Posted by Ignacio on
Fri, 29/12/2006
Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.
The 1990s
Developing countries’ vulnerability to reductions and reversals in capital flows lies behind the economic growth downturns. The 1982 banking crisis in Mexico and the financial crises in East Asia in the late 1990s demonstrate the vulnerability of economic growth in developing countries to unregulated capital flows and, in particular, to short-term foreign currency denominated bank loans. Sovereign lending to developing countries effectively dried up in the wake of the Mexico banking crisis and global LDC growth was at its lowest point of the period. Whilst bank lending was the primary source of capital flows up to the mid-1980s, funds for foreign direct investment and portfolio equity flows have become increasingly important.
Investment Flows to Developing Countries
Development Aid:
Public aid decreased in the 1990s, both as a proportion of the GNP of developed countries and in volume terms, with increased multilateral flows being more than offset by a contraction on the bilateral side. At least four reasons help explain the reversal in public flows. First, the end of the Cold War rendered the geopolitical objectives of aid less relevant than before. Second, there was a realization among donor countries that aid was becoming ever more complex with new instruments and players with increasing criticisms over the effectiveness of aid. Third, private flows increased rapidly in the wake of increased liberalization of trade and financial flows, leading to a displacement effect.
The increase in private capital flows was unprecedented in the 1990s, driven by market reforms, the lowering of global trade and investment barriers and, the fall in communications and transport costs. In the early 1990s, private flows were about 50 percent above those in the 1980s on average and four to five times larger by the end of the decade.
Furthermore, the distribution of private flows varies significantly across regions. Latin America and East Asia account for three quarters of all private flows, and 90 percent of all private flows when Europe and Central Asia is added in. This also translated into much higher flows to these regions even when differences in income levels are taken into account. On the other hand, public flows across the regions are much more stable. Sub-Saharan Africa accounted for 26 percent of total public flows in the 1990s. East Asia and the Pacific Region and Europe and Central Asia accounted for just over 20 percent of total public flows in the same period.
Non governmental organizations (NGOs) became an important and vocal platform for the involvement of civil society in public affairs. The humanitarian function of NGOs evolved to embrace poverty reduction, environmental sustainability, gender equality and democracy. Roughly 400 international NGOs were in existence over a century ago, increasing to some 25,000 international NGOs by 2000. NGOs have been instrumental in pushing through 22 HIPC initiative cases to decision point at the end of 2000 and their number in consultative status with the Economic and Social Council (ECOSOC) has increased from 377 in 1968 to 1,350 in 2003. An increasing number of NGOs are also affiliated with the multilateral organizations. For example, CONGO (Conference of NGOs) and DPI (Department of Public Information (DPI) work with the UN. CLONG – the umbrella group for European NGOs in existence since 1975 has its secretariat in Brussels. The World Bank has a long history of engaging with NGOs on specific subjects, project implementation and in developing country dialogue for project development (FRIDE, 2003, p. 21).
New players and instruments continued to enter the aid industry during the 1990s. For example, the Global Environment Facility and the HIPC trust fund were created to address the public debt problems of a number of countries; in tandem was the requirement for two new documents from the recipient countries eligible for debt relief under the HIPC – the Comprehensive Development Framework and the Poverty Reduction Strategy Paper (PRSP). Examples of the new instruments created by the aid organizations were the partial risk guarantees designed to facilitate private flows and also from the World Bank function specific loans such as the Learning and Innovative Loans and Programmatic Adjustment Loans. The European Bank for Reconstruction and Development (EBRD) was created and the G-7 US, UK, France, Canada, German, Italy, Japan. assumed greater importance in developing aid policies.
Posted by Ignacio on
Fri, 22/12/2006
Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.
The 1980s
Commodity Prices, 1970 to 2000
The vulnerability of developing economies to changes in commodity prices is shown by their economic downturns during the 1980s, which corresponded with periods of weak commodity prices. Commodity prices are a major source of foreign earnings for developing economies. Over the period as a whole, commodity prices for non-fuel products declined by as much as 50 percent in real terms. The reduction in non-fuel prices was such to negate the beneficial effects of the reduction in oil prices for oil-importing economies and result in reduced economic performance.
