The Triple Crisis and the Global Aid Architecture

Tony Addison, Channing Arndt & Finn TarpUNU-WIDER

UNU WorldwideUNU Office at the United Nations, New York

28 January 2010

Introduction

• The global economy in turmoil: Immediate concern the financial crisis

• But there are – in reality – at least three global crises at work: Finance, food and climate

• At present the three crises sit in their separate ”policy silos”

• Key argument: the three crises interact – a ”triple crisis” with implications for development assistance

2

CRISIS 1: FINANCE

3

IMF

Fo

reca

st

-4-2

02

46

8R

eal G

DP

Ann

ua

l Gro

wth

(%)

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015Year

World Advanced Economies

Emerging and Developing Economies

Source:IMF World Economic Outlook Database October (2009)

Real GDP Growth in World and Major Economic Groupings (1970-2014)

Present economic downturn deepest in 60 years, and no region untouched + a lot speculation as to recovery 4

IMF

Fo

reca

st

-11.89

-2.66-0.93 0.24

First Oil CrisisSecond Oil Crisis

Dot Com Bubble

Financial Crisis

-15

-10

-50

510

15

Tra

de

Vo

lum

e (

Ann

ual P

erc

en

tage

Cha

ng

e)

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015Year

World Trade Volume

Source:IMF World Economic Outlook Database October (2009)

World Trade Volume (1970-2014)

World trade has experienced its sharpest decline in decades + uncertain future

5

2.98

-0.71

IMF

Fore

cast

-10

12

3N

et P

riva

te C

ap

ital F

low

s (%

of G

DP

)

1990 1995 2000 2005 2010 2015Year

Net Private Capital Flows

Source: IMF World Economic Outlook Data Base April (2009)

Net Private Capital Flows to Emerging and Developing Economies (1990-2014)

Net private capital flows to the South have fallen dramatically

6

-$88 Billion(-41%)

-$221 Billion(-47%)

-$78 Billion(-28%)

+2.5 Billion(+11%)

-$46 Billion(-41 %) -$19.5 Billion

(-35.3%)

400

500

300

200

100

0

Private

Capital F

low

s (

$ B

illio

ns)

Source:World Bank Global Development Finance Report(2009)

Note:2008 is an estimate by the World Bank

Changes in Private Capital Flows by Region Between 2007 and 2008 ($ Billion)

2007 2008

And this is true for all regions, except the Middle East and North Africa (but now Dubai!)

7

30.032.4

50.1

35.4

-14.2

-10

010

2030

4050

Glo

bal

FD

I Inf

low

s A

nnu

al G

row

th(%

)

2004 2005 2006 2007 2008Year

Global FDI Inflows(Annual Growth)

Source: UNCTAD World Investment Report 2009

Global FDI Inflows (Annual Growth)

Global FDI inflows turned negative8

-7.3

-10.10

25.2

World Bank Forecast

-10

010

2030

Rem

itta

nce G

row

th R

ate

(Per

cent

age

)

2006 2007 2008 2009 2010year

Base Case Forecast Low Case Forecast

Source:World Bank Migration and Development Brief July 2009

Note:2008 is an estimate by the World Bank

Remittance Growth Rate in Developing Countries

And remittances to developing countries fell sharply9

Worl

d B

ank

Fore

cast

020

40

60

80

Re

mitt

ance

Flo

w($

Bill

ion

)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010year

East Asia and Pacific Latin America and Caribbean

SSA South Asia

Source:World Bank Migration and Development Brief July 2009Note: 2008 is an estimate by the World Bank.

Remmitance Flows to Main Regions 1999-2010($ Billion)

And again: this is is so in all regions

10

The Response• Unprecedented monetary and fiscal expansion (a

very heavy dose of Keynesian medicine) • Will it work? Some optimism – but in reality much

too early to say ….• Northern governments close to borrowing limits,

and reductions in fiscal deficits already being discussed

• Implications potentially serious for the South where social impact much bigger

• Will the North respond to the need for increased development assistance?

