Low income countries have a $65bn hangover from the global crisis -will it destroy the MDGs?

I wrote this for the Guardian Comment is Free site (went up last Friday), summarizing the findings of a new Oxfam research paper. Take note, anyone involved in next months’ big UN MDG summit.

“Sometimes the things we don’t know about what is happening in the world take your breath away. A global economic crisis strikes just a few years before the world’s 2015 deadline for achieving the improvements in health, education and poverty reduction required by the UN’s Millennium Development Goals (MDGs). How has that crisis affected poor countries’ spending on schools, hospitals or growth?

Those numbers aren’t collected and published in anything approaching real time. So to find out, Oxfam had to fund Development Finance International, a non-profit specialist research and advocacy organisation, to collect the budgets of 56 low-income countries and crunch the data. What they discovered is truly alarming.

As revenue from raw material exports and taxation slumped, the crisis created a huge “fiscal hole” in the 56 poorest countries, decimating their budget revenues by $53bn (£33bn) in 2009 – nearly 10% of their pre-crisis revenues. A further $12bn will be lost in 2010, creating a total fiscal hole of $65bn over the two-year period. That hole ensures that the poorest countries will share the rich world’s pain of cuts in essential services (while countries in the middle hangoverlike China, India and Brazil steam on relatively unharmed), even though they missed out on the preceding financial boom. It’s like suffering a monumental hangover when you weren’t even invited to the party.

Governments in the poorest countries initially tried to keep spending with a laudable fiscal stimulus that contrasted with the sharp cuts made in previous crises. But it didn’t last – only a quarter managed to continue this stimulus in 2010. Countries with IMF programmes turned on the taps faster than others in 2009 but, conversely, are forecast to cut back more sharply in 2010; this suggests that, while the IMF protected social sector spending at the start of the crisis, it is now advising (or at least failing to dissuade) countries to reduce it.

Aid has failed dismally to fill the gap. I attended the G20 summit in London in April 2009, at the height of the crisis. It was a moment of real hope as world leaders came up with $1.1tn to bail out the global economy. But the lion’s share went to middle-income countries; their low-income neighbours have received an average increase in grants of $4.1bn a year – less than 1% of the London largesse. This has filled only 13% (one eighth) of the fiscal hole created by the crisis. Governments of poor countries have managed to borrow a similar amount at low interest rates, but the rest has had to come from borrowing domestically or by running down their reserves.

Meanwhile, Spain, Germany, France and Italy have all announced they are freezing or cutting their aid budgets – putting further pressure on poor countries’ finances. In this context, David Cameron’s promise to stick to the UK’s aid promises becomes increasingly important – not just for the money involved, but also as a message to other leaders that even when times are tough, breaking their pledges to the poorest countries should never be an option.

Many governments of poor countries are already cutting spending rather than risk a new debt crisis. Two-thirds of countries are cutting budget allocations in 2010 to one or more of the priority sectors of education, health, agriculture and social protection. According to their budget statements, Zambia has slashed its health spending by a third this year, while Mali, Benin, Niger and Nicaragua have taken the axe to their schools budget. Mongolia is cutting everything. All this, just at a time when they need to massively increase such spending if they are to achieve the MDGs. So there you have it, across low-income countries vital services are being taken away at a time when the poorest need them most and we didn’t even know it was happening. Shocking.”

One footnote – there’s nothing like writing something on the Guardian site to realize just how well informed and sensible the discussion is on this blog (check out the comments to see what I mean – who would have thought so many angry and/or unhinged people read the Guardian?). I definitely prefer you lot……

 

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Comments

7 Responses to “Low income countries have a $65bn hangover from the global crisis -will it destroy the MDGs?”
  1. Duncan, well written. But what has been generated so far even on pro-development news sites like the Guardian is a string criticism over the focus on aid during a still present downturn. More is still needed to convince the public of the reality of the global development system.

  2. Nicolas

    Duncan,

    aren’t you contradicting yourself when you say that poor countries didn’t benefit from the financial boom but at the same time emphasise how they suffer from the boom falling flat? Surely, if lower global growth has led to a sharp decrease in tax revenue in developing countries, then that means that in the period of high global growth tax revenue was higher than it would otherwise have been (i.e. without the high global growth). (Maybe you’re thinking there are asymmetric effects, but then it would be helpful if you could spell out the mechanism a bit more.)

    Duncan: Thanks Nicolas, although I usually end up contradicting myself, I think I avoided it on this occasion, I was saying that the LICs didn’t benefit much from the financial boom, rather than growth itself – most of them are fairly disconnected from flows of hot money. So I think the hangover metaphor still stands.

    I suspect these global cycles leave developing countries much more vulnerable than they do developed nations, but that doesn’t mean high global growth did not benefit poor countries. It could be a reason to push for countercyclical aid, but I’m not sure how that would be feasible politically.

  3. Frederic Jeanjean

    Woah… tough crowd! Great piece Duncan. However, it did read a little drastic to me. I just came across some figures in this article (http://www.lowyinstitute.org/Publication.asp?pid=1355) today that show ODA from OECD countries growing exponentially in the last decade – from USD 59 billion in 2000 to USD 121.5 billion in 2008. Although the 10% decrease in LIC budgets is substantial, it is tough to argue that these findings will take our ‘breath away’. It seemed that the Guardian readers were not aware of the implications of these budget cuts on the ‘ground’. Evidence based impact studies may be more effective in the period of austerity… Really enjoy reading your blog. thank you

    Duncan: thanks Frederic, but the thing that took my breath away was the complete absence of any data, good or bad!

  4. Nicholas Colloff

    I think there is a typing pool of the unhinged and angry filling out the comment sections of all the mainstream publications, that or I live a very sheltered life!

    I think one of the longer term solutions must be to boost domestic savings rates (critical to the sucess of East Asia) and, thus, one infrastructure that needs investment is a banking one, and if the markets will not provide, the state ought to, which may not sound the most enticing target for improved levels of aid…!

  5. East Asia din’t grow through simply savings rates–only a few countries used that in the 60s and 70s. East Asian governments simply were dominant in the overal economic upbringing. (and they continue to be save Hong Kong). Evne so, there were failures such as failed infant industries and government plans.

  6. JPK

    You know what, a balanced debate about those issues affecting social & economic development, environmental conservation and protection, public governance & safety, etc. is neccessary because some of you fail to understand why are waste time on fighting when you do the sort of ideological, emotional and philosopical campaigns.

    Please discuss about those campaigns on their own merits, and do not fail in cooperating with other advocates, public officials, scholarly & professional experts, and ordinary people concerned tackling various issues, thank you.

    Duncan: hard to argue with that, JPK!

  7. JPK

    To Duncan (UK):

    Perhaps you need to understand why are you not considering a series of timely discussions on sundry issues affecting social & economic development, environmental conservation and protection, public governance & safety, energy, communications and transportation improvements, and many more?

    The difficulty of arguing for resolving such issues I mentioned is that some people refuse to realise how to confront the situation wherever they are, how to take a stand, and how to fight back at all fronts.

    Please let me know soon, OK?

    And, please take care of you.

    – JPK

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