Poor countries continue to be vulnerable to reductions in commodity prices and the world trade system that discriminates against developing countries by subsidizing agricultural production in developed countries and tariffs on developing countries’ manufactured exports contributes to this remaining vulnerability.
Development Aid
Development assistance continued to grow over the 1980s, in particular public aid, exhibit below. Total public aid was US$77.8 billion during the 1980s, significantly above private flows of US$64.8 billion and roughly 30 percent higher than total public aid in the 1970s. Multilateral flows represented the main source of debt flows in the 1980s, almost doubling their 1970s level. As part of this, the IMF increased its net disbursements, from US$2.1billion on average in the 1970s to US$3.3 billion on average in the 1980s, in part reflecting the introduction of the Structural Adjustment Facility – the concessional loan window of the IMF. By contrast, bilateral debt flows increased by just 16 percent during the decade.
Net Disbursements of Public and Private Flows
Source: Compiled from Exhibit 1.6, FRIDE, 2003
The 1980s also saw a greater emphasis on the policy environment for aid allocation. Donors began attaching policy conditions to their funding at the sector and country level and agreement with the IMF on a macroeconomic program started becoming critical for balance of payments support by the donor community elsewhere.
Posted by Ignacio on
Thu, 21/12/2006
Posted by Ignacio on
Tue, 19/12/2006
The December issue of Finance and Development is dedicated to Africa.
'Africa: Making Its Move' explores some of the obstacles facing sub-Saharan Africa as it attempts to capitalize on changes that offer fresh opportunities for growth and poverty reduction.
In its lead article, Right Time for Africa, Abdoulaye Bio-Tchané and Benedicte Vibe Christensen, Director and a Deputy Director of the IMF's African Department respectively, present a somewhat optimistic view of the continent. "Africa needs to build on its recent success to catch up".
Yet things seem to be changing for the better throughout the subcontinent. In most African countries, leaders are now selected through democratic elections. The decision-making process is becoming more participatory and involving greater segments of civil society. The number of countries in crisis has declined, although conflict persists in some countries and regions. The pursuit of strong macroeconomic policies and economic reforms is bearing fruit: economies are growing faster and more steadily than before, and inflation is falling. Record levels of reserves in both oil-producing and oil-importing countries act as a cushion against external shocks, such as the recent increase in oil prices. Countries pursuing economic reforms have benefited from unprecedented amounts of debt relief from a wide variety of sources. In addition, the international community has promised a significant scaling up of aid resources in the years to come, offering African countries a fresh chance to free up resources and invest in human and fixed capital to promote sustainable growth. These changes have not gone unnoticed abroad. Foreign investors are showing increasing interest in the African continent, both in the domestic debt markets and in direct investment in the extraction of natural resources.
Although not exempt of challenges
The challenge for African policymakers now is to carry this vision forward. While economic growth has accelerated in many countries, it still needs to translate into greater improvement in the living standards of the broader population. Governments face a dilemma. With unprecedented amounts of debt relief from multilateral and bilateral donors and promises of a scaling up of aid from the international community, which have yet to materialize, the populations hold great expectations for better education and health services, as well as for improvements in infrastructure such as roads, ports, and energy. At the same time, governments have to make sure that increased spending is consistent with absorptive capacity and with maintaining the progress in macroeconomic stability and low inflation, and they must avoid a repetition of past mistakes of misallocation of budgetary resources. This requires a tightrope balancing act.
Posted by Ignacio on
Fri, 15/12/2006
Posted by Ignacio on
Thu, 14/12/2006
I already blogged about the latest UNDP Human Development Report on water and poverty, but I can't help mentioning it again after reading Mario Vargas Llosa’s comment on the report.
