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G-20: macro-economics must include the poor

Written by Dirk Willem te Velde

With all eyes on London as world leaders meet, the, focus is firmly on the role of the G-20 in addressing the global financial crisis. But there are concerns as to whether the macro economic measures under discussion will take sufficient account of the needs of, and contribution by, the poorest. Poor countries need stable, open export markets, yet at least 17 of the G-20 countries have, according to Robert Zoellick of the World Bank, implemented protectionist elements in trade, migration and stimuli packages in recent months. Poor countries benefit from stable financial flows, yet financial protectionism and pro-cyclical accountancy rules in developed countries are leading to drops in net capital flows to developing countries.Liquidity constrained consumers in poorer countries are those who can use a fiscal stimulus most effectively to kick start growth in the current credit crisis, yet donor nations have fallen behind on the Gleneagles aid pledges (although some, such as the UK, have recorded remarkable increases in 2008). It is time the G-20 countries moved away from poor macro-economic management, and moved towards macro-economic management that includes the poor as proposed in ODI’s Development Charter for the G-20.

Global studies paint a bleak picture:

  • ODI estimates that developing countries could lose at least $750 billion by end of 2009. In sub-Saharan Africa, the figure is over $50 billion.
  • The volume of world exports would be down by 6% in 2009, according to Zoellick, or 9% according to WTO. The OECD forecasts a drop in world trade volumes of 13.2%
  • Net private capital flows are expected to decline by 82% in the period 2007-2009, says the Institute for International Finance.
  • The United Nations Conference on Trade and Development (UNCTAD) suggests that FDI will decline by 10% this year.
  • Remittances are expected to fall at least 5% in 2009, according to Zoellick.
  • Aid flows increased to around $120 billion in 2008, but they fall short of commitments, and exchange rate effects and cuts already announced alone are likely to put pressure on aid budgets in dollar terms.
  • The World Bank suggests that 84 out of 109 developing countries surveyed face a financing gap of $270-$700 billion depending on the severity of the crisis and the strength and timing of the policy responses.
  • The International Monetary Fund (IMF) provides current baseline projections for 2009 which suggest an aggregate additional financing need for low income countries of about $25 billion. However much larger financing needs, up to $140 billion, would result if various downside risks were to materialise.
  • The consequence of these forecasts is likely to be rising unemployment, poverty and hunger: an extra 50 million people trapped in absolute poverty, with the number expected to rise to 90 million; and the total number suffering from hunger already up by 75 million to nearly a billion people, rising for the first time in nearly two decades.
  • The World Bank estimates that an additional 200,000 to 400,000 babies will die this year because of the drop in growth.

The monitoring system of the effects of global financial crisis in developing countries coordinated by ODI and including 30 developing country researchers in 10 countries has also begun to confirm alarming evidence.

Several recent studies discuss a fiscal stimulus for developing countries involving increased aid and/or a new global stimulus:

A recent study by the National Institute of Economic and Social Research (NIESR) and ODI, simulates the effects of existing G-20 stimuli on sub-Saharan Africa (SSA), as well as a new stimulus of $50 billion (equivalent to the estimated output loss by 2009).

In this projection, the G-20 fiscal packages, worth close to $2 trillion, help to smooth income losses in SSA in 2009-2010, offsetting about one quarter of losses resulting from the financial crisis, based on estimations using the quarterly macro econometric model.

If $50 billion of the stimulus goes to debt relief in SSA, the initial growth effects are small, but growth effects are larger later in the cycle. If the stimulus is spent on consumption (income transfers, social safety nets, etc.) it can smooth income losses and increase incomes in SSA by 4% in 2009, and a further 1% in 2010. If the stimulus goes to productive investment, there is a similar income smoothing effect over the short term but, in addition, there is a long-run positive impact on the level of output, which remains about 1.5% higher, while other stimuli do not shift the long-run level of potential output. Furthermore, the stimulus on infrastructure could have a sustained increase in output (because the empirical literature suggests a 20% economic rate of return on infrastructure investment) by an additional 1%.

The infrastructure stimulus in SSA of $50 billion has positive effects on global trade, and world GDP would be 0.1% higher in 2009-2010 as a result. This is equivalent to $44 billion worldwide. Of this, around 15% or $6 billion benefits the rest of the world. US and Chinese exports would increase by about $1.4 billion in 2009; German exports would increase by about $1.9 billion and UK exports by $0.7 billion. The modelling tells us what we should already know, but it is good to emphasise again: we live in an interdependent world and welfare in developing and developed countries are linked.