Written evidence submitted by Ricardo
Gottschalk, Institute of Development Studies
"Whether international aid commitments
should be increased to address the impact of the global downturn".
Ricardo Gottschalk is a Research Fellow at the
Institute of Development Studies, UK. He also holds a DPhil degree
in Economics from the University of Sussex. He has done research
and consultancy work on capital flows to developing countries,
reform of the international financial architecture; the sequencing
of capital account liberalisation; China's impacts on other developing
countries and their macroeconomic policy responses. His publications
include "The Macro Content of the PRSPs: Assessing the Need
for a more Flexible Macroeconomic Policy Framework", in Development
Policy Review 23.4; "Development in International Financial
Policies" (with S. Griffith-Jones and A. Rosser) in Policy
Coherence for Development in a Global Economy, The Development
Dimension Series, OECD (2005); and Should Capital Controls Have
a Place in the Future International Monetary System?" (with
J. Williamson, and S. Griffith-Jones), in M. Uzan (ed.) The Future
of the International Monetary System (Edward Elgar, 2005).
I. BACKGROUND
INFORMATION
1. The global downturn is having a massive
impact on developing countries. The effects have taken place through
private capital flows, trade and remittances.
2. Emerging market economies have been hit
through sudden reversals of private capital flows, with major
effects on their currencies and their ability to finance their
balance of payments' needs. However, some of these economies have
large international reserves and sound macro policies, which give
them some room to draw their own policy responses to minimise
the effects of the crisis and to put in place social protection
mechanisms for the poor. Moreover, new lending facilities have
been created to help some of these economies to weather the storm.[49]
3. Low-income countries are a greater concern.
They have been hit hard by the crisis through both global falling
demand and prices of their main commodity exports. Moreover remittances,
which in previous crises have tended to counteract the worst effects,
are this time declining and therefore reinforcing the plight of
those many poor for whom such financial flows constitute a vital
source of income. These effects can be seen as a double blow because
they take place short after the food and oil crisis, which left
many countries already very vulnerable to deal with the current
crisis.
II. THE CASE
FOR INCREASED
AID
4. Unless more aid is forthcoming, low-income
countries will have little room for manoeuvre. As a consequence,
they will have to adopt restrictive macroeconomic policies, with
high costs in terms of forgone output and poverty increase. Due
to the lack of a concrete and immediate action from the international
community, this scenario has become the most likely outcome. But
this is the opposite of what has been reiterated in the Doha Declaration
on Financing for Development, that
"macroeconomic policies should be aimed
at sustaining high rates of economic growth, full employment,
poverty eradication…[t]hey should attach high priority to
avoiding abrupt economic fluctuations…[and] in this context,
the scope for appropriate counter-cyclical policies to preserve
economic and financial stability should be expanded".—(Doha
Declaration on Financing for Development, page 5, paragraph 15).
5. For many countries, the export shortfall
will be quite large and therefore the need for additional aid
will be large too. To avoid major growth deceleration or even
economic contraction, the international community should act fast
to ensure additional aid is provided to help low-income countries
sustain their current growth path. However, despite calls being
made for increased aid, there has been hardly any action taking
place thus far. The prospects facing low-income countries look
very worrying.
6. Despite expressions of sympathy, developed
countries have little appetite for helping low-income countries
with more aid. Their own fiscal stimulus packages are taking precedence
in a context in which aid budgets are, in fact, likely to be reduced
due to the crisis. This is particularly problematic for aid-dependent
countries, where aid accounts for up to 50 per cent of their
government budgets, and a large proportion of which is used to
finance social sector spending. Sub-Saharan Africa alone has 20 countries
which can be considered aid-dependent.[50]
7. Although there are mechanisms currently
in place to help low-income countries deal with economic shocks,
these mechanisms—such as the IMF External Shock Facility
(ESF)[51]
and the European Union's FLEX—suffer from a number of limitations.
First and foremost, the funds available are very limited; second,
the eligibility criteria can be strict and involve high conditionality;
third, they suffer from very low speed of disbursement (especially
FLEX; under this mechanism, resources can take four years to be
disbursed).
8. FLEX is currently under review while
the ESF, created in 2005, was modified in September 2008 and
used for the first time in December 2008 by Malawi and the
Kyrgyz Republic to deal with the effects of the fuel and fertilizer
prices shocks (in the case of Malawi) and commodity prices and
other shocks (in the case of the Kyrgyz Republic). These ESF loans
are welcome, but are too few and too late, as they are still addressing
a past shock while a new shock is happening.
