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HomeDOCUMENTSCommittee Reports2010 Annual Session216 ESCTER 10 E bis - GLOBAL RECESSION, POVERTY AND INSECURITY IN THE DEVELOPING WORLD

216 ESCTER 10 E bis - GLOBAL RECESSION, POVERTY AND INSECURITY IN THE DEVELOPING WORLD

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JEPPE KOFOD (DENMARK)
RAPPORTEUR

I.  INTRODUCTION 

II.  ORIGINS OF THE CRISIS: FROM NORTH TO SOUTH, FROM BOOM TO BUST 

III.  COMMODITY AND FOOD PRICE MOVEMENTS 

IV.  INVESTMENT FLOWS 

V.  TRADE 

VI.  FISCAL AND MACROECONOMIC CHALLENGES 

VII.  POVERTY EFFECTS 

VIII.  INTERNATIONAL COMMUNITY RESPONSE TO DEVELOPING COUNTRY NEEDS  10

IX.  DEVELOPMENT ASSISTANCE 

X.  CHINA IN AFRICA 

XI.  CONCLUSION AND RECOMMENDATIONS 

BIBLIOGRAPHY 


I. INTRODUCTION

1.  The global financial and economic crisis has posed one of the greatest challenges to national and international economic policymakers in decades. The crisis has adversely affected the lives of billions of people and is rife with critical economic, political and security implications of both a short- and long-term nature.  It struck the developing world in a belated but nevertheless devastating fashion, ultimately pushing millions of people into extreme poverty, reversing recent developmental progress, and turning some voters in donor countries against development assistance.  All of this unfolded at a particularly delicate moment of transition within this Alliance, which increasingly recognises that very serious humanitarian, environmental and security problems arise when states become fragile and poverty becomes endemic. 

2.  The recent crisis is thus rife with serious security as well as economic and humanitarian implications.  It has rendered the lives of millions of people in the developing world even more precarious, but interestingly the international community seems to have responded with greater alacrity than in the past to their predicament. Globalisation has further clarified the strong interdependencies between the developed and developing worlds.  International policymakers are now more responsive to the unique challenges that the developing world faces than in the past. That said, serious deficiencies in Western approaches to the developing world persist. 

3.  Since the collapse of the Bretton Woods system, most financial crises have originated in developing countries and only belatedly, if at all, derailed growth in advanced countries. The current crisis is unique insofar as it began in the United States, the very heart of global capitalism, and only later spread to developing countries. Unsurprisingly, its impact has been more generalised and profound than previous crises arising out of Latin America or East Asia.  Indeed, it took nearly a year for the full impact of turmoil in American credit markets to strike fully emerging and developing countries.  It did so, moreover, in a highly uneven fashion, an indication of the inherent diversity of this broad range of countries, some of which are rapidly catching up with the developed north, while others languish in profound economic crisis and even state failure.  

4.  The impacts of the crisis in developing countries have included massive job losses, reverse migration, falling wages, declining remittances and reduced capital inflows. Less developed countries have additionally had to cope with unanticipated reductions in primary and secondary school enrolment, lower levels of healthcare, rising hunger and, in some cases, political instability. For the world’s poorest, the crisis has increased mortality rates due largely to malnutrition. Many of these effects have long-term implications. Declining primary school enrolment, malnutrition and degrading health care standards can effectively stunt the growth and development of children, impairing them for the remainder of their lives and exacting a high toll over the long-term on the societies in which they live.  Thus the impact of the current crisis on developing countries will, in some instances, have dire long-run effects on the social, economic and political landscape. In the most extreme cases, these could have serious security implications. This is one of several important reasons why the international community must maintain its longterm commitments to helping developing countries create the conditions for genuine and sustainable development.

5.  The most acute phase of the economic crisis has now passed, but, the damage to the developing world is real and will have long-term consequences. Surprisingly though, the impact has generally been less catastrophic than many economists and development experts had initially predicted. The reasons are complex and varied but certainly include the rapid international response to the crisis with key guiding roles played by the G-20, the IMF and the World Bank.  But perhaps the most important factor has been the impressive reforms many developing countries undertook over the past decade which left them better prepared to cope with the global downturn.  A number of emerging countries have been pursuing sounder macro- and micro-economic policies that have rendered their financial and commercial systems more robust than in the past. Improved governance, regulation, and transparency have thus left many emerging and developing countries better prepared to weather external shocks while paving the way to a relatively swift return to growth and stability.
 

II. ORIGINS OF THE CRISIS: FROM NORTH TO SOUTH, FROM BOOM TO BUST

6.  The financial crisis triggered a contraction of global trade and output unprecedented in the post-World War II era.  Although, the contraction was led by the steep declines in industrialised economies, many developing countries suffered from falling commercial exchange. Yet, by 2009, many of these developing countries were already achieving positive growth rates. While there is much variation across and within the regions, growth rates across the developing world generally fall below trend. Latin America and the Central Asia-Emerging Europe region saw sharp contractions of –2.6% and –6.2%, respectively. The other four developing regions each saw positive growth. Sub-Saharan Africa and the North African-Middle East regions grew more slowly at 1.1% and 2.9%, respectively. In contrast, emerging Asia again led the world in 2009, with South Asia growing by 5.7% and East Asia and the Pacific obtaining real GDP growth of 6.8% (WB [World Bank], GEP). These figures include the emerging global powers of China and India, which were, yet again, two of the world’s best performing economies.  Their size obviously skews the statistics.  If one excludes these giants from the calculation, the developing world contracted by –2.2% in 2009, as against 1.2% growth when China and India are included.  Nonetheless, it is clear that the global South fared much better than the North during this latest crisis and has emerged more quickly from it. Still, millions of people in developing countries have suffered incomparably due to their greater level of vulnerability prior to the crisis.

7.  The recent recession must be considered in light of a decade of strong growth prior to the global turmoil.  On average, developing economies grew, in real terms, by approximately 7% each year of the boom from 2003 to 2007. While much of the expansion was driven by Chinese and Indian growth rates at 11% and 9% respectively, virtually all countries performed significantly better than during the 1990s and early 2000s.  Except for emerging Eastern Europe, inflation rates in emerging economies in 2007 hovered around 6% during a period of large capital inflows and expanding credit.  Again excepting Eastern Europe, current account deficits and gross debt levels in developing and emerging economies generally remained modest and sustainable.

8.  While millions in the Least Developed Countries (LDCs) have suffered greatly throughout this latest global crisis, many of the investments made during the boom will yield long-term benefits.  Indeed, unlike previous investment booms (such as in the mid-1990s) a much greater share of the capital inflows to developing countries have gone into fixed capital formation rather than to one-off merger and acquisitions, short-term debt financing or to underwrite excessive consumption (UNCTAD, 2009). These investments have introduced a greater degree of resilience in many developing countries, helping them to weather the recent financial storm.

9.  We now know that the easing of global credit conditions from 2003 onwards was clearly unsustainable. Yet, the boost of relatively cheap capital to developing economies helped a number of middle-income countries break out of a ‘capital trap’.  From 2000 to 2007 net capital inflows to the developing world quintupled, while spreads on foreign debt fell from 6.56% to 1.68%. These inflows coupled with strong institutional and policy reform have placed many developing countries on a higher capital-output trajectory, which increases their prospects for long-term growth. An increasing capital-output ratio obviously reflects a country’s improving economic potential. Indeed, while rates of growth in GDP were undoubtedly impressive during the boom years, even more promising was the increase in potential output. The crisis, of course, has significantly reduced international capital flows while increasing the cost of borrowing; the growth of potential output has slowed accordingly. Developing countries, however, are clearly in better shape than they were a decade ago.  As the potential output of the developing world soared during the boom and retreated in the crisis, the percentage point decrease in potential output growth (approximately 0.2 to 0.7 percentage points lower per annum) is less than the boom period’s increase of 1.5 percentage points over the pre-boom period from 1995 to 2002 (WB, 2010).  This suggests that the developing world has clearly taken a step forward over the course of this recent global business cycle.

10.  The global credit boom from 2003 to 2007 was driven by a fatal combination of excess liquidity, macro-economic imbalances and poor financial regulation in the world’s major financial centres.  For its part, the developing world benefited from this rise in liquidity and enjoyed a significant increase in capital inflows during the boom (World Bank, 2010).  Properly handling this inflow required an important degree of banking reform in many countries – increasing their capacity for what is known as ‘domestic intermediation’ of capital inflows from abroad. Rising foreign investment is generally funnelled through domestic banking institutions. Mounting capital flows, in turn, helped to increase the size, liquidity base and, ultimately, the capacity of these institutions. 

