Historically, periods of sharp economic contraction have been extremely harmful for human development. Social indicators tend to deteriorate rapidly during economic downturns and improve only slowly during growth cycles.
While it is too early to reach definitive conclusions on the impact of the crisis, there are significant reasons why this crisis may be different for poor countries: social spending has been largely protected so far; pre-crisis policies and institutions had improved before the crisis; and external shocks, not domestic policy failure, were the main causes of the crisis for developing countries.
When the current crisis hit, the international community responded strongly and swiftly with rescue programs, aid, and lending designed to limit the economic contraction, protect core social programs, and strengthen the private sector.
Past crises severely affected human development indicators
Past crises have shown that the deterioration in health, education, and other human development indicators in bad times is much greater than the improvement during good times.
Vulnerable groups—infants and children, especially girls—are disproportionately affected during crises. For example, during downturns, female enrollment in primary and secondary education drops more than male enrollment. The consequences of this persist long into the future, permanently lowering human capital.
Drops in spending on social services like education and health care are an important reason for the sharp deterioration in human development indicators during past crises. These cut backs are the more worrisome because they disrupt service delivery during periods when people need them most.
During past crises, donor funding has also come under pressure if the crisis was global or if aid effectiveness declined at the time. But there is some evidence that official development assistance has provided countercyclical support since 2003.
Why this crisis may be different for poor countries
Historically, almost 90 percent of the economic growth volatility in poor countries has been due to internal conditions and shocks, such as policy failures and conflicts. But the current crisis was not caused by domestic policy failure.
This time, many countries had improved their policies and institutions before the crisis struck, and hence endured it better than previous episodes of economic contraction.
Safety nets have been a crucial part of the response to the current crises in the hardest hit countries:
Many countries that responded most effectively already had safety nets, which governments were able to quickly modify and expand.
When the crisis hit, the World Bank lending for safety dramatically increased, topping $3 billion in 29 countries in fiscal 2009. Elevated activity is expected to continue in 2010-11, particularly in low-income contexts and fragile and post-conflict settings.
The international community has responded strongly and swiftly to the crisis
The international community mounted a swift and historic response to limit the economic contraction and contagion of the crisis that started in high-income countries.
Despite widespread fears, trade-restrictive measures that had been put in place around the world did not significantly reduce developing countries’ market access. At the end of 2009, 350 trade-restrictive measures had been put in place around the world, but in the aggregate, protectionism has been contained and the basic principles of free trade were not abandoned. Governments and multilateral development institutions responded to the threat of protectionism and supported developing countries’ exports by bolstering trade finance:
The G-20 leaders pledged $250 billion in support of trade at their April 2009 London Summit
the World Bank Group provided guarantees and liquidity for trade finance through the International Finance Corporation’s Global Trade Finance Program and Global Trade Liquidity Program
Export credit agencies stepped in to prevent a complete drying up of trade finance
By end-February 2010, the IMF had committed a record high $175 billion to emerging and developing countries as part of its rescue designed to limit economic contraction and contagion. The global nature of the crisis led the IMF to act swiftly to boost lending and modify conditionality frameworks.
Responses by multilateral development banks have sought to protect core development programs, strengthen the private sector, and assist poor households: o More than $150 billion has been committed since the beginning of the crisis (two-thirds from the World Bank Group)
IBRD lending to poor nations almost tripled in fiscal 2009, and the first half of fiscal 2010 shows the strongest IBRD commitments in history ($19.2 billion, up from $12.4 billion in the same period in fiscal 2009).
Commitments by the regional multilateral development banks also increased sharply, by more than 50 percent from 2007 to 2009.
Donors also increased aid volumes:
Aid from countries in the OECD’s Development Assistance Committee (DAC) rose by 0.7 percent in real terms in 2009 to $119.6 billion. When debt relief is excluded, ODA rose last year by 6.8 percent in real terms. Meanwhile, assistance from non-DAC donors as well as from private sources is rising fast. And progress continues in reducing poor countries debt burden through World Bank and IMF initiatives.
The expected medium-term impact of the crisis has heightened the urgency to meet aid commitments. Current donor spending plans leave a $14 billion shortfall in the commitments to scale up aid by $50 billion by 2010. The G-8 Gleneagles commitment to double aid to Africa by 2010 also requires a further $20 billion, of which $18 billion remains uncommitted. .