the development charter for g2

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A Development Charter for the G-20

March 2009

Overseas Development

Institute


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Contributors

Overseas Development Institute

Massimiliano Cal

Geo HandleyKate Higgins

Nick Highton

Jodie Keane

Tony Killick

Isabella Massa

Simon Maxwell

Mareike Meyn

Anna McCord

Dirk Willem te Velde

Milo Vandemoortele

External contributors

Olu Ajakaiye, Director o Research, Arican Economic Research Consortium

Ray Barrell, Senior Research Fellow, NIESR

Debapriya Bhattacharya, Executive Director, Centre or Policy Dialogue, Bangladesh

Oluwatayo Oni Fakiyesi, Head o Economics Department, University o Lagos, Nigeria

Amoussouga Gero Fulbert, Proessor, Universit dAbomey-Calavi, BeninDawn Holland, Senior Research Fellow, NIESR

Hossein Jalilian, Director o Research, Cambodian Development Policy Research Institute, Cambodia

Luis Carlo Jemio, Director o Group Integral S.R.L., INESAD, Bolivia

Manenga Ndulo, Proessor o Economics, Department o Economics, University o Zambia

Mustazur Rahman, Executive Director, Centre or Policy Dialogue, Bangladesh

Ira Setiati Titiheruw, Senior Research Associate, Centre or Strategic and International Studies, Indonesia

Hadi Soesastro, Executive Director, Centre or Strategic and International Studies, Indonesia

Sarah Ssewanyana, Executive Director/Principal Research Fellow, Economic Policy Research Centre, Uganda

For further information, please contact ODI Research Fellow Dirk Willem te Velde ([email protected])

Overseas Development Institute 2009

The views presented in this collection are those o the authors and do not necessarily represent the views othe Overseas Development Institute.

Cover image: fickr/thebigdurian, Chowpatty Beach, Mumbai. Reproduced under a Creative Commons licence.


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The global nancial crisis started in developed countries, but the global recession which has ollowed ishaving a wide-spread impact on developing countries. By the end o this year, developing countries are

expected to lose incomes o at least US $750 billion. In sub-Saharan Arica, the gure is over US $50bn.

The consequence is likely to be rising unemployment, poverty and hunger: an extra 50 million peopletrapped in absolute poverty, with the number expected to rise to 90 million; 1 and the total number suering

rom hunger already up by 75 million to nearly a billion people, rising or the rst time in nearly two decades.2

ODI researchers, in coordination with other developed and developing country institutes, are tracking the

spread o the recession, monitoring and modelling its impacts and applying their dierent skills to the policychallenge o restoring growth and development in the poorest economies in the world. The G-20 cannot deliver

development, but its members can aim to promote development eorts rather than hinder them. The 12 short

articles in this pack do not constitute an institutional position but, taken together, they outline a DevelopmentCharter or the G-20 to help poor countries tackle the eects o the global economic recession. This includes:

A Global Poverty Alert System:

to monitor the economic impact o declines in trade, nancial fows, remittances and aid. Work by ODI

and its partners in ten countries in Arica, Asia and Latin America show all are aected, but in verydierent ways.

to monitor the impact on peoples lives o lost work, lower incomes and alling investment in health

and education.

Better nancial regulation and new nancial rules to increase the transparency o capital fows, curb illegaltransers, and reduce the pro-cyclicality o nancial fows to developing countries, or example by adjusting

capital adequacy ratios over the business cycle, or promoting capital fows to developing countries using

innovative nancing mechanisms. A signicant share o the scal stimulus o G-20 countries to be spent in developing countries (at least $50

billion in Arica) to provide social protection, but especially to help provide the inrastructure needed torestore growth. Such a scal stimulus can raise welare in the poorest countries and oset a signicant part

o the impact o the crisis and will also help developed countries seeking export markets.

A trade package which does not set unrealistic expectations about a conclusion to the Doha Round, but

instead concentrates on preventing beggar-thy-neighbour protectionism and bringing orward unding orAid or Trade.

A reversal o labour protectionism, which restricts migration and hurts both sending and receiving countries.

Support developing country eorts or building institutions, establishing crisis management ocal points,

and implementing home-grown rainbow policies that:

promote policies and institutions that help developing countries to grow themselves out o the crisis; support the livelihoods o the poor through greatly expanded social protection schemes;

invest in the technology, institutions and structures necessary to deal with climate change;

Making sure that aid is managed to support national ownership and eective response, with ast distribution,

in support o government plans, and through government budgets;

Using the G-20 as a platorm or reorm o the international system, starting with the governance o the Bretton

Woods system, but also launching a wider process to strengthen the eectiveness o the United Nations.

Dirk Willem te Velde

Overseas Development Institute

A Development Charter or the G-20

Endnotes

1. Address by Douglas Alexander, Secretary o State DFID, Chatham House, London 2009: http://www.dd.gov.uk/news/les/speeches/sos-wb-speech.asp

2. Address by Jacques Diou, Director-General o the Food and Agriculture Organization, Madrid 2009: http://www.ransa2009.org/docs/docs/speech_DG_FAO_ransa2009.doc.pd
http://www.dfid.gov.uk/news/files/speeches/sos-wb-speech.asphttp://www.dfid.gov.uk/news/files/speeches/sos-wb-speech.asphttp://www.ransa2009.org/docs/docs/speech_DG_FAO_ransa2009.doc.pdfhttp://www.ransa2009.org/docs/docs/speech_DG_FAO_ransa2009.doc.pdfhttp://www.ransa2009.org/docs/docs/speech_DG_FAO_ransa2009.doc.pdfhttp://www.ransa2009.org/docs/docs/speech_DG_FAO_ransa2009.doc.pdfhttp://www.dfid.gov.uk/news/files/speeches/sos-wb-speech.asphttp://www.dfid.gov.uk/news/files/speeches/sos-wb-speech.asp


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1. Monitoring the eects o the global nancial crisis on developing countries: 4

a Global Poverty Alert Network

2. The impact o the nancial crisis on poor people: what we know and what 6can be done

3. First things rst: trade priorities or the G-20 8

4. Restricting migration is a counterproductive way to tackle the crisis 10

5. Global inance and development: new global rules needed 12

6. Blue, green and red: a rainbow stimulus to tackle global recession 14

7. Us or them. Them and us. We are all in it together, stupid. How a G-20 16supported iscal stimulus in sub-Saharan Arica can help the G-20 too

8. Social protection is a global imperative 18

9. Aid architecture and the global inancial crisis 20

10. Beyond the numbers: combating the crisis in poor countries requires 22more than just cash

11. The G-20 and low-income countries: a growing crisis or growing 24out o a crisis?

12. Is the G-20 a temporary sticking plaster or a ull organ transplant? 26


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The Overseas Development Institute (ODI)is coordinating a large study examining the

eects o the global nancial crisis in 10

developing countries. This links developing

country research institutes, think tanks and donoragencies, with unding rom the UK Department or

International Development (DFID) and the Dutch

Ministry o Foreign Aairs. The research is ongoing,and the ollowing refects the views o the authors

alone, but there are already important preliminary

ndings. The research nds that low-income coun-tries are being aected through dierent transmis-

sion mechanisms: declines in trade such as commodity export rev-

enues and government budgets; declines in nancial fows such as bank lending

and oreign direct investment; declines in remittances; and possible declines in the dollar value o aid.

The G-20 will need to monitor closely the eects othe global nancial crisis on development.

Asian countries such as Bangladesh, Cambodia

and Indonesia have already experienced a sharp

decline in manuacturing exports and industrialactivity. Bangladesh recorded negative export growth

or the rst time in recent years. Cambodian garment

exports to the US have suered. In Indonesia, growthin manuacturing slowed in 2008, and exports have been

hard hit since November 2008.

Commodity exporters such as Bolivia (hydrocar-

bons), Kenya (tea), Nigeria (oil), Uganda (coee) andZambia (copper) have seen recent declines in export

revenues, which have also aected government rev-

enues negatively. The copper price has allen and aquarter o the mining jobs have already been lost in

Zambia. In Uganda, there has been a decline in valueo trade rom September 2008 into 2009. In Benin,cotton accounts or a large share o exports, but prices

have allen recently. The value o Kenyan tea exports

has declined by 60% since September 2008. The

government budget in Bolivia is highly dependent onhydrocarbon revenues, which are alling.