11

The Impact on Aid

• The average banking crisis reduces output per capita by 10% - and the loss is not restored within 7 years of the crisis onset

• The target for raising aid is expressed as a percentage of economic size (0.7% of GNI)

• To maintain the VOLUME of aid, aid will have to rise faster as a % of total spending

• Is this likely under business as usual scenarios? No

12

.98.92

.88.82 .8

.58

.47.43 .43 .43 .42 .41 .39 .38

.34 .32 .3 .3.27

.2 .2.18 .18

Average Country Effort (0.47)

UN Target (0.7)

0.2

.4.6

.81

OD

A P

erc

en

tage

of D

on

or

GN

I

Sw

ed

en

Lu

xem

bou

rg

Norw

ay

Den

ma

rk

Neth

erl

an

ds

Irela

nd

Belg

ium

Unite

d K

ingd

om

Spa

in

Fin

land

Aust

ria

Sw

itzerl

an

d

Fra

nce

Ge

rma

ny

Aust

ralia

Can

ad

a

TO

TA

L D

AC

New

Ze

ala

nd

Port

uga

l

Italy

Gre

ece

Unite

d S

tate

s

Japa

n

Source: OECD-DAC Online Data Base

Net ODA as Percentage of Donor GNI in 2008

ODA/GNI

Many donors far from achieving the UN goal 13

122

59

84

38

88

36

63

29

80

18

60

1626

11

38

6

41

4

33

1

37

-2

42

-6

26

-6

14

-7

26

-7

6

-9

21

-11

9

-17

7

-19-7

-22-13

-31-29-36

-50

050

10

015

0

Net O

DA

an

d O

DA

/GN

I(%

Ch

an

ge

)

Spa

in

Irela

nd

Austr

alia

Port

uga

l

Gre

ece

Lu

xe

mb

ou

rg

New

Ze

ala

nd

Ge

rma

ny

Sw

ed

en

Den

ma

rk

Neth

erl

an

ds

Norw

ay

Can

ad

a

Sw

itzerl

an

d

Fin

land

UK

Belg

ium

Fra

nce

Austr

ia

US

Italy

Ja

pa

n

Note: ODA Disbursement is expressed in current prices(Millions of USD). Data for 2008 is preliminary.

Source: OECD-DAC Online Data Base

Net ODA Disbursement and ODA/GNI (% Change Between 2005 and 2008 )

Net ODA Disbursement (% Change) ODA/GNI (% Change)

The ODA/GNI ratio fell for 12 out of 22 DAC donors before the crisis 14

Gleneagles G8 Summit 90,277

64,227

40

00

050

00

060

00

070

00

080

00

090

00

0

OD

A N

et D

isbu

rse

me

nt (2

007

US

D M

illio

n)

1980 1985 1990 1995 2000 2005 2010Year

Net Disbursement, Total Net Disbursement, Excl. Debt Relief

Source: OECD-DAC Online Data Base

Net ODA Disbursement to Developing Countries Constant Prices (1980-2007)

Net ODA disbursements ”inflated” by debt relief15

Gleneagles G8 Summit

34,224

27,712

17,64317,282

10

00

015

00

020

00

025

00

030

00

035

00

0

OD

A N

et D

isbu

rse

me

nt (2

007

US

D M

illio

n)

1980 1985 1990 1995 2000 2005 2010Year

Net Disbursement,Total Net Disbursement Excluding Debt Relief

Source: OECD-DAC Online Data Base

Net ODA Disbursement to Africa Constant Prices(1981-2007)

Netting out debt relief foreign assistance to Africa has not risen in real terms since the late 1980s

16

Should We Worry?

• Aid’s critics would say NO (some would say growth will rise if aid is eliminated, others say aid has no effect)

• Weight of empirical evidence: Arndt, Jones and Tarp (2009) – aid’s aggegate impact conforms to priors from modern growth theory

• The present financial climate not a good time to experiment with Dambisa Moyo’s proposal to kill aid

17

3.3 2.9 3.2 .6

1.8 2.7 5.0 1.2

.9 3.2 11.2 0

.1 3.5 14.5 .02

1.3 3.6 15.5 0

.7 6.1 15.4 .04

4.0 3.8 14.7 .02

.8.7 21.9 0

1.2 4.1 21.7 0

0 10 20 30

Nigeria

SSA

Ghana

Tanzania

Ethiopia

Zambia

Uganda

Rwanda

Mozambique

Note: Portfolio refers to portfolio investment equity flows in current $. These flows are net and include non-debt-creating portfolio equity flows

Capital Flows to SSA and Selected Countries (% of GDP)

Remittance FDI ODA Portfolio

Average of 2003-2007

(the sum of country funds, depository receipts, and direct purchases of shares by foreign investors.)Source: World Development Indicators and Author's Computation

Despite some improvements in other flows ODA continues to dominate total capital flows to SSA 18

19.919.5

20.8

22.9

22.3

21.220.9

22.3

24.1

24.8

24.1

25.1

21.0

19

20

21

22

23

24

25

Re

ven

ue

Exc

lud

ing G

ran

t (%

of G

DP

)

1996 1998 2000 2002 2004 2006 2008 2010Year

SSA Government Revenue Excluding Grant (% of GDP)

