nership for development but is falling short AIDS are estimated at more than 2 million of targets in several areas. The goal covers 20 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 M D G S : C R I S I S I M P A C T A N D O U T L O O K cooperation in the areas of aid, trade, debt need to recommit to the longer-term devel- relief, and access to technology and essential opment objectives and redouble efforts to drugs. Net ODA (official development assis- generate stronger and broader momentum tance) disbursements from the Development toward the MDGs and related development Assistance Committee of the Organisation outcomes. This report addresses key ele- for Economic Co-operation and Develop- ments of that agenda. ment rose during 2003­05 but fell in both 2006 and 2007, dropping from 0.33 percent Notes of donors' gross national income (GNI) in 2005 to 0.28 percent in 2007. The ODA-to- 1. United Nations. 2008. "Committing to GNI ratio increased to 0.30 percent in 2008, Action: Achieving the Millennium Development but to meet donors' aid commitments, larger Goals." Background note by the Secretary-General and sustained increases in ODA will be for the High-Level Event on the Millennium Devel- needed than seen so far. Donors will need to opment Goals. New York. 2. United Nations. 2008. "Achieving the Mil- demonstrate resolve in shielding aid budgets lennium Development Goals in Africa: Recom- from the fiscal impact of the financial crisis. mendations of the MDG Africa Steering Group." The largest implementation gap in the trade MDG Africa Steering Group. New York. area is the failure to date to conclude the 3. What follows provides a summary assess- Doha Round of trade negotiations. Greater ment of the outlook for the MDGs. More details progress has been achieved in the provision on trends in progress toward the MDGs, including of debt relief to poor countries, thanks to a listing of the goals, are provided in the annex to the Heavily Indebted Poor Countries Initia- this report. tive and the Multilateral Debt Relief Initia- 4. High exposure denotes that countries are tive.11 A challenge in monitoring progress experiencing the combined effects from both in improving the transfer of technology to declining growth rates and high initial poverty levels, whereas moderate exposure denotes that developing countries and their access to they are affected by either decelerating growth or essential drugs is the lack of specific targets high poverty levels. Low exposure to the finan- for commitments in these areas.12 cial crisis is defined as having economic growth at rates similar to precrisis conditions and low initial poverty levels. See "The Global Economic Crisis: Looking Ahead Assessing Vulnerability with a Poverty Lens." A Risks to the achievement of the MDGs have note prepared by the World Bank's Poverty Reduc- tion and Economic Management Network in Feb- greatly intensified with the global economic ruary 2009. crisis. Goals that were already imperiled by 5. See "The Expected Impact of the Global shortfalls in progress have been put in fur- Financial Crisis on the World's Poorest." A note ther jeopardy. The world needs a strong, prepared by the World Bank's Development coordinated response to preserve the prom- Economics Vice Presidency in February 2009; ise of the MDGs, very much in the spirit of and International Labour Organization, Global the international cooperation that gave birth Employment Trends: January 2009, Geneva. to the MDGs at the turn of the decade and 6. Fallon, Peter, and Robert Lucas. 2002. "The to the Monterrey framework for the mutual Impact of Financial Crises on Labor Markets, accountability of both developing and devel- Household Incomes, and Poverty: A Review of oped countries for the achievement of these Evidence," World Bank Research Observer 17 (1): 21­45. goals. The immediate priority is to mitigate 7. Baird, Sarah, Jed Friedman, and Norbert the impact of the crisis on developing coun- Schady 2007. "Infant Mortality over the Business tries' growth and on programs critical for Cycle in the Developing World," Policy Research the poor and vulnerable. At the same time, Working Paper 4346, World Bank, Washington, countries and their development partners DC. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 21 M D G S : C R I S I S I M P A C T A N D O U T L O O K 8. Arbache, Jorge, and John Page. 2007. "More 10. Environmental sustainability and its links Growth or Fewer Collapses? An Investigation of to the MDGs were a major focus of Global Moni- the Growth Challenges of Sub-Saharan African toring Report 2008. Countries." Policy Research Working Paper 4384, 11. Developments in aid, debt relief, and trade World Bank, Washington, DC. are discussed in more detail in chapters 4 and 5. 9. See "The Impact of the Financial Crisis on 12. United Nations. 2008. "Delivering on the Progress towards the Millennium Development Global Partnership for Achieving the Millennium Goals in Human Development." A note prepared Development Goals." MDG Gap Task Force by the World Bank's Development Economics and Report. New York: United Nations. Human Development vice presidencies in Febru- ary 2009. 22 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 1 The Global Financial Crisis and Its Impact on Developing Countries T he deepening global recession, rising Though originating in advanced coun- unemployment, and high volatility of tries, the crisis is hitting developing coun- commodity prices in 2008 and 2009 tries hard. have severely affected progress toward pov- While transmission channels may differ, erty reduction (Millennium Development both emerging market and low-income Goal [MDG] 1). The steady increases in countries will be severely impacted. food prices in recent years, culminating in Economic policy responses should be exceptional price shocks around mid-2008, adapted to country circumstances: coun- have thrown millions into extreme poverty, tries with strong fundamentals may have and the deteriorating growth prospects in room for monetary and fiscal stimulus, developing countries will further slow prog- while those in weaker macroeconomic ress in poverty reduction. The prospects for positions and with limited access to an economic recovery, essential for alleviat- external financing will have less room ing poverty, are highly dependent on effec- for policy maneuver; some may need to tive policy actions to restore confidence in undertake fiscal consolidation. the financial system and to counter falling Advanced, emerging, and developing international demand. While much of the countries should take comprehensive responsibility for restoring global growth action to resolve liquidity and solvency lies with policy makers in advanced econo- problems in the banking system and mies, emerging and developing countries strengthen prudential supervision. have a key role to play in improving the Development aid must be increased to growth outlook, maintaining macroeco- help countries cope with the crisis. nomic stability, and strengthening the inter- It is crucial to maintain an open trade national financial system. and exchange system. The main messages in this chapter can be summarized as follows: Emerging and Developing Countries and the Weakening The world faces the severest credit crunch Global Economic Environment and recession since the Great Depression. Developing countries' growth prospects The global economic downturn is much and access to external financing are sub- deeper than expected, and the recovery will ject to unusually large downside risks. be gradual and uncertain. During the second G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 23 C H A P T E R 1 half of 2008, the global economy came to (figure 1.1). The contraction in economic a halt: on an annualized basis, global GDP activity is most sharply felt in advanced growth slowed to 2 percent after an average economies, which have decidedly entered the growth rate of 5 percent over 2003­07. Inter- severest recession since the Great Depression, national trade flows collapsed in the last quar- with consumer and investor confidence indi- ter of 2008, with world exports projected to cators at historic lows following the dramatic decline in 2009 for the first time since 1982 broadening of the confidence crisis in finan- cial markets in October 2008. While bold FIGURE 1.1 World trade in goods and services actions by governments and central banks in advanced economies have helped to mitigate strains in the interbank money markets (box Percent 1.1), they have been insufficient to address 15 reduced access to private sector credit and wide interest spreads in advanced economies. 10 While relatively strong balance sheets in the U.S. corporate sector and the western Euro- 5 pean household sector initially eased the drag from liquidity and credit strains in financial 0 markets, advanced economies are now expe- riencing rapidly rising default rates, with a ­5 damaging feedback loop further undermin- ing the solvency of the banking sector. As a ­10 result, advanced economies are expected to contract in 2009 by 3.8 percent, compared ­15 World trade Imports of Imports of with 0.9 percent growth in 2008. volume (goods advanced emerging and Emerging and developing countries are and services) economies developing economies increasingly affected by the recession in 2007 2008 2009 2010 advanced economies through trade and financial market channels; earlier expecta- Source: IMF. tions that these countries would be able to BOX 1.1 The financial crisis Financial conditions will remain difficult in 2009 and could deteriorate further if the adverse feedback loop between the slowdown in the real economy and financial markets intensifies. Systemic financial risks again appear elevated and policy measures, although aggressive and unprecedented, have failed to restore confidence in banks. Bank equity prices and credit premiums reflect serious solvency concerns, and in the absence of private sector willingness to provide bank capital, the policy debate has shifted toward the form and degree of public intervention. Recent borrowings have been confined to those that bear government guarantees. Even with significant public capital injections, the pressure for banks in advanced economies to delever will remain high as loan losses continue to accumulate, limiting the supply of credit into 2010. Other sources of financing also appear limited in the short term, apart from those supported by government programs. Firms will be under increasing stress in 2009, as earnings deteriorate. Conditions will be especially difficult for firms with lower credit ratings, which will face significantly higher financing costs, if they can borrow at all. One risk is that an increase in the supply of government debt will lead to a rise in long-term rates, choking off demand for financing by creditworthy borrowers. 24 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S There has been a structural reassessment of credit risk as a result of the crisis. The amount of financial lever- age that markets are allowing will be reduced for a sustained period. In addition, counterparty risks that were once deemed trivial are now foremost in traders' minds, and this will be one factor contributing to keeping risk premiums elevated. The widespread process of deleveraging and risk retrenchment is continuing to weaken a broad range of finan- cial markets and institutions. Funding markets continue to be dominated by central bank operations and, despite measures to alleviate credit risk, residual counterparty concerns are limiting interbank activity. Cross-border bank financing has contracted sharply. This has placed significant pressure on some European banking systems reliant on cross-border flows to meet dollar refinancing needs, especially in emerging Europe. Securitization markets remain severely hampered but are being supported by government guarantees or asset purchases that are being extended to a widening range of securities. Institutional investors have faced significant redemptions from retail clients while hedge funds' assets under management have fallen substantially due to losses and redemptions, and their access to financing has declined markedly. These have led to a sharp unwinding of risk positions and falls in asset prices in both advanced and emerging economies. Declining asset prices are spreading strains to other nonbank financial institutions such as insurance companies and pension funds. Although liquidity pressures on such institutions are less than on banks and hedge funds, they may face solvency risks that force them into asset sales that further add to adverse feedback loops. Market volatility has dropped from the levels of late 2008, but equity markets remain near multiyear lows and credit spreads near multiyear highs. In fact, corporate credit spreads have started to widen further, reflecting severe credit deterioration stemming from the global economic downturn. Coordinated interventions and swap arrangements by global central banks have eased short-term liquidity con- ditions and offshore dollar shortages, but conditions have not normalized and liquidity remains very limited at longer maturities. Asset purchase programs have led to some tightening of spreads in several markets (for instance, U.S. agency securities, commercial paper, and consumer asset-backed securities), but spreads are rising further for corporate debt and commercial mortgages for which no government support is in place, and reflect a serious decline in credit quality and a rise in defaults stemming from the global economic downturn. Emerging markets are coming under serious pressure from the global credit and economic crisis, particularly in emerging Europe. Emerging market financing costs remain significantly higher than precrisis levels, and bond issuance, which was extremely low in the fourth quarter of 2008, has recovered only marginally, largely confined to higher-quality borrowers. Emerging market corporates are facing extremely serious financing constraints, and some will almost certainly be unable to meet rollover needs. Advanced economy banks undergoing severe pressures to shrink balance sheets are likely to scale back lending to emerging markets, particularly in Europe. Local banks, facing their own pressures to deleverage, will be hard- pressed to substitute for the drop in financing of corporate clients from international banks and credit markets. "decouple" and weather the storm through growth rate since the 1990s. In general, low- rising domestic demand have turned out to income countries have been less affected by be overly optimistic. With contracting world the financial contagion, but slowing exports trade, slowing domestic demand, and sharply and deteriorating terms of trade for com- reduced access to external financing, emerg- modity exporters will increasingly hit growth ing market growth is expected to decline prospects in 2009: growth in Sub-Saharan sharply to 1.5 percent in 2009, from 6.1 per- Africa, for instance, will drop to 1.7 percent, cent in 2008, which would be the weakest from 5.5 percent in 2008. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 25 C H A P T E R 1 Commodity and food prices have come pressures in some countries remain strong, down considerably from their peaks in reflecting price stickiness in markets for mid-2008 (figure 1.2), reflecting the sharp food products and the lagged effects of ris- downturn in global demand for nonfood ing wages and input cost. commodities,1 the resolution of weather- A gradual recovery will not become visible related supply disruptions in agriculture, before the end of 2009: with advanced econo- and the removal of export restrictions on mies in recession and growth in emerging and food products. Overall, however, commod- developing economies rapidly declining, the ity and food prices are projected to rise April 2009 World Economic Outlook (WEO) again once global growth picks up, because projects a contraction of global output by demand pressures from rapidly industrial- 1.3 percent in 2009, compared with 3.2 per- izing emerging economies will continue to cent growth in 2008 (table 1.1). This baseline have their effects on world markets. scenario, however, is subject to unusually Headline inflation rates have come down large downward risks, because weakening from their peaks in mid-2008 as the sharp confidence and continuing solvency problems drop in economic activity and the declines in in the financial sector may cause a longer and commodity prices affect consumer prices. In deeper contraction of global economic activ- the advanced economies, headline inflation ity than currently projected. receded to around 3.5 percent in December 2008 (12-month rate), down from 4.5 per- Financial Turmoil Spreading cent in mid-2008. With rapidly rising unem- to Emerging Markets ployment and output gaps, risks of deflation have become a concern in some countries. The financial market turmoil is spread- Developments in emerging and developing ing to emerging markets, but thus far low- countries show a mixed picture. While infla- income countries have been less affected by tion has declined in most countries, price the financial contagion. Weakening global FIGURE 1.2 Commodity price indexes Index (1st quarter, 2000 = 100) 500 Copper 400 300 All commodities Fuel 200 Cereals 100 Nonfuel Food 0 1st/ 4th/ 3rd/ 2nd/ 1st/ 4th/ 3rd/ 2nd/ 1st/ 4th/ 3rd/ 2nd/ 1st/ 4th/ 3rd/ 2000 2000 2001 2002 2003 2003 2004 2005 2006 2006 2007 2008 2009 2009 2010 Projected Quarter/year Source: IMF. Note: Indexes are in U.S. dollars. 26 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S TABLE 1.1 Summary of world output annual percent change Projections 2002 2003 2004 2005 2006 2007 2008 2009 2010 World Output 2.8 3.6 4.9 4.5 5.1 5.2 3.2 ­1.3 1.9 Advanced Economies 1.6 1.9 3.2 2.6 3.0 2.7 0.9 ­3.8 0.0 of which United States 1.6 2.5 3.6 2.9 2.8 2.0 1.1 ­2.8 0.0 Euro Area 0.9 0.8 2.2 1.7 2.9 2.7 0.9 ­4.2 ­0.4 Japan 0.3 1.4 2.7 1.9 2.0 2.4 ­0.6 ­6.2 0.5 Canada 2.9 1.9 3.1 2.9 3.1 2.7 0.5 ­2.5 1.2 United Kingdom 2.1 2.8 2.8 2.1 2.8 3.0 0.7 ­4.1 ­0.4 Other advanced countries 3.9 2.5 4.8 4.0 4.6 4.7 1.6 ­4.1 0.6 Emerging markets and developing 4.8 6.3 7.5 7.1 8.0 8.3 6.1 1.6 4.0 countries Emerging markets 4.6 6.3 7.5 7.1 8.0 8.3 6.1 1.5 3.9 Other developing countries 7.5 6.2 7.4 7.6 8.2 8.3 6.5 3.2 4.7 Africa 6.5 5.7 6.7 5.8 6.1 6.2 5.2 2.0 3.9 of which Sub-Saharan Africa 7.3 5.4 7.1 6.2 6.6 6.9 5.5 1.7 3.8 Central and Eastern Europe 4.4 4.9 7.3 6.0 6.6 5.4 2.9 ­3.7 0.8 Commonwealth of Independent States 5.2 7.8 8.2 6.7 8.4 8.6 5.5 ­5.1 1.2 Developing Asia 6.9 8.2 8.6 9.0 9.8 10.6 7.7 4.8 6.1 South Asia 4.4 6.5 7.6 8.7 9.1 8.7 7.0 4.3 5.3 East Asia 7.9 8.8 9.0 9.2 10.1 11.4 8.0 5.1 6.4 Middle East 3.8 7.0 6.0 5.8 5.7 6.3 5.9 2.5 3.5 Western Hemisphere 0.6 2.2 6.0 4.7 5.7 5.7 4.2 ­1.5 1.6 Memorandum items: China 9.1 10.0 10.1 10.4 11.6 13.0 9.0 6.5 7.5 India 4.6 6.9 7.9 9.2 9.8 9.3 7.3 4.5 5.6 Source: IMF. growth prospects, the financial deleverag- deleveraging process in advanced economies ing process in advanced economies, and the have led to sharp drops in the availability of unintended effects of some of the recent pol- funding for sovereigns and corporations and icy measures taken by advanced economy steep increases in interest margins. While governments have severely affected emerg- external financing conditions remained rel- ing economies in recent months. atively stable through most of 2008, espe- Banks and investors in advanced econo- cially in comparison with previous crises, mies have sharply reduced their exposure market access for emerging and developing to emerging markets and developing coun- countries virtually collapsed in October tries. The global repricing of risk and the 2008 with the intensification of the turmoil G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 27 C H A P T E R 1 in advanced economies: the Emerging Mar- and solvency problems in the nonfinancial kets Bond Index Global (EMBIG) sover- sector following the appreciation of the U.S. eign spread jumped by around 200 basis dollar in the second half of 2008. Many points in October 2008 and remains well companies have high refinancing needs in above the levels seen in 2007 (figure 1.3). 2009 that may be hard to meet in the cur- Most affected are countries with large cur- rent environment. rent account deficits and countries in which The pernicious effects of reduced access the banking sector relies heavily on foreign to external financing are exacerbated by the funding, such as emerging Europe. Coun- sharp tightening in domestic credit condi- tries with solid external and fiscal positions, tions; banks are hoarding cash because of such as Brazil, have seen increases in spreads increasing concerns about counterparty risks. as well but by much less than in the more Overall, banking systems in emerging and vulnerable countries. developing countries are not facing the sol- Corporate sectors in emerging and devel- vency problems affecting banks in advanced oping countries are particularly hard hit by economies, but vulnerabilities are rising, increasing funding problems and, in some especially for those banks dependent on for- cases, foreign exchange losses. While some eign funding in the wholesale markets. recovery of access for sovereign borrowers Policy measures in advanced economies has become visible since early 2009, funding aimed at stabilizing the financial sector may conditions for the corporate sector remain have had the unintended effect of contrib- extremely difficult, especially in light of uting to the weakness in emerging markets. high refinancing needs this year. In addition, There are indications that the enhancement exporters and other firms in several coun- of deposit insurance schemes and govern- tries have taken substantial open currency ment actions to strengthen financial institu- positions against the U.S. dollar. Many of tions' capital, aimed at restoring confidence these positions have given rise to liquidity in advanced economies, have had the side FIGURE 1.3 Bond spreads and issues of international bonds in emerging markets and developing countries US$ (billions) Spreads (basis points) 100 1,000 90 900 80 EMBIG (right axis) 800 70 700 60 600 50 500 40 400 30 300 20 200 10 100 0 0 1st/ 1st/ 1st/ 1st/ 1st/ 1st/ 1st/ 1st/ 1st/ 1st/ 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Quarter/year Source: Dealogic; Bloomberg. 28 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S effect of generating a flight to banks benefit- the year 2008 as a whole, private financial ing from state guarantees. flows to emerging markets declined by about It is expected that the full effect of reduced 2 percentage points of GDP in comparison market access will become visible in deterio- with 2007, while flows to other developing rating capital account balances in 2009, and countries continued to rise (table 1.2). As the the risks are firmly on the downside. For deleveraging process in advanced economies TABLE 1.2 Net capital flows % of GDP Average 1991­2001 2002 2003 2004 2005 2006 2007 2008 2009 Emerging market economies 7.1 6.4 7.9 7.5 8.6 9.0 10.8 8.4 3.8 Private capital flows, net 3.5 2.4 4.1 4.0 5.5 5.7 7.3 4.9 ­0.6 of which private direct investment 2.6 3.0 2.6 3.3 3.5 4.5 4.3 3.8 2.4 private portfolio flows 0.5 ­0.1 0.1 0.7 0.7 0.7 0.8 ­0.8 ­0.6 Private current transfers 2.2 3.1 3.4 3.5 3.5 3.5 3.4 3.2 2.9 Official capital flows and transfers (net) 1.3 1.0 0.3 0.0 ­0.4 ­0.3 0.1 0.3 1.4 Memorandum item: Reserve assets ­1.4 ­1.1 ­3.3 ­2.5 ­3.0 ­4.1 ­4.3 ­1.8 1.3 Other developing countriesa 13.7 14.4 14.9 14.2 17.0 15.6 16.8 18.3 16.2 Private capital flows, net 2.6 2.7 3.0 2.2 3.6 3.5 5.1 6.8 4.9 of which private direct investment 3.0 4.0 4.6 4.4 4.5 5.6 6.0 5.7 5.2 private portfolio flows 0.1 0.1 ­0.2 ­0.2 ­0.1 0.0 ­0.1 ­0.1 ­0.2 Private current transfers 3.3 4.3 4.9 5.7 6.2 6.0 5.9 5.8 5.3 Official capital flows and transfers (net) 7.8 7.4 6.9 6.3 7.2 6.2 5.9 5.7 6.0 Memorandum item: Reserve assets ­1.1 ­1.6 ­1.4 ­1.8 ­2.5 ­4.1 ­3.9 ­2.3 0.4 Memorandum items (US$ billions): Private capital flows, net 112 94 171 257 312 280 647 307 ­82 of which private direct investment: 106 152 142 186 231 238 392 467 311 private portfolio flows 33 ­22 27 63 60 ­7 136 ­55 ­136 liabilities to foreign banks 5 ­16 23 32 25 73 190 177 142 Private current transfers 60 106 135 156 187 217 250 279 262 Total net private financial flows 172 200 306 413 499 497 898 586 180 including current transfers Source: IMF. Note: Percentage numbers represent unweighted averages. a. Includes fragile states, but excludes Timor-Leste, Zimbabwe, Sierra Leone, Liberia, and the Solomon Islands. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 29 C H A P T E R 1 is continuing and as private investment plans sector vulnerabilities are rising as a result are being scaled back, all groups of coun- of weakening domestic economic activity. tries will be faced with sharply reduced syn- Domestic banks in low-income countries dicated bank lending, portfolio flows, and usually fund their lending activities in rela- foreign direct investment this year. tively stable domestic savings markets and Emerging market currencies have seen often have ample liquidity reserves parked at sharp declines in recent months (figure 1.4), the central bank. Domestic interbank money while some other countries have lost large markets and derivatives markets are in gen- amounts of reserves in attempts to stabilize eral small or nonexistent, while capital con- exchange rates. Countries with highly liquid trols and the limited size of other financial markets that in the past experienced short- markets (such as treasury bill markets) have term capital inflows from carry trades, such often limited participation by foreign mar- as Brazil and South Africa, and countries with ket operators. Credit markets have therefore external vulnerabilities have been hit hardest not witnessed the instabilities seen in some (most recently in eastern Europe). Market advanced economies, although foreign par- volatilities have risen to levels not seen after ent banks have withdrawn capital from sub- the Asian crisis of the 1990s, a reflection in sidiaries in some countries, stock markets some cases of extremely illiquid and dysfunc- have dropped sharply, and nonperforming tional market conditions (box 1.2). loan portfolios may rise if economic activity Financial systems in low-income coun- weakens further. Some low-income countries tries are less affected by the turmoil in have shown signals of sagging confidence in advanced economies, although financial the banking system, but this appears to be FIGURE 1.4 Daily spot exchange rates, national currency per U.S. dollar Index (January 1, 2008 = 100) 180 160 140 120 100 80 60 40 20 0 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. 2008 2009 Mexico Indonesia South Africa Poland Brazil Thailand Kenya Source: Bloomberg. 30 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S BOX 1.2 Increasing exchange rate volatility and the financial market crisis Following several years of relatively stable currency market developments, exchange rate volatility in some emerging and developing countries has increased recently, approaching levels not seen since the Asian crisis of the 1990s. As measured by the normalized standard deviation of daily exchange rates, volatility of the Indonesian rupee, for instance, increased almost fivefold in 2008 in comparison with 2007. Several factors may explain this phenomenon. Perceptions of increased external vulnerabilities in an environ- ment of slowing global growth and weakening commodity prices certainly play a role. Technical market factors related to the financial crisis in advanced economies may have an impact as well. First, the overall risk budget of international banks acting as market makers on emerging market curren- cies has been shrunk, because banks have generally scaled down their risk appetite and lowered their stop-loss thresholds across trading books. Some large market makers, including Lehman Brothers and Bear Stearns, have also withdrawn from the market. The recent bank mergers have also in general resulted in lower aggregated risk budgets, because banks taking over usually slim down the risk budget of the entity taken over. Another factor that might have depressed market makers' trading turnover, and therefore their cushioning impact on daily volatility, is the U.S. dollar liquidity squeeze on offshore markets. Although a large part of the turnover does not result in overnight exposure, all positions taken beyond the horizon of a trading session involve the need to access some overnight (or longer-term) funding. In principle higher funding costs should simply affect forward rates. But this assumes that funding is available without restriction. In the current circumstances, how- ever, some individual banks have been deprived of any access to U.S. dollar lending from their correspondent banks. This disruption has been mitigated by the recent swap arrangements between the Federal Reserve and Brazil, the Republic of Korea, Mexico, and Singapore. In the context of a dollar funding squeeze, most emerging market currency trading is affected, because most emerging market currencies are traded against the U.S. dollar. It is also likely that foreign exchange activities on emerging market currencies involving some U.S. dollar funding needs have been curtailed to lower the overall funding needs of market makers. Investment banks, which were among the main liquidity providers on the foreign exchange market, have been hit very hard because of their lack of a deposit base and reliance on the interbank market. In this context, the higher volatility could be the consequence of the withdrawal of key market makers, resulting in a smaller cushion of risk capital available in the market to absorb the price impact of the normal commercial order book. Selected spot exchange rates volatility,a 1995­2008 Index (1995 = 100) 2,500 2,000 1,500 1,000 500 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Indonesia Brazil South Africa Korea, Rep. of Philippines Source: Bloomberg and IMF staff calculations. a. Volatility is calculated as the index of the annual coefficients of variation (standard deviation/mean) of daily spot exchange rates. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 31 C H A P T E R 1 FIGURE 1.5 Vulnerabilities in emerging and developing countries related to domestic factors rather than the international crisis. Europe & South Asia Middle East Central Asia & North Africa Increasing Vulnerabilities in Emerging 4% 17% 17% 18% and Developing Countries 1 country 4 countries 1 country 2 countries The confluence of weak economic activ- 3% 36% ity, sharp swings in commodity prices, 2 4 countries countries and financial market instability is causing 79% 50% 46% increasing vulnerabilities in emerging and 18 countries 3 countries 5 countries developing countries. The sharp downturn in advanced economies and the fluctuations in commodity prices are affecting current Latin America East Asia Sub-Saharan account and fiscal balances in emerging & Caribbean & Pacific Africa and developing economies. Countries that 25% 7% entered the global crisis with weak macro- 7 countries 3 countries economic fundamentals are most severely hit, but other countries are affected as well 40% 27% 42% 6 4 (figure 1.5). Several factors are contributing 19 countries countries countries 51% to increased vulnerabilities. 75% 23 33% Recent movements in commodity prices 21 countries countries 5 countries are having strong--and often divergent-- effects on emerging and developing coun- Low vulnerability Medium vulnerability High vulnerability tries' terms of trade. Notwithstanding the sharp movements in commodity prices, the terms of trade for emerging and developing Source: IMF. Note: Vulnerabilities are measured on the basis of developments in exports, foreign direct countries as a group have not changed much investment, remittances flows, external debt ratios (emerging markets), and aid flows (low- in recent years, but these averages conceal income countries). For a detailed explanation of the methodology, see IMF 2009. sharp contrasts dependent on countries' composition of imports and exports (figure 1.6). While commodity-importing emerging FIGURE 1.6 Terms-of-trade changes per quintile group markets with large manufacturing industries and net fuel importers are benefiting from Percent lower commodity input prices, countries 20 highly dependent on exports of fuels, met- als, and some other commodities are experi- 10 encing a weakening of their terms of trade. 0 Reflecting rising unemployment and weak earnings growth among migrant workers in ­10 advanced economies, remittance flows to developing countries began to slow down in ­20 the third quarter of 2008. Although in U.S. ­30 dollar terms they are still up for 2008 as a Lowest-quintile Highest-quintile All countries whole, overall flows are projected to fall by countries countries 5 percent to 8 percent in 2009 (table 1.3). 2005 2006 2007 2008 2009 Migration from developing countries may slow as a result of the global growth down- Source: IMF. turn, but the number of foreign workers liv- Note: Quintile groups are based on the average of terms-of-trade changes in 2007­08 and 2008­09. ing in destination countries is unlikely to 32 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S TABLE 1.3 Inflows of international remittancesa US$ (billions) Annual average 1992­2002 2003 2004 2005 2006 2007 2008b 2009c 2010c Emerging 56.8 114.4 128.0 153.5 179.1 218.9 240.5 229.1 227.5 market economies Other 16.8 27.5 33.8 39.2 47.3 59.2 62.0 58.1 66.0 developing countries Fragile states 1.2 2.7 3.1 2.7 3.1 4.1 4.3 4.2 5.2 Source: World Bank remittances data. a. Remittances include workers' remittances, compensation of employees, and migrant transfers. b. Estimate. c. Base case scenario forecast. decrease. Countries in Latin America, the Official transfers are expected to either Middle East and North Africa, and South remain broadly unchanged or decline in Asia that rely on remttance flows are most 2009, at a time when the flow of private affected.2 capital is slowing rapidly (figure 1.8). On Per capita income adjusted for terms current trends, official aid will not play a of trade will decline in 2009 in a number countercyclical role in developing countries of countries (figure 1.7). As a group, Sub- as it should. To prevent a reversal of years Saharan African countries are particularly of development progress, official aid should affected: 13 countries will experience decline be increased substantially in 2009 and later in per capita income in 2009 on the order years. of 11 percent on average. The situation is As a result of these factors, weak export comparable in North Africa and the Middle markets, and the divergent terms-of-trade East, but other regions are less affected. effects of recent commodity price declines, FIGURE 1.7 Real 2009 per capita growth rate adjusted for terms-of-trade changes Percent 10 30 12 6 15 5 7 6 0 ­5 13 7 8 ­10 6 13 5 ­15 Sub-Saharan Developing Latin America Central & CIS North Africa Africa Asia & Caribbean Eastern Europe & Middle East Source: IMF. Note: Simple average percentage change for developing country regional groups. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 33 C H A P T E R 1 FIGURE 1.8 Official current transfers, 2008­09 % of GDP 6 5 4 3 2 1 0 Sub-Saharan Developing North Africa & Central & CIS Latin America Africa Asia Middle East Eastern Europe & Caribbean 2008 2009 Source: IMF. the current accounts of many emerging and of more than 10 percent of GDP. Overall, developing countries are deteriorating. Oil more than half of the emerging and devel- exporters in the Middle East and North oping countries can expect a weakening of Africa are hardest hit, with a weakening current account balances in 2009. in current account balances by 6 percent- The sharp declines in capital flows to age points of GDP in 2009, followed by emerging and developing countries will Europe and the Commonwealth of Indepen- exarcerbate the strains and vulnerabilities dent States (CIS) of about 3.5 percentage caused by deteriorating current accounts. points (figure 1.9). In other regions, the net Many countries will find themselves in situ- balance-of-payments effects are projected to ations where it will be impossible to square remain limited, although some countries are the circle of deteriorating current account strongly affected: 14 countries are projected balances, reversing capital flows, and declin- to see a deterioration in the current balance ing aid. As a result, following years of steady FIGURE 1.9 Current account balances, 2008­09 % of GDP 4 2 0 ­2 ­4 ­6 ­8 ­10 ­12 ­14 Sub-Saharan Developing Latin America Central & CIS North Africa & Africa Asia & Caribbean Eastern Europe Middle East 2008 2009 Source: IMF. 34 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S reserve accumulation, many countries will Macroeconomic and Social experience steep declines in foreign exchange Policy Choices in Emerging reserves in 2009, especially in Europe and and Developing Countries Sub-Saharan Africa, and the risks of debt defaults are rising. Emerging and developing countries are fac- Overall, fiscal positions in emerging and ing difficult macroeconomic policy choices in developing countries are weakening in 2009. the current environment. Because economic Several factors are contributing to this out- circumstances and developments differ come, including slowing domestic revenue from country to country, the optimal policy growth, increased spending on social pro- responses are not uniform across emerging grams in response to the crisis, and deterio- and developing countries. The World Bank rating terms of trade in commodity exporters and the International Monetary Fund (IMF) (figure 1.10). Fuel-exporting economies are stand ready to assist countries in addressing hardest hit, with an average deterioration in these policy challenges.3 the overall government balance of just over 10 percentage points in 2009, but they are Macroeconomic Policies often well positioned to mitigate the domes- tic effects. Overall, fiscal balances in nonfuel Macroeconomic policies should be adapted to commodity exporters will deteriorate as well, the specific circumstances of countries. The but less than in fuel exporters, because sources most pressing need is to address in a compre- of government revenue in nonfuel commodity hensive way the continuing confidence crisis producers are often more diversified. in financial markets and stop its fallout in the The rise in demand for raw materials from real economy. Although this is primarily a emerging markets in recent years and supply responsibility of policy makers in advanced bottlenecks have led to marked increases in economies, the authorities in emerging and price volatility for a number of commodi- developing countries have a key role to play ties, complicating macroeconomic and fiscal in restoring confidence and preventing a more management in countries highly dependent serious downturn in global economic activ- on commodity exports (box 1.3). ity. In particular, they should adapt economic policies to support economic growth while keeping inflation under control; strengthen the liquidity of the banking system; ensure FIGURE 1.10 Government balances, 2008­09 that an efficient framework is in place allow- ing the prompt resolution of liquidity and solvency problems, especially for systemically % of GDP 10 important financial institutions; clarify to 8 what extent further strengthening of domes- 6 tic prudential supervision and market regu- 4 lation is needed to set their domestic finan- 2 cial systems on a firm footing; and dress up 0 contingency plans to deal with sudden stops ­2 in capital flows and shocks in the domestic ­4 banking system. These issues are discussed in ­6 more detail in the next section. Nonfuel primary Fuel All other In most emerging and developing coun- products exporters countries tries, the balance of risks has firmly shifted exporters from inflation to financial instability and dete- 2008 2009 riorating growth prospects. In light of this, several countries, especially emerging mar- Source: IMF. kets, have taken steps to stimulate economic G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 35 C H A P T E R 1 BOX 1.3 Commodity exporters: how to deal with increased price volatility? The past year has witnessed significant increases in market volatility in emerging and developing countries. As a result of the deleveraging process in advanced economies and concerns about growth prospects and vulnerabili- ties, emerging market currencies have shown wide swings since October 2008. In many commodity-exporting countries, the macroeconomic policy challenges posed by currency instability are compounded by increased volatility in U.S. dollar prices for commodities. The chart below shows that price volatility (as measured by the normalized standard deviation of daily prices) jumped in 2008 for several key commodities. For example, the standard deviation of rice prices in 2008 more than tripled in comparison with 2007, and medium-term price projections are more uncertain than usual. Because many of the underlying causes of higher volatility are still at work, volatility could remain elevated in the coming years. In the commodity markets, supply constraints and short-term demand inelasticities may cause new price fluctuations once global demand picks up. Commodity prices volatility,a 1995­2008 Index (1995 = 100) 900 800 700 600 500 400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Copper Aluminum Tin Crude oil Lead Riceb Source: Bloomberg and IMF staff calculations. a. Volatility is calculated as the index of the annual coefficients of variation (standard deviation/mean) of daily commodity prices. b. Due to the lack of data for rice, calculations use monthly commodity prices (for rice, the index is 1996 = 100). The increased uncertainties surrounding commodity prices have implications for fiscal policy formulation and the size of foreign exchange reserves in countries highly dependent on revenue from commodity exports. In principle, a commodity exporter will maximize its social welfare if primary government spending is based on an estimate of "permanent income" derived from the exploitation of commodity wealth.a The practical imple- mentation of this principle, however, is not straightforward because of the many uncertainties related to, among other things, long-term price projections, extraction costs, and estimates of the volume of exploitable commod- ity reserves. In many commodity-exporting countries, therefore, governments have based their fiscal policies on price projections linked to actual spot prices, or to a combination of spot and forward market prices, which may lead to sizable over- or underspending in relation to permanent income. In addition, intra-annual price fluctua- tions may lead to the need for sizable unexpected adjustments in government spending and borrowing, with nega- tive effects on macroeconomic stability and the poverty reduction effort. To avoid this type of stop-and-go policy, relatively simple rules of thumb have been proposed to smooth primary government spending over time based on conservative price projections.b In a recent IMF working paper on Nigeria, Bartsch (2006) proposes to base annual government spending on moving averages of past oil prices in combination with a stabilization fund that 36 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S is fed in good times and used as a source of financing for government spending in times of low prices. Building on this approach, the following conclusions can be drawn: The recent increase in price volatility strengthens the case for establishing stabilization funds in countries highly dependent on commodity exports. To accumulate assets in such a fund, governments would initially need to base fiscal policy on a prudent, relatively low projection of export prices. As assets grow to the targeted level, the export price projection could move closer to a path linked to a moving average. Simulation results for Nigeria show that with a three-year moving average price, a stabilization fund asset level of about 75 percent of 2004 government revenue from oil production would reduce the probability of a forced adjustment of government spending to below 20 percent. The optimal size of a stabilization fund is sensitive to export price variability. In light of the higher volatility seen in recent years, countries with a stabilization fund should consider an increase in its average size to deal with potentially larger revenue shortfalls in the future. The timing of the buildup or increase of the stabilization fund should be consistent with macroeconomic poli- cies: to avoid procyclical polices, the shift to larger buffers should take place during periods of rising commodity prices and economic growth and not during periods of distress. Commodity exporters should consider a more extensive use of the forward markets and long-term contracts to reduce short-term price risks. The liquidity of forward markets for major fuel and nonfuel commodities has grown considerably over the past decade, especially for crude oil (with hedging possible for periods up to seven years) and precious metals, but also for some base metals and agricultural commodities.c Higher price volatility also has implications for the optimal size of foreign exchange reserves.d Sharp fluctua- tions in export prices will affect not only the central government but also the broader economy, with potentially large effects in terms of lost output. Foreign exchange reserves allow the monetary authorities to smooth the effects of export price fluctuations on the economy similar to the role of stabilization funds in smoothing gov- ernment spending; optimal reserves levels will be higher if export prices fluctuate more sharply. On the basis of a two-good model, Drummond and Dhasmana (2008) concluded that foreign exchange reserves in almost one- half of 44 commodity-exporting countries in Sub-Saharan Africa faced with large terms-of-trade shocks were, on average, roughly one-third below optimal levels at the end of 2007. The recent increases in commodity price fluctuations, therefore, have underlined the need to strengthen foreign exchange reserves in many countries. a. The optimal noncommodity primary budget deficit is equivalent to the sum of the projected permanent income stream from extraction and the income from foreign assets acquired from the receipts of commodity exports. For a discussion of the permanent income approach, see Davis, Ossowsky and Fedelino (2003). b. See, for instance, box 1.4 in the Global Monitoring Report 2008. c. See also The World Bank 2008, chapter 3. d. As foreign exchange reserves constitute self insurance against various external shocks to the economy, their optimal size is determined by factors such as terms-of-trade fluctations; unexpected changes in the volumes of exports and imports; sudden reversals in capital flows and official aid; and developments in remittances, etc. activity through expansionary monetary and of stimulus once domestic activity picks up. fiscal policies this year, and further stimulus Temporary tax measures or quick-disbursing may be needed in 2010. Notwithstanding the public expenditure of a nonrecurrent nature deterioration in financial market conditions that can be relatively quickly reversed (such as since October 2008, a number of economies increased spending on infrastructure mainte- with rapidly declining inflation, sustainable nance) would therefore be preferable to mea- fiscal balances, strong international reserve sures leading to sizable future liabilities that positions, and limited external vulnerabilities may eventually undermine fiscal sustainabil- have scope for monetary easing and discre- ity (such as large increases in the public wage tionary fiscal policies to support domestic bill through new hires or pay awards). demand. Fiscal measures should be selected Countries facing unsustainable fiscal and in a way that allows a gradual withdrawal current account deficits, reduced access to G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 37 C H A P T E R 1 international financing, and vulnerable exter- address the effects of the international cri- nal debt positions have no choice but to give sis through adjustment alone without laying priority to improving the fiscal and external unacceptable burdens on the poorest in soci- accounts, while seeking to mitigate negative ety. While adjustment to the realities of con- effects on domestic growth prospects. The tracting world trade and the sharp declines optimal policy mix in these cases will depend in financial flows may be unavoidable, donor on the circumstances but could include tighter countries must step up their efforts to help monetary policy and fiscal deficit reduc- developing countries mitigate the effects on tion, accompanied by a depreciation of the the poor and protect spending critical for exchange rate to support economic growth future growth, such as on essential infrastruc- and external viability. Increasing fiscal con- ture. On current indications, total foreign straints heighten the need for improved exchange receipts by low-income countries expenditure management to protect core will drop sharply in 2009 (box 1.5), caus- spending, including infrastructure spending ing an additional financing need of at least for growth and better social safety nets. $25 billion,4 which may increase significantly Many countries with sound macroeco- if the downside risks to the growth projections nomic fundamentals may also be better off materialize. This underscores the urgency of continuing a medium-term policy aimed at increasing official development aid. maintaining stable economic conditions, even if they are facing slowing domestic and exter- The Importance of an Open International nal demand. Notwithstanding good policies, Trade and Exchange System many governments, especially in low-income countries, face external financing constraints Maintaining an open international trade and limiting the scope for using monetary and fis- exchange system remains crucial. In 2008 cal instruments to stimulate domestic demand. many countries responded to the food cri- While the quality of fiscal policies in most sis by imposing export restrictions.5 These low-income countries has improved some- restrictions aggravated the sharp increases what in recent years (box 1.4), many lack the in world market food prices in 2008 and administrative capacity to implement a suc- undermined confidence in the international cessful domestic demand management policy, trade system. More recently, some countries because economic data are insufficiently com- have introduced, or are considering, trade prehensive and up-to-date to assess accurately and exchange measures in an attempt to the most recent developments in economic raise tax revenue or protect domestic indus- activity. Governments in these countries often tries from the effects of the global down- do not have the capacity or sufficient policy turn. Also, there are widespread concerns credibility to implement effective short-term that government intervention in advanced stimulus measures that can be easily reversed. country financial systems is associated In these circumstances, policies that give pri- with pressures to curtail cross-border bank ority to maintaining fiscal and debt sustain- lending. If followed on a larger scale, these ability while allowing automatic stabilizers to restrictions could deepen the current global work are likely to have more positive growth recession and undermine the prospects for a effects than short-term stimulus measures. global recovery--reminiscent of the vicious cycle of trade protection and production declines during the Great Depression. Rapid Support from the International and substantial progress in opening mar- Community kets at the multilateral level remains a pri- The international community must act deci- ority. All parties involved should therefore sively to support low-income countries. Most make strong efforts to reinvigorate the Doha low-income countries, will not be able to Round (see chapter 5). 38 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S BOX 1.4 The quality of macroeconomic policies in low-income countries Since 2003 IMF staff have conducted surveys among mission chiefs to gauge their assessments of the quality of macroeconomic policies in low-income countries. While substantial progress has been made in many areas of economic policy since 2003, the quality of policies in two areas (monetary policy and governance in monetary and financial institution) declined in 2008. At the same time, progress was made in the areas of fiscal policy and fiscal transparency. Quality of macroeconomic policies in low-income countries % of countries in each category Fiscal policy Composition of public spending 80 80 60 60 40 40 20 20 0 0 Unsatisfactory Adequate Good Unsatisfactory Adequate Good Fiscal transparency Monetary policy 80 80 60 60 40 40 20 20 0 0 Unsatisfactory Adequate Good Unsatisfactory Adequate Good Consistency of macroeconomic policy Governance in monetary and financial institutions 80 80 60 60 40 40 20 20 0 0 Unsatisfactory Adequate Good Unsatisfactory Adequate Good Governance in the public sector Access to foreign exchange 80 80 60 60 40 40 20 20 0 0 Unsatisfactory Adequate Good Unsatisfactory Adequate Good 2003 2005 2007 2008 Source: IMF. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 39 C H A P T E R 1 Maintaining Longer-Term Priorities commodity prices may weaken further in 2009, food prices remain relatively high in The financial crisis should not distract comparison to levels seen in the first half policy makers from longer-term priorities. of the decade, and upward price pressures The food crisis is not over. Even though may reappear once the global economy picks BOX 1.5 The impact of the crisis on selected countries The economic downturn in advanced economies has decidely spread to emerging markets and other developing countries. The collapse of world trade and declining net capital flows have led to sharp declines in the availability of foreign exchange resources in emerging and developing countries, causing dismal growth, deteriorating fiscal balances, and sharp declines in private demand (see the left figure). To combat the downturn, many governments have announced fiscal packages to boost their economies. But only countries that have created fiscal space in recent years through debt reduction and strong policies have scope for fiscal stimulus. In others, this scope is limited by debt sustainability or financing constraints. Hence, many emerging and developing countries are facing the need to adjust. While the impact of the crisis is felt around the globe, some economies are especially hard hit. Examples of negatively impacted countries grappling with seemingly unrelated challenges in the context of the crisis, include Tanzania, Kazakhstan, Chile, and Latvia (see the figure to the right). A worldwide recession impacts negatively on Tanzania's fast-growing tourism and export sectors, while cutbacks in foreign financing pose a threat to business investment. Lower growth dampens government revenues, suggesting that the current path of spending may lead to widening fiscal deficits and financing gaps. The year 2009 will likely be very difficult for Kazakhstan's economy. Lower oil and commodity prices, adverse conditions in international financial markets, and developments in neighboring countries are negatively affecting confidence, credit availability, and foreign exchange inflows. In response, substantial fiscal easing has provided important support to growth over the past year. However, with the outlook for oil prices uncertain, some scaling-back of nonessential expenditures may be called for, notwithstand- ing the need to protect social safety net spending. While the Chilean economy enters the crisis from a position of fiscal and external stability, and its GDP growth has become increasingly resilient to copper price booms and busts, its fiscal and current account balances are nonetheless expected to deteriorate significantly in 2009 as a result of the crisis. In Latvia, years of unsustainably high growth and large current account deficits have coalesced into a financial and balance-of-payments crisis, brought to a head by the current international financial turmoil. Declines in private sector deposits have sparked severe liquidity problems. The Latvian authorities have launched a decisive economic reform program and sought substantial international financial assistance to quell this crisis. Foreign exchange inflows Impact of crisis on selected countries Index (2001 = 100) Percentage point change, 2008­09 500 0 ­4 400 Fuel producers ­8 300 ­12 200 Other ­16 ­20 100 Nonfuel primary products producers ­24 Tanzania Kazakhstan Chile Latvia 0 2001 2003 2005 2007 2009 proj. Fiscal balance Net capital flows Real GDP Source: IMF. Source: IMF. Note: For Latvia, the fiscal balance includes estimated bank restructuring costs, 12.4 percent of GDP in 2009. 