April 24, 2009—Low-income economies, many of which are in Sub-Saharan Africa, were until recently buffered from the global financial crisis, since their banks and stock exchanges were distant from sub-prime meltdowns and collapsing investment banks.
Yet most of the world’s regions now face recession. This means poor countries are facing a slump in their exports, government budgets are badly stretched, and foreign aid appears likely to fall short of donor promises at the very time when it will be most needed.
“Yes, the financial crisis is affecting us,” said Tembani Ndeula, a young farmer in Malawi, “Our economy depends on agriculture, and I am especially talking about tobacco. What affects the rest of the world affects us. Malawi is going to be affected so much—and we are one of the poorest countries in the world.”
The latest Global Monitoring Report, published every year by the World Bank and the International Monetary Fund to assess progress toward the Millennium Development Goals, warns this year of “a development emergency”; and calls for urgent global action to avoid the erosion of hard-won gains against poverty, hunger, illiteracy, and disease.
“The financial crisis has made the outlook for the 2015 goals more worrisome than ever,” said Zia Qureshi, lead author of the report, and senior advisor at the World Bank, “Developing countries are going to need help to cope with the fallout from the crisis as it starts to severely strain their resources and affect their most vulnerable people.”
Slower poverty reduction, rising hunger
The recent food crisis threw millions into extreme poverty, and the prospect of much slower growth in developing countries is now likely, in turn, to slow the pace of poverty reduction. Estimates of the additional number of people trapped in extreme poverty in 2009 as a result of the financial crisis range from 50 to 90 million.
Across the developing world, in 2009 the number of people living on under $1.25 a day will total 1.184 billion, lower than the 1.375 billion estimated for 2005, but still an alarmingly high total.
The number of chronically hungry people in the world, which rose in 2008 because of the food crisis, is set to exceed 1 billion in 2009, reversing gains in fighting malnutrition and making investment in agriculture all the more important.
“With simultaneous recessions striking all major regions, the likelihood of painfully slow recoveries in many countries is very real, making the fight against poverty more challenging and more urgent,” said John Lipsky, Deputy Managing Director at the IMF.
A development emergency
“In Africa, where most people are self-employed, unemployment takes on the face of a woman who grows vegetables for market and finds that people are no longer buying them,” said Joy Phumaphi, Vice President, Human Development, at the World Bank.
“This woman is forced to make difficult choices—to pull her children out of school, to wait until a child is very sick before going to the clinic, to feed her family a poor-quality diet without the meat or vegetables they need.”
It is estimated that an additional 200,000 to 400,000 infants could die around the world per year between 2009 and 2015 as a result of the crisis. If no action is taken now, this could add up to 1.4 million to 2.8 million additional million infant deaths by 2015.
While individual families struggle with increased needs and shrinking incomes, the financial crisis is also deeply affecting the capacity of low-income country governments to meet public needs in critical areas.
In another report issued today, Averting the Human Crisis, the Bank is warning that 23 countries—collectively home to 60 percent of the world’s HIV-positive people on anti-retroviral therapy (ART)—will see disruptions to HIV/AIDS treatment and prevention programs by the end of 2009 as a result of the global economic crisis.
And in countries like Ethiopia, 50 percent of the government’s health budget depends on aid from rich countries.
“Donors should urgently meet and exceed their aid commitments in the face of such looming threats,” said Qureshi, “Although overall official aid rose by a welcome 10 percent between 2007 and 2008, it is still well short of the 2010 targets set at Gleneagles, including the specific targets for Africa.”
The effectiveness of aid is also doubly important in constrained times. What is needed is a reassessment of existing systems and institutions in countries to make sure they are operating efficiently and using resources in a targeted manner.
Protecting investments in human capital
To protect strategic investments in “human capital,” countries will need to quickly strengthen social safety nets like targeted cash transfers, which help poor families cope with reduced incomes without cutting back on school-related expenses and on healthcare.
While governments are key actors, the private sector—both for-profit and non-profit—is expanding its role in health and education. More than half the service use for many MDG-related needs is with private providers, while the majority of health spending in many developing countries comes from private sources.
During the crisis and beyond, governments should continue to work closely with the private sector, taking advantage of its potential to bring in innovation and flexibility, but also improving their own skills and capacity in contracting, monitoring and regulation.
Shoring up the private sector
“When I went to the bank, I was told they had no cash for foreign exchange because of the financial crisis,” said Zione Kamsinde, a woman entrepreneur in Malawi. “I needed the money but there was no way I could proceed with my transaction, and that made for some losses in my small business.”
Worldwide, recovery prospects depend on effective policies that restore confidence in the financial system, recapitalize banks, and counter falling global demand. While responsibility lies largely with rich countries, developing countries need to continue their efforts to improve the investment climate for the private sector.
Shoring up the private sector during the crisis—not just in emerging markets and middle-income countries, but also in poorer countries—is expected to help improve future growth and recovery prospects in all developing economies.
“Africa is part of the solution to the crisis,” said Phumaphi, “It is a growing market, with lots of scope for innovation and new technologies; we must preserve and protect this, or it is a lost opportunity for the whole global economy.”
IFI responses to the crisis
All international financial institutions are gearing up to respond even more strongly to the crisis, and to help fill the huge financing gap—by some estimates, as high as $1 trillion—in developing countries. G-20 leaders, who met recently in London, agreed to support a tripling of resources for the IMF to $750 billion, among other actions of concrete support.
While the IMF addresses balance of payments issues, the World Bank Group and other multilateral banks are concentrating on health, education, infrastructure, and trade finance, while also sustaining their efforts to combat climate change and protect the environment—goals that cannot be forgotten during a development emergency.
The World Bank Group’s response to the financial crisis includes support to public-private partnerships in infrastructure projects that are now in distress, assistance to small and medium enterprises, and helping countries strengthen social safety nets.