The leaders of the world’s eight largest economies are meeting Italy this week. Among the topics on the agenda is international financial support for developing countries. With a drop in trade and tax revenues, many of them are considering cutting social programs that protect the hungry.
Much of the international financial support for poor countries is handled through the World Bank and the International Monetary Fund.
VOA reporter William Eagle spoke with a leading economist of the World Bank, Andrew Burns, about the organization’s efforts to promote economic growth and food security in the developing world.
What is some of the support you are giving to Africa ?
BURNS: Essentially, as is the case for every country, there is a reduction in external demand, trade, and in GDP. That means for developing countries, including in Africa, there is going to be a sharp reduction in government revenues. That is important because the trade, which as part of the formal sector, is one of the most taxed sectors. About 30% of government revenues is coming from trade, and that is one of the areas that are the hardest hit.
What it means is that the government resources to maintain the programs in place are curtailed and the capacity to borrow from the private sector abroad is reduced. So, there has been a sharp stepping up of a full range of lending the Bank is doing to help these lower income countries to try to bridge the gap.
The bank lent $13 billion [U.S.] in 2007, and in 2008 it went up to $33 billion and we expect the same rate again in 2009 and 2010. The goal is to provide governments with additional sources of funding to allow them to maintain programs that they would otherwise have to cut. Cutting those programs would have serious consequences for the domestic population.
How much of the $33 billion is going to Africa?
BURNS: That $33 billion involves the Bank’s non-concessionary lending strategy, and that’s not going to the poorest countries. But there is a second arm [of the Bank], the IDA – the International Development Agency, that is lending concessional loans and grants. There, we have allocated $45 billion to spend over the next three years and most of that money is going to African countries.
Most of those are concessional loans?
BURNS: Yes, with low interest rates and long repayment schedules attached to them.
One of the issues of the G8 summit will be how to increase needed food aid and also how to improve food production. What is the Bank doing [to improve food production] ?
BURNS: The area of food is complicated and counter-intuitive. The history of food production in the world is that we are able to produce more food every year than we consume and as a result the price of food tends to goes down and the number of people involved in farming is able to decline without us running into any food shortages. That has generally been the case over the last 100 years. [However,] we had this unusual blip over the last two years where prices were skyrocketing and there was a concern that demand [for food] was outstripping supply. The reality is at the global level, demand was not particularly strong over last 18 months.
[However], there was a combination of supply side shocks that helped drive up prices, and there were reactions by policy makers that exacerbated the problem at the same time the prices of oil and biofuels were going up. Going forward, we don’t see those conditions reasserting themselves or there being a global shortage of food.
The issue is that in those economies with fast population growth, we find rates of growth in agriculture are very low and there’s more and more pressure to import.
So for the bank we don’t see a global food problem. We see more of a local food problem, and that is particularly acute in some African regions. By our estimation if Africa is able to raise productivity levels to the same as countries with similar climates and per capital incomes, they could double their production. So there is large scope for improvement, and the bank is focusing on improving their productivity growth and improve the extent to which the product that is produced is able to get to the market even within a country. That’s usually the problem that because of poor infrastructure, you can not get the food from an area that’s doing well to an area having a drought [in a timely manner].
Is there anything that you as an economist will be watching for at the G8 summit ?
BURNS: I think the Bank in general is of view that much of the attention of the G8 so far in this recession has been on their domestic economies, trying to set the financial sector back on track and provide stimulus to their domestic economies, and that is sensible and right, but now is the time to turn their vision outward a little bit to take a look at what implications this is having on poorer countries, and the longer term implications that those impacts will have for them.
Ultimately, what’s been occurring over last 10-15 years is much of the growth and dynamism of the global economy that high income countries have benefitted from has come from developing countries, and it is essential that this crisis that had little to do with anything that they did does not damage permanently what has become the world’s growth machine.
I think what the Bank will be arguing for is for the G8 countries to look a bit further afield to see what they can do to help the poorer countries weather this storm.
In terms of recommendations for micro and macro policies to weather or overcome the recession, what advice are you giving to developing countries?
BURNS: Warning against protectionism is a big part of it. We know that what made the Great Depression [of the 1930’s] great was the tit for tat escalation [of protectionist measures] that came with it. I think there is widespread recognition that that is not the way to go. That said, virtually every country is implementing polices that are protectionist at heart. But it’s our sense that to the extent it’s occurring, it’s much less than in the past and we are in good shape on that ground.
But for poor African countries, is an issue of trying to maintain a level of spending for programs that are already existing. These are not countries that have the resources or the ability to borrow that would allow them to start a “counter-cyclical” policy as we’ve seen in the United States. The real issue is to maintain their critical programs in terms of health care, education and the maintenance of already existing infrastructure that will ensure that when the downturn passes they are in good shape to rebound.
When you say developing countries do not have the means to enact counter-cyclical policies as in the US, you mean policies that increase spending as a means of stimulating economic growth?
BURNS: The stimulus program of the Obama administration or European governments is financed through two mechanisms: borrowing from domestic population and selling bonds to the US and to rest of the world. For developing countries, they don’t have that domestic financial market that would allow them to sell bonds to their local population. They don’t have that mechanism to finance deficit spending, and they also in current circumstances have much reduced access to international financial flows. For those two reasons, because there is no one to lend them the money to spend more than they are bringing in in tax revenues, they are really deeply constrained. That’s why the Bank is stepping in to boost their lending to help them maintain spending levels despite reduced revenues.