40 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S up pace. Food demand, particularly from in the future. While many of the lessons of emerging and developing economies, is likely the crisis focus on the more mature financial to remain robust over the medium term, markets, where the problems began, most while continued strong demand for corn for of them are also relevant for emerging and ethanol use will also bolster price pressures. developing countries. In light of these factors, policy makers in The globalization of financial institutions emerging and developing countries should has complex implications for financial sta- continue to plan for enhancing food security bility.6 From the perspective of individual through increased investment in the agricul- institutions, globalization helps diversify tural sector and domestic reforms aimed at risks and may well have improved financial developing commercial farming and increas- stability, particularly in the face of relatively ing small holder productivity. small shocks. As recent events have shown, Governments in emerging and develop- however, severe crises can be more easily ing economies are also faced with difficult transmitted across borders and therefore choices when addressing the social effects of more difficult to deal with. To address wider high food prices. Countries have responded systemic risk, a comprehensive approach to in different ways, including reductions in prudential supervision and market regula- fuel and food taxes and tariffs, increases in tion is needed. Emerging and developing universal subsidies, expansions in transfer countries are thus presented with new chal- programs, and public sector wage increases. lenges to strengthen institutions and improve Some of these measures, however, are coordination. often cost ineffective and may even be coun- Drawing from recent reports under the terproductive over the medium term. About Financial Sector Assessment Program (box one-third of developing countries have 1.7) and the new lessons emerging from the increased fuel price subsidies in 2008. These current global financial turmoil, it appears subsidies may create unsustainable fiscal posi- that policies aimed at strengthening the tions, even at current lower oil prices, and robustness of financial systems should be are inconsistent with longer-term objectives tailored along four dimensions: policies that to mitigate climate change. Governments seek to strengthen the soundness of indi- should therefore give high priority to phasing vidual institutions; policies that solidify the out these subsidies and replacing them with contingency planning and crisis management more finely tuned social protection schemes framework; policies that mitigate the risks to protect the poor. Well-targeted and flex- from cross-border exposures and spillover ible measures, such as direct income support, effects; and policies that adopt a broader workfare, and food-for-work programs, that macroeconomic orientation for financial help the poorest while keeping a cap on gov- surveillance. ernment spending are highly preferable to measures that also benefit those who do not Further Strengthening Prudential need government support (box 1.6). Frameworks Prudential Supervision and Supervisors must have adequate expertise Market Regulation in Emerging and resources to monitor banks' risk man- and Developing Countries agement models and develop their own assessment tools. This recommendation The financial crisis has exposed a number applies to all supervisory regimes, from the of shortcomings in countries' supervisory emerging countries with the more developed frameworks that need to be addressed to banking systems that use the internal risk- restore confidence in the financial system and based approach under the Basel II frame- reduce the likelihood of financial instability work, to the developing countries where G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 41 C H A P T E R 1 banks continue to work under the more systemic liquidity framework, including the traditional Basel I regime. The financial role of the central bank as a lender of last crisis has highlighted the need for financial resort and the degree of cooperation between institutions and supervisors to contemplate the fiscal and monetary authorities to ensure low-probability risks in their stress test a coherent debt management policy. assumptions. Supervisors must have at their In countries where nonbank financial disposal the discretion to use a range of tools institutions (such as pension funds and insur- to reduce financial risks, including a gradual ance companies) pose systemic risks, non- increase in overall capital requirements. bank regulatory regimes should be strength- Supervisors must give equivalent weight to ened. For example, risks can build up and the supervision of liquidity risk and solvency go unrecognized where there is insufficient risk. The current crisis has demonstrated that information on exposures through nonbank during times of extreme stress, there is little subsidiaries, such as leasing companies, distinction between illiquidity and insol- and opaque ownership linkages (such as vency. While emerging countries that already Botswana and Haiti). have a sound systemic liquidity framework National authorities must actively encour- may focus more on monitoring banks' inter- age improvements in the resilience of finan- nal liquidity risks management processes cial infrastructure. Strengthening the resil- (as Kazakhstan and Sri Lanka have done), ience and efficiency of domestic clearing and low-income countries may need to focus settlement systems, including those for retail their efforts on strengthening their broader electronic payments and foreign exchange BOX 1.6 Bailing out the world's poorest As the financial crisis spills over to the developing world in 2008­09, many governments and citizens are asking what can be done to help protect the poorest. The starting point for many developing countries will be a weak safety net, with limited potential for protect- ing the poor from an economywide crisis. There will also be limited information concerning the likely profile of welfare impacts, although an effort should still be made to anticipate the types of households and places that will be most vulnerable, using the best available data and analytic tools. Crises have often presented opportunities for setting up better information systems for monitoring progress and for future preparedness. Expanding the coverage and increasing the benefit levels on conditional cash transfer programs (CCTs) has been one response to crises, particularly in Latin America. There are several examples of effective CCTs in devel- oping countries. The Food-for-Education Program in Bangladesh, Mexico's PROGRESA program (now called Oportunidades) and Bolsa Escola in Brazil require the children of the recipient family to demonstrate adequate school attendance (and health care in some cases). Impact evaluations show evidence that such programs bring non-negligible benefits to poor households in terms of both current and future incomes, through higher invest- ments in child schooling and health care. Mexico was able to help redress the adverse welfare impacts of the recent rise in food prices by implementing a one-time top-up payment to Oportunidades participants. There has been some evaluative research on specific programs introduced during past crises. One example studied a CCT program in Indonesia, the Jaring Pengamanan Sosial, and found that it appreciably reduced school dropout rates among beneficiaries during the 1998 financial crisis; the program had the greatest impact at the lower secondary school level where children are most susceptible to dropping out. A common drawback of targeted cash transfer schemes in practice is that they tend to be relatively unrespon- sive to changes in the need for assistance. A previously ineligible household that is hit by, say, unemployment of the main breadwinner may not find it easy to get help from such schemes. Temporary expansion in the transfer payments to existing beneficiaries can help in a crisis, though a temporary expansion in coverage will probably also be needed and this can be harder to achieve. 42 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S markets, should become a key priority for fiscal deficits and public debt markets need to countries with less developed financial sys- be carefully monitored. tems (such as Haiti and Moldova). Off-balance-sheet items and derivatives Governments must be fully cognizant should also be monitored. Even though the of the risks inherent in direct intervention. originate-to-distribute model had flaws that The breadth of public responses to address led to overexpansion in credit in mature mar- troubled institutions witnessed during the kets, emerging markets have used some forms current crisis has no historic parallel (table of securitization to expand credit. Emerging 1.4). Policy makers must ensure that these market securitization should also incorporate interventions are credible, both in terms of appropriate safety nets to avoid problems their funding and implementation, and that similar to those in mature markets. they do not aggravate market distortions. For example, encouraging banks to lend in Strengthening Contingency Planning the face of a credit crunch could weaken the prospects of a return to normalcy when the The current crisis has demonstrated that financial turmoil recedes. Similarly, the use of existing contingency planning and cri- government guarantees and expenditures on sis preparedness arrangements have been One way to ensure that the safety net provides effective insurance--a genuine safety net--is to build in design features that only encourage those in need of help to seek out the program and encourage them to drop out of it when help is no longer needed given better options in the rest of the economy. The classic example of such self-targeting is a workfare program (variously called relief work or public works programs; food-for-work programs also fall under this heading). Workfare has been widely used in crises and by countries at all stages of development. Famously, workfare programs were a key element of the New Deal intro- duced in the United States in 1933 in response to the Great Depression. They were also a key element of the Fam- ine Codes introduced in India around 1880 and have continued to play an important role to this day in the sub- continent. Relief work programs have helped in responding to, and preventing, famines in Sub-Saharan Africa. During the East Asian financial crisis of the late 1990s, both Indonesia and the Republic of Korea introduced large workfare programs, as did Mexico in the 1995 "Peso crisis," Peru during its recession of 1998­2001, and Argentina in the 2002 financial crisis. These programs can be responsive to differences in need--both between people at one date and over time for a given person--provided the program is designed and implemented well. The Employment Guarantee Scheme in Maharashtra, India, which started in the early 1970s, aims to ensure income support in rural areas by providing unskilled manual labor at low wages to anyone who wants it. The scheme is financed domestically, largely from taxes on the relatively well-off segments of Maharashtra's urban population. In 2004 India introduced an ambitious national version of this scheme under the National Rural Employment Guar- antee Act. This program promises to provide up to 100 days of unskilled manual labor per family per year, at the statutory minimum wage rate for agricultural labor, to anyone who wants it in rural India. An ideal workfare scheme guarantees low-wage work on community-initiated projects. The low-wage rate ensures that the scheme is self-targeted in that the nonpoor will rarely want to participate. The federal or state government announces that it is willing to finance up to, say, 15 days a month of work on community projects for any adult at a wage rate no higher than the market wage rate for unskilled manual labor in a normal year. The work is available to any adult at any time, crisis or not. This would extend the coverage of the public works schemes often found in current relief efforts to include normal times at which demand would be much lower, but almost certainly not zero. It would also relax the eligibility restrictions often found on relief work. Access to the program would rely very little on administrative discretion (either in turning it on and off, or determining who gets help.) As long as the guarantee is credible, it will also help reduce the longer-term costs of risks facing the poor. Thus it can help in fighting chronic poverty as well as transient poverty in a crisis. Source: Ravallion 2008. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 43 C H A P T E R 1 BOX 1.7 The Financial Sector Assessment Program The FSAP is a joint IMF­World Bank program that aims at synthesizing a relatively comprehensive and detailed view of a country's financial sector risks, vulnerabilities, and development needs in an overall report. With over two-thirds of the countries having been covered by a first-round FSAP or FSAP update, the FSAP is now recognized as an essential cornerstone of the World Bank and the IMF's financial sector surveillance work, and demand for this voluntary program by member countries remains strong. The FSAP coverage remains uneven across regions and levels of development, with mainly developing countries covered by an FSAP. Nonetheless, the coverage of developing countries is rising, reflecting the initial emphasis on systemically important countries and the greater capacity of high-income countries to undertake the exercise. A sound and well-functioning financial system rests on three pillars, which constitute the basis of the assess- ment framework: Macroprudential surveillance and financial stability analysis by the authorities to monitor the impact of poten- tial macroeconomic and institutional factors (both domestic and external) on the risks, vulnerabilities, and stability of financial systems. Financial system supervision and regulation to help manage the risks and vulnerabilities, protect market integ- rity, and provide incentives for strong risk management and good governance for financial institutions. Financial system infrastructure, including the legal infrastructure for finance; the systemic liquidity infrastructure (monetary and exchange operations; payments and securities settlement systems; and the structure of money, exchange, and securities markets); and issues related to governance and transparency (such as the accounting and auditing framework, market monitoring arrangements, and credit reporting systems). The FSAP assessments carefully consider the complementarities and trade-offs between financial stability and development. Policies to foster financial stability also support orderly financial development. Nevertheless, in specific contexts, the benefits of stability policies in terms of increased soundness and containment of risks have to be weighed against the costs of regulatory compliance and the possible side effects of prudential regulations on market functioning and access. Similarly, policies to foster financial development necessarily involve some increase in both macroeconomic and financial risks, which need to be managed. Thus, promoting an orderly process of financial development alongside stability necessarily involves a proper sequencing and coordination of a range of financial policies. The FSAP assessments have also proven to be a powerful tool in helping shape policy advice on prudential supervision and market regulation during the financial market crisis. Since August 2007, 21 FSAPs (mostly updates) have taken place, including in advanced and emerging market countries that could be expected to be susceptible to the turmoil. In these assessments, particular attention was paid to crisis management frameworks and cross-border supervisory cooperation, as well as to exposures to subprime-related financial instruments and tighter funding conditions. inadequate in responding to systemic risk governments, both domestically and on a and has underscored the need to strengthen cross-border basis, would contribute to better these arrangements. monitoring of liquidity and solvency risks. The roles and responsibilities between National authorities must ensure that a relevant authorities must be clear. Certain robust legal process exists for early inter- conditions are of critical importance dur- vention in, and resolution of, failing finan- ing a financial crisis: a clear hierarchy in the cial institutions. Recent FSAP reports found decision-making structure, up-to-date super- prompt corrective action and bank resolu- visory information, and a true ability to act tion systems to be weak in a broad range of swiftly. As events have demonstrated, these countries (box 1.8). Regulatory authorities conditions are not in place in many countries. need to have the power to close or restruc- Greater coordination among central banks, ture a troubled financial institution. For this, financial regulators, and their respective the authorities must be clear about the main 44 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S TABLE 1.4 Measures implemented during financial turmoil, by country Higher deposit Other debt insurance guarantee Bank Foreign exchange Domestic Capital Country coverage provision recapitalization liquidity support liquidity support controls Argentina ... ... ... ... Brazil ... ... ... ... Bulgaria ... ... ... ... China ... ... ... Colombia ... ... ... ... Croatia ... ... ... ... ... Czech Republic ... ... ... ... Ecuador ... ... ... ... ... Estonia ... ... ... ... ... Hong Kong, Chinaa ... ... ... ... Hungary ... ... ... Indiaa ... ... ... Indonesia ... Kazakhstan ... ... Korea, Rep. of ... ... Latvia ... ... ... ... ... Lithuania ... ... ... ... ... Malaysiaa ... ... Mexico ... ... ... ... Mongolia ... ... ... ... ... Nigeria ... ... ... ... ... Peru ... ... ... ... Poland ... ... ... Philippines ... ... ... Romania ... ... ... ... Russian Federation Singapore ... ... ... ... Slovakia ... ... ... ... ... Slovenia ... ... ... ... ... Turkey ... ... ... ... Ukraine ... ... Total 21 6 6 15 19 6 Source: IMF. Note: This is a summary of key measures taken by authorities. a. Bank recapitalization not yet implemented, possibly only as contingency. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 45 C H A P T E R 1 BOX 1.8 Common regulatory and supervisory shortcomings identified in recent FSAP reports Publicly available information drawn from a sample of 16 FSAPs and FSAP updates conducted in emerging and developing countries in 2007­08, shows common shortcomings emerging across different levels of development and/or geographical regions. For illustration purposes, in what follows, each of the common shortcomings identi- fied during an FSAP is associated with some of the sample countries. This does not suggest, however, that these shortcomings were particularly severe in the cited country, but only that they were discussed in the FSAP. The economies included are Algeria, Botswana, Costa Rica, Croatia, Arab Republic of Egypt, Haiti, Kazakhstan, Lithuania, Moldova, Mongolia, Morocco, Namibia, Sri Lanka, Thailand, Ukraine, and the Western African Economic Monetary Union (WAEMU). Insufficient independence and enforcement powers of supervisory agencies. Many FSAP reports highlighted the need to strengthen supervisors' powers to enforce prudential requirements, including through stronger bank licensing frameworks and "fit and proper" rules (Haiti, Mongolia, WAEMU) and through more resources to attract and retain high-skilled staff (Lithuania, Namibia) and achieve operational independence (Costa Rica, Kazakhstan). Insufficient tools to assess borrower's creditworthiness and quality of collateral. Weak auditing, reporting, and accounting standards (WAEMU), lack or incomplete credit registries (Egypt, Haiti), and limited judicial capacity to enforce foreclosure rules (Haiti, Thailand) were found to substantially hamper banks' ability to assess bor- rowers' creditworthiness. Weak risk management. Key recommendations in this area focused on strengthening supervisors' ability to ensure the quality of banks' assets, including through adequate provisioning rules and capital risk weights (Kazakhstan, Morocco, Ukraine), a proper connected-lending and concentration risk regulation (Haiti, Mon- golia, WAEMU), and effective consolidated supervision for groups and their offshore subsidiaries (Botswana, Costa Rica, Kazakhstan, Namibia, Sri Lanka, Ukraine). Other shortcomings included weak internal controls (Haiti, Morocco) and limited liquidity risk management (Algeria, Kazakhstan, Mongolia). Limited coordination between bank and nonbank supervisory authorities. Key issues related to weak informa- tion exchange on risk exposures and ownership linkages (Croatia, Ukraine) and unequal level-playing field (Botswana, Egypt, Haiti, Namibia, Sri Lanka). Distortionary role of the state in the financial system. Some FSAP reports highlighted weak supervision of state- owned banks, including capital deficiencies and unresolved problem loans (Algeria, Sri Lanka, Thailand). Many reports pressed for scaling back government ownership and interference (Botswana, Egypt, Mongolia). Weak payment infrastructure. Many countries were found to have weak payment and settlements systems. Insufficient contingency planning. The FSAP recommended revamping early remedial actions and bank resolu- tion systems (Costa Rica, Haiti, Kazakhstan, Sri Lanka, Ukraine); initiating formal cross-border crisis manage- ment arrangements with foreign supervisors (Lithuania); and clarifying the role of different agencies in contin- gency planning (Croatia). Underdeveloped infrastructure in capital markets. FSAP reports recommended increasing disclosure standards and transparency practices of nonfinancial and financial institutions (Algeria, Ukraine); simplifying legal proce- dures for equity share listings and bond issuances (Egypt, Namibia); and establishing a benchmark yield curve (Algeria, Botswana, Ukraine). Limited capacity to assess financial stability. Key recommendations focused on the need to improve financial sector data and analytical capacity to monitor systemwide risks and vulnerabilities, including through stress testing (Egypt, Namibia, Ukraine). objectives to achieve (maintaining public con- National authorities must ensure clar- fidence in the banking system, for example), ity over deposit insurance responsibility and the methods of bankruptcy prevention, and coverage, including for cross-border institu- the crisis resolution tools (such as liquidation tions. In all countries, depositors must receive or merger).7 clear information on who is responsible for 46 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S safeguarding their claims and the coverage of Specifically, surveillance should consider their deposit insurance. The coverage must the composition of private sector credit, its be credible, and the payouts in the event of impact on a country's external position, and a failure must be provided promptly to mini- the ability of its banking system to absorb mize disruptions in the payments system. shocks from a sharp unwinding of external funding. This is particularly true for coun- tries (such as the Baltics, Hungary, and some The Need for Greater International Sub-Saharan African countries) with a large Cooperation foreign ownership component, because they Reflecting the links between financial markets could face the effects of a credit crunch in and institutions, the current crisis is calling the event of a sharp capital flow reversal. for greater international policy cooperation Central banks must have access to ade- among countries with international banks. quate institution-specific information to National authorities need to cultivate assess financial stability risks. Central banks closer cooperation between home and host should have access to all necessary supervi- supervisors. A number of countries, par- sory information to assess systemic risks to ticularly in Eastern and Central Europe their economy, including to the payments and Sub-Saharan Africa, have banking sys- system and emergency liquidity operations. tems dominated by foreign-owned banks. Regulators must ensure that market The behavior of foreign subsidiaries could participants are fully informed of the risks depend largely on their parent groups, whose inherent in financial products, and financial management and supervisory authorities are supervisors must ensure that capital buffers located abroad. This calls for coordinated are commensurate with the risks.8 inspections of international banks, joint risk Prudential regulations should explic- assessments, and the preparation of plans to itly counter cyclical tendencies, including deal with a major bank failure. Going for- through larger liquidity and capital buffer ward, the role of international supervisory requirements and dynamic loan loss provi- colleges for cross-border financial institu- sioning to account for the inherent under- tions needs to be augmented to achieve a pricing of risk in upturns. more effective information exchange. National authorities must counteract Close cross-border coordination in cri- institutions' tendency to become "too big sis management is necessary to forestall to fail" or "too connected to fail" to better beggar-thy-neighbor policies with damag- internalize the economic costs of financial ing cross-border spillover effects and market instability. Authorities need to protect tax- distortions. This is particularly important in payers' interests by seeking to reduce risks countries where large international banks posed by large and complex institutions. are established. Recent unilateral increases This can be promoted through competition in deposit insurance coverage are examples policy, restrictions on activities, or pruden- of how a lack of policy coordination can tial measures (such as capital requirement or cause serious spillover effects. deposit insurance premiums). Emphasis on Systemic Risks Capital Restrictions as a Last Resort Financial surveillance should have a greater Capital restrictions might be unavoidable as emphasis on systemic risks and their wider a last resort to prevent or mitigate the crisis implications for economic stability. Financial effects. A few emerging countries have intro- surveillance needs to pay closer attention to duced capital controls and other measures to the sources of financing of domestic credit better monitor and, in some cases, limit the and their macroeconomic implications. conversion of domestic currency into foreign G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 47 C H A P T E R 1 exchange (see table 1.4). Capital controls, into poverty by the high food prices may however, typically result in economic dis- emerge from poverty in 2009. tortions that are harmful for longer-term The slowdown in economic growth result- growth and lose their effectiveness quickly, ing from the global financial crisis will add as market participants find ways to circum- to the poverty impact of high food prices. vent them and undermine investors' confi- On current growth projections, there will be dence. Nonetheless, capital controls might about 55 million more extreme poor (those need to be imposed as a last resort to help living below the international poverty line of mitigate a financial crisis and stabilize mac- $1.25 a day in 2005 purchasing power parity roeconomic developments terms) in developing countries in 2009 than expected before the financial crisis.9 The The Poverty Effects of the Crisis poverty rate is still expected to decline in 2009, but at a much slower pace because of As a result of the food and financial crises, the sharply lower growth. Table 1.5 presents the pace of poverty reduction has slowed. poverty projections for 2009 based on cur- The positive effects on poverty of the high rent growth projections.10 The proportion of global growth in recent years have been people living in extreme poverty is projected partly offset by the rise in food prices, which to decline in 2009 by 0.6 percentage point. pushed an estimated 160 million to 200 mil- This compares with an average annual lion people into extreme poverty between decline of 1.3 percentage points in the three- 2005 and 2008. Although international year period preceding 2009. All regions of food prices have declined since the middle of the developing world are affected, although 2008, all of the benefits of the lower prices to a varying degree. Sub-Saharan Africa will will not be felt immediately because local see a rise in the poverty count. Rising pov- prices lag behind changes in international erty is likely especially in the more fragile prices. As a result, no more than 90 million and low-growth economies. While poverty to 120 million people who had been pushed rates on average are much lower in Europe TABLE 1.5 Short-term poverty outlook people living below the international poverty line of $1.25/day (2005 PPP) Number of people Change in number of Change (millions) people (millions) % of population (percentage points) 2008 2009 2005­08a 2009 2008 2009 2005­08a 2009 East Asia and the Pacific 222.5 203.0 ­31.2 ­19.5 11.5 10.4 ­1.8 ­1.1 Europe and Central Asia 15.1 15.5 ­0.7 0.4 3.2 3.3 ­0.2 0.1 Latin America and the Caribbean 37.6 40.3 ­2.5 2.7 6.6 7.0 ­0.5 0.4 Middle East and North Africa 8.6 8.3 ­0.8 ­0.3 2.7 2.5 ­0.3 ­0.2 South Asia 536.3 530.6 ­19.8 ­5.7 34.8 33.9 ­1.8 ­0.9 Sub-Saharan Africa 382.7 385.9 ­1.9 3.2 46.7 46.0 ­1.4 ­0.7 Total 1,202.8 1,183.6 ­56.9 ­19.2 21.3 20.7 ­1.3 ­0.6 Low-income countries 952.3 947.8 ­26.9 ­4.5 38.0 37.2 ­1.8 ­0.8 Middle-income countries 262.1 247.2 ­33.1 ­14.9 8.3 7.8 ­1.2 ­0.5 Source: World Bank (model-based projections). Note: PPP = purchasing power parity. a. Simple annual average change for the three-year period 2005­08. 48 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 T H E G L O B A L F I N A N C I A L C R I S I S A N D I T S I M P A C T O N D E V E L O P I N G C O U N T R I E S and Central Asia and in Latin America and impact is estimated to be associated with the Caribbean, these regions could also see 93 million additional people classified as an increase in the number of poor in 2009. extreme poor.11 If the crisis deepens and growth in develop- The MDG 1 for poverty reduction remains ing countries falters further, the impact on achievable at the global level, but the cri- poverty would be still stronger. Overall, on sis adds new risks. Current growth projec- current growth projections, more than half tions envisage a gradual recovery of growth of all developing countries could experi- in developing countries starting in 2010. ence a rise in the number of extreme poor in Per capita GDP growth in developing coun- 2009; this proportion could be still higher tries is expected to rebound to an average of among low-income countries and countries about 4.5 percent per year during 2011­15. in Sub-Saharan Africa--two-thirds and On the basis of these projections, the propor- three-fourths, respectively. tion of people living below $1.25 per day is Estimates by the International Labour expected to reach 15.1 percent by 2015, sur- Organization (ILO), which focus on the passing the MDG target of 20.8 percent (half impact of the growth slowdown on employ- of the 1990 level) for developing countries as ment and wages, indicate a still stronger a whole (table 1.6). These projections, how- impact on poverty. The ILO estimates that ever, are subject to considerable uncertainty some 30 million more people around the and downside risks stemming from the crisis. world may be unemployed in 2009, com- Within this overall picture, there are major pared with 2007, of which 23 million could differences in performance among regions be in developing countries. The labor market and countries. In Sub-Saharan Africa, the TABLE 1.6 Longer-term poverty outlook people living below the international poverty line of $1.25 (2005 PPP) Over/ Number of people (millions) % of population undera 1990 2005 2015 1990 2005 2015 MDGb East Asia & Pacific 873.3 316.2 103.6 54.7 16.8 5.1 22.3 East Asia & Pacific, excluding China 190.1 108.5 43.5 41.3 18.7 6.7 14.0 Europe & Central Asia 9.1 17.3 12.8 2.0 3.7 2.7 ­1.7 Latin America & the Caribbean 49.6 45.1 33.4 11.3 8.2 5.4 0.3 Middle East & North Africa 9.7 11.0 6.7 4.3 3.6 1.8 0.4 South Asia 579.2 595.6 416.1 51.7 40.3 24.5 1.4 South Asia, excluding India 143.7 139.8 97.7 53.1 36.6 21.2 5.4 Sub-Saharan Africa 295.7 388.4 352.6 57.6 50.9 36.6 ­7.8 Total 1,816.6 1,373.5 925.2 41.7 25.2 15.1 5.7 Total, excluding China 1,133.5 1,165.8 865.1 35.2 28.1 18.2 ­0.6 Low-income countries 920.4 1,032.9 789.3 52.8 43.5 28.0 ­1.6 Middle-income countries 914.2 361.5 143.5 35.0 11.8 4.3 13.2 Source: World Bank (model-based projections). Note: PPP = purchasing power parity. a. The difference in percentage points between the MDG target and the projected poverty rate in 2015. Negative numbers indicate underperformance. b. Relates to MDG 1, target 1.A, which calls for halving, between 1990 and 2015, the proportion of people living below the poverty line. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 49 C H A P T E R 1 share of people living in extreme poverty per capita would have grown at 1.7 percent will remain well above the MDG target of a year instead of 0.7 percent between 1975 28.8 percent in 2015. South Asia will barely and 2005, and it would have been more than meet the MDG target. In contrast, the East 30 percent higher by the end of the period.12 Asia and Pacific region has already surpassed the target. The Latin America and the Carib- Notes bean region is on track. The Middle East and North Africa and Europe and Central Asia 1. Commodity prices are sensitive to growth prospects, because output in commodity-intensive regions are likely to miss the MDG target, sectors (manufacturing and construction) tends to but they started from much lower poverty contract more in recessions than output in other levels. sectors. Low-income countries as a group are 2. World Bank 2008b. likely to fall short of the MDG target. The 3. Details of World Bank and IMF response to poverty rate in these countries is projected the crisis are discussed in chapter 6. to fall from 52.8 percent to 28.0 percent 4. IMF 2009. between 1990 and 2015. The middle-income 5. By August 2008, 35 countries had some form countries do much better, with the poverty of export restriction on food items in place. The rate declining from 35 percent to 4.3 per- most distortionary measures have been removed cent. Within these groupings, however, there since then. 6. For a detailed discussion on financial sta- is considerable variation in performance bility implications of globalization of financial among individual countries. institutions, see Chapter 3 of the 2007 Global The effects of growth volatility are not Financial Stability Report (Washington, Interna- symmetric. Research shows that growth tional Monetary Fund). accelerations and decelerations have an asym- 7. A good review of banking crises resolution metric impact on poverty and human devel- can be found in Hoggarth and Reidhill (2003). opment outcomes. These outcomes tend to 8. These issues are the focus of a Financial Sta- deteriorate more quickly during growth decel- bility Forum Working Group on enhancing mar- erations than they improve during growth ket and institutional resilience, and of discussions accelerations. This finding suggests that pre- within the Basel Committee. venting growth collapses is essential for a 9. World Bank 2009. 10. These poverty projections are based on pro- region such as Sub-Saharan Africa to attain jections of economic growth; they do not include the MDGs. Sub-Saharan Africa has had a the effects of food price changes. number of growth acceleration episodes in the 11. ILO 2009. Geneva. The report also presents past 30 years, but also nearly a comparable a worse-case scenario that projects an increase in number of growth collapses, offsetting much the number of unemployed at 51 million globally of the benefit of the bursts in growth. Had and at 40 million in developing countries. Africa avoided its growth collapses, its GDP 12. Arbache and Page 2007. 50 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 2 Improving the Private Investment Climate for Recovery and Growth E conomic growth is central to achieving everywhere in the world, private firms are the Millennium Development Goals having to downsize, lay off workers, and (MDGs) and related development out- delay if not cancel investment plans. Fear comes, and a vigorous private sector is vital that economic hardships in the private sec- for strong and sustainable growth. The pri- tor could widen and lead to deeper recession vate sector drives job creation, increases in globally has heightened the need to ensure productivity, and economic growth.1 Private that the private sector has the tools it needs sector jobs provide most of the income in and the fiscal and monetary policies that will developing as well as developed countries. make it grow. Addressing key constraints Revenues from private sector transactions in the private sector is necessary to ensure and incomes pay for many of the public that firms can respond and expand once the goods provided by governments. Competi- recovery is under way. tion can help spur technological advance- The agenda involves improving the ments and productivity gains that are the key enabling environment facing businesses of to sustained long-term growth. all types and sizes, from small farmers to Private-sector-led growth also benefits the sophisticated technology firms, and increas- poor. The expansion of job opportunities is ing the attractiveness of economies to inves- identified as the single most important path- tors, both foreign and domestic. This chap- way out of poverty.2 When average house- ter assesses progress and the policy agenda hold incomes rise by 2 percent, poverty rates regarding three key elements of the private fall by about twice as much on average.3 The investment climate: the regulatory and insti- poverty effects of income growth are often tutional environment; access to financial ser- associated with a shift in employment from vices; and access to infrastructure. The lat- traditional sectors with low productivity to ter two elements are both important inputs those with higher productivity growth, such to private sector development, and the pri- as manufacturing, mining, and utilities. The vate sector itself can play an important role poor also benefit from expanding public in their provision. goods provision associated with higher rev- The current crisis reinforces lessons enue collection. from research on regulatory reform: the The current international financial cri- aim should be better, not necessarily fewer, sis has sharpened the focus on the private regulations; and the quality of enforcement sector. With credit hard to come by almost and broader governance matter greatly for G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 51 C H A P T E R 2 the effectiveness of regulations. The crisis can or cannot engage in and who can engage underscores the need to pay special atten- in them. A firm's access to finance can deter- tion to the financial sector. It is also vitally mine the opportunities it can pursue. And important to protect infrastructure invest- the availability of infrastructure services can ment from the impact of the crisis as much affect the costs of production and delivery of as possible. Infrastructure investment can goods and services to consumers. Indeed, by both help with economic recovery in the influencing the barriers to entry, the risks, short term and strengthen foundations for and the costs facing firms, the investment future growth. climate affects the scope for private sector growth and productivity. Quality of Investment The World Bank's Enterprise Surveys, now Climate Key to Private Sector completed in over 100 countries, provide Contributions insights into the current investment climate. The information includes subjective rank- The investment climate, or broader business ings of constraints, which can be corrobo- environment, in which firms operate can be rated with more objective, quantitative mea- critical in shaping the incentives and oppor- sures. Thus, if firms report electricity to be a tunities for, and rewards from, investment problem, information is also available on the and productive efforts. Taxation directly frequency of outages, the costs of running a affects the return on investment, while regu- generator, and the production lost as a result lations influence the types of activities one of interruptions in the public grid. Firm responses show that the regulatory environment, access to finance, and infra- FIGURE 2.1 Key constraints on firms vary by country income level structure are three key constraints affecting private business around the world.4 Figure 2.1 illustrates a number of patterns shown Electricity in these surveys. Access to finance Tax rates Firms in high-income countries report fac- Competition from ing fewer constraints. The share of firms informal sector that see the various potential issues as a Tax administration major or severe constraint to the growth of Corruption their business is much lower in high-income Transportation countries than it is in developing countries. The share is often half that of lower-income Customs countries, with the exception of licenses Crime and permits and labor regulations, where Licensing & permits the share is only marginally lower than for Legal middle-income countries. Because the objec- Telecommunication tive conditions in higher-income countries are generally better--that is, electrical out- Labor regulations ages are less common, the financial system 0 10 20 30 40 50 is more developed, and procedures to com- Share of firms reporting major ply with regulations are often more stream- or severe constraint, % lined--this finding is not too surprising. Low-income countries Middle-income countries High-income countries Access to electricity and finance are the top two issues in low-income countries. The Source: Enterprise Surveys database. importance of these constraints decreases 52 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H dramatically as a country's income rises. have spillover effects on others that are not This is true for the other infrastructure vari- taken into account by the original actor. A ables too--although telecommunications is second market failure is information asym- not reported as a major constraint in any metry, where the producer, for example, income category, thanks to rapid progress in may have more information about the safety this area in recent years. or reliability of its products than the con- sumer. A third is monopoly power, market Several areas related to regulations and power that can be used to raise prices and governance are reported as most significant lower output to maximize a firm's rents at in middle-income countries. These are tax the expense of the consumer. rates, tax administration, competition from These market failures drive a wedge the informal sector, and corruption. As between the private interests of firms and discussed below, it is often the low-income those of broader society. They can also countries that have the most regulatory pro- inhibit productive investments and growth. cedures and time delays associated with com- Thus regulations can play a critical role in pliance. As income rises, these tend to fall. protecting society and consumers and in pro- However, enforcement of these regulations moting greater equity and access to a level often strengthens as income rises. So, while playing field for private sector development. the formal requirements may be decreasing, The challenge to governments, however, the greater enforcement could well explain is that they not overreach in correcting why entrepreneurs in middle-income coun- these failures. While underregulation may tries report being more constrained by reg- fail to address social interests or externali- ulation. The results also suggest that cor- ties, overregulation can stifle the ability to ruption and regulatory constraints may go pursue opportunities, curtailing growth. together. Government failures, from limited capacity Many studies show that these areas of the or its own rent-seeking incentives, can also investment climate--regulatory and insti- be harmful. Such risks reinforce the case for tutional environment, finance, and infra- keeping regulations simple, transparent, and structure services--are closely associated enforceable. with firm performance.5 Weaknesses in the The goal is not simply to have fewer reg- business environment have been shown to ulations. Rather it is to have better regula- shift the size distribution of firms down- tions. And one of the lessons of experience ward.6 Interruptions in access to power is that enforcement matters in assessing the are particularly significant in reducing the quality of regulations. The effectiveness growth of large firms while encouraging the of regulations can depend on the capacity spread of small, more labor-intensive firms. of local officials as well as on budget con- A lack of access to finance lowers growth straints. The broader quality of governance across the size distribution. Because the plays a role as well. benefits of finance are particularly strong for small firms, a lack of access hurts them Substantial Scope Exists disproportionately.7 for Regulatory Improvements Regulatory and Institutional Looking at what is known about regulations Environment for Private Sector in practice, there appears to be substantial Development room for improvements without compromis- ing broader public interests. Too often gov- Regulations are generally justified as ernments pursue regulations that fail to meet addressing market failures. A common one intended social interests or impose unnec- involves externalities, cases where activities essary costs, risks, or barriers to entry and G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 53 C H A P T E R 2 competition. Demonstrating a commitment investment, job creation, and growth (see to improve the regulatory environment can box 2.1 for a recent evaluation of the Doing lead to substantial results--without requir- Business project and follow-up actions). ing a perfect business environment. Examples The Doing Business measure of the ease from China to India to Uganda show how of doing business covering 10 regulatory tackling regulatory costs and strengthen- areas shows that the ease of doing bussiness ing property rights can generate significant varies widely across countries (figure 2.2). 9 increases in investment and productivity.8 Richer countries tend to have more efficient One source of data on regulations is and streamlined regulations. But there is the World Bank's Doing Business project, considerable variation in this relationship. benchmarking specifically defined areas What matters for the quality of the business of business regulations in most countries environment is the quality of the regulations, of the world. The ability to compare for- including their enforceability, not just the mal requirements of regulatory compliance number of regulating procedures. Enforce- across countries can be useful in encour- ability is a particularly important consid- aging officials to undertake reforms. And eration in poorer countries, which tend to the data can be used to analyze their asso- have less control of corruption and more ciations with outcomes of interest, such as limited administrative capacities. A heavy BOX 2.1 Independent Evaluation Group reviews Doing Business In 2008 the World Bank's Independent Evaluation Group (IEG) released its report on the Doing Business project. The evaluation recognized that the project has been effective in spurring dialogue on reforms and motivating interest and action. "For country authorities, it sheds a bright, sometimes unflattering, light on regulatory aspects of their business climate. For business interests, it has helped to catalyze debates and dialogue about reform." However, the evaluation also found that business is affected not only by laws and regulations, but also by a host of other variables outside the scope of the Doing Business indicators. In response, the 2009 report on Doing Busi- ness is careful to strengthen the caveats about what the indicators do and do not capture. The IEG evaluation found little evidence that the Doing Business indicators distorted policy priorities or encouraged policy makers to make superficial changes solely to improve rankings. It also concluded that a coun- try's legal origin, whether civil or common law, does not determine its score in the Doing Business indicators. The evaluation's recommendations to further develop the transparency of the data collection, data revisions, and the respondent selection process have been accepted and are being implemented by the Doing Business team. Within indicator areas, the IEG evaluation addressed concerns that the rankings may appear to reward less regulation without necessarily capturing the quality of the regulations or the social values they might reflect. The 2009 report clarifies Doing Business's focus on efficient, streamlined, and accessible regulation. In the case of labor regulation, Doing Business specifically endorses the International Labour Organization's (ILO) core labor standards, and the Employing Workers indicator is designed to be consistent with all relevant ILO conventions. No economy can achieve a better score by failing to comply with these conventions. The Paying Tax indicator generated more debate about whether to include the tax rates in addition to the administrative time and costs of paying taxes. The tax rates remain as an indicator, but it is noted that they reflect in part the social and political preferences of a country. The IEG cautioned that the Bank Group, by so prominently recognizing highly ranked countries in the Doing Business index, may be inadvertently signaling that it values reduced regulatory burdens more than other devel- opment goals. The Bank Group's approach entails helping countries achieve a wide range of objectives, yet it has no comparable way of celebrating improvements in other important development outcomes. One response could be to apply cross-country rankings to spur dialogue and motivate interest in and action on other development issues--those for which actionable indicators can serve as proxies for the target outcomes and for which there is a clear consensus on what constitutes an improvement. 54 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H regulatory burden in situations of poor FIGURE 2.2 The ease of doing business varies widely enforcement capacities can produce perverse outcomes, including undermining the cred- ibility and effectiveness of the government. Overall ease of doing business rank 200 Improvements in Doing Business 150 Indicators Are Common across Countries A great many countries have seen improve- 100 ments in their Doing Business indicators over time. Across all indicators and over the 50 six years of data now available, 126 of the 178 economies for which there is at least two years of data register an improvement 0 of 10 percent or more in at least one indi- 4 6 8 10 12 GDP per capita (log scale) cator. Fifty-two countries report such an improvement in more than three indicators. Only 18 countries report an overall reversal Source: World Bank Doing Business database and World Development Indicators. in an indicator. Figure 2.3 shows the share of countries by region that report an improvement of 10 per- FIGURE 2.3 Most regions are improving their regulatory indicators cent or more in an indicator. The Europe and over time Central Asia region has had a higher share of countries with improving indicators.10 Share of countries in which an indicator Sub-Saharan Africa has had a somewhat improved by 10% or more since previous year smaller improvement over time. However, Share of countries in region, % the majority of countries there saw their indi- 100 cators improve in 2007­08, and three of the world's top ten economies that reformed their business regulations were from the region: 75 Botswana, Burkina Faso, and Senegal. Mau- ritius moved up to 24 in the global rankings on the regulatory ease of doing business. 50 The runner-up in these overall rankings was South Africa at 32, followed by Botswana at 38. Other economies in Africa making the 25 most reforms of business regulations include some postconflict countries, such as Liberia, 0 Rwanda, and Sierra Leone. 2004 2005 2006 2007 2008 More specialized analysis of Arab coun- Europe & Central Asia East Asia & Pacific tries illustrates that reforms can have an OECD high-income Latin America & Caribbean impact. Six months after the Arab Republic South Asia Sub-Saharan Africa of Egypt reformed its property registry, title Middle East & North Africa registrations increased and related revenue rose by 39 percent. Commercial registrations Source: World Bank, Doing Business database. in Oman increased by 93 percent during the Note: Additional indicators were added in later years, contributing to the probability that an indicator would improve. The figure excludes coverage of credit registries that could year after Oman implemented a one-stop be expanding without any reforms having been initiated. Cost variables are normalized shop for business start-ups. In Saudi Arabia, as a share of GNI per capita. As countries grow, the same fixed cost will decline as a share. However, looking at annual changes (rather than the whole period), few countries would reducing minimum capital requirements led register an improvement based solely on growth. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 55 C H A P T E R 2 to an 81 percent increase in new company An expanded number of countries, includ- registrations.11 ing China, Mexico, Nigeria, and the Philip- The analysis also shows that geographi- pines, have developed subnational indicators cal challenges in many landlocked and small of regulations. This has allowed for more island economies are compounded by a tailored messages, improved the ability to bureaucratic regulatory environment that benchmark, and made it easier to demon- hinders business. More isolated, such coun- strate what is actually feasible within the tries need to make their business environ- country. In Mexico these subnational indi- ments all the more attractive if they are to be cators have revealed wide differences from successful in encouraging new investments. city to city and state to state. For example, However, this is not always the approach the time to enforce a contract varies signifi- taken in many such economies. Compared cantly from 248 days in Zacatecas to 560 with coastal economies, landlocked coun- days in Quintana Roo. Zacatecas and other tries tend to rank lower in starting a busi- states are reducing the backlog by creating ness, dealing with construction permits, specialized commercial courts. Other states getting credit, protecting investors, paying are increasingly using electronic platforms taxes, trading across borders, and closing to share information and manage cases. a business. Overall, landlocked economies have an average ranking of 107 out of 181 But Reforms Are Not Equally Common economies covered by the global Doing across Regulatory Areas Business 2009 report. But again, improve- ments are possible. The Dominican Republic In which areas of business regulation are was the top small-island reformer in 2008, reforms most common? With six years of as well as a top-10 reformer globally. data now available, it is possible to look in FIGURE 2.4 Regulatory reform is more common in some areas than in others Countries that improved each indicator by Country characteristics associated with reform 10% or more over the period data are available Longer initial Weaker More compliance rule of Lower Higher political times law income income stability Starting a business (days) Trading across borders (days) Accessing credit (info) Registering property (days) Construction permits (days) Paying taxes (days) Enforcing contracts (days) Employing workers (rigidity) Investor rights (disclosure) Closing a business (days) 0 20 40 60 80 Share of economies reforming (%), 2003­08 Source: World Bank, Doing Business database. Note: Not all indicators are covered for the full period of 2003­08. Property was introduced in 2004; construction permits, tax, investor rights, and trade indicators were introduced in 2005. 