About 40 percent of developing countries are highly exposed to the poverty effects of the financial crisis. The majority of these are in Sub-Saharan Africa. Without additional external assistance, poor countries may not be able to protect hard-won progress toward the Millennium Development Goals (MDGs).
Donors must urgently deliver on their aid commitments. While official aid from the OECD’s Development Assistance Committee (DAC) members rose by 10 percent in 2008—a welcome increase following declines in 2006 and 2007—the prospects of reaching the Gleneagles target ($130 billion per year by 2010) are uncertain.
The additional money needed to meet the Gleneagles targets is a fraction of the support provided to rescue financial institutions in rich countries, and a tiny proportion of their fiscal stimulus packages. In fact, the crisis calls for exceeding Gleneagles commitments to help poor countries meet increased needs.
The Vulnerability Fund proposed by World Bank President Robert Zoellick is a mechanism that can be used to channel additional support. The Fund calls for rich countries to invest 0.7 percent of their stimulus package to help developing countries.
Private aid is an increasingly important player in development finance. The growing role of private assistance has spawned innovative public-private partnerships, especially in the areas of health, education, and climate change.
Progress on improving the quality of aid has been insufficient. For example, the latest OECD monitoring survey shows that on average only 45 percent of aid is delivered on schedule. Rapid progress is needed on the Accra Agenda for Action for improved aid effectiveness; times of crisis and rising budget pressures impart an added urgency to implementing the Accra agenda.
The sharp rise in food prices between 2005 and 2008 pushed an estimated 160 million to 200 million more people into extreme poverty. Although food prices have since moderated, sustainable food supply is still a problem. Preliminary estimates for improving global food security range from $25 billion to $40 billion a year. Donors have been urged to double food assistance and to raise the share of agriculture in official aid from 3 percent to 10 percent within five years.
The impact of the global slowdown on poor countries is expected to intensify in 2009. The IMF estimates that about a quarter of these countries will see their revenue fall by over 2 percentage points of GDP.
Only 13 percent of low-income countries for which data are available will run a budget surplus in 2009 (compared with 28 percent in 2008 and 34 percent in 2007). The worst deterioration is in Sub-Saharan Africa and developing Europe and Central Asia, where budget deficits as a share of GDP are expected to rise on average by 4.7 percentage points and 2 percentage points, respectively.
In nearly half of poor countries, official aid is over 10 percent of gross national income (GNI). Four-fifths of these countries are in Sub-Saharan Africa; several are fragile states. These countries will be severely affected by aid contractions.
However, in real terms, aid in 2008 was $29 billion short of the Gleneagles target of $130 billion per year by 2010. Aid to Africa was about $20 billion short of the 2010 target of $50 billion per year. The prospects of reaching the Gleneagles targets remain uncertain.
Donors have made substantial commitments of assistance, but scaling up of aid to Africa has been uneven. Only about one-third of donors have achieved a 50 percent or larger increase in aid to Sub-Saharan Africa. Donors are stepping up support for infrastructure in Africa, including non-DAC donors such as China and India.
The ongoing financial crisis threatens to widen the gap between commitment and delivery. Some donors may cut aid budgets. History suggests that the longer and deeper the crisis, the larger the impact on aid.
Currency movements may affect aid volumes. Because aid budgets are held in the donors’ own currencies, the recent appreciation of the USD against most major currencies will deflate aid volumes measured in current dollar terms.
Aid wiped out by currency movements in 2009 could be as much as $3 billion to $5 billion.
Aid from non-DAC donors has been growing in importance. Non-DAC donors reporting to DAC gave $5.6 billion in 2007; Arab donors provided $2.6 billion; non-DAC OECD countries provided $2.1 billion. Among non-reporters, Brazil’s assistance was estimated at $437 million, India’s at 1 billion, Russia’s at $210 million, and China’s (official numbers not yet available) at $1.4 billion.
Private actors, particularly foundations and businesses, are becoming increasingly important players in development aid. Private giving for international purposes, as reported to the OECD, climbed to $18.6 billion in 2007, a more than 25 percent increase over 2006.
Reported numbers do not capture the full extent of private giving, which is much larger. For example, private international giving by the United States alone was estimated to be nearly $37 billion in 2007.
Despite the current financial crisis, some large foundations have announced their intention to maintain current grant levels. The Gates Foundation has announced it will increase its total giving for 2009 to $3.8 billion, compared with $3.3 billion in 2008. The increase comes despite a nearly 20 percent decline in the foundation’s assets in 2008.
As policy makers focus on addressing the immediate impacts of the financial crisis, they must not shift attention away from the longer-term climate challenge.
Developing countries will need between $150 billion and $200 billion a year over 2010-20 to tackle climate change, rising to $400 billion a year on average beyond 2020. Current climate-related financial flows cover only a tiny fraction of the money needed.
Substantial progress has been made with debt relief, identified as one of the challenges for financing development at Monterrey in 2002. Over four-fifths of eligible countries have passed the decision point and qualified for Heavily Indebted Poor Countries (HIPC) Initiative assistance. Of those, 24 countries have reached the completion point and qualified for irrevocable debt relief under the HIPC Initiative and the Multilateral Debt Relief Initiative. On average, debt relief (which totals $124 billion) represents about 50 percent of these countries’ 2007 GDP.
However, complete implementation of the HIPC Initiative will still require sustained efforts from the international community. Many of the 17 eligible, pre-completion point HIPCs face substantial challenges such as war, conflict, political instability, and weak policies and institutions.