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Trade, Aid, and the International Financial Institutions (IFIs)

Key Points

  • Despite initial fears, trade restrictions in reaction to the crisis affected only a small part of international trade. With a global recovery underway, developing country export revenues have begun to pick up and their access to external finance to improve, though both remain well below pre-crisis levels.
  • While these are positive signs, the global community must continue to support trade. Reaching agreement on the Doha Round would support an open trading environment and generate substantial increases in market access for developing countries.
  • Although aid hit record levels in 2008, aid flows remain well below those envisioned by donors, and the more constrained fiscal environment is a serious threat to future aid efforts. More progress is needed to strengthen aid effectiveness and improve aid allocation.
  • There is an urgent need to establish the appropriate policies for dealing with the post-crisis international economic environment. These challenges are likely to require fundamental changes in the IFIs. More resources will have to be mobilized.

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Factsheet Sections

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Recovery through open trade, trade finance, and aid for trade

  • While a breakdown of the world trading system was averted, ensuring an open trading system remains an important global goal.
  • Completing the Doha Round would substantially improve developing countries’ market access and enhance their competitiveness through an agreement on trade facilitation.
  • Beyond Doha, progress is needed in negotiating new rules and disciplines related to trade-related climate change, and to food and energy security.
  • Increased support from donors and policy reform in developing countries will be required to ensure their institutions are capable of taking advantage of trade opportunities.

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Bringing aid flows back on track

  • Although 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, it falls well short of earlier commitments, especially for Sub Saharan Africa. 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.
  • To keep alive the hope of halving poverty by 2015, aid has to expand to meet previous commitments:
    • Current donor spending plans leave a $14 billion shortfall in the commitments to scale up aid by $50 billion by 2010.
    • Aid to Africa has grown 5 percent annually since 2000, but much of it has been debt relief or emergency and humanitarian assistance, not new finance. The G-8 Gleneagles commitment to double aid to Africa by 2010 requires a further $20 billion, of which $18 billion remains uncommitted.

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Making aid more effective

  • The crisis has increased the importance of aid to address the rise in poverty. But the crisis also led to substantial increases in government debt that will severely constrain fiscal resources in donor countries for the foreseeable future.
  • In this context, it becomes more important than ever to make further progress in improving aid effectiveness through harmonizing donor activities, reducing the share of tied aid, making aid disbursements more predictable, and improving aid allocation:
    • When aid is too fractured, it pushes up transaction costs and makes it difficult for recipient countries to manage their own development agenda. In 2006, 38 recipient countries received assistance from 25 or more DAC and multilateral donors. In 24 of these countries, 15 or more donors collectively provided less than 10 percent of that country's total aid.
    • Untied aid procured through open international competition offers the best prospect of good value and supports the recipient’s ownership of aid. Studies confirm that tied aid regimes that restrict procurement to suppliers from the donor country cost 15–25 percent more on average and are more influenced by supplier interests and capacities.
    • Aid must be predictable to be effective. Without good information on what resources will be available, aid recipients cannot plan their own expenditures or participate meaningfully in determining how aid is allocated and used. However, recipients also need to improve their own budget planning and programming to be able to use such information from donors.
    • Considerable scope remains for a more rational, results-oriented, and needs-driven aid allocation mechanism. For example, there are wide variations in the distribution of aid among low-income countries. Over the past decade India received $1 per capita in aid while Bosnia and Herzegovina received $129 per capita. Aid as a share of recipient country GNI shows similar large divergence, ranging from 0.1 percent for India to 189 percent for Liberia.

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IFIs need to adapt to post-crisis world

  • The IFIs responded to the crisis quickly and decisively to boost lending. They adopted innovative programs to stabilize markets, limit the slide in economic growth, support the poor, and minimize interruptions in development progress.
  • But even as the recovery progresses, it is clear that the crisis has dramatically altered the development challenges facing low- and middle-income countries, and hence those facing the international community.
    • Managing the availability and allocation of concessional resources will remain a major challenge for the IFIs as the recovery proceeds, as is managing the impact of the crisis-induced frontloading of concessional resources by multilateral agencies.
    • Changes in responsibilities and organization of the IFIs are on the horizon: increased demand for technical services will shift requirements for staff expertise, coordination among the IFIs will need to be strengthened, and proposals to improve the responsiveness of the multilateral development banks (such as decentralization at the World Bank) are under consideration.

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