56 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H more detail at the trends. Figure 2.4 illus- those with higher burdens to tackle them. trates the share of countries that have posted Low-income countries have been more likely an improvement of at least 10 percent in to reform access to credit, construction each indicator. The most common area is permits, and disclosure rules, while high- starting a business, followed by improving income countries have been relatively more trading across borders and expanding access focused on reforms regarding starting a busi- to credit.12 In contrast, labor regulations, ness and employing workers. Other country closing a business, and investor rights are characteristics do not show much pattern. areas experiencing more limited reform, in The data on reform patterns over time show large part because political economy consid- that countries that reform are more likely to erations are particularly challenging. have subsequent improvements too.13 Less Figure 2.4 also shows those country char- encouraging, there is no significant evidence acteristics that are associated with particular that reformers are concentrated in countries regulatory areas being reformed. Of particu- that are improving their broader policy or lar interest is knowing whether countries political environments.14 that started out with weaker Doing Busi- The impact of these regulations and ness indicators were more or less likely to their reform has been a growing area of reform in the subsequent years. For six of the research--aided in part by the expanded areas, countries with longer initial times to coverage of the Doing Business indicators complete the regulatory processes have been and Enterprise Surveys. The findings of more likely to make subsequent reforms. this research underscore the importance of This is encouraging; much of the motivation improving regulations and strengthening for providing the benchmarks is to encourage enforcement (box 2.2). BOX 2.2 Business environment reforms matter Numerous studies have found examples of regulations that hamper business and of reforms that have improved the business climate. Barseghyan (2008) looks at output per worker in 157 countries and total factor productiv- ity in 97 countries. He finds that an increase in entry costs by 80 percent of income per capita, which is one half of their standard deviation in the sample, decreases total factor productivity and output per worker by 22 per- cent and 29 percent, respectively. The magnitudes are large: one reason may be that an increase in entry costs decreases entry pressure, allowing existing firms with lower productivity to survive. Klapper, Laeven, and Rajan (2006) find that the difference in real growth rates of value added per worker between the retail and pulp wood industries in the Czech Republic (whose entry costs put it at the 25th percentile in the sample of 40 countries) is 0.7 percentage points higher than the difference in real growth rates between the same industries in Italy (which is at the 75th percentile in entry costs). In other words, moving from Italy to the Czech Republic benefits the growth rate of the high-entry retail sector relatively more. With the average real growth rate in value added per worker at 1 percent, this is a sizable magnitude. Similar measures have been constructed and used to look at reforms within specific countries. Chari (2008) looks at the simplification of entry regulation in India in 1984­90 and finds that when entry costs were cut by approximately 65 percent, the resulting productivity increase was as much as 28 percent over the six years cov- ered by the data, of which 16 percent was directly contributed by the entry reforms (the remainder results from reforms in licensing of already-established businesses). Bruhn (2008) uses information on the simplification of entry regulations initiated in Mexico in 2002 to look at the effects of entry. She finds a 5 percent increase in entry in eligible industries. However, little of this effect was attributable to already-established informal firms registering for the first time. Rather, former wage earn- ers opened new businesses. Moreover, employment in eligible industries went up by 2.8 percent, and the results imply that competition from new entrants lowered prices by 0.6 percent and decreased the income of incumbent businesses by 3.2 percent. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 57 C H A P T E R 2 The Effects of Regulations Can Vary formal or informal sectors. Cross-country within a Country correlations show that countries with more regulatory burdens often have large infor- Another strand of research analyzing the mal sectors. Onerous regulations can rein- impact of regulations has focused on how force the incentives informal firms have to effects can vary across firms, particularly remain small and informal and thus prevent by the size of the firm, whether the firm them from realizing their full potential. To is formal or informal, and the gender of encourage small firms to grow and to partic- the entrepreneur. Lifting the burden from ipate in the formal sector, it is important to small firms, encouraging informal firms to strengthen those areas that will benefit for- become formal, and drawing more women mal firms. Improving property rights is one into the marketplace can strengthen the pri- such benefit. This can reduce uncertainty, vate sector and promote growth and prog- encourage transactions with a wider set of ress toward the MDGs. suppliers and customers, and, by strength- Effects on firm size. Regulatory reform can ening control of collateral, expand access to make small businesses more effective partic- credit. ipants in the economy. In many areas, small Burdensome regulations can affect infor- and medium (10 to 50 employees) enter- mality on another dimension--compliance. prises, which typically are the main motor Noncompliance is higher where regulations of job creation in an economy, are the most are more stringent and also where enforce- affected by weaknesses in the investment cli- ment is more lax. Reducing the time require- mate. 15 In contrast, microfirms--those with ments and the costs of regulations is only 10 or fewer employees--are often able to part of the solution. Improving transparency stay below the bureaucratic radar screen and about what is required and making sure the avoid the costs of taxation and regulatory information is readily available are impor- compliance. Larger firms, while hampered tant steps. It is important too to overcome 17 by weak property rights, often can provide the "culture of informality." Widespread their own solutions to problems such as weak noncompliance can undermine the legiti- infrastructure (by purchasing their own gen- macy of the state and reduce the likelihood erator, for example) or limited local finance that reforms will be effective at chang- (by attracting a foreign partner or drawing ing behaviors of firms. A broader goal of on their larger volume of retained earnings). improving the quality and fairness of state They are also often best positioned to nego- institutions and policies can help ensure spe- tiate favorable tax treatments. cific reforms will be effective. Smaller firms face many fixed costs that are proportionally higher for them, result- Effects on women's participation. One of the ing in greater constraints on their being able MDGs is women's economic empowerment, to do business. Smaller firms are also more and greater participation of women in busi- likely to face difficulties accessing finance, ness is one indicator of that goal. Data from because of the higher relative transaction the Enterprise Surveys confirm that partici- costs and greater information uncertainty pation rates are lower for women than men. involved, although the evidence shows that Women's participation as owners in formal small firms that do get access to finance ben- firms varies across countries but generally efit the most from it.16 ranges between 20 and 30 percent of firms. Participation rates, both as owners and as Effects on formality. The regulatory burden workers, are generally highest among the faced by small firms has particular influence smallest firms and in the informal sector. on a second dimension of differences across These gaps signal an important untapped firms, namely, whether they operate in the resource for economic growth. 58 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H Evidence suggests that as regulatory bur- the changes are likely to be seen as credible dens fall, women's participation as entre- and thus more likely to generate a response. preneurs tends to rise.18 Some of this may Data from the World Bank's Enterprise stem from decreases in practices that explic- Surveys reinforce the importance of gover- itly restrict women's economic rights. A nance in implementing and enforcing regu- new Gender Law Library documents where lations. These surveys are based on informa- gender-differentiation exists in formal regu- tion firms themselves report and show the lations around the world (box 2.3). More gaps that can exist between a regulation as generally though, lower regulatory burdens it is meant to work and the actual experi- make entry easier and can encourage more ence on the ground. part-time businesses where women's partici- Weak and ineffective regulatory imple- pation is higher. mentation and enforcement create incen- tives for firms to circumvent the regulations, by failing to report all their revenues to the Effects of Broader Institutional tax authorities, for example, or by not reg- Environment Can Undermine istering all their employees with the social Regulatory Reforms security office. As table 2.1 shows, there is Regulatory reforms will have little impact on indeed a range of responses to regulations the economic outcomes of interest if the sur- across regions. One measure is the time rounding institutional and governance envi- managers have to spend with government ronment is weak, inefficient, and corrupt. officials dealing with regulatory require- The six years of available data indicate that ments. The time varies across countries, associations between changes in individual but patterns also emerge across regions and Doing Business indicators and the economic income groups. These indicators corrobo- outcomes of interest are stronger for coun- rate the earlier findings from the subjective tries that are well-governed (controlling for rankings that some of the regulatory bur- income).19 That the governance of a country dens are felt most strongly in middle-income affects the impact of business reforms should countries. Management time is highest in not be surprising. Changing what is on the middle-income countries, particularly in books is not likely to have much impact if Latin America and to a lesser extent in the there is a large gap between de jure and de Middle East and North Africa. Respon- facto regulations. With better governance, dents in middle-income countries were also BOX 2.3 Adding a gender dimension to the measures of regulation Given the MDG on women's economic empowerment, and the recognition that some regulations are not neutral in their impact on men and women, the Gender Law Library was launched in Octo- ber 2008 (http://www.doingbusiness.org/elibrarydata/elibrary.aspx?libID=1). Topics covered in the library include national legal statutes on property and inheritance rights, business registration, and employment. The library also identifies countries that are signatories of gender-related international conventions. This new resource is a starting point for governments, civil society, and researchers to gain a better picture of the legal framework shaping a woman's ability to do business. According to World Bank studies, better economic opportunities for women are associ- ated with higher incomes, higher literacy, better health, and faster economic growth.a While the empowerment of women is the subject of MDG 3, progress on this goal contributes to the achievement of all of the other MDGs. a. Mason and King 2001; Buvinic and King 2007. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 59 C H A P T E R 2 TABLE 2.1 Weak implementation and enforcement can increase the regulatory burden percent Firms that report Management regulations are Firms that believe Firms that make time with interpreted courts will uphold payments to "get Income group or region officials consistently property rights things done" Low income 9.0 47.5 52.2 57.5 Middle income 10.6 40.5 55.2 30.4 High income 4.7 53.3 70.9 23.0 East Asia and Pacific 9.8 56.1 69.4 49.6 Europe and Central Asia 7.1 40.8 50.3 38.3 Europe high-income 3.4 56.6 75.0 20.7 Latin America and Caribbean 13.9 34.0 49.2 20.2 Middle East and North Africa 11.3 47.4 60.7 26.0 South Asia 10.8 57.5 52.3 72.7 Sub-Saharan Africa 7.9 42.0 56.5 44.6 Source: Enterprise Surveys database. least likely to report that regulations were When governance is improved by one stan- enforced consistently. dard deviation, infant mortality declines by The importance of the quality of imple- two-thirds and incomes rise about threefold mentation in determining the impact of reg- in the long run. Such an improvement in ulations and regulatory reforms raises ques- governance is within reach.21 tions about what optimal regulations would Good governance can be found at all look like. Regulations that are simple rather income levels. Some emerging economies than complex and that reduce the discretion are even matching the performance of rich of officials are likely to be more desirable in countries. More than a dozen emerging countries with lower enforcement capacity. countries, including Botswana, Chile, Costa Rica, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Mauritius, Slovenia, and Improvements in the Broader Uruguay score higher on key dimensions of Institutional Environment Are Possible governance than some industrial countries. Better governance not only improves the cli- And in many cases these differences are sta- mate for investment, but it also helps in the tistically significant.22 fight against poverty and the achievement of Improvements in governance can and do the MDGs more broadly. The World Bank's occur. From 1998 to 2007 countries in all World Governance Indicators comprise regions have shown substantial improve- indicators in six areas (voice, political sta- ments in governance, even if at times start- bility, rule of law, government effectiveness, ing from a very low level. Examples include regulatory quality, and control of corrup- Ghana, Indonesia, Liberia, and Peru in voice tion) for 212 countries, beginning in 1996.20 and accountability; Algeria, Angola, and Research over the past decade shows that Rwanda in political stability and restoration improved governance helps raise incomes. of peace; Afghanistan, Ethiopia, and Serbia 60 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H in government effectiveness; the Democratic Strengthening broader governance Republic of Congo and Georgia in regulatory environment and building capacity for quality; Tajikistan in rule of law; and Liberia enforcement. The evidence on the impact and Serbia in control of corruption. Support- of regulations stresses the importance of ing and encouraging improved governance the broader governance environment for has broad benefits. As the research shows, it reform effectiveness. Changing formal is an essential foundation for an investment regulations can have little impact in the climate conducive to private sector develop- face of weak governance and enforcement ment and economic growth. capacity. Building capacity by hiring and training officials can improve enforce- ment, an effort in which external assis- Moving Regulatory Reform Forward tance can help. But part of the solution The current financial crisis is rightly putting can also be to reform implementation. attention on appropriate regulatory oversight. In particular, reducing discretion in how While the case is particularly compelling in regulations are implemented can lower the financial sector, it would be a mistake to uncertainty and address a significant con- assume the lessons should be limited to the cern reported by firms. regulation of financial institutions. One broad Expanding inclusive public-private dia- lesson is that regulations need to be effective logue in shaping reform priorities. Mem- and that enforcement matters. While many bers of the private sector can identify issues countries are focusing their efforts on the that they experience as most constraining. immediate challenge of restoring financial Clearly, all of their preferences cannot be stability, conditions that shape the growth automatically followed; they need to be of private sector activities will be important weighed against public interests that may in affecting how well the private sector can not align with their private ones. But tools cope with the downturn and take advantage like the Enterprise Surveys can highlight of new opportunities as recovery begins. the extent of various constraints--and how The foregoing review of progress on the they can vary across different actors (by private sector regulatory and institutional size, location, and gender). The variation environment suggests three areas of empha- in impact within a country across different sis for future efforts: types of firms underscores the importance of making public-private dialogue inclu- Simplifying regulations while ensuring ade- sive. This approach can help target priori- quate protection of public interests. Regu- ties for reform and better ensure results. lations are governments' way of protecting legitimate social interests. The objective of Financial Sector Development reform is not to remove regulations. Rather the goal is to ensure that regulations are Finance is an essential part of the develop- indeed addressing the underlying public ment process. When financial markets work interests they are meant to safeguard. In well, they provide opportunities for a wider many cases, streamlining requirements set of market participants to take advantage can actually help ensure greater compli- of the best investments by channeling funds ance. Setting standards too high can mean to their most productive uses, hence boost- not only that few firms meet them but that ing growth, improving income distribution, many are discouraged from even trying to and reducing poverty. When they do not comply. Simplification can also help close work well, growth opportunities are missed, loopholes or exceptions that benefit only a inequalities persist, risks and volatility rise, few, more connected, firms, thus helping to and in the extreme case crises follow with level the playing field for all firms. high fiscal and real costs.23 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 61 C H A P T E R 2 Improved Access to Finance Contributes show positive relationships, with some evi- to Reaching the MDGs dence of causal relationships, although the quality of data does not allow for strong A growing body of evidence--country and tests. Supporting case-study evidence, using cross-country studies and, more recently, household and firm surveys and specific experimental analyses--shows that access to interventions, suggests, however, that finan- financial services can contribute significantly cial development does have beneficial causal to reaching the MDGs. Financial develop- impacts on these MDGs.28 The contribution ment and greater access to financial services of finance to MDGs relative to other policies lead not only to income growth but also to is large: the evidence suggests that financial reductions in poverty and undernourishment; development accounts for one-quarter to they are also associated with better health, one-half of the impact of GDP per capita on education, and gender equality outcomes. several of the MDG indicators (box 2.4). The most researched and arguably the Financial sector development is not with- most important direct effect of financial sec- out risks, however. The recent financial cri- tor development is its impact on economic sis underscores the need for appropriate reg- growth and poverty. Research implies that ulation and supervision to ensure financial if India, for example, had increased its aver- system soundness and stability. age ratio of private credit to gross domestic product (GDP)--a commonly used metric of financial sector development--from 19.5 per- Financial Sector Development Is Key cent to 25 percent (the mean value for devel- for Private Sector Development oping countries), its average real annual GDP per capita growth would have accelerated by Finance is important for many key private an additional 0.6 percentage point per year sector activities. Investment, domestic and over the period 1960­95.24 Another, more international trade, and other private sector recent study finds that a 10 percentage point activities all require financial services. Recent increase in the private-credit-to-GDP ratio research using detailed firm-level data and reduces poverty ratios by 2.5 to 3 percentage survey information provides direct evidence points.25 Similar effects have been found for on the role of access to finance in affecting the development of capital markets and other firm growth. The Enterprise Surveys show forms of nonbank financing as important that small and medium enterprises (SMEs) in drivers of economic growth.26 low-income countries rank finance as an espe- Financial development also affects the non- cially high barrier for growth (figure 2.5). poverty MDGs, both indirectly, through the Corroborative evidence for this comes income channel, and directly. For instance, from the responses of some 10,000 firms in a 1 percentage point increase in the private- 80 countries to the World Business Environ- credit-to-GDP ratio has been shown to reduce ment Survey. Respondents who identified the prevalence of undernourishment by 0.22­ finance as a constraint are more likely to 2.45 percentage points.27 These findings experience slow output growth.29 Finance is imply that much can be gained from financial a general obstacle to firm growth, but that sector development: the ratio of private credit growth is also significantly constrained by to GDP is around 16 percent in low-income barriers that capture more specific aspects countries compared with 88 percent in high- of financing, such as high interest payments, income countries. collateral requirements, bank paperwork The relationships between financial devel- and bureaucracy, as well as bank corrup- opment and health, education, and gender tion. Other important business environment equality have not been researched much to obstacles are often interrelated with finance. date, but cross-country regression analyses Even when controlling for these interactions, 62 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H BOX 2.4 Relative impact of economic and financial development on MDGs To illustrate the significant impact of financial development on the MDGs, the chart below compares the impact of financial development, as measured by private credit as a percentage of GDP, and the impact of GDP per capita on several MDG indicators in 2015, the target date for the MDGs. In this analysis, both private credit and GDP per capita are assumed to follow their past growth trends of 1.6 and 1.1 percentage points per year, respectively. Impact of financial development and GDP per capita on selected MDGs in 2015 when they follow their past growth trendsa 7.9 Decline in poverty rateb 9.3 Household expenditure change 3.6 0.5 Life expectancy change 0.5 9.9 Decline in under-five mortality rate 5.2 1.6 Female labor participation change 0.3 0 5 10 Percent GDP per capita impact Financial development impact Source: Claessens and Feijen 2006. a. All analyses are based on elasticities calculated by using time series fixed-effects regressions. Elasticity of poverty and GDP per capita is taken from Besley and Burgess (2003). Educational variables are not shown for lack of sufficient time-series data. b. There is insufficient data to calculate the impact of financial development on the poverty rate. access to finance seems to emerge consis- Cross-country data also show innova- tently as one of the most important and tion to be an important channel through robust underlying factors constraining firm which finance affects firm performance. A growth.30 And some evidence also suggests survey of some 17,000 firms in 47 countries that lack of finance makes other barriers found that firms' use of external finance was more binding for firms. significantly associated with more innova- Research shows that small firms benefit tion.31 This finding was even more strongly the most from financial development--both evident when access to finance came from in terms of entry and in seeing their growth foreign banks.32 constraints relaxed. At any given level of financial development, smaller firms have Where Are Countries Today in Their more difficulty accessing external finance Financial Sector Development? than larger ones. But with financial devel- opment and greater availability of external A country's financial sector development finance, those that were formerly excluded should be assessed on four dimensions-- are given new opportunities. size, access, efficiency, and stability. Analysis G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 63 C H A P T E R 2 FIGURE 2.5 Access to finance varies by country income and size of most developing countries, but it can play firm an important role in improving the price and availability of longer-term credit to smaller borrowers. Leasing and other forms Share of firms reporting access to finance as a major constraint (%) of collateral-based lending can be of particu- 40 lar importance for getting small firms going. And nonbank financing can be a source of competition for banking systems that often 30 favor lending to large, connected enterprises. Bond finance can provide a useful alternative 20 to bank finance. Supply of external equity (including portfolio equity investments, for- 10 eign direct investment, and private equity) requires strong investor rights; where these 0 are present, a country that opens itself to Low-income Middle-income High-income capital inflows can improve access and lower countries countries countries the cost for large firms, with spillover effects Size of firm for smaller firms. Micro: 1­10 employees Small: 11­50 employees While the depth and efficiency of finan- Medium: 51­200 employees Large: +200 employees cial systems are good indicators of overall development, they do not necessarily cap- ture access. Comparing the use of financial Source: Enterprise Surveys database. services (by households) with financial depth indicators shows a positive but imperfect of the effects of different aspects of finan- correlation (figure 2.7a). Economic develop- cial sector development makes clear that all ment does not guarantee access to finance dimensions of financial sector development for households (figure 2.7b). Similar patterns matter, but in different ways, for growth exist for comparisons of access to financial and development. This recognition is impor- services for small firms with financial depth. tant because countries can vary in each of For instance, low-income countries in South these dimensions. Although data are lim- Asia typically have a higher proportion of ited, the main finding is that while the size use of financial services than low-income of the financial sector has grown in many countries in Sub-Saharan Africa. countries, access generally remains weak. There is some evidence that access to In most of Sub-Saharan Africa, fewer finance in developing countries is increas- than 20 percent of households have an ing. On the household side, data on the use account in a financial institution, and this of microfinance suggest an expansion of figure is less than 50 percent in many other the use of financial services (box 2.5). Some developing countries. While business access evidence also suggests increasing financial to financial services is less of a constraint service provision by commercial banks, in some regions, in almost all developing as competitive forces and technology lead countries in Sub-Saharan Africa, more than them to reach the lower-income segments 50 percent of firms complain about lack of of the population. Examples in develop- finance (figure 2.6). ing countries include the ICICI Bank and All forms of finance matter for firms' the SHG Bank Linkage program in India access. Bank finance is typically the major and commercial banks in Brazil and South source of external finance for firms of Africa. On the firm side, the evidence on all sizes, no matter how small. Nonbank increased access to credit and other finan- finance remains much less important in cial services is more mixed. It appears to 64 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H FIGURE 2.6 Many firms say lack of access to financing hampers their growth percentage of firms IBRD 36888 APRIL 2009 37%­80% 20%­37% 4%­20% no data Source: Enterprise Surveys database. FIGURE 2.7 Financial and economic development does not guarantee access to finance a. Financial depth vs. breadth b. Economic development and use of financial services Private credit/GDP GDP per capita, 2000 US$ (thousands) 2.4 50 2.0 40 1.6 30 1.2 20 0.8 10 0.4 0 0 0 20 40 60 80 100 0 20 40 60 80 100 % of households using financial services % of households using financial services Source: World Bank 2008a. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 65 C H A P T E R 2 BOX 2.5 Microfinance: reaching out to the poor but with limits Thirty years after the establishment of Grameen Bank, the microfinance movement has attained a certain matu- rity. Yet there remains a lack of scale in microfinance; only in eight countries do microfinance borrowers account for more than 2 percent of the population. One reason is that these programs can be very costly to operate, mak- ing many of them dependent on subsidies and not sustainable on their own. Indeed, in a sample of 124 microfi- nance institutions (MFIs) in 49 countries representing around half of all microfinance clients around the globe, only half were profitable and self-sustainable. The lack of self-sustainability might result from scale. Many MFIs have found that the poorest of the poor are difficult to reach even with a subsidy. Also, focusing on finance for the very poor shifts the attention to subsidies and charity, which hurts the quality of services. As a result many MFIs remain small. At the same time, those MFIs that grow and mature seem to focus less on the poor, which could be interpreted either as a success story for their borrowers or as mission drift. In any case, broadening access to the middle class makes it more likely that promotion of access will receive higher political priority. More generally, shifting the focus to building inclusive financial systems and improving access for all under- served groups is likely to have a greater impact on development outcomes. Indeed, the attention of the develop- ment community has shifted to focus not only on microcredit institutions but on an array of other financial insti- tutions, such as postal savings banks, consumer credit institutions, and most importantly the banking system. Here a broader approach is taken, focusing on overall financial system efficiency and outreach to the whole popu- lation. In this process, it will remain important, however, to apply the valuable lessons of the microcredit move- ment on technologies and methodologies. The characteristics of microcredit lend- ing most cited for their contributions to Microfinance penetration across countries success include dynamic incentives, repay- ment in public, forced savings, notional collateral, and targeting of women (85 per- Ethiopia cent of the poorest 93 million MFI clients Bolivia are women). Dynamic incentives, such as India the promise of repeat lending, has been a Nicaragua mechanism to overcome moral hazard in El Salvador lender relationships with risky and high- Honduras transaction-cost borrowers. Repayment Niger in public is said to increase social pres- Mali sure and the threat of stigma while at the Nepal same time reducing transaction costs for Senegal Benin lenders. The requirement to keep a certain Gambia, The fraction of the credit as savings with the Togo microfinance institution, and the use of Malawi assets with "notional" rather than resale Cambodia or salvage value, such as refrigerators and Vietnam televisions, have often been cited as suc- Sri Lanka cess factors but have not yet been evalu- Thailand ated properly. Targeting women has not Indonesia only contributed to women's greater eco- Bangladesh nomic empowerment, but studies have 0 2 4 6 8 10 12 14 shown wider contributions to expanding Ratio of borrowing clients to total population health and educational outcomes. Source: Honohan 2004; Cull, Demirgüç-Kunt, Source: Honohan 2004. and Morduch 2007; Armendariz de Aghion Note: This figure shows the ratio of borrowing clients to total population for the 20 coun- and Morduch 2005; World Bank 2007a. tries with the highest microfinance penetration. 66 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H be increasing in some countries, but mostly underline the importance of designing regula- in consumer finance forms and less so in tion and supervision in developing countries credit to SMEs.33 in such a way as to allow for increased access Increasing access to financial services in a sustainable manner (box 2.6). to low-income groups is not easy and can involve risks. Increased competition can, Why Is Access to Finance Still Limited for example, lead to more access but also in Developing Countries? to weaker lending standards. Furthermore, when amplified through opaque financial What are the most important barriers to engineering, problems with even a small seg- access, and how can they be reduced? The ment of the financial system can have dev- barriers derive from the size and reach of the astating effects on confidence in the overall financial system, institutional constraints, financial system. Recent experiences with the ownership structures, technology hurdles, subprime lending market in the United States and political economy constraints. BOX 2.6 Access to financial services: evidence from the subprime mortgage market The recent global financial crisis has placed the U.S. subprime mortgage industry in the spotlight. Over the last decade, this market expanded rapidly and witnessed the entry of major players, evolving from a small niche seg- ment to a major portion of the U.S. mortgage market. Evidence suggests that this growth was accompanied by a decline in credit standards and excessive risk taking by lenders. Indeed, major mortgage lenders are experiencing increased delinquency rates of subprime mortgages and insolvency problems. Analysis using data from over 50 million individual mortgage applications in the United States combined with information on local and national economic variables shows that the credit expansion in the subprime mortgage market led to a decrease in lending standards, as measured by a decline in application denial rates and an increase in loan-to-income ratios not explained by an improvement in the underlying economic fundamentals. Specifi- cally, denial rates declined more and loan-to-income ratios rose more in areas where the number of loan applica- tions rose faster. These areas subsequently experienced a sharper increase in delinquency rates. Also, changes in market structure affected lending standards, with denial rates declining more in areas with a larger number of competitors, evidence that local lenders cut lending standards when facing competition from new entrants. But evidence also shows that lax regulation and supervision, in part attributable to the lobbying efforts of firms involved in subprime lending, led to poor lending, with the effectiveness of laws in place suffering as a result of such industry actions. Obviously, more households were able to get financing for their homes but in many cases on unaffordable terms. And when the bubble burst, mortgage defaults fed a vicious cycle that led to a downward spiral in housing prices. What does this mean for overall welfare? Analysis of the impact of mortgage market transformation on the well-being of households is difficult. Before the crisis, the perception was that the developments were welfare- enhancing because they increased households' access to housing finance. A widely cited statistic was the home ownership ratio that hit an all-time high in 2006. Many viewed the fact that home ownership rose faster among households that historically had difficulty gaining access to credit as a sign of benefits associated with financial innovation and fast growth in mortgage credit. However, many also warned that these mortgages were going to be problematic. Following the increase in delinquency rates and a wave of foreclosures, however, more questions on the opti- mality of the mortgage credit boom, the opaqueness and risks associated with the increasingly complex financial instruments, and the very existence of public institutions supporting mortgage credit have been raised. A better assessment of lending quality and overall exposures and risks of the financial system is needed, and these will be important areas of focus for future financial sector regulations. Source: Dell'Ariccia and others 2008; Igan and Okada 2009. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 67 C H A P T E R 2 Many financial systems are too small--in market discipline; and greater transparency absolute and relative terms--and lack out- and freedom for the media.34 reach to poorer households and smaller firms. Indeed, many systems are smaller The ownership structures of the banking than a small bank in most advanced econo- system can matter as well. Evidence shows mies--thus lacking the scale to operate more that state-owned banks can reduce over- efficiently (figure 2.8). In financially less- all financial sector development, leading developed countries with limited outreach, to lower efficiency and reduced access to poorer households and smaller firms use financial services. The performance of state- fewer financial services than richer house- owned banks in subsidized lending aimed holds and larger firms do. As a consequence, at enhancing access has tended to be poor smaller firms experience higher obstacles to as well.35 Governments with greater checks growth than larger firms do. and balances and better institutional devel- opment might be expected to have more Policy and institutional environment bar- positive results from state ownership. riers also play important roles. Macro- economic instability, a weak institutional The balance of a large body of evidence sug- environment, extensive government inter- gests that opening to foreign banks improves vention, and a lack of competition can act access for SMEs. Even if foreign banks often as barriers to accessing financial services or confine their lending to large firms and gov- make financial services more expensive or ernments, they can enhance access to SMEs incapable of being provided in a viable way. through competitive pressures. Indeed, firms Analysis of the wide variation across coun- in countries with more foreign banks are less tries shows that barriers are lower for both likely to rate high interest rates and access households and firms in countries with more to long-term loans as major obstacles. An open and competitive banking systems char- analysis of borrowers' perceptions across 36 acterized by private ownership of banks and countries finds that financing obstacles are foreign entry; stronger legal, information, lower in countries with higher levels of for- and physical infrastructures; regulatory eign bank penetration.36 While at times the and supervisory approaches that reinforce internationalization of financial services can FIGURE 2.8 Most financial systems are small M2 money, US$ (billions) 10,000 1,000 100 10 1 0.1 0.01 Banking system, 166 countries > $10 billion $1 billion to $10 billion < $1 billion Source: World Bank 2007a. Note: M2 money is a measure of the money supply. It includes currency in circulation plus demand deposits or checking accounts and net time deposits. 68 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H introduce more volatility, in the long run, medium term. Recent evidence suggests the gains in access are significant. that, in low-income countries, it is the infor- mation infrastructures that generally matter Supply and demand mismatches can also most, while enforcement of creditor rights is hinder access. From the supply side, finan- more important in high-income countries.40 cial services providers often do not target Another finding is that in relatively under- the poor and small firms because of prob- developed institutional environments, pro- lems of information, high transaction costs, cedures that enable the individual lenders and poor enforcement of contracts. From the to recover on debt contracts (for example, demand side, poor households and smaller those related to collateral) are much more firms often lack financial sophistication and important in boosting bank lending than literacy, do not trust financial institutions, procedures such as bankruptcy codes that simply do not realize their need for financial are mainly concerned with resolving con- services, or think that products offered can flicts between multiple claimants. These are be ill suited to their needs. But technological important findings because building credit improvements and competition are broaden- registries and reforming procedures related ing the access frontier, as evidenced by the to collateral are potentially easier to achieve rapid expansion of specialized microfinance than making lasting improvements in the firms.37 enforcement of creditor rights and bank- ruptcy codes. The largest barriers to broadening access Consequently, encouraging specific infra- may be the influence of special interests. structures, particularly in information and Powerful insiders may oppose financial debt recovery, can be particularly important, development because it creates a level play- given the large deficiencies today in many ing field and enables newcomers to finance countries (figure 2.9). Institutional reforms and implement their ideas and defy the eco- that can lower transaction costs include nomic status quo.38 establishing credit registries or issuing indi- vidual identification numbers to establish credit histories, reducing costs of registering Improving Access to Finance or repossessing collateral, and introducing The recent financial crisis has reconfirmed specific legislation to underpin modern finan- some old lessons in how to develop sound cial technology--from leasing and factoring financial systems that expand access to to electronic finance and mobile finance. finance in a sustainable manner. But it has Encouraging openness and competition, also provided some new lessons, particularly including by internationalization of finan- in how to manage risks.39 In many develop- cial services, is an essential part of broaden- ing countries, achieving broad-based access ing access because it encourages incumbent requires deep institutional reforms. Because institutions to seek out profitable ways of expanding access remains an important chal- providing services to previously excluded lenge even in some developed economies, it segments of the population and increases is likely that governments everywhere have the speed with which access-improving new an important role to play in building inclu- technologies are adopted. Achieving the full sive financial systems. gains from increased competition and inter- Reforms should foremost ensure security nationalization of financial services does, of property rights against expropriation by however, often require some convergence of the state. This will typically be a longer-term regulations and legal and other institutional challenge. Prioritizing institutional reforms, infrastructure. however, would help focus reform efforts In this process, providing the private sec- and could produce impact in the short to tor with the right incentives is key; hence the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 69 C H A P T E R 2 FIGURE 2.9 Availability of credit information varies greatly OECD OECD Europe & Latin America Central Asia & Caribbean Latin America Europe & & Caribbean Central Asia Middle East & East Asia North Africa & Pacific Middle East & South Asia North Africa East Asia Sub-Saharan & Pacific Africa Sub-Saharan South Asia Africa 0 1 2 3 4 5 6 0 10 20 30 40 50 60 Credit information index Private credit bureau coverage (% of adults) Source: World Bank 2008b. Note: The number of individuals or firms listed by the private credit bureau with current information on repayment history, unpaid debts, or credit outstanding. importance of good prudential regulations. can have a useful role in jump-starting these Competition that helps foster access can also services.42 result in reckless or improper expansion if not Direct intervention through taxes and accompanied by proper regulatory and super- subsidies can be effective in certain circum- visory framework (see box 2.6). At the same stances. If poorly designed and implemented, time, the increasingly complex international however, it can have large unintended conse- regulations imposed on banks to help mini- quences. The government-underwritten credit mize the risk of costly bank failures should guarantees for SME lending are a good exam- not inadvertently penalize small borrowers. ple. Experience shows that these are often The scope for beneficial direct govern- poorly structured, embody hidden subsidies, ment interventions in improving access must and benefit mainly those who do not need the be carefully assessed. A large body of evi- subsidy. With direct and directed lending pro- dence suggests that interventions to provide grams having generally performed less well, credit through government-owned subsid- partial credit guarantees have been the direct iaries have generally not been successful.41 intervention mechanism of choice for SME In nonlending services, the experience has credit in recent years.43 In the absence of thor- been more mixed. A handful of government ough economic evaluations, however, the net financial institutions have moved away from effects of many such schemes in cost-benefit credit and evolved into providers of more terms remain unclear. complex financial services, entering into Finally, as noted, political economy con- public-private partnerships to help overcome cerns are key in implementing policies to coordination failures, first-mover disincen- expand access. If the interest of powerful tives, and obstacles to risk sharing and dis- incumbents is threatened by the emergence tribution. Ultimately private capital can take of new entrants financed by a system that over the successful initiatives, but the state has improved access and outreach, lobbying 70 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H by those incumbents can block the needed be prevented through timely access to essen- reforms. A comprehensive approach to tial childbirth-related care, but to physically financial sector reform aiming at better reach that care, an adequate road network is access must take these political realities into crucial.44 The construction of an all-weather account. Given that challenges of financial road in Morocco increased school attendance inclusion and benefits from broader access by girls from 28 percent to 68 percent; in go well beyond ensuring financial services parallel, the quality of education improved, for the poor, defining the access agenda because it became possible to recruit teach- more broadly to include the middle class will ers to staff the schools, and absenteeism of help mobilize greater political support. both teachers and students dropped.45 Every year 1.8 million people die from diarrheal Infrastructure diseases, including cholera. Improved water supply reduces diarrheal morbidity by 21 per- Cost-effective, reliable, and affordable infra- cent, improved sanitation by 37.5 percent.46 structure services are critical for private sec- An adequate supply of infrastructure has tor development and economic growth. The long been viewed as a key ingredient for role electricity and transport play in economic economic development.47 By one estimate, activity is well understood, yet infrastructure raising infrastructure services of all Sub- services in many developing countries remain Saharan countries to the level of the regional woefully inadequate. Progress in closing the leader Mauritius could add 2.2 percentage infrastructure gap has been made in the past points to per capita growth. Catching up decade, but many challenges remain. A lack to the level in the Republic of Korea would of financial resources is only part of the story. raise economic growth per capita by up to Equally important is the need to address 2.6 percent percentage points per year.48 below-cost price structures that make rev- Infrastructure has also received much atten- enue streams insufficient to support even the tion in the context of reducing poverty and operation and maintenance of existing assets, inequality.49 In rural Ethiopia, improve- weak governance and regulatory frameworks ments in access to quality roads increased that lead to misuse of resources, and inade- consumption growth by an estimated 16 per- quate sector policies and planning and imple- cent and reduced poverty by 7 percent.50 mentation capacities that slow investment Infrastructure is an important part of the programs. Both financial and nonfinancial investment climate enabling the emergence factors must be part of an integrated strategy and success of private entrepreneurs. Many for infrastructure development. case studies provide evidence of the benefi- cial impact of infrastructure on business per- formance. After an upgrade of the highway Infrastructure Is Important for Growth system connecting the four largest cities in and the MDGs India, firms in the beneficiary cities reported Infrastructure directly affects progress in that they encountered fewer transportation achieving MDG 7, part of which is to "halve, obstacles to production, that they were able by 2015, the proportion of the population to reduce their average stock of input inven- without sustainable access to safe drink- tories by about a week's worth of produc- ing water and basic sanitation." Indirectly, tion, and that they had greater flexibility in infrastructure influences the achievement choosing their primary input suppliers.51 of most MDGs, be they health, education, gender equality, or income poverty, through Yet Infrastructure Needs Remain Large its effect on household opportunities. Each year 529,000 women die from childbirth Since the start of this decade, there has complications. Most of these deaths could been a renewed focus on infrastructure. For G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 71 C H A P T E R 2 example, World Bank financing for the infra- power producers in many developing coun- structure sectors totaled $33 billion for the tries.53 But it is in the information and com- 2004­07 period, compared with $22 billion munications technology sector that the role over the preceding four-year period.52 None- of technological progress has had the larg- theless, large infrastructure gaps remain in est impact. In the mid-1990s, installing a areas crucial for the MDGs: 1.1 billion peo- satellite telephone cost $60,000, whereas in ple are without safe access to water, 1.6 bil- 2002 it cost between $2,000 and $4,000.54 lion without electricity, 2.4 billion without As a consequence, mobile usage and associ- sanitation, and more than 1 billion without ated information services, such as Internet access to telephones (table 2.2). South Asia access, have increased exponentially in all and Sub-Saharan Africa confront the largest developing regions (figure 2.10). In Africa gaps in essential infrastructure for house- infrastructure improvements added nearly holds and businesses. one percentage point to per capita economic Competition and technology develop- growth between 1990 and 2005, almost ments have reduced the costs associated with entirely attributable to advances in the pen- some infrastructure development. Gas-fired etration of telecommunication services.55 combined-cycle gas turbines and the emer- Despite progress in recent years, the gence of smaller, more modular technolo- region with the greatest infrastructure chal- gies have decreased the capital cost of power lenge remains Sub-Saharan Africa (table plants and the time needed to plan and 2.3). It lags behind other low- and middle- build them. The generation sector has seen income countries in infrastructure cover- growth and private entry by independent age for paved roads, telephone mainlines, TABLE 2.2 Access to infrastructure is improving but still lags seriously in some regions percent of population unless otherwise indicated East Asia & Europe & Latin America & Middle East & Sub-Saharan Pacific Central Asia Caribbean North Africa South Asia Africa Type of infrastructure 2000 2006 2000 2006 2000 2006 2000 2006 2000 2006 2000 2006 Access to electricity 87 89 -- 99 87 90 -- 78 41 52 23 26 Access to improved 80 87 93 95 89 91 89 89 81 87 55 58 water supply Urban 95 96 98 99 96 97 96 95 93 94 81 81 Rural 72 81 85 88 69 73 80 81 77 84 42 46 Access to improved 60 66 89 89 75 78 74 75 27 33 29 31 sanitation Urban 71 75 94 94 85 86 86 89 54 57 41 42 Rural 52 59 79 79 47 51 58 59 17 23 22 24 Access to rural -- 90 -- 82 -- 59 -- 59 -- 57 -- 34 transport Mainline telephone 0.0 3.0 -- 3.0 0.0 2.6 -- -- 0.0 0.2 -- -- density (per 100 people) Source: For water and sanitation, World Energy Outlook 2002 for 2000 figures; International Energy Agency for 2006. China is included in data for East Asia and Pacific; North African countries are excluded from data for the Middle East and North Africa. For access to rural transport, see Joint Monitoring Program database (wssinfo.org), 2004 data. Note: -- = Not available. 72 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H FIGURE 2.10 Exponential growth of telecommunications services in all regions Internet users (per 100 people) Mobile phone subscribers (per 100 people) 30 120 25 100 20 80 15 60 10 40 5 20 0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 East Asia & Pacific Latin America & Caribbean South Asia Europe & Central Asia Middle East & North Africa Sub-Saharan Africa Source: World Development Indicators. and power generation capacity. The Africa found in the continent's larger power systems. Infrastructure Country Diagnostic reports Geography also matters in the transport area: that for these three key infrastructures, Africa has a large number of landlocked Africa has been expanding stocks much countries, which are home to about 40 per- more slowly than other developing regions, cent of the region's population. Poor infra- implying a widening gap over time.56 In structure compounds the growth challenge 1970 Sub-Saharan Africa had almost three times as much generating capacity per mil- TABLE 2.3 Africa's infrastructure deficit is widening compared with other regions lion people as South Asia, a region with sim- ilar per capita income. Three decades later, in 2000, South Asia had left Sub-Saharan Low-income countries Africa far behind: it now has almost twice the generation capacity per million people. Normalized units Sub-Saharan Africa Other Similarly, in 1970 Sub-Saharan Africa had Paved road density 31 134 twice the mainline telephone density of Total road density 137 211 South Asia, but by 2000 the two regions had drawn even. Mainline telephone density 10 78 Geography and population patterns play Mobile telephone density 55 76 a role in the particularly challenging situ- Internet density 2 3 ation of infrastructure in Africa. The low economic density of the continent makes Generation capacity 37 326 transport networks and power grids, which Electricity coverage 16 41 exhibit economies of scale and density, more Improved water 60 72 expensive to build and maintain.57 Accord- ing to one report, the national power systems Improved sanitation 34 51 in 21 of 48 Sub-Saharan countries fall below the minimum efficient scale of 200 mega- Source: AICD 2009. watts for electricity generation.58 As a result, Note: Road density is in kilometers of road per thousand square kilometers; telephone density is in lines per thousand population; generation capacity is in megawatts per million their operating costs are nearly double those population; electricity, water and sanitation coverages are in percentage of population. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 73 C H A P T E R 2 for these countries, because it results in high missing out on the efficiencies, cost savings, transport costs that hamper trade both within and environmental benefits that a well- and outside the region. One recent estimate designed and centrally operated power net- suggests that a feasible upgrading of the work brings (figure 2.12). On average, Afri- transnational road network in Sub-Saharan can firms report losing more than 5 percent Africa would increase overland trade from of their sales as a result of frequent power $10 billion annually to $30 billion.59 Over outages; this rises to 20 percent for informal a 15-year period, this research suggests the sector firms unable to afford backup genera- region would gain $250 billion in additional tion facilities.61 intra-African trade at a cost of $32 billion (upgrade and annual maintenance). The Lack of Financial Resources Is a Major Constraint Infrastructure Gaps Hinder The gaps in infrastructure coverage reflect a Private Sector Growth large unmet need for infrastructure invest- Enterprise Surveys show that firms in devel- ment in developing countries. This in turn oping countries often rate infrastructure as is often attributed to a lack of financial one of their biggest problems (figure 2.11). resources to fund these investments. In African countries the infrastructure con- Estimates of "required" future spend- straint on doing business is found to be asso- ing on infrastructure are very large. Each ciated with 40 percent lower firm productiv- year developing countries require around ity.60 For most countries the negative impact $900 billion (7­9 percent of their GDP) of deficient infrastructure is at least as large both to maintain existing infrastructure and as that associated with crime, red tape, cor- to undertake new projects, yet only half of ruption, and financial market constraints. the required amount is actually spent.62 By Enterprise Surveys underscore the impor- one estimate, the investment effort implicit tance of unreliable power as a major obsta- in catching up would require as much as cle to growth and business development. 