For our Spanish-speaking audience, “El olor de la pobreza” (the smell of poverty) is an excellent read. His article, peppered with literary quotes, is as poignant and tough as Vargas Llosa can get.
My quick translation will not do it justice, but here are some pearls:
From this reading, the first conclusion I reach is that the emblematic object of civilization and progress is not the book, the telephone, Internet or the atomic bomb, but the toilet. Where human beings empty their bladder and intestines is the decisive factor to know if they still find themselves in the cruel underdevelopment or if they have started to make progress. The repercussions that this simple and very important fact has on people’s life are vertiginous…
…
In Dharavi, a populous part of Mumbai, there is only one toilet per 1,440 people, and in the rainy season the water flooding the streets turns them into rivers of excrements. The abundance of the liquid element is, in this case as in many third world cities, a tragedy, because, given the condition in which people live, water, instead of being life is often times the instrument of sickness and death…
…
In Les Miserables, Victor Hugo wrote that “sewers are the conscience of the city” and … he tried to do a strange interpretation of history through human excrement. This terrific report does something similar, without the poetry and eloquence of the great French romantic, but with a much better scientific knowledge.
…
“We are born among feces and urine”, wrote Saint Agustin. A shiver should shake us when we think that a third of our contemporaries never leave the filth in which they came to this valley of tears.
Sometimes it takes a great writer to make us feel (and smell) what lies behind technical reports.
Via CIDDES
Posted by Ignacio on
Tue, 12/12/2006
Why has growth been more successful in reducing poverty in some countries than in others? How can poor women and men best participate in, contribute to and benefit from growth? What can donors do to promote a pattern of growth that better connects poor people to the growth process and to help deal with the risks, vulnerabilities and market failures which hold back their participation? The DAC Network on Poverty Reduction (POVNET) has been exploring and addressing issues related to pro-poor growth, particularly in the key areas of private sector development, agriculture and infrastructure.
Key messages coming out of this POVNET work are:
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Rapid and sustained poverty reduction requires pro-poor growth, i.e. a pace and pattern of growth that enhances the ability of poor women and men to participate in, contribute to and benefit from growth
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Policies to tackle the multiple dimensions of poverty, including the cross-cutting dimensions of gender and environment, are mutually reinforcing and should go hand-in-hand
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Empowering the poor is essential for bringing about the policies and investments needed to promote pro-poor growth and address the multiple dimensions of poverty.
Key Policy Messages
(Via PovertyNet)
Posted by Ignacio on
Mon, 11/12/2006
Muhammad Yunus gave his Nobel Lecture in Oslo yesterday.
We get what we want, or what we don't refuse. We accept the fact that we will always have poor people around us, and that poverty is part of human destiny. This is precisely why we continue to have poor people around us. If we firmly believe that poverty is unacceptable to us, and that it should not belong to a civilized society, we would have built appropriate institutions and policies to create a poverty-free world.
We wanted to go to the moon, so we went there. We achieve what we want to achieve. If we are not achieving something, it is because we have not put our minds to it. We create what we want.
What we want and how we get to it depends on our mindsets. It is extremely difficult to change mindsets once they are formed. We create the world in accordance with our mindset. We need to invent ways to change our perspective continually and reconfigure our mindset quickly as new knowledge emerges. We can reconfigure our world if we can reconfigure our mindset.
Full text and video of his lecture.
Related: an old post on his Nobel Prize and Microfinance.
Posted by Ignacio on
Fri, 08/12/2006
Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.
In general, the relationship between aid and growth has had a mixed track record over the five decades from 1950. The commitment of rich countries to help their poorer counterparts took off in the post-war era and while that commitment has remained it has been diluted at times by macroeconomic conditions in rich countries, their strategic and political interests, and their perception and knowledge of how aid has worked or failed to work in recipient countries. At the same time, the aid industry itself has been subject to volatility in flows, expansion of private flows, diversified and new players and an increasing menu of instruments. This and upcoming posts will examine the growth experience and aid flows for developing economies by decade from the 1950s (material for the period 1950 to 1999 draws on FRIDE 2003).