11.  Varying regulatory environments constitutes a principal difference among developing countries.  Those countries with more sophisticated regulatory capacities have been better able to allocate capital inflows toward productive investments.  In other words, capital has tended to be put to the best use in those countries where sound governance structures and practices are in place (World Bank, 2010). 

12.  There are, however, important exceptions to this narrative of progress. Central Asia and parts of emerging Europe, for example, followed unsustainable financial and fiscal policies during the run-up to the crisis. The numbers suggest that capital inflows to these regions helped underwrite unsustainable levels of consumption, while government deficits run during these boom years provided little room for manoeuvre once the good times ended (NATO PA 2010 Report, “The Impact of the Financial Crisis on Central and Eastern Europe” [217 ESCEW 10 E]).  At the same time, the highly diverse group of Least Developed Countries continue to confront acute and persistent development challenges, and many are plagued by the kind of insecurity that makes development nearly impossible.  The unique plight of LDCs is explored below. 


III. COMMODITY AND FOOD PRICE MOVEMENTS

13.  The developmental challenges now facing the global South are obviously complex and myriad. The recent financial crisis is only a small part of the problem. Perhaps even more consequential, in some respects, was the preceding food crisis that had already begun to wreak havoc on the lives of millions of people prior to the global economic downturn. The developing world’s remarkable growth after 2003 also boosted global demand for a broad range of commodities. The rapid expansion of China and India’s middle classes has been particularly significant in this regard. Rising demand for food, and particularly for protein rich food, has been one factor generating pressure on primary commodity supplies.  Commodity price rises from 2003 to 2008 were the most acute in over a century in terms of degree, duration and the number of commodity groups affected (World Bank, 2009).  During this period, real non-energy commodity prices doubled and real energy prices rose 170% (World Bank, 2010).  In developing countries, these price rises struck the poor particularly hard, resulting in some cases in increased malnourishment and even political instability.

14.  Commodity price changes can have sharp effects on developing country growth as many developing economies rely heavily on the export of a handful of commodities. Price changes in just a few key commodities can therefore have serious impacts on the foreign exchange earnings of undiversified economies.  Managing an economy that is driven by commodity sales thus poses unique challenges.  Adding to this particular challenge is the growing interrelation between fuel and food supply and demand.  Petroleum products have long been key agricultural inputs and are used to make fertilisers, to operate farm equipment and to move product to world markets. But the link has been tightened recently as grainbased bio-fuel has become an important and highly subsidised petroleum substitute. Thus as energy prices rise, they increasingly drag along global food prices, particularly as arable land is increasingly diverted to fuel production.  Moreover, recent droughts in East Africa and Oceania led to poor harvests that further tightened global food supplies.  Of course, these price movements have varied effects on different economies, with oilexporters, for example, greatly benefiting from soaring fuel prices. 

15.  Ironically, hundreds of millions of small farmers and farm labourers were unable to capture the benefit of rising food prices.  Because the prices of the key inputs of energy and fertilisers rose in tandem with food price, small farmers often failed to achieve higher income on their production  (FAO, 2009).  Wages for the rural landless and earnings for small farmers stagnated while the cost of their basic foodstuffs soared.  Indeed, after years of steady increase, prices of wheat, rice and soybeans suddenly jumped 2- to 3-fold in the first quarter of 2008 (World Bank, 2010).  Obviously, food expenditures consume a far higher share of individual income in poor countries than in developed ones. Doubling or tripling these costs can thus quickly push millions of families into destitution.

16.  These substantial price increases proved short-lived as the global financial crisis began to undercut demand. Energy demand also declined precipitously both as a response to soaring prices and because consumer income was falling in many energy intensive economies. Falling energy prices also eased pressure on food prices, although food prices did not fall to the same extent as energy prices due to continuing market bottlenecks.  In the autumn of 2008, following the collapse of Lehman Brothers, commodity prices plunged with a momentum comparable only to the price increases of that spring. From July 2008 to February 2009, agricultural prices declined by 30%, metals fell by over 50% and energy prices plummeted by an incredible two-thirds in US$ terms (World Bank, 2010a). These declines, however, were often not translated into matching declines in local prices for many countries (World Bank, 2009b).  Since the first quarter of 2009, prices began to edge upwards as economic activity recovered. This immediately triggered concerns about a new rise in food prices (World Bank, 2009b).

17.  A recent joint FAO, OECD report (FAO, 2010) suggests that over the next decade coarse grain prices will, in real inflation-adjusted terms, rise by 15 to 40% above the 1997-2006 averages, while dairy and vegetable oils may well rise by over 40%.  This summer’s drought and forest fires in Russia, Ukraine and Kazakhstan led to the quickest increase in grain prices in three decades, with European wheat prices nearly doubling from 120€/tonne in April 2010 to a peak of 220€/tonne in early August 2010 (FT, 2010c).  Russia’s subsequent restrictions on wheat exports only heightened market uncertainty and price volatility. At the same time though, the FAO has estimated the number of hungry people in the world will drop by 9.6% in 2010 to 925 million, the first decline in 15 years.  This is due to the improving economic climate in many developing countries.  This figure, however, was produced prior the Russian action (Kilman). For the moment though, senior FAO economists are convinced that renewed growth is helping to reduce hunger levels. World wheat stocks are very high due to record harvests in 2008 and 2009 and, in FAO’s estimation, today’s price volatility is not likely to result in the kind of price surge that created the 2007 crisis.  Once again though the situation could vary significantly across regions, and some foresee far more trouble in Africa than in Asia and Latin America.

18.  As suggested above, these price movements have had varying effects on different developing countries. Of course, the real impact hinges on whether countries are net importers or exporters of a given commodity. The intensity of the domestic use of that commodity and/or the relative weight of that commodity in overall exports and GDP are also important.  Another factor is whether or not the income of a broad share of the population is derived in one way or another from the sale of a particular commodity or a basket of commodities or, in contrast, if income is highly concentrated in the hands of a narrow elite.  The capacity of a given developing country to convert commodities into intermediary or finished products and thus to derive income from higher value-added activities is also of great consequence.  Finally, although many developing countries rely heavily on the exports of particular commodities, neither producers nor consumers benefit from extreme price volatility because this fosters the kind of uncertainty that discourages economic activity and particularly investment. 


IV. INVESTMENT FLOWS

19.  The primary transmission mode of the global crisis was through the international financial system. The rapid increases in finance flowing to the developing world during the boom and the marked reversal during the global recession are central elements of this narrative.  Over the past 10 years, the composition of international capital flows to the developing work has changed markedly (BIS, 2009). In the 1980s and 1990s, capital inflows to developing countries largely underwrote short-term debt instrument which were often used to finance fiscal deficits or to sustain consumption rather than to bolster domestic capital formation (BIS, Turner 1995).  As suggested above, over the past decade inflowing capital was far more likely to underwrite productive investments. 

20.  The level of net capital inflows to developing countries, in aggregate, remained below 1% of GDP until the late 1980s.  Over the next 10 to 15 years, however, capital inflows more than doubled, although not all countries benefited equally (IMF, WDI database).   Low-income countries (LICs) received net inflows of just 0.24% of GDP in 1988.  Between 1997 and 2005 this figure rose to roughly 2% of GDP, subsequently rising to 2.87% in 2006 and 4.3% in 2007.  From 2000 to 2007 investment as a percentage of GDP rose between 32 to 38% in East Asia, and 23 to 34% in South Asia, again reflecting very high investment rates in China and India in particular.  While it is difficult to determine the actual productivity of these investments, rapidly expanding exports and industry’s rising share of value-added production in total output suggests that these funds were largely being put to productive use, although bad lending has certainly been a problem in some countries including China (IMF, WDI database).

21.  In 2009 net private capital flows to the global south fell by US$795 billion, a 70% drop from the 2007 historic peak (World Bank, 2010).  However, the magnitude of the reversal was far less than observed in previous crises and did not completely arrest capital flows to most regions.  While some countries lost access to international capital markets, more advanced emerging economies retained their capacity to issue international bonds and to win subscribers.  Amazingly, in 2009 corporate bond issued by developing countries reached US$109 billion, an increase of nearly US$5 billion over 2008, a reflection of investor confidence even during the downturn.  Turkey and the Philippines, for example, raised US$2 billion and US$1.5 billion in 2009, respectively (World Bank, 2010).  Thus, despite the drastic fall in global investment rates over the past two years the ‘flight to quality’ dynamic was certainly less pronounced in comparison to previous crises. One could alternatively argue that a number of developing countries have simply become quality destinations for investors.