15 percent of GDP in the low-income coun- Businesses in East Asia, South Asia, and tries of East and Central Africa.63 Trade-offs Sub-Saharan Africa report numerous power are inescapable in countries with limited outages per month. The unreliability of ser- resources: more money spent on infrastruc- vice leads a majority of firms in low-income ture means less money spent on health, edu- countries to generate their own power, thus cation, and other valuable services. FIGURE 2.11 Inadequate infrastructure constrains business Inadequate Investment Is Not the Only Challenge % of firms Financial constraints are a part of the story, 50 but they are far from the whole story. Several 40 30 factors other than investment have emerged 20 as important in designing a strategy for sus- 10 tainable infrastructure provision in develop- 0 ing countries. Addressing them would lower East Asia Europe & Latin Middle East South Sub-Saharan the unit costs of supply, free resources for & Pacific Central America & North Asia Africa Asia & Caribbean Africa increasing capacity, and improve the busi- ness environment. Among the most impor- Electricity is a major constraint Transport is a major constraint tant issues to be tackled are below-cost tar- iffs, ill-targeted subsidies, weak governance Source: Enterprise Surveys database. and regulatory frameworks, systematic 74 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H FIGURE 2.12 The business cost of inadequate infrastructure can be high Dominican Republic Guyana Bangladesh Nigeria Tanzania Kenya Nigeria India Bangladesh Kenya Tanzania Philippines Senegal Senegal Cameroon India Indonesia Ghana Peru Pakistan Mexico Brazil Congo, Dem. Rep. of China Philippines South Africa Sub-Saharan Africa Egypt, Arab Rep. of South Asia Brazil Middle East & North Africa China Latin America & Caribbean Europe & Central Asia Mexico East Asia & Pacific South Africa OECD 0 20 40 60 80 100 0 5 10 15 % of firms with own generator Value lost due to power outage (% of sales) Large firms Small firms Source: Enterprise Surveys database. inefficiencies, and inadequate sector policies The underpricing of utility services is not a and planning capacities. phenomenon of low-income countries alone. Even in upper-middle-income countries, a sig- The tariff challenge: getting prices right. nificant portion of water services are priced The essential nature of infrastructure ser- too low to cover basic operations and mainte- vices and their monopoly provision make nance (O&M) costs (table 2.4).64 tariff setting political, and politics as well Subsidies to service providers, in particu- as affordability concerns often keep tariffs lar to state-owned enterprises, can fill the below costs. Tariff revenues that do not cover revenue gap left by low tariffs (and are par- costs result in a vicious cycle of underper- ticularly important when the infrastructure formance, low-quality services, and ensuing creates positive externalities, as in the case lack of goodwill among the population for of sanitation), but their costs often com- tariff increases. Because their fundamentals promise the fiscal position of low-income are unsound, infrastructure service providers countries. Evidence from Europe and Cen- often lack the cash flow and creditworthiness tral Asia shows that the hidden costs of elec- needed to secure investment commitments. tricity tariffs set below cost recovery totaled G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 75 C H A P T E R 2 TABLE 2.4 Water and electricity services are often underpriced percent Water tariffs Electricity tariffs Too low to cover Covers O&M and Too low to cover Covers O&M and Country income level basic O&M partial capital basic O&M partial capital High 8 50 0 83 Upper-middle 39 39 0 29 Lower-middle 37 22 27 23 Low 89 3 31 25 Source: Foster and Yepes 2006. Note: Figures are the percent of countries at an income level that fall in each category. $10.6 billion in 2003, or 2.6 percent of GDP; monopolies with significant fixed costs and the figure for the gas sector was 0.6 per- which award complex contracts through cent of GDP, and for water 0.4­0.5 percent nonstandard procedures, suggest that there of GDP.65 In Indonesia, the government's are many opportunities for corruption and explicit subsidy to PLN, the state-owned that it is relatively easy to hide the crime.69 power company, to cover the gap between For example, the Business Environment and electricity tariffs and actual costs reached Enterprise Performance Survey (BEEPS), 1.4 percent of GDP in 2005 (not including which covers 4,000 firms in 22 transition the additional subsidy received in the form countries, provides evidence that construction of below-cost fuel for generation).66 firms pay considerably more than the aver- On the demand side, price subsidies are age firm in bribes, with a focus on bypassing often poorly targeted and regressive. Although regulation and obtaining government con- tariffs are lowest for the low-voltage connec- tracts.70 One study finds corruption to be the tions typically used by the poorest consum- most important explanatory factor behind ers, the poorest consumers also purchase only variation in efficiency among 80 electricity small quantities of electricity. The subsidy distribution companies in Latin America.71 design thus gives the poorest consumers rela- The three key components of hidden costs tively less of the total subsidy than the richest affecting infrastructure--poor bill collection consumers, whose consumption is greater.67 rates, excessive losses resulting from inef- An in-depth study of 22 cases of quantity- ficient operations or theft from networks, based subsidies in water and electricity across and tariffs set below cost-recovery rates-- developing regions concluded that not a single averaged 4.4 percent of GDP in 2003 in the case achieved a progressive, or even neutral, power sector in Europe and Central Asia, subsidy distribution.68 down from double that figure in 2000. Hid- den costs in the gas and water sectors were The high cost of corruption, red tape, and 1 percent and 1.2 percent of GDP respectively operational inefficiency. Corruption in in 2003, with little change since 2000.72 In infrastructure reduces the funds available for Bangladesh and the Indian state of Orissa, essential services as well as the returns from an estimated 45 percent of generated power investments. The characteristics of infra- is lost to technical and commercial ineffi- structure sectors such as transport, which ciencies.73 The Africa Infrastructure Coun- relies heavily on construction services, and try Diagnostic finds that addressing existing utility sectors, which are regulated natural system inefficiencies would almost halve the 76 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H amount of funding required for Sub-Saharan TABLE 2.5 Closing the infrastructure financing gap in Sub-Saharan Africa to close its infrastructure gap (table Africa 2.5).74 Recent research into landlocked countries US$ (billions) annually in Africa shows that physical constraints are not the only source of high transporta- Financing gap +40 tion costs: widespread rent-seeking activi- Reallocate spending across categories ­8 ties and flaws in the implementation of the Raise capital budget execution ­3 transit systems also prevent the emergence of reliable logistics services.75 One report Reduce operating inefficiencies ­3 on transport services in West Africa reveals Improve cost recovery ­4 that trucking wares from Bamako, the capi- Remaining gap +22 tal of Mali, to a port in Ghana over 2,000 kilometers away costs about $200 in bribes to various groups of officials, including Source: AICD 2009. police, customs, and gendarmerie.76 The nearly 50 stops along the way delay the jour- 27 checkpoints and paid a total of $23 in ney by almost four hours (figure 2.13). The bribes, representing roughly 13 percent of situation is not unique to Africa; during the the cost of the trip and more than the wages 637 kilometer trip from Medan to Meula- of those driving the truck.77 boh in Aceh province, Indonesia, one study Such findings have helped to focus atten- found that drivers typically passed through tion on the governance agenda in improving FIGURE 2.13 First priority corridors in West Africa: Checkpoints, bribes, and delays IBRD 36887 APRIL 2009 = 4.56 Bamako = 25.09 = 38 Ouagadougou = 2.01 = 8.73 = 21 Police Customs Gendarmerie = 1.50 Other: Transport department, = 3.33 trade unions, forestry department, = 16 health Checkpoints/100 km Lomé Tema Value of bribes/100 km = 2.23 Accra Minutes delay/100 km = 4.17 Subject road network = 21 Source: West Africa Trade Hub 2007. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 77 C H A P T E R 2 the quality of public spending on infrastruc- in distribution losses, as well as significant ture. Strategic medium- and long-term plan- improvements in labor productivity.79 Table ning and transparent procedures for the 2.6 summarizes experience with private sec- identification and implementation of proj- tor participation in different infrastructure ects have emerged as critical in improving sectors in Africa. the performance of public investment. Pub- During the 1990s, there were wide- lic expenditure reviews and budget track- spread expectations that the private sector ing procedures improve the monitoring of would play a much larger role in financ- spending against identified needs. The per- ing infrastructure in the developing world. formance of state-owner enterprises (SOEs) While private investment in infrastructure plays a key role in improving infrastructure has risen, it has fallen short of these expec- service delivery. SOE governance and finan- tations. The volume of investments with cial management are receiving increasing private sector involvement in developing attention, including appropriate incentive countries expanded in the 1990s, reach- and control mechanisms to strengthen per- ing a peak of about $140 billion in 1997 formance and reduce the risk of misalloca- (figure 2.14). However, private financing tion of funds. Reforms span benchmarking flows were concentrated in relatively few approaches, corporatization, and improve- countries and sectors, with telecommuni- ments in internal governance.78 cations absorbing 46 percent of investment and energy 33 percent.80 During the period of optimism in the 1990s, bilateral official Private Participation in Infrastructure development assistance (ODA) for infra- Considering the persistent investment gap, structure declined and, in parallel, World many governments see the private sector Bank lending dropped from $10.6 billion in as a solution. However, private financing, 1993 to $5.4 billion in 2003.81 Following while offering additional resources, does not the Latin American financial crisis and then change the fundamentals of infrastructure the Asian crisis, as well as the Enron and provision: customers or taxpayers (domes- other corporate scandals, private invest- tic or foreign) must ultimately pay for the ment in infrastructure declined sharply, investments; and cost-covering tariffs (and even in developing countries previously suc- well-targeted subsidies) remain the center- cessful in attracting capital. piece of all sustainable infrastructure pro- In recent years, however, a resurgence of vision, public or private. Indeed, private private participation in infrastructure has provision reinforces the need to address gov- been observed.82 Investment commitments ernance issues around contracting and con- in developing countries grew in real terms cession decisions. over several years, reaching a level in 2007 In addition to financing, mitigating the that was 10 percent higher than the previous efficiency gap observed in service delivery peak 10 years earlier. Still, private funding is another benefit offered by the private sec- of infrastructure remains limited: 70 percent tor. A recent global study comparing public of infrastructure investment in the 2000­05 and private operators in water and electric- period originated from governments and ity distribution found that private operators state-owned enterprises, 22 percent from provided significant efficiency gains over the private sector, and 8 percent from ODA. comparable public enterprises, including a In International Development Association 12 percent increase in residential connec- (IDA)-eligible countries, only 10 percent of tions for water utilities, a 19 percent increase infrastructure was funded from the private in residential coverage for sanitation ser- sector in 2007, and the number is likely to vices, a 45 percent increase in electricity fall in the immediate future in light of the bill collection rates, an 11 percent reduction current financial crisis. 78 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I M P R O V I N G T H E P R I V A T E I N V E S T M E N T C L I M A T E F O R R E C O V E R Y A N D G R O W T H TABLE 2.6 Overview of experience with private participation in infrastructure in Sub-Saharan Africa Extent of PPI Nature of experience Prospects ICT Mobile telephony Over 90 percent of countries have Extremely beneficial with A number of countries still have licensed multiple mobile operators exponential increase in coverage potential to grant additional and penetration licenses Fixed telephony 60 percent of countries have Controversial in some cases, but A number of countries still have undergone divestiture of SOE has helped to improve overall potential to undertake divestitures telecom incumbent sector efficiency Power Power generation 34 IPPs provide 3,000 MW of new Few cancellations but frequent Likely to continue given huge capacity investing US$2.5 billion renegotiations, PPA have proved unsatisfied demands and limited costly for utilities public sector capacity Power distribution 16 concessions and distribution; Problematic and controversial with Movement toward hybrid models 17 management or lease contracts one quarter of contracts cancelled involving local private sector in in 24 countries before completion similar frameworks Transport Airports 4 airport concessions, investing No cancellations but some lessons Limited number of additional 0.05 50 Share of aid using PFM 32.2 36.7 40 systems (average) 30 20 Share of aid in direct budget 8.5 18.7 10 support (average) 0 Share of aid using 28.6 38.2 2.0 2.5 3.0 3.5 4.0 4.5 program-based Quality of PFM (CPIA 13) approaches (average) Source: Knack 2009. Note: Country Policy and Institutional Assessment (CPIA) data are for 2006. Higher rating denotes better performance. 122 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 S C A L I N G U P A I D T O P O O R C O U N T R I E S results. The action agenda calls on donors to should give an impetus to implementation of align their monitoring with country infor- the Accra agenda.37 mation systems and to support measures to strengthen developing countries' national Mobilizing Private Aid statistical capacity and information systems. for Development It also calls on donors and developing coun- tries to jointly determine conditions for aid Private actors, particularly foundations disbursements, with conditions to be based and businesses, are becoming increasingly on developing countries' national devel- important players in development finance. opment strategies. Other actions include Along with new resources, private par- increasing the medium-term predictabil- ticipation brings innovation. Private giv- ity of aid--for example, donors providing ing has shifted from the traditional charity three-to-five-year forward spending plans. approach to one of active participation by The results of the latest OECD monitoring private donors in the aid community, includ- survey show that on average only 45 percent ing bringing a business approach to develop- of aid is delivered on schedule.33 Budget sup- ment assistance. port survey data from the Strategic Partner- ship for Africa also show that forward pro- Trends in Private Giving jections of aid can be very unreliable. Using aid projections and outturns data derived Comprehensive data on private giving are not from macroeconomic programming exer- available, but all indications point to a large cises by IMF staff, one study found that on and growing amount of private resources average disbursements of budget aid differed being devoted to development purposes. Pri- from projected amounts by about 30 per- vate international giving as reported to the cent.34 The follow-up conference at Doha OECD shows a strong upward trend in grant also focused on improving the quality of making. Private giving for international pur- aid. Participants reiterated a need to make poses climbed to $18.6 billion in 2007, buck- aid more predictable by regularly providing ing the recent slide in official aid and repre- developing-country partners with multiyear senting more than a 25 percent increase over indicative information on forward spending 2006 levels (figure 4.8). The 2007 increase plans. was driven by a surge in private giving in the Along with improving aid predictability, United States, which accounts for 65 per- donors also need to turn their attention to cent of the total. Canada (7.5 percent) and the issue of aid volatility. Aid flows tend to Germany (7 percent) accounted for sizable be more volatile than other forms of revenue shares in total private giving as well, closely and output.35 Uncertainty of aid flows dimin- followed by the United Kingdom (3.7 per- ishes the true value of these resources. One cent) and Australia (3.6). study uses the concept of "certainty equiva- Although large, these numbers do not lence" to estimate the cost of volatile flows at capture the full extent of private giving. For 15­20 percent of the total value of aid.36 example, corporations are not included, and Implementing the Accra Agenda for some countries do not provide any reports. Action requires strong political support The Hudson Institute estimates that the and coordinated action among all actors. extent of underreporting is large. For the The challenges to implementation are nei- United States alone the institute estimates ther new nor simple. It remains to be seen that private international giving by foun- whether donors will be able to step up the dations, corporations, educational institu- pace of reform. Improving the quality of aid tions, religious organizations, and private has taken on an added urgency in the face of and voluntary organizations was $36.9 bil- pressures on aid budgets. The current crisis lion in 2007--three times the $12.2 billion G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 123 C H A P T E R 4 FIGURE 4.8 Private grants data: undercounting philanthropy Grants by private voluntary agencies Gaps in grants data reported to the OECD in 2007 as reported to the OECD US$ (billions) US$ (billions) Reported Estimates 20 18.6 14.8 15 United States 12.2 36.9 United Kingdom 0.67 4.12 10 8.8 France Not reported 1.03 5 Norway Not reported 0.25 0 Spain Not reported 0.36 2002 2006 2007 Sources: OECD database; Hudson Institute 2009; GuideStar Data Services. reported to the OECD.38 Likewise, interna- Corporate giving is on the rise as well. tional giving by the United Kingdom was Results from a survey of U.S.-based com- $4.1 billion, six times the reported amount. panies and corporate foundations indicate Private giving by France, Norway, and Spain that these institutions contributed around is not captured in the DAC numbers but is $2.3 billion annually in 2006 and 2007 for estimated at a combined $1.6 billion. international development assistance. About Foundations and corporations are the two-thirds of this amount was provided in most dynamic sectors of private philan- the form of goods and services rather than thropy. U.S. giving is spurred by the activi- as cash. The industry with the largest inter- ties of foundations.39 According to the national donations was the pharmaceuti- Foundation Center, there are over 72,000 cal sector--10 pharmaceutical companies grant-making private and community foun- reported contributing $1.5 billion interna- dations in the United States, which contrib- tionally in 2007.41 uted an estimated $5.4 billion in 2007.40 The European foundation sector has also The growth in international giving has far been growing, and the number of public- exceeded that of general foundation giving benefit foundations increased by more than since 2002. The trend in giving is dominated 54 percent between 2001 and 2005.42 But by the Bill and Melinda Gates Foundation. data on European foundations are even At $2 billion in 2006 (and $2.4 billion in more incomplete. Based on a 2007 survey 2007), international grants awarded by this by the European Foundation Centre, Euro- foundation are larger than the combined pean foundations gave $607 million in international grants of the next 14 larg- 2005. Like the U.S. foundations, much of est foundations. Increased funding by the this was directed toward health, followed by Gates Foundation accounted for most of the education. growth in the share of international giving in total giving by foundations: from 13.8 per- Injecting Entrepreneurship in Aid cent of total giving in 2002 to 22 percent in 2006. This share would have grown even Private involvement in aid is transforming without the Gates Foundation, albeit more philanthropy, with traditional giving being modestly from 11 percent to 13 percent. A replaced by entrepreneurship in aid. The substantial part of funding to developing new philanthropists want to bring a busi- countries targets health, but support in other ness approach to aid and international devel- areas such as education and relief efforts has opment--"philanthrocapitalism."43 The also increased. philanthrocapitalist model applies market- 124 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 S C A L I N G U P A I D T O P O O R C O U N T R I E S based principles to development: problem and individuals to make new and additional solving, taking risks, fostering innovation, philanthropic commitments. Corporate managing organizational structures, mobi- profits are already adversely affected, and lizing media attention to set the agenda, and a broad-based decline in financial assets measuring success.44 Private engagement is likely to lower the value of foundations' is particularly strong in health, education, endowments and their returns. Given dif- humanitarian assistance, and climate change ficult economic conditions in their home activities. countries, many philanthropic organizations Global corporate citizenship is leading could pull back their international support to an increased engagement of business in and focus more of their resources on local or development. The concept of global corpo- domestic causes. rate citizenship recognizes that businesses Despite a difficult economic environment, are stakeholders in development; in other some large foundations have issued state- words, development impacts business. Thus ments indicating their intentions to maintain business needs to be committed to address- grant levels. For example, the Gates Founda- ing global challenges such as public health tion has announced an increase in its total care, climate change, and environmental giving for 2009--$3.8 billion compared sustainability. The involvement by busi- with $3.3 billion in 2008, representing ness in development is manifested in several 7 percent of its assets as opposed to about ways: engagement in the community, which 5 percent in previous years.46 This increase is essentially philanthropic (businesses pro- comes in the face of a 20 percent decline in vide money to support good causes but the foundation's assets in 2008. The Mac- also involve staff in fundraising activities Arthur Foundation has announced that it or working on local community projects plans to maintain grant-making levels in such as a school, health facility, or train- 2009 despite significant endowment losses.47 ing center); commitment to corporate social But some other foundations have expressed responsibility, that is, adoption of minimum difficulty in maintaining current levels and standards regarding labor practices, the have even indicated a cutback. For example, environment, and transparency; enhance- the Hewlett Foundation has announced that ment of the development impact of business grants will likely be 5­7 percent lower in activity, particularly through research and 2009 than in 2008.48 development, supply chains and subcontrac- Past patterns provide some insights on tors, and distribution networks; and con- how grant making has been affected by eco- tribution to global public policy.45 Because nomic crisis. A review of foundations' giv- business involvement in development brings ing from 1975 to 2007 shows that during more than funding, these contributions are the previous recessionary periods of 1980, not adequately counted (box 4.2). 1981­82, and 1990­91, grant making held up fairly well.49 In the 2001 recession, grants declined slightly, but far less than the The Global Financial Crisis and Prospects 10 percent decline in the value of founda- for Private Aid tions' assets during 2000­02 (figure 4.9). A The current global crisis could interrupt the large number of foundations base their grant rising trend in private aid. As with official budgets on a rolling average of their asset aid, the impact will depend upon the depth values over two to five years, a practice that and duration of the crisis. Also, the short- helps smooth the effects of asset price fluc- and medium-term impacts of the crisis are tuations. Some foundations even increased likely to be different. Nonetheless, the crisis their payout rate in the 2001 recession to is likely to have a significant negative effect provide resources for activities that they on the ability of foundations, corporations, had been supporting over time. New gifts G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 125 C H A P T E R 4 BOX 4.2 Contributions of private actors to development in Sub-Saharan Africa Early findings from an ongoing study sponsored by the W. F. Kellogg Foundation, the government of Norway, and the World Bank suggest that private actors in Sub-Saharan Africa are contributing to solving development problems in a variety of ways. Private corporations bring more than just funding. They provide opportunities, especially at the local level, to tackle problems that are meaningful for their company, the community, and the country. Trends indicate an increasing space for collaboration and attention to scale and sustainability. The study finds that corporate contributions are often underrepresented in calculations that are based on corporate social responsibility (CSR) budgets or "giving" programs. Capturing the expenditures on other "core business" activities that have positive spillover effects is difficult, but the results are no less important. In Ghana, the idea of harnessing mainstream business operations and not just CSR budgets for development impact is being adopted by some companies. A good example is Standard Chartered Bank (Gh). This bank has shifted from CSR to the concept of sustainability--a way of doing business that is fundamental to its strategy, is embedded across its businesses, and contributes to shareholder value. The bank realizes that it can have a positive impact on the environment and society, as well as on building a sustainable business, if it focuses on enhancing the economic development of the country in which it operates. Another example of company activities that benefits both the affected communities and the company is the malaria program at AngloGold Ashanti's Obuasi mine (Ghana). This $1.3 million-a-year program has helped reduce malaria incidence at the local hospital from 79,000 cases in 2005 to 21,000 in 2007. The malaria inci- dence rate among the mine's employees dropped from 238 to 69 over the same period. In addition, the program created 116 jobs and developed ongoing community interaction to sustain the efforts. In Uganda, early estimates show that the corporate sector provides basic services at the community level in which the companies work; however, specific investment figures are difficult to obtain. Headquarter surveys of foundations, corporations, and nongovernmental organizations (NGOs) suggest that more attention is being given to increasing the impact of single interventions, replicating successful models, and ensuring the sustainability of benefits after the private programs are completed. Firms, foundations, and NGOs are looking for ways to leverage collaboration among themselves and with traditional donors and governments to strengthen the probability of achieving short- and long-term results. Governments play an important role in facilitating private engagement in development and enhancing its effec- tiveness. In Sierra Leone, for example, the government is mapping how and where private actors are contributing to health care service delivery. The view is that by knowledge sharing and collaboration, scarce resources can be better allocated and opportunities for strengthening institutional systems or sharing lessons can be facilitated. In Liberia, strong leadership by the government is encouraging private actors to align their contributions in finance and capacity building to the country poverty reduction strategy. Source: White, Bastoe, and Curry 2009. and bequests and a growth in the number Public-Private Partnerships and of foundations also helped to reduce the Innovative Financing Mechanisms decline in grant volumes. A long and pro- nounced decline in foundation assets would The growing presence of private actors in have troubling consequences for grants, aid and development is fostering partner- however. ships between private entities and public The Foundation Center's analysis of trends institutions. Several factors are motivating in U.S. foundation grant making (excluding this partnership. One is a recognition that the Gates Foundation) also shows that the official assistance is not enough for meeting relative share of resources devoted to inter- the MDGs and related development goals national giving remained fairly stable during and that private resources, both foreign and the economic downturn in 2000­02.50 domestic, are also needed. A second is the 126 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 S C A L I N G U P A I D T O P O O R C O U N T R I E S FIGURE 4.9 Trends in U.S. foundations' assets and giving Assets and total giving Assets, US$ (billions) Total giving, US$ (billions) 800 80 600 60 400 40 200 20 0 0 1975 1979 1983 1987 1991 1995 1999 2003 2007 Assets (left axis) Total giving (right axis) International giving US$ (billions) 6 5 4 3 2 1 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Foundation Center 2008c. Note: Data on foundations' assets and giving are not available for 1986. Data include the Gates Foundation. recognition that private participation can The Solidarity levy on airline tickets raised bring an increased focus on efficiency and 160 million from France in 2008, and pro- performance and spur innovation. ceeds from auctioning or selling project- Through innovative instruments and based carbon emissions permits under the mechanisms for development, progress is European Union's Emission Trading Sys- being made on a range of complex issues tem raised 120 million (for investment in related to key global priorities, in particu- climate protection measures in developing lar in the areas of health, education, and cli- countries) from Germany in 2008.52 mate change, as well as on specific country- In addition to identifying and efficiently level challenges. Innovative finance activities using new sources of public and private and mechanisms are tapping new sources funding, innovative financing mechanisms of finance and new actors. Flows from help manage the risks and costs of vulner- innovative financing approaches are grow- ability (for example, to weather and to cur- ing.51 The International Finance Facility for rency and interest rate movements) facing Immunization has raised $1.6 billion, the developing countries and provide incentives Advance Market Commitments $1.5 billion, for implementation. One way that these and (PRODUCT)REDTM over $100 million. objectives are achieved is by leveraging G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 127 C H A P T E R 4 private resources to support public pur- environmental sustainability into core devel- poses in developing countries. An example opment work. As policy makers focus on is the International Finance Facility for addressing the immediate fallout from the Immunization, which front-loads bilat- current global crisis, they must not shift eral development aid by issuing bonds to attention away from the longer-term climate finance high-return activity. Another way change challenge. Tackling climate change is by deploying public resources to reduce will require mobilizing substantial financial the costs and risks of private entry in flows--public and private--to developing developing-country markets, and thereby countries, much beyond current levels. leveraging private investment in developing The investment needs are large. To stabi- countries, through guarantees, risk-sharing lize greenhouse gas atmospheric concentra- facilities, and transactional support for tions at levels that are considered reachable public-private partnerships. Two examples and manageable, the latest estimates suggest are the use of carbon credits and Advance that additional investment required in devel- Market Commitments, which help mobilize oping countries will range from $150 billion private sector investment in vaccine devel- to $200 billion per year over 2010­20 and opment and production (box 4.3). will rise to $400 billion per year on average beyond 2020. Estimates vary depending on Financing for Combating assumptions, especially regarding the ambi- Climate Change tion of long-term stabilization targets and the nature of policies adopted to curb green- Addressing climate change is central to house gas emissions, in particular, the type attaining durable progress toward the MDGs of instrument, the degree of global participa- and related development outcomes. Global tion, and the contribution of various sectors. Monitoring Report 2008 provided a detailed The estimates also vary depending on percep- discussion on the importance of integrating tions of the scope for cheap energy efficiency BOX 4.3 Advanced market commitments: promoting private investments by leveraging public funds An advance market commitment (AMC) tackles a long-standing development problem--persistent private sector failures to develop and produce goods needed in developing countries because of perceived insufficient demand or market uncertainty. The pilot focuses on the vaccine market, where research, development, and production of vaccines specific to the needs of the poorest developing countries are limited by the small number of manufac- turers, high cost of product development and capacity scale-up, and demand uncertainty. With an AMC, public financing leverages private funds, spurring private sector investment in research, development, and distribution of vaccines. Official and private donors--Canada, Italy, Norway, Russia, the United Kingdom, and the Bill and Melinda Gates Foundation--have pledged $1.5 billion for a pilot AMC for vaccines against pneumococcal diseases. (The Global Alliance for Vaccines and Immunization will support the AMC operationally and the World Bank will provide the financial platform.) The pilot AMC offers a subsidy to purchase eligible vaccines in exchange for a long-term commitment to supply the vaccine at a low price. For the pilot AMC, donors first commit funds appropriate for a predetermined market size and price with specifications targeting effectiveness and develop- ment impact in developing countries. Second, as and when the vaccine becomes available, a credible independent body will determine if the new vaccine meets the target specifications. Approval by that independent body entitles a manufacturer to enter into a supply agreement giving it access to AMC funds subsidizing the purchase of the vaccine. Finally, when AMC funding is depleted, the manufacturer will continue to provide the vaccine at an established price for a specified period to meet continuing demand. 128 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 S C A L I N G U P A I D T O P O O R C O U N T R I E S measures and opportunity costs of mitiga- financial flows to developing countries, tion measures in the forestry and agriculture though growing, cover only a tiny fraction sector as well as on the rate of technological of the estimated amounts needed (table change and deployment of climate-friendly 4.1). The bulk of available and emerging technologies. Research, development, and resources dedicated to climate action relates demonstration of mechanisms for producing to mitigation (at about $10 billion per year), and using cleaner and safer energy would add mainly through carbon market transactions anywhere from $10 billion to $100 billion a to reduce project-based emissions and to a year to the needed investment.53 lesser extent through the recently launched Financing the costs of adapting to the Climate Investment Funds. The Global Envi- inevitable amount of warming that the world ronment Facility has been the largest source will experience will also be costly, albeit the of grant financing for energy efficiency and estimates of adaptation costs are very incom- renewable energy, with an overall cumula- plete and preliminary.54 The World Bank puts tive commitment of over $2.4 billion (since investment needs in developing countries at the early 1990s) in mitigation and capacity $4 billion a year over the next several years, building. The amounts available for adapta- rising to $37 billion a year. Estimates from tion are about $1 billion per year. other international groups working on cli- Private sources through carbon markets mate change range from as low as $8 billion are mobilizing the bulk of financial flows for a year to a high of $86 billion a year by 2015. mitigation. Recent years have seen strong Estimates so far are dominated by the cost of growth in the carbon market and in private climate proofing future infrastructure invest- investment in clean energy. The carbon mar- ments; they thus tend to overlook other forms ket, the largest share of which is accounted of adaptation, such as changes in behavior, for by the European Union Emission Trad- adjustments in operational practices, or relo- ing Scheme, was valued at about $120 bil- cation of economic activity. They are also lion in 2008 (over 12 times its 2005 value). influenced by the estimated level of climate About 2.1 billion metric tons of carbon change and resulting effects as well as by the dioxide equivalent emission reductions have scope of adaptation strategies, which reflect been transacted over 2002­08 under the competing understandings of the adaptation Clean Development Mechanism (CDM) for process, in particular its relationship to devel- an approximate value of $24 billion.55 It opment dynamics. is estimated that some $52 billion in clean These needs go far beyond current and energy investment has benefited from this upcoming resources. Current climate-related mechanism over 2002­07.56 TABLE 4.1 Current dedicated resources for climate change in developing countries US$ (billions) Mitigation Adaptation Global Environment Facility, per year 0.25 Least Developed Country Fund, 0.3 Special Climate Change Fund Carbon market, per year 8+ Adaptation Fund 0.3­.0.5 Clean Investment Funds 5+ Clean Investment Funds 0.5 Other, per year 1+ Other, per year 0.4+ Total, per year 10 Total, per year 1 Source: World Bank 2008 and staff estimates. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 129 C H A P T E R 4 Much of the financial support for adap- 2008. Several new bilateral funds have tation comes from international donors. been created by donors to support climate Donors have pledged resources through change activities, primarily mitigation-- both bilateral and multilateral initiatives, pledges that total $2.7 billion a year over but existing resources and financing instru- the next few years.57 Official flows are ments for adaptation are modest. An impor- important for correcting market imperfec- tant development is the establishment of the tions, building capacity, and targeting cer- Adaptation Fund, which should provide a tain areas. Because bilateral initiatives rep- boost to mobilizing resources for adapta- resent ODA, one issue that arises is whether tion (box 4.4). Other sources are the United these new flows dedicated to climate change Nations Framework Convention on Climate are additional to other ODA commitments. Change Special Funds (administered by Another issue involves the implications the Global Environment Facility), made up that the proliferation of specialized funds of a $180 million fund for least-developed could have for effectiveness of resources. countries and a $90 million Special Climate Among multilateral programs, the largest Change Fund, and the Global Facility for is the Climate Investment Funds Initiative Disaster Reduction and Recovery ($40 mil- (established by the World Bank jointly with lion in fiscal 2008). the African Development Bank [AfDB], the The international community had an Asian Development Bank [ADB], the Euro- estimated $9.5 billion invested in climate- pean Bank for Reconstruction and Devel- friendly funds--public and private--in opment [EBRD], and the Inter-American 2007, and the size of the funds grew in Bank [IDB]), which is designed to provide BOX 4.4 The Adaptation Fund: country ownership in adaptation finance Under the UN Framework Convention on Climate Change process, the Adaptation Fund is intended as a princi- pal source of adaptation support for developing countries and a centerpiece of the international agenda on climate change. The fund is designed to finance concrete climate change adaptation projects and programs that are coun- try driven and based on needs, views, and priorities of eligible developing-country parties to the Kyoto Protocol. The fund's primary financing comes not from traditional development assistance, but from a 2 percent share of proceeds of certified emissions reductions (CERs) issued by the Clean Development Mechanism (CDM) under the Kyoto Protocol. The Adaptation Fund's financial base is thus precedent-setting: an international base arising from an international treaty. Using a share of the proceeds from CER sales to assist developing countries was envisioned when the Kyoto Protocol was agreed in 1997; the Adaptation Fund was allocated a 2 percent share in 2001. As of January 12, 2009, the Adaptation Fund held about 4.9 million CERs. Current estimates by the UN Environment Programme's Riscoe Center suggest that the Adaptation Fund will receive about 30 million CERs by 2012. In November the center estimated that a total of 1.518 billion CERs would be issued by 2012, based on the current CDM pipeline and historic approval rates (http://www.cdmpipeline.org/). The governance of the Adaptation Fund reflects its innovative source of financing. It assigns true ownership to developing countries. Accordingly, 75 percent of the Adaptation Fund Board is made up of representatives from developing countries, including the most affected countries (small island developing states and least-developed countries), and it provides that they can submit proposals directly to the Adaptation Fund Board. The World Bank serves as a trustee to the Adaptation Fund, performing two core functions, trust fund management and monetization of CERs for the Adaptation Fund. The Global Environment Facility serves as its secretariat. Mon- etization of CERs will start in 2009. Source: Multilateral Trustee and Innovative Financing Group. 130 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 S C A L I N G U P A I D T O P O O R C O U N T R I E S interim, scaled-up funding in the form resources for poverty reduction and achiev- of grants and concessional financing to ing the MDGs. help developing countries in their mitiga- Substantial progress has been made since tion and adaptation efforts. In September 2002 in implementing debt relief. More 2009, donors pledged $6.3 billion for the than four-fifths of eligible countries (35 out Clean Investment Funds: $4.3 billion for of 41) have passed the decision point and the Clean Technology Fund and $2 billion qualified for HIPC Initiative assistance. Of for the Strategic Climate Fund.58 Finan- those, 24 countries have reached the com- cial flows through CDM and these climate pletion point and qualified for irrevocable funds are still below required amounts. debt relief under the HIPC Initiative and The shortfall between needs and the MDRI. The debt relief committed to the resources available for meeting the challenge 35 post-decision-point HIPCs amounts to of climate change in developing countries is $124 billion (in nominal terms, excluding enormous. Scaling up financing for climate Côte d'Ivoire), including $52 billion under change in the current global economic envi- the MDRI. On average this debt relief rep- ronment will be even more of a challenge. In resents about 50 percent of these countries' this context it is important to explore syn- 2007 GDP. ergies in proposed solutions and responses, As a result, the debt burdens of many poor for instance incentives for energy efficiency countries have been reduced markedly. On improvements, investments in renewable average, the debt burden of the 35 HIPCs is energy sources, and investments in greener expected to be reduced by about 90 percent, infrastructures. Reforming existing market- compared to their pre-decision-point debt based mechanisms to boost mobilization of stock. HIPCs' debt service obligations have funds and channel investments toward devel- fallen on average by about two percentage oping countries should also be a high prior- points of GDP since the late 1990s, while ity, along with increased resource mobiliza- poverty-reducing spending has increased on tion for adaptation. average by about the same amount during this period (figure 4.10). Debt Relief: Progress To facilitate the HIPCs' advances toward and Challenges debt relief, flexibility has been applied in implementing the initiative while preserv- The international community reached a ing its core principles.59 However, complet- consensus in Monterrey in March 2002 on a ing implementation of the HIPC Initiative global response to address the challenges for will still require sustained efforts from the financing development, including through international community. Many of the 17 debt relief. It was agreed at that time that eligible, pre-completion-point HIPCs face external debt relief could play an important substantial challenges, most in noneco- role in liberating resources that could help nomic areas. Almost half have been affected foster sustainable growth and development by war in recent years, and many remain at and accelerate progress toward the MDGs. a high risk of conflict, political instability, More specifically, the consensus called for or both. Most also have weak policies and the speedy, effective, flexible, and full imple- institutions. Addressing these challenges will mentation of the HIPC Initiative, which require continued efforts from these coun- should be fully financed through additional tries to strengthen their policies and institu- resources. In 2005, the HIPC Initiative was tions, together with sustained international supplemented with the MDRI, whereby four support. Additional resources will also multilateral financial institutions (IDA, the have to be marshaled to finance the cost of IMF, the AfDB, and the IDB) provide addi- debt relief to all pre-decision-point HIPCs, tional debt relief with the view to free more including Somalia and Sudan, two countries G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 131 C H A P T E R 4 FIGURE 4.10 Average debt service and poverty-reducing expenditures % of GDP 10 Poverty-reducing expenditure 9 8 7 6 5 Debt service before MDRI 4 3 2 1 Debt service after MDRI 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Preliminary Projected Source: IMF­World Bank 2008; HIPC documents; and IMF staff estimates. with large and protracted arrears that were $9 billion of commercial external debt. Over not included in the original framework for the past 12 months, the DRF has financed financing debt relief in the IMF. a debt buyback for Nicaragua and has pro- Another challenge is to ensure that the vided support for the preparation of debt HIPCs get full debt relief from all their buybacks for Liberia and Sierra Leone. The creditors. Although the largest creditors (the DRF-supported buyback for Nicaragua World Bank, the AfDB, the IMF, the IDB, extinguished close to $1.4 billion of com- and all Paris Club creditors) provide debt mercial external debt (97 percent of eligible relief in line with their commitments under claims) on terms consistent with the full the HIPC Initiative, and even beyond, oth- delivery of HIPC Initiative debt relief. This ers are lagging behind. Smaller multilateral operation is particularly important for the institutions, non­Paris Club official bilateral DRF in that it extinguished the claims of all creditors, and commercial creditors, which litigating creditors. together account for about 25 percent of total Debt relief, while welcome, addresses HIPC Initiative costs, have delivered only a only a relatively small part of the HIPCs' small share of their expected relief so far.60 financing needs and cannot ensure debt A number of commercial creditors have also sustainability permanently (box 4.5). Debt initiated litigation against the HIPCs, raising relief savings accrue through time and gen- significant legal challenges to burden sharing erally constitute only a moderate share of in the context of the initiative. net aid inflows to the HIPCs. Addressing The World Bank's Debt Reduction development needs of the HIPCs, and more Facility (DRF) for IDA-only countries has generally low-income countries, therefore become one of the key instruments for pro- requires higher new aid flows in addition moting commercial creditor participation to debt relief. New flows also allow for in the HIPC Initiative.61 Since its establish- a quick and targeted response to address ment, the DRF has supported 24 operations any emerging issues, such as the impact of in 21 countries, helping to extinguish about the current global crisis on poor countries. 132 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 S C A L I N G U P A I D T O P O O R C O U N T R I E S BOX 4.5 Results from low-income country debt sustainability analyses Debt sustainability analyses (DSAs) performed under the Debt Sustainability Framework pro- vide a comprehensive view of the debt outlook for low-income countries. Between 2005, when the framework was introduced, and March 2009, 205 DSAs covering 68 low-income countries were completed; 173 DSAs were published. Recent joint World Bank­IMF DSAs for IDA-only countries and their ratings suggest that about 29 percent of these countries have a low risk of external debt distress (see the figure below). This share is higher for non-HIPCs (42 percent, or 8 countries) and post-MDRI countries (36 percent, or 8 countries). No pre-completion-point HIPC has a low risk rating. Post-MDRI countries perform nearly as well as non-HIPCs, thanks in large measure to the provision of debt relief, which has decreased their external debt ratio con- siderably. Another 32 percent of IDA-only countries have a moderate risk rating. This share is again higher for post-MDRI countries (45 percent, or 10 countries) and non-HIPCs (26 percent, or 5 countries). In these countries' DSAs, vulnerabilities appear in stress tests. Debt dynamics seem particularly sensitive to shocks to exports. Debt sustainability is a major concern for the 39 percent (22 countries) of countries rated at high risk or in debt distress. Of these 22 countries, 12 are pre-completion-point HIPCs (80 per- cent of this country group), 6 are non-HIPCs (32 percent), and 4 are post-MDRI countries (18 percent). Again, debt dynamics seem particularly sensitive to shocks to exports. Risk of debt distress for IDA-only countries by HIPC status % of countries 60 8 50 10 8 40 8 6 30 5 4 3 20 4 10 0 Low Moderate High In debt distress Level of distress Pre-completion point Completion point Non-HIPC low-income countries Source: Joint World Bank­IMF debt sustainability analyses. Note: Data are for 56 low-income countries. Numbers above bars indicate number of countries. These new flows need to be on appropri- their efforts to achieve their development ate terms to ensure that debt sustainabil- goals, while reducing the risks of future debt ity, which has been restored through debt problems. relief, is maintained in the future. The joint Maintaining debt sustainability after IMF­Bank Debt Sustainability Framework receiving debt relief highlights the need for for low-income countries is an important strengthening debt management in these tool that supports low-income countries in countries. The IMF and the World Bank G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 133 C H A P T E R 4 have stepped up their efforts to assist low- higher with respect to borrowing and related income countries to enhance public debt financing activities.64 management frameworks and have devel- DeMPA can serve as an essential input oped a comprehensive debt management tool for the second component of the tool kit-- kit for low-income countries.62 One building formulation of a debt management strategy block of this tool kit facilitates assessment of that is consistent with long-term debt sus- a country's debt management performance tainability. The outputs from the assess- using 15 indicators that span the six core ment and the strategy formulation can also functions of public debt management. This feed into the third building block--a reform assessment, known as DeMPA, has been plan. The recently established donor-funded applied in 20 low-income and 3 middle- Debt Management Facility will support a income countries (as of December 2008). substantial scaling up of the World Bank­ Early results from the assessment reports are IMF's work in strengthening debt manage- helping to identify common priority areas for ment capacity and institutions. debt management reform across countries. Across the six core functions, operational Notes risk management and cash flow forecasting and cash balance management appear as key 1. Robert B. Zoellick, "A Stimulus Pack- weak spots (figure 4.11). Less than half of age for the World," New York Times, January the sample complies with minimum require- 23, 2009 (http://www.nytimes.com/2009/01/23/ ments for sound governance and strategy opinion/23zoellick.html). development.63 Countries appear to do bet- 2. Voluntary contributions to the World Food Programme jumped to over $5 billion in 2008 ter in the areas of coordination with mac- from $2.7 billion in 2007. Among the larg- roeconomic policies and debt records and est donors were the United States ($2.1 billion), reporting, while roughly half scored a C or Saudi Arabia ($503 million), the European Union ($355 million), and Canada ($275 million); see http://www.wfp.org/appeals/wfp_donors/2008 .asp?section=3&sub_section=4). The World Bank FIGURE 4.11 The DeMPA tool: assessing core functions of public established a $1.2 billion rapid financing facility-- debt management Global Food Response Program--in May 2008 to speed assistance to the neediest countries. 3. This framework has been developed by the Debt records and U.N. Secretary General's High-Level Task Force reporting 53 on the Global Food Crisis. Operational risk 4. The task force has proposed establishing a 23 management Financial Coordination Mechanism to facilitate quick mobilization and disbursement of additional Cash flow forecasting and 20 donor resources. cash balance management 5. IMF 2009. Borrowing and related 54 6. PREM 2008, 2009a, 2009c. financing activities 7. Only a third of developing countries, and Coordination with even fewer low-income countries, have reasonable 70 macroeconomic policies fiscal capacity to expand fiscal deficits. See DEC- Governance and PREM 2009 and PREM 2009b. 44 strategy development 8. See the UN's MDG Gap Task Force 2008 report. 0 20 40 60 80 9. CPA excludes debt relief, exceptional assis- % of countries with a score of C or higher tance such as humanitarian aid (which can rise and fall in response to unexpected events such Source: IMF­World Bank 2009 forthcoming. as natural disasters) and food aid, some specific Note: A score of C indicates the minimum requirement for effective debt management. items including administrative costs, core funding 134 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 S C A L I N G U P A I D T O P O O R C O U N T R I E S of NGOs, imputed student costs and refugees in cipient pairs, while the OECD results are based on donor countries. In 2008, CPA constituted 68 per- aggregates for recipient countries. cent of total DAC ODA. 33. OECD 2008. 10. Chapter 2 of the report estimates the 34. Celasun and Walliser 2008. Several of the regions' financing gap in infrastructure at about studies also suggest that while recipients' perfor- $40 billion, but it also notes that factors other than mance is an issue, many other factors, including financing severely hamper infrastructure services. technical, legal, and political, contribute to low 11. The share of infrastructure was 25 percent predictability. in 1995. 35. Bulir and Hamann 2003, 2006; Pallage and 12. The consortium was established in 2005 Robe 2001. following the Gleneagles Summit. 36. Kharas 2008. 13. OECD 2009a and 2009b. 37. Mold, Olcer, and Prizzon 2008. 14. The 2009 survey on planned CPA covered 38. Hudson Institute Center for Global Pros- 41 bilateral and multilateral donors; 35 donors perity 2008. responded. The forward aid expenditures are con- 39. There are three types of foundations--pri- servative estimates of future aid flows. Donors' vate, corporate, and community. practices regarding forward aid planning vary with 40. Foundation Center 2008b. regard to periodicity of updating. Some donors 41. Conference Board annual surveys for 2007 have annual updates of multi-year schedules while and 2008. In 2007, 197 companies and corporate others update multi-year schedules in the context of foundations participated in the survey, compared bilateral consultations with partner countries. The with 189 companies in 2006. Accra Agenda for Action calls on donors to pro- 42. A public-benefit foundation is defined by vide regular and timely information on their roll- the European Foundation Center as being an ing 3-to-5-year forward planned expenditures and asset-based, purpose-driven institution that has no implementation plans to developing countries. members or shareholders but has an established, 15. This estimate assumes debt relief and reliable income source to carry out its work over humanitarian assistance will be at long-term a longer term than other institutions such as com- averages. panies. In the 24 European Union member states, 16. OECD 2009a. over 95,000 organizations are public-benefit 17. Brautigam 2008. foundations. Nearly three-fourths of the 54 per- 18. IMF 2008. cent increase in the number of these foundations 19. IMF 2007. from 2001 to 2005 can be attributed to European 20. Frontier economies are some of the poorest Union enlargement and the rest is a result of an developing countries. increase in the number of foundations. 