Cultivating development in times of crisis

Cultivating development in times of crisis

Friday, 11 June, 2010

There is no doubt that the global financial and economic crisis has had profound effects on the living conditions on large sectors of the global population. It has threatened to derail efforts underway in developing countries that have made substantial social progress as well as in meeting the Millennium Development Goals. It is in this context that ministers from the EU are meeting in Madrid, Spain from 9-10 June to discuss development issues against the backdrop of a faltering world economy.

Financing development has been an issue talked about for many years, yet it is in these financially unstable times that it is needed more than ever. Developing countries have seen national progress slowly erode, while developed countries have cut back on spending and have been tempted to resort to protectionist measures to shield their economies. However, through concerted and joint action at the international level, developed countries can set about alleviating the troubles that are befalling the world’s underprivileged nations.

Yet, as every cloud has a silver lining, the global recession has enabled global development actors to look at ways of reforming the system in which development aid is administered. Some of the major innovations in recent years in this field include constructing a shared agenda in order to achieve the Millennium Development Goals (MDGs), building on work on aid effectiveness such as the Paris Declaration, the Accra Agenda for Action, the EU Consensus on Development and lastly finding new ways and tools for implementing aid and financing aid stakeholders.

The reform of the international financial system has brought with it regulation in national and international markets, yet has also ensured that emergency financing during crises is upheld, in order to guarantee liquidity. The Monterrey Consensus, which has been a kind of benchmark for financing development, foresaw the continued consistency of international development financing despite systemic financial issues. This has been acted upon in the current financial crisis as multilateral development banks have continued to provide financing to developing countries.

In the last decade, new designs have been introduced to finance development. These include the successor to the Structural Adjustment Programmes - the Poverty Reduction Strategy Papers - which were seen as a first step in providing a more co-ordinated approach towards development aid involving donors and recipient countries.

Conference priorities

The conference is therefore an important step in further discussing the reform of the development financing system. The goals of the conference, to be held under the auspices of the Spanish Presidency of the EU, are clear: delegates want to use the opportunity that the global financial crisis has given them to reflect on the role that development co-operation can play in such a crisis. Furthermore, the financing arm of development will be closely looked at, as there are areas where it can be expanded. The meeting will also be a chance to look at ways of incorporating new actors who have emerged on the development scene. Aid effectiveness will be discussed, as will be the best ways to achieve the MDGs by 2015.

Development aid affected

As already noted, developed countries have seen their economies shrink due to the crisis. OECD figures show an average of -3.5% GDP negative growth over the whole OECD region in 2009. A remarkable statistic is that of developing countries: they actually posted GDP growth in 2009 of an average of 1.2%, compared to 5.6% in 2008. This is not to say developing countries have not suffered merely because they did not post a GDP loss – indeed many have been highly affected through loss of exports, as developed countries are their major sources of income. For example, Morocco experienced a 37% decrease in exports in the first quarter of 2009.

Tourism and remittances are an important source of income for African countries, yet their expected dip in 2009 was not as bad as was expected. In fact, tourism saw a 5% increase in Africa in 2009, while the world experienced a 4% dip.

The crisis has certainly hit those in poverty the hardest. Due to the financial crisis, there will be 64 million more people in poverty than there would have been without the crisis, according to World Bank estimates. This naturally makes it harder to achieve the first MDG of alleviating poverty by 2015. Africa was relatively on course to achieve the MDGs before the crisis hit: it enjoyed 5.6% GDP growth in 2008, compared to 1.9% in 2009.

Knock-on effects include disruptions to aid flows. Africa is at the receiving end of this effect, as on average the aid it receives is equivalent to 9% of GDP. Some higher examples include Mali at 13%, Malawi 20% and Sierra Leone and Burundi at over 30% of GDP. The G8 summit in Gleneagles, Scotland in 2005 called for higher aid flows, especially to Africa. However, aid flows remain far shorter than expected.

A similar example to the present crisis can be seen in the early 1990s. Finland was going through a banking crisis from 1991-93, where its GDP fell by 11%. It subsequently slashed its aid budget by nearly 30%, according to the OECD. However, not all financial crises are accompanied by cuts in aid budgets, as these vary country to country, as can be seen during Japan’s recession in 1998, which saw an aid increase of 40%.

Although aid to developing countries in 2010 will be substantial, it is still far short of what was called for at Gleneagles in 2005.
While the crisis has brought about fertile ground for reform of financial institutions, the main resources have gone to multilateral institutions. Delegates at the conference will be discussing these issues in depth.