22.  Investment levels in developing and emerging economies are also expected to rebound more quickly than in advanced economies.  UNCTAD (2009) has suggested that private capital flows to the developing world should grow quickly in 2010 and 2011, and might even match the 2007 peak figures by 2012.  The dramatic expansion of domestic savings and the development of local capital markets during the boom have also helped compensate for declines in foreign investment. The World Bank reports that in the first 11 months of 2009, new equity issuances in emerging economies reached US$98 billion, up from US$66 billion over the same period of 2008.

V. TRADE

23.  The profound impact of the crisis on global trade flows has been widely reported.  Falling international commercial activity has been one of the primary vehicles for spreading the impact of the crisis beyond the developed world. Throughout the global economic expansion earlier this decade, exports from developing countries rose precipitously in both value and quantity (World Bank, 2010). Indeed, developing country exports grew approximately four times faster than did advanced economy imports (WB Briefing Brussels). Such export growth, moreover, did not simply reflect soaring consumption in the developed world. Analysts suggest that developing country exports, in fact, have begun to displace Western exports (World Bank, 2010b).  In 2001 developed country exports accounted for 66.5% of the world’s total. By 2008 this share had fallen to 56.6% (UNCTAD, 2009).  These numbers point to growing “south-south” trade among developing countries.  Rather than capitalising on lower-wage rates alone, manufacturers in the more dynamic developing countries world have significantly improved total factor productivity over the past decade and are proving formidable competitors with developed country producers. Admittedly, there are other important factors behind this shift, including the lagged effects of lowertariff rates and increasing international investment.  However, increased productivity in developing countries is the driving force behind these significant changes.

24.  Growing productivity, however, is far more evident in middle-income rather than in the Least Developed Countries.  The latter often lack the infrastructure to exploit trade opportunities. They do not enjoy easy access to credit, and often are effectively locked out of international markets due to protectionist policies, particularly for agricultural goods.  Even in low value-added export sectors like agricultural commodities, LDCs have been losing ground to low- and middle-income developing countries (UNCTAD, 2009). The 49 LDCs are not engaged in high-value primary commodity production and are often structurally unable to exploit opportunities in the international economy. Support from the international community to help build trade-generating infrastructure will therefore remain a vital means to help LDCs break out from the underdevelopment trap. In the current economic climate, however, there are signs that several key donor countries are losing, the will to underwrite such efforts.  Thus, on the trade front, the gap is widening between the relatively dynamic emerging nations of the global South and those poorer countries that confront an array of structural, financial, political and security challenges that make it inordinately difficult to move their goods to global and even to regional markets. 

25.  Tariff rates for goods in which developed countries have a comparative advantage have fallen to the low single digits but remain very high on those products that poor countries export.  There were promises made in the 2000 Millennium Declaration to provide duty-free quota-free market access for virtually all exports from the leading developed countries.  This goal was reaffirmed at the 2005 WTO Ministerial Conference, but little action has since been taken. Ministers at that meeting also called on emerging countries to extend LDCs open market access.  One problem is that the Doha Round has stalled and will likely not be concluded for some time.  Today high levels of agricultural protection in North America and Europe only compound the problems these countries confront.  But there is also a dense web of south-south trade restrictions that penalise developing countries (World Bank, 2010c).  On the other hand, the international community has so far largely resisted the temptation to respond to the economic downturn by raising tariff and non-tariff barriers.  During the 1930s the great economic powers engaged in a “beggar thy neighbour” tariff war that exacted a terrible toll on all economies.  Opening trade rather than restricting it is the best means to respond to falling global economic growth.

26.  At Gleneagles in 2005 the G-8 called for the successful completion of the Doha Development Round; yet those negotiations came to a crashing halt in 2006. They have since resumed, but the gaps in negotiating positions remain formidable (UNCTAD/WTO, 2009).  Any breakthrough in Geneva would create some optimism about a trade-driven boost to the global economy, but the prospects for this are not particularly bright.  The first round of serious negotiations were held at the end of March 2010, but no tangible framework for resolving outstanding disagreements has yet emerged.  Apart from continued calls for more concerted negotiations, there have been no further signs of progress. To be sure the complexities are daunting, but the benefits of a timely agreement far outweigh the concessions that will be needed to achieve a breakthrough.


VI. FISCAL AND MACROECONOMIC CHALLENGES

27.  As a result of the global economic downturn, the World Bank’s initial 2007 projection for the global output level in 2011 will now likely only be reached in 2014 (IMF, WEO 2009).  Meanwhile advanced economies are expected to grow, in real terms, by approximately 12% from 2006 to 2014 – a level previously expected to be achieved by 2010.  The World Bank estimates that the rate of per annum growth of potential output for developing countries will be 0.2 and 0.7 percentage points less over the next five years than had previously been expected. This translates into a fall in the long-run level of potential output of between 3.4% and 8.0% against the pre-crisis scenario (World Bank, 2010).

28.  Rising capital costs are going to continue to pose problems.  The World Bank (2010) estimates that: “The borrowing costs developing countries face could rise by between 110 and 220 basis points compared with their boom-period levels”.  In practical terms, this suggests that some developing country governments will have to slash core spending programmes that have long been seen as vital planks for long-term development.  With debt levels soaring in the OECD, higher developed country borrowing could begin to crowd out developing country borrowing. Most developing countries entered the current crisis with fiscal deficits made all the more burdensome by exploding food and fuel prices.  All of these factors will add to the cost of debt financing.

29.  A key question for developed economies over the next two to six quarters will be how and when to unravel the fiscal and monetary supports that were put in place at the height of the crisis.  Reining in the loose monetary policy will invariably result in interest rate hikes.  This is unavoidable because exceptionally low nominal interest rates (below 1% in real terms) provide little room for monetary responses to future downturns; that space must soon be created or Central Banks risk losing control of a critical monetary tool. Yet, even in economies where loosened monetary policy was not part of the crisis response, comparatively higher interest rates could attract destabilising capital flows, particularly in those countries maintaining open capital accounts.  Therefore, in considering the return to normal monetary operations, developing countries must be conscious of both the effects on local credit conditions and of their exposure to developments in large credit markets in the advanced economies. At the G-20 meeting in June 2010 the consensus view was that consolidation efforts must soon begin to proceed, but there was little guidance as to when this should begin. In fact, it is already underway.  But if Western fiscal tightening unfolds prematurely, this could slow down export markets for developing countries. An uneven and unco-ordinated tightening of monetary policy could generate destabilising ‘carry trade’ or speculative financial flows. This is all generally discussed as a matter for Western governments, but developing countries are hardly insulated from these developments.

30.  Not surprisingly, the current crisis has also opened an important debate about global financial architecture. The desirability of an open trading regime represents the one area where consensus reigns among economists. But as suggested above, the Doha Round has all but stalled – tied-up in seemingly interminable battles over agricultural subsidies and market opening (Bhagwati, 2009).  There is far less consensus among economists about matters pertaining to financial liberalisation and capital account openness than there is about the virtues of free trade (WSJ, 2010, WB, GEP 2010).  Even the IMF, long a supporter of unhindered capital mobility, now implicitly recognises the potential need for capital controls in countries with under-developed financial sectors (IMF, 2010). 

31.  Indeed, under-regulated financial markets have been seen as one of the key causes of the global economic crisis (Baily). However, the impact of financial liberalisation on economic stability in developing countries remains a source of some contention.  Since the Asian financial crisis of the 1990s, economists have had to weigh the risks of moving too early to liberalise the capital account against the possibility of cutting developing countries off from potential capital inflows. That debate has re-emerged as a result of the current crisis, and more economists and policymakers have begun to recognise the risks of premature financial opening to so-called “hot money”, particularly in the absence of a robust regulatory framework.  It is thus far less common today to hear economists arguing for full capital market liberalisation in developing countries.


VII. POVERTY EFFECTS

32.  It is estimated that the crisis has pushed an additional 64 million people into absolute poverty (World Bank, GEP).  Another study found that in Africa some 30,000 to 50,000 children under the age of five died in 2009 due to the impact of the global economic crisis (Friedman and Schady, 2009). As always, it is the poorest segments of society that are at the greatest risk of falling into extreme poverty in a downturn. The impacts of extreme poverty can be long-lasting, and it can be very difficult to move back above the poverty line after falling below it (Ravallion, 2008).  Getting the millions that have fallen below the poverty line out of that predicament now poses one of the greatest challenges for national and international policymakers.

33.  As suggested above, the first signs of economic difficulties in the developing world did not start with the crash of Lehman Brothers, but rather when commodity prices began to soar.  Many poor families and farmers found themselves in a weaker position as a result.  In Kenya farm-gate prices remained flat while the cost of fertiliser tripled in a six-month period.  Rising transportation costs, in turn, blunted incentives for boosting food production (FAO, 2009). Malnutrition levels were thus already on the rise in 2008 before the global recession struck.  Indeed, between 2004 and 2008 the proportion of chronically hungry people in the world increased for the first time since 1970 when records began – a trend that only worsened in 2009 (FAO, 2009).