21. http://www.irishaid.gov.ie/latest_news 43. BishopandGreen(2008)describephilanthro- .asp?article=1411. capitalism as a movement to harness the power 22. "Less and worse aid? Financial crisis shows of business and the market to the goals of social first impacts on European aid budgets" http://www change. Also see Ben-Artzi (2008). .eurodad.org/whatsnew/articles.aspx?id=3285. 44. Marten and Witte 2008. 23. http://ipsnews.net/news.asp?idnews=45625. 45. Schwab 2008; Maxwell 2008. 24. Desai and Kharas 2008; Mold, Olcer, and 46. www.gatesfoundation.org/annual-letter/ Prizzon 2008. Documents/2009-bill-gates-annual-letter.pdf. 25. Desai and Kharas 2008. 47. www.macfound.org/site/c.lkLXJ8MQKrH/ 26. Roodman 2008. b.4196225/apps/s/content.asp?ct=6334379. 27. Faini 2006. 48. A Note on the Economy at www.hewlett 28. McDonnell, Solignac-Lecomte, and Wegi- .org/AboutUs/News/A_Note_on_the_Economy mont 2003. .htm. 29. Paxton and Knack 2008. 49. Foundation Center 2008c. 30. Zimmerman 2008; Eurobarometer 2005. 50. Foundation Center 2008a. 31. OECD 2008. 51. See Kiess (2008) and World Bank (2009c) 32. Knack and Eubank 2009. The study uses for a detailed presentation of innovative financing the unweighted average of all relevant donor-re- mechanisms. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 135 C H A P T E R 4 52. Not all new funds raised through these share of debt relief. Given the voluntary nature mechanisms represent additional financing with of creditor participation in the HIPC Initiative, regard to conventional ODA. the IMF and the World Bank will continue to use 53. International Energy Agency 2008. moral suasion to encourage creditors to partici- 54. United Nations (2008a); World Bank pate in the Initiative and to deliver fully their share (2008). The forthcoming World Development of HIPC Initiative debt relief. Report 2010 will present more complete evalua- 61. Established in 1989, the DRF aims to help tion of financing requirements and mechanisms. reforming, heavily indebted, IDA-only countries 55. The CDM is the main mechanism for reduce their commercial external debt, as part of encouraging private investment in mitigation in a broader debt resolution program. Support from the context of developing countries. the DRF is provided through grants for the prepa- 56. World Bank Institute 2008. ration and the implementation of commercial 57. Since December 2006 new bilateral funds debt reduction operations. The DRF is financed have been established by Australia, the European by transfers from IBRD and grant contributions Union, Germany, Japan, Spain, and the United from other donors, as well as investment income Kingdom; see Bird and Peskett (2008). earned on such contributions. 58. The value of the pledges was $5.7 billion as 62. IMF­World Bank forthcoming. of exchange rates on January 23, 2009. See World 63. Relates to 20 countries for which the assess- Bank 2009a. ment reports have been finalized. 59. Several rules have been adapted to take 64. The dimensions under the indicator for into account HIPCs' specific circumstances; for coordination with macroeconomic policies reveal example, the policy track record required to qual- a sample bias that is likely to unwind with future ify for debt relief has been shortened. Additional assessments. A number of the countries in the cur- debt relief has been provided when debt indicators rent sample are part of either the Economic and deteriorated because of factors beyond a country's Monetary Community of Central Africa or the control, such as negative terms-of-trade shocks or West African Economic and Monetary Union; as natural disasters. such the governments are bound by strict legisla- 60. Many creditors who have agreed to partici- tion that limits the availability of direct resources pate in the initiative are lagging in providing their from the regional central banks. 136 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 5 Pressing Ahead with Trade Openness E xternal competitiveness and access to A resurgence of "buy national" and other international markets are paramount inward-looking policies risks retarding mar- for poor countries to realize the devel- ket corrections, distorting trade, and trigger- opment promise of international trade. Press- ing retaliation. Maintaining and enhancing ing ahead with trade openness is a power- trade openness is key not only to preserving ful means for countries to help mitigate the the mutual benefits of trade but to support- impact of the financial crisis and enhance ing the eventual economic recovery. prospects for economic recovery. Even with bleak trade prospects, devel- The recent food, fuel, and financial crises oping countries can improve their competi- have put great strain on the global trading tiveness and diversify their exports through system, slowing--and at times reversing-- trade facilitation measures and other progress in trade integration. In early 2008 behind-the-border reforms. The accelerating sharp increases in world food and fuel prices pace of globalization and erosion of prefer- triggered disorderly and sometimes harmful ences for poor countries associated with the trade policy responses, including the impo- expanding web of preferential trade agree- sition of export taxes, quotas, or outright ments make improving domestic competi- bans by some large food-exporting coun- tiveness through behind-the-border reforms tries. In late 2008 the financial crisis com- imperative. In particular, efforts in the area pounded the food crisis and led to a trade of trade facilitation could do a lot--and credit crunch and sharp increases in trade perhaps even more than further reductions credit spreads. International trade slowed in tariff rates--to increase trade flows. The sharply in the last months of the year and is ease of moving goods internationally-- projected to contract in 2009--for the first including through improved border pro- time since 1982. cessing systems, logistics services, and trade Risks of protectionism and other trade- infrastructure more generally--has become distorting policies have heightened as eco- a key determinant of export competitiveness nomic activity collapses and unemployment and diversification. soars in many countries. Although trade The crisis also increases the urgency of actions have remained relatively circum- bolstering multilateral cooperation in the scribed so far, several countries have raised trade area. A Doha Round agreement would border barriers or subsidized automotive, help keep markets open at a time of finan- steel, or other export-oriented industries. cial stress, ease protectionist pressures, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 137 C H A P T E R 5 and strengthen the rules-based multilat- finance and policy, including the risk of trade eral trading system. It would also provide protectionism. In the second part, it dis- a much-needed boost in confidence to the cusses possible avenues for transforming the global economy. Moreover, fulfillment of current crisis into opportunities for reform, aid-for-trade commitments by high-income including completing the Doha Round of countries and international institutions is multilateral trade negotiations, pursuing important to support both the multilateral domestic reforms aimed at enhancing trade trade liberalization agenda and domestic openness and external competitiveness, and trade facilitation efforts. Given that many mobilizing more effective aid for trade in poor countries continue to face considerable support of those reforms. infrastructure and other supply-side con- straints to participating in global markets, Strains in the Global donors should deliver on their aid-for-trade Trading System commitments in support of domestic reforms that address these constraints. The multilateral trading system came under In its first part, this chapter reviews the heightened strains in 2008 amid major recent sources of strain in the global trad- international crises that eventually led to a ing system--the food, fuel, and financial global economic recession and a sharp drop crises--and discusses their impact on trade in international trade. FIGURE 5.1 Robust trade growth turned negative in most regions by late 2008 Export growth by region Monthly growth rate (%) 50 40 30 20 10 0 ­10 ­20 ­30 ­40 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Latin America & Caribbean South Asia Europe & Central Asia East Asia & Pacific Middle East & North Africa North America Sub-Saharan Africa Source: Staff calculations, based on data collected from national sources. 138 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S Recent Developments world trade moderated to 3.4 percent in in International Trade 2008, from an average of 7.9 percent during 2003­07. According to the World Bank's The global recession has put great pressure Global Economic Prospects (April 2009), on trade. In the fall of 2008 global demand the world trade volume in goods and ser- suffered a sharp decline, most of the global vices is projected to decline by 6.1 percent economy went into recession leading to fall- in 2009, with a significantly sharper con- ing demand for both domestically produced traction in trade volumes of manufactured goods and imports, and by early 2009 robust goods. While tourism is down in many trade growth had turned negative in most regions, total trade in services appeared countries.1 International trade is forecast to to be more resilient than in manufactures. decline in 2009, for the first time in 27 years These projections corroborate the WTO (figures 5.1 and 5.2). Declining demand has forecast of a 9 percent fall in world mer- been compounded by a contraction in the chandise trade in 2009, with developed- available finance for trade flows. Monitoring economy exports falling by some 10 percent from the World Trade Organization (WTO) on average, and developing-country exports and the World Bank indicates that the con- shrinking by 2­3 percent. With the global tribution of protectionist and discriminatory economy remaining weak throughout the policies to the decline in trade has remained year, a gradual pickup in trade volumes is limited to date. However, looking forward, not expected until 2010. there is a danger of a retreat from the rela- A number of leading indicators con- tively open border policies of the past decade. firm this bleak trade outlook. In late 2008, The second half of 2008 saw a sharp a large oversupply of ships was reported in slowdown in merchandise trade. For the many ports, together with falling prices for year as a whole, growth in the volume of shipping services. The Baltic Exchange Dry FIGURE 5.2 World trade will contract in 2009 Annual growth of global trade volumes Percentage change 15 12 9 6 3 0 ­3 ­6 ­9 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source: World Bank 2009. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 139 C H A P T E R 5 Index, a benchmark for global freight costs of which fell by double digits. Small coun- along key routes, fell by more than 90 per- tries in Africa, Eastern Europe, and Central cent between May and November 2008, and Asia have experienced the largest percentage has yet to recover (figure 5.3).2 Air cargo traf- declines in exports to the U.S. market. fic, another possible early indicator of trade Depending on the degree of trade and developments, has also registered its worst financial openness and the state of readi- decline since the burst of the technology ness to cope with shocks, the impact of bubble in 2001. According to the Interna- the financial crisis has differed by country. tional Air Transport Association, the volume Most at risk have been developing countries of cargo traffic dropped by 13.5 percent in with large foreign banking and trade expo- November 2008 (compared with November sure combined with weak foreign exchange 2007). December was worse; cargo freight positions, rigid exchange rate systems, and declined by 23 percent. fragile budgets. In the short run, emerging Falling commodity prices and exchange countries are particularly vulnerable. As a rate movements have compounded the siz- group, they have accounted for the bulk of able decline in world trade. In the second global growth in 2007­08 and are therefore half of 2008 commodity prices decreased particularly exposed. Low-income coun- sharply, and the U.S. dollar appreciated tries appear less vulnerable in the short run against the currencies of major traders. The because of their lower financial and trade 27 percent decline in the International Mon- integration. However, they are also often the etary Fund (IMF) commodity price index least equipped to deal with crises. While net between November 2007 and November commodity importers will see some relief 2008 is estimated to have contributed to an from the rapidly declining price of food and 11 percent drop in trade. The slowdown has fuel, net exporters face the triple financial, been widespread, across regions and between fuel, and food crisis.3 developed and developing countries, as well as across exports and imports, implying that Food and Fuel Crisis reduced demand is playing a major role. For instance, U.S. import data by sector indi- International trade was significantly disturbed cate that, although the decline in commod- in 2007 and early 2008 by large terms-of- ity prices is evident, U.S. imports fell across trade shocks as a result of surging prices of nearly all industries. Declining demand and minerals and various food products. Oil prices investment was especially evident among doubled between January 2007 and August imports of transportation and machinery, 2008. Grain prices also more than doubled electrical equipment, and stone and glass, all between January 2006 and September 2008, including dramatic surges in staples such as FIGURE 5.3 Baltic Exchange Dry Index wheat, rice, and soybean oil. A large number of developing countries that are net importers of food and fuel were severely affected by the 12,500 increase in the prices of these commodities. 10,000 Import bills increased and balance of pay- 7,500 ments deteriorated. In all countries, consum- ers, especially vulnerable consumers, were 5,000 negatively affected by the rise in food prices. 2,500 Both food and fuel prices have in recent 0 months retreated from their mid-2008 peaks. April July October 2009 However, food prices have remained and are projected to remain well above their 1990s Source: Baltic Exchange Information Services Ltd. and Bloomberg L.P. levels for the next several years.4 140 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S The 2008 global food price crisis had efficient production in developing countries.5 deep historical roots in the distortions of the High-income countries have historically pro- world trading system (box 5.1). While several tected their domestic producers and subsi- factors beyond trade combined to produce dized inefficient production--most recently an upward global food price spiral (includ- biofuels--dumping surpluses onto global ing high energy and fertilizer prices, depre- markets. In turn, developing countries have ciation of the U.S. dollar, biofuel production, often used trade and other domestic policies changes in food buffer stocks, droughts, and to simultaneously tax and protect their agri- increased world demand), the origins of the cultural sector, with the net effect in many current spike in global food prices can be countries of taxing farmers. Overall, the traced to decades of trade-distorting policies world has suffered from overproduction in that have encouraged inefficient agricultural high-income countries and underproduction production in rich countries and discouraged in poor countries. BOX 5.1 Trade policies: A taproot of the global food price crisis The global food price crisis had deep roots in the distortions of the world trading system. Historically, agricul- tural trade-distorting policies have taken the form of specific and ad valorem tariffs that are sometimes linked to quantities of imports (such as tariff rate quotas); quantitative restrictions or prohibitions on imports and exports; and domestic producer supports and export subsidies for farm products. Countries have also availed themselves of additional restrictions in the form of safeguard protection in case of import surges. The trading system in agriculture is further distorted and segmented by the existence of trade agreements whereby preferential tariff rates, market access conditions, or both, are offered on a reciprocal or nonreciprocal basis to a subset of partner countries. Overall, the trading system in agriculture is nontransparent, discriminatory, and highly distorted. More recently, biofuel policies in high-income countries, which consist of import duties, subsidies, tax credits, and legislative mandates, have had the effect of further distorting global agricultural trade and contributing to the global food price crisis. Biofuel production in the United States from food crops such as maize and soybean oil and in the European Union from rapeseed and sunflower seed oils have fueled the rise in food prices by increasing the demand for these food crops and shifting land out of other crops. In the last three years, 5 million hectares of cropland that could have been used for wheat have gone to rapeseed and sunflowers for biofuels in major wheat producers, including Canada, the European Union, and the Russian Federation. Increased demand for biofuels is estimated to have accounted for 70 percent of the increase in corn prices and 40 percent of the increase in soybean prices. Although oil prices may have been somewhat higher in the absence of biofuels, these subsidies do not pro- mote economic efficiency as an offset to their inflation impact. The combined impact of these trade-distorting agricultural policies has been to displace and reduce the efficiency of agricultural production globally. While such policies are introduced for a wide range of domestic motives (economic, social, environmental, security), they are welfare-reducing--both in the country applying them and in the rest of the world--relative to direct, first-best policy instruments for achieving those domestic objectives. In distorting the incentives producers and consumers would otherwise face, they are also welfare- redistributing and inherently discriminatory. By promoting less efficient production in developed countries at the expense of investment in generally more efficient production in developing countries, world food prices have been kept artificially low, and domestic food prices in protected markets have been kept artificially high. Policies in developing countries have, until recently, generally taxed agriculture to channel resources into manufactur- ing, with the result that investment in increasing supply has not been adequate to provide for rapid responses to global price spikes. Furthermore, because agricultural production has taken place in relatively inefficient, thin, and insulated markets, global trade in food products is less resilient to exogenous shocks and less able to handle volatility in trade and output. Source: Chauffour 2008. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 141 C H A P T E R 5 While agricultural trade restrictions and who previously had a protected market, par- direct subsidies in high-income countries ticularly if the tariff reductions are unan- have tended to decrease over time, they ticipated. Such farmers may need targeted remain a major source of support for pro- assistance as tariffs are reduced. In contrast, ducers in these countries. In 2007 support direct price controls or untargeted subsidies to farmers in advanced countries from agri- typically tend to be disincentives for produc- cultural policies amounted to $258 billion, ers, do not concentrate help on the poorest, equivalent to 23 percent of the farmers' gross and drain scarce fiscal resources. receipts, down from 26 percent in 2006 and In addition, some large food-exporting 28 percent in 2005.6 With prices for major countries imposed export taxes, quotas, or agricultural commodities rising steeply on outright bans.8 While it can be difficult for international markets, the gap between sup- countries with abundant supplies to allow ported domestic prices and world prices international prices to filter through to con- has narrowed considerably, contributing to sumers, especially when a large majority the lowest level of producer support since of the poor are urban, and there is tempta- the estimates began in the mid-1980s. Yet, tion to keep food prices down by reducing developed countries did not take advantage exports, such measures reduce production of this window of opportunity to struc- incentives and can have unintended eco- turally reform their agricultural policies. nomic and social consequences. In particu- Some progress has been made in moving lar, export restrictions tend to distort prices away from the most production- and trade- and the allocation of resources (impeding distorting policy measures, although they investment and the supply-side response) continue to dominate producer support in and prevent local farmers from receiving most developed countries. the higher world market price for their pro- The rapid rise in food and fuel prices duction (slowing the reduction of poverty led to diverse reactions in affected coun- in rural areas where most poor people live tries. Along with protests and riots, higher in most of the countries involved).9 Export prices put macroeconomic stability in jeop- restrictions also displace local production to ardy. The impact of the food crisis across crops that are not subject to export restric- a significant share of the population in tions (aggravating the very food security many developing countries generated social and price concern that justifies the mea- demands for broad-based action. Govern- sure in the first place); cut local production ments were pressured to reduce food prices from global buyers and distribution chains through administrative measures, including (jeopardizing future reentry in once-secure lower import tariffs or taxes, subsidies, and markets); create space for illegal trade (fuel- price controls.7 In some countries, the pol- ing corruption and related forms of gover- icy response reflected the lack of more tar- nance malpractices); exacerbate the rise and geted mechanisms such as conditional cash fluctuations of global food prices (creating transfers or food-for-work programs, which a vicious incentive for trading partners to require substantial preparation time and follow suit, curb exports, and hoard); and implementation capacity. Many poor coun- more generally hurt trading partners and the tries have narrow tax bases and rely on tar- multilateral trading system (weakening the iffs and other trade taxes for a large part of security of poor and vulnerable countries).10 government revenue. In such countries, it is Looking forward, trade policies that important to ensure that the revenue losses would help address the food crisis more from tariff or tax reductions can be accom- fundamentally would involve correcting modated without destabilizing the macro- historical distortions in agricultural trade. economic situation. Tariff reductions can Priority areas for action include disci- also have adverse effects on poor farmers plining export controls; reversing biofuel 142 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S subsidies; lowering production subsidies; poor nations that lack other resources to facilitating agriculture trade; investing in finance their imports and exports, has been trade-related infrastructure; completing disrupted. While the crisis began and spread the Doha Round; and, in the longer run, in the financial sphere, the real economy further liberalizing agricultural trade on a has not remained immune. With collapsing multilateral basis. While all of these steps demand and economic activity, protectionist would lead to more efficient agricultural pressures have intensified. markets, the complex web of policy distor- tions in agriculture has many cross-cutting Trade finance. As the financial crisis unfolded, effects, and it is difficult, especially in the the availability of trade finance tightened and short term, to predict precisely the impact its cost rose because of growing liquidity pres- that unwinding these policies would have sure in mature markets and a perception of on food prices. In particular, net food- heightened country and counterparty risks. importing countries might be adversely The contraction in trade finance was also affected because global agricultural trade fueled by the loss of critical market partici- liberalization could cause world prices of pants, such as Lehman Brothers, a drying up agricultural commodities--at least those of the secondary market for short-term expo- that are highly protected--to rise (while sure (as banks and other financial institutions domestic prices in the liberalizing countries deleveraged), and the volatility of commod- fall). Yet, the current conditions of relatively ity prices.11 The implementation of the Basel high food prices provide an opportunity II Accord on banking laws and regulations, for implementing long-standing agricul- with its increased risk sensitivity of capital tural trade reform. Instruments such as the requirements, in an environment of global IMF's Trade Integration Mechanism exist recession is also generally considered to have to help mitigate the possible adverse effects put additional pressure on banks to hold back of liberalization on net food importers. on trade finance. Regardless of the impact of Basel II, as companies continue to be down- graded, higher risk premiums increase capital Financial Crisis requirements, further reducing access to trade In September 2008, with the impact of the credit, especially for small and medium enter- food crisis still unfolding, the multilateral prises and banks in emerging markets.12 trading system had to cope with another With up to 20 percent of the $15.8 trillion major crisis--this time financial. The finan- world merchandise trade in 2008 involving cial crisis, which originated in the developed secured documentary transactions, such as world, fast spilled over to emerging markets letters of credit (LCs), trade finance is critical and developing countries. The initial shock to sustaining the multilateral trading system.13 was a squeeze of liquidity, including for trade As the financial crisis spread, the demand for finance. The credit crunch in developed- LCs, insurance, and guarantees increased, country markets caused havoc in many low- because exporters wanted to be certain income and emerging countries, as foreign importers would pay on schedule. This led banks abruptly reduced or stopped lending to delays in international trade, with goods and stepped back from even the most basic reportedly being docked for weeks before banking services, including trade credits and shipment, as terms of financing were finalized. guarantees. Net flows of private capital to Trade finance has tended to be highly vul- emerging markets are projected to decline nerable in times of crisis. For instance, trade sharply in 2009. Although they are less finance to developing countries collapsed dur- financially integrated, low-income countries ing the 1997­98 East Asian financial crisis. are also being hurt: trade finance, which is Bank-financed trade credits declined by about usually considered the lifeline of trade for 50 percent and 80 percent in the Republic of G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 143 C H A P T E R 5 Korea and Indonesia, respectively, in 1997­98. December 2008, compared with the same During the 2001­02 crisis episodes in Argen- period in 2007. This covers collection and tina and Brazil, trade credits declined by as cash letters as well as documentary credits much as 30­50 percent.14 and guarantees. According to a survey of With no comprehensive and reliable 40 banks in developed and emerging mar- data on trade finance available, an overall kets undertaken by the IMF in collaboration assessment of trade finance developments with the Bankers' Association for Finance in 2008 remains difficult. Selected infor- and Trade (BAFT) in December 2008, banks mation indicates that--along with global in developed countries reported roughly the demand--trade finance flows declined in same number of transactions of documen- the last quarter of 2008. According to Dea- tary credits, guarantees, and LCs in Octo- logic, "structured" medium- and long-term ber and November 2008 compared with the trade finance instruments (such as syndi- same period in 2007.16 In contrast, emerg- cated loans) contracted by about 40 per- ing market banks reported a 6 percent fall cent in the last quarter of 2008 compared in such transactions. These developments with 2007.15 While structured trade finance are consistent with the data released by the represents only a fraction of medium- and Berne Union of export credit and investment long-term global trade finance, it appears to insurance agencies, which indicate that, be indicative of a broader trend. On short- in the last quarter of 2008, new insurance term trade finance, data from the Society for commitments increased strongly for high- Worldwide Interbank Financial Telecommu- income countries and decreased for develop- nication indicate that the number of trade ing countries (figure 5.4).17 finance messages declined by 4.8 percent in At the same time, the price of trade finance and the need for securing transac- tions through guarantees and insurance FIGURE 5.4 New insurance commitments (medium- and has increased markedly. Tight credit condi- long-term) reported by Berne Union members on tions have allowed lenders to drive up inter- selected countries est rates for their loans in many countries, especially in emerging markets (figure 5.5). When banks are under pressure, the capital US$ (billions) needed for trade finance may be allocated 18 elsewhere on balance sheets. With no sec- 16 ondary market to offload loans, balance 14 sheets have been constrained. In addition, 12 global currency volatility and more rigorous counterparty risk assessment contributed 10 to higher cost of trade finance for import- 8 ers, exporters, and financial intermediar- 6 ies. By the end of 2008, trade finance deals 4 were offered at 300­400 basis points over 2 interbank refinance rates--two to three times more than the rate a year earlier. The 0 1st quarter 2nd quarter 3rd quarter 4th quarter cost of LCs was reported to have doubled 2008 or tripled for buyers in emerging countries, Middle-income countries including Argentina, Bangladesh, China, Low-income countries Pakistan, and Turkey. This assessment was High-income countries confirmed in the IMF/BAFT survey, which found widespread increases in pricing of Source: Berne Union. all trade finance instruments relative to 144 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S banks' costs of funds. More than 70 percent FIGURE 5.5 Cost of trade finance in selected emerging markets of respondents indicated that the price of various types of LCs increased because of Trade credit spreads (basis points) an increase in their own institution's cost 250 of funds (80 percent of respondents), an increase in capital requirements (60 percent of respondents), or both. 200 As part of the financial sector bailouts, given the rapidly deteriorating trade finance 150 landscape, a number of national authori- ties started to intervene to provide blanket liquidity to banks and targeted trade credit 100 lines and guarantees for exporters that have been cut from trade finance. For instance, 50 in October 2008, Brazil's Central Bank was one of the first to issue loans in an attempt 0 to provide relief to exporters. However, the 2003 2004 2005 2006 2007 2008 est. financial interventions did not always lead Brazil Indonesia Korea, Rep. of to the desired results, because banks were China Russian Federation India concerned about increased counterparty Turkey risk and remained cautious, with many preferring to use the injected liquidity to Source: Data collected by staff from private bankers. purchase government paper. Moreover, as developed countries bailed out their banks, there has been political pressure to finance steps are not possible, hard-pressed coun- domestic transactions rather than pro- tries could consider depositing a collateral vide trade finance that goes to developing fund offshore to encourage acceptance countries. of LCs by local importers, as the Indone- Coordinating national interventions sian Central Bank did during the 1997­98 would send a powerful signal to market Asian crisis. participants that would help restore confi- In parallel, there is scope for financial dence and eventually lower the overall cost institutions and enterprises to promote of public intervention. When central banks other sources of short-term financing. Fac- lack the foreign exchange reserves to pro- toring is a type of supplier financing that vide trade credit lines, other central bank- could be particularly suited to a height- ers could offer currency swaps to help keep ened risk environment. Because factoring normal trade flows. The intervention of the involves the outright purchase of invoices U.S. Federal Reserve in support of Brazil at a discount rather than the collateraliza- and Mexico through currency swaps in late tion of a loan, the creditworthiness of the 2008 was a case in point. Export credit seller becomes less important in the decision agencies from developed countries could process than the value of the seller's under- be mobilized further to provide short-term lying assets. Hence, factoring could become insurance, and lending when possible, for an instrument of choice when firms in bilateral trade credits. Promoting the use developing countries have difficulty access- of local currencies in intraregional trade ing trade financing. While still a relatively to reduce the dependence on the U.S. dol- small source of credit in emerging markets, lar and the euro as currencies of payment the crisis could be an opportunity to expand is another option to consider for reducing factoring in both low-income and emerging pressure on foreign exchange. When these countries. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 145 C H A P T E R 5 For sectors and products highly inte- flexibility in capital requirements for trade grated in a global supply chain, supply-chain finance under Basel II. finance solutions should remain a relatively stable source of working capital and thus Protectionism temptation. If history is a financing. Corporations already use credit guide, the economic stress and uncertainty across multiple transaction types as part that engulfed the international scene in 2008 of daily operations. Since these credits are could be a precursor to rising protectionist not intermediated through banks and their tendencies. Raising barriers at the frontier, underlying risks are borne among party con- starting with barriers to trade in goods or stituents (absent factoring and insurance), services, is often a tempting political option they should be more resilient to the credit under such circumstances. Restricting capi- crunch, at least to its initial direct effect. tal movements, including for the more secure They will, however, remain vulnerable to the operations to finance imports and exports, is global economic and financial prospects. another inward-looking temptation. As gov- Development institutions have taken ernments consider their policy options, they actions to help ease access to trade finance. should be mindful of the domestic and inter- For example, in response to the financial cri- national consequences of such actions. In par- sis, the International Finance Corporation ticular, developed countries can lead by exam- (IFC) has, among other actions, doubled its ple in avoiding protectionist responses. Less Global Trade Finance Program to $3 billion distorting policies to respond to the economic to facilitate trade by providing guarantees crisis would include the use of fiscal policy to that cover the payment risk in trade transac- stimulate domestic demand across the board. tions with local banks in emerging markets. While trade and industrial policy may boost To deal with the liquidity constraint, the IFC domestic consumption and production in cer- has also introduced a Global Trade Liquid- tain sectors, on balance they tend to impose a ity Pool, which, in collaboration with official net cost on the economy, have adverse domes- and private partners, is expected to provide tic consequences on resource allocation and up to $50 billion of trade liquidity support economic efficiency, and discriminate against over the next three years. Regional develop- foreign producers. They are likely to be met ment banks such as the African Development with retaliation from other countries, limit- Bank (AfDB), the Asian Development Bank ing their effectiveness and undermining the (ADB), the European Bank for Reconstruc- international trading system. Trade policy is tion and Development (EBRD), and the Inter- not the appropriate instrument for pursuing American Development Bank (IDB) have also equity objectives or for attaining goals such launched or expanded their trade finance as employment protection; indeed, the distri- programs to extend guarantee facilities to butional consequences of protectionism may international banks confirming local banks' be harmful to many poor households. Finally, LCs, with a focus on small transactions in once in place, tariffs and subsidies are diffi- low-income countries that have little access to cult to remove, potentially creating a host of international markets and no or low interna- future difficulties. tional ratings.18 Multilateral cooperation is therefore The international community has recog- essential to ensure that disruptions to trade nized the importance of dealing with trade in goods and services and trade finance trig- finance concerns in a coordinated fashion. gered by the global financial crisis remain At the Group of Twenty (G-20) meeting circumscribed. Unlike in 1929, international in London, in April 2009, leaders reached trade is nowadays governed by rules and dis- agreement to ensure $250 billion of sup- ciplines aimed at preventing the world econ- port for trade finance.19 They also asked omy from falling into another trade-induced their regulators to make use of available Great Depression.20 As noted by its director- 146 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S general, Pascal Lamy, the WTO "provides the TABLE 5.1 Trade distorting actions taken in selected countries real economy, the everyday economy, with a collective insurance policy against the dis- Country Trade policies Sector-specific support order caused by unilateral actions, whether open or disguised; a guarantee of security for Argentina transactions in times of crisis, henceforth an Australia element of resilience that is vital to the run- Austria ning of a globalised world. In short, a global Azerbaijan insurance policy for a global real economy."21 Brazil Yet for the system to hold at times of crisis, all countries need to obey these multilateral rules Canada and disciplines. China At the Summit on Financial Markets Ecuador and the World Economy, Washington, DC, Egypt, Arab Rep. of November 2008, the leaders of the G-20 European Union underscored the critical importance of reject- France ing protectionism and not turning inward in Germany times of financial uncertainty.22 They com- mitted to refrain, during the next 12 months, India from raising new barriers to investment or Indonesia to trade in goods and services, imposing Japan new export restrictions, or implementing Kazakhstan WTO-inconsistent measures to stimulate Libya exports. However, many countries could Malaysia increase their applied levels of tariffs and Mexico trade-distorting subsidies without breach- ing their bound rates or other relevant WTO Morocco disciplines.23 According to the WTO moni- Paraguay toring of trade developments, there has been Philippines a marked increase in protectionist pressures Portugal globally since September 2008, including by Romania a number of G-20 countries. Although there Russian Federation is no general trend, a pattern is beginning to emerge of increases in import licensing, Spain import tariffs and surcharges, and trade rem- Turkey edies to support industries facing difficulties Ukraine early on in the crisis. Examples of countries United States that have introduced trade restricting or Uzbekistan distorting measures (see table 5.1) include Vietnam Argentina (more stringent licensing require- ments), Ecuador (higher rates on some 630 tariff lines), India (higher tariffs on some Source: WTO. Report to the Trade Policy Review Body, March 26, 2009. Note: Trade policy actions include WTO-consistent antidumping and countervailing duties, steel products), Indonesia (limitations on but do not include increases in overall domestic support to agriculture or financial sector entry points for certain imports), Ukraine measures. (possibility of an import surcharge), and the European Union (increased export subsidies have launched extensive domestic stimulus for selected dairy products).24 packages targeted at troubled export indus- While resisting outright protectionism, tries or competing import industries (such as governments, mainly in developed countries, airline, construction, steel, semiconductors, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 147 C H A P T E R 5 and automobile). While not barriers to trade inconsistent measures to stimulate exports. in the traditional sense, these programs In addition, they agreed to rectify promptly aimed at protecting businesses and jobs any such measures taken since their meeting from the effects of the global slowdown in Washington, DC. could nevertheless restrict or distort trade, The number of antidumping actions rose especially when they include "buy domes- significantly in 2008 (figure 5.6). Initiations of tic" provisions.25 In particular, industrial new antidumping investigations and applica- subsidies in one country (to the car indus- tion of new antidumping measures increased try, for example) provide an incentive for by 31 percent and 19 percent, respectively. other countries to respond with their own With 73 percent of all new investigations, subsidies or protection against imports from developing countries dominated the use of subsidized producers.26 They are conta- antidumping in 2008. Brazil, India, and Tur- gious and could result in a subsidy war that key were the top three initiators with some compounds the damage caused and leaves 100 cases combined. Exporters in develop- everyone worse off. In addition, they pull ing countries were the most frequent target. resources away from more productive uses. Regarding the application of new antidump- As noted by the WTO, when analyzing these ing measures, India, the United States, and support measures from a trade perspective, the European Union applied the most mea- it must be recognized that at least some of sures, some 64 combined, most frequently the measures, which in most cases consti- targeted at China's products. tute some form of state aid or subsidy, may To strengthen confidence in global coop- eventually have negative spillover effects on eration and institutions, it remains impor- other markets or distort competition. tant that countries refrain from unilaterally At the G-20 meeting in London, world restricting trade in areas where multilateral leaders reaffirmed--and extended to the end rules and disciplines do not exist or are not of 2010--the commitment made in Wash- fully developed. For instance, the introduction ington, DC, to refrain from raising new bar- of export restrictions on agricultural products riers to investment or to trade, imposing new by many large net food exporters contributed export restrictions, or implementing WTO- to the severity of the recent food price crisis. Countries should instead strive to keep their markets open and use the crisis as an oppor- FIGURE 5.6 Growth of antidumping cases tunity to invest in trade-related infrastructure and to implement measures to facilitate trade. Growth rate of antidumping (%) In particular, efforts in the area of trade facili- 20 tation could do a lot to increase global trade flows and partially counterbalance the effects 10 of the global recession on trade. In the same vein that multilateral coopera- 0 tion leads to a global trade outcome superior ­10 to beggar-thy-neighbor policies, multilateral cooperation could help make trade finance ­20 more affordable and resilient in times of cri- sis. The Doha Round of negotiations under ­30 the General Agreement on Trade in Services ­40 could be used to increase the WTO's con- Antidumping initiation Antidumping measures tribution to making the provision of trade 2004 2005 2006 2007 2008 financing more secure and more readily available, particularly in developing coun- Source: WTO, Antidumping Database; Brown forthcoming. tries. Meanwhile, the WTO could continue 148 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S to use its convening power to raise aware- issues, including key parameters for cutting ness and find ways to alleviate the situation tariffs and trade-distorting subsidies. The if it were to deteriorate further. IMF and the World Bank have called on all parties to revive the significant package that Transforming Crises into was on the table in Geneva in July 2008 and Opportunities for Reform work swiftly toward closure. After years of valuable technical work, there is a Doha As an old Chinese proverb says, a crisis is an deal to be seized. According to the World opportunity riding the dangerous wind.27 In Bank, a deal based on the broad parameters the trade arena, the current crisis could pro- discussed in Geneva would compare favor- vide an opportunity to complete the Doha ably with the Uruguay Round on market Round of multilateral trade negotiations, access and would surpass it in breadth of accelerate national trade liberalization and coverage and tangible benefits for develop- trade facilitation reforms, and fulfill aid- ing countries.29 for-trade commitments and improve their Despite progress leading up to it, the min- efficiency. isterial meeting held in Geneva in July 2008 failed to achieve a breakthrough. Though compromise appeared within reach, the ten- Doha Round tative agreement on nonagricultural market Central to the task of promoting inclusive access (NAMA) and agriculture reached globalization and making the multilateral an impasse in country positions on several trading system more resilient in times of cri- issues, including the provisions governing the sis are bringing down barriers to the trade of new agricultural special safeguard mecha- goods and services that poor people produce nism for developing countries.30 Other areas and increasing the reliability and predictabil- of disagreement that were not addressed ity of the system's rules and disciplines. A or resolved included domestic subsidies for successful Doha Round would help to ensure cotton, tariff-cutting sectoral initiatives in open markets at a time of financial stress, NAMA, and protections for food products ease protectionist pressures, and strengthen with geographical names. the rules-based multilateral trading system. While an opportunity has been missed, It could also provide a much-needed boost in the very substantial progress achieved at confidence to a global economy experiencing and since the meeting should not be over- a sharp slowdown, financial uncertainty, and looked or wasted. The compromise package high food prices. The need for a successful on the tariff and subsidy reduction param- outcome has become more urgent, because eters in agriculture and NAMA circulated the circumstances and some of the challenges during the meeting attracted broad support. facing the world economy in 2009, such as Progress was made in the dispute over fish- disciplining export restrictions or support to eries subsidies. The long-standing issue of industries, are different from those in 2001 the European Union's banana regime and when the round was launched.28 the margin of preference for ACP (African, Seven years into the Doha Round, Caribbean, and Pacific) producers had also trade negotiators have remained unable to nearly been resolved. The "signaling confer- reach agreement on modalities to further ence" on services held in the context of the open markets for goods and services and mini-ministerial to set out the possible scope strengthen the rules of the multilateral trad- and ambition of a services agreement was ing system. Yet trade negotiators have never a success. Countries showed willingness to been so close to an agreement. In the thorny lock in actual market access and make new agriculture negotiations, gaps have been nar- or improved commitments in a wide range rowed significantly on a number of critical of services sectors. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 149 C H A P T E R 5 Given the amount of progress made dur- economic growth and expand opportunity by ing the July meeting and the G-20 pledge to cutting subsidies drastically, lowering tariffs conclude the round before year-end,31 efforts significantly, and opening up services markets. to reconvene a ministerial meeting led to It would be a mistake for the world economy revised draft texts for both agriculture and and harmful for developing countries not to NAMA in December 2008. However, con- revive it.34 Existing gaps can be bridged. For sultation with key players revealed that sub- instance, there are certainly ways to solve the stantial differences remained, particularly special safeguard mechanism problem and on whether to hold additional specific nego- to establish a user-friendly safety net against tiations for particular sectors, the special import surges of agricultural products to pro- safeguard mechanism, and cotton. Under tect fragile farming systems while, at the same the circumstances, Director-General Lamy time, agreeing on disciplines so that it is not decided against calling a ministerial meet- abused and does not hamper normal trade ing. At their London meeting, G-20 lead- flows.35 The major players have all indicated ers reiterated their commitment to urgently their resolve not to lose momentum. Agri- reach an ambitious and balanced conclusion culture and NAMA negotiations resumed in to the Doha Round.32 early 2009 and discussion is focused on areas The extent of progress toward the final of divergence while preserving agreed topics agreement differs across negotiating groups. as tabled in the draft texts. Negotiations in In agriculture, developed countries under the other areas, such as services and rules, will agreement would, among other things, cut continue in parallel. highest bound tariffs by 70 percent over five years, with an average cut of not less than Preferential Trade Agreements 54 percent; lower subsidy limits by 70 per- cent (United States) to 80 percent (European With slow Doha Round negotiations toward Union); and eliminate all export subsidies by a new multilateral agreement, the surge in 2013. Developing countries' bound tariffs preferential trade agreements (PTAs) is fast would be cut by somewhat less than two- reshaping the architecture of the world trad- thirds of the cuts required of developed coun- ing system and the trading environment of tries, and these countries would be able to developing countries.36 Such proliferation designate certain "special" products for differ- of regional and bilateral trade agreements ential treatment, exempting them fully or par- could pose serious challenges to the pro- tially from tariff cuts. In NAMA, developed motion of a more open, transparent, and countries' average bound and applied tariffs rules-based multilateral trading system. would be cut by roughly a third over four or While preferential agreements may in some five years, with the highest cuts in peak tariffs, instances promote development, they neces- while developing countries would be subject sarily discriminate against nonmembers and to little or no cut in applied tariffs. "Rules" can therefore lead to trade diversion in a negotiations on revisions to the antidumping way that hurts both member countries and and subsidies and countervailing measures excluded countries. The multitude of PTAs agreements have also produced a draft text, is also becoming cumbersome to manage for with the U.S. practice of "zeroing" remain- many developing countries. As agreements ing the primary source of disagreement.33 proliferate, countries become members of Notwithstanding the signaling conference, several different agreements. The average the services negotiations remained at an early African country belongs to four different stage. Negotiations in the area of trade facili- agreements; the average Latin American tation continued to proceed satisfactorily. country to seven. This proliferation creates Much is at stake in the Doha negotiations. what has been referred to as a "spaghetti The December 2008 package would boost bowl" of overlapping arrangements, with 150 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S often different tariff schedules, different Developments in National Trade Policies exclusions of particular sectors or prod- Governments use numerous instruments to ucts, different periods of implementation, regulate trade, including import tariffs, spe- different rules of origin, and different cus- cial duties, quotas, technical product regula- toms procedures, among other differences. tions, antidumping duties, and discretionary Notable PTAs that came into force in 2008 licensing. The commonly used indicators of and early 2009 include bilateral agreements trade policy, such as average tariffs and fre- between the European Union and Bosnia quency measures, capture only partially the and Herzegovina, the CARIFORUM states, impact of trade policies on trade flows. It is Montenegro, and Côte d'Ivoire; between the often preferable to use summary measures United States and Peru and Oman; between that take into account the effect of all poli- Japan and Indonesia and the Philippines; cies affecting trade. and a number of agreements between devel- oping countries, such as between Panama and Chile, Pakistan and Malaysia, and Tur- Measures of trade restrictiveness. As in pre- key and Albania. vious reports, this section briefly presents two In 2008 the European Union negoti- measures of the restrictiveness of trade poli- ated a number of economic partnership cies affecting merchandise trade: the Overall agreements (EPAs) with ACP countries Trade Restrictiveness Index (OTRI), and the to replace the system of trade preferences Tariff Trade Restrictiveness Index (TTRI). under the Cotonou trade regime. Several Both provide a measure of the uniform tar- interim agreements were initialed with indi- iff equivalent of observed policies on a coun- vidual countries rather than with full ACP try's imports: they represent the "tariff" that regions. In Central Africa an interim agree- would be needed to generate the observed ment has been concluded with Cameroon level of trade for a country. The level of (other countries in the region opted out). In restrictiveness confronting exporters is cap- Southern Africa, a regional agreement was tured by two similarly constructed indica- agreed with Botswana, Lesotho, Mozam- tors: the Market Access OTRI (MA-OTRI), bique, Namibia, and Swaziland. In West and the Market Access TTRI (MA-TTRI). Africa, the European Union reached indi- The OTRI captures ad valorem tariffs, vidual agreements with Côte d'Ivoire and specific duties, and nontariff measures Ghana. In East Africa, a regional agreement (NTMs), such as price control measures, was agreed with the East African Commu- quantitative restrictions, monopolistic mea- nity (Burundi, Kenya, Rwanda, Tanzania, sures, and technical regulations.37 The TTRI and Uganda). In Eastern and Southern is narrower in scope; it takes into account Africa, a regional agreement was agreed only tariffs (both ad valorem and specific).38 with Comoros, Madagascar, Mauritius, Because many NTMs are not protectionist Seychelles, Zambia, and Zimbabwe (but in intent (or effect), the OTRI reflects net with individual market access schedules). (overall) restrictiveness; it is not necessar- In the Pacific region, a regional agreement ily a measure of the level of protection that was reached with Papua New Guinea and a government seeks for domestic industry. Fiji (with individual market access sched- Some NTMs include border restrictions, ules). The European Union's aim remains such as quotas or bans, and are motivated to conclude full regional EPAs. Negotia- by protectionist objectives. Others, such as tions over these full EPAs are ongoing with standards for mercury content or fecal mat- all African and Pacific regions and cover a ter, are aimed at safeguarding human, ani- wider range of topics, including any issues mal, or plant health. Since distinguishing set out in the interim agreements that part- between objectives is not possible, protection ners want to reexamine. is better measured by the TTRI; because of G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 151 C H A P T E R 5 its limited coverage of trade policy instru- income countries.39 With the exception of ments, however, it is best seen as providing upper-middle-income countries, agricultural a lower-bound estimate of the extent of pro- TTRIs and OTRIs substantially exceed those tection prevailing in a market. for manufactures. Nontariff measures are an Measured by the OTRI and TTRI, trade important component of overall trade restric- policies are generally more restrictive in devel- tiveness, especially for agricultural products, oping countries than in high-income econo- resulting in OTRI levels that exceed the TTRI mies (figure 5.7). This reflects both lower tar- by a significant margin. For high-income iffs and the higher percentage of manufactures countries, the OTRI is about three times in the trade of high-income nations (manufac- higher than the TTRI, while in lower-middle- tures generally face much lower trade restric- income and low-income countries, the ratio is tions than agricultural products, which are two or less. relatively more important in the export basket The level of trade restrictiveness on aver- of developing countries). Trade restrictions on age is higher for countries in South Asia and agriculture are, on average, highest in high- the Middle East and North Africa, and lower for countries in East Asia and Pacific and Europe and Central Asia. Sub-Saharan Africa FIGURE 5.7 OTRI and TTRI by income group, 2007 and Latin America and the Caribbean have overall restrictiveness levels in between these two extremes (figure 5.8). The United States, OTRI European Union, Japan, and China account Percent 35 for about 60 percent of world trade. All have policies that are more restrictive of trade in 30 agricultural products than manufactures, 25 with Japan and the European Union imposing 20 significantly higher restrictions (figure 5.9). 