Prior to the global recession, many low-income countries (LICs) had made tangible progress on economic policies that facilitated decent growth and single-digit inflation. Together with debt relief – mainly through the International Monetary Fund’s (IMF’s) Heavily Indebted Poor Countries and Multilateral Debt Relief initiatives, the former being jointly administered by the World Bank – and rising trade and capital inflows (foreign investment, remittances and official aid), these policies led to falling poverty rates and improving social indicators. However, many of these hard-won gains were, through no fault of the poorer countries, subsequently eroded during 2009.
Despite the contagious impact of harsh conditions, a significant number of LICs found themselves better prepared than before to cope with global turmoil, thanks to ‘policy buffers’ – sound budget positions, declining current-account deficits and adequate reserves levels – which had been built-up in good times. The IMF noted: ‘Those countries that had improved their policies most during the pre-crisis period were able to mount the strongest counter-cyclical responses, thus successfully limiting the decline in output.’
Significantly, health and education spending rose in real terms in 20 African countries during 2009. Foreign portfolio investors have not taken wholesale flight from the developing world, as evidenced by recovering stock markets, sovereign spreads returning to near pre-crisis levels and successful bond issuances (as occurred, for example, in Senegal in December 2009). LIC growth is projected at around six per cent over 2010-11 – higher than during the 1990s. Several factors account for this resilience, among them low financial integration, which shielded many LIC economies from market upheavals in the developed world, and buoyant commodity markets fuelled by strong Asian demand.
MILLENIUM DEVELOPMENT GOALS OFF-TRACK
Nonetheless, external shocks have undone recent progress on reaching the Millennium Development Goals, which aim to cut hunger, disease, maternal/child deaths and other chronic ills in half by 2015. The World Bank estimates that, as a result of the global recession, 71 million fewer people will have escaped absolute poverty by 2020, 100 million more people could lack access to safe water in 2015, and an additional 1.2 million children might die before the age of five during the period 2009-15. Furthermore, budget deficits have increased, and LIC external debt has risen by seven per cent of gross domestic product (GDP). According to the World Bank, ‘years of progress appear to have been lost and the positive momentum has been derailed.’
From the mid 1990s until just prior to the recession, the number of people living in abject poverty – ie, on less than US$1.25/day – dropped by 400 million, or 40 per cent. Poverty alleviation and universal primary education goals seemed within reach. To regain this momentum, it is vital that robust and inclusive growth be restored quickly. Moreover, peace and prosperity are closely interlinked. ‘Economic marginalisation and destitution could lead to social unrest, political instability, a breakdown of democracy or war,’ warns Dominique Strauss-Kahn, the IMF’s managing director. Worryingly, about 600 million people live in fragile conflict states where poverty rates average 54 per cent (compared with 22 per cent for LICs as a group).
BENEFITS OF DIVERSIFICATION
Foreign direct investment (FDI) and remittances should rebound after recent steep falls, albeit at a moderate pace, given depressed construction activity and lower capital spending in advanced economies. The World Bank estimates that remittances to LICs will increase during 2010-11 at an annual rate of six-to-seven per cent. Meanwhile, trade remains critical for smaller nations that rely heavily on exports as a source of employment and foreign exchange. LICs that have diversified their exports more toward large, dynamic emerging markets in Asia – led by China – and South America will enjoy a more sustained recovery in exports than counterparts whose major trading partners are developed countries.
The IMF projects 2010 growth in the US and Eurozone at 2.6 per cent and 1.7 per cent respectively, and expects both regions to slow down once more as stimulus policies are gradually withdrawn. The banking sector remains the Achilles’ heel of the developed world’s recovery process, hindering credit provision and consumption. By contrast, the newly industrialised Asian economies are likely to surge ahead at 7.8 per cent growth this year. Olivier Blanchard, the IMF’s chief economist, observes: ‘The world economic recovery is proceeding. But it is an unbalanced recovery, sluggish in advanced countries, much stronger in emerging and developing countries.’
SPECIFIC GLOBAL ACTIONS
The international community must restore balanced and sustainable global growth as a precondition for achieving the Millennium Development Goals. Doing so will require concerted efforts by the G-20 economies (which account for 80 per cent of world output), multilateral institutions and developing nations themselves.
IMF-World Bank analysis predicts that the $1 trillion fiscal stimulus package unveiled in April 2009 by G-20 leaders will boost world GDP by 0.5 per cent per annum over a five-year period, create 30 million new jobs and rescue 33 million people from poverty.