Several countries are also aected through migra-

tion, remittances, nancial markets and exchange

rate fuctuations. The number o workers leavingBangladesh to nd work elsewhere ell by 45% in

January 2009 year-on-year (y-o-y). Uganda has seen

a slowdown in remittances. Some o the case studycountries have also reported large eects on their

nancial sector. The Indonesian stock exchange

dropped by hal during 2008; the equity marketcapitalisation nearly halved during 2008. The stock

market index ell by 29% in 2008 in Zambia, and 25%since July 2008 in Kenya. Some countries have also

reported exchange rate depreciations.In Bangladesh, export growth in the rst six

months o the 2008/09 nancial year (July and

December 2008) was robust at 19.6% (y-o-y), butexports ell by 2% in the second quarter (y-o-y). This

is the rst time that negative export growth has been

recorded in recent years. The number o workersleaving Bangladesh to nd work elsewhere ell by

45% in January 2009 (y-o-y). The impact o devalua-

tion in Pakistan and India has rendered Bangladesh

less competitive. Stimulus packages in other coun-tries may aect Bangladesh negatively. Import duty

values have decreased considerably.Benins exports are limited to a ew products with

relatively low value added. Cotton accounts or 34% o

all exports. Cotton prices on the international market

have allen recently by around 37.4% y-o-y. Oil prices

have allen by 60.6% y-o-y. The US dollar has appreci-ated by almost 10% against the euro in the past year.

This combination will most likely result in a dramatic

reduction in exports.In Bolivia, the mining sector is the rst to have

started to eel the impact o the nancial crisis. FromDecember 2007 to June 2008, there was a decline in

exports. Remittances grew dramatically in 2007 but

almost halved in 2008. The government budget is highly

dependent on hydrocarbon revenues, which are alling.

1. Monitoring the eects o the globalnancial crisis on developing countries:

a Global Poverty Alert NetworkBy Olu Ajakaiye, Debapriya Bhattacharya, Massimiliano Cal, TayoFakiyesi, Amoussouga Gero Fulbert, Hossein Jalilian, Luis Jemio,Jodie Keane, Isabella Massa, Mareike Meyn, Manenga Ndulo,Mustafzur Rahman, Ira Setiati, Hadi Soesastro, Sarah Ssewanyana,Milo Vandemoortele and Dirk Willem te Velde1


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In Cambodia, tourism and garments revenues are

under pressure. Around 300,000 migrant workers

in Thailand have been told to go back to Cambodia.

Most Foreign Direct Investment (FDI) is destined or

the garment and construction industries, but therehave been recent actory closures and reduced

investment, including some fight o investors. Mostinvestment in construction comes rom Korea. The

government has responded with scal, monetary

and nancial policies.

In Indonesia, growth in manuacturing industries

slowed in 2008, with commodity prices starting to allrom June 2008 onwards; exports have been hard hit

since November 2008. The non-oil and gas trade bal-

ance has worsened and experienced a larger exportdecline compared with imports. The Indonesian stock

exchange dropped 51.17% during 2008; equity mar-

ket capitalisation was down 46.4% during that year.Government policy has consisted mostly o measures

to maintain nancial market stability and to providescal stimuli in order to keep private and government

consumption (which occupies almost 65% o its grossdomestic product GDP) growth in check.

In Kenya, the NSE-20 Index has allen by 25% since

July 2008; portolio fows have been adversely aected.

The Kenyan stock market is still going down. The decline

in the stock market index has made it more dicult to

borrow rom the capital market; this has aected the

availability o unds. The value o Kenyan tea exports

has declined by 60% since September 2008. Cut fow-

ers may be aected. Macro imbalances could cause the

Kenyan shilling to all dramatically: it has already depre-ciated by 22.6% against the US dollar since September

2008. In 2007, Kenya achieved the highest growth rate

in over two decades but the International Monetary Fund

(IMF) predicts growth or 2009 will be only 4%. Reduced

growth will aect poverty reduction eorts signicantly.

In terms o policy responses to the crisis, the govern-

ment has reduced bank cash ratios rom 6% to 5%; the

Central Bank has reduced ratios rom 9% to 8.5%.

In Nigeria, stock market capitalisation ell by some

45% in 2008 compared with 2007. There has been a

dramatic reduction in the all share index. Huge capital

outfows have eroded condence. A reduction in liquid-

ity has constrained rms ability to raise unds. The

government has increased interest rates. In addition,

bad banking debt is hidden; borrowers are unable topay back loans. Foreign reserves have declined. There

has been a reduction in expenditure on capital projects.

Some oreign commitments have been scaled back or

withdrawn. Crude oil comprises around 85% exports

and 90% o government revenue. The price o oil ell

rom a high o $147 per barrel in July 2008 to $47 per

barrel in January 2009.

In Uganda, monthly trade data show a decline in

value rom September 2008 into 2009. Ugandas keyexport is coee. At the beginning o 2008, the value o

exports was high ($/kg) but this ell towards the end o

2008. The exchange rate has depreciated by 20% sinceOctober 2008. Government tax revenue has recently

declined. There was a slowdown in remittances during

2008. Aid disbursements declined between 2007 and

2008 (y-o-y). There have been anecdotal reports thatBarclays Bank Uganda might close. There are some

reports o non-governmental organisation (NGO) activi-

ties in northern Uganda alling and operations closing.Ugandas growth projections have allen. No concrete

measures have been announced by the government

on either monetary or scal policy.In Zambia, the global nancial crisis threatens

recent development gains. Trade data show that, inthe nal period o 2008, the trade balance worsened

(imports exceeded exports). Changes in the terms otrade index or Zambia suggest that the impact may

be yet to come. The stock market index ell by 29%

in 2008. Mining products account or around 80%o Zambias exports. The Kwacha has depreciated

against the US dollar. The copper price ($/pound) ell

in 2008, rom just over $3 per pound to just over $2 perpound by December 2008. Copper mines are already

closing. There were around 30,000 workers in mining

in 2008 but some 8,100 have lost their jobs 27% o

the total mining workorce. New projects have beenput on hold; exploration projects have been aected

as a result o diculties in obtaining bank loans or

nancing. The government is adopting prudent scalpolicies and negotiating with mining companies or a

potential suspension o windall tax.The monitoring o the eects o the global nancial

crisis on developing countries is ongoing and urther

results rom the network will become available on ODIs

website on the global nancial crisis. See www.odi.org.

uk/odi-on/nancial-crisis/deault.asp.

Endnotes

1. For aliation o the authors, and the details o the presentations on which this note draws, please see http://www.odi.org.uk/odi-on/nancial-crisis/deault.asp

Low-income countries are being

aected in dierent ways the

G-20 will need to take note o the

eects o the global nancial crisis

on development.
http://www.odi.org.uk/odi-on/financial-crisis/default.asphttp://www.odi.org.uk/odi-on/financial-crisis/default.asphttp://www.odi.org.uk/odi-on/financial-crisis/default.asphttp://www.odi.org.uk/odi-on/financial-crisis/default.asphttp://www.odi.org.uk/odi-on/financial-crisis/default.asphttp://www.odi.org.uk/odi-on/financial-crisis/default.asphttp://www.odi.org.uk/odi-on/financial-crisis/default.asphttp://www.odi.org.uk/odi-on/financial-crisis/default.asp


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The economic impact o the crisis on low-

income countries is serious and cannot beignored. But it does, to some extent, mask the

human impact.

This human impact deserves attention, particularly

i we want to understand and respond to the povertyimpact o the nancial crisis. Specically, in the con-

text o the G-20, three questions need to be answered.

First, will the crisis push more people into poverty?Second, will the crisis make the lives o those who are

already poor even more dicult? And third, what can

be done to anticipate, and mitigate, these impacts?

Poverty impact: what might happen?The nancial crisis is likely to push more people

into poverty, and undermine progress towards theMillennium Development Goals. The UK Department

or International Development (DFID) estimates that by

December 2010, the number o people living on lessthan $1.25 a day will be about 90 million higher as a

result o the nancial crisis. The International LabourOrganization (ILO) anticipates an increase o between

24 million and 52 million people unemployed world-wide, a large majority in developing countries.

The crisis will also make the lives o those who

are already poor and vulnerable even more dicult.UNESCOs Education or All Global Monitoring Report

team estimates that reduced growth in 2009 will cost

390 million people in sub-Saharan Arican living inextreme poverty around $18 million, representing 20%

o the per capita income o Aricas poor. Poor people

spend between 50% and 70% o their income on ood

this has important human development implications.The ndings also highlight wider human develop-

ment impacts, including the prospect o an increase

o between 200,000 and 400,000 in the number oannual inant deaths. Malnutrition levels are rising the

report says. Following the 2008 ood price crisis, the

Food and Agriculture Organization (FAO) estimated an

increase o 40 million in the number o malnourishedpeople. What will 2009 bring?

Poverty impact: what can we anticipate and mitigate?The poverty impacts o the crisis are hard to determine

at this stage or at least two reasons. First, the impact othe crisis has not yet been ully transmitted through the

real economy to poor people. Second, the availability o

timely, relevant and reliable national-level and disaggre-

gated data on income and non-income poverty trends

are hard to come by on a monthly or quarterly basis.

This does not mean there should be no action. Wedo know how macroeconomic changes are transmit-

ted to households. We do know how past nancial

crises have aected poor people. Governments and

donors must take action to anticipate, and mitigate,these impacts.

Five transmission channels, shown in Figure 1, link

macro and micro (or household) level shocks: taxesand transers; prices; assets; employment and access

to goods and services (OECD, 2007). The structure o

a countrys economy and o its political economy will

determine the channels that have greatest impact onthe lives o poor people.

