Op-Ed

The Financial Crisis, a Development Emergency, and the Need for Aid

Homi Kharas

The global economy is in a mess. That is not news. But the degree to which the global crisis has spread across all countries, even the poorest that are only marginally integrated with the world, is alarming. Just four months ago, the World Bank forecast growth for Africa for 2009 at 6.8 percent. Last week it narrowed that forecast to 3.5 percent with the prospect of 2.5 percent growth for 2010. That would mean zero growth in average incomes for some of the poorest people on the planet. Closer to home, Haitian President Preval has just visited Washington, DC seeking $100 million to stop his country sliding into anarchy.

Poor countries depend on foreign aid for much of their basic needs—food, primary education, health care, and minimal levels of public investment in infrastructure—and the world has responded by providing about $100 billion each year in aid. This is not the time to debate whether aid “works” or doesn’t work. No one believes that a rapid cut-back in aid would help countries in the short-run. Yet that is exactly what is happening, and it is forcing poor countries to cut back public spending. Not a single poor country has had the resources to implement a fiscal stimulus.

Some rich countries, like France and Italy, have already announced aid cuts, citing ballooning domestic budget deficits as the cost of bailouts mushrooms. Others, like the UK, bravely promise to continue to provide aid at promised levels. But even in these cases, the money that aid recipient countries receive has less value. Thanks to the financial crisis, each pound sterling today is worth 38 cents less than in 2008. Every euro is worth 18 cents less. Overall, currency movements alone will wipe out almost $5 billion in aid in 2009—even after allowing for the fact that some aid, like technical assistance and debt relief, is not cash.

What is to be done? World Bank President Robert Zoellick is passing around the tin cup, asking all rich countries to devote just 0.7 percent of their domestic stimulus package to aid for the poorest. Nice try, but in the current political climate the appeal does not seem to have much traction, except in Japan, which announced a substantial increase in aid for this year (but with no details on what this actually would entail). In any event, it could take years for the rich countries to approve fresh money, transfer it to the World Bank, identify programs to be funded and actually disburse the money. That timetable does not fit with President Preval’s appeal. When asked when he needed the money, he responded simply, “now.”

One way to get money faster to poor countries is to allow them to access non-concessional funds from multilateral agencies like the World Bank and the IMF. The danger of course is that poor countries cannot afford the high debt service charges on these loans. But that can be offset by asking rich countries to buy-down the debt service. This process has the advantage of allowing poor countries to get money now, while rich countries will only need to give additional money in the future when debt service becomes due. They have done this before, for example, in China where the UK’s Department for International Development provided grants to help poor Chinese provinces pay off a World Bank loan for TB reduction.

But, there is an even better way to help poor countries now. It turns out that a considerable amount of aid money—an astonishing $60 billion—is already in the pipeline, but procedural requirements have stalled its delivery to poor countries. $33 billion of this sum is sitting in Washington, DC in the World Bank’s International Development Association (IDA) portfolio. These funds have already been allocated and budgeted by rich countries. The projects have been vetted as important for development. Yet, the delivery of this money has been slow.

Accelerating disbursements—the flow of money to already approved projects—is the surest way of helping poor countries today. There are several tricks that can be used. First, some of the money can be reprogrammed into budget support—freeing the funds from slow moving projects and consultant contracts and infusing it directly into the coffers of poor governments. Of course, donors do not like this because they lose the ability to track exactly where each dollar went. But in an emergency, perhaps this is a risk worth taking. After all, no one seems to know exactly where all the bailout money for banks is going domestically. Why impose harsher standards on poor countries?

Second, aid agencies can relax the amount of counterpart, or matching, funds that poor countries are supposed to provide. Cost-sharing, while perhaps ideal, may be unrealistic and harmful when treasuries are broke. Slowing things down further because poor governments have run out of money worsens the fiscal cycle at exactly the wrong time.

Third, emergency procedures can be used for some countries that have sound policies and programs in place. When there are major calamities, aid agencies suspend some of their standard rules and procedures in order to get money out of the door fast. Reconstruction in Bosnia and tsunami-relief in Aceh, Indonesia are two recent examples. These episodes have now been studied ex post to see what happened. Analyses show that development results were just as successful as in projects under normal circumstances, and there was no evidence of higher corruption or leakage of funds.

Author

In those cases, it was clear that the emergency was outside the government’s control. Of course, one needs to be sure that a government does not purposefully lead a country into a state-of-emergency so that it receives additional funding assistance. No one would suggest budget support to Zimbabwe under emergency procedures at this time because that crisis is entirely of the government’s own making. But many poor countries are simply caught in the backwash of the global turmoil. These countries were assessed as having good policies and strategies for poverty reduction that are now being threatened. This crisis is not of their making. These are the countries that should be helped.

That is why the G20 should consider declaring a development emergency for 2009. They should urge aid agencies to take every step possible to accelerate the disbursement of already approved funds. They should support staff and managers for taking risks to speed up the flow of money. Their representatives on the boards of these agencies should monitor progress. Poor countries need the money, and they need it now. Rich countries have already paid for this. Now they just need to demand speedier results.

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