|
Going by past experience, the financial crisis could mean cuts in developmental aid budgets by 30% or more, says a policy paper from UNCTAD
One of the far-reaching consequences of the global financial crisis could be a cut in official development assistance (ODA) flows to developing countries. In a policy brief, the UN Conference on Trade and Development (UNCTAD) has said that the financial crisis will deal a hard blow to ODA flows and this, in turn, will set back programmes for achieving the Millennium Development Goals by 2015. The current recession, and some of the stimulus measures being introduced to combat it, is compounding budget deficits and budget re-allocations in many donor countries. ODA is often the first to suffer in such a situation. In similar crises in the past, ODA has fallen by 20-40%. The brief cited a recent study that found that the crises affecting Finland, Japan, Norway and Sweden in the 1980s-1990s were all followed by a substantial decline in foreign aid, ranging from 10% in Norway to 62% in Finland. A study of donor countries that have undergone a banking crisis in the past 30 years has shown that in the year of the crisis, average ODA drops by about one percentage point. In the following year, the cumulative drop is about four percentage points, and in the fifth year, 30 percentage points. What this means for developing countries, especially those that depend heavily on foreign aid for development, is that by the time donor countries start recovering -- which could typically take up to four years -- developing countries do not have the capacity to take advantage of the reviving opportunities. Second, since some donors set their aid targets as a percentage of GDP, a drop in GDP could lead to a drop in aid. Aid budgets will also be affected if the domestic currency depreciates against the recipient’s currency. This will reduce the value of the aid budget in the recipient country. In the case of the UK, the exchange rate for the pound has fallen steeply in recent months; this depreciation would mean a decline of British ODA for countries receiving assistance. One way to deal with this, UNCTAD suggests, is for aid agencies to be provided with an endowment, and their activities funded through interest earned on the principal. In order to eliminate debt roll-over problems, this endowment could be created by issuing government consols (consolidated annuities) or government bonds with no maturity date. The aid agency could then use the interest revenues from the consols to fund its activities, but would be prohibited from using the capital. While this proposal raises several concerns, all of them can be addressed, the policy brief said. For example, one concern could emanate from financial markets and voters in reaction to a large and sudden rise in the country’s debt-to-GDP ratio. However, the funding mechanism proposed by UNCTAD would involve an increase in “gross” but not “net” government debt, since the newly issued government bonds would be held by one of the government’s own agencies, with no change to the aggregate balance. Another possible concern is that the proposed funding mechanism would not protect the quantity of aid from fluctuations in the exchange rate of the donor currency. This could be addressed by endowing the aid agency with government bonds denominated in a mix of currencies -- or by having aid agencies from different countries exchange part of their endowment. UNCTAD’s concern is spurred by the realisation that governments of developing countries cannot provide the kind of stimulus packages that advanced countries have been able to do to pull their economies out of recession. Given the extent of global interdependence today, maintaining aid commitments and stabilising aid flows will do much more than help recipient countries: it will also help stabilise global demand, which is in everyone’s interest, the brief concluded. Source: Third World Network, March 25, 2009
|