Taxes and transers include both private and pub-lic transers. Some countries depend heavily on remit-

tances. In Kenya and Bangladesh, such fows haverepresented almost 6% and 9% o GDP in recent years

(World Bank, 2008). Slowing remittance fows will

aect the level o expenditure on nutrition and educa-tion, which are the most common uses o this type o

transer (Mehrotra, 2009). The potential or long-term

recovery is likely to be jeopardised as the cognitiveand physical capacities o people are undermined by

reductions in spending on nutrition and education.

The prices channel includes consumption and

production prices, wages, salaries and interest rates.Lower demand in global markets or commodities is

pushing down prices, reducing the income o primary

producers. The Asian economy is expected to experi-ence a drop o 3%, and this will push an additional

40-50 million people below the poverty line in the

Asian Pacic region alone (Bauer et al., 2009).

The reduction in employment (in both ormal andinormal sectors) associated with macroeconomic

shocks will reduce income levels o individuals and

households. ILO estimates that the number o emaleswithout work will rise by 16 million to reach 97 million

by the end o 2009, with most o this rise taking placein developing countries. Households struggling tosurvive may turn to child labour and commercial sex

work as a means o survival.

The ability o a household or individual to cope

2. The impact o the nancial crisis on poorpeople: what we know and what can be done

By Milo Vandemoortele and Kate Higgins

Poor people did not create this

crisis, but their lives will be

seriously aected by it


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with a shock is linked to the possession o (or access

to) assets, which may be social, physical, natural ornancial. During the 1995 recession in Mexico, the

poorest children dropped out o school and many

never returned (Birdsall, 2007). This undermines thenext generations ability to participate productively in

growth (owing to low levels o education). It may also

reduce the ability o communities and households tocope with subsequent shocks.

The th transmission channel between macrolevel shocks and households is access to goods and

services. As government revenues shrink as revenuesrom exports, national taxes and import levies all,

social budgets shrink as well. Thailands public health

budget was reduced by 9% and its education budgetell by 6% in 1998 (Bauer et al., 2009). This reduced

the quality and quantity o social services available to

the poor. Unlike European countries protecting theircitizens access to goods and services, 43 out o 48

low-income countries lack the capacity to provide a

pro-poor scal stimulus (UNESCO, 2009).

Understanding how macroeconomic shocks aretransmitted to people, and how they eed back into

prolonged macroeconomic instability, is essential or

the appropriate design o policies, both to mitigatepoverty impacts and macroeconomic instability, and

to help countries grow out o poverty in an inclusive

and pro-poor way.

A response that supports poor peoplePoor people have had little to do with creating the nan-cial crisis, but their lives will be seriously aected by it.

Decisions made around the G-20 need to result in bold

action that prevents the slide into poverty o some, andthe slide into even deeper poverty o others. Its deci-

sions, and the subsequent actions o G-20 countries,

need to refect a commitment to mitigating the adverseimpact the crisis could have on the poorest.

Countries can mitigate against the poverty impacts byaddressing key transmission channels. This may include

strengthening the provision o health and education

services and supporting social protection programmes.

There are three action points or the G-20. First, it

should support the development o a Global PovertyAlert Network that links international organisations,

aid agencies and research groups under a single net-

work to provide updates on the impact o the nancialcrisis on poor people. Second, it must reassert the

Gleneagles aid commitments and support additional

commitments. For example, support Robert Zoellicks

proposal that 0.7% o developed countries stimuluspackages are channelled into a vulnerability und or

the worlds poorest countries. Finally, G-20 countries

must maintain commitments on aid eectiveness,as expressed in the Paris Declaration and the Accra

Agenda or Action.

Reerences

Bauer, A. et al. (2009) Global Economic Slowdown and the Impact on Poverty and Non-Income MDGs: Implications or the Inclusive GrowthAgenda o the Asian Development Bank?, Drat 5, Poverty, Gender and Social Development Division o RSDD, Manilla: ADB.

Birdsall, N. (2007) Inequality Matters: Why globalization doesnt lit all boats, Boston Review, March/April.

ILO (2009) Global Employment Trends 2009, Geneva: ILO.Mehrotra, S. (2009) The Poor in East and South East Asia in the Time o Financial Crisis, Drat working paper prepared or UNICEF Conerence

East Asia and the Pacic Islands.OECD (2007) Promoting Pro-Poor Growth: Policy Guidance or Donors, Paris: OECD.UNESCO (2009) Global crisis hits worlds most vulnerable, Press release, 3 March.World Bank (2008) Migration and Remittances Factbook 2008, Washington DC: World Bank

Figure 1: Impact o global nancial crisis on poverty

Global nancial crisis

Macro-level shocks

Trade Capital fows Remittances Aid

Transmission mechanisms

Taxes and transers AssetsPrices Employment Access to goods &services

Poverty


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Developing countries need open export mar-kets to help them mitigate the negative

eects o the global nancial crisis on their

economies. G-20 countries have the choiceo implementing short-sighted protectionist meas-

ures, thereby prolonging and aggravating the crisis,

or responding with open trade policies, thus ensur-

ing that long-term development interests prevail. Thesuccessul conclusion o the World Trade Organization

(WTO) Doha Round is highly unlikely in the current eco-

nomic and political environment and the G-20 shouldconcentrate on other, more urgent, trade issues.

One important mechanism that is transmitting

the crisis to developing countries is trade. For trade-

dependent economies like Bangladesh, Cambodia,Mozambique and Vietnam, exports account or up

to 70% o gross domestic product (GDP). Many small

developing countries export to only two markets, botho which are severely impacted by the global nancial

crisis: the US and the European Union (EU) (WTO,

2008). Aected even more heavily are those coun-tries hit by multiple eects o the crisis, many o them

alling into the rst category: low diversity and a highdependence on exports. Nigeria, or example, has

been hit by tumbling oil prices and a 45% decrease inshare prices, both resulting in a sharp depreciation o

the local currency and worsened terms o trade.Protectionist measures in developed countries will

aect vulnerable developing economies. It is disturbing

to see new protectionist measures emerging in devel-

oped countries, such as increased subsidies or agricul-

ture, conditional bailouts or the car industry and ten-

dencies to expand trade distorting product standards.

The crisis as a chance to conclude the WTODoha Round?There are two divergent views on how an economic

crisis aects trade policy in developing countries. Theconventional view (based on historical observations

o the behaviour o countries) is that governments

tend to become protectionist in times o crises, aiming

to protect their own rms and employment. Reormsthat are unpopular and hurt certain interest groups

are undertaken in good times, not during recessions.

However, a dierent view argues that policy changesthat may well be unpopular, such as enhanced trade

liberalisation and macroeconomic reorm, are madepossible in times o crises (Little et al., 1993).

Following this argument, Baldwin and Evenett

(2008) suggest that the crisis oers the chance or

an immediate conclusion o the WTO Doha Round,which is seen as the best insurance against the risk

o increased protectionism. This view is challenged

by Meyn et al. (2009), who argue that a Doha tradedeal is unlikely to be reached in the current economic

and political climate. It is not only the probability

o concluding Doha successully that is low, but the

likely benets o the compromise deal that could bereached. In brie, the Doha Round would not be very

important, or either developing or developed coun-

tries. It is estimated that the eects o a successullyconcluded WTO Round would be around $80 billion

around one-tenth o the estimated 2008/09 out-

put losses resulting rom the global nancial crisis,

which are estimated to be around $800 billion ordeveloping countries (Anderson et al., 2005, Te Velde,

2009). There would be some benets or some large

developing countries, such as Argentina, Brazil, Indiaand Thailand. A lowering o the bindings on taris

and subsidies, even i there was no actual reduction

rom current levels, would reduce the risk o increasedprotection in response to the recession. But the ben-

ets would not be large or most developing countries(Page et al., 2008) and would be negative or most

preerence-dependent countries (Meyn, 2008).

High priority trade issues

Instead o pushing or a minimalistic consensus onthe Doha Round, which bears the risk o damaging the

institution o the WTO, policy-makers should instead

concentrate on more urgent trade issues, such as: Resisting domestic pressures to apply protectionist

measures and opposing protectionist measures

taken by any G-20 member. For instance, the Czech

and German governments have set a good exampleby questioning French support or cars that are

produced in France; Avoiding the introduction o new ormal or inormal

product standards, labelling requirements and so

on, intended to encourage discrimination againstimports;

Supporting the surveillance process that the

WTO has put in place to track the new protection

3. First things frst: the trade priorities or the G-20

By Mareike Meyn

The conclusion o the WTO Doha

Round is desirable, but does not appear

realistic in the current economic and

political environment


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measures applied by members and encouraging

it to cover a broad range o potentially distorting

measures; Monitoring and disciplining any trade-distorting

impact o the various scal stimuli aimed atcombating the global nancial crisis; Bringing orward Aid or Trade allocations (without

reducing other aid commitments) and addressing

trade nance constraints, in order to mitigate the

eects o recession on developing countries (Meynet al., 2009).