34.  The UN’s Food and Agricultural Organisation (FAO) estimates that the number of undernourished people worldwide rose from 915 million in 2008 to 1.02 billion in 2009 – the highest numbers recorded since 1970. Indeed, global under-nourishment had consistently fallen in absolute terms from 1970 to 1995. But, it subsequently began to rise despite increasing GDP growth rates in developing countries – a reflection of the rising inequality that often accompanies economic growth.  The UN’s Standing Committee on Nutrition (UNSCN) projects that the number of underweight children below the age of five will increase to 143 million, 5 million more than if the 2007 projections had remained constant.  Similarly, 50 million pregnant women suffer from anaemia (UNSCN, 2010), which often leads to serious life-long mental and physical challenges for these soon-to-be born children. Certainly, the consequences of today’s malnutrition can be expected to endure for several generations in both obvious and in subtler but equally devastating ways.

35.  The decline or loss of household income has also aggravated the situation for millions of impoverished people.  The International Labour Organisation (ILO) reports that, after four years of absolute decline, the total number of unemployed people in 2008 increased by 7.2 million, from 177.7 to 184.9 million. Its estimate for 2010 worldwide unemployment ranges from 201.9 million to 221.2 million. Global unemployment rate will likely reach 6.6% in 2010, with a rate of 13.4% for the world’s youth (ILO, 2010). While the jobs crisis in the developing world is still unfolding, it is clear that many urban labourers are being pushed into informal markets (where wages are lower) or are being compelled to return to their rural homelands to work in the marginal and already overemployed agricultural sectors.  According to the ILO, “between 40 and 50% of the world’s working men and women in 2009 are not expected to earn enough to lift themselves and their families above the US$2 a day per person poverty line” (ILO, 2009).  The harsh reality of inadequate food and rising unemployment will pose serious challenges to social, economic and security stability.

36.  Many developing countries are dependent on food imports (FAO, 2009).  This obviously increases their need to generate foreign exchange through exports, foreign investment, Official Development Assistance (ODA) and remittances.  Of these, FDI has declined the most while ODA and remittance flows have remained somewhat more stable.  While remittances have traditionally assumed counter-cyclical functions during difficult economic times, this crisis has hit labour-importing countries in Europe, North America and the Gulf Region particularly hard and thereby reduced global remittance earnings.  Remittance flows fell from a historic high in 2007 of US$338 billion to US$317 in 2008, a drop of 6.1%.  There is even evidence of ‘reverse remittances’ from Mexico to the United States before the recessionary impact of the crisis struck Mexico.  The World Bank expects remittance flows to recover only slightly in 2010 and 2011, as industrialised countries struggle to revive their economies in the face of massive fiscal shortfalls (World Bank, 2009).  Rising anti-immigration sentiments in the United States and in Europe could add further political complications, unless governments adopt more realistic immigration policies that better align regulations with economic and social reality.

37.  Even before the crisis, it had become evident that most Millennium Development Goals (MDGs) would not be achieved by 2015.  Upon entering the crisis, 40% of developing countries were highly exposed to poverty effects of food and energy price increases (with both declining growth rates and high levels of poverty), while most others were moderately exposed (World Bank, 2009c).  Yet, high growth rates achieved during the boom had lifted millions out of poverty and seemed to have put the world on a path toward halving global poverty by 2015 (MDG 1).  Unfortunately, the earlier food and fuel crises “pushed an estimated 160 million to 200 million more people into extreme poverty” (World Bank, 2009c).  As trade and GDP rebound, fewer people will rise above the poverty line than the number pushed below it as a result of the crisis at least over the short-term. The concern is that millions have essentially been caught in a poverty trap that could vitiate the benefits of revived global growth.

38.  Preliminary studies suggest that the impact of the crisis will ultimately cause the death of 200,000 to 400,000 infants over the next five years (World Bank, 2009c), reversing progress toward the goal of reducing the mortality rate by two-thirds (MDG 4). Education will also be adversely affected and will very likely reduce school enrolment. Girls’ school enrolment will fall more than that of boys, similarly mitigating progress towards gender equality in education (MDG 3.1).  The consequences for the next generation’s productivity, their mental faculties and physical health are unquantifiable but malnutrition and extreme poverty will likely have a consequential impact on all of these indicators.

39.  It should be noted, however, that the central Millennium Development Goal of reducing poverty levels by half from their 1990 level by 2015 remains on track (World Bank 2010).  But, progress toward this goal is almost entirely due to the stunning growth of the Chinese and Indian economies over the past decade, where tens of millions have been lifted out of poverty.  But while growth in East and South Asia is, on the whole, impressive, the performance in sub-Saharan Africa has lagged significantly behind.  Based on pre-crisis trends, even extending the timeline by five years to 2020 would not provide sufficient time to reduce poverty by half in sub-Saharan Africa (World Bank, 2010). It should be noted here that 31 of the 49 LDCs are located in sub-Saharan Africa.  In these countries, by definition, the average income per capita is below US$905 (PPP [Purchasing Power Parity] GNI). School enrolment and adult literacy levels are unacceptably low. Child mortality and malnutrition levels rates are high and national economies remain fragile (UNCTAD, 2009). 

40.  Most LDCs are in sub-Saharan Africa, with two in the Middle East and North Africa, one in Latin America, five in South Asia and six in East Asia and the Pacific.  LDCs differ widely in terms of their size, level of democratisation and economic and political challenges.  They remain largely isolated from international capital markets, which, while providing some insulation from the financial crisis has also reduced their capacity to underwrite desperately needed investments.  Falling aid levels and remittances, and the collapse of trade have worsened the plight of millions in the LDCs.  Even during the boom, LDCs were nowhere near the trend lines needed to halve poverty by 2015.  These economies are generally not sufficiently diversified and remain vulnerable to the price shifts of a few key commodities.  Governments from these countries have almost no fiscal leeway to engage in counter-cyclical spending to bolster demand on the downswing and are thus denied a critical tool for managing external shocks (UNCTAD, 2009).

41.  It is nonetheless important to recognise that for much of the past decade many LDCs experienced positive growth rates.  This growth can be attributed to a number of factors including: high remittances, unprecedented rates of gross capital formation, rising commodity prices and important influxes of increasingly better-calibrated ODA. In 2007 remittances accounted for 3.9% of LDCs’ gross domestic product, while official development assistance accounted for 8.0%; both proportions were below their recent peaks of 4.2% (2004) and 11.5% (2003), respectively (WDI database).  Neither of these factors can be ignored, and a significant retrenchment of either would compound the already precarious situation in these 49 countries.

42.  The challenges confronting the poorest sixth of the world transcend any fallout from the recent financial crisis. The sources of their worsening plight include the structure of global food markets, trade protectionism, war and instability, the unique problems of fragile states, poor governance and infrastructure, the uneven distribution of wealth and chronic unemployment. The relatively strong performance of many developing countries in this crisis has thus not significantly ameliorated conditions in the poorest countries.  Failing states are a particular concern. A country like Somalia, for example, where the central state has essentially lost control of the hinterland, poses a threat to regional stability at the same time that its people are enduring a humanitarian tragedy (Marozzi).

43.  This is precisely why it is so important to maintain Western aid programmes despite serious fiscal pressures.  The provision of technical and financial support for badly needed infrastructure in LDCs (and in middle-income countries), for example, will help these countries generate stronger growth employment and business opportunities.  This is as much a security imperative as it is a humanitarian challenge.  Helping to create economic opportunities for the most vulnerable will continue to remain a vital pillar of global security.


VIII. INTERNATIONAL COMMUNITY RESPONSE TO DEVELOPING COUNTRY NEEDS

44.  The international community’s reaction to the crisis in developing countries was relatively swift.  This proved particularly helpful as did the fact that the crisis struck the developing world in a delayed fashion, giving policymakers time to prepare for the inevitable knock-on effects of the Wall Street crisis.  Concerted international action helped prevent panic and kept solvent many vulnerable countries, which lacked the fiscal space to respond on their own. Government leaders meeting at the April 2009 G-20 London Summit, for example, agreed to a 200% increase in the IMF resources - from US$250 billion to US$750 billion, a sum which included special drawing rights (SDR) facilities of US$250 billion. It also deemed that US$6 billion generated through IMF gold sale proceeds should be lent to the world’s poorest nations with an additional US$100 billion placed at the disposal of multilateral development banks.  For its part, the IMF has reformed its lending bodies, including the introduction of a rapid response facility known as the ‘flexible credit line’. This is a vehicle for providing emergency financing to countries facing strong macroeconomic and financial pressures. Moreover, the G7 nations pledged to underwrite debt relief, improvements in educational capacity, and water and sanitation services. They also promised greater investment in agriculture and more market access for sub-Saharan African producers. 

