The Euro Zone Crisis and its Impact on ODA

Published: 7 June 2012

J. Brian Atwood, DAC Chair, International Federation of Red Cross and Red Crescent Societies. Geneva, 7/6/2012

President Konoe, Secretary General Geleta, distinguished Board members and delegates. Thank you very much for inviting me to address this 25th Session of the Governing Board of the International Federation of Red Cross and Red Crescent Societies.

I have long admired your contribution to humanitarian endeavors. The Red Cross/ Red Crescent is often in crisis zones where no other organization will go. In the 1990s, I worked closely with your organization in both Rwanda and Kosovo. Your Societies are in every corner of the world contributing to both development and disaster relief.

You have asked me to address an issue that preoccupies many today: the relationship between the Euro crisis and prospects for maintaining our support of the developing world and poverty reduction through official development assistance (ODA).

The global economic outlook remains challenging. We are in a period of adjustment and high uncertainty. OECD projections are for weak growth in the near term followed by gradual recovery during this and next year. But if we are not able to properly deal with the Euro crisis, we risk the return of the global recession and an economic shock that could have a major impact on international financial markets. Nobody is able to predict with any confidence how this would unravel, but there is agreement that its consequences could be devastating, especially on the world’s poorest nations.

Despite the fact that developing countries have faced a number of external shocks, the number of people in developing countries living on less than $1,25 a day fell from about 1.8 billion in 1990 to 1.29 billion in the years before 2008. The global financial crisis disrupted this positive trend. The costs of food and fuel, and the freezing of credit lines negatively impacted on vulnerable populations and slowed the rate of poverty reduction. Yet, even with slower growth rates and the commodity price issues the developing world faced, the global extreme poverty rate kept falling, albeit at a slower rate.

By 2010, the $ 1.25-a-day poverty rate had fallen to under half of its 1990 value. The first MDG target (i.e. halving extreme poverty), though originally it had been characterized as the most unrealistic goal, had been achieved despite the global crisis.

This is very good news, but we cannot rest on our laurels. We are still challenged by the fragility that poverty represents.A new global financial crisis could be quite devastating, especially if we have fewer ODA resources to respond. Consider that:

• more than a billion people still live in extreme poverty,
• those who moved above the $1,25 a day poverty line are still poor
and very vulnerable,
• there is less progress regarding the $2-a-day poverty line (the number of people living below this line only fell from 2.50 to 2.47 billion people); and,
• today’s modest global recovery continues to limit the development prospects of developing countries, particularly Low Income Countries (LIC).

If there were to be a further economic downturn, poor countries could suffer in several ways:

• While low-income and lower-middle-income countries have been able to withstand the economic shocks of the past years relatively well, their growth and ability to develop will be invariably affected if the world economy - and this time including the major emerging economies - were to suffer a pronounced cool-down.
• A particularly worrying scenario would see commodity prices increase further, especially oil and food prices. While the primary effect of a slowdown should help relieve demand pressure, food price spikes in 2008 and 2011 are a clear indication of how persistent these pressures are. The poor will spend even larger portions of their income on food.
• The third channel, and the one that is of course of immediate relevance to the DAC, is international development finance, and in particular ODA:

Here, the encouraging news is that, since the onset of the crisis in 2008, ODA has held up remarkably well. Between 2008 and 2010, we have seen consistent increases. It reached its highest level ever in 2010. In the decade before 2010, ODA had increased by 63% between 2000 and 2010. This clearly had an impact, enabling these socities to achieve high growth rates and even to withstand the pressures of the global crisis. This was a real triumph of reason over despair. But can we do it again?

The prospects are not good as we experience major fiscal pressures. In 2011, we saw a decrease in net ODA of 2.7 percent in real terms, while the nominal figure still showed a small increase.

So what is the outlook? The DAC conducts an annual Survey on Donors’ Forward Spending Plans. The survey is meant to reduce some of the uncertainty around planned ODA by projecting spending plans – for up to three years – for DAC members and the largest 23 multilateral agencies. This is the only regular, global projection of its kind.

The Survey looks at Country Programmable Aid (CPA) which is a core subset of ODA. It excludes non-programmable items such as humanitarian aid, debt relief, and in-donor costs, such as administration costs and refugees in donor countries. It covers roughly 75 percent of global ODA. CPA has repeatedly proven to be a good proxy for projecting the overall flows. So what does the picture look like?

Global CPA in 2011 is estimated at USD 93.1 billion, representing a decline of 2.4% compared to 2010. This decline contrasts with last year’s projected increase for 2011, so donors are clearly cutting below what they themselves predicted. In real terms, the decline represents nearly $2.3 billion; it mainly affects countries in Central America, as well as some large recipients in East Asia (e.g. Indonesia and the Philippines).

This is troubling as it constitutes a reversal of recent trends and of the increases agreed previously, designed to reduce the effect of the downturn on developing countries. And preliminary findings suggesting that global CPA could recover in 2012, will not help, as this 6% increase is mainly due to soft loans from multilateral agencies (outflows), reflecting the delayed effects of earlier capital replenishments. From 2013, global CPA is expected to stagnate, confirming earlier findings that it takes several years from the onset of a recession for the full impact on ODA flows to be felt.

What is to be done? The most important thing will be to find a solution to the worsening crisis in the Euro area. It will be essential that advance economies:

• restore economic and financial stability. This will only be possible if they pursue reforms in the global banking system,
• prevent renewed signs of protectionism, keeping the markets open as a precondidtion for recovery and international trade, as well as international investments.
• And maintain commitments to development, so that we will see ODA safeguarded, ringfenced if you will, as an investment in growth and stability.