Source:IMF African Regional Economic Outlook October (2009)

SSA Government Revenue Excluding Grant 1997-2009 (% of GDP)

Tax revenues are down (especially trade taxes)19

-$88 Billion(-41%)

-$221 Billion(-47%)

-$78 Billion(-28%)

+2.5 Billion(+11%)

-$46 Billion(-41 %) -$19.5 Billion

(-35.3%)

400

500

300

200

100

0

Priv

ate

Cap

ital F

low

s ($

Bill

ion

s)

Source:World Bank Global Development Finance Report(2009)

Note:2008 is an estimate by the World Bank

Changes in Private Capital Flows by Region Between 2007 and 2008 ($ Billion)

2007 2008

20

Private flows are sharply down in Africa after years of growth

Prospects

• More difficult to sell government bonds + poorer countries risk being crowded out by financing requirements of advanced countries

• Aid at a critical juncture: Will be stretched by the food and climate crises which will intensify if growth resumes

21

CRISIS 2: FOOD

22

050

100

150

200

250

Ind

ices

of M

arke

t Pri

ces

(200

5=

100

)

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010Year

Rice Wheat

Maize Soybeans

Source : IMF Primary Commodity Price Data Base

Note: Rice:Thailand(Bangkok); Wheat:US Gulf ; Maize:US ; Soybeans: US

Cereal Prices in Indices of Market Prices (1957-2008)

Food prices soared in 2007-2008 and then fell back: prospects?23

Food Crisis (1)• Food price developments reflect:

– Low priority to agriculture/food production– Shifting demand patterns– Biofuels (+ lack of research in alternative energy

sources)• Underlying structural drivers behind 2007-2008

spike remain in place – if growth resumes food prices likely to increase again

• Global food architecture not geared to deal with supply shortages – governments may intensify protection to try to satisfy domestic consumers

24

Food Crisis (2)• National responses to food crisis have varied• Africa: Macro-policies main tool to limit impact of

world price shocks• Elsewhere: Greater focus on social protection • But too much social protection ad hoc, stop-go, high

cost – needs to be systematic• A double bind:

– If recovery stalls: new trade and financial shocks– If recovery is sustained: food and energy prices will climb

and hit energy and food importers• Need for public action – but fiscal space limited in the

smaller and poorer economies

25

CRISIS 3: CLIMATE

26

Climate Change (1)

• Present global growth model clearly unsustainable – the challenges are unprecedented

• To respond, the world must transform existing energy systems (mitigation) and simultaneously adapt to the climate change that is already built into global climate (adaptation)

• Failure in shifting from fossil-fuel dependence evident in run-up in oil price prior to the financial crisis (due to lack of investment in energy research)

27

020

40

60

80

10

012

014

0

US

$ P

er

Barr

el

01jan1998 01jan2000 01jan2002 01jan2004 01jan2006 01jan2008 01jan2010

Daily

Note:Oil prices refer to Brent; US dollars per barrel

Source:US Department of Energy

Oil Prices ( January 1998 to October 2009)

Huge run-up, then a fall as recession set in – but what next?

28

Climate Change (2)• If growth resumes energy prices will move back up• Places huge burdens on poor countries – a range of fiscal effects,

which make states more aid-dependent, not less• Costs far exceed current level of aid:

– Per annum mitigation in developing countries by 2030: USD 140-175 billion

– Per annum adaptation costs by 2050: USD 30-109 billion– Aid is presently around USD 100 billion in total

• COP15 demonstrated – climate change finance fragmented as traditional aid, unclear funding will be additional, and who takes control of supply (how much voice for the South?)

• Climate change financing seen as compensation – but aid processes remain conditional

29

Conclusion (1)• A WIDER perspective needed:

– Not one – but three interrelated global crises: The Triple Crisis• Unclear how financial crisis will evolve, but we do know

recovery should not be business as usual• Whether growth resumes or not the world must address

the triple crisis – and break out of the ”policy silos”• Global problems require global solutions, including for

example: – Comprehensive action on climate change– A new global food architecture– And increased development assistance delivered in new ways

30

Conclusion (2)• So far action has been chaotic:

• Economic recovery at best extremely fragile• The coming reduction in in fiscal deficits will force unpleasant

spending choices – and aid may be the loser• A pronounced risk of collapse in the confidence in international

food markets• Aid falling – not increasing – and far from clear that climate

financing will be additional• Carbon taxes (or the alternative of auctioning carbon-emission

licenses) need to be at the core of any serious attempt to come to grips with climate change – but progress at best tentative

• Global institutions are needed for global action• The world at a turning point: Will the future be unilateral or

multilateral?

31