45.  From the early 1980s until very recently, the IMF required developing countries confronting financial crises to boost interest rates, slash deficits, reduce trade barriers and devalue currencies in order to qualify for emergency funding.  It was a one-size-fits-all policy response to financial crisis, which did not always work as planned. The Asian Financial crisis in the late 1990s demonstrated that such prescriptions were not necessarily appropriate. Since then, a number of Asian countries have chosen to hoard their own capital in order to garner the resources needed to manage a global or regional downturn rather than to have to turn to the IMF and its set of policy prescriptions.  Yet the IMF has also learned from its mistakes and has developed new tools to help developing countries survive the financial and commercial shocks of the past two years. Importantly, it has not reverted to simple pleas for austere monetary and fiscal policies, which can have very adverse effects on critical social and development spending (Davis, 28 September 2009). The Fund has also sought to restructure its own operations in such a way as to improve its crisis prevention and crisis response capacities. It is seeking to ease some of the tensions arising out of the high demand for global liquidity by emerging market economies and their dependence on the stability of a very limited number of suppliers of this liquidity.  Achieving this particular goal ranks among the central financial challenges to the international system today (IMF Survey, 26 February 2010).

46.  This summer the IMF announced that it would further expand the kinds of loans it makes to help developing countries on the cusp of financial crisis.  This substantial “precautionary credit line” for as much as five times a country’s normal quota would be extended to countries pursuing sound macro-economic policies but facing potential future difficulties.  The IMF would, however, impose conditions on recipients which would be designed to correct structural deficiencies in areas like trade and fiscal policy, monetary policy, financial regulation and transparency.  One problem is that recipients of these kinds of loans might feel stigmatised in global markets, and this, of course, has a price. Three countries have so far taken out these flexible credit lines: Mexico, Columbia and Poland. The IMF is also developing a “global stabilisation mechanism”, which would be available for groups of countries, thereby reducing the potential stigma of IMF borrowing.  This idea has been pushed by Asian nations which remain very concerned about IMF lending and conditionality (Davis, 31 August 2010).

47.  For its part, the World Bank ramped up lending to middle income nations to a record US$33 billion in FY09 to 30 June as part of a three-year US$100 billion-dollar burst of lending to support global demand.  It also launched an initiative to raise funds to buy distressed assets from banks in emerging and developing markets to help them clean up their balance sheets and to free up credit flows.  This was in response to the problem that rising losses on loans were straining bank balance sheets.  The International Finance Corporation (the World Bank’s private sector wing) will commit US$1.5 billion to this effort and hopes to raise an additional US$4 billion.  There has been uncertainty about future financing capacity for the World Bank.  While developing nations unanimously support a capital increase for the World Bank, some in the developed world have been highly reluctant to endorse this course (Guha, Strauss and Giles).


IX. DEVELOPMENT ASSISTANCE

48.  Although rapidly developing emerging economies have largely managed to wean themselves from development assistance, LDCs, in particularly, remain highly dependent on external support to underwrite vital infrastructure development, capacity building and human development.  The 11 most aid-dependent LDCs in sub-Saharan Africa rely on foreign grants for approximately 25% to 50% of government expenditure (UNCTAD, 2009).  The problem today is that fiscal problems in donor countries are putting enormous pressure on aid budgets.  This, in turn, could lead to reduced expenditures on infrastructure, education and healthcare with long-term and adverse effects on the poorest developing countries.

49.  It is becoming increasingly clear that because of the global financial and economic crisis and faltering political will in this harsh economic climate, the aid targets laid out at Gleneagles will not be met. The DAC (Development Assistance Committee)-EU 16 and the seven non-EU members are currently not meeting collective commitments solemnly undertaken at that meeting.  One recent OECD DAC study suggested that overseas aid has fallen US$21 billion short of the promises made at the Gleneagles Summit five years ago.  Seven of the 23 OECD DAC member countries have reduced aid levels due to domestic budgetary pressures (NATO PA OECD meeting, February 2010). DAC figures also show that aid has increased by 35% since 2004; but there is still a large and persistent gap between aid promised and actual aid delivered – US$17 billion of this shortfall is due to unmet promises from donor governments; but US$4 billion of the deficit stems from aid pledges linked to set percentages of donor country income.  In these cases, the global economic downturn has simply shrunk the size of certain donor economies that set aid levels in this manner, and this, in turn, has triggered reductions in development assistance.

50.  Although most donor countries are slated to meet their aid commitments, the underperformance of several large donors will generate a significant shortfall in overall promised aid. In 2005, the 15 countries, members of both the EU and the DAC, committed to reach a minimum Official Development Assistance country target in 2010 of 0.51% of their Gross National Income (GNI is a measure of a country’s annual income based on the total value of goods and services produced within its territory, plus net income received from other countries in such forms as interest payments and dividends). Several countries will surpass that goal: Sweden, with the world’s highest ODA as a percentage of its GNI stands at 1.03% and is followed by Luxembourg (1%), Denmark (0.83%), the Netherlands (0.8%), Belgium (0.7%), the United Kingdom (0.56%), Finland (0.55%), Ireland (0.52%) and Spain (0.51%)1.

51.  But others will fall short: France (0.46%), Germany (0.40%), Austria (0.37%), Portugal (0.34%), Greece (0.21%) and Italy (0.20%), have all slashed aid below their Gleneagles pledges (DAC Members’ Commitments and Performance).  At 0.2% and 0.18% of GNI, respectively, the United States and Japan remain the lowest aid givers in terms of percentage of GNI in the DAC, although Japan’s aid level is higher than the 0.18% pledge made in 2005. At Gleneagles the United States had pledged to double aid to sub-Saharan Africa between 2004 and 2010.  Canada promised to double its 2001 International Assistance Envelope level by 2010 in nominal terms while Australia aimed to reach AU$4 billion.  New Zealand plans to achieve an ODA level of NZ$600 million by 2012-13.  According to the OECD, all four countries are on track to meet these objectives. Norway will maintain its ODA level of 1% of its GNI, and Switzerland will likely reach 0.47% of its GNI, exceeding its previous commitment of 0.41%.

52.  Vigilance is going to be required even to maintain current aid promises. With debt levels soaring in the OECD, a number of countries, including several major aid donors will face very serious and politically difficult budget consolidation demands.  Aid budgets are highly vulnerable in this climate, as their domestic constituencies are generally not very powerful. This political deficiency becomes all the more apparent when fiscal pressures mount. Of course, the security implications of failing to act must also be factored in to the aid debate, although doing so is not always easy for the development community.

53.  If anything, the global financial crisis has brought the development-security nexus into far greater focus. Many analysts have worried that the global crisis could push the most vulnerable developing countries to the edge of collapse.  This would not only have catastrophic humanitarian implications, but is obviously a security challenge in its own right and of great concern to organisations like NATO which is currently deployed not only in Afghanistan but also off the coast of East Africa, where highly fragile and dysfunctional states are unable to assert control over pirates off their waters.  Fragile states there, as elsewhere, pose critical security as well as humanitarian challenges.  In a time of generalised global economic difficulties, the resources normally dedicated to coping with these challenges can be put at risk, adding to the already formidable array of problems these vulnerable countries confront. These concerns are conditioning the international community’s efforts to help countries in difficulty manage the current crisis but the resources to do so often fall short.

54.  The local, regional and international security threats that emerge from failed states and from failed development policies can only be successfully addressed by adopting a broader vision of these problems. Obviously prevention is the best approach to impending security challenges, and it is vital that fragile states are supported in such a way that genuine security problems are minimised.  NATO’s New Strategic Concept should provide an opportunity to reinforce the Alliance’s Comprehensive Strategy, which has done a great deal to make the securitydevelopment nexus a central element in NATO’s approach to conflict-ridden countries.  NATO’s experience in Afghanistan and its anti-piracy patrols off the Somali coast have thus only reinforced the view that fragile states are of direct security concern to NATO member nations and that non-military as well as military strategies are needed to cope with these difficult challenges.


X. CHINA IN AFRICA

55.  China’s rapid economic expansion over the past two decades has greatly increased the country’s international clout.  While China remains a developing country with a per capita income well below Western levels, it is nonetheless assuming an ever more prominent role in shaping the international economic and development agenda. China’s rapidly evolving role as a donor to the developing world, particularly to Africa, is an interesting case in this regard.  