Although the conclusion o the WTO Doha Round

is desirable, it does not appear realistic in the cur-

rent economic and political environment. However,

the G-20 countries can still demonstrate that they

are serious about complying with international tradeobligations by ghting any orm o new protectionism

at home, and by supporting developing countries toaccess their markets.

Reerences

Anderson, K. et al. (2006) Global Impacts o the Doha Scenarios on Poverty, in Hertel, T. and Winters, L. (eds), Poverty and the WTO.Palgrave Macmillan, World Banks Trade and Development Series, www.palgrave.com/products/title.aspx?is=082136314X .

Baldwin, R. and Evenett, S. (2008) What World Leaders Must Do to Halt the Spread o Protectionism. VoxEU.org publication. London:Centre or Economic Policy Research.

Little, I.M.D., Cooper, R.N., Corden, W.M. and Rajapatirana, S. (1993) Boom, Crisis, and Adjustment: The Macroeconomic Experience oDeveloping Countries. New York: Oxord University Press.

Meyn, M. (2008) The WTO Doha Round Impasse: Implications or Arica. ODI Brieng Paper 41, London: Overseas DevelopmentInstitute.

Meyn, M., Cal, M., Hewitt, A., Page, S. and te Velde, D.W. (2009) Pursuing a Doha Trade Deal is a Low Priority. ODI Opinion 126,February. London: Overseas Development Institute (http://www.odi.org.uk/resources/odi-publications/opinions/126-doha-nancial-crisis-trade-policies.pd).

Page, S., Cal, M. and te Velde, D.W. (2008) Development Package at the WTO? What Do Developing Countries Want rom the DohaRound? London: Overseas Development Institute.

te Velde, D.W. (2009) Workshop on the Global Financial Crisis and Developing Countries. 11 February. London: Overseas DevelopmentInstitute.

World Trade Organization (2008) World Trade Proles, www.wto.org/english/res_e/publications_e/trade_proles08_e.htm.
http://www.palgrave.com/products/title.aspx?is=082136314Xhttp://www.odi.org.uk/resources/odi-publications/opinions/126-doha-financial-crisis-trade-policies.pdfhttp://www.odi.org.uk/resources/odi-publications/opinions/126-doha-financial-crisis-trade-policies.pdfhttp://www.wto.org/english/res_e/publications_e/trade_profiles08_e.htmhttp://www.wto.org/english/res_e/publications_e/trade_profiles08_e.htmhttp://www.odi.org.uk/resources/odi-publications/opinions/126-doha-financial-crisis-trade-policies.pdfhttp://www.odi.org.uk/resources/odi-publications/opinions/126-doha-financial-crisis-trade-policies.pdfhttp://www.palgrave.com/products/title.aspx?is=082136314X


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As the global nancial crisis intensies, a

number o G-20 leaders have demonstrateda desire to ght protectionism in trade and

nance. But none o them seem to be willing

to ght another more pronounced orm o protection-

ism that is acquiring prominence in the wake o thecrisis: migration protectionism. In act, governments

across the globe are tightening their borders in an

attempt to constrain migration fows. For example,the UK government has just proposed new measures,

which would limit access to dependants o skilled

migrants working in Britain and would restrict skilled

migrants to taking jobs only in occupations with short-ages. The economic stimulus, signed recently by US

President Obama, limits the ability o companies

receiving stimulus money to employ highly skilledoreign workers. And this tendency is not conned

to developed countries. Recent reports suggest that

restrictions on the employment o oreign labour areoccurring in countries like India and Thailand.

It seems these days that nationalising jobs is amore popular proposition than nationalising banks.

But while there may be arguments to support the lat-ter, no economic argument in support o migration

restriction can withstand close scrutiny. Ater all, i

the impact o the economic crisis and unemploymentcould be addressed simply by restricting the entry o

outsiders into a local labour market, why is no one

calling or restriction in movement o workers romone US state to another?

Migration restrictions are a bad way to ght unem-

ployment in times o crisis. There is no evidence that

less immigration means less unemployment. In act,the opposite seems to be true. While immigration

tends in the minds o people to be linked to domestic

unemployment, in reality rises in immigration havebeen associated with alling unemployment in all

countries or which data are available. It is obvious

that a booming economy attracts migrants, but it

is also true that the presence o migrants helps theeconomy grow (in per capita terms) and creates jobs.

Research has shown that immigrants play an impor-

tant role in US innovation in science and technology:in periods when the number o visas granted by the

US to highly skilled oreign workers (so-called H-1Bvisa) decreased, so did patent applications in thecountry. When the number o visas went up, so did

patent applications (Kerr and Lincoln, 2008).

The economic literature is airly convincing: there

is no evidence o any negative eect on the domesticlabour market as a result o immigration. Even one o

the largest migration infows in recent European his-

tory that o Eastern Europeans into the UK ollow-

ing the enlargement o the European Union (EU) in2004 did not contribute to a all in wages or a rise

in claimant unemployment in the UK in the ollowing

two years (Lemos and Portes, 2008). And this doesnot apply only to Eastern European migrants. Recent

evidence suggests that overall immigration has led to

a slight increase in average real wages in the UK, with

the eects being most benecial or relatively highskilled workers (Dustmann et al., 2008).

This is not surprising as migrants tend to sel-

select, with the brightest and more educated peoplethe most likely to migrate. Migration is, thereore,

likely to raise the average education and skills level o

the workorce in the host country, helping employerscreate (rather than destroy) new employment oppor-

tunities. And new migrants tend to be concentratedin the young (and most productive) age groups, rais-

ing the average productivity o the labour orce. Thisis why immigrants are usually an important source

o innovation and long-term growth or the receiving

economy. In addition, migrants oten act as interme-diaries between their country o origin and the country

o destination, eectively reducing transaction costs

in trade and investment between the host and thesource countries.

This brie review suggests that not only are there no

economic arguments supporting immigration restric-

tions, but also that the welare losses rom restric-tions in destination countries may be substantial. In

times o crisis, such losses (in terms o competitive-

ness, innovation, trade, investment, skills, etc.) maybe particularly painul.

Moreover, restricting migration is damaging orinternational development. As restrictions are mostbinding or developing countries among the send-

ing countries, they prevent, in eect, the unleashing

4. Restricting migration is a counterproductiveway to tackle the crisis

By Massimiliano Cal

No country in the world hasdeveloped by closing its borders

to new immigration


13/3011


o the potential benecial impacts o migration or

source (developing) countries (Cal, 2008). These

include remittances, increased trade and investment

linkages, knowledge transer and incentives to accu-

mulate human capital (see Cal and Te Velde, 2008 ora review o the evidence).

No country in the world has developed by closing

its borders to new immigration, just as no country has

ever developed by closing its borders to trade. As the

G-20 leaders meet to nd solutions to the global crisis

and to renew international cooperation, they woulddo well to bear this in mind.

Reerences

Cal, M. (2008) Migration Restrictions and the Brain Drain: The Wrong Response to an Ill-dened Problem. ODI Opinion 98. London:Overseas Development Institute.

Cal, M. and te Velde, D.W. (2008) Temporary Migration and Development: A Review o the Evidence and Policy Options, in Razzaque,M. (ed.), Trade Migration and Labour Mobility. London: Cameron May, orthcoming.

Dustmann, C., Frattini, T. and Preston, I. (2008) A Study o Migrant Workers and the National Minimum Wage and Enorcement Issues

that Arise. Report or the Low Pay Commission (www.econ.ucl.ac.uk/cream/pages/LPC.pd).Kerr, W.R. and Lincoln, W.F. (2008) The Supply Side o Innovation: H-1B Visa Reorms and US Ethnic Invention. Harvard Business School

Working Paper Nr. 09-005 (http://hbswk.hbs.edu/item/6097.html ).Lemos, J. and Portes, S. (2008) New Labour? The Impact o Migration rom Central and Eastern European Countries on the UK Labour

Market. IZA Discussion Paper 3756 (http://tp.iza.org/dp3756.pd).
http://www.econ.ucl.ac.uk/cream/pages/LPC.pdfhttp://hbswk.hbs.edu/item/6097.htmlhttp://ftp.iza.org/dp3756.pdfhttp://ftp.iza.org/dp3756.pdfhttp://hbswk.hbs.edu/item/6097.htmlhttp://www.econ.ucl.ac.uk/cream/pages/LPC.pdf


14/3012


Development depends on stable internationalnancial resources. While the nancial

systems o low-income countries may not

have been aected markedly by the global

nancial crisis to date, it is clear that they have adirect interest in global nancial stability. At the April

summit, leaders o the G-20 will consider new global

nancial rules. It is important that these consider theeects o these rules on development.

Global nancial fows to developing countries are

set to drop dramatically, ater increasing to record

highs in 2007. International nancial fows includeprivate capital fows such as oreign direct investment

(FDI), portolio fows and international lending; other

ocial fows (OOF) and capital/current transers; o-cial development assistance (ODA); and remittances.