The 1950s and 1960s
Comparative Annual Growth Rates; 1950-1967
Between 1950 and 1970, economic performance in developing countries was impressive. Annual real GDP in most LDCs exceeded that of industrialized countries. Moreover, significant improvements were made in social indicators of well-being—health, education, life expectancy. However, the impressive performance in headline growth was offset by large population expansion. The exhibit above shows that real GDP per capita in developing countries lags behind that of developed countries. In 1951, the UN forecast that population in Africa and Asia would grow at an annualized rate between 0.7 and 1.3 percent. By the mid-1960s, population was increasing at an average annual rate of 2.5 percent.
Development Aid
On the aid front, the move by richer countries to help poorer ones that had begun in the postwar era continued. Bilateral aid dominated and up to the mid 1960s, approximately 90 percent of development aid was provided under bilateral channels. The U.S. accounted for more than 50 percent of total assistance from the late 1940s to mid-1960s. The motivation was very much influenced by security concerns and the containment of communism during the Cold War. Development assistance concentrated on large infrastructure projects—80 percent of all lending from the World Bank during the period 1948 to 1960, roughly US$2.9 billion, was for power and transportation—and developed countries received US$1.7 billion in loans with US$0.5 billion going to Africa. India received 22 percent of all lending going to LDCs and Latin America received 40 percent.
In terms of an aid philosophy over these decades, the view was that investment and growth benefiting from aid would trickle-down to the poor. Import substitution policies were followed and the IFIs began to provide concessional aid. The observation was that many countries could not afford to borrow at commercial rates. Thus the Fund for Special Operations was introduced in 1959 by the IDB; IDA was introduced by the World Bank in 1960 as was the Cooperation Fund of the European Economic Community. The UNDP was also established in 1965.
Next Friday: The 1970s
Posted by Ignacio on
Thu, 07/12/2006
... in the film "Bamako".
"Bamako", featuring a mock trial of the Fund and World Bank, will headline this year's New African Films Festival, opening today at the AFI Silver Theater in Silver Spring, Maryland.
The film, directed by Malian filmmaker Abderrahmane Sissako won the Jury's Prize at both the Carthage Film Festival in Tunisia and the Lumières d'Afrique festival. It has also been screened at film festivals at Cannes, Toronto, and New York. It tells the story of Chaka and Melé and of a mock trial involving international financial institutions held in the couple's courtyard. The movie examines the role the World Bank, Fund, and WTO play in Africa and casts a critical eye on globalization.
Thank you for the heads up, Salomon.
Posted by Ignacio on
Thu, 07/12/2006
The World Bank's Independent Evaluation Group (IEG) launched today its Annual Review of Development Effectiveness 2006: Getting Results.
It assembles evidence around three questions central to poverty reduction:
- How effectively has economic growth translated into poverty reduction in Bank-assisted countries and what factors have affected these results?
- What factors have led to high-quality results in areas that deliver services to the poor?
- What measures help raise the accountability of public institutions responsible for delivering and sustaining these results?
Regarding Growth and Poverty Reduction:
A focus on the nature of growth. Poverty reduction will continue to require a strong focus on growth. To ensure that growth translates efficiently into poverty reduction, however, the countries, the Bank and their partners will need to find effective ways to enhance the ability of the poor to participate in this growth. This will require country-level analysis of the binding constraints to employment creating growth and to growth in regions where the poor may be concentrated, as well as analysis of the factors that hinder the intersectoral mobility of the poor.
From the report:
Some Growth Patterns Reduce Poverty More Effectively than Others
Achieving Poverty Reduction-Growth
Download the report
Posted by Ignacio on
Mon, 04/12/2006
Posted by Ignacio on
Fri, 01/12/2006
Like every Friday, from Raj Nallari and Breda Griffith's lecture notes
Against the backdrop of a mixed record of the effectiveness of aid, the scaling up of aid flows poses a daunting policy challenge for both developing countries and donors alike.