56.  In some development circles, there have been suspicions regarding Chinese motives and methods, although there is also recognition among others that China can positively contribute to the development agenda (FT, 2006a; FT, 2006b).  African leaders are generally positive about China’s arrival, arguing that it has indeed provided a counterweight to Western donors and investors. This view is not shared in Western development circles and some African development and human rights groups have also been critical (FT, 2010a).  China, they argue, is disbursing aid in a targeted fashion to secure access to raw materials and paying little heed to the governance and human rights agenda that Western governments have been advancing with their African partners in recent years. Chinese development support, they argue, lacks the transparency and regularised reporting that is now routinely demanded of Western aid agencies, NGOs and multilateral lenders.

57.  In fact, the situation is somewhat more nuanced. Even when it was a closed and largely underdeveloped economy in the 1960s and 1970s, China had already begun investing in African infrastructure, including the Tanzania-Zambia Railway.  The introduction of domestic market reforms rapidly bolstered Chinese engagement in global trade and investment and ultimately deepened ties to Africa. By 2000, Chinese corporations had embarked upon 500 investment projects in Africa and two-way trade surpassed US$10 billion (Brautigam, 2009), rising to nearly US$60 billion in 2006 (World Bank, 2008).  By 2008, this figure had nearly doubled (Trade Map, 2010). African exports to China have increased in volume and value more quickly than imports, and Africa’s terms of trade have improved by 80%-90% from 2001 to 2006 (World Bank, 2008). China’s imports from Africa are largely concentrated on raw materials such as oil, copper and bauxite, but they also cover an array of low-end manufactures following China’s elimination of 440 import tariffs on African commodities (Brautigam, 2009). As most of this trade is conducted along commercial lines, Chinese-African trade is very similar in composition to US and EU trade with Africa (IMF, 2008, table 3).

58.  This deepening economic relationship between China and Africa has also involved growing investment and Official Development Assistance.  Again, these financial flows have been greeted with a degree of suspicion in the West.  First of all, China’s statistical reporting leaves much to be desired. There is a level of unsettling opacity in figures measuring these flows as well as in the specific arrangements surrounding ODA. Part of the problem is that China’s political and economic system is structured very differently from those of the West; the level of state engagement at the firm level is far more pronounced and there is no real culture encouraging public scrutiny of government activity. Comparing Western (private) FDI or (public) ODA to those of China is often misleading. 

59.  China’s definition of ‘aid’ also differs greatly from the OECD’s definition.  For China, ‘aid’ includes only grants and zero-interest loans.  The OECD’s definition of ODA includes, for example, debt-relief and ‘concessional loans’.  Such loans are understood to be made “with the promotion of economic development and welfare as the main objective”, and as “having a grant element of least 25%” (OECD, 2010).  Whereas China’s aid is approved by the Ministry of Finance (MoF) and managed by the Ministry of Commerce’s Bureau of Foreign Economic co-operation, China’s Exim Bank extends concessional loans while the grant element is covered by the MoF’s aid budget.  China often asks for some preferential treatment in exchange for these loans, i.e. tax-free repatriation of the payments on the loan; relief on import tariffs for inputs; and lower-income tax (Brautigam, 2009).  The mix of a grant element, commercial bonds and reciprocal concessions makes categorising Chinese concessional loans extremely challenging.

60.  Such definitional and administrative differences have led to widely divergent appraisals of China’s aid to Africa.  By its own definition, Chinese foreign assistance increased from about US$309 million in 2006 to US$600 million in 2009 (i.e., the doubling of aid China promised at the 2006 FOCAC [Forum on China-Africa Co-operation]).  At the other extreme, a Congressional Research Service paper included estimates for all investments that received export credits from China Exim Bank.  The authors of this study suggest that China’s “reported aid” to Africa doubled from 2006 to 2007, from roughly US$9 to US$18 billion (CRS, 2009).  This would have made China’s 2007 ‘aid budget’ greater than the sum of assistance from the World Bank, the United States and the United Kingdom’s development assistance.  Both the World Bank and the IMF reported that “the last officially reported flows are for 2002 [when China] reported that it provided US$1.8 billion in economic support to Africa” (World Bank, 2007; IMF, 2007).  Both reports note that that this figure includes both concessionary and non-concessionary loans and is thus not aligned with the OECD’s definition of ODA.  “Economic co-operation” in China refers to all work in Africa contracted to Chinese companies, be it a contract from the World Bank, African governments or other private enterprises (Brautigam, 2009).  Clearly, when it comes to Chinese aid and investment statistics, one must remain extremely cautious in interpreting numbers from even the most reputable of sources.

61.  According to one comprehensive study on China’s role in Africa, and using OECD definitions, Chinese ODA rose from US$687 million in 2002 to an estimated US$2.5 billion in 2009 (Brautigam, 2009).  This level, however, remains a small fraction of the 2007 World Bank ODA (US$6.9 billion), US ODA (US$7.6 billion) and European2 ODA (US$15.4 billion).  While the China Exim Bank has been increasing its concessional lending (from an average of about 14 loans per year to 24 in 2005 and 29 in 2006), the great bulk of Chinese investments are commercial in nature.

62.  Und,, oubtedly, the Chinese government has worked to gain access to Africa’s oil, copper, gold and other raw materials that it needs to meet burgeoning demand in the Chinese market for production inputs.  China’s aid policy is not exclusively focused on this end, although it is certainly linked. Beijing provides assistance to every country in Africa that does not recognise Taiwan as an independent state.  Even those countries are not prevented from conducting commercial relations with Chinese businesses (Brautigam, 2009).  Despite the millions of aid and investment for a range of projects across the continent, the multi-billion-dollar infrastructure-for-resources deals in Angola and the Democratic Republic of Congo (DRC) have attracted the most attention (BBC, 2009).  These investment agreements are often referred to as ‘aid’ when, in fact, they are almost entirely commercial in nature.  In the DRC, for example, China Exim Bank agreed to finance US$6 billion of infrastructure ranging from roads to electrification to university investment.  The interest rate has been commercially pegged to the LIBOR (London Interbank Offered Rate), but with little foreign exchange, the DRC uses a copper and a cobalt mine as collateral.  Coupon payments are taken directly from export receipts (in Namibia, the equivalent is offshore oil).  The development economist Paul Collier, among others, has noted that such deals have often been one-sided, as China is pulling out far more value from the mines than China is providing in finance. China has also been rightly criticised for its poor record on workers’ rights and environmental protection, and the practice of bringing Chinese workers to work on infrastructure projects is obviously a source of controversy particularly among African workers.  Chinese companies are also often accused of bribery, but Western countries themselves do not have an exemplary record in this regard.


XI. CONCLUSION AND RECOMMENDATIONS

63.  Fragile states need special support when shocks roil the world economy.  In cases when suddenly rising food or energy prices or the collapse of credit markets literally put millions of already vulnerable people into even greater risk, the international community needs wellcalibrated tools and policies to deliver sufficient critical support in timely fashion. Increasingly, fragile states are caught in a web of regional tensions and conflicts that cannot be addressed at strictly national levels; so regional assistance strategies will therefore remain essential.

64.  Emergency assistance must remain focused on stabilisation, which, however, is only the first step toward long-term development.  Along these lines, our countries must rally to support Pakistan, which has suffered one of the worst natural catastrophes in recent decades, directly striking an estimated 20 million people.  Floods have devastated a large swathe of that strife-torn country, which remains a lynchpin of security in South-Western Asia.

65.  In conflict-ridden regions in which NATO forces might be deployed, supporting state reconstruction will generally rank among the top priorities.  NATO can make a difference here, but only by cooperating broadly with local and national officials and other key actors.  Solutions must rest on the specific circumstances of the country, institutions and individuals involved, but defence planners must be ever-cognisant of the security consequences of illegitimate or dysfunctional states.  NATO’s intervention in Afghanistan, Operation Active Endeavour in the Mediterranean, and Operation Ocean Shield off the coast of the Horn of Africa are not likely to be the last NATO deployments in or on the edge of the developing world. NATO’s New Strategic Concept should be deisgned to help the Alliance cope with these critical security challenges.

66.  At the same time, longer-term development strategies are needed for building state capacity at local and national levels.  Clearly, no development can take place in the absence of legitimate political authority. Aid efforts in fragile or post-conflict regions should aim to help local and central governments deliver practical benefits to their people and to develop the habits of accountability and transparency.  This is the key to building legitimacy in regions where state authority has been either tyrannical or absent.  In such cases, it is particularly important that local and national authorities rather than donors are positioned to take credit for improving the lives of people.  Obviously introducing systems for minimising corruption ought to be part of this process. These principles are outlined in OECD’s 2005 Paris Declaration for Aid Effectiveness.