Forecasts on net capital fows have become gloomier:

the World Bank (2008) suggests that net capital fowsto developing countries will decline rom one trillion

US dollars to around $550 billion in 2009. The Instituteo International Finance (IIF, 2009) orecasts an 82%

decline, rom $929 to $165 billion.This slowdown will be much more dramatic and

aster than those experienced in the downturns o

1981-1986 and 1996-2002. The IIF suggests thatinfows as a percentage o gross domestic product

(GDP) may all by 5.8 percentage points, rom 7% o

GDP in 2007 to around 1% o GDP in 2009, comparedwith alls o 3.2% o GDP rom 1981-1986, and 3.7%

rom 1996-2002. Net portolio fows experienced a

dramatic drop in 2008, shiting to large net outfows.

This is consistent with the sharp all in equity pricesglobally. Initial public oerings in developing coun-

tries have dried up.

FDI will also be aected. In previous downturns(1989-1992 and 2000-2002), FDI has tended to decline

by more than GDP. According to the UN Conerenceon Trade and Development (UNCTAD, 2009), world-wide FDI ell by 21% in 2008, with a urther decrease

expected in 2009, and growth in FDI fows to develop-

ing countries dropped rom 20% in 2007 to 3.6% in2008. The IIF estimates that net FDI fows to emerging

markets have already declined, rom $304 billion in

2007 to $263 billion in 2008, a drop o some 15%.

The latest International Monetary Fund (IMF) projec-tions show FDI infows or 2009 alling by almost 20%

rom 2008 levels, compared with the over 10% growth

projected in April 2008.The IIF suggests that net bank lending ell rom $410

billion in 2007 to $167 billion in 2008, and orecasts a

net outfow o $61 billion in 2009. In December 2008,

the Bank or International Settlements (BIS) reportedsigns o a slowdown in the growth in credit to emerg-

ing markets, which had quadrupled between mid-

2002 and mid-2008. There is more recent anecdotalevidence o oreign banks pulling out capital to satisy

new stringent domestic requirements on capital. For

24 countries, more than two-ths o their bankingassets are held by oreign banks.

Remittances are normally considered a stableresource o external nance. IMF projections show

remittances to low-income countries stagnating in thesecond hal o 2008, and shrinking in 2009. Cal et al.

(2008) observe that previous nancial crises led to a

20% drop in the value o remittances, which, undersome assumptions, implies a drop o around $40 bil-

lion in the current context. Remittances account or

more than 15% o GDP in 12 developing countries.ODA reached $100 billion in 2007. At the Gleneagles

G-8 summit in 2005, donors committed to increasing

aid to $130 billion in 2010 (at constant 2004 prices),

with a target o 0.56% o GDP or the EuropeanUnion (EU) in 2010. According to the Organisation

or Economic Cooperation and Development (OECD),

most donors would have had to make unprecedentedincreases to meet their 2010 targets. However, commit-

ments are under increasing pressure. Cal et al. (2008)

suggest there is no systematic relationship between

economic downturns and aid because, primarily, aidis a policy and can, thereore, increase i the environ-

ment is right. However, there is a risk that the value o

commitments in dollar terms will decline substantiallyin 2009, by several billion. For example, the devalua-

tions o the pound against the dollar (30-40% over thepast year) and the euro against the dollar (15%) may,taken together, cut the value o EU aid commitments

by several billion this year. Further, commitment cuts

5. Global nance and development:new global rules needed

By Nick Highton, Isabella Massa and Dirk Willem te Velde

There is consensus that most

global nance fows need urther

regulation, but how?


15/3013


by Italy and Ireland may slash aid by a urther $5 billion

compared to the plans. Finally, where countries aim or

aid/GDP ratios, aid value might decline urther.

There now seems to be a clear consensus that most

global nancial fows need urther regulation, buthow? There are questions as to what new regulations

need to be introduced, which regulations need to bebetter enorced and which are particularly important

or development.

Regulations should consider new accounting rulesto reduce the pro-cyclicality o international capital

fows, and international bank lending in particular.

There is a debate between academic thinkers, avour-

ing a complete rewrite o the current Basel II nancialprinciples, and practitioners and regulators, who sug-

gest that anti-cyclical elements could be included in

those principles. Capital adequacy ratios could bemade to vary over the cycle and should be linked to

growth in banking assets; these could be lower in

bad times. There is also a need or rules on the und-

ing o assets: the crisis has taught us that it matterswhether mortgages are nanced by deposits or by

short-term money markets. Further, there is a need to

make incentives (e.g. bonuses) in the banking systemconsistent with a stable international nance system

that can deliver development benets.

There are discussions on the global rules govern-

ing tax havens. It is important to separate the imme-

diate need or transparency rom a longer debate on

tax policy. Transparency should cover new or better

supervisory colleges or international regulators oexisting international nancial activities, more atten-

tion to dealing with illicit capital fight rom develop-ing countries, but also the need to put in place new

comprehension tests beore the introduction o the

new nancial products. The debate on taxes is morecomplex as it is a sovereign issue. It is perectly pos-

sible or countries to engage in a beauty contest and

compete on ecient tax systems that deliver public

goods, but, at the same time, they need to avoidcompetition leading to an undesirable and welare-

reducing race to the bottom.

Low-income countries need better rules on globalnance so that they can benet rom nance while

preventing their development prospects rom being

overruled by the cyclicality built into the current glo-

bal nancial system. The G-20 will need to ensure thatnew rules are appropriate to the needs o developing

countries.

Reerences

Cal, M., Massa, I. and te Velde, D.W. (2009) The Global Financial Crisis: Financial Flows to Developing Countries Set to Fall by One Quarter.ODI Background Paper. London: Overseas Development Institute.

International Monetary Fund (2009) The Implications o the Global Financial Crisis or Developing Countries. Washington, DC: IMF (http://

www.im.org/external/pubs/t/books/2009/globaln/globaln.pd).World Bank (2008) Global Economic Prospects. Washington, DC: World Bank.Institute o International Finance (2009) Capital Flows to Emerging Market Economies, 27 January.UN Conerence on Trade and Development (2009) Assessing the Impact o the Current Financial and Economic Crisis on Global FDI Flows.

UNCTAD Paper, 19 January.
http://www.imf.org/external/pubs/ft/books/2009/globalfin/globalfin.pdfhttp://www.imf.org/external/pubs/ft/books/2009/globalfin/globalfin.pdfhttp://www.imf.org/external/pubs/ft/books/2009/globalfin/globalfin.pdfhttp://www.imf.org/external/pubs/ft/books/2009/globalfin/globalfin.pdf


16/3014


Political ideologies are oten associated with

particular colours: blue or conservatism andmarket orces; green or environmental sus-

tainability; and red or state interventionism.

As monetary policy becomes ineective, with peo-

ple losing aith in the banking sector, attention hasshited to scal stimulus as a possible lieline. But

what colour should this stimulus be, and can it really

promote development?The crisis is putting pressure on the main sources o

external revenues or developing countries: exports,

remittances, oreign direct investment and equity

fows. This is likely to hamper growth and eorts toreduce poverty. It is impossible to predict the precise

eects, as the news gets worse every day. Growth revi-

sions rom the International Monetary Fund (IMF) overthe past six months suggest losses o more than $50

billion in sub-Saharan Arica and $750 billion in devel-

oping countries as a whole in 2008-2009, and a 3.5%reduction in world output in 2009. World income per

head is expected to all. In Arica, incomes are likelyto stagnate. These predictions include the eect o a

scal stimulus equivalent to 1.5% o gross domesticproduct (GDP) in G-20 countries.

While developing countries have larger reserves

than 10 years ago, ew can aord the kind o scalstimulus needed to address a crisis originating in the

developed world.

Some estimate that global nancial fows to devel-oping countries will tumble rom $1 trillion in 2007 to

$165 billion this year. Banks in developed countries

are required to hold more capital at home. Trade

nance is under pressure; global trade is orecast

to all by at least 2% in 2009. Exports and industrial

production in China, Taiwan and South Korea werealready down at the end o 2008. The International

Labour Organization (ILO) suggests that up to 30 mil-

lion jobs could be lost between 2007 and the end o

2009. The World Bank suggests around 100 millionpeople will remain poor, 20 million or each percent-

age point o slower growth.

What should be done? Quite a lot. The G-20 meetingon 2 April could consider more transparent and coun-

tercyclical rules, and reorm o the international nan-

cial institutions. But, above all, they could encourage

a global scal stimulus, with a signicant part or earlydisbursement in poor countries, where even a small

proportion o a 1.5% stimulus would go a long way.

Blue, green or red?A blue stimulus would accelerate support or the pri-

vate sector on the supply side by creating an appropri-ate ramework or investment and investing in inra-

structure. The market alone, however, will not deliverdesirable economic and social outcomes, so the G-20

should respond to and implement global trade rules.The G-8 has committed $4 billion to Aid or Trade but,

i inrastructure is included, research suggests that

$12-13 billion is needed in sub-Saharan Arica aloneto meet the Millennium Development Goals.