15 For all income groups and all regions, the 10 overall OTRI has fallen since 2002 (figure 5 5.10). The greatest overall liberalization has 0 been implemented by low-income countries, High-income Upper-middle- Lower-middle- Low-income especially in manufacturing goods. Middle- countries income income countries countries countries income developing countries significantly reduced the restrictiveness of agricultural TTRI trade. In particular, there has been a sig- Percent nificant reduction in China's OTRI, which 16 fell by almost 8 percentage points between 14 2002 and 2007. This was in part explained 12 by a dramatic reduction of 32 percentage 10 points in China's agricultural OTRI, which 8 led to a sharp reduction in the agricultural 6 trade restrictiveness in East Asia and Pacific. 4 In terms of the overall OTRI, South Asia 2 0 improved the most followed by the Middle High-income Upper-middle- Lower-middle- Low-income East and North Africa and Latin America countries income income countries and the Caribbean. countries countries Total trade Agriculture Manufacturing Changes in market access. The effect of trade policies on exporters' access to markets is dif- Source: World Bank and UNCTAD staff estimates. ferent across trading partners and geographic 152 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S FIGURE 5.8 OTRI and TTRI by region, 2007 OTRI Percent 35 30 25 20 15 10 5 0 East Asia Europe & Latin America Middle East South Asia Sub-Saharan & Pacific Central Asia & Caribbean & North Africa Africa TTRI Percent 25 20 15 10 5 0 East Asia Europe & Latin America Middle East South Asia Sub-Saharan & Pacific Central Asia & Caribbean & North Africa Africa Total trade Agriculture Manufacturing Source: World Bank and UNCTAD staff estimates. regions, in part because of the discriminatory FIGURE 5.9 OTRI of the four largest traders, 2007 use of trade policies (trade preferences) and in part because of the composition of trade. Fig- Percent ures 5.11 and 5.12 report the MA-OTRI and 60 change in MA-OTRI faced by exporters in 50 each geographic region and country income 40 group. The MA-OTRI measures the overall 30 restrictiveness (including nontariff measures) faced by exports. 20 Sub-Saharan Africa countries benefit 10 from relatively liberal market access as a 0 Total trade Agriculture Manufacturing result of preferential access to the major economies and a larger share of exports of United States European Union Japan China commodities for which tariffs are low. Con- versely, Sub-Saharan Africa's market access to other low-income countries is restricted Source: World Bank and UNCTAD staff estimates. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 153 C H A P T E R 5 FIGURE 5.10 Change of OTRI by income group and region, 2002­07 Percentage points 0 ­2 ­4 ­6 ­8 ­10 ­12 High-income Upper-middle- Lower-middle- Low-income countries countries income countries income countries Percentage points 0 ­5 ­10 ­15 ­20 East Asia Europe & Latin America Middle East South Asia Sub-Saharan & Pacific Central Asia & Caribbean & North Africa Africa Total trade Agriculture Manufacturing Source: World Bank and UNCTAD staff estimates. Note: Most changes in OTRI in this figure reflect tariff changes. FIGURE 5.11 MA-OTRI by region, 2007 Percent 50 40 30 20 10 0 High-income East Asia Europe & Latin America Middle East & South Asia Sub-Saharan countries & Pacific Central Asia & Caribbean North Africa Africa Importers High-income countries East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Source: World Bank and UNCTAD staff estimates. Note: The horizontal axis represents the importing area and the vertical bars show exporters into that area. 154 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S FIGURE 5.12 Change in MA-OTRI by region, 2002­07 Percentage points 5 0 ­5 ­10 ­15 ­20 High-income East Asia Europe & Latin America Middle East & South Asia Sub-Saharan countries & Pacific Central Asia & Caribbean North Africa Africa Importers High-income countries East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Source: World Bank and UNCTAD staff estimates. Note: Most market access changes in the figure reflect tariff changes. The horizontal axis represents the importing area and the vertical bars show exporters into that area. by relatively high tariffs. Among other because high-income countries' exports regions, Europe and Central Asian market mainly consist of manufactures, for which access to high-income countries is facilitated restrictiveness has declined relatively more. by preferences in the European Union, while Exports of lower-income countries are more the low MA-OTRI confronting Middle East oriented toward agriculture, which faces and North African countries is largely attrib- more restrictive barriers and for which lib- utable to the composition of exports--oil eralization has been more mute. products are generally subject to low import tariffs. Latin America and the Caribbean Policies in services markets. Permitting for- faces relatively high market access barriers eign firms to compete in services markets is in Europe and Central Asia and the Middle another powerful potential channel for tech- East and North Africa. Interestingly, despite nology diffusion as well as a mechanism to the multiplication of regional trade agree- reduce costs and raise the quality of services. ments, restrictions on intraregional market As reported in Global Monitoring Report access remain high in many regions. 2008, an ongoing research project by the In terms of changes, market access has World Bank is seeking to compile data on the improved in recent years, with Latin Amer- extent to which policies discriminate against ica and the Caribbean benefiting the most foreign services providers. To date, surveys in South Asia, East Asia, and within Latin have been conducted in 56 developing coun- America; and Sub-Saharan Africa gaining tries and comparable information obtained significantly in South Asia but also within for 24 developed countries, covering five key Africa. High-income countries increased sectors: financial services (banking and insur- their market access in most regions. This is ance), telecommunications, retail distribution, largely attributable to export composition, transportation, and professional services.40 In G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 155 C H A P T E R 5 FIGURE 5.13 Restrictiveness of services trade policies by region, 2008 Restrictiveness of services trade policy 41.4 39.3 36.6 World average 26.0 21.0 18.7 17.1 Middle East South Asia East Asia Sub-Saharan Latin America Europe & OECD & North Africa & Pacific Africa & Caribbean Central Asia Source: Gootiiz and Mattoo 2009. Note: The regional index is an average of individual countries' services trade restrictiveness index. This index incorporates indexes of financial services, retailing, maritime shipping, maritime auxiliary services, air passenger services, accounting, auditing, and legal services in domestic and foreign law. each sector, the survey covered the most rel- professional services are restricted all over evant modes of supplying that service: cross- the world, including in Latin America, East- border trade (mode 1 in WTO parlance) in ern Europe, and the developed countries financial, transportation, and professional (figure 5.14). services; commercial presence or foreign direct investment (mode 3) in each services Behind-the-Border Agenda: Impact of sector; and the presence of service-supplying Trade Policy vs. Other Trade Costs individuals (mode 4) in professional services. The restrictiveness of services policies var- The fast pace of globalization and the ero- ies substantially across world regions (figure sion of preferences for poor countries asso- 5.13). Interestingly, some of the most restric- ciated with expanding preferential trade tive policies today are visible in the fast- agreements make improving domestic com- growing economies of Asia as well as in the petitiveness through behind-the-border Middle East. In contrast, policies are rela- reforms imperative. In particular, efforts tively liberal in Latin America, Sub-Saharan in the area of trade facilitation can do a lot Africa, Eastern Europe, and the developed to increase trade flows.41 The ease of mov- countries. Some of the poorest countries, ing goods internationally has become a key like Cambodia, Ghana, Mongolia, Nige- determinant of export competitiveness and ria, and Senegal, are remarkably open, with diversification. World Bank­IMF reform programs and There is much that developing countries accession to the WTO probably playing a can do in the area of trade facilitation to significant role. Despite significant liberal- expand trade by reducing the transaction ization in recent years, telecommunications, costs for their firms and farmers. High trade finance, and retail services are still relatively transaction costs and lack of capacity to rap- restricted in Asia; many Sub-Saharan Afri- idly move goods and services across borders can countries have opened up telecommu- prevent many developing countries from nications, especially the mobile segment, to taking advantage of existing trade oppor- competition, but the sector is still relatively tunities. In particular, outdated and inef- restricted in the region; and transport and ficient border processing systems, problems 156 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S FIGURE 5.14 Restrictiveness of services trade policies by region and sector, 2008 Restrictiveness of services trade policy 70 60 50 40 30 20 10 0 Middle East & South Asia East Asia Sub-Saharan Latin America Europe & OECD North Africa & Pacific Africa & Caribbean Central Asia Financial Telecom Retail Transportation Professional Source: Gootiiz and Mattoo 2009; restrictiveness index of cross-border air passenger policy came from the WTO QUASAR database (2007). Note: Financial services = retail banking and life and automobile insurance; telecom services = fixed and mobile phones; retail services = retailing (commercial presence); transportation services = maritime shipping, maritime auxiliary services, and air passenger services; profes- sional services = accounting, auditing, and legal services in domestic and foreign law. associated with inefficient logistics services, trade and transaction costs may be of equal and gaps in the trade infrastructure all result if not greater importance as constraints in higher transaction costs, delays, and to trade. Many of these trade costs reflect unreliable supply chains. The high returns the domestic economic environment and to action in this area are increasingly rec- the overall private investment climate: the ognized, as reflected in increased levels legal and regulatory framework, the effi- of investment in trade-facilitation-related ciency of infrastructure services and related reforms by governments and the develop- regulation, customs clearance procedures, ment community. The World Bank Group, and administrative red tape, among other in partnership with donors, is increasing its things. efforts to provide additional services and A substantial amount of information on resources to help developing countries with the extent of product market regulation is trade facilitation activities, including provi- available for developed countries, but com- sion of support for regional, multicountry parable data do not exist for developing projects.42 country regulatory regimes. However, data The available data on the level of trade are available for a large number of develop- restrictiveness implied by border policies ing countries on the performance of logistics indicate that nontariff measures are increas- services and on the internal costs associated ing in relative importance as a barrier to with shipping goods from the factory gate to trade but that tariffs remain a significant the port, and from ports to retail outlets. The factor, especially in developing countries. first is mainly captured by the Logistics Per- The tariffs and NTMs included in the indi- formance Index (LPI); the second is largely cators discussed above are only a subset of covered by the Doing Business database.43 the policies that may affect trade. Internal All of these indicators capture dimensions G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 157 C H A P T E R 5 of prevailing domestic regulatory regimes indicators on merchandise trade flows using that affect trade. While they overlap to some a gravity model framework where bilateral extent, they also inform about possible spe- trade flows are a function of the economic cific bottlenecks. The Doing Business "cost size and distance between two countries. of trading" measures the fees associated In addition to standard economic variables, with completing the procedures to export or they use both the TTRI and the NTM com- import a 20-foot container, measured in U.S. ponents of the OTRI (defined as the differ- dollars. These include costs for documents, ence between the OTRI and the TTRI), as administrative fees for customs clearance and well as the Doing Business and LPI indica- technical control, terminal handling charges, tors as explanatory variables.45 The results and inland transport.44 The LPI is based on a are typical of those of other gravity equation worldwide survey of global freight forward- models.46 Distance is an important deter- ers and express carriers and measures the minant of bilateral trade, as are a common logistics friendliness of countries on seven key border and common language. Landlocked dimensions (efficiency and effectiveness of the countries tend to trade less, especially in clearance process by customs and other bor- terms of exports, while larger and more der control agencies; quality of transport and populous countries tend to trade more. information technology infrastructure for Trade policies (tariffs and NTMs) are sta- logistics; ease and affordability of arranging tistically significant determinants of trade vol- shipments; competence in the local logistics umes. On average, a reduction in the TTRI of industry; ability to track and trace shipments; 10 percent would increase trade volumes by a domestic logistics costs; and timeliness of little more than 2 percent, while NTMs add shipments in reaching destination). Feedback another 1.8 percent.47 Other trade costs are from the survey is supplemented with data on important. Coefficient estimates for the LPI the performance of key components of the suggest that a one point reduction in the LPI logistics chain. Table 5.2 reports the average score would increase trade volumes by about of these indexes by country income groups. 50 percent. Similar results are found for Low-income countries generally have weaker internal trade costs as captured by the Doing trade facilitation performance than higher- Business indicators. The elasticity of imports income economies. to the cost of importing is about 0.48, and Hoekman and Nicita (2008) assess the that of exports to the cost of exporting is effects of border barriers and trade costs about 0.47. That is, a 10 percent reduction in the cost associated with importing (export- ing) would increase imports (exports) by TABLE 5.2 Measures of domestic trade costs about 4.8 percent (4.7 percent). When includ- averages by country group ing both the LPI and the Doing Business indicators in the estimation, all coefficients remain significant except for the LPI for the High-income Middle-income Low-income importers. Indicator countries countries countries To assess the relative impacts of internal LPI (score)a 3.9 3.0 2.8 trade costs and the trade-impeding effect Doing Business, 813.6 1,024.2 1,212.0 of border trade policies, table 5.3 reports import (US$)b the predicted effect on trade if low-income Doing Business, 774.4 867.2 949.3 countries were to converge to a set of poli- export (US$)b cies that would generate the observed aver- age levels of the LPI and Doing Business Source: Hoekman and Nicita 2008. indicators in middle-income countries. These a. On a 5-point scale (5 highest performance). results are compared with the average effect b. Fees associated with completing the procedures to export or import a 20-foot container (not including tariffs and trade taxes). of a reduction in the TTRI and OTRI to 5 158 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S and 10 percent, respectively.48 The predicted TABLE 5.3 Effects of convergence by low-income countries to increases in trade volumes of low-income middle-income average percent countries in this convergence experiment are substantial. The largest increases in trade are associated with actions to improve the Increase in Increase in logistics-trade facilitation scores (as mea- Indicator/policy area imports exports sured by the LPI). Improving performance on LPI score 15.2 14.6 the Doing Business measure of internal trade Doing Business, cost of trading 7.4 4.1 costs has an impact similar to what could be obtained by further traditional trade policy TTRI for low-income countries 5.7 n.a. reform--reducing the TTRI or bringing reduced to 5 percent down the restrictiveness of NTMs. OTRI for low-income countries 8.4 n.a. These results suggest that administrative reduced to 10 percent and regulatory policies are at least as impor- tant as trade policies in impeding trade. This Source: Hoekman and Nicita 2008. finding supports the recent focus of many n.a. Not applicable. developing countries on taking action to facilitate trade. The analysis also makes clear technology), including customs, standards that large benefits are still to be gained from compliance, and transport security; (2) traditional trade liberalization, the focus of streamlining trade regulations and proce- the ongoing Doha Round of WTO negotia- dures, such as licensing, trade finance rules, tions. As noted above, progress in the Doha documentary requirements, and work per- Round has unfortunately been slow. Bring- mits; (3) increasing the efficiency and capac- ing the negotiations to a successful conclu- ity of trade gateways, such as ports and air- sion is important because it would imply ports; (4) creating an enabling environment improvements in market access to all export for the efficient provision of services such as markets. Trade facilitation does not require logistics, transport security, trade finance, multilateral (or bilateral) negotiations--the testing and certification, remittances, costs that are incurred by traders in develop- freight-forwarding, and customs broker- ing countries can be reduced through uni- ing; (5) improving trade corridors, including lateral actions. As Ikenson argues, there is multimodal freight transport and gateway great scope to enhance growth opportuni- infrastructure; and (6) establishing regional ties "while Doha sleeps."49 The recent finan- trade facilitation systems, such as transit cial crisis makes this policy prescription regimes for landlocked countries, regional even more important. Trade facilitation and sanitary and phytosanitary management, supporting measures to enhance competi- and regional customs harmonization and tiveness are areas in which aid for trade can standardization. have an important impact. To help developing countries improve The trade facilitation agenda facing devel- their competitiveness by reducing the costs oping countries is broad and can be defined of engaging in international trade, the World as covering the infrastructure, institutions, Bank, together with other development regulations, policies, procedures, and ser- agencies, has scaled up its trade facilitation vices that allow firms to conduct interna- programs and launched a Trade Facilita- tional trade transactions--involving trade tion Facility. This facility, launched in April in either goods or services--on time and at 2009, will enable the World Bank Group to low cost. Specifically, this agenda includes respond to increased demands from develop- (1) modernizing and improving border man- ing countries to overcome trade bottlenecks agement institutions, processes, and related imposed by weaknesses in trade logistics, supporting hardware (such as information customs, testing and certification, trade G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 159 C H A P T E R 5 finance, and other aspects of trade facilita- to ensure that pledges on aid for trade were tion regimes. An integral part of scaling up fulfilled.50 As part of this effort, three World Bank and IFC services in the trade regional reviews took place in 2007 to facilitation area, the facility creates a one- take stock of progress in the delivery of aid stop shop by bringing together the different for trade, and a first WTO Global Aid for parts of the institution that provide trade Trade review was held in Geneva in Novem- facilitation-related assistance and estab- ber 2007 to exchange ideas about best lishing a dedicated facility that will allow practices and to facilitate collective action the institution to deliver a coherent and to maximize the benefits of aid for trade. In expanded package of services, and respond 2008 the WTO announced an aid-for-trade more effectively to the increasing demand roadmap aimed at monitoring overall aid- for support in this area. for-trade aggregates with a view to evalu- ating the initiative and mobilizing support for the trade agenda through national con- Aid for Trade ferences.51 A second global review will take In supporting the multilateral trade liber- place in early July 2009. alization agenda as well as domestic trade Common themes that emerged from the facilitation efforts, aid for trade can produce first global review included the importance positive cross-border externalities that ben- of leadership in developing countries to inte- efit all trading partners. Although trade is grate trade into national plans; priority set- an important engine of growth, many poor ting in deciding on the projects that deliver countries face considerable infrastructure the biggest return on investment; thinking and other supply-side constraints to par- regionally, because many capacity and con- ticipating in global markets. Trade reform nectivity problems, especially for small or is also a "global public good" in that all landlocked countries, are regional in scope; countries generally benefit from one coun- ensuring increased and predicable financing, try's policy and institutional reforms (such by following through on donor pledges made as lowering of tariffs and other trade barri- at the Monterrey, Gleneagles, and Hong ers) and investments in trade infrastructure Kong, China meetings; and mobilizing the (such as customs reforms and ports). Those private sector because it is businesses, not benefits are increased when reforms are governments, that trade. undertaken by a number of countries con- Leaving aside the methodological limita- currently. Because the benefits of reform are tions in defining and tracking aid for trade not fully captured by the reforming country discussed in last year's report, aid-for-trade itself, there is potentially "underinvestment" flows increased by some $2 billion in real in reforms. Aid for trade can thus be an terms during 2007, or 21 percent relative important complement to trade reform and to the baseline for 2002­05 established by global market opening. the Aid for Trade Task Force (table 5.4). To set in motion a process to help pro- Total aid for trade in 2007 on the basis of vide more and better aid for trade, trade the OECD Creditor Reporting System defi- ministers at the 2005 Hong Kong, China nition represented roughly 30 percent of Ministerial called on bilateral and multilat- total sector allocable official development eral donors to increase the resources for aid assistance (ODA), below the 35 percent for trade, endorsed the enhancement of the registered in 2002. A noticeable develop- Integrated Framework for least developed ment in 2007 was the contrast between the countries, and established a Task Force performance of multilateral and regional on Aid for Trade. The Aid for Trade Task donors, such as the World Bank and the Force recommended, among other things, regional development banks, and that of improvements in global monitoring efforts bilateral donors, including the European 160 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S TABLE 5.4 Aid-for-trade commitments: annual averages 2002­05 and totals for 2006 and 2007 US$ (millions), 2006 constant prices As a share of As a donor share of sector Change total aid allocable Trade policy and Total aid for 2006 to for trade ODA, Average Infrastructure Capacity building regulations trade 2007 in 2007 2007 aid for trade 2002­05 2006 2007 2006 2007 2006 2007 2006 2007 percent percent percent Top 10 bilateral donors Denmark 387 95 167 142 145 0 1 237 314 32 1.2 25 France 681 517 507 310 738 1 4 828 1,249 51 4.9 21 Germany 1,160 797 501 1,062 968 18 38 1,877 1,508 ­20 5.9 24 Japan 4,439 3,417 2,968 1,105 1,392 50 46 4,573 4,406 ­4 17.3 65 Netherlands 529 134 86 664 508 63 44 861 638 ­26 2.5 10 Norway 252 104 142 199 189 21 21 324 352 9 1.4 20 Spain 372 592 297 111 279 1 7 704 583 ­17 2.3 32 Sweden 216 87 70 213 236 26 34 326 340 4 1.3 23 United 757 108 110 445 374 81 26 634 510 ­20 2.0 10 Kingdom United States 3,594 2,307 2,482 1,897 1,967 316 183 4,520 4,632 2 18.2 35 Total bilateral 13,810 8,649 7,749 6,937 7,716 1,046 703 16,217 15,899 ­2 62.0 27 Main multilateral donors AfDB 565 282 831 243 231 .. .. 526 1,062 102 4.2 92 ADBa 717 166 340 216 257 .. 5 382 603 58 2.4 45 European 2,479 1,647 1,352 1,161 1,133 411 261 3,220 2,746 ­15 10.8 29 Commission World Bank 3,166 1,724 3,233 1,120 1,431 .. .. 2,844 4,663 64 18.3 44 (IDA) Total 7,321 3,874 5,918 2,933 3,414 414 269 7,221 9,600 33 38.0 37 multilateral Total aid for 21,097 12,523 13,666 9,870 11,130 1,460 971 23,439 25,499 9 100 30 trade Source: OECD Creditor Reporting System (as of January 2009). Note: .. = Negligible. a. Data provided here are only indicative of ADB's expanding trend and position relative to other institutions. They do not necessarily reflect ADB's actual involvement in aid for trade, which is likely to be higher due to some limitation of current classification systems. Union. While the main multilateral donors 2007 while commitments from multilateral continued to scale up their aid-for-trade donors increased by more than 30 percent programs, several bilateral donors recorded (figure 5.15). a significant decline in their aid-for-trade The United States and Japan continued commitments. Total commitments from to dominate global aid-for-trade delivery, bilateral donors decreased by 2 percent in with $4.6 billion and $4.4 billion in 2007, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 161 C H A P T E R 5 FIGURE 5.15 Aid-for-trade commitments: annual averages for through technical assistance, accounted for 2002­05, and totals for 2006 and 2007 the smallest share. However, limitations in the data collection might underestimate this portion of aid for trade. 2006 constant US$ (billions) Iraq, India, Vietnam, Afghanistan, and 30 Ethiopia were the top five recipients of aid for 25 trade in 2007, accounting for almost 30 per- cent of the total. Asian countries received 20 almost 50 percent of all aid for trade-- 15 $10 billion on average during 2002­07 (fig- ure 5.16).52 Africa followed with 32 percent 10 ($7.14 billion). Ethiopia, with 3.17 percent 5 of total aid for trade in 2007, was the only country from Sub-Saharan Africa among the 0 Average aid for Total aid for Total aid for top five recipients. The predominance of Asia trade 2002­05 trade 2006 trade 2007 largely reflects the volume of aid received for economic infrastructure--almost 60 per- Total bilateral Total multilateral Total aid for trade cent of total aid for trade in the region. Even when excluding large recipient countries in Source: OECD Creditor Reporting System (as of January 2009). Asia, Africa lags behind: the average Asian country received one-and-a-half times more respectively. Other important bilateral than the average African country. Low- donors include France, Germany, the Neth- income countries received only about half erlands, Spain, and the United Kingdom. of the total aid-for-trade commitments in The World Bank, through the International 2002­07, slightly more than half of which Development Association (IDA), was the went to least-developed countries. largest provider of concessional aid for trade Progress has been made in trade-related in 2007, closely followed by the United technical assistance for the least-developed States; both provided about 18 percent of countries with the establishment of the total aid for trade in 2007. IDA aid for trade Enhanced Integrated Framework (EIF) in has been driven by an increase in aid for 2007, a new executive secretariat, and a trust infrastructure projects. The ADB and the fund to support its operations. The new EIF AfDB are also important providers of aid for governance structure will emphasize coun- trade in their respective regions and among try ownership by reinforcing and enlarging the top 10 donors globally. In 2007, the the involvement of the EIF national bodies AfDB allocated more than 90 percent of its at the country level, linking the WTO-based total sector allocable ODA to aid for trade. EIF secretariat to in-country processes, and The 10 largest bilateral donors and multilat- encouraging recipient countries to lead proj- eral agencies funded more than 90 percent ects.53 In September 2007 a pledging con- of global aid-for-trade activities in 2007. ference was held for the EIF Trust Fund in In general, a greater portion of multilateral Stockholm; 22 donors pledged $170 million than of bilateral commitments goes to low- over a five-year period. Since then, a further income countries. $3 million has been pledged. With the selec- In terms of composition, aid to support tions of the trust fund manager and head of the development of economic infrastructure the secretariat, the EIF is likely to be fully and productive capacity building dominated operational in early 2009. overall volumes of aid for trade, at 54 percent To complement the EIF, the World and 43 percent, respectively, in 2007. Aid for Bank launched in November 2007 the trade policy and regulations, usually delivered Multi-Donor Trust Fund for Trade and 162 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S FIGURE 5.16 Commitments of aid for trade by region, income group, and category, average 2002­07 By region By income 2006 constant US$ (billions) 12 10 8 6 4 2 0 Asia Africa America Europe Oceania Global Lower- Least- Other Upper- Multi- programs middle- developed low- middle- country income countries income income countries countries countries Trade policy and regulations Economic infrastructure Productive capacity Source: OECD Creditor Reporting System and OECD/WTO Trade Capacity Building database. Note: Asia includes East and South. Development to provide additional resources Notes in support of the Bank's trade strategy at the country, regional, and global levels.54 In its 1. Exports and imports of 45 countries that first year of operation, the trust fund has have reported trade data for January 2009 are supported work in many low-income coun- uniformly weak, with an average drop of over tries and regional projects, and enhanced 30 percent compared to January 2008. Based on a the World Bank's capacity to respond to handful of countries that have reported February client demand for trade-related technical 2009 data, including China, trade continues to be very weak, and downside risks are large. assistance and capacity building; develop 2. The Baltic Dry Index indirectly measures analytical tools to assist countries to define global supply and demand for the commodities trade policy strategies; expand research and shipped aboard dry bulk carriers, such as build- datasets on trade topics of importance to ing materials, coal, metallic ores, and grains. The developing countries; and diffuse knowledge index is sometimes perceived as a leading economic on international trade to developing coun- indicator of global trade because dry bulk primarily tries. Some examples of work include a com- consists of materials that function as raw material prehensive program on trade in services in inputs to the production of intermediate or finished the Africa region; mainstreaming trade and goods, such as concrete, electricity, steel, and food. competitiveness in Côte d'Ivoire, Madagas- 3. See chapter 1 for a more detailed account of car, and Tanzania; technical assistance for the macroeconomic impact of the global economic crisis on developing countries. trade policy reform and export promotion in 4. World Bank 2009. North Africa; a regional study on services 5. Chauffour 2008. trade in South Asia; an assessment of trade 6. OECD 2008. facilitation and logistics in Mongolia; and 7. Additional information on food and fuel new research on agriculture and poverty price impacts on individual countries is available with a focus on gender. in IMF 2008. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 163 C H A P T E R 5 8. The world's major developing-country port trade finance through our export credit and exporters of wheat (Argentina, Ukraine, Russian investment agencies and through the MDBs. Federation, and Kazakhstan) and rice (Vietnam, 20. The 1930 U.S. Smoot-Hawley Act that India, and China) introduced various types of raised tariffs is widely blamed for intensifying the temporary export restrictions in an attempt to Great Depression. decouple domestic markets from global markets 21. Pascal Lamy, "WTO Is Global Insurance and rein in domestic food prices. Policy for a Global Economy," speech before 9. In the case of large exporters, this impact the Finance Commission of the French National may be less significant as agriculture export is Assembly, Paris, October 1, 2008. often carried out by large commercial farms that 22. Statement from the G-20 Summit on Finan- have few links to the rural poor. cial Markets and the World Economy, Washing- 10. Export restrictions had a particularly ton. DC., November 15, 2008. strong impact on the rice market, for which global 23. It is estimated that if WTO members were trade is less than 10 percent of total production. to increase their applied tariffs up to their bound After China, the Arab Republic of Egypt, India, rates, the average global rate of duty would dou- Pakistan, and Vietnam (among others) restricted ble and the value of global trade would be cut by exports, small countries that relied on imports about 7.7 percent; see Bouet and Laborde 2008. were unable to ensure adequate supplies. Subse- 24. Newfarmer and Gamberoni 2009; WTO quent bilateral agreements between important 2009. trading partners, such as Bangladesh and India, 25. For instance, a "Buy American" provision were insufficient to alleviate this problem. made it into the final $787-billion fiscal stimulus 11. The secondary market plays a key role in bill passed by the United States in February 2009. helping banks undertake transactions that are larger It requires the purchase of U.S.-made iron, steel, than their current credit and cross-border limits. and manufactured goods for projects of construc- 12. Whether the contraction of trade finance in tion, alteration, maintenance, or repair of a public late 2008 contributed to the decline in world trade building or public work financed by the bill. How- or was a consequence of this decline remains an ever, it also requires that the measure be applied open question. However, the latter force appears in a manner consistent with U.S. obligations under to have been dominant: overall demand for trade international trade agreements. finance has decreased with lower trade volumes 26. Major U.S. and European carmakers and higher prices. received various forms of financial support in late 13. According to Global Business Intelligence, 2008 and early 2009. a consulting firm specializing in international sup- 27. In the same vein, when meeting with the ply chain matters, accounts receivable and payable Swiss president on January 27, 2009, Chinese Pre- (that is, open accounts) represent 78 percent of mier Wen Jiabao underscored that the word "cri- international trade, LCs 15 percent, and finance sis" in Chinese is made of two characters meaning for export collection (another paper-based transac- danger and opportunity. tion similar to LCs but without credit) 7 percent. 28. Mattoo and Subramanian 2008. 14. IMF 2003. 29. Martin and Mattoo 2008. 15. In total only 116 trade finance loans (exclud- 30. The special safeguard mechanism allows ing aircraft and shipping) were signed in the last developing countries to raise tariffs temporarily quarter, the lowest quarterly count since 2004. to deal with import surges and price falls. The 16. IMF 2009. blockage in the July 2008 negotiations was about 17. Evidence of liquidity pressure on trade import surges in the particular instance where the finance has also been reported by the banks par- mechanism raises tariff above commitments made ticipating in the IFC's Global Trade Finance Pro- in the Uruguay Round. A number of countries gram. Major international banks participating in opposed breaching the pre-Doha Round commit- the program have been unwilling to assume a por- ments, while others insisted on being able to do tion of the risk in a particular transaction, leaving this. the underlying risk to the IFC alone. 31. Statement from the G-20 Summit on Finan- 18. See chapter 6 for more details on actions cial Markets and the World Economy, Washington taken by the international financial institutions. DC, November 15, 2008. 19. Leaders agreed to "ensure availability of at 32. Statement from tthe G-20 Summit, Lon- least $250 billion" over the next two years to sup- don, April 2, 2009. 164 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 P R E S S I N G A H E A D W I T H T R A D E O P E N N E S S 33. In calculating the dumping margin of a vide information on required documents and cost product (that is, the average of the differences as well as the time to complete each procedure. between the export prices and the home market Inland transport costs are based on distance to the prices), the practice of zeroing puts a value of zero shipping port. The methodology, surveys, and data on instances when the export price is higher than are available at http://www.doingbusiness.org. the home market price. 45. Hoekman and Nicita 2008. Standard vari- 34. According to Bouet and Laborde (2008), ables include GDP and population of the country there would be a potential loss of $1.064 trillion pairs, distance between them, controls for adja- in world trade if world leaders were to fail to con- cency, common language, and access to the sea. clude the Doha Round and if countries were to Because the OTRI is calculated at the bilateral subsequently revert to the trade policies in place level, it captures the effect of preferential trade at the end of the Uruguay Round. agreements. In the analysis only two components 35. Statement of World Bank Group President of the LPI are used: indicators of the efficiency of Robert B. Zoellick on Doha WTO Negotiations, customs and a measure of access to (choice of) and August 18, 2008 at http://web.worldbank.org/ affordability of international shippers. The dataset WBSITE/EXTERNAL/NEWS/0,,contentMDK:21 used spans 104 importers and 115 exporters. 874660~pagePK:34370~piPK:34424~theSitePK: 46. For example, Limão and Venables 2001; 4607,00.html. Wilson, Mann, and Otsuki 2003; Anderson and 36. As of December 31, 2008, some 421 Marcouiller 2002; Anderson and van Wincoop regional trade agreements had been notified to the 2003; Francois and Manchin 2007. World Trade Organization. 47. The effect of NTMs is captured at the mar- 37. For more detail, see World Bank­IMF gin, that is, given the effect of the existing tariff 2008. structure. 38. The OTRI and TTRI are calculated as a 48. The 5 and 10 percent thresholds corre- weighted sum of ad valorem tariffs and ad valorem spond to the levels that would bring the TTRI and equivalent of specific duties, and nontariff mea- OTRI of low-income countries to that of middle- sures (for the OTRI), where the weights are import income countries. volumes and import demand elasticities (Kee, Nic- 49. Ikenson 2008. ita and Olarreaga 2008). The OTRIs by country 50. Monitoring takes place at three levels: (1) and the data used to calculate the OTRI are posted global monitoring, carried out by the OECD; (2) on the DECRG Trade Research Website under donor monitoring, in the form of self-evaluations; "data and statistics"; see http://go.worldbank.org/ and (3) in-country monitoring, also in the form of C5VQJIV3H0. self-assessments. 39. One characteristic of the OTRI to keep 51. For an update of the ongoing work, see in mind is that it is calculated using weights that WTO, 2008 Aid-for-Trade Roadmap, Annotated reflect actual imports. This may distort the pic- Update, July 23, 2008 at http://www.wto.org/ ture about the geographic pattern of protection. english/tratop_e/devel_e/a4t_e/a4t_roadmap_ An appropriate measure of the OTRI and TTRI is feb08_e.doc the one that breaks it down by product category, 52. In the OECD Credit Reporting System not by source. database, Asia includes Middle East Asia, South 40. Gootiz and Mattoo 2009. and Central Asia, and Far East Asia. 41. Djankov, Freund, and Pham, 2006; Iken- 53. The Enhanced Integrated Framework (EIF) son 2008. is a multi-agency (IMF, ITC, UNCTAD, UNDP, the 42. World Bank 2008b. World Bank, and the WTO), multidonor program 43. World Bank 2007; World Bank 2008a. to assist least-developed countries in addressing 44. The cost measure does not include tariffs national competitiveness priorities through trade or trade taxes or "unofficial" costs such as briber- diagnostic. The enhancement of the EIF was rec- ies. The indicator is part of the Doing Business ommended by the WTO Task Force to improve trading-across-borders index, which compiles the governance as well as communication and coordi- number of documents, the cost, and the time nec- nation between the various partners. essary for procedural requirements for exporting 54. The current donors to the MDTF are Nor- and importing a standardized cargo of goods by way, Sweden, and the United Kingdom for a total ocean transport. Local freight forwarders, ship- contribution of approximately $30 million over ping lines, customs brokers and port officials pro- three years (2007­10). G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 165 6 International Financial Institutions: Crisis Response and Support for the Private Sector T he international financial institutions severity of the economic and financial cri- (IFIs) have a crucial role to play in sis and the strength and timing of policy supporting an effective response to the responses.3 Should a more pessimistic out- global crisis and the development emergency come occur, the financing gap could increase that now confronts many developing coun- to as much as $1 trillion. Some middle- tries.1 As a result, the focus of the IFIs has income countries had relied heavily on pri- shifted to counteracting and mitigating the vate finance to fund large current account global private credit crunch and recession. deficits in 2008. They have been the first to This contrasts with 2007, when the impact feel the impact of the global crisis. They need of the IFIs stemmed largely from their abil- funding to smooth a reduction in deficits, as ity to leverage private capital, which reached well as to roll over existing debts and manage record levels of about $1 trillion in net terms reduced liquidity in their banking systems. in that year. In 2009 another round of impacts is In 2008 credit conditions for develop- expected to hit all developing countries. ing countries deteriorated sharply as private Reflecting the global recession, this round flows dried up. Cross-border syndicated will come through reductions in export bank loans fell from $410 billion to $167 bil- volumes and prices, remittances, tourism, lion. Bond issuances fell from $170 billion foreign investment, and reduced public rev- to $72 billion. Equity investments fell from enues and hence expenditures. $269 billion to $174 billion. In 2009 net The immediate priority for the IFIs is to private capital flows to developing countries limit the fall in economic growth in develop- could fall still further, to less than one-fifth ing countries, to maintain public infrastruc- of the 2007 peak level, as private credits con- ture assets, and to assist poor households. tinue to contract.2 Indeed, net private flows The negative effect on human capital of could even turn negative in 2009 if difficul- growth collapses seems to be greater than ties in rolling over maturing debt intensify. the positive effect from growth accelera- The immediate priority for the IFIs is tions.4 Thus the ability of the IFIs to offset to respond to the crisis and deal with an recent shocks is critical to sustaining recent unprecedented rise in demand for financing. gains toward achieving the Millennium The World Bank estimates that developing Development Goals (MDGs). countries face a financing gap of $270 bil- Before the crisis hit, one-third of all lion­$700 billion in 2009 depending on the developing countries had current account G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 167 C H A P T E R 6 deficits surpassing 10 percent of gross Protect development assets, by avoiding domestic product (GDP). These countries stop-go expenditures on new projects and will face growing problems in financ- maintaining existing infrastructure assets ing such deficits and will need to restrict spending demand. Private capital for trade, infra- Protect poor households and help main- structure, microfinance, and health care tain social and political stability has been sharply cut. All told, the reduc- Maintain the long-term focus on market tion in net private capital could amount to development and strengthening of the pri- about 5 percentage points of developing- vate sector. country GDP in 2009. The private sector in developing coun- The IFIs have responded with agility to tries finds itself in a particular squeeze. country needs to stabilize the balance of The flight to quality means that financing payments so far. The International Mon- is more expensive or simply unattainable etary Fund (IMF) has provided $49 billion for many firms. The International Finance since mid-2008 and the MDBs (the World Corporation (IFC) estimates that its cli- Bank Group and the four major regional ents have postponed or cancelled about development banks) had record gross dis- $100 billion worth of projects because of bursements of $55 billion in 2008. Much lack of finance. of this increase took the form of budget The boom, and now bust, of private support to maintain public expenditure, financial flows to developing countries including improvements in social safety highlight the complexity of tapping the nets to mitigate the effects of the crisis on development potential of the private sec- the poorest. But IFI capacity to continue to tor. On the one hand, in a normal year, expand operations in response to the cri- private capital far exceeds official aid and sis is declining. Some MDBs may require is viewed as indispensable to achieve the significant capital increases because crisis MDGs, especially for big-ticket items like lending has reduced available headroom. In infrastructure and social services. On the this context, the Group of Twenty (G-20) other hand, private capital has been vola- leaders at the recent summit in London tile and is allocated on commercial terms took timely action in agreeing to support rather than according to where the develop- sizable increases in resources available to ment impact is greatest. the IMF and the MDBs. The resources of the multilateral develop- Low-income countries, while less ment banks (MDBs) flow largely to the public affected by the crisis so far, have not sector, so these institutions must be careful had access to additional resources to the that any crisis response not undermine the same extent. Disbursements of conces- long-term strategy of support for the private sional funds from MDBs were relatively sector and that the response builds long-term flat in fiscal 2008 at about $12.5 billion. productivity improvements into the projects The IMF provided about $260 million in they finance. The MDBs need to find what additional Poverty Reduction and Growth the African Development Bank (AfDB) refers Facility funds in 2008. While disburse- to as the growing "sweet spot" between tra- ments may pick up thanks to generous ditional public and private domains. replenishments of the International Devel- Although differentiated according to opment Association (IDA), the African country circumstance, the core IFI strategy Development Fund, and the Asian Devel- must have four components: opment Fund, existing resources may not be sufficient to meet low-income country Stabilize the macroeconomy and, where needs. Accordingly, agreements reached at appropriate, encourage stimulus the G-20 summit in London also sought to 168 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R boost resources available to support low- Strategic Overview: income countries. Crisis Response and Along with greater resources, the MDBs Medium-Term Strategies to have made progress in the effectiveness of Support the Private Sector their interventions, including in terms of the indicators relevant for the Paris Decla- The crisis has only reinforced the IFI focus on ration on aid effectiveness. In some areas, private sector activity as the critical driver of however, such as the use of country sys- development. When the private sector is strong tems, use of project implementation units, and vigorous, development progress is made, and predictability of aid, the MDBs still but when the private sector falters, the key fall short. The Development Assistance strategy is how to protect development against Committee suggests that efforts will have reversals. Fiscal stimulus packages in response to be geared up considerably to meet the to the crisis will catalyze sustainable economic Paris Declaration targets set for 2010. growth only if they result in a reawakening The role of the IFIs of course extends of private and business sector activities. The beyond financing. Knowledge is a core IFI private sector, in turn, will rebound only if it comparative advantage. A crucial role for is supported by an adequate financial sector the IFIs in the context of the current global and by an appropriate enabling environment. crisis is to inform policy making by analyz- Hence, structural reform of the business envi- ing the international spillovers of national ronment is an important complement to mac- policy actions and bringing out the inter- roeconomic and fiscal policies in dealing with connected nature of the challenges, and to the crisis. The most effective strategies will be highlight the need to ensure that national those that link the crisis response with long- responses are consistent with the global term productivity enhancements and with good. Amid rising pressures for policies a vision of how to nurture the private sector to turn inward, the IFIs' role in warning over the long term. against the risks of trade protectionism and At the heart of the IFI approach toward financial mercantilism is indispensable. private sector development is the realization Drawing policy lessons from the current that growth is central to poverty reduction crisis, especially but not only in financial and that private sector development in a regulation, will be another key area. The properly regulated environment is the main IMF has a particularly important role in engine of growth. As the Asian Development enhanced surveillance of risk in the global- Bank (ADB) has put it: "Thriving businesses ized financial markets. create jobs. Jobs provide incomes. Steady The crisis has highlighted the need for incomes reduce poverty and provide oppor- a reform of the Bretton Woods institutions tunities for new generations." and indeed all the IFIs to fill the gaps in The approach to private sector develop- development finance--especially in risk ment has evolved as countries move beyond management instruments and facilities first-round macroeconomic and trade inte- for low-income countries--that have been gration reforms to second-round micro- revealed and to better integrate private sec- economic and institutional reforms such as tor development with public sector lending administrative, legal, and regulatory func- and reform. The central issues are the man- tions. The latter require private sector input dates, instrumentalities, and governance of to determine priorities and impact, and pre- the institutions to allow them to play a more suppose in-depth knowledge of the sector. effective role. A vigorous crisis response in Thus, public policy increasingly relies on a 2009 can set the stage for a new multilat- healthy dialogue with and understanding of eralism, one that embraces finance, trade, the private sector. The IFIs have understood development, and climate change. this and adapted their strategies accordingly, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 169 C H A P T E R 6 raising the share of financial and human promote additionality but also call for flex- resources dedicated to private sector devel- ibility. As markets mature and demonstra- opment and changing approaches to build tion effects take hold, the rationale for pub- partnerships and broaden engagement. lic intervention diminishes.8 Nevertheless, the IFIs have not always More fundamentally, the MDBs have found it easy to develop effective opera- moved to sharpen the identification of the tional approaches. In a 2005 evaluation of public policy rationale for supporting private development effectiveness, the Independent firms. In this, they have shifted from sup- Evaluation Group of the World Bank noted port for specific firms to support for market that private sector development projects development, with a focus on creating the had one of the lowest success rates of any right enabling environment for business, set- sector.5 ting standards for environmental and social Partly, these findings reflect the ten- assessments for firms, reducing capital flight sions involved in providing public support and corruption, and widening the scope of to private companies. First and foremost, markets. as some MDB funding is on terms that are Accordingly, a broader, more comprehen- generally more favorable to companies than sive approach toward private sector develop- purely commercial finance, questions have ment has been adopted. Broadly speaking, been raised about the distortionary effects IFI efforts to catalyze the private sector can of implicit public subsidies. The benefits be classified under two headings: from lending to the private sector are clear. New theories of the importance of "self- Extending the reach of markets, through discovery"6 and the potential for market risk mitigation, improvement in the failure in introducing new products and pro- enabling environment, and direct support cesses into an economy provide the under- for demonstration projects; and pinnings for public funds to support demon- Improving basic infrastructure and social stration projects. But there can also be costs. service delivery through introducing pri- Direct credit lines may distort broader credit vate sector management and incentives, markets and create unsustainable financial including innovative finance, to induce intermediaries.7 faster speed of implementation and The MDBs have also been concerned expansion of access of the poorest seg- about whether their funding to the private ments of society. sector is additional to private funding, or simply a cheaper option that could under- The strategic challenge today is to respond mine market discipline. Additionality of to the financial crisis while remaining com- funding has been fostered by aggressively mitted to the long-term goals of private sec- expanding into underserved market seg- tor development. Table 6.1 shows some of ments such as micro, small, and medium the main elements of IFI support for the enterprise funding; big-ticket infrastructure; private sector. It should be noted that many social sectors; and, increasingly, underserved IFI operations bundle finance, knowledge, areas. For example, the European Bank for and partnerships. Moreover, some elements Reconstruction and Development (EBRD) might be more significant as instruments was initially the only market-oriented lender for mobilizing other elements (for example, in transition economies, so its activities were partnerships for finance and advisory ser- additional almost by definition. The IFC has vices) than as a means of support in them- put an increased focus on poor countries selves. Many new mechanisms have been and Africa in its strategy, explicitly aim- introduced in 2008, particularly to stabilize ing at having 50 percent of its new projects markets, in risk management and finance, in these countries by 2011. Such strategies but knowledge and partnership activities 170 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R TABLE 6.1 Selected elements of IFI support to the private sector Extending the reach of markets Improving basic service delivery Area of Enabling Direct project engagement Risk management environment support Infrastructure Social services Finance Countercyclical lending/ Financial market Equity Public-private Innovative financing balance of payments support development partnerships Loans Health for Africa Flexible Credit Linea Public sector Sustainable Guarantees Vulnerability Financing reform Infrastructure DPOs/deferred drawdown Facilitya Micro-, small, Action Plan Disaster insurance and medium Advance Market Energy for the enterprise Commitment for Microfinance Liquidity Facilitya Poor Initiative funds Vaccinesa Trade Finance Facilitation Program Global Trade Finance Program Global Food Response Programa IDA Fast-Track Initiativea Knowledge Macroeconomic policy Doing Business Technical Risk Social performance assistance management indicatorsa Debt Sustainability Financial Sector frameworks Framework Assessment Small and Program medium International Tax Dialogue enterprise Standards and Saving mobilization toolkit codes Extractive Industries Regulatory reform Transparency Initiative++ Foreign investment promotion Partnerships Climate change Corporate social Carbon markets Public-Private Global Partnership for responsibility Infrastructure Output-Based Aid Stolen Asset Recoverya Aid for trade Advisory Equator principles Global Fund to Fight Ethics in business Consultative Facility AIDS, Tuberculosis, and Corporate Group to Assist Global Emerging Markets Global Gas Malaria governance the Poor Local Currency Bond Program Flaring Global Alliance Sovereign Fund Reduction for Vaccines and Facilitya Immunizations a. Mechanism introduced in 2008 or 2009. have also evolved. At the same time, the Finance institutions have intensified activities under On financing, several key strategic issues existing mechanisms. emerged during 2008: As the crisis unfolds, the IFIs have responded in flexible ways, but some weak- Are IFI resources adequate to meet the nesses in each area of engagement--finance, needs caused by a major global slowdown? knowledge, and partnerships--have also Does the crisis alter long-term projections been revealed. of demand for MDB activities? G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 171 C H A P T E R 6 Are modalities of support sufficiently that it may need to bring forward its plans for flexible? a capital increase in 2012. The International Is MDB capital leveraged and deployed to Bank for Reconstruction and Development minimize risk? (IBRD) estimates it could use its $100 bil- Are low-income countries adequately lion in available resources over the next three protected? years. At the London summit in April 2009, Do MDB activities adequately protect the G-20 leaders agreed to support a 200 per- vulnerable groups within countries? cent general capital increase at the ADB and to review the need for capital increases of the The IFIs have had the financial capability AfDB, EBRD, and the IDB. The G-20 state- to respond to the crisis but are now approach- ment supported additional lending by the ing resource limits. While the IMF's liquid- MDBs, including to low-income countries, of ity position remained satisfactory at the end $100 billion over the next three years. of 2008, G-20 leaders at the recent summit From a strategic perspective, MDB capi- in London agreed to support a large expan- tal increases should be based on longer- sion in the IMF's precrisis lending capacity term business needs rather than a crisis to enable the institution to face the expected response. To illustrate, IBRD lending after unprecedented rise in demand for financing. the East Asia crisis fell to one-half of its As an immediate measure, bilateral financing crisis-lending levels, so crisis-lending levels from members will be increased to $250 bil- should not be the basis for capital need. At lion. In the near term, the immediate financ- the same time, the crisis may be changing ing from members will be incorporated into the nature of demand from middle-income an expanded and more flexible New Arrange- clients, who may now see the MDBs as more ments to Borrow and will be increased by up reliable development finance partners than to $500 billion. The G-20 leaders also sup- private capital markets and look to them ported consideration of market borrowing for a larger part of their financing needs. by the IMF to be used if necessary in con- Demand for risk-based instruments, such as junction with other sources of financing to deferred drawdown options and guarantees, raise resources to the level needed to meet has been especially strong and may well con- demands. The IMF's concessional lending tinue after the current crisis is over. capacity for low-income countries and access The issue of capital increases is therefore limits will be doubled. The leaders committed tied to the issue of adequately flexible and to using additional resources from agreed-on speedy modalities of MDB engagement. A IMF gold sales, together with surplus income, striking feature of 2008 was that even in the to provide $6 billion additional concessional face of dramatic shocks, some IFI facilities and flexible finance for the poorest countries were underused. A number of precaution- over the next two to three years. In addition ary instruments, such as the World Bank's to these steps, G-20 leaders agreed to support deferred drawdown option, and various a general allocation of special drawing rights trade financing arrangements, which have (SDRs) equivalent to $250 billion to increase had slow uptake in times of ample private global liquidity, $100 billion of which will go liquidity, are now seen as useful additions directly to emerging market and developing for MDBs. Clients are increasingly request- countries. ing such credit lines. The crisis has high- Among the MDBs, the ADB is already lighted the need for speed and transparency short of resources, and without a general cap- in access to resources. But the standard ital increase it cannot conduct regular mul- MDB lending model is built around negoti- tiyear programming discussions with major ated agreements and safeguard procedures clients. The EBRD is also reviewing its capi- that take considerable time, although in tal resources. The AfDB is already finding emergencies the response can be rapid. 