67.  In an era of increasingly tight budgets, it is imperative that all areas of our government policies be subject to tough financial scrutiny to ensure that there is a match between means and ends.  This is particularly true in the area of development assistance, which often enjoys only marginal domestic support in donor countries.  Our taxpayers therefore need to understand that development support extended by governments is targeted, transparent and ultimately effective and that it serves not only humanitarian ends but also that national security are goals broadly defined. Development support should obviously be closely tied to the implementation of sound economic policies and particularly close relations should be established with those countries that demonstrate a clear political will to implement good economic policy and exercise proper governance.

68.  Along these lines, Western donors and representatives of international lending institutions need to continue their dialogue with China. That conversation should focus on the manner in which China furnishes aid to these countries.  Critics charge that in an effort to secure access to a range of raw materials, China gives aid without conditions to a range of African governments, which undermines efforts to improve governance in this part of the world (Jopson). China is positioned to exercise ever greater influence in developing countries and its own experience can be a valuable and instructive contribution.  Indeed, its focus on critical infrastructure development has great potential. In Nigeria, for example, the Chinese are negotiating to endow that country with an energy refining capacity that it has never had.  This deficiency has long compelled that major energy exporter to import final petroleum products. Such deals have the potential to be of great benefit to Africa.

69.  Donor and African countries alike should continue a dialogue with China on the lessons learned in development assistance programmes.  China has its own approaches and interests, but signs also exist that it is willing to draw on those experiences of traditional donor countries.  As the donor community works to better co-ordinate policy and to pool resources, it should also work to make sure that China is part of this effort.  Efforts are needed to encourage China not to allow its business interests to become mixed up with efforts to prop up several of Africa’s most oppressive governments, including those in Sudan and Zimbabwe.

70.  Donor countries must continue to work to co-ordinate aid and development policy.  This offers the best way of deriving cost-effective advantage from tight and politically vulnerable development budgets.  Moreover, a developing country hosts on average 260 visits a year from donors.  Often these donors have different or even conflicting methods and ambitions (Zoellick).  Anything that can be done to minimise the complexity of the aid landscape will reduce the burden on developing countries and help them focus on development rather than filling out forms to satisfy donor governments. For fragile countries, such bureaucracy consumes far too much time and talent. Pooling resources through the creation of trust funds and constructing reasonable divisions of labour among donors can minimise the burden on recipient countries, allowing them to focus on the development tasks at hand (Zoellick).

71.  Achieving better results with ever scarcer aid funds is now essential. In an era of narrowing fiscal margins in developed countries, national aid and development policies will increasingly be expected to show positive results so that these programmes can be justified to taxpayers.  One consequence of this is that national aid and development efforts will have to be far better coordinated and “multilateralised” in order to achieve “greater bang for the buck” (Beattie). More efforts are essential to “untie” aid, to render it more transparent and to streamline development assistance bureaucracies at the national and international levels.  Donors should publish post-facto assessments of aid projects so that mistakes are not repeated and to reinforce best practices.  Efforts are also needed to employ the financial management systems of recipient countries rather than the donors; failure to do so generates very high duplication costs.  It is noteworthy that the Obama Administration is now exploring a number of reforms in these areas despite the resistance of very powerful domestic interest groups that reap all manner of benefits from the aid contracting business (Beattie, Dombey).

72.  Achieving sustainable development requires vision, long and patient engagement, and the implementation of solid economic policies.  Setbacks are inevitable.  The problem in this television and Internet age is that once a country falls off the media radar screen, support for that country invariably begins to dry up. This is utterly counterproductive.  Long-term engagement is needed to affect positive change particularly in very fragile regions.  Support for those programmes which will contribute to long-term development is particularly critical.  At the most basic level, food and health systems must be sustained at a moment of global crisis to ensure good health - an essential prerequisite of development.  Education support is also essential so that skill levels are raised rather than eroded even during difficult moments (Brown).  Improving access to education represents one of the best means to lower inequality in emerging economies.

73.  As developed and emerging countries begin what one hopes will be an orderly and co-operative exit from fiscal and monetary stimulus programmes, they will need to ensure that doing so does not introduce aid and credit shocks into the developing world.  One idea to ensure that continued liquidity is for the IMF to provide an insurance fund that emerging countries could tap into in the event of a sudden liquidity crisis.  This would help move these growing economies away from an ingrained tendency to hoard cash, which was reinforced in the last Asian financial crisis.  This might help mitigate risk and do more to correct global imbalances, which are exacerbated by undervalued currencies that help produce these foreign exchange stockpiles.

74.  Particular attention must also be paid to food prices over the coming months. It is possible that a gathering global recovery could further drive up food and energy prices. In recent months these prices have indeed begun to rise again, driven, in part, by Russia’s grain export ban. Soaring food prices hit the poor disproportionately and small supply shifts can have very significant global price effects. Persistent structural problems continue to plague food markets, although the global slowdown temporarily obfuscated some of these.  Cleary, more investment is needed to improve agricultural productivity in the developing world and to help poor farmers move their produce to market (Leahy).  Multilateral approaches to containing rapid price fluctuations need also to be considered, including the development of new buffer stocks and rules that would discourage the kind of unilateral export restrictions than can have an outsized impact on global markets.  At the same time, the most environmentally and economically dubious bio-fuel projects ought to be abandoned if for no other reason than because they are driving up food prices for the world’s poor and wasting Western taxpayers’ money (Blas and Boland).  These are all issues that ought to assume a prominent place in the G-20 agenda.

75.  Open trade regimes represent the most powerful contribution that the international community can make to developing countries.  Trade has a far more powerful pro-development impact than aid, and its benefits are numerous. Unfortunately, tariff rates for goods in which developed countries have a comparative advantage, have fallen to the low single digits but remain very high in products which poor countries export.  The Doha Round was supposed to address this imbalance, but those talks remain mired in disputes over agriculture and market access, among other things.  These differences must be resolved in order to complete those talks so that reinvigorated trade can help galvanise economic development and global growth.  Protectionism continues to hamper “south-south” trade in ways that penalise the most impoverished people in these countries.  Developing countries must trade more freely among themselves to reap the benefits of trade and globalisation. Finally, pro-trade development support should help finance the roads and ports needed to bring developing country products to world markets.

76.  Finally, getting OECD economies back on track will undoubtedly be an important factor in galvanising growth in the developing world.  Western governments, however, will need to engage in fiscal consolidation.  According to a recent World Bank study, the benefits of near-term fiscal consolidation would more than offset the immediate impact on developing country exports.  Failure to correct structural budgetary problems in the West will adversely affect global capital markets and raise long-term interest rates significantly in developing countries.  This, in turn, would deprive emerging economies of critically needed investment (Beattie, 10 June 2010). Clearly, our governments will need to make very difficult choices over the next several years, and parliaments must help ensure that these domestic policy decisions are taken with one eye on their global consequences.


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CRS (2009) Congressional Research Service, Thomas Lum, Hannah Fischer, Julissa Gomez-Granger and Anne Leland, China’s Foreign Aid Activities in Africa, Latin America, and Southeast Asia, 25 February.

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Malone,  Andrew,  Daily Mail, “How China’s taking over Africa, and why the West should be VERY Worried”, 18 July2008.
http://www.dailymail.co.uk/news/worldnews/article-1036105/How-Chinas-taking-Africa-West-VERY-worried.html

Davis, Bob “IMF, reversing course, urges capital controls”, The Wall Street Journal Europe, 19-21 February 2010, XXVIII no. 15, page 1.

Davis, Bob “IMF says it acted effectively to combat global recession,” The Wall Street Journal, September 28, 2009.

Davis, Bob “IMF’s New role: helping the G-20,” The Wall Street Journal, October 58, 2009.

Davis, Bob “World Bank seeks funds,” The Wall Street Journal, 6 October 2009.

Davis, Bob “IMF to increase loans available prior to crisis,” The Wall Street Journal, 31 August, 2010.

Eichengreen, Barry (2010) “Lessons of the crisis for emerging markets”, International Economics and Economic Policy, forthcoming.

Financial Times (2006a), “EIB accuses Beijing over unscrupulous loans”, 29 November.

Financial Times (2006b), “Wolfowitz Slams China Banks on  Africa Lending”, 24 October.

Financial Times (2010a), “Pretoria defends China’s Africa Policy”, 24 August.

Financial Times (2010b), “Chain’s new scramble for Africa”, 26 August, page 6.

Financial Times (2010c), “Rise in Wheat Prices fastest since 1973”, 2 August.

