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Fact Sheet: Scaling Up Aid: Opportunities and Challenges in a Changing Aid Architecture

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After a long period of strong global expansion, during which emerging market economies’ shares in global production rose rapidly, world economic growth is easing because of financial market turbulence.

Arrow The benefits of recent global expansion did not reach all developing countries, especially fragile states where per capita growth rates are still low or negative. Income inequality is on the rise in many countries and rising food prices are a threat to millions. 

Going forward, a stable macroeconomic policy framework, strong private sector development, good governance, and attention to the sustainable use of natural resources and the environment are key to strong growth and poverty reduction.

The global economy: Recent developments and prospects 

green arrowWorld GDP growth is projected to slow to 3.7 percent in 2008 from 4.9 percent in 2007. Financial market turbulence is a critical downside risk. The IMF and World Bank project 6.7 percent GDP growth in developing countries in 2008. 
green arrowRevised global estimates of purchasing power parity (PPP) imply lower PPP-based GDP in China and India. Still, emerging economies remain the main drivers of growth in PPP terms, led by China’s 27 percent share of global growth in 2007. 
green arrowNew PPPs (coming soon with World Development Indicators 2008) will lead to revisions of poverty estimates later this year. ( 
green arrowAn early estimate shows that between 1990 and 2004, the number of people living on less than $1 a day fell by 278 million. 
green arrowWhile most Sub-Saharan African countries remain off track to halve poverty and hunger by 2015, with little progress in fragile states, countries such as Ghana, Mozambique, Tanzania and Uganda are making solid progress toward the MDGs. 

Growth in Africa: Rising but Uneven
Africa's economic growth has risen from 2.1 percent in the 1990s to an average 5.6 percent in 2003-07. Policy challenges vary across three broad groups of countries:
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The first group, comprising 7 resource-rich countries, had about 9 percent annual growth in the past decade. Their main challenge is to transform natural resource wealth into sustainable growth.

Map of Africa - GDP per capita growth - Small
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round bullet The second group, comprising some 18 countries, has achieved an average growth of about 5.5 percent in the past 10 years. These countries, which have fairly well-managed economies, must further improve the investment climate, strengthen infrastructure, and deepen regional and global links. Aid remains essential. 
 round bulletThe third group is characterized by low or negative growth (some 20 countries). Low-growth economies, averaging just 2.1 percent in the past decade, must enhance security, provide private sector growth opportunities, and build basic governmental capacity to put international aid to good use. 
Rising commodity prices 
green arrowCommodity price increases in recent years have contributed much to developing countries' growth (commodities made up 74 percent of their exports in 2003-06).Fig 1.4 - Commodity price indexes - Small
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green arrowEconomies benefiting from rising prices (e.g. Kazakhstan, Venezuela) must focus on efficient use of resources, price stability, sound institutions, and governance. 
green arrowBut countries are also affected by high commodity prices as importers. High oil and food prices severely affect those poor people who are net consumers of food.
green arrowThe World Bank supports several measures to cushion the impact of high food prices: trade reform, improved agricultural technologies, well targeted safety net programs, and access to weather-based index insurance.
green arrowHigh food prices offer less incentive for rich countries to continue subsidies and could mean better prospects for the Doha Round of trade liberalization.

Rising income inequality within many countries

green arrowWhile per capita incomes rose in most countries in recent decades, income inequality within many countries also increased. 
green arrowTo reduce income inequality, the focus needs to be on expanding access to education, broadening opportunities in the more technologically advanced and remunerative sectors, and widening access to finance. 
Vietnam – Growth with equality leads to dramatic success in reducing poverty
Vietnam has achieved one of the world’s fastest declines in income poverty rates – from 58 percent in 1993 to 16 percent in 2006. Reasons include: 

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Vietnamese women studyingCritical income growth of about 7-8 percent a year, with low increases in inequality. Growth has been both rural and urban, and widespread.

Vietnam’s inclusive growth is linked to literacy, trade, and infrastructure. The country’s literacy is over 95 percent today, thanks to major basic literacy drives. Its ratio of exports + imports to GDP is about 150 percent. And rural electrification and roads programs ensure that remote areas are not excluded.

Migrant workers’ remittances 
green arrowRemittances, a strong source of foreign financing, have helped reduced poverty, including in Sub-Saharan Africa. Using poverty surveys beginning in 1980, a study of 76 countries, of which 24 are in Sub-Saharan Africa, found that each 10 percent increase in remittances has led to a 1 percent decline in poverty. 
Environmental sustainability and growth
green arrowDeveloping countries rely heavily on natural resources. When growth is based on depleting these resources, it is difficult to sustain long term poverty reduction.
green arrowFragile states have very low “produced” (as opposed to natural) assets per capita. Sound forest management will be critical in these often forest-rich countries.
green arrowIt is vital to preserve soil quality, as agricultural land constitutes a large share of natural wealth (51 percent in South Asia, and 62 percent in Sub-Saharan Africa).
green arrowIn East Asia and the Pacific and in South Asia, intense health damage from particulate matter and carbon dioxide pollution must be addressed. 
Photo credits: Simone D. McCourtie 

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