172 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R The strategic issue is how to ensure that concessional credits. There is therefore an MDB facilities complement the leading role asymmetry in treatment between low- and of the IMF in countercyclical lending and middle-income countries and a much greater are provided only in the context of viable risk that low-income countries will be forced macroeconomic programs. The broader to adjust through domestic demand contrac- trend toward ex ante certification of poli- tion, risking recent development gains. Poor cies rather than ex post conditionalities may households in low-income countries will make this task easier. In countries with good then be left with no relief. For that reason, policies, MDB finance could be directly tar- the World Bank established a Global Food geted at fiscal expenditures that need to Crisis Response Program based on addi- be supported during a crisis to avoid long- tional trust funds in May 2008 and is now lasting development setbacks. proposing a flexible Vulnerability Fund as a The MDB role in crises is to protect pub- way of responding to the current crisis.10 lic assets and the most vulnerable house- Several technical solutions have been holds so that welfare and economic losses advanced to deal with the limited availabil- are minimized. For example, one estimate ity of incremental resources for poor coun- suggests that $45 billion in road asset value tries: front-loading of new commitments, in developing countries was lost between contingent debt service clauses in conces- 1970 and 1989 for lack of $10 billion in sional credits, emergency procedures to maintenance spending.9 The MDBs do not accelerate disbursements on existing proj- have the resources, however, to offset pri- ects, relaxation of budget support ceilings, vate capital swings in most countries. From and access to nonconcessional financing this perspective the MDB role is to provide (with or without buy-down arrangements resources to fund budget priorities, not to to lower future debt service costs) subject provide countercyclical balance of payments to limits under the Debt Sustainability financing per se. Framework. One of the benefits of the shift of MDB The crisis has revealed areas where a cut- financing toward nonconcessional, nonsover- back of private capital can be particularly eign lending, documented in the 2008 Global damaging to development: trade, infra- Monitoring Report, was the increase in lever- structure, banks (including those dealing age that could be brought about by partner- with micro-, small, and medium enterprise ing with the private sector. With the crisis, finance), energy, and household safety nets. leverage options have narrowed. For that rea- Options to ensure that these areas can be son, the IFC has shifted its focus by launch- managed through future cycles should be a ing a broad and targeted set of initiatives to strategic priority for MDBs. In this way, the help shore up the private sector through sup- crisis may drive considerations of selectivity port for trade financing, recapitalization of and comparative advantage of MDBs. banks, and financing for small and medium enterprises. There are better prospects for Knowledge guarantees and other innovative financing instruments to generate leverage by mitigat- In recent years, all IFIs have emphasized ing risk. While there has been an expansion their knowledge and learning contribu- of such instruments, the crisis has highlighted tions to development and their desire to the ample scope for scaling up in a more sys- shift toward more knowledge-based institu- tematic way if balance sheets permit. tions. Knowledge services, such as country Low-income countries have far fewer analytical work, technical assistance, and options than middle-income countries to global data and research, provide countries access new funds during crisis periods. They with analytic, diagnostic, and capacity- are constrained by fixed limits on grants and building support. Shared knowledge on the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 173 C H A P T E R 6 development vision, policies, and expendi- macroeconomic and financial risks. The ture frameworks to link programs with bud- IMF will closely collaborate with a new get resources has become indispensable in Financial Stability Board (including G-20 the current volatile environment. countries, members of the Financial Stabil- In fact, provision of knowledge is one of ity Forum, Spain, and the European Com- the core comparative advantages of mul- mission) to monitor progress in implement- tilateral agencies.11 The IFI reorientation ing the G-20 Action Plan for strengthening toward knowledge services focuses on build- financial supervision and regulation. Both ing country absorptive capacities, strength- institutions will also prepare joint semi- ening country strategies, underpinning aid annual Early Warning Exercises (EWEs), effectiveness, and disseminating and sharing which integrate macrofinancial and regula- global practices and experiences in imple- tory perspectives and identify macrofinan- menting development. Four areas stand out: cial risks; the first of these joint exercises was completed in March 2009 in collabora- Understanding of the global economic sys- tion with the Financial Stability Forum. At tem and development of risk mitigation the same time, financial sector advice given Country-level implementation of global under the joint IMF­World Bank Financial standards and codes Sector Assessment Program (FSAP) will be Country-level development of robust better integrated into country surveillance markets activities and policy dialogue. To further Social and environmental assessments bolster its macroeconomic analysis, the IMF has also expanded its semiannual vulnerabil- Many countries are struggling to under- ity analyses to advanced economies. Many stand the nature of the current financial emerging economies have been surprised at crisis and the channels through which they the dimensions of their exposure to a global could be affected. For example, middle- recession. For low-income countries, the income countries in the Middle East and joint IMF­World Bank Debt Sustainability North Africa region have asked for help in Framework provides a key tool for assessing understanding the factors behind the large fiscal risk. swings in oil prices and the implications of The crisis has underlined the benefits of the financial crisis. financing development in ways that do not Growing economic nationalism and create debt. Self-reliance echoes calls from financial mercantilism in the face of the many developing-country policy makers crisis are pressuring the open, global econ- but is undermined by tax evasion and illicit omy. The IFIs have a valuable role to play capital flows.12 These were a major topic in documenting cooperative, collective solu- of discussion at the Doha Conference on tions and the pitfalls of beggar-thy-neighbor Financing for Development, and the inter- policies. The implementation of new forms national tax dialogue and anticorruption of state aid to industry, regulatory forbear- efforts are examples of how IFI knowledge ance for banks, temporary trade and capital activities can have impact on broad develop- account restrictions (even those permitted ment policies. under the World Trade Organization), incen- Increasingly IFIs are viewed as useful tives for foreign investments, and exchange vehicles for monitoring the application of rate policies are all areas where the IFIs can global standards and codes and other forms monitor developments on a global basis and of international benchmarking. Financial provide advice and information to countries Sector Assessment Programs (FSAP), asso- and regional peer review groups. ciated Reports on Observance of Standards The IMF, in particular, has a critical and Codes, and business and foreign invest- role to play in enhanced surveillance of ment promotion rules and regulations have 174 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R been valuable tools for this dialogue. With the MDBs' own development initiatives, new regulatory approaches to the financial but they also facilitate harmonization of sector certain to emerge out of the global efforts between donors, recipient countries, crisis discussions, the IFIs will be well and various other stakeholders at global, placed to monitor individual country com- regional, and country levels. The MDBs pliance and to assist developing countries are slowly moving toward expanding part- with implementation. nerships in this broad sense. There are now Strengthening country systems, espe- many instances of partnerships among and cially on financial management and public between multilaterals, bilaterals, and private expenditure, are important pillars of the IFI agencies: as of fiscal 2008, the World Bank agenda of leveraging knowledge with finan- alone had more than 1,000 trust funds with cial resources to maximize development donor commitments totaling $26.3 billion. impact. But private resource mobilization remains Sound markets with well-developed reg- limited. World Bank Group trust fund con- ulatory systems are the best form of insur- tributions from foundations and corpora- ance against risk. IFI knowledge can help tions totaled only $1 billion between 2002 countries implement institutional reforms to and 2008, and the development gains from build more robust markets.13 All the MDBs trying to expand these resources signifi- have technical assistance programs that help cantly appear small. Hence, resource mobi- entrepreneurs understand the responsibilities lization is no longer seen as the main driver and risks they bear as business people. This of private partnerships.14 work has helped advance an understanding More scope exists to build partnerships of how social and environmental standards in response to specific challenges. Earlier can help businesses contribute to sustainable successes with public-private partnerships development in a cooperative fashion with- include the Consultative Group on Inter- out losing competitiveness. national Agricultural Research and the Onchocerciasis (River Blindness) Control program. Along the same lines, the Global Partnerships Alliance for Vaccines and Immunizations, Before the crisis, the scale of private capital the Global Fund to Fight AIDS, Tuberculo- was already driving MDBs to seek new part- sis, and Malaria, and new commitments to nerships to advance development. As the agricultural research in Africa offer much crisis unfolds, the strategic need to engage promise and exemplify the MDB approach coherently with partners in shaping strate- of reaching out to world-class corporations. gies and carrying out specific programs Another example is the IFC's Global Emerg- becomes more critical. Strategic partner- ing Markets Local Currency Bond program. ships are evolving around: But these approaches work only when there is a full understanding of the comparative Resources for development to fill financ- advantage of various partners, in terms of ing gaps either sectoral expertise or the nature and Division of labor according to compara- terms of the financing they provide. tive advantage among agencies Partnerships are especially important in Innovative and scaled-up approaches the delivery of global public goods. In those Global public goods cases, the voice of developing countries in shaping international goals is important. A The MDBs engage in partnerships to recent example is the UN Office on Drugs achieve common development objectives, and Crime/World Bank Stolen Asset Recov- under agreed-upon shared and joint respon- ery (StAR) program, where bank secrecy sibilities. Partnerships are meant to augment rules in developed countries were adapted G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 175 C H A P T E R 6 to enable developing countries to reclaim payments and public debt profiles. Since stolen assets which, by some counts, could mid-2008, it also has provided financial exceed $1 trillion.15 StAR (along with the support, amounting to about $49 billion, to Extractive Industries Transparency Initia- nine emerging countries to permit orderly tive) helps promote transparency and bet- adjustment to payments crises.16 Requests ter governance across the developing world for such support are expected to rise sharply (box 6.1). in 2009. The IMF moved quickly to establish a new Flexible Credit Line (FCL) to provide IFI Operational Results large and up-front financing to emerging and New Initiatives economies with very strong fundamentals and policies. The facility can be used on a The IFI crisis response has prioritized sta- precautionary basis or for actual balance-of- bilizing markets. The medium-term support payment needs. Because access to the FCL for private sector strategies falls under two is restricted to those countries that meet categories--extending the reach of mar- strict qualification criteria, drawings under kets, and improving basic service delivery. it are not tied to policy goals agreed with This section summarizes IFI activities in the country. Countries not qualifying for 2008 and recent new initiatives along these the FCL can count on new High Access Pre- dimensions. cautionary Stand-By Arrangements (SBAs) as a regular lending window. Like the FCL, precautionary SBAs can be frontloaded Extending the Reach of Markets and take account of the strength of a coun- Stabilizing markets, countercyclical financing, try's policies and the external environment. and risk management Decisions have been taken on a doubling In 2008 the IFIs played an important role of access levels for emerging markets and in countercyclical financing (table 6.2) and low-income countries, and conditionality in financing emerging development needs. has been reformed to make it more focused The IMF has taken the lead with its strong and tailored to country circumstances. Fur- encouragement of additional fiscal stimu- thermore, the IMF has made substantial lus in countries with healthy balance of progress with a comprehensive review of the BOX 6.1 Stolen Asset Recovery Initiative Corruption and asset theft are development problems of the first magnitude. The direct economic impact is huge. An even greater impact probably results from the insidious effects of degrading public institutions, tainting and destabilizing financial systems, and undermining the rule of law. The StAR Initiative, launched by the World Bank and the United Nations Office on Drugs and Crime in October 2007, works with financial centers and developing countries to reduce the barriers to asset recovery and facilitate developing countries' efforts to secure the return of stolen assets. Programs have been started in six countries, and discussions with many more are under way. The StAR initiative is about justice and the prospect of taking legal action after years of impunity for corrupt officials, even when the prospects for the return of stolen assets are low. StAR is exploring how financial centers can strengthen regulations and improve compliance and enforcement of authorities to trace the beneficiary ownership of bank accounts and to enhance supervision of accounts of politi- cally exposed persons. At the same time, StAR provides legal assistance and training to developing countries to strengthen their capacity to manage asset recovery programs as part of broader anti-corruption efforts. In a first success, Haiti appears to be on its way to recovering $6 million after the Swiss Federal Office of Justice ruled that account holders had failed to prove that the funds were legally acquired. The order may be appealed. 176 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R lending framework and external debt poli- Reduction and Growth Facility arrange- cies for low-income countries. ments in 2008, increasing financial commit- The Fund also modified its Exogenous ments under these arrangements by about Shocks Facility to speed up access, given $214 million. the limited uptake of demand for resources The MDBs also expanded their activities, from this facility in early 2008 when com- in the first instance to help countries man- modity prices started to soar. As a result, age food and fuel price increases. The World $261 million has been committed under this Bank and the ADB both announced major facility as of the end of 2008. There were initiatives to help countries manage higher twelve cases of augmentation under Poverty food prices. The World Bank's Global Food TABLE 6.2 Examples of IFI crisis response programs in 2008 Agency Program Amount Key features IMF Flexible Credit Line No formal access limits Eligibility based on strong macroeconomic fundamentals IMF Modified Exogenous Shocks Facility Up to 75 percent of quota Rapid access component with streamlined conditionality IMF High-Access Precautionary Access above normal Emergency financing procedures Stand-By Arrangements (SBAs) limits for SBAs Only core macroeconomic conditions IMF Poverty Reduction and Growth Flexible within annual and Balance of payments support Facility Augmentation cumulative ceilings IBRD Development Policy Operations $100 billion over 3 years Budget and payments support IBRD Global Food Crisis Response $200 million + Trust funds from net income for social Program $1 billion (other donors) protection and food production IBRD Energy for the Poor Trust fund Increase energy access IDA Fast-track Facility $2 billion Support critical public spending. Front-loading of IDA 15 IFC Global Trade Finance Program $3 billion Guarantees of trade credits IFC/Japan Bank recapitalization fund $3 billion Equity and subordinated debt for banks IFC Infrastructure Financing Facility $500 million Equity and loans for private and PPP infrastructure ADB Trade Finance Facilitation Program $150 million Support for trade transactions ADB Budget support $717 million Budgetary support for food security/safety nets IDB Liquidity Program for Growth $6 billion Balance of payments support to member Sustainability governments EBRD Crisis response 7.0 billion Expected 2009 financing of 7 billion (1.6 billion over 2008), mainly for crisis response, including expanded Trade Facilitation Program AfDB Trade Finance Initiative $1 billion Lines of credit to financial institutions AfDB Emergency Liquidity Facility $1.5 billion Short-term emergency finance support Source: IMF and MDBs. Note: The indicated amounts do not include mobilization from partners. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 177 C H A P T E R 6 Crisis Response Program has already com- $35 billion in fiscal 2009, triple the level of mitted $856 million for 29 countries, includ- the previous year. ing $325 million for African countries. IDA The World Bank has rapidly implemented has also provided $4.1 billion in new com- a Vulnerability Financing Facility to pro- mitments of concessional financing in the vide an umbrella structure under which spe- second half of 2008. While helpful, that still cific initiatives can be formed to pool grant leaves low-income countries vulnerable to resources from donors with World Bank global shocks. Nonconcessional lending by funds in a rapid-response program to expand the IBRD has risen sharply and could reach and strengthen social safety nets and protect BOX 6.2 World Bank Group's Vulnerability Framework The World Bank Group's Vulnerability Framework is an umbrella mechanism that includes a comprehensive range of ongoing and new programs to support growth and poverty reduction in countries impacted by the global economic crisis. A key component is a Vulnerability Financing Facility (VFF) with a focus on mitigating the impact on the poor and vulnerable through strengthening safety nets and basic social services. It comprises the Global Food Crisis Response Program (GFRP) and the Rapid Social Response Fund. A second key compo- nent is the Infrastructure Recovery and Assets Platform (INFRA) that aims to support infrastructure spending critical for growth, including energy for the poor programs. A third key component aims to strengthen support to the private sector through IFC programs. The Vulnerability Framework draws on the full range of the World Bank Group's financial, technical, advisory, and coordinating resources. The framework has an open, flexible architecture that would facilitate ready adaptation to evolving needs. Support for programs in the Vulnerability Framework would be one option for donors wishing to contribute additional resources to help developing coun- tries respond to the global economic crisis. At the London summit in April 2009, G-20 leaders committed to supporting the Vulnerability Framework through voluntary bilateral contributions. The World Bank Group Vulnerability Framework Vulnerability Infrastructure Recovery and IFC Private Sector Financing Facility Assets Platform Platform Bank Recap Global Food Crisis Rapid Social Response Response Trade Finance Program Fund Energy · Direct Finance for the · Parallel Finance Infrastructure Facility Poor · Concessional Finance Microfinance Facility Trust Funds Advisory Facility 178 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R other critical public programs (box 6.2).17 emerging markets will have access to finance The facility is part of a broader Vulnerability to weather the global crisis, and it partnered Framework to assist vulnerable countries to with the Japan Bank for International Coop- deal with the impact of the global economic eration to help recapitalize banks in smaller crisis. A supporting initiative is the IDA emerging markets through equity and subor- Financial Crisis Response Fast-Track Facil- dinated debt (box 6.4). ity, set up in late 2008, which aims to fast- track up to $2 billion of financial assistance, Volume and Allocation of MDB Lending with the potential to increase this amount in Overall, MDB gross disbursements in 2008 the future, depending on the need. reached a record volume of $55.1 billion, The MDBs have also responded to cut- up from 48.7 billion in 2007 (figure 6.1). backs in private trade credits. Private trade Of this, $42.5 billion was in nonconces- finance was hurt as counterparty risk rose sional resources, up from $36.7 billion in and spreads on trade finance soared even for 2007. Gross concessional flows rose by only creditworthy borrowers. The ADB, EBRD, 3.5 percent to $12.5 billion, compared with and IFC have moved to strengthen trade the 17.2 percent increase in nonconcessional financing facilities and the Inter-American lending to sovereign borrowers. Total MDB Development Bank (IDB) and the AfDB lending is expected to rise sharply in the have new trade finance facilities under prep- next three years, in response to the global aration (box 6.3). economic crisis, to an annual average of as Other areas that have been sharply affected much as $100 billion. are infrastructure, banks, and micro-, small, and medium enterprises. The MDBs have Nonconcessional lending to sovereigns. focused programs to respond to the needs Nonconcessional lending to sovereigns in these sectors. The IFC established a new totaled about $27.8 billion in 2008, up from infrastructure crisis facility to ensure that via- $23.7 billion in 2007, with increases spread ble privately funded infrastructure projects in across all regions. But nonconcessional BOX 6.3 MDBs and trade finance The World Bank Group has ramped up its support to the private sector by doubling the IFC's Global Trade Finance Program from $1.5 billion to $3.0 billion. Trade guarantees issued under the program will have an aver- age duration of six months, thereby supporting up to $18 billion of trade finance over the next three years. The program offers banks guarantees covering the payment risk in trade transactions. Since the program's inception in September 2005, $3.2 billion in trade guarantees have been issued to support 2,600 transactions. Of the total transactions, 48 percent were for banks in Africa, 70 percent involved small and medium enterprises, 50 percent supported trade with the world's poorest countries, and 35 percent facilitated trade between emerging markets. The EBRD's trade facilitation program guarantees political and commercial risk of 100 issuing banks and factoring companies. As of the end of 2008, the program had facilitated more than 7,600 trade deals worth more than 4.5 billion. The ADB trade finance facilitation program started operations in 2004 and consists of three products: a Credit Guarantee; a Revolving Credit Facility; and a Risk Participation Agreement under which ADB shares risk with international banks to support trade in challenging and frontier markets. The program has supported over 1,000 international trade transactions for a total value of about $500 million and has grown exponentially over the past 12 months. The IDB has recently approved a two-year mandate for the Structured and Corporate Finance department to support trade finance largely through credit guarantees. The AfDB is in the process of preparing a $1 billion trade finance initiative. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 179 C H A P T E R 6 BOX 6.4 IFC response to the crisis The IFC has ramped up four facilities with about $30 billion in new financing over the next three years, combin- ing its own funds with those from partners. The facilities include: Bank Recapitalization Fund ($3 billion). This is a global equity and subordinated debt fund managed by the IFC that aims to recapitalize distressed banks. It will also provide advisory services. Japan will be a key founding partner and provide $2 billion to the fund. Infrastructure Crisis Facility ($10 billion). This facility will help ensure that viable privately funded infrastruc- ture projects in emerging markets can weather the financial crisis. The facility will comprise a loan financing trust, an equity facility, and an advisory facility. The loan and equity components are expected to provide roll- over financing and to substitute temporarily for commercial financing for new projects. Funding for existing projects would have a three- to six-year maturity. The IFC expects to invest a minimum of $300 million and mobilize between $1.5 billion and $10 billion from other sources. Microfinance Liquidity Facility ($500 million). The IFC expects to invest $150 million of its own money with contributions from Germany's KfW development bank and other donors for a total investment of $500 million, to provide refinancing to more than 100 strong microfinance institutions in 40 countries, which reach 60 million poor borrowers. The facility will be managed by three of the industry's leading fund managers. Expanded Global Trade Finance Program ($18 billion over 3 years). (See box 6.3 on trade finance.) Global Trade Liquidity Pool (up to $50 billion over 3 years). The IFC is working with a number of partners-- global and regional banks--to create a global trade liquidity pool that will fund trade transactions for up to 270 days and will be self-liquidating once conditions for trade finance improve. The initiative involves $1 billion of IFC's own resources. G-20 countries have agreed to provide $3 billion to $4 billion in voluntary, bilateral contributions. FIGURE 6.1 MDB gross disbursements, 2000­08 Type of flow Region US$ (billions) US$ (billions) 30 25 25 20 20 15 15 10 10 5 5 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2000 2001 2002 2003 2004 2005 2006 2007 2008 Nonconcessional flows to sovereign Concessional flows Latin America Asia Europe Africa Nonconcessional flows to nonsovereign Source: Staff of the big five multilateral development banks. 180 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R lending has sharply accelerated recently. The in commitment authority agreed for IDA IBRD lending pipeline has doubled since the 15 replenishment for the next three years-- start of fiscal 2009. Commitments in the with scope for front-loading. It has up to first half of fiscal 2009 reached $12.4 bil- $20.3 billion of resources available in fiscal lion, compared with $3.3 billion in the first 2009; while it committed only $4.1 billion in half of fiscal 2008. Lending of $100 billion the first half of the fiscal year, commitments is envisaged for fiscal years 2009­11, almost are expected to accelerate in the second half. triple the annual rate before the crisis. An IDA has a significant undisbursed portfolio acceleration in lending is also taking place against past commitments, amounting to at other MDBs. For example, the ADB has $33 billion at the end of fiscal 2008. proposed $4 billion­$5 billion in additional commitments in 2009. Direct support to firms. MDB nonconces- sional loans and guarantees to nonsover- Concessional lending. Despite the crisis eign entities, mainly to the private sector, and record levels of donor pledges for recent increased by about $2 billion in 2008 to replenishment of MDB concessional win- $15 billion (figure 6.2). MDB nonsovereign dows, gross concessional flows from MDBs flows (lending and equity investments) have were relatively flat in 2008 at about $12.5 bil- grown by almost fourfold since 2000. The lion. A sharp upward trend is expected as EBRD plans a 33 percent increase in commit- disbursements from new commitments start ments for 2009, to 7 billion. With the slump to rise. Credits and grants from the Asian in private capital flows, demand for support Development Fund grew by 33 percent, and from the private sector arms of the MDBs in by 10 percent from the African Development likely to be strong in the period ahead. Fund. Flows from IDA, however, declined. The top two sectors for MDB private sec- IDA is in a strong position to increase tor operations are infrastructure and finan- support--thanks to the nearly $42 billion cial institutions. Between them, these two FIGURE 6.2 MDB gross disbursements to nonsovereign borrowers, by region, 2000­08 US$ (billions) 9 8 7 6 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total nonconcessional nonsovereign Europe Total nonconcessional nonsovereign Africa Total nonconcessional nonsovereign America Total nonconcessional nonsovereign Asia Source: Staff of the big five multilateral development banks. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 181 C H A P T E R 6 sectors account for over 60 percent of total the global crisis. An important example commitments. of such coordination is a 24.5 billion Sixty percent of MDB nonconcessional, program of support to the banking sector nonsovereign flows were directed to Europe, and bank lending to businesses hurt by the but there is an encouraging increase even in crisis in Central, Eastern, and Southern Africa. Geographically, the IFC has recently Europe jointly announced by the World placed the poorest countries at the top of Bank Group, the EBRD, and the European its agenda, and this led to commitments of Investment Bank (EIB) in February 2009. $3.5 billion in IDA countries in fiscal 2008, The coordinated program of support will of which $1.4 billion was in Africa across 25 include contributions of 6 billion from countries. This is matched by AfDB's private the EBRD, 11 billion from the EIB, and sector operations, which grew to $1.5 bil- 7.5 billion from the World Bank Group lion in 2008. (IBRD 3.5 billion, IFC 2 billion, and In the current context, there are also MIGA 2 billion). good opportunities to provide nonsovereign public entities at the subnational level with The Enabling Environment long-term finance. The World Bank Group for Private Sector Development has integrated its approach to subnational financing by offering financial and guarantee MDB support for private sector development products using the IFC balance sheet,18 but has shifted from a focus on privatization and this mechanism has not yet seen significant restructuring of state-owned enterprises to growth, and volumes are still modest, with one of improving the enabling environment a total exposure of $350 million. A number for the private sector. The new focus is on of countries have asked for support for non- supporting regulatory reforms, encouraging sovereign lending to subnationals, extending competitive and business-friendly environ- beyond finance to include enhanced capi- ments, and redefining the public sector role tal market access, especially in cases where as a catalyst and facilitator for the private administrative responsibilities for basic sector rather than a competitor. infrastructure services have been devolved The IFIs use a full range of instruments to local governments. The EBRD has a long- to pursue a better enabling environment for standing and successful municipal finance private sector development. Lending for the business, with total commitments of 2.8 financial sector and for public sector reform billion to date. helps provide conditions in which the pri- vate sector can operate effectively. Analyti- Guarantees. Beyond countercyclical financ- cal work, such as country diagnostics, met- ing, the MDBs have moved forward with rics and global benchmarking, and specific other programs to reduce risk in emerg- advisory services, such as the World Bank ing markets. The role of the Multilateral Group's Foreign Investment Advisory Ser- Investment Guarantee Agency (MIGA), for vice and the Public-Private Infrastructure instance, has expanded in countries such as Advisory Facility, help countries pursue Ukraine and the Russian Federation, where reforms to create a more efficient private sec- private insurance has become more expen- tor. Partnerships, such as the introduction of sive (box 6.5). The IFC is also stepping up global standards and codes, help ensure that its guarantee operations, including increased the playing field is level across countries, as collaboration with MIGA. well as within countries. Coordination of MDB crisis support. Financial sector The MDBs have stepped up coordination Although banks in developing countries in of their support to countries impacted by general have not suffered severe direct losses 182 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R BOX 6.5 MIGA's contributions to supporting investment in developing countries The Multilateral Investment Guarantee Agency (MIGA) is a specialized agency within the World Bank Group that offers political risk insurance to foreign long-term investors in developing countries. Guarantees issued by MIGA cover against the risks of inconvertibility of local currency into foreign exchange and its transfer out of developing countries, expropriation (including so-called "creeping expropriation" related to a series of govern- mental actions that eventually lead to the abandonment of an investment), breach of contract by the sovereign or its agents, and destruction of assets or interruption of business activities arising from politically motivated violence or civil unrest. By assuming these risks, MIGA aims at encouraging productive foreign investments into developing countries. MIGA can manage these political risks better than private insurance providers can, but its administrative costs are higher. For this reason, MIGA is best positioned in the riskiest developing countries, where private insurers charge very high premiums. The figures below show that MIGA is "overweight" with respect to foreign direct investment (FDI) stocks in high-risk countries--in the sense that its exposure in risky countries is far higher than these countries' share of total FDI to developing countries or their share of total developing country gross national income (GNI). By contrast, MIGA is "underweight" in low-risk, middle-income countries, which receive 72 percent of all FDI of developing countries but account for only 30 percent of MIGA's exposure. Share of FDI stocks, GNI, and MIGA exposure in developing countries by income and risk, 2007 High risk Low risk % share % share 100 100 80 80 72 67 Middle-income 60 60 countries 40 33 40 30 20 14 14 20 0 0 % of MIGA % FDI stock GNI share % of MIGA % FDI stock GNI share portfolio portfolio % share 100 80 Low-income 60 countries 37 40 20 12 11 0 % of MIGA % FDI stock GNI share portfolio Source: MIGA. Note: Low risk is defined as an Institutional Investor score greater than 50. Income per capita cutoff is $1,785. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 183 C H A P T E R 6 from the current global financial crisis, they cooperation, exposure to subprime mort- are increasingly suffering from the indirect gages, and tighter funding conditions, in fallout from reduced credit availability, higher addition to the traditional focus of macrofi- counterparty risks, and slower real growth nancial stability, regulatory and supervisory domestically. In addition to the shocks from issues, and financial market infrastructure. the crisis, the difficulties faced by developing- Recently concluded assessments have found country banks reflect shortcomings and vul- weak risk management, insufficient tools to nerabilities in developing countries' finan- assess borrower creditworthiness or collat- cial systems identified in assessments under eral, inadequate contingency planning, and the joint IMF­World Bank Financial Sector weak payment infrastructure, all underscor- Assessment Program (FSAP). ing the need to accelerate financial sector Financial sector assessments have now reforms. been made for over 40 percent of develop- All the regional development banks have ing countries--over 87 percent if weighted a strong focus on the financial sector. For by GDP (figure 6.3). These assessments will example, over 40 percent of the operations now become a truly global program thanks of the EBRD have supported the financial to the recent G-20 agreement to apply the sector, especially micro- and small enter- FSAP to all countries, including the major prises (box 6.6). Similarly, the IFC has sup- industrial countries. Since August 2007, the ported micro-, small, and medium enter- assessments have paid particular attention to prises throughout the years--in fiscal 2008, crisis management, cross-border supervisory the IFC's clients provided 8 million loans FIGURE 6.3 Financial Sector Assessment Program country coverage a. By region Unweighted Weighted by GDP Percent Percent 100 100 80 80 60 60 40 40 20 20 0 0 All AFR APD EUR MCD WHD All AFR APD EUR MCD WHD countries countries b. By development level Unweighted Weighted by GDP Percent Percent 100 100 80 80 60 60 40 40 20 20 0 0 All Advanced Emerging Developing All Advanced Emerging Developing countries economies markets economies countries economies markets economies FY00­08 FY00­09 Source: IMF­World Bank database. Note: AFR = Africa; APD = Asia and Pacific; EUR = Europe; MCD = Middle East and Central Asia; WHD = Western Hemisphere. 184 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R BOX 6.6 EBRD's micro- and small enterprise lending program EBRD support to private business development through its micro- and small enterprise (MSE) lending program provides individual entrepreneurs and firms with access to otherwise scarce finance. The EBRD implements MSE lending through local commercial banks and nonbank microfinance institutions. The programs are currently being expanded to help rural areas and small farming enterprises. Loans are accompanied by technical assistance to strengthen partner institutions and to establish efficient credit procedures for lending to small businesses. A new focus on risk management and corporate governance is being introduced in response to the global crisis. Currently, there are MSE lending programs with commercial banks in 13 countries. Non- bank microfinance institutions have proven to be efficient intermediaries. The EBRD has to date partnered with 29 microfinance institutions providing loans, equity, and technical assistance for institutional strengthening, risk management, asset and liability management, and upgrades of management information systems and operational procedures. for almost $100 billion to such enterprises. environment reforms. Low-income countries The AfDB is preparing a facility to provide have become the major source of demand for short-term emergency finance to financial business advisory services. Africa was iden- institutions. tified as the second most reforming region in Doing Business 2009, with 28 coun- Business Climate tries implementing 58 reforms. Botswana, The MDBs have collaborated on a number Burkina Faso, Ghana, Kenya, and Senegal of Investment Climate Assessments and have been cited as top reformers. Another Enterprise Surveys. In the past six years, example of the growing impact of analyti- over 70,000 enterprises across 104 coun- cal work is seen in the marked improvement tries have been surveyed, providing valuable in the implementation rate of recommen- information on how regulations affect firms' dations made by the World Bank Group's economic performance. Middle-income Foreign Investment Advisory Service: from countries, faced with an increasingly com- 47 percent in 2001 to 70 percent in 2006.19 petitive environment, have been among the most active partners in these diagnostics. Social, Environmental, and Ethical Standards All the regional development banks have The IFC has an active role in setting social active programs to support the broad enabling and environmental standards and promoting environment. Examples are the ADB's Making good corporate governance. Its Equator prin- Markets Work Better for the Poor program, ciples are a benchmark for the financial indus- designed to understand the links between try to manage social and environmental issues growth, poverty, and market dynamics; the in project financing and have been adopted by EBRD's Turn-Around Management and Busi- 66 of the largest global banks. The agency sup- ness Advisory Services programs that are ports the management of social, environmen- focused on medium and smaller enterprises; tal. and labor dimensions of its companies' and the AfDB's engagement on continent-wide business practices. Along with other devel- programs such as the Infrastructure Consor- opment finance institutions, the IFC signed tium for Africa, the Africa Water Facility, and on to a Corporate Governance Approach the African Fertilizer Financing Mechanism. Statement in 2007 to promote good corpo- Doing Business is the World Bank rate governance practices.20 This approach Group's flagship to benchmark business supports the rights and equitable treatment G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 185 C H A P T E R 6 of shareholders, disclosure and transpar- term stimulus and address long-term devel- ency, and the role of boards of directors. The opment needs. So far infrastructure spend- Extractive Industries Transparency Initiative ing accounts for about two-thirds of the gives additional prominence to transparency stimulus programs in emerging economies. for natural resource development. Stimulus spending should prioritize main- Despite progress, the approach that MDBs tenance and can benefit poor households should adopt to support private sector devel- by providing short-term employment and opment activities still generates controversy. income generation through labor-intensive For example, the ADB has been holding public works programs. Successful examples consultations with multi-stakeholders since in Argentina (Trabajar), Indonesia (Urban 2005 on updating its safeguards. The bank Poverty Project), and the Republic of Korea has proposed articulating policy principles show the potential. and then separating these from procedural The funding gap for new infrastructure requirements; balancing a front-loaded projects has risen by about $20 billion per procedural approach with one that is also year as prospects for private sector financ- focused on results during implementation; ing recede as a result of the financial crisis. and introducing flexibility that is tailored to In response, the World Bank is launching a different clients with varying capacities as new infrastructure initiative--Infrastructure well as to different financing products and Recovery and Assets (INFRA) Platform-- modalities. The bank's intent is to enhance which could provide an incremental $2 bil- effectiveness and strengthen the relevance of lion to $4 billion per year over the next three safeguards to changing client needs. These years. Embedded in the bank's Sustainable proposals have met with resistance from Infrastructure Action Plan (SIAP), the new some NGOs, demonstrating the complex platform would be an umbrella for mobiliz- nature of MDB efforts to support private ing additional finance for energy, transport, sector development. The challenge to MDBs water, and information and communications is to keep processes simple but at the same technology infrastructure in developing time ensure that the highest safeguard stan- countries over and above the targets envis- dards are met. aged in SIAP (box 6.7). The current crisis occurs just as infrastruc- ture had been afforded a higher priority by Improving Basic Service Delivery MDBs. One area of focus is the reengage- Infrastructure ment of IDA with hydropower in Bujugali Between 2003 and 2007, investment com- (Uganda), Resumo Falls (Rwanda), and Inga mitments to infrastructure projects with (Democratic Republic of Congo). Clean private participation in developing countries coal is being supported in Botswana. Other grew by almost 1.5 times--amounting to MDBs share this focus. The ADB is financ- $158 billion in 2007,10 percent higher in ing the first Ultra Mega Power Project in real terms than the previous peak in 1997. India, at Mundra, with participation by the Recent private activity also showed more Korean Ex-Im Bank and the IFC. The EBRD diverse investors and projects. Companies has launched a sustainable energy initiative from developing countries mobilized half with a focus on industrial energy efficiency, of funding for infrastructure projects with firm-level energy audits, and technical coop- private participation in 2005­06, in con- eration. This program has been extended to trast to the 1990s, when large international a multidonor, multi-IFI initiative coordinated companies from the developed world played in the World Bank. The IFC supported a 50 a dominant role. megawatt wind park in Mongolia. In the current economic crisis, additional The AfDB, along with others, is respond- infrastructure spending can provide a short- ing to the shrinking share of infrastructure 186 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R BOX 6.7 World Bank's Sustainable Infrastructure Action Plan and the Infrastructure Recovery and Assets Platform The Sustainable Infrastructure Action Plan (SIAP) was approved in July 2008 to leverage private and public funding of $109 billion to $149 billion over fiscal 2008­11 based on World Bank Group financing of $59 billion­$72 billion. This would represent a major increase compared with lending of $28 billion in fiscal 2000­03 (leveraged to $45 billion). However, estimates in December 2008 were already showing that investment commitments in private infrastructure projects were 40 percent below levels just a year earlier, putting the SIAP at risk. To mitigate this risk, the World Bank Group is establishing a framework initiative for infra- structure recovery and assets during the crisis. This framework will serve as an umbrella for the World Bank's crisis response in infrastructure. The objectives of the three-year program are to stabilize existing infrastructure assets by restructuring current portfolios; ensure delivery of priority projects by accelerating disbursements and identifying additional financing, and by seiz- ing opportunities for "green infrastructure" through access to carbon finance leveraging facili- ties; support public private partnerships in infrastructure through advisory and restructuring support, use of guarantees, and innovative instruments (in coordination with the IFCs' Infra- structure Crisis facility); and support new infrastructure project development and implementa- tion by providing financing and advice to governments launching growth and job enhancement programs. World Bank Group average annual infrastructure financing and leverage: crisis impact Average annual World Bank Group financing before and with crisis US$ (billions) 60 50 40 30 Financing gap 20 Leverage donor Leverage private sector 10 Leverage government 0 World Bank Group Before crisis With crisis Source: World Bank. in total development assistance to Africa, Water and sanitation are two other which dropped from 23 percent in the mid- focus areas for infrastructure. The number 1980s to 13 percent by 2006. The AfDB of countries that are off track to meet the hosts the Infrastructure Consortium for MDG in sanitation is second only to the Africa, the Africa Water facility, and the number off track in reducing mortality indi- NEPAD Infrastructure Project Preparation cators. To meet the needs in these areas, the Facility. MDBs have experimented with new forms G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 187 C H A P T E R 6 of innovative financing, including public- Evaluation and Assessments private partnerships, working more closely with subnational finance, output-based aid Evaluation of MDB responses to previ- or performance-based grant initiatives, and ous crisis episodes suggests seven points to political risk guarantees. Output-based aid consider: is oriented toward a results focus by provid- ing subsidies for externalities or redistribu- Quality is as important as scale of crisis- tion only after prespecified results have been response support achieved. But these new instruments have The implications for poverty and social yet to be adequately scaled up. safety nets should be given priority The World Bank's target under the Africa Opportunities for greener development Action Plan is to connect 2.5 million more activities should be developed people to clean water by 2015. With more Collaboration within and across groups than 300 million Africans lacking access to is necessary but not always easy clean water (and 500 million lacking sani- Safeguards continue to be vital to ensure tation), progress at this rate will leave large that funds reach intended beneficiaries unmet needs except in the very long run. A focus on results is even more important when resources are scarce Social Sectors Preparedness and early warning make Education and health are two other sectors interventions more effective.21 where much needs to be done to achieve the MDGs (see chapter 3). In both cases, The current financial crisis may affect scaling-up approaches envisage leveraging support for the private sector as the main the private sector for service delivery. Pri- driver of development. Although all the vate providers in these areas are not a new MDBs are making strong efforts to reorient phenomenon, but organized, scaled-up, or their strategies toward support for the pri- franchised private delivery of social service vate sector, they may face some difficulties is still at an early stage in most developing among recipient countries about whether countries. That provides an opportunity that this is the best way of advancing develop- the IFC and the AfDB have incorporated ment. To illustrate, in a recent Gallup World into their strategies. Social sector operations Poll, the private sector arms of the World involving the private sector are still modest, Bank Group, the IFC, and MIGA, suffered with 2 percent of lending in 2008 for the from much lower perceptions of develop- EBRD and the IFC and with less than 1 per- ment effectiveness (figure 6.4) than the rest cent for the other MDBs. In general, empiri- of the World Bank Group. This could be cal evidence and best practices from around because the single greatest priority cited by the world support more active private provi- respondents is poverty reduction rather than sion of services under appropriate regulatory growth or strengthening the economy. The systems, and there is scope for greater MDB MDBs need to do a better job of linking engagement in this area. these priorities. The AfDB has proposed an increased Perceptions may improve as more efforts focus on higher education and technology are devoted to a focus on development effec- and vocational training. The IFC is focused tiveness in private sector projects. The IFC more on health and has recently partnered introduced a development outcome track- with IDA and the Bill and Melinda Gates ing system in 2005 to measure its develop- Foundation to develop a significant Africa ment results. This shows that in fiscal 2008 health initiative. The IFC is supporting the the percentage of projects with high devel- first private hospital in Bosnia and the first opment outcomes increased from 63 to student loan program in Jordan. 