Low income countries have a $65bn hangover from the global crisis -will it destroy the MDGs?

August 9, 2010

     By Duncan Green     

I wrote this for the Guardian Comment is Free site (went up last Friday), summarizing the findings of a new Oxfam research paper. Take note, anyone involved in next months’ big UN MDG summit.

“Sometimes the things we don’t know about what is happening in the world take your breath away. A global economic crisis strikes just a few years before the world’s 2015 deadline for achieving the improvements in health, education and poverty reduction required by the UN’s Millennium Development Goals (MDGs). How has that crisis affected poor countries’ spending on schools, hospitals or growth?

Those numbers aren’t collected and published in anything approaching real time. So to find out, Oxfam had to fund Development Finance International, a non-profit specialist research and advocacy organisation, to collect the budgets of 56 low-income countries and crunch the data. What they discovered is truly alarming.

As revenue from raw material exports and taxation slumped, the crisis created a huge “fiscal hole” in the 56 poorest countries, decimating their budget revenues by $53bn (£33bn) in 2009 – nearly 10% of their pre-crisis revenues. A further $12bn will be lost in 2010, creating a total fiscal hole of $65bn over the two-year period. That hole ensures that the poorest countries will share the rich world’s pain of cuts in essential services (while countries in the middle hangoverlike China, India and Brazil steam on relatively unharmed), even though they missed out on the preceding financial boom. It’s like suffering a monumental hangover when you weren’t even invited to the party.

Governments in the poorest countries initially tried to keep spending with a laudable fiscal stimulus that contrasted with the sharp cuts made in previous crises. But it didn’t last – only a quarter managed to continue this stimulus in 2010. Countries with IMF programmes turned on the taps faster than others in 2009 but, conversely, are forecast to cut back more sharply in 2010; this suggests that, while the IMF protected social sector spending at the start of the crisis, it is now advising (or at least failing to dissuade) countries to reduce it.

Aid has failed dismally to fill the gap. I attended the G20 summit in London in April 2009, at the height of the crisis. It was a moment of real hope as world leaders came up with $1.1tn to bail out the global economy. But the lion’s share went to middle-income countries; their low-income neighbours have received an average increase in grants of $4.1bn a year – less than 1% of the London largesse. This has filled only 13% (one eighth) of the fiscal hole created by the crisis. Governments of poor countries have managed to borrow a similar amount at low interest rates, but the rest has had to come from borrowing domestically or by running down their reserves.

Meanwhile, Spain, Germany, France and Italy have all announced they are freezing or cutting their aid budgets – putting further pressure on poor countries’ finances. In this context, David Cameron’s promise to stick to the UK’s aid promises becomes increasingly important – not just for the money involved, but also as a message to other leaders that even when times are tough, breaking their pledges to the poorest countries should never be an option.

Many governments of poor countries are already cutting spending rather than risk a new debt crisis. Two-thirds of countries are cutting budget allocations in 2010 to one or more of the priority sectors of education, health, agriculture and social protection. According to their budget statements, Zambia has slashed its health spending by a third this year, while Mali, Benin, Niger and Nicaragua have taken the axe to their schools budget. Mongolia is cutting everything. All this, just at a time when they need to massively increase such spending if they are to achieve the MDGs. So there you have it, across low-income countries vital services are being taken away at a time when the poorest need them most and we didn’t even know it was happening. Shocking.”

One footnote – there’s nothing like writing something on the Guardian site to realize just how well informed and sensible the discussion is on this blog (check out the comments to see what I mean – who would have thought so many angry and/or unhinged people read the Guardian?). I definitely prefer you lot……