Richer nations could help even further by giving 100 per cent duty-free and quota-free (DFQF) market access coupled with liberal rules of origin (RoO). Full DFQF treatment by advanced economies could increase LIC exports by $2.1 billion. More significantly, the LIC exports could receive a $7.7 billion boost per annum, if major emerging markets lower their high tariffs and offer increased trade preferences. At present, preferences cover around two-thirds of eligible trade, but largely overlook the textiles/apparel sector. And restrictive RoO deter the sourcing of inputs from the cheapest suppliers and impose administrative costs – on average, some three per cent of final prices, according to IMF figures.
Supply-side bottlenecks and higher domestic costs prevent some African countries from exploiting duty-free access to EU and US markets offered to them under the European Commission’s ‘Everything But Arms’ (EBA) regulation and the US’ African Growth and Opportunity Act (AGOA). LICs therefore need more ‘aid-for-trade’ initiatives, which aim to improve infrastructure – notably transport and communications services – and trade institutions/policies to help meet product standards. For example, since 2002 the Standards and Trade Development Facility, a joint initiative of various groups including the World Bank and the World Health Organisation (WHO), has assisted LICs in complying with sanitary and phytosanitary measures commonly imposed on agro-exports.
The conclusion of the World Trade Organisation’s (WTO’s) Doha Round, launched in late 2001, would greatly help. According to a World Bank paper, ‘Conclude Doha: It Matters!’, even allowing for likely product exceptions and sensitivities, the modalities under protracted discussion are capable of boosting trade that could generate an extra $160 billion in real income for the world. If agreed upon, the Doha deal would ban agricultural export subsidies in the richer world, thus sharply reducing the scope for distorting domestic production – by up to 70 per cent in the EU and 60 per cent in the US. In fact, many LICs have a real competitive edge in agriculture, but export subsidies elsewhere depress market prices and discourage badly needed investment in agro-businesses.
Meanwhile, multilaterals and other development partners have provided technical and financial support during post-crisis period. The IMF quadrupled its soft lending to LICs to some US$4 billion, in addition to the US$18 billion already offered via new Special Drawing Rights (SDR) allocations which became effective in September 2009. The agenda also includes capacity building in areas of public finance and debt management, tax policy and administration, strengthening policies to withstand future volatility and using aid and natural resources more effectively – all to underpin growth and poverty reduction over the medium-term.
GOOD HOME POLICIES
While donors should as a matter of principle honour their pledges on aid and trade openness, LICs’ own policies must equally foster high-quality growth through productivity-enhancing investments in both public infrastructure (road, rail, telecoms and power-generation) and business facilitation (efficient markets, skilled labour, improved health and a better investing climate, as well as new technologies). These countries also need to devise social safety nets to protect their most vulnerable groups.
On the trade front, some LICs maintain high tariff and non-tariff barriers, such as checkpoints and excessive customs practices, which slow intra-regional trade. Hence, despite the introduction of customs unions and common markets within the African continent, the level of intra-African trade remains at only 10 per cent of total trade activity, compared to about 40 and 60 per cent, respectively, in North America and Western Europe. The deregulation of transport and communications sectors can also reduce costs that inhibit trade.
Developing countries face huge financing needs to close their infrastructure gaps and tackle climate change, both of which are barriers to long-term growth. With tighter global markets, as reflected in scarcer and more costly funds, these economies will increasingly need to rely on domestic sources of financing. This puts a premium on financial development – ie, the creation of well-regulated, efficient local capital markets and banking systems. There is also scope to attract capital via public-private partnerships in infrastructure, sovereign wealth fund investments and diaspora bonds, which are popular in Asian countries.
The IMF stresses: ‘Countries need to mobilise and use domestic resources more effectively, create conditions to attract FDI, and strengthen their capacity for safe borrowing. All these should aim at engendering private sector-led growth.’ Future aid commitments can fulfill only part of the financing gap. Policymakers should focus more on supply side reforms that encourage the growth of small and medium-sized enterprises (SMEs), those engines of job creation and poverty alleviation, and boost industrial competitiveness.
In sum, LICs need diversified investments in higher value-added production and knowledge-intensive sectors. The UN Conference on Trade and Development has advised these countries to ‘adopt policies that help improve their local capacities, and in particular their labour skills and technological capabilities.’ That, in turn, will provide a solid base for robust GDP growth and future diversification. Key challenges today are to accelerate real per-capita growth and make developing nations more resilient to future exogenous shocks, while boosting spending on core Millennium Development Goal-related programmes. Larger aid flows, in line with promises that emerged from the G8’s 2005 Gleneagles summit, and swelling trade are vital for sustainable development over the forthcoming decade.