Food and Agricultural Organization (2009), The State of Food Insecurity in the World: Economic crises – impacts and lessons learned. http://www.fao.org/docrep/012/i0876e/i0876e00.htm

Food and Agricultural Organization (2010), “Higher average farm prices expected, food security concerns persist, say OECD and FAO”
http://www.fao.org/news/story/en/item/43208/icode/

Foster, Vivien and William Butterfield, Chuan Chena and Nataliya Pushak, Building Bridges: China’s Growing Role as Infrastructure Financier for Africa. World Bank, 2008,
http://siteresources.worldbank.org/INTAFRICA/Resources/Building_Bridges_Master_Version_wo-Embg_with_cover.pdf

Friedman, Jed and Norbert Schady, World Bank (2009) “How Many More Infants are Likely to Die in Africa as a Result of the Global Financial Crisis?” Policy Research Working Paper, 5023, August
http://econ.worldbank.org/external/default/main?pagePK=64165259&piPK=64165421&theSitePK=469372&menuPK=64166093&entityID=000158349_20090820140450

“Glossary”. Development Cooperation Directorate – DAC, OECD Access 13, September 2010.
http://www.oecd.org/document/32/0,3343,en_2649_33721_42632800_1_1_1_1,00.html#ODA

Gua, Krishna and Delphine Strauss, “World Bank to buy distressed assets,” Financial Times, October 8, 2009.

Gua, Krishna and Christ Giles, “IMF told to aid orderly exit from stimulus,” Financial Times, October 5, 2009.

Gua, Krishna and Delphine Strrauss, Chris Giles, “Big countries spar over $5 billion equity plea,” Financial Times, October 6, 2009.

Handbook of Statistics Online: Foreign Investment, accessed, UNCTAD, 13 September 2010.
http://www.unctad.org/Templates/Page.asp?intItemID=1890&lang=1

IMF (2007) Jian-Ye Wang, Working Paper, “What Drives China’s Growing Role in Africa?”, WP?07/211, October 2007.

IMF, Jian-Ye Wang and Abdoulaye Bio-Tchané (2008), “Africa’s Burgeoning Ties with China”, Finance and Development vol. 45, no. 1.
http://www.imf.org/external/pubs/ft/fandd/2008/03/wang.htm#author#author

IMF (2009a), World Economic Outlook: Sustaining the Recovery, October.
http://www.imf.org/external/pubs/ft/weo/2009/02/index.htm

IMF Survey, “IMF in rethink of its role in Post-Crisis World, February 26, 2010.)

IMF (2009b), World Development Indicators Database: Accessed on 20 March 2010.

IMF (2009c), World Economic Outlook Database.  Accessed on 16 March 2010.
http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx

International Labour Organization (2009), “The Financial and Economic Crisis: A Decent Work Response” International Institute for Labour Studies.
http://www.ilo.org/global/What_we_do/Publications/ILOBookstore/Orderonline/Books/lang--en/docName--WCMS_107583/index.htm

International Labour Organization, Global Employment Trends, January 2010.
http://www.ilo.org/public/libdoc/ilo/P/09332/09332(2010-January).pdf

Jopson, Barney “Wen makes $10 billion loan pledge to Africa,” Financial Times, November 9, 2009.

Kilman, Scott, “U.N. says world hunger is declining,” The Wall Street Journal, 15 September, 2010.

Kose, M. Ayhan, Eswar Prasad, Kenneth Rogoff and Shang-Jin Wei (2006) “Financial Globalization: A Reappraisal”, IMF Working Paper WP/06/189.
http://www.brookings.edu/~/media/Files/rc/papers/2006/08globaleconomics_rogoff/20060823.pdf

Lamont, James “Singh commits India to financial reform plan,” Financial Times, November 9, 2009.

Lahard, Justin “Global recovery contains a few dilemmas for the G-20,” The Wall Street Journal, September 25-27, 2009.

Lehy, Joe “To feed a need,” Financial Times, October 2, 2009.

Marozzi, Justin, “Western neglect of Somalia will have a high price,” Financial Times, 26 August 2010.

Member’s Commitments and Performance: Summary Table of OECD Secretariat Projections, http://www.oecd.org/dataoecd/20/19/44607047.pdf

Moyo, Dambisa (2009), Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. Farrar, Straus & Giroux.

NATO PA (2010b) Briefing OECD, February 2010.

NATO PA (2010a) ESCEW Report, “Central and Eastern Europe”

ONE (2009), The Data Report 2009: Monitoring the G8 Promise to Africa. http://www.one.org/international/datareport2009/

“Open Markets for the Poorest Countries,” Center for Global Development, 2010.

Ostry, Jonathan D., Atish R. Ghosh, Karl Habermeier, Marcos Chamon, Mahvash S.
Qureshi and Dennis B.S. Reinhardt (2010), “Capital Inflows: The Role of Controls”, IMF Staff Position Note, SPN/10/04, 19 February. http://www.imf.org/external/pubs/ft/spn/2010/spn1004.pdf

Pandey, Sheo Nandan “China and the diplomatic power play at G-20 London Summit”, South Asia Analysis Group, Paper No. 3155, http://www.southasiaanalysis.org/\papers32\paper3153.html

People’s Daily Online, “President of China, Zambia pledge to elevate relationship” 26 February 2010, http://english.peopledaily.com.cn/90001/90776/90883/6902889.html

Ravallion, Martin, World Bank (2008), “Bailing out the World’s Poorest”, Policy Research Working Paper 4763, October http://econ.worldbank.org/external/default/main?pagePK=64165259&theSitePK=469372&piPK=64165421&menuPK=64166093&entityID=000158349_20081216092058

Rodrick, Dani (1998): “Who needs capital account convertibility?”, Princeton Essays in
International Finance, no 207: 55–65.

Satha, Dilip, Sanket Mohapatra and Ani Silwal, World Bank (2009), “Migration and Remittance Trends 2009: A better-than-expected outcome so far, but significant risks ahead” Migration and Development Brief 11, 3 November.
http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1110315015165/MigrationAndDevelopmentBrief11.pdf

Security and Africa: The Africa All Party Parliamentary Group’s submission to the 2010 Srategic Defence and Security Review, 10 August 2010.

Steward, Heather “Gordon Brown calls on Developed world to honour Gleneagles Pledges,” The Guardian, 17 February 2010

Stiglitz, Joseph E. (2009), “Wall Street’s Toxic Message”, Vanityfair, July 2009.
http://www.vanityfair.com/politics/features/2009/07/third-world-debt200907

“The Dark Side of China Aid,” International Herald Tribune, 25 March 2010.

Trade Map, Trade Competitiveness Map: Trade Statistics for International Business Development, Accessed 12 September, 2010, www.trademap.org

Turner, Philip, Bank for International Settlements (1995): “Capital flows in Latin America: a new phase”, BIS Economic Papers, no 44. http://www.bis.org/publ/econ44.htm

Tuteja, Ashok “G-20 Leaders seal new deal,” The Tribune, April 3, 2009, http://www.tribuneindia.com/2009/20090403/world.htm#9

UNCTAD (2008) “Financial crisis makes Doha Agreement still more vital, chiefs of UNCTAD, World Trade Organization say” 16 September.
http://www.unctad.org/Templates/Page.asp?intItemID=4609&lang=1

UNCTAD (2009), “The Least Developed Countries Report 2009: State and Development Governance” United Nations. http://www.unctad.org/en/docs/ldc2009_en.pdf

UNCTAD (2002), “The Least Developed Countries Report 2002: Escaping the Poverty Trap” United Nations, Sales No. E.02.II.D.13.http://www.unctad.org/en/docs/ldc2002_en.pdf

United Nations Standing Committee on Nutrition (2010) “Global financial and economic crisis – the most vulnerable are at increased risk of hunger and malnutrition” Briefs on Nutrition
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Von Braun, Jochim, “Time to regulate these volatile food markets,” Financial Times,” 10 August 2010.

World Bank (2009a), “Global Economic Prospects 2009: Commodities at the Crossroads” IBRD/WB.
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World Bank (2009b), “Global Food Crisis”, Issue Brief, April 2009.

World Bank (2010a), “Global Economic Prospects 2010: Crisis, Finance, and Growth” IBRD/WB. http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/GEPEXT/EXTGEP2010/0,,contentMDK:22438006~menuPK:6665268~pagePK:64167689~piPK:64167673~theSitePK:6665253,00.html

World Bank (2009c), Global Monitoring Report 2009: A Development Emergency.
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World Bank (2010b) Briefing Brussels, March 2010.

World Bank (2010c), “Aid for Trade: An Action Agenda Looking Forward”, Economic Premise, no. 25, August.

Zoellick, Robert, “Fragile States: Securing Development, Survival, vol. 50 no.6, December 2008 January 2009 pp 67-84.

 

1   Figures are in 2004 US dollars and relate to net ODA.
2   ODA of “Europe” includes France, Germany, the United Kingdom and the European Community’s budgets.

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