A green stimulus would address the two biggest

market ailures relating to climate change. First, theprice o energy does not refect the negative costs to

the environment. I it did, it would change incentives,

as well as trade and growth strategies, throughout the

world. Second, there are inormation-related market

6. Blue, green and red: A rainbow stimulus totackle global recession

By Dirk Willem te Velde

Figure 1: Revised orecasts or GDP per capita, 2009 (annual change, %)

Source: IMF orecasts and own calculations, scaled or expected population growth.

Developing countries Sub-Saharan Arica World

6

5

4

3

2

1

0

-1

-2

Jul 2008Oct 2008

Nov 2008

Jan 2009

Jul 2008

Oct 2008

Nov 2008

Jan 2009

Jul 2008

Oct 2008

Nov 2008

Jan 2009


17/3015


ailures linked to technical change and the adoption o

green technologies. Green growth growth that is e-

cient enough in its use o energy depends on level o

economic activities, sector distribution o energy use

and energy eciency at rm and household level.Preliminary research suggests that productive

rms tend to be more energy ecient, so private sec-tor development policies that promote productivity

growth can also promote greener growth. Support or

the adoption o green technology can help narrow theenergy eciency gap between actual energy savings

and those that are economically and socially ecient.

Further stimulus could go to measures to help people

adapt to the realities o climate change.

A red stimulus would inject nance into the

economy to stimulate consumption and demand andaim or short-term macroeconomic stabilisation. This

would include social programmes to smooth incomes

over the cycle, especially or the poorest or thoseaected by price rises or sudden loss o employ-

ment. It could include tax reductions or governmenttransers, which have little impact on growth, or

public investment support or growth-oriented poli-cies. Small and medium enterprises, which require

an increase in liquidity, need additional support, as

they ace greater diculties in accessing nance thanlarger rms. The nancial crisis will make this worse,

as will a lack o trade nance.

A rainbow stimulusWe need a stimulus that brings together the very best

o the blue, green and red. Why should developed

countries support such a stimulus? The crisis, which could outstrip the capacities o

developing countries to respond, has been caused

by ailures in developed countries. In addition, thebenets o higher growth in the developing world

will be elt in developed countries. China has been

responsible or up to 75% o recent world growth,

importing large quantities o goods and services

rom developed countries. It is the developing

world that will account or most o the worlds

growth this year (even i small). We also estimate

that every $6 provided in non-earmarked bilateralaid to developing countries leads to at least $1 in

imports rom developed countries. Countries such as the US and UK have suered a

period o over-consumption, accumulating large

debts. It may be that a scal stimulus will haveless impact here, where additional resources may

be used by households to pay back debt, and will

work better in the developing world. I the poorest countries are unable to put in place

a scal stimulus, while other richer countries

do so, they will suer rom a kind o beggar-thy-

neighbour economic nationalism.

How much scal stimulus should be provided? The

IMF suggests a stimulus o 2% o GDP. Model simula-

tions by the National Institute o Economic and SocialResearch (NIESR) suggest that such a coordinated

developed country stimulus could lead to a rise in

GDP o around 1-1.5% in 2009 and early 2010. Thesmoothing o incomes would entail a cost o at least

5% o GDP or 2008-2009 alone. See a note elsewhere

in this pack specically dealing with this issue.What mechanisms exist to do this? One channel is

Aid or Trade, which urgently needs more unds. Fasterbudget support would also help to address balance

o payments or other issues. Inrastructure spendingcould also be streamlined and, perhaps, brought

orward through the use o development nance insti-

tutions. All o this requires improved shock acilitiesand nance arrangements with improved disburse-

ment rules. These interventions need to be in tune

with private sector needs as the mechanisms need toleverage in, not crowd out, other actors.

To conclude, it is clear that developing countries

will be hit by a global nancial crisis caused by devel-

oped countries. While the benets o a scal stimulusmight be greater in developing countries, developed

countries could benet through greater demand or

their exports. Developed countries should provide arainbow stimulus or developing countries, including

more aid or trade, investment in inrastructure, sup-

port or green growth and improved social protection.

Reerences

Koopmans, C.C. and te Velde, D.W. (2001) Bridging the energy eciency gap: using bottom-up inormation in a top-down energy demandmodel, Energy Economics 23: 57-75.

te Velde, D.W. (2008) Promoting green growth: evidence rom rm level analysis in China, preliminary note (July). London: OverseasDevelopment Institute.

What we need now is a rainbow

scal stimulus, bringing together the

best o market, environmental and

interventionist approaches


18/3016


The G-20 countries have announced scalstimuli worth around $2 trillion, to cushion the

consequences o the global nancial crisis. It

will matter greatly or poor countries (non-

G-20), such as sub-Saharan Arican (SSA) countries,whether part o such a stimulus is provided in poor

countries or whether the entire stimulus is kept in the

G-20. At the same time, exporters in G-20 countriesneed strong growth elsewhere. The world is linked

and inter-dependent, o course, and some are now

realising just how true this is.

The World Bank President, Robert Zoellick, hasargued that 0.7% o the developed country stimulus,

worth around $ 15 billion, should be used to nance

a vulnerability und or developing counties to spendon inrastructure, saety net and projects or small and

medium size enterprises (SMEs). The International

Monetary Fund (IMF, 2009) provides current baselineprojections or 2009 that suggest an aggregate addi-

tional nancing need or low-income countries o about$25 billion. However much larger nancing needs up

to $140 billion would result i various downside riskswere to materialise. The World Bank (2009) suggests

that developing countries ace a nancing gap o $270-

$700 billion, depending on the severity o the crisisand the strength and timing o the policy responses.

Birdsall (2009) discusses the nancial resources or a

cash injection into the world economy and suggeststhat one trillion US dollars could be resourced, though

this is not based on needs. Te Velde (2009) uses the

revisions in growth orecasts by the IMF (July 2008 to

present) and suggests that the global nancial crisishas already led to an estimated output loss (assuming

that the revisions can be attributed only to the crisis)

o $2.7 trillion in the world (around 5% o world GDP),$737 billion in developing countries and $51 billion in

sub-Saharan Arica (SSA).

ONE is arguing or a countercyclical investment inArica commensurate with the loss o output causedby exogenous actors fowing rom the global nancial

crisis, and commissioned this research to assess:

Impact o countercyclical package commensuratewith the output loss or SSA o around $50bn; Impact

o countercyclical package o 1% o total global scal

stimuli (1% o $2 trillion = $20bn); How such sums

could be programmed; Benets or Arica, and or therest o world/donors o investing such sums.

Developed countries can support a scal stimulus

in developing countries through increased aid (e.g. inthe orm o budget support or unds or Aid or Trade

and inrastructure). The empirical literature suggests

that productive investment in inrastructure increases

growth in developing countries. Studies suggest thatsocial rates o return are around 20% or investment

in inrastructure.

Barrell et al. (2009) use a quarterly macro econo-metric model (NiGEM) to simulate a $20 and a $50 bil-

lion scal expansion in sub-Saharan Arica, nanced

out o the original developed country scal stimuli.Taken together, the developed countries domestic s-

cal stimuli and a $20 billion stimulus or sub-SaharanArica (this region excludes South Arica and Nigeria,

but includes Morocco and Tunisia) spent on currentconsumption would oset about hal the impact o the

global nancial crisis on GDP growth in SSA in 2009

and 2010, raising growth in SSA by some 2 percentagepoints in 2009-2010. This still leaves a signicant gap

in GDP that could be lled by increasing the size o the

stimulus package to around $50 billion.I $50 billion goes to debt relie in SSA, the initial

growth eects are small. I the stimulus is spent on

consumption (income transers, social saety nets

etc.) it can smooth income losses and increaseincomes by 4% in 2009 and a urther 1% in 2010. I

the stimulus goes to productive investment there is a

similar income-smoothing eect over the short term,but in addition there is a long-run positive impact on

the level o output, which remains about 1.5% higher,

while other stimuli do not shit the long-run level o

potential output. Additionally, the stimulus on inra-structure could have a urther sustained increase in

output by an additional 1%.

A stimulus in SSA o $50 billion has positive eectson global trade, and world GDP would be 0.1% higher

in 2009-2010 as a result. US and Chinese exportswould increase by about $1.4 billion in 2009; Germanexports would increase by about $1.9 billion and UK

exports by $0.7 billion.

7. Us or them. Them and us. We are all in it together,stupid. How a G-20 supported scal stimulus in

sub-Saharan Arica can help the G-20 tooBy Ray Barrell, Dawn Holland and Dirk Willem te Velde

we live in an interdependent world.