9. More worryingly, both in the cases of
FLEX and the ESF, the sources of funding are very limited. The
resources for FLEX come from the non-programmable envelope B of
the European Development Fund and are determined every five years.[52]
They cover the ACP countries, and each country faces an individual
upper limit, set on the basis of their historical vulnerability.
The resources of the ESF come from the Poverty Reduction and Growth
Facility (PRGF)-ESF Trust.[53]
10. The initiatives undertaken thus far
to improve the existing facilities can be characterised as a piecemeal
approach. Given the magnitude of the current crisis, clearly this
is not sufficient.
III. A PROPOSAL
ON HOW
TO INCREASE
AID FOR
DEALING WITH
THE CURRENT
SHOCK
11. There is a need for a more integrated
approach. The latter should include: an overview of the various
mechanisms at disposal, their specific purposes, geographic targets
and sources of funding, which should serve as a basis for changes
towards: increased co-ordination, availability of large-scale
resources, less stringent eligibility criteria, less conditionality,
faster speed of disbursement and identification of ways in which
the resources can be allocated domestically to ensure they support
the poor and the most vulnerable.
12. Specifically in regard to the current
crisis, a set of actions should be undertaken to help low-income
countries. These are: (i) a comprehensive needs assessment exercise
and corresponding provision of financial resources (ii) proper
identification of mechanisms through which the resources will
be made available, and (iii) speed of approval and disbursement.
13. (I) A Committee should be set up
to conduct a needs assessment exercise, covering most low-income
countries or at least those that are aid dependent; the exercise
should be based on simple macroeconomic models that can be run
with data that are easily available to estimate the countries'
financing needs in the short term, arising from the shortfall
in export values and the decline in remittances.
14. (II) Concomitantly, a fund should
be created and championed by a donor country such as the UK Government.
The fund's resources should be distributed through the multilateral
organisations such as the IMF and the European Union, which can
use their existing mechanisms for that purpose. Where appropriate,
regional and sub-regional development banks can play a role as
well in distributing the resources.
15. (III) However, existing mechanisms
should be quickly modified to: suspend eligibility criteria temporarily;
reduce conditions attached; and, principally, expedite disbursement.
The latter aspect is of particular importance because countries
are already being hit by the crisis. Due to their very limited
capacity to respond, they will soon be compelled to initiate an
adjustment that will result in lower growth or even economic contraction,
in addition to increased poverty.
16. I believe the creation of a Fund is
better than the alternative of relying on the existing financial
architecture for shocks. The creation of a common fund would increase
the visibility of the problem. Moreover, it could have the support
and benefit from the monitoring role of international and national
NGOs committed to international financing issues.
49 In October 2008, the IMF created the Short-term
Liquidity Facility (SLF) to help strongly performing countries
deal with the crisis, and the US Federal Reserve set up a currency
swap facility to up to US$ 30 billion to each of the following
emerging market economies: Brazil, Mexico, Singapore and South
Korea. Back
50
Aid-dependent countries are defined here as countries with a ratio
of aid to Gross National Income (GNI) greater than 10 per
cent. The Sub-Saharan African countries with aid/GNI ratios greater
than 0.10 (2000-06 average) are: Burkina Faso, Burundi,
Cape Verde, Congo, DR, Ethiopia, Gambia, Ghana, Guinea-Bissau,
Madagascar, Malawi, Mali Mauritania, Mozambique, Niger, Rwanda,
S. Tome and Principe, Sierra Leone, Tanzania, Uganda and Zambia. Back
51
The IMF also has the PRGF augmentation, which has been used to
provide financing to low-income countries that have PRGF programmes
in place; and the Compensatory Financing Facility (CFF), which
nonetheless is non-concessional and therefore not suitable for
low-income countries. Back
52
The envelope B refers to unforeseen needs, and includes FLEX,
humanitarian/emergency needs and debt relief (enhanced HIPC).
The other envelope (envelope A) refers to the European Commission's
programme of aid. Back
53
According to projections from the IMF (see IMF, 2008 "Proposed
Reforms to the Exogenous Shocks Facility (ESF)-Background Information
on Financing of PRGF-ESF Operations", September), the PRGF-ESF
resources available for shocks financing over the next 2-3 years
amount to SDR 1.5 billion (US$ 2.5 billion). Back
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