DOHA, November 29, 2008–The World Bank today called on the industrialized nations to keep up their aid flows to developing countries amid the economic downturn, one of the implications of which is an anticipated steep decline in private capital flows to developing countries.
“Over the past year, many developing countries have already had to cope with high food and fuel prices, and are now faced with a third problem of unprecedented proportions,” said Justin Lin, the World Bank’s Chief Economist and head of delegation in a speech prepared for the United Nations International Conference on Financing for Development in Doha, Qatar, “While the channels of transmission may differ, virtually no developing country—whether an emerging market or a poor country in Africa—has escaped the impact of the widening financial crisis.”
“Lessons from earlier crises point to the importance of safeguarding investment in long-term growth and development,” he added. “It is critical that aid flows be maintained, past commitments be honored and supplemented, and aid effectiveness be improved. At about US$100 billion a year, total official development assistance is modest compared with what is being spent to tackle the financial crisis in developed countries.”
According to World Bank estimates, net private capital flows to developing countries could drop from about US$1 trillion in 2007 to roughly half that level in 2009. Given this projection, it is important to intensify efforts to catalyze and leverage private capital in support of development, including through innovative public-private partnerships.
“The global financial crisis is likely to set back the fight against poverty and progress toward the Millennium Development Goals,” said Lin, “Sharply tighter credit conditions and slower economic growth may affect investment in education, health, and women’s empowerment, and undo many of the hard-won gains in recent years.”
The World Bank Group is ready to assist financial and private sectors in responding to the crisis, support countries in managing fiscal challenges, and avoid cuts and delays in investments upon which economic recovery and long-term development depend.
This includes a US$1.2 billion Global Food Crisis Response Program that is under accelerated implementation and an Energy for the Poor initiative that is at an advanced stage of preparation. In addition, the World Bank Group’s International Bank for Reconstruction and Development (IBRD) could make new commitments of up to US$100 billion over the next three years. This year, IBRD lending could almost triple to more than US$35 billion compared to US$13.5 billion last year. And following its record 15th replenishment, the International Development Association (IDA) has authority to commit US$42 billion for the next 3 years, which can be frontloaded to meet the needs of low-income countries, including many in Africa
For its part, the International Finance Corporation (IFC), the Bank’s private sector arm, is launching four new facilities for bank recapitalization, infrastructure financing, trade facilitation, and refocused advisory services. Combined with financing mobilized from others, these new facilities could provide more than US$30 billion over the next three years. The Bank’s Multilateral Investment Guarantee Agency (MIGA) will also provide much needed risk mitigation for flows of private finance to developing countries.
Linwelcomed the commitment expressed by the G20 leaders in their summit in mid-November to continue working for a successful conclusion to the World Trade Organization’s (WTO) Doha Development Agenda, and said that a recovery of trade would help reinvigorate economic growth.
“The crisis poses major challenges, but also creates opportunities, setting the stage for a new multilateralism,” said Lin. “Among other key actions, countries must reaffirm and strengthen their commitment to the framework for cooperation and mutual accountability agreed in Monterrey.”
Lin added that a vigorous response to the crisis should include new approaches that go beyond the G7 to bring in other key countries including the poorest, and work on issues beyond trade and finance to include development, climate change and fragile states.