Economic growth in sub-Saharan Arica

is good or other regions or all o us


19/3017


Table 1 summarises the ndings in terms o the

growth rates o real GDP expected or SSA under the

various scenarios. Under a pre-crisis scenario, realGDP in SSA could have been expected to rise by about

6.5% per annum 2008-2010. The crisis has reduced

prospects signicantly, with growth expected to bejust 1.75-2.25% per annum 2009-2010. Announced

scal packages in the G-20 economies will osetsome o this loss, raising the prospects or growth to

about 3.25% per annum in these years. On top o thisa scal stimulus o $20 billion raises growth to aver-

age 4.2% in the two years, while a scal expansion o

$50 billion raises growth to average 5.6% in the twoyears, largely osetting the impact o the nancial

crisis on SSA.

Table 2 provides the costs and benets to thenancing regions, and also to the world as a whole

and China, o the $50 billion simulation o investment

in inrastructure in SSA, entailing productivity spillo-

vers. Taking the UK as an example, we nd that whileit spends $1 billion on the SSA scal stimulus it gets

$0.7 billion back in the orm o exports.

These simulations show clearly that we live inan interdependent world. Economic growth in sub-

Saharan Arica is good or other regions or all o us.

The benets o aster growth in Arica are both non-

economic: less confict and more stability, ewer com-

municable diseases and so on, and economic. Part othe G-20 scal stimuli might, very useully, be spent

on development.

Reerences

Barrell, R., Holland, D. and te Velde, D.W. (2009) A scal stimulus to address the eects o the global nancial crisis on sub-Saharan Arica, ANIESR, ODI paper or ONE.

Table 1: Summary o growth projections or sub-Saharan Aricaa

2007(current prices US$)

2008(real growth %)

2009(real growth %)

2010(real growth %)

Long-run impact

Pre-crisis 855.8 6.5 6.5 6.5 Base

Post-crisis 5.4 2.2 1.7 Returns to base

G-20 scal packages 3.3 3.2 Returns to base

$20 bn debt reduction 3.3 3.3 Returns to base

$20 bn consumption 4.7 3.7 Returns to base

$20 bn investment 4.8 3.8 Increased by 0.6%

$20 bn inrastructure 4.7 3.8 Increased by 1%

$50 bn debt reduction 3.4 3.5 Returns to base

$50 bn consumption 7.2 3.9 Returns to base

$50 bn investment 7.2 4.1 Increased by 1.4%

$50 bn inrastructure 7.2 4.0 Increased by 2.5%

Note: a) Growth rates or the $20 billion and $50 billion scal expansions in SSA also include the spillover impact o currently agreed scalprogrammes in the G-20 economies.

Table 2: Impact o sub-Saharan Arica scalexpansion on nancing countries in 2009

Direct costs Additionalexports

Net impacton real GDP

US$28.5 bn (0.20% o

GDP)$1.4 bn +0.003%

Japan $6 bn (0.11% o GDP) $0.6 bn +0.005%

Germany $6 bn (0.18% o GDP) $1.8 bn +0.007%

France $4 bn (0.15% o GDP) $1.6 bn +0.025%

Italy $3 bn (0.14% o GDP) $0.7 bn +0.007%

Canada $1.5 bn (0.12% o GDP) $0.3 bn +0.006%

UK $1 bn (0.05% o GDP) $0.7 bn +0.011%

China $1.4 bn +0.016%

World $20.4 bn +0.073%

Professor Ray Barrell, Senior Research Fellow, NIESR, Dawn Holland,

Senior Research Fellow, NIESR and Dirk Willem te Velde, Research

Fellow and Programme Leader, ODI. This is a summary of a paper

for ONE. The views expressed are those of the authors alone.


20/3018


The contagion eects o the international nan-cial crisis risk reversing decades o progress in

developing countries. Without urgent meas-

ures to extend social protection or the mostvulnerable, hundreds o millions o people will experi-

ence worsening impoverishment and destitution.

Progress towards the Millennium Development

Goals (MDGs) may well be eroded. As poverty rises,so will malnutrition, ill health and mortality, while

rates o school participation may well all, leading to

irreversible human capital losses among the poor, asgovernment expenditure on basic services contracts.

In previous crises, ailure to protect the poorest has

had a signicant and sustained negative impact on

poverty and inequality as well as growth. But there isnow a brie opportunity to support developing country

governments to put the necessary programmes in place

beore it is too late. This also represents an opportu-nity to set up systems and ways o working that can

provide ongoing social protection on a scaled-down

basis once the worst eects o the crisis are over.The current crisis conronts developing country

governments with a paradox; government revenuesare shrinking but there is a desperate need not only

to protect health and education expenditure but alsoto invest in increased social protection provision or

the poorest. Policies ocusing on macro-economic

stabilisation or growth alone will not address thecurrent crisis o global impoverishment, or the imme-

diate problems aced by the poorest as a result o the

nancial collapse.

The current ocus on stabilisation may be at theexpense o social protection

The international donor community and develop-ing country governments must now work to protect

the development achievements o recent decades,

and address the immediate needs o the poor asa priority component o their response, alongside

initiatives to promote macro-economic stabilisation

and stimulate growth. The immediate response o

many developing countries has been to restrict gov-ernment expenditure in the ace o alling revenues,

and prioritise stabilisation rather than extending

expenditure directed towards the poor. However,experience rom previous crises highlights the impor-

tance o addressing, explicitly, the immediate needso the poor, while promoting interventions to protectgrowth in the orm o economic stimulus packages.

Without this twin-track strategy, addressing both sta-

bilisation and social protection provision, there is areal risk that the poor o today will pay the price or

economic recovery tomorrow.

Many international unding agencies are calling ondeveloping country governments to make signicant

increases in social protection provision. However,

despite donor enthusiasm in recent years, and cur-

rent demands to extend provision, many countrieshave remained reluctant to adopt comprehensive

programmes, even during periods o relatively rapid

growth. This reticence is partly a consequence oconcerns about the scal implications and orward

liabilities associated with implementing such large-

scale programmes, and the diculty o scaling down

a system once it has been initiated. These concernsare particularly acute, given the volatility o com-

modity prices, and fuctuations and uncertainties

associated with donor aid fows.

What should be done?Increase unding fows on a medium-term basis. Theimportance o identiying modalities to address the

medium- to long-term recurrent costs o large-scaleprogrammes needs urgent recognition, by both the

donor community and by developing country gov-ernments. In the current climate, the predictability

o ocial development assistance (ODA) fows

becomes all the more critical i governments are torespond to calls to develop, and take ownership

o, major expansions in social protection provision.

A commitment to increased nancial support oraected governments must be central to the inter-

national development response, and should include

multi-year ODA packages to saeguard the provision

o basic health and education services, as well asthe extension o social protection or the growing

numbers o poor. Such a response is critical to sup-

port governments in saeguarding the interests othe vulnerable during the current crisis.

Recognise institutional constraints. Institutional

constraints are signicant actors that limit the

development and implementation o programmesat national level. This undermines prospects or the

absorption o signicant additional unding fows

and the development o expanded social protectionprovision that enjoys signicant national ownership.

As such, the international community needs to investin capacity and institution building, to promote thesustainability o donor-supported interventions,

national ownership and the potential to maintain

8. Social protection: a global imperative

By Anna McCord


21/3019


in the medium to long term instruments developed

in response to the crisis. In this way, the problems

characterising many internationally unded interven-

tions in recent years, such as parallel implementa-

tion structures, can be addressed.

Rationalise existing social protection expendi-

ture. The current crisis oers an opportunity or

national governments to rationalise current pro-gramming and expenditure, and or donors to har-

monise their own activities at country level, rather

than continuing to promote multiple small-scale

or pilot initiatives with patchy and inequitable

coverage. The rationalisation o current expendi-

ture could result in increased and more equitable

coverage, and the simplifcation o activity in a sec-

tor currently characterised by ragmentation and

inefciencies, which exacerbate institutional and

ownership problems.

Protect social sector expenditure. There is a

simultaneous imperative to protect expenditure inthe health and education sectors, particularly at pri-

mary level. These sectors are oten subject to cutsduring periods o budgetary contraction, in the ace

o competing demands or resources rom sectors

with more infuential champions. It is critical thatexpenditure in these sectors be protected to ensure

continued access by the poor.

In short, developing country governments should: Protect existing budgetary allocations to health,

education and social protection provision;

Extend social protection coverage to include the

growing number o people in poverty; Rationalise social sector spending to address prior-

ity needs within the existing resource envelope on

the basis o national social protection strategies; (Where countries cannot nance social protection

provision rom their own resources), work withthe donor community to establish modalities or

nancing the recurrent costs and orward liabili-

ties implied by the adoption o a sustained andextended social protection programme;

Ensure that crisis response policies take into account

the immediate needs o those in poverty, as well as

protecting macroeconomic stability and growth.

The international community should:

Maintain the real value o overall international aidallocations and continue to work towards the G-8

Gleneagles commitments; Saeguard existing ODA allocations to the health,

education and social protection sectors; Prioritise increased allocations or social protection

provision; Work with developing country governments to

develop national social protection strategies with

extended coverage, rather than continuing to pro-

mote multiple small-scale or pilot initiatives withpatchy and inequitable coverage; Promote coordi-

nation and rationalisation o donor social protectionprogramming to increase eciency and maximise

the impact o expenditure; Provide technical assistance to develop appropri-

ate policies to extend coverage; Commit to medium- to long-term social protection

unding at national level (5 to 10 years), to acili-

tate developing country government planning and

budgeting processes and ownership o social pro-tection initiatives.