This is an urgent matter, and we should be deeply worried about the implications. It is beyond question that all public expenditures must come under much enhanced scrutiny during these times of budgetary crises. But cutbacks in ODA will translate into larger expenditures later—in peacekeeping, relief and more conflict.

I am concerned, however that we will be tempted to look for budget lines that may be seen as “easy” to cut. Easy perhaps, from the political perspective of some; however, “easy” is not the same as wise.

What I hope we will recognize is that, in investing in developing countries, we are investing in the key sources for future global growth - and that means the growth of our own, advanced economies. Our economies are losing population; we need new markets. During the last decade, more than 80 emerging and developing economies managed to double OECD per capita growth rates. Since 2009, they have accounted for more than two thirds of global growth. By 2030 we expect them to account for nearly 60% of world GDP.

It is also important to recognize that these investments have sound returns. It is impressive how low income countries, particularly African economies, have held up overall during the economic and financial crisis.

Africa is now one of the world’s fastest-growing regions, as the Economist reported very recently. In the decade before 2010, six of the world’s ten fastest-growing economies were in sub-Saharan Africa. During this time, the simple unweighted average of countries’ growth rates was virtually identical in Africa and Asia. Moreover, African countries are forecast to account for seven of the top ten places over the next five years. The average African economy will outpace its Asian counterpart according to the Economist. Sub-Saharan Africa has the highest return on investment of any region in the world. Yes, the African economies start at a lower base; however, this is still very impressive growth.

ODA is not the whole story here, but it is a crucial part of it. Better governance and strong leadership for structural reform are equally important. But ODA has been a catalyst for change, and it has filled budgetary gaps. Africa world look much different today without ODA. And progress in domestic resource mobilisation has helped Africa become less dependent on ODA. The continent more than tripled its revenue collection between 2002 and 2008 to reach over US$513 billion. There was a sharp fall in 2009 due to the crisis, but by 2011 this had recovered to hit a new high of US$520 billion in 2011. Donor agencies are now promoting a tax and development strategy initiated at the OECD.

It is not for donors to take credit for all this progress – this is due essentially to the countries themselves, their improved governance, human and institutional capacity, and the private- sector driven growth and investment this has generated. But this in no way diminishes the contribution of ODA investments. Clearly, ODA resources are much too small to create growth on their own. It is not the job of ODA to replace private sector activity, but it can help reduce the risks that investors consider before moving private capital into an economy.

ODA has acted as a catalyst of change. It is key in unlocking growth sources. ODA has been essential as a transformational resource in creating the enabling environment based on which private sector-led growth can take off: by working to encourage partners to strengthen governance systems, to reform economic policies and to create more human capacity through healthcare and education.

Moreover, while in a good number of cases, countries have benefitted from the resource boom and improved terms of trade, we have also seen progress in many countries that do not have resource endowments. Democracy has been spreading in Africa, and that means governments that are both more legitimate and more accountable.

This has helped create effective partnerships with donors. The international focus on certain MDG targets has had a much larger impact because both governments and civil society have joined with bilateral and multilateral donors in a real partnership.

Africa is experiencing some of the biggest falls in child mortality ever seen, anywhere. We can also see tangible progress in areas like HIV/Aids or malaria. The MDG target of universal primary education is within reach for 2015. These human capacity goals are essential in sustaining development progress.

This progress has been achieved for much less than the 0.7% of GNI that most donors have committed to. In fact the current DAC average is only 0.31 percent of GNI. Just imagine what we could accomplish with these good partners if we fulfilled our commitments.

A few years ago some claimed that the MDGs were a failure. These voices are quieted by the results we now see. Today, we essentially have certainty that the headline target (halving absolute poverty) will be comfortably exceeded. China accounts for a disproportionate contribution to the MDGs, but progress has been made in all regions. Over the last two decades, we have seen development progress on an unprecedented scale. And many people expect further significant progress until 2015, due to the lag between making investments and measuring the impact .

So we should feel very proud of the record of development co-operation in producing results – even if we know we can do better. We have an unprecedented opportunity to do so through the Global Partnership for Effective Development Co-operation that will formally be established in a few weeks time.

This new focus on development effectiveness will empower developing partners to take charge of their own destiny. It will encourage the growth of viable country systems to account for resources and measure results. It will improve coordination and lower transaction costs. And it will help us rationalize an international system that had grown fragmented, incoherent and ineffective. That is the promise of Busan. If we can make it work, ODA will be an even better investment.

Those of you in this room must be sadly aware of the enormous cost that lack of action or reduced funding implies. We have seen time and again how natural disasters or conflict has translated into human disaster and massive development setbacks. We have never had enough money and political will to address development needs adequately, to prevent fragile states from falling back into chaos. This in turn leads to a massively increased cost for the international response to such crises.

The DAC is not the body to address the resolution of the euro zone crises, but the resolution of the crisis will be essential for development. We will be sorely tempted to reduce ODA expenditures if Europe falls into recession. However, that will only make recovery more difficult. For ODA is part of the solution. The developing world is a growing marketplace. ODA is a better investment than it has ever been. Our failure to help at this critical point in time could be very costly. If you think this is counterintuitive, I ask you please to examine the record of the past 5 years.

Thank you.