To understand how future aid flows might best be used, in this and upcoming weeks we will examine the record of aid provision from the 1950s onwards, comparing trends in both official and private capital flows to developing countries. We will show how private capital flows have become far more important in recent decades, but that official aid flows have recovered since the mid-1990s. Given these trends, and the need to scale up aid if the Millennium Development Goals are to come close to being met, it is important to examine the efficacy of aid flows. While the vast literature in this area is inconclusive, a key finding, which has been picked up by policymakers, is that aid flows work best if in good policy environments. Recent literature also suggests that the type of aid matters, with not all aid being aimed at achieving higher growth (e.g. humanitarian aid). We will end with a consideration of competitiveness, or “Dutch Disease” concerns, which naturally arise as aid is being scaled up. Recent research suggests that generally aid should, over the long run, be spent by government, with the liquidity impact managed by the sale of foreign exchange (the aid) by the central bank. This, of course, requires an improvement in coordination of fiscal and monetary policies.
Capital flows to developing countries can, if wisely used, help developing countries invest and devote expenditures to high priority current spending.
To put development aid flows in context, the exhibit below shows the source and composition of net flows to developing countries for 2004, broken down by private and public capital flow providers.
Source and composition of net capital flows to developing countries Amounts for 2004 in US$billion
* refers to Total Foreign Aid (grants) excluding technical cooperation grants
On the public side, three groups set broad guidelines for new policies or arrangements for development aid. These are the G-8 who meet annually and the Development Committee and the International Monetary and Financial Committee who meet twice a year, advising the World Bank and the International Monetary Fund on critical issues of development and the resources needed. Among the multilaterals, there is the IMF, the World Bank Group, the four regional development banks, the specialized UN agencies and the EU group. Bilateral donors comprise specialized departments in the relevant ministry in developed countries and/or specialized agencies dealing with development. On the private side, no specialized institution exists for channeling private flows, although some institutions such as the International Finance Corporation of the World Bank Group facilitate private investment in emerging markets.
Private net capital flows far outweigh official development flows. For example, the breakdown of the total amount of flows in 2004 (US$323.8 billion, as shown in the exhibit) shows that net private flows (and foreign direct investment in particular) account for more than US$300 billion of this. The role of private flows became increasingly important from the 1990s, outpacing substantially flows of public aid.
Public aid has, however, recovered in recent years from recent decades of relative decline. In particular, flows of public aid have increased from 2001 as donors begin to fulfill their commitments made at the Monterrey summit in 2002 at which the actions needed to reduce global poverty and meet the Millennium Development Goals were discussed. It is safe to say that poverty reduction is now firmly back on the global policy agenda, this time with specific targets and deadlines and commitments by rich countries to boost development aid, cancel debts and promote trade access for developing countries.
This scaling up of aid presents many challenges for the developing country. The Millennium Development Goals, a set of eight objectives for poverty reduction, improvement in indicators of well-being (health, education, infant mortality) and the promotion of sustainable development represent the international community’s commitment to narrow the gap between rich and poor countries.
Development aid has, however, a mixed track record in bridging the gap between rich and poor countries, calling into question the effectiveness of aid. The aid and growth debate has been studied widely generating conclusions on the relationship between aid and growth and by extension, poverty reduction that have held sway at different points in time over the past three decades. One of the main contributions of the work on aid and growth has been in linking the effectiveness of aid to conditions prevailing in the recipient country and/or on donor behavior.
One of the key developments in aid in recent years has been the formalized involvement of the recipient country through the country strategy paper process. Under this process, the recipient country sets out its development strategy, taking into account the country context, and the assistance needed to achieve its objectives (growth, debt reduction, poverty reduction, improvement in well-being). Increasingly the country strategy paper is prepared in consultation with the donors—multilateral and bilateral—and civil society.
Next Friday: Aid and Growth - Developing Country Experience 1950 - 2005
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