Experience rom previous

crises highlights the

importance o addressing,

explicitly, the immediate

needs o the poor


22/3020


The current aid architecture is not set up to deal

with the possible eects o the global nancialcrisis. Eective shock-response architecture

must provide rapid countercyclical resources.

Existing modalities are ad hoc and inadequate to

address problems on the scale currently being experi-enced. The G-20 countries need to think about mobilis-

ing new sources o nancing in the short term to enable

existing mechanisms to unction, and putting in placea more appropriate and less ragmented architecture

over the longer term one that can both protect against

system ailure and provide a more fexible and better

resourced response in the event o uture shocks.

The role o the international inancialinstitutions in the shock architectureThe International Monetary Fund (IMF) has taken

steps to strengthen its capacity or nancing in crises.

For example, in 2004, the IMF introduced the TradeIntegration Mechanism (TIM) to mitigate situations

where World Trade Organization (WTO) agreementsgive rise to strictly temporary balance o payment

diculties (e.g. erosion o tari preerences in exportmarkets, removal o textile quotas). This works by

increasing the predictability o resource availability

under existing acilities rather than by providing a newmechanism. A key advantage o TIM is that it does not

normally involve additional conditionality, and it also

builds in possible deviations rom the IMFs usualbaseline scenarios, which help to provide a greater

degree o certainty. In this respect, it could provide a

model or dealing with trade-related shocks.

However, new mechanisms such as this are notbacked by additional money, leaving a key part o the

architecture acing undamental constraints. Allowing

the Fund to issue Special Drawing Rights (SDRs) wouldrequire amendments to its Articles o Agreement and

could ace opposition.

In the longer term, a practical way o building greater

speed o response to shocks into existing IMF lend-ing acilities is to build alternative scenarios into all

Fund programmes. Thus, programmes could include

provisions that lending would automatically increase,should certain levels o deterioration o terms o trade

or reversals o capital fows occur while programmesare otherwise on track.

The World Bank is planning to make available

crisis-related nancing on International Development

Association (IDA) terms or 78 o the worlds poor-

est countries though a new Fast-Track Financial CrisisResponse (FTCR) acility. FTCR will be designed to pro-

vide quick technical and budgetary nancial assistance

(up to $2 billion o the $42 billion IDA resources, subject

to urther review) to support a degree o scal stimu-lus, strengthen saety nets and maintain basic serv-

ices, subject to Board approval. No additional macro

conditionality is envisaged, beyond an up-to-date IMFassessment. It is hoped that the FTCR acility will help

leverage parallel donor nancing. The upront analyti-

cal work to be carried out by World Bank country teams

should serve as a basis or donors to make rapid assess-ments o the situation and help acilitate ollow-up on

their part. The International Finance Corporation (IFC)

has acilities or $30 billion over the next three years,providing resources or a bank recapitalisation und

and distressed inrastructure programmes.

The regional development banks aim to respondto the crisis through resources, or example to pro-

vide trade credits. The Arican Development Bank(ADB) is observing a worrying decline in Arican equi-

ties, exports and ability to access capital and tradenance, and is establishing an Emergency Liquidity

Facility (ELF), tentatively set at $1.5 billion, to provide

ast-disbursing liquidity. The Asian Development Bank(ADB) is supporting proposals to establish a so-called

Asian New Deal to cushion the impacts o the global

nancial crisis through coordinated nancial assist-ance. The ADB response is constrained by a lack o

capital. The Inter-American Development Bank (IADB)

might seek a capital increase rom members to allow

it to expand its lending.

The European Union and bilateral donorsThe EUs FLEX (part o the European Development

Fund EDF) is unlikely to reach its ull potential in itscurrent ormat. Allocations to countries are small, andare calculated on the basis o historic vulnerability,

which is inappropriate to current circumstances.

9. Aid architecture and the globalnancial crisis

By Nick Highton and Dirk Willem te Velde

New mechanisms to address the crisis

are not backed by additional money,

leaving a key part o the architecture

acing undamental constraints


23/3021


Bilateral donors cannot, typically, reorient fows

quickly, although ast-disbursing budgetary aid pro-

vided by EU countries, including early disbursements

o EDF (subject to relaxation o disbursement rules)

and concessional nancing provided by the WorldBank and regional banks though similar mechanisms,

could provide an opportunity i nancing were broughtorward or countries requiring a rapid scal stimulus.

Such responses should have low conditionality and

require no more than, or example, approved annualArt. IV consultations to ensure that acceptable macr-

oeconomic rameworks are in place.

Can development inance institutions play acountercyclical role?The G-20 countries are shareholders o a range o bilat-

eral, regional and multilateral Development FinanceInstitutions (DFIs). The DFIs serving the private sector

(e.g. IFC, EIB, DEG, FMO, CDC, EBRD, ADB) have had

long experience in using nancial instruments on com-

mercial terms (loans, equity positions and guarantees)on the basis o state-backed guarantees or loans. It is

important to recognise the contribution o DFIs (worth

$50 billion in 2006/07), as capital may have alreadybecome a binding constraint in many countries, and to

consider whether DFIs can play a countercyclical role.

Until recently, DFIs had substantial liquid assets(e.g. cash) in their balance sheets. Capital adequacy

ratios had increased dramatically. For example, the IFCreached a level o 57% in 2007, much higher than the

recommended 30% (i.e. they have not been able to

nd enough protable projects in recent years). This

may now change, and DFIs need to ensure that they

can continue to promote capital fows to developing

countries in 2009 and 2010. As mentioned above, theIFC has announced a number o schemes (including

dealing with trade nance); the EBRD will be increas-ing its exposure by 20%.

New aid, incentives and regulations would need to

ensure that DFI nance is used to overcome marketand coordination ailures (e.g. the current herding

behaviour in trade nance, or the mismatch between

nancial and real rates o return) and promote capital

to countries and sectors that are aected by the crisis.Practically, this could involve recapitalisation o multi-

lateral DFIs; revised investment targets or countries;

incentives or investment ocers inside DFIs; andnew crisis unds that could be linked to DFI operations

in a transparent and open way, similar to the global

partnership o output-based aid (see Te Velde and

Warner, 2007). A survey among European develop-ment nancial institutions (EDFIs) suggested that the

nancial crisis had not yet hit hard by the end o 2008:

they expected that the eects would become evidentlater in the year. EDFI members were already seeing

an increase o projects in the pipeline. Promoters are

increasingly turned down by commercial banks ornancing o their projects or promoters are araid that

their credit acilities will be withdrawn and are there-ore contacting DFIs.

Reerences

te Velde, D.W. and Warner, M. (2007) The Use o Subsidies by Development Finance Institutions. ODI Project Brieng. London: OverseasDevelopment Institute (www.odi.org.uk/resources/odi-publications/project-briengs/2-subsidies-development-nance-institutions-inrastructure-sector.pd).
http://www.odi.org.uk/resources/odi-publications/project-briefings/2-subsidies-development-finance-institutions-infrastructure-sector.pdfhttp://www.odi.org.uk/resources/odi-publications/project-briefings/2-subsidies-development-finance-institutions-infrastructure-sector.pdfhttp://www.odi.org.uk/resources/odi-publications/project-briefings/2-subsidies-development-finance-institutions-infrastructure-sector.pdfhttp://www.odi.org.uk/resources/odi-publications/project-briefings/2-subsidies-development-finance-institutions-infrastructure-sector.pdf


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The orthcoming G-20 summit in London will

ocus on plans to address the global nancialcrisis, and perhaps even strike a grand bar-

gain to ensure that a crisis o this magnitude

cannot happen again. Debates surrounding any such

bargain will rightly involve calls or support to low-income countries suering rom the crisis.

Much o the debate about how rich countries can

help has centred on building a coalition or vast andrapid additional resource fows to countries that have

insucient scal space to protect the poor during the

crisis. This has been accompanied by numerous back

o the envelope calculations about what appropriatevolumes might be.

The President o the World Bank, Robert Zoellick has

proposed that 0.7% o rich countries stimulus packages

should be pledged to a vulnerability und to assist the

poorest developing countries. Nancy Birdsall, President

o the Center or Global Development (CGD), argues

that, in order to help emerging market economies

as well as poor countries, $1 trillion will be required(Birdsall, 2009). World Bank Chie Economist Justin Lin

has even argued or provision o $2 trillion, spread over

ve years. At the same time, some donors have been

quietly reneging on their aid commitments and it is not

clear how these competing wishes will play out.

Whether or not such additional resources are

ound, it is important to remember the hard learned

lessons o how to deliver aid eectively and what itcan achieve, realistically, in a short timerame. Some

key principles are needed to inorm any additional aid

spending during the crisis:

Rationalise and coordinat

the development charter for g2

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