The current economic crisis could push an additional 90 million people around the world into extreme poverty by end of 2010. If it persists, two million children could die in the next five years. And in sub-Saharan Africa, the crisis could undermine recent progress through declines in commodity prices, tourism earnings, exports, remittances and private capital flows.
Before the crisis, the region's gross domestic product (GDP) had been growing since 2004 at more than five percent a year. Foreign direct investment (FDI) had contributed to this growth, with net FDI inflows increasing from U.S. $13 billion in 2004 to about $29 billion in 2007.
But now growth is likely to fall to 1.7 percent in 2009. Thirteen countries could experience a decline in per capita income of more than 10 percent on average. Unemployment could rise further in a number of countries. For example, in South Africa it climbed from 23.6 percent in the second quarter of 2009 to 24.5 percent in the third quarter, with the economy contracting by about two percent over the year.
Dealing with the economic and human impacts of the crisis in Africa requires both re-invigorated financial flows and more effective use of funds. Similar volumes of spending in the past have produced vastly different development outcomes. The World Bank Group's Independent Evaluation Group, on the basis of country reviews, highlights a number of factors driving the quantity and quality of the crisis response.
First, financial flows need to be adequate and timely, especially in the face of growing fiscal gaps, and well targeted. During the current crisis, official flows from multilateral sources have been running at record levels. At the same time, it is essential to recognize that sustained recovery depends not only on the volume of spending but also on its quality and how it is structured.
Currently, the World Bank Group is substantially increasing its financing for countries.
Globally, lending to middle-income governments by the International Bank for Reconstruction and Development in the 2009 fiscal year tripled to $33 billion. Lending to low-income governments by the International Development Association rose by 25 percent to $14 billion, $7 billion of which went to sub-Saharan Africa. The International Finance Corporation (IFC), the group's private sector arm, invested $10.5 billion, focusing on strengthening the financial sector and facilitating trade. In sub-Saharan Africa, IFC's investments reached a record $1.8 billion.
To sustain the economic revival, private capital flows must be re-invigorated. Private financial flows to developing countries fell from $1,200 billion in 2007 to $360 billion in 2009, and reversing this trend is fundamental. Worldwide, poorer developing countries face a $12 billion financing gap this year and may not be able to cover even the most essential social spending.
Second, the macroeconomic implications of the crisis response, in particular the growing government deficits, need to be handled well.
Fiscal deficits in 2009 are estimated to be nearly seven percentage points of GDP higher than in 2007 in G20 nations, and about five percentage points higher in G20 emerging economies. Meanwhile, the ratio of public debt-to-GDP in the G20 could, by one estimate, have risen by nearly 15 percentage points over these years. The biggest fiscal expansion is seen in high- and middle-income countries, but the need for careful management of fiscal policies applies just as much to low-income countries.
To generate economic growth, the spending should be directed to high-productivity areas, such as infrastructure or skills enhancement projects that have produced higher payoffs, rather than to providing untargeted subsidies. But even here, just any spending on infrastructure does not automatically generate growth. Only a few countries have, during the crisis, put in place much-needed mechanisms for analyzing, tracking and evaluating project costs and benefits.
Third, considerations of poverty and unemployment are paramount.
During past financial crises, poverty issues did not receive sufficient attention either from individual countries or from financing sources.
Signals are that this time, social safety nets such as conditional cash transfers, are better established and protected, with support from official sources such as the World Bank Group. In view of the long-term damage to the poor caused by such crises, it is vital that the protection of vulnerable groups be confronted early on.
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Finally, the rising pressures of the financial crisis should not divert attention from the environment and climate change. The impact of damage done as a consequence of change in these areas is especially severe in low-income countries where the poor are the most vulnerable. The instrument of fiscal stimulus presents a unique opportunity to shift focus to sustainable investments both in mitigating global warming and in adapting to the emerging changes.
Every crisis is unique, yet lessons from past crisis responses are informative. The speed and scale of response needs to be matched by careful attention to the quality of the interventions. Together with improved coordination across organizations, the World Bank Group, drawing on these lessons, can be helpful to countries in Africa in mitigating the impact of the current crisis.
Vinod Thomas is the director-general and Marvin Taylor-Dormond the director of the Independent Evaluation Group at the World Bank Group.