71 percent (81 to 87 percent when weighted 188 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R FIGURE 6.4 Effectiveness and future importance of donor institutions Future importance 8.0 7.5 important WBG Most 7.0 WBG UNDP NGO NGO Bilaterals Private foundations 6.5 MIGA UN-other UN-other UNDP Bilaterals 6.0 IFC Private foundations IFC important 5.5 MIGA Least 5.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 Least effective Current effectiveness Most effective Industrialized countries Developing countries Source: Gallup World Poll 2008. by dollar value of projects). In general, eval- focused on private sector development. One uations show there is no trade-off between common finding in evaluation is the pres- investment profitability and development ence of overlaps and limited coordination results. Significantly, both improve when the between different parts of an institution in overall investment climate is improving.22 providing an integrated and consistent pro- All the MDBs have independent evalua- gram of support for the private sector. tions of their private sector support opera- As a direct consequence, the World Bank tions. The EBRD's Evaluation Department Group has consolidated its investment cli- recommended a range of actions in 2008, mate reform work and investment promo- covering financial sector operations policy, tion work under a single entity--the Invest- business advisory services, private equity ment Climate Department. A new IDA-IFC funds, and technical cooperation programs. secretariat was established in fiscal 2008 The AfDB established a new function in the to improve coordination of private sector chief economist's office in 2008 to review operations in low-income countries and to development outcomes for new private sec- promote more joint IDA-IFC operations. In tor operations. Additionality and comple- the decade ending in 2008, the World Bank mentarity are also reviewed. A recent review Group approved just 17 projects in IDA of the ADB's private equity funds found countries that leveraged both public (IDA "unsatisfactory" returns and weak monitor- and other donors) and private (IFC and ing of environmental and other safeguards. other private partners) resources. In the past The Independent Evaluation Group of the couple of years, the pipeline of such projects World Bank found that the private sector has grown to 35, most of them in Africa. portfolio was among the weakest in terms of Global practice groups in oil, gas, chemicals development results.23 and mining, information and communica- These examples illustrate the practi- tions technology, and global capital markets cal difficulties in implementing a strategy bring together different parts of the World G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 189 C H A P T E R 6 Bank Group in these areas. The IDB and countries. Because each multilateral agency ADB also face issues in ensuring consistency operates in a different number of countries, within each institution in how private sec- the number of respondents for each agency tor support is conducted; recent assessments is different. Nevertheless, the data are indic- have pointed to fragmentation and over- ative of the strengths and weaknesses of the lapping areas of responsibility across bank multilaterals. groups.24 The MDBs do reasonably well on align- Coordination and harmonization across ing aid to national priorities and including and within agencies are key issues for mul- aid in government budgets but still fall well tilateral aid effectiveness, and all the multi- short of the 2010 target. They have also laterals have signed on to the Paris Declara- made good progress on coordinating their tion on Aid Effectiveness.25 That declaration technical cooperation to strengthen country set out specific indicators to be achieved by capacity. As with all donors, use of country 2010. Seven of the twelve indicators are rel- financial management and procurement sys- evant for multilateral agencies. Progress on tems still lags behind. The World Bank is a these indicators has been monitored in two leader among multilaterals, and indeed all surveys: a benchmark survey conducted in donors, on this score; others have followed 2006, and a follow-up survey conducted in with more caution. Multilaterals have been 2008. trying to reduce the number of independent Table 6.3 shows the 2008 survey results project implementation units and now score based on responses from 54 aid recipient better than bilaterals on this indicator, but TABLE 6.3 Paris Declaration survey results, 2008 Align Coordinate Use country Avoid Joint Joint aid technical Use country procurement parallel Predictable Program-based field analytical flowsa cooperationb PFM systemc systemd PIUse aidf approachesg missionsh worki ADB 80 61 61 36 40 79 59 18 25 AfDB 57 28 44 42 121 45 38 17 44 IDB 55 60 52 26 108 54 52 35 44 WB 66 85 62 52 101 65 54 31 59 All multilaterals 48 63 48 40 1,193 45 48 35 60 All bilaterals 43 57 47 50 1,267 41 40 24 49 All donors 46 59 48 44 2,460 43 44 31 55 2010 targets 85 50 80 80 611 71 66 40 66 Source: DAC 2008. Note: The category "All multilaterals" includes vertical funds, UN agencies, and other multilaterals. a. Percent of aid on budget. b. Percent of coordinated technical assistance. c. Percent of aid using country's public financial management system. d. Percent of aid using country's procurement system. e. Number of project implementation units (PIUs). f. Percent of aid delivered on schedule. g. Percent of aid using program-based approaches. h. Percent of joint missions. i. Percent of joint country analytic work. 190 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S : C R I S I S R E S P O N S E A N D S U P P O R T F O R T H E P R I V A T E S E C T O R all donors continue to rely heavily on such Notes mechanisms, with likely costs in terms of weakening other areas of recipient country 1. The IFIs covered in this chapter include the government. The MDBs have high scores on International Monetary Fund (IMF), the World aid predictability, but progress since 2006 Bank Group, and the four big regional develop- has been mixed on this indicator. The MDBs ment banks (AfDB ADB, EBRD, and IDB). lead all donors in terms of program-based 2. IIF 2009. approaches to their flows. They tend to lag 3. World Bank 2009b. See also Birdsall 2009. behind other donors in coordinating field 4. Arbache and Page 2007. missions and undertaking joint analytical 5. IEG 2005. The evaluation covered IBRD and IDA operations. work. Their stronger in-house capabilities 6. Hausmann and Rodrik 2003. permit them to do independent work. But 7. IEG 2006. IEG found that in over 90 percent this may perpetuate the problems of overlap of projects, there was at least one form of addi- and waste and of excessive claims on gov- tionality in IFC projects. Providing funding on ernment officials' time. commercial terms is an important discipline for Overall, multilateral agencies, and the MDBs and goes a long way toward ensuring that MDBs in particular, are closer than bilateral they are indeed additional. donors to reaching the Paris Declaration per- 8. The Independent Evaluation Group found formance targets, but considerable progress that IFC additionality was less than satisfactory in is still required if they are to meet the 2010 one-fifth of cases; see IEG 2008. commitments. The target for coordinated 9. World Bank 2009c. 10. Robert Zoellick, "Time to Herald the Age technical cooperation has already been met of Responsibility," Financial Times, January 25, by three of the MDBs, and the ADB has 2009. met the target for aid predictability. In all 11. DAC 2008. other cases, the MDBs still have work to do. 12. Tandon 2008. The DAC suggests that the multilaterals will 13. The IFC has rapidly expanded its advi- have to gear up their efforts considerably to sory services programs (including the Foreign achieve the 2010 targets. Investment Advisory Service and the Global To sharpen the MDBs' focus on results, Partnership on Output-Based Aid) since 2002 to a common performance assessment sys- become a second leg of its core business alongside tem (or COMPAS) was designed in 2005 investments. as a self-assessment framework to track 14. World Bank 2009a. 15. Kar and Cartwright-Smith 2008. MDB capacities to manage for development 16. Belarus ($2.5 billion), El Salvador ($800 results. COMPAS reviews show progress: million), Georgia ($700 million), Hungary ($15.7 the MDBs have been improving the quality billion), Iceland ($2.1 billion), Latvia ($2.4 bil- of project design and supervision, strength- lion), Pakistan ($7.6 billion), Serbia ($500 mil- ening results frameworks, better managing lion), and Ukraine ($16.4 billion). risk in project portfolios, and increasing 17. World Bank 2008a. staff training in managing for results. The 18. A three-year pilot World Bank­IFC subna- 2008 COMPAS reports that for most MDBs tional development facility provides loans to munic- more than 80 percent of projects have base- ipal and regional governments, public utilities, and line data, monitoring indicators, and clearly financial institutions without sovereign guarantees. defined outcomes. Moreover, between 57 19. Recommendations adopted within one year of completion of advisory project. and 84 percent of MDB-funded projects 20. The statement endorses the OECD Prin- receive satisfactory or better ratings in reach- ciples of Corporate Governance. ing their intended development objectives. In 21. IEG 2008b. addition, MDBs have made improvements in 22. IEG 2008a assessing and strengthening partner coun- 23. Like other parts of the development agenda, tries' capacities in managing for results.26 promoting private sector development can be a G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 191 C H A P T E R 6 high-risk activity, and significant failure rates are to Action for Support of Private Sector Develop- be expected. While success rates may be somewhat ment"; and ADB, "Private Sector Development: A lower than for other sectors, evaluation evidence Revised Strategic Framework," February 2006. also shows that, when successful, improvement in 25. The Paris Declaration is relevant for official the enabling environment for private sector devel- aid. Hence the EBRD, which lends largely to the opment can be very large, with high benefit-to-cost private sector, is not separately identified here. ratios. 26. To be published in April, the 2008 COM- 24. 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"The Impact of the Financial Crisis on tors, Poverty Data: A Supplement to World Progress towards the Millennium Development Development Indicators 2008. Washington, Goals in Human Development." Note, World DC: World Bank. Bank, Washington, DC (February). World Bank Development Economics Vice Presi- World Bank Poverty Reduction and Economic dency. 2009. "The Expected Impact of the Management Network. 2009. "The Global Global Financial Crisis on the World's Poor- Economic Crisis: Assessing Vulnerability with est." Note, World Bank, Washington, DC (Feb- a Poverty Lens." Note, World Bank, Washing- ruary). ton, DC (February). World Bank Development Economics Vice Presi- dency and the Human Development Network. 202 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 9 ANNEX Monitoring the MDGs: Selected Indicators This annex contains DataLinks, a feature that provides access to the Excel files corre- sponding to each figure. To make use of this feature, simply locate the link below each figure (beginning with http://dx.doi.org), and type it into your Internet browser. M I L L E N N I U M D E V E L O P M E N T G O A L 1 Eradicate Extreme Poverty and Hunger Projections based on the new 2005 purchasing power If China were excluded from the global calculation, parity (PPP) poverty data reveal that the share of the drop in poverty would be less drastic, from 35.2 people living on less than $1.25 a day will fall from percent in 1990 to 18.2 percent in 2015. East Asia 41.7 percent in 1990 to 15.1 percent in 2015. The and the Pacific exceeded its target; Latin America and greatest poverty reduction has occurred in East Asia the Caribbean and South Asia are projected to be on and the Pacific and is largely attributable to China. target. MDG 1 FIGURE 1 Poverty rates by region, based on new PPPs Sub-Saharan Africa East Asia & Pacific Europe & Central Asia % of population % of population % of population 60 60 54.7 60 50.9 50 57.6 50 50 36.6 40 40 40 30 30 30 28.8 20 20 27.4 20 8.9 6.9 10 10 16.8 5.1 10 7.0 2.0 3.7 2.7 0 0 0 1.0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa % of population % of population % of population 60 60 60 51.7 50 50 50 40.3 40 40 40 30 25.9 30 30 19.7 19.7 16.6 16.9 20 24.5 20 12.8 20 8.2 8.2 10 10 10 11.3 5.7 4.3 1.8 3.6 0 0 5.4 0 2.2 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Actual $1.25/day Projected $1.25/day 2015 target Path to goal Actual $2/day Projected $2/day http://dx.doi.org/10.1596/978-0-8213-7859-5_F1 Source: World Development Indicators. MDG 1 FIGURE 2 Proportion of countries on track to achieve the poverty reduction target Extreme poverty is defined as the proportion of individuals in developing countries who live on less than $1.25 a day (based on purchasing power Fragile states parity 2005 constant prices). Poverty estimates are computed based on data covering 96 percent of developing countries' population. MDG 1 Figure 1 Sub-Saharan shows that Sub-Saharan Africa lags behind, and based on current projections, Africa this region will reduce poverty by only 20 percent between 1990 and 2015. South Asia Middle East & North Africa Of the 84 countries with available data (out of 144), 45 have already Latin America achieved or are on track to meet the poverty reduction target, but 40 are & Caribbean either off track or seriously off track. Four of 8 countries in East Asia and the Pacific, and 4 of 5 countries in South Asia with available data are not on Europe & track. Fifteen of 21 countries in Europe and Central Asia have achieved or are Central Asia on track to achieve the target. Ten of the 12 fragile states with available data East Asia are not on track, so the prospect is bleak for fragile states to meet MDG 1. & Pacific Fragile states are low-income countries or territories with no Country Policy and Institutional Assessment (CPIA) score or a CPIA score of 3.2 or less. 0 25 50 75 100 % of countries No data Seriously off track Off track On track Achieved http://dx.doi.org/10.1596/978-0-8213-7859-5_F2 Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 1 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 MDG 1 FIGURE 3 Share of poorest and richest quintiles in MDG 1 FIGURE 4 Proportion of countries on track to halve national consumption under-five malnutrition Fragile states Fragile states Sub-Saharan Sub-Saharan Africa Africa South Asia South Asia Middle East & Middle East & North Africa North Africa Latin America Latin America & Caribbean & Caribbean Europe & Europe & Central Asia Central Asia East Asia East Asia & Pacific & Pacific 0 20 40 60 80 100 0 25 50 75 100 % of population % of countries Poorest Quintile 2 Quintile 3 Quintile 4 Richest No data Seriously off track Off track On track Achieved quintile quintile http://dx.doi.org/10.1596/978-0-8213-7859-5_F4 http://dx.doi.org/10.1596/978-0-8213-7859-5_F3 Source: World Bank staff estimates based on data from UNICEF. Source: World Bank staff estimates. The prevalence of child malnutrition is measured by the percentage of Poverty data based on the new PPP estimates reveal that for all regions, children under the age of five whose weight-to-age ratio is more than two the richest population quintile has a 40 percent or larger share in national standard deviations below the international median. Standards of child growth consumption, which is far greater than the 2 to 9 percent consumed by the were revised in 2006, and estimates of child malnutrition that conform to the poorest quintile. Sub-Saharan Africa and the fragile states have the greatest new standard are being computed. The current assessment of progress toward disparity between the richest and poorest quintiles. MDGs achievement is based on child malnutrition estimates conforming to old child growth standards. According to this assessment, more than half of the countries with available data are not on track to achieve the target by 2015. MDG 1 FIGURE 5 Ratio of employment to population, by gender The employment-to-population ratio is the proportion of a country's working-age Men population (ages 15 years and older) that Employment-to-population ratio is employed. Between 1991 and 2006, this 100 ratio fell in most regions, with the exception 80 of the Middle East and North Africa for both genders and Latin America and Caribbean 60 for females. For all regions, the ratio has 40 consistently been lower for females than 20 males. 0 East Asia Europe & Latin America Middle East South Sub-Saharan & Pacific Central Asia & Caribbean & North Africa Asia Africa Women Employment-to-population ratio 100 80 60 40 20 0 East Asia Europe & Latin America Middle East South Sub-Saharan & Pacific Central Asia & Caribbean & North Africa Asia Africa 1991 2006 http://dx.doi.org/10.1596/978-0-8213-7859-5_F5 Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 2 Achieve Universal Primary Education Progress toward the primary education goal has var- on track. Europe and Central Asia and the Middle ied across regions. East Asia and the Pacific and Latin East and North Africa have had slow progress. Nei- America and the Caribbean have both progressed ther Sub-Saharan Africa nor South Asia is on track well in achieving the primary completion rate tar- to achieve the target, but a few countries in these get, although some countries in these regions are not regions have shown significant progress. MDG 2 FIGURE 1 Primary school completion rates, by gender Sub-Saharan Africa East Asia & Pacific Europe & Central Asia % of children completing primary school % of children completing primary school % of children completing primary school 110 110 105 110 100 98 100 99 100 100 100 100 93 90 90 97 98 90 96 92 80 80 80 70 65 70 70 57 60 60 60 50 47 55 50 50 40 40 40 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa % of children completing primary school % of children completing primary school % of children completing primary school 110 110 110 100 101 100 100 100 100 100 93 85 90 90 90 84 83 100 80 75 80 80 88 77 84 70 70 70 72 60 52 60 60 50 50 50 40 40 40 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Actual male Goal male 2015 target Actual female Goal female http://dx.doi.org/10.1596/978-0-8213-7859-5_F6 Source: World Development Indicators. The primary school completion rate is the percentage of children completing the last year of primary schooling. It is computed by dividing the total number of students in the last grade of primary school minus repeaters in that grade by the total number of children of official completing age. Under certain circumstances, the computation can overestimate the actual proportion of a given cohort completing primary school and sometimes exceeds 100 percent. M I L L E N N I U M D E V E L O P M E N T G O A L 2 TARGET 2.A Ensure that by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling MDG 2 FIGURE 2 Proportion of countries on track to meet MDG 2 FIGURE 3 Literacy rates, ages 15­24, by gender the primary education target Niger Fragile states Yemen, Republic of Benin Sub-Saharan Africa Pakistan Sierra Leone South Asia Chad Middle East & Morocco North Africa Latin America Mali & Caribbean Zambia Europe & Burkina Faso Central Asia Senegal East Asia & Pacific Nepal 0 25 50 75 100 Bhutan % of countries Mozambique No data Seriously off track Off track On track Achieved Haiti India http://dx.doi.org/10.1596/978-0-8213-7859-5_F7 Source: World Development Indicators. Congo, Rep. of Guam Seventeen of 24 countries in Latin America and the Caribbean, 13 of 18 countries in Europe and Central Asia, and 12 of 14 countries in East Asia and Liberia the Pacific (for which data exist) have already met or are on track to meet the Mauritania target. Other regions have shown little progress; 3 of 5 countries in South Asia and 33 of 36 countries in Sub-Saharan Africa are not on track. Fragile states Lao PDR also lag behind--only 3 of 22 countries with available data have achieved Ghana the target. Tanzania Papua New Guinea The youth literacy rate is the percentage of people ages 15­24 that Bangladesh can, with comprehension, both read and write a short, simple statement about their everyday life. For countries with data available for the 2005­07 0 20 40 60 80 100 period, literacy rates in most Sub-Saharan African countries were lower than % of youths ages 15­24 who are literate 80 percent for both males and females. All countries in that region besides Liberia have lower literacy rates for females than males. Female Male http://dx.doi.org/10.1596/978-0-8213-7859-5_F8 Source: World Development Indicators. MDG 2 FIGURE 4 Adjusted net enrollment ratio in primary education Adjusted net enrollment rates in primary education measure the proportion Percent of children of official primary school age 100 who are enrolled in any level of education. Although higher values indicate that more 80 children of primary school age attend school, these rates do not capture issues 60 such as repetition and late enrollment, as long as children enter school before the 40 official age of completion. For all regions except Sub-Saharan Africa, net enrollment 20 ratios met or exceeded 90 percent in 2006. In Sub-Saharan Africa, the rate only rose 0 from 58 to 71 percent from 1990 to 2006. East Asia Europe & Latin America Middle East South Sub-Saharan & Pacific Central Asia & Caribbean & North Africa Asia Africa 2000 2006 http://dx.doi.org/10.1596/978-0-8213-7859-5_F9 Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 3 Promote Gender Equality and Empower Women Most of the progress in achieving gender parity in levels. Female participation in the labor force has education has been made at the primary school level, increased, but labor force participation rates, occu- but regions such as East Asia and the Pacific, Europe pational levels, and wages reveal continuing signifi- and Central Asia, and Latin America and the Carib- cant gender gaps. bean have had fairly good progress at all education MDG 3 FIGURE 1 Gender disparity at primary and secondary education, by regions Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Percent Percent Percent 110 110 110 100 99 100 102 100 100 100 100 100 90 90 90 89 80 86 80 80 79 70 70 70 60 60 60 50 50 50 1990 1995 2000 2005 1990 1995 2000 2005 1990 1995 2000 2005 South Asia Latin America & Caribbean Middle East & North Africa Percent Percent Percent 110 110 103 110 100 100 100 100 100 100 96 89 98 90 90 90 80 80 80 70 70 70 70 78 60 60 60 50 50 50 1990 1995 2000 2005 1990 1995 2000 2005 1990 1995 2000 2005 Actual 2015 target Path to goal http://dx.doi.org/10.1596/978-0-8213-7859-5_F10 Source: World Development Indicators. Gender disparity is measured by the ratio of girls to boys enrolled in primary and secondary schools. Most regions are on track to achieve this target by 2015. MDG 3 FIGURE 2 Gender parity disaggregated by education levels East Asia and the Pacific and Europe and Central Asia are close to reaching the gender parity target for all Ratio of female to male enrollment, 2006 education levels. The Latin America and Caribbean region 140 is well on track to achieve the target at the primary level, but gender bias against boys is apparent at the secondary 120 and tertiary levels. Regions with higher primary and 100 secondary gender parity ratios have exhibited better performance at the tertiary level. South Asia and Sub- 80 Saharan Africa lag behind at all levels for this target, 60 particularly at the tertiary level. 40 20 0 East Asia Europe & Latin America Middle East & South Sub-Saharan & Pacific Central Asia & Caribbean North Africa Asia Africa Primary Secondary Tertiary http://dx.doi.org/10.1596/978-0-8213-7859-5_F11 Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 3 TARGET 3.A Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015 MDG 3 FIGURE 3 Proportion of countries on track to Twenty-five of 27 countries for which data exist in Latin America and the achieve gender parity in education Caribbean have achieved gender parity in primary and secondary education. Eighteen of 21 countries in Europe and Central Asia and 15 of 17 countries in East Asia and the Pacific with available data are on track or have achieved Fragile states this target. In Sub-Saharan Africa, 20 of 37 countries for which data exist Sub-Saharan are not on track, and another 10 countries lack data. Ten of the 22 fragile states (for which data exist) are seriously off track, and only 6 have achieved Africa the target. Combining primary and secondary education for some countries South Asia masks gender bias at either the primary or secondary level of education. This progress assessment also does not take into account the gender bias for boys, Middle East & but male underenrollment is a concern in many countries, especially at the North Africa secondary level. The methodology for assessing this target is currently being revised. Latin America & Caribbean Europe & Central Asia East Asia & Pacific 0 25 50 75 100 % of countries No data Seriously off track Off track On track Achieved http://dx.doi.org/10.1596/978-0-8213-7859-5_F12 Source: World Development Indicators. MDG 3 FIGURE 4 Women in the labor force The total labor force participation rate measures the proportion of the population between ages 15 and 64 that Share of female in total employment (%) is economically active, employed, or actively seeking a 50 job, while the share of females in total employment shows the extent to which women are active in the labor force. 40 The percentage of females in the labor force is below 50 percent for all regions and is lowest in the Middle East 30 and North Africa and in South Asia. South Asia showed no improvement in the ratio from 1990 to 2006, while 20 several regions had slightly lower ratios in 2006 than in 1990. The only regions to show improvements were the 10 Middle East and North Africa and Latin America and the Caribbean. 0 East Asia Europe & Latin Middle East South Sub-Saharan High- & Pacific Central America & North Asia Africa income Asia & Caribbean Africa countries 1991 2006 http://dx.doi.org/10.1596/978-0-8213-7859-5_F13 Source: World Development Indicators. MDG 3 FIGURE 5 Disparity in occupational level by gender The Enterprise Surveys indicate that about half of the firms in East Asia and the Pacific have female Percent participation in ownership, compared to only 13 percent 50 in South Asia and 18 percent in the Middle East and North Africa. The percentage of women in senior positions is far 40 smaller, ranging from only 2 percent in South Asia to 13 percent in Latin America and the Caribbean. 30 20 10 0 All South Middle East Sub- Europe & Latin East Asia countries Asia & North Saharan Central America & Pacific Africa Africa Asia & Caribbean Firms with female participation in ownership Women in senior positions http://dx.doi.org/10.1596/978-0-8213-7859-5_F14 Source: World Bank Enterprise Surveys. M I L L E N N I U M D E V E L O P M E N T G O A L 4 Reduce Child Mortality The under-five mortality rate has fallen in all regions to water and sanitation infrastructure, contributes to since 1990, and some regions have come close to the poor health and death of young children. The being on track to meet MDG Target 4.A. However, in leading cause of childhood deaths, including pneu- most countries, the rate has not declined fast enough monia, diarrhea, malaria, and measles, can easily to meet the target by 2015, and over three-quarters of be prevented through basic health service improve- countries with available data are not on track. Nearly ments and interventions, such as insecticide-treated half of all deaths of children under five occur in Sub- mosquito nets and vaccinations. Saharan Africa. Malnutrition, as well as lack of access MDG 4 FIGURE 1 Under-five mortality rate, by region Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Deaths per 1,000 live births Deaths per 1,000 live births Deaths per 1,000 live births 200 200 200 183 146 150 150 150 100 100 100 61 56 49 50 50 27 50 19 23 16 0 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2005 1990 1995 2000 2005 2010 2005 South Asia Latin America & Caribbean Middle East & North Africa Deaths per 1,000 live births Deaths per 1,000 live births Deaths per 1,000 live births 200 200 200 150 125 150 150 100 78 100 100 77 55 50 42 50 38 26 50 18 26 0 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2005 1990 1995 2000 2005 2010 2005 Actual 2015 target Path to goal http://dx.doi.org/10.1596/978-0-8213-7859-5_F15 Source: World Development Indicators. The under-five mortality rate is the probability that a newborn will die before reaching age five (expressed as a rate per 1,000). At an aggregate level, none of the regions is on track to achieve the under-five mortality target, though all regions except South Asia and Sub-Saharan Africa have come close. However, as MDG 4 Figure 2 shows, most countries are off track. Regional estimates of child mortality are based on data covering 99.9 percent of developing countries' total population. M I L L E N N I U M D E V E L O P M E N T G O A L 4 TARGET 4.A Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate MDG 4 FIGURE 2 Proportion of countries on track to MDG 4 FIGURE 3 Proportion of countries on track for achieve the child mortality target measles vaccination Fragile states Fragile states Sub-Saharan Sub-Saharan Africa Africa South Asia South Asia Middle East & Middle East & North Africa North Africa Latin America Latin America & Caribbean & Caribbean Europe & Europe & Central Asia Central Asia East Asia East Asia & Pacific & Pacific 0 25 50 75 100 0 25 50 75 100 % of countries % of countries No data Seriously off track Off track On track Achieved No data Seriously off track Off track On track Achieved http://dx.doi.org/10.1596/978-0-8213-7859-5_F16 http://dx.doi.org/10.1596/978-0-8213-7859-5_F17 Source: World Development Indicators. Source: World Development Indicators. Data are available for all but 2 countries on the under-five child Assessment of measles immunization rates shows a more positive picture mortality rate, but only 33 of the 142 countries with available data have for some regions. Though an official target has not been set, assessment is achieved or are on track to achieve the target by 2015. None of the 46 Sub- based on a target of achieving a 95 percent measles immunization rate by Saharan African countries with available data is on track to reach the target. 2015. Twenty-one of 23 Europe and Central Asian countries with available None of the fragile states has attained the target and only 1 of 34 is on track data have already achieved this target, while 6 of 8 South Asian countries to reduce by two-thirds the 1990 under-five mortality rate. are either on track or have already achieved the target. About half of the countries in East Asia and the Pacific are not on track. Sub-Saharan Africa and fragile states also lag behind. MDG 4 FIGURE 4 Measles vaccination coverage Measles vaccination coverage is defined as the percentage of children ages 12­23 months who received Measles immunization rate (% of children ages 12­23 months) measles vaccinations before 12 months or at any time 100 before the survey was administered. Since 1990, the 90 coverage of measles vaccinations has increased in all six regions, with the greatest improvements occurring in 80 Sub-Saharan Africa and South Asia. Measles vaccination 70 coverage in South Asia increased from 56 percent in 1990 to 71 percent in 2007. The vaccination rate for Europe and 60 Central Asia (83 percent) surpassed the average rate for 50 high-income countries (97 percent) in 2007. 40 30 20 10 0 Europe & High- Latin Middle East East Asia Sub- South Central income America & North & Pacific Saharan Asia Asia countries & Caribbean Africa Africa 1990 2007 http://dx.doi.org/10.1596/978-0-8213-7859-5_F18 Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 5 Improve Maternal Health Among all the MDGs, the least progress has been Saharan Africa--a region with the highest maternal made in improving maternal health, and a full mortality rate--has been negligible. Improving the achievement of the MDG 5 targets remains a chal- access to and quality of births attended by skilled lenging task. Every year, more than 500,000 women personnel, providing prenatal care, and reducing the die from complications during pregnancy, childbirth, number of pregnancies (particularly among adoles- or in the six weeks after delivery. Most of these cents) can all contribute to reducing the number of women live in low-income countries. Progress in Sub- maternal deaths. MDG 5 FIGURE 1 Maternal mortality rates Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Deaths per 100,000 Deaths per 100,000 Deaths per 100,000 live births Attended births, % live births Attended births, % live births Attended births, % 1000 920 900 100 1000 100 1000 100 800 80 800 80 800 80 600 60 600 60 600 60 400 40 400 40 400 40 230 220 200 20 200 150 20 200 20 55 60 44 15 0 0 0 0 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa Deaths per 100,000 Deaths per 100,000 Deaths per 100,000 live births Attended births, % live births Attended births, % live births Attended births, % 1000 100 1000 100 1000 100 800 80 800 80 800 80 650 600 500 60 600 60 600 60 400 40 400 40 400 40 260 163 180 200 200 20 200 130 20 200 20 45 65 0 0 0 0 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Actual Path to goal Attended births http://dx.doi.org/10.1596/978-0-8213-7859-5_F19 Source: World Development Indicators. Note: Only data for 2007 are available for attended births in Europe and Central Asia and Sub-Saharan Africa. The maternal mortality rate is the number of women who die from pregnancy-related complications during pregnancy or delivery, per 100,000 live births. Such statistics are very difficult to collect through surveys, and data reported here rely on modeling techniques developed by the World Health Organization, United Nations Children's Fund, and United Nations Population Fund. The increased share of attended births contributes to declines in maternal mortality rates. See MDG 5 Figure 3 for information on attended births. M I L L E N N I U M D E V E L O P M E N T G O A L 5 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 MDG 5 FIGURE 2 Contraceptive prevalence by MDG 5 FIGURE 3 Proportion of countries on track to achieve income groups attended births target % of married women ages 15­49 using contraception Fragile states 80 Sub-Saharan 60 Africa South Asia 40 Middle East & 20 North Africa 0 Latin America All developing Low-income Middle-income & Caribbean countries countries countries Europe & Central Asia 1990 2007 East Asia http://dx.doi.org/10.1596/978-0-8213-7859-5_F20 & Pacific Source: World Development Indicators. 0 25 50 75 100 The contraceptive prevalence rate is the percentage of married % of countries women ages 15­49 who use, or whose sexual partners use, any No data Seriously off track Off track On track Achieved form of contraception. This rate has increased for all income groups between 1990 and 2007, but is still quite low at only 33 http://dx.doi.org/10.1596/978-0-8213-7859-5_F21 percent for low-income countries in 2007. Source: World Development Indicators. Births attended by skilled health staff are the percentage of deliveries MDG 5 FIGURE 4 Prenatal care coverage in South attended by personnel trained to give the necessary supervision, care, and advice to women during pregnancy, labor, and the postpartum period. Increasing attended Asia births helps decrease the maternal mortality rate. Twenty-one of 23 countries in Europe and Central Asia and 19 of 26 countries in Latin America and the Caribbean Percent have achieved the target to lower the nonattendance rate to 10 percent by 2015, 80 but most South Asian and Sub-Saharan African countries are not on track. 60 40 MDG 5 FIGURE 5 Adolescent fertility rate, by region 20 Births per 1,000 women, ages 15­19 160 0 1990 2007 140 Pregnant women receiving prenatal care at least once 120 Pregnant women receiving prenatal care at least four times 100 80 http://dx.doi.org/10.1596/978-0-8213-7859-5_F22 Source: World Development Indicators. 60 40 Maternal death is correlated with poor health care during 20 pregnancy and childbirth. Prenatal care coverage is the percentage of women attended during pregnancy by skilled health personnel 0 for pregnancy-related issues. One of the regions with the highest East Asia Europe & Middle East South Latin Sub-Saharan maternal mortality rates, South Asia, has shown improvements in & Pacific Central & North Asia America Africa the percentage of pregnant women who have received prenatal Asia Africa & Caribbean care at least once, increasing from 47 to 69 percent from 1990 to 2007. Although this shows progress, a healthy pregnancy requires 1997 2007 much more than one or two prenatal visits. The number of women who received prenatal care at least four times increased only http://dx.doi.org/10.1596/978-0-8213-7859-5_F23 marginally, from 26 to 34 percent between the two years. Source: World Development Indicators. Giving birth at an early age puts young women at an increased risk of pregnancy complications and, in some cases, death. The adolescent fertility rate is defined as the number of births per 1,000 women ages 15­19. From 1997 to 2007, the rate has marginally declined in all regions. The largest decrease between the two years is in Latin America and the Caribbean, where the rate dropped from 102 to 74. Progress was less dramatic in the most fertile region, Sub-Saharan Africa, where the rate only decreased from 141 to 134. M I L L E N N I U M D E V E L O P M E N T G O A L 6 Combat HIV/AIDS, Malaria, and Other Diseases In 2007, around 33 million people globally were liv- HIV transmission and prevention. Women from the ing with HIV, and about 2 million people, the major- poorest income quintile are the least knowledgeable. ity in Sub-Saharan Africa, died from the disease. Most Achieving the target to halt and reverse the incidence countries face difficulty in reaching the MDG targets of major diseases such as malaria and tuberculosis related to HIV/AIDS. Less than half of the individu- has also been challenging. als in these countries have correct knowledge about MDG 6 FIGURE 2 Proportion of population aged 15­24 years in Sub-Saharan Africa with MDG 6 FIGURE 1 HIV prevalence rates and estimated comprehensive HIV/AIDS knowledge, by deaths gender and income quintile South Africa Cameroon, 2004 Nigeria % of population Zimbabwe 100 Tanzania 80 Mozambique 60 Uganda 40 Malawi 20 Ethiopia 0 Women Men Zambia Cameroon Chad, 2004 China % of population Côte d'Ivoire 100 Russian Federation 80 Thailand 60 Sudan 40 Myanmar 20 United States 0 Ghana Women Men Vietnam Ukraine Mozambique, 2003 Lesotho % of population Brazil 100 Chad 80 Angola 60 Botswana 40 Burundi 20 Central African Republic 0 Mexico Women Men Swaziland Poorest quintile Richest quintile 0 50 100 150 200 250 300 350 http://dx.doi.org/10.1596/978-0-8213-7859-5_F25 Estimated deaths (thousands) Sources: HNPStats database, World Bank, based on household surveys. % of population ages 15­49 living with HIV HIV/AIDS knowledge is defined as the percentage of individuals who < 1 1­4.9 5­9.9 10­14.9 15 have comprehensive, correct knowledge about HIV (ability to describe two ways to prevent infection and to reject three misconceptions concerning http://dx.doi.org/10.1596/978-0-8213-7859-5_F24 HIV). Estimates from household surveys in Sub-Saharan African countries Source: World Development Indicators. such as Cameroon, Chad, and Mozambique reveal the disparity in knowledge about the sexual transmission of HIV/AIDS by household income levels and gender of the respondents. Women from the poorest income quintile have HIV prevalence is the percentage of individuals ages 15­49 who are the least amount of knowledge, while men from the richest income quintiles infected with the HIV virus. South Africa had the highest number of estimated have the most knowledge. Men and women from the richest quintiles have deaths from AIDS (350,000) and a prevalence rate of 18.1 percent in 2007. more knowledge than their counterparts in the poorest quintile. A higher Other Sub-Saharan African countries also exhibited high death rates and percentage of men and women in Cameroon have HIV/AIDS knowledge prevalence rates greater than 1 percent. compared to Mozambique, and subsequently the prevalence and estimated death rates in Cameroon were both lower in 2007. M I L L E N N I U M D E V E L O P M E N T G O A L 6 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 MDG 6 FIGURE 3 Tuberculosis detection and treatment MDG 6 FIGURE 4 Bednet use by children Tuberculosis cases detected under DOTS (%) Gabon 2000 100 Cambodia 2000 80 Colombia 2005 60 Tanzania 2004 40 Chad 2004 Benin 2001 20 Mali 2001 0 East Asia Middle East Latin South Europe & Sub-Saharan Kenya 2003 & Pacific & North America Asia Central Africa Burkina Faso 2003 Africa & Caribbean Asia Zambia 2001 2002 2007 Rwanda 2000 Tuberculosis treatment success rate Uganda 2000/01 (% of registered cases) Cameroon 2004 100 Mozambique 2003 80 Ghana 2003 60 Namibia 2000 Nigeria 2003 40 0 20 40 60 80 100 20 Percent 0 East Asia South Middle East Latin Sub-Saharan Europe & Poorest quintile Richest quintile & Pacific Asia & North America Africa Central http://dx.doi.org/10.1596/978-0-8213-7859-5_F27 Africa & Caribbean Asia Source: Country household surveys. 2001 2006 The majority of malaria cases that plague the developing world http://dx.doi.org/10.1596/978-0-8213-7859-5_F26 occur in tropical or subtropical regions. Malaria causes over 1 million Source: World Development Indicators. deaths each year, predominantly in Sub-Saharan Africa, to children under age five. Because bednets protect humans from contact with mosquitoes, which are the vector for malaria transmission, they are To effectively halt and lower the tuberculosis (TB) incidence rate, early one of the best malarial prevention strategies. In most countries, detection and successful treatment of the disease are vital. The TB cases detected children in the richest quintile have a greater usage of bednets, but under the Directly Observed Treatment Short-course (DOTS) increased dramatically the reverse is true in Colombia, Ghana, Namibia, and Nigeria. in East Asia and the Pacific (40 to 77 percent) and South Asia (29 to 67 percent) from 2002 to 2007. The detection rate in Sub-Saharan Africa only rose marginally from 42 to 47 percent. The TB treatment success rate has fallen in Latin America and the Caribbean and Europe and Central Asia, but has slightly improved in the other regions. M I L L E N N I U M D E V E L O P M E N T G O A L 7 Ensure Environmental Sustainability Based on current trends, the world and a few regions important to mitigate the effects of climate change. will meet the water access target by 2015. How- However, global carbon dioxide emissions levels ever, achieving the improved sanitation access target have gradually increased since 1990 and reached 28 remains a challenge. There are disparities among billion metric tons in 2005. The rate of deforestation regions, and South Asia and Sub-Saharan Africa has been highest in Latin America and the Caribbean have made the least progress on both targets. Reduc- and Sub-Saharan Africa--two regions that contain ing deforestation and carbon dioxide emissions are over 40 percent of the world's forest area. MDG 7 FIGURE 1 Population without access to an improved water source or sanitation facilities Sub-Saharan Africa East Asia & Pacific Europe & Central Asia % of population % of population % of population 90 90 90 74 69 60 51 60 52 60 37 34 42 32 30 30 26 30 26 12 11 13 16 6 0 0 0 10 5 5 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa % of population % of population % of population 90 82 90 90 67 60 60 60 41 32 27 30 30 22 30 16 13 13 16 12 8 16 9 8 11 0 0 0 9 6 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Without water access actual Path to water access goal 2015 target Without sanitation access actual Path to sanitation access goal 2015 target http://dx.doi.org/10.1596/978-0-8213-7859-5_F28 Source: World Development Indicators. Access to sanitation refers to the percentage of population with at least adequate access to excreta facilities (private or shared, but not public) that can effectively prevent human, animal, and insect contact with excreta. Access to improved sources of water refers to the percentage of population with reasonable access to a permanent source of safe water in their dwelling or within a reasonable distance from it. Regional estimates for both indicators are computed using country data covering 97 percent of developing countries' total population. All regions but Sub-Saharan Africa and the Middle East and North Africa are on track to achieve the water access target, based on current trends. Prospects are bleaker for the sanitation access target, with only the Middle East and North Africa on track and Sub-Saharan Africa and South Asia lagging far behind. M I L L E N N I U M D E V E L O P M E N T G O A L 7 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 MDG 7 FIGURE 2 Proportion of countries on track to achieve the targets for access to improved water and sanitation Fragile states Fragile states Sub-Saharan Sub-Saharan Africa Africa South Asia South Asia Middle East & Middle East & North Africa North Africa Latin America Latin America & Caribbean & Caribbean Europe & Europe & Central Asia Central Asia East Asia East Asia & Pacific & Pacific 0 25 50 75 100 0 25 50 75 100 Water: % of countries Sanitation: % of countries No data Seriously off track Off track On track Achieved http://dx.doi.org/10.1596/978-0-8213-7859-5_F29 Source: World Development Indicators. Forty-nine percent of the developing countries with available data have achieved or are on track to achieve the improved water target, while 23 percent have achieved or are on track to achieve the improved sanitation target. Fourteen of 21 countries with available data in Europe and Central Asia have achieved the target to improve water access. In the Middle East and North Africa, 7 of 13 countries with available data are not on track. Progress has been much slower for the improved sanitation target, and no Sub-Saharan African country and almost two-thirds of countries in the other regions are not on track, based on available data. MDG 7 FIGURE 3 CO2 emissions disaggregated by largest MDG 7 FIGURE 4 Forest lost and gained emitters and the rest of the world Latin America 2005 & Caribbean 2004 High-income countries 2002 Europe & 2000 Central Asia 1995 Sub-Saharan 1990 Africa East Asia 0 5 10 15 20 25 30 & Pacific Emissions of CO2 (billions of metric tons) South Asia United States Euro area Japan Rest of high-income countries Middle East & China Russian Federation North Africa India Rest of developing countries ­700 ­500 ­300 ­100 0 100 300 http://dx.doi.org/10.1596/978-0-8213-7859-5_F30 km2 (thousands) Source: World Development Indicators. http://dx.doi.org/10.1596/978-0-8213-7859-5_F31 Carbon dioxide (CO2) emissions are derived from burning fossil energy Source: World Development Indicators. and manufacturing cement. The United States, Euro Area, and Japan produce almost 75 percent of the CO2 emissions from all high-income countries. Deforestation, resulting largely from land use change, has been about However, about half of the total global CO2 emissions comes from the 13 million hectares a year, and net forest lost has been 7.3 million hectares. developing world, particularly from China, the Russian Federation, and India. Because forests are important to mitigating climate change, deforestation China's share of global emissions has risen from 11 to 20 percent between creates challenges to fostering sustainable development. The fastest rates of 1990 and 2005. forest lost from 1990 to 2005 were in Sub-Saharan Africa (7.1 percent), Latin America and the Caribbean (7.0 percent), and East Asia and the Pacific (1.6 percent). The other regions had increases in their forest areas. M I L L E N N I U M D E V E L O P M E N T G O A L 8 Develop a Global Partnership for Development According to preliminary estimates, the share of offi- (MDRI) have drastically decreased the debt burdens cial development assistance (ODA) in GNI rose from of many low-income countries, but maintaining long- 0.28 in 2007 to 0.30 in 2008, but falls below the 0.33 term debt sustainability will be difficult. Mobile phone level reached in 2005. ODA in 2005 was boosted subscriptions have more than doubled in low- and by the exceptional debt-relief initiatives for heavily middle-income countries, but large gaps remain for indebted poor countries (HIPC). Donors will need improving access to technologies such as broadband to increase programmable aid (which excludes debt Internet. Substantial infrastructure investments by the relief) in order to meet the 2010 aid target to increase private sector will facilitate the growth of informa- total aid by $50 billion overall and aid to Sub-Saha- tion and communications infrastructure and access to ran Africa by $25 billion a year (in 2004 dollars). The mobile phone technology. HIPC Initiative and Multilateral Debt Relief Initiative MDG 8 FIGURE 1 Evolution of global aid, as a percentage of GNI in DAC countries Increase required to meet % of GNI Constant 2004 US$ (billions) current 2010 targets 0.40 140 0.35 120 ODA as % of donors' GNI 0.30 100 Total net ODA from DAC (right scale) 0.25 80 members (left scale) 0.20 60 0.15 40 0.10 20 0.05 0 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 http://dx.doi.org/10.1596/978-0-8213-7859-5_F32 Source: OECD DAC database. In 2005, G-8 leaders at the Gleneagles Summit agreed to increase the annual aid allocations to developing countries by an additional $50 billion by 2010, compared with 2004. From 2005 to 2007, the ratio of ODA to gross national income for DAC donors fell from 0.33 to 0.28, but the ratio must be 0.35 in 2010 to meet the target. The total net ODA from DAC donors increased from 1990 to 2005, but has declined since then; aid in 2005 was high because of the one-time debt relief to Nigeria and Iraq. MDG 8 FIGURE 3 Debt service as a percentage of exports of goods and services MDG 8 FIGURE 2 Aid to small island states and landlocked Debt service-to-export ratio developing countries 25 ODA-to-GNI ratio (%) Heavily indebted poor countries (HIPC) 10 20 9 Landlocked developing countries 8 15 7 10 Middle-income 6 countries 5 5 Low-income countries, 4 excluding HIPCs 3 0 2 Small island states 1990 1992 1994 1996 1998 2000 2002 2004 2006 1 0 http://dx.doi.org/10.1596/978-0-8213-7859-5_F34 1990 1994 1998 2002 2006 Source: OECD DAC database. http://dx.doi.org/10.1596/978-0-8213-7859-5_F33 Debt relief under the HIPC Initiative reduced burdens of external debt Source: OECD DAC database. service for 34 post-decision-point highly indebted poor countries. Assistance under the MDRI Initiative further reduced the external debt of 23 post- The ODA-to-GNI ratio for landlocked developing countries has fluctuated completion-point counties. High commodity prices and strong growth in the between 5 and 9 from 1990 to 2007 but has not changed much over the world economy before the onset of the global financial crisis have improved period. The ratio has decreased for small island states from 1990 to 2007. export revenues of many developing countries. The debt-service-to-export ratios for all developing country groups shown in the figure have declined since 1990, with low-income countries and HIPCs enjoying the largest declines. M I L L E N N I U M D E V E L O P M E N T G O A L 8 TARGET 8.A Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system TARGET 8.B Address the special needs of the least developed countries TARGET 8.C Address the special needs of landlocked developing countries and small island developing states TARGET 8.D Deal comprehensively with the debt problems of developing countries through national and international measures in order 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 MDG 8 FIGURE 4 Average tariff imposed by developed MDG 8 FIGURE 5 Cellular subscribers per 100 people countries on least developed countries Telephone mainlines Agricultural products Low- Mobile income Australia phones countries Canada Internet users Norway Telephone European Union mainlines Middle- Switzerland Mobile income phones Japan countries Internet United States users 0 5 10 15 20 25 30 35 Telephone mainlines % of tariffs High- income Mobile Textiles phones countries Internet Australia users Canada 0 10 20 30 40 50 60 70 80 90 100 European Union Per 100 people Japan 2000 2007 Norway http://dx.doi.org/10.1596/978-0-8213-7859-5_F36 Source: World Development Indicators. Switzerland United States Compared with telephone mainlines, the number of mobile phone subscribers and Internet users has rapidly increased in low- and middle- 0 5 10 15 20 25 30 35 income countries, although the levels remain much lower than those of % of tariffs high-income countries. Between 2004 and 2007, mobile phone subscribers increased from 3.7 to 23.1 per 100 people in low-income countries and 22.2 Clothing to 46.9 per 100 people in middle-income countries. Australia Canada European Union Japan The average tariffs imposed by industrial countries on least developed countries' (LDC) agricultural, textile, and clothing products have fallen from Norway 1996 to 2006. Tariffs on agricultural products have decreased only slightly. Tariffs on clothing products have been the highest, and the rates of reduction Switzerland the largest. Although these reductions eroded the preferential access to high- United States income markets that some LDCs had previously exclusively enjoyed, the overall reduction of tariffs benefit production and exporting sectors of all LDCs. 0 5 10 15 20 25 30 35 % of tariffs 1996 2000 2006 http://dx.doi.org/10.1596/978-0-8213-7859-5_F35 Sources: United Nations Conference on Trade and Development, World Trade Organization, and International Trade Center. E C O - A U D I T Environmental Benefits Statement The World Bank is committed to Saved: preserving endangered forests and · 33 trees natural resources. The Office of · 32 million BTUs of the Publisher has chosen to print energy the Global Monitoring Report 2009 · 35,614 pounds of on recycled paper with 30 percent solid waste post-consumer waste, in accordance with the recommended standards · 11,844 gallons of for paper usage set by Green Press water Initiative--a nonprofit program · 1960 pounds of supporting publishers in using fiber greenhouse gases that is not sourced from endangered forests. For more information, visit www.greenpressinitiative.org. "A Development Emergency," the title of this year's Global first order of business must be to stabilize these markets Monitoring Report, the sixth in an annual series, could and counter the recession that the financial turmoil has not be more apt. e global economic crisis, the most triggered. At the same time, strong and urgent actions are severe since the Great Depression, is rapidly turning into needed to counter the impact of the crisis on developing a human and development crisis. No region is immune. countries and help them restore strong growth while e poor countries are especially vulnerable, as they have protecting the poor. the least cushion to withstand events. e crisis, coming Global Monitoring Report 2009, prepared jointly by the staff on the heels of the food and fuel crises, poses serious of the World Bank and the International Monetary Fund, threats to their hard-won gains in boosting economic provides a development perspective on the global economic growth and reducing poverty. It is pushing millions back crisis. It assesses the impact on developing countries--their into poverty and putting at risk the very survival of many. growth, poverty reduction, and other MDGs. And it sets e prospect of reaching the Millennium Development out priorities for policy response, both by developing Goals (MDGs) by 2015, already a cause for serious countries themselves and by the international community. concern, now looks even more distant. e report also focuses on the ways in which the private A global crisis requires a global response. e crisis began sector can be better mobilized in support of development in the financial markets of developed countries, so the goals, especially in the aftermath of the crisis. ISBN 978-0-8213-7859-5 SKU 17859