The last ten years have seen an explosion of external finance into developing countries. Many of the more recent success stories of the less developed countries have these financial flows as a basis, among them the exceptionally high growth rates (on average 5% p.a.), the lifting of several hundred million persons out of “extreme” poverty (usually defined as less than 1 (constant) dollar per day), the build-up of efficient financial market instruments, the establishment of market-driven economies.
Private and official flows (as recorded in the World Bank’s Annual Global Development Finance volumes) since the pricking of the “new economy” and “dot.com” bubble have increased from 174 bill $ in 2002 to 1.025 bill $ in 2007. Of this, nearly all is private debt and equity (since some of the official flows were evened out by paying back loans, etc.). To these volumes one should probably also add remittances of foreign workers to their home countries which nearly doubled from 143 bill $ to 240 bill $. Before the present crisis set in, these flows amounted to approximately 8% of developing countries’ GDP. This is a sizeable amount.
Data for 2008 are not available yet, but informed estimates point to a halving of 2007 levels. Anecdotal evidence from around the world would suggest that this is even optimistic: foreign portfolio investors have disappeared, or, worse, disinvested; foreign banks (often parent banks of local banks) are in trouble at home and thus have discontinued credit lines to their affiliates or subsidiaries; domestic investors are bringing their capital outside the country into (perceived) safe havens; foreign workers are laid off, their remittances thus reduced – and they might in many cases become a burden on their countries of origin, because they go back and need to be fed, instead of sending money home. In addition, because of the above, many emerging and developing country currencies are losing in exchange value relative to the dollar and the euro, thus exacerbating the already high debt services private and sovereign debtors have to fulfil.
It now becomes obvious that much of the success of the past years was excessively built on low international interest rates, a successful search for high yields in emerging and developing countries, on the assumption that structural reform, the introduction of market mechanisms, the opening up of countries to the world economy would lead to an ever-increasing flow of outside capital to emerging and developing countries. These countries to a large extent “have done everything right”, have followed the prescriptions of international financial institutions and the expectations of private investors – and now are getting punished for something they certainly cannot be blamed for.
And, to make matters worse, the recent upswing has to a large extent been aided by the strong growth of these countries who provided outlets for the goods and services of the industrial countries and helped keep inflation down by low prices for manufacturing goods exported by these countries. We know now, that the export share in GDP of developing and emerging countries between 2002 and 2007 has increased from 29% to 39% – and that at a time of very fast GDP growth.
To call upon these countries to increase their internal financing, in order to compensate for the fall in foreign flows can only be successful in countries with high foreign reserve accumulations as a result of current account surpluses (mainly Asian and oil-exporting countries). The net oil importers, among them the many really poor countries (mainly in Africa, but also in Latin America and parts of Asia), do not have enough domestic savings potential to increase financing.
The G-20 summit in Washington, D.C. in mid-December 2008 called upon the International Financial Institutions (IFI) to increase their activities and step up lending and equity operations. By end of January 2009, the following plans have emerged:
1. World Bank Group (WBG)
President Zoellick has announced a tripling of the WB’s commitment over the next three years to a total of 100 bill $, with a special 2 bill $ window for the poorest (IDA) countries. The private sector arm of the WB, IFC
plans to double its Global Trade Finance Program, launch an equity fund to recapitalize distressed banks, create a new infrastructure facility and strengthen its advisory services.
2. International Monetary Fund (IMF)
The IMF has already extended new crisis-related programs to Hungary, Ukraine, Pakistan, Belarus and Iceland and is in talks with a number of other countries. IMF which is the only institution able to provide liquidity aid, at present has a potential to support programs to the tune of 250 bill $. MD Strauss-Kahn has urged member countries to increase his lending capacity to 500 bill $.
3. European Bank for Reconstruction and Development (EBRD)
EBRD’s board has decided to increase the bank’s activity potential for 2009 by around 20% to 7 bill €, with half the extra amount (of 1 bill €) going to Central and Eastern Europe, and the other half to the Western Balkans and the Early Transition Countries in the Caucasus and Central Asia. This additional money should be used primarily for the financial sector (both extending credit lines to SMEs, for energy-efficiency), but also for the corporate sector and infrastructure projects. In addition, special emphasis will go to the Trade Facilitation Program.
4. Asian Development Bank (ADB)
Demand for ADB activities is estimated to be twice the potential lending volume (8 bill $) following a potential capital increase. Most of this additional money should go to the poorest countries, new emphasis will be put on regional cooperation and trade finance.
5. African Development Bank (AfDB)
A recent meeting of African finance ministers and national bank governors committed to enhanced structural reforms and strengthened regulation and oversight. The expected increased demand for AfDB services will be met by being more selective, strengthening trade finance, putting more emphasis on financing extractive industry activities and by extending partnership with other IFI.
6. Inter-American Development Bank (IDB)
IDB is planning to increase its lending volume in 2009 by 20% to 12 bill $. The bank also plans in addition to set up a new quick-disbursing facility (6 bill $) to help countries sustain growth, with the purpose of helping to finance private sector firms which can no longer obtain domestic or foreign finance.
This short survey shows that IFI can play a major role in helping emerging and developing countries to overcome some of the financing bottlenecks they are facing today. The sums contemplated are limited by the capital resources of the IFI – which again are the result of political decisions by their member countries. It is clear that IFI by no means can fully replace the expected halving of private sector flows. While countries with large foreign currency reserves, among them the large economies of China, India, Russia and a number of other Asian and Middle-East countries, will be able to compensate some of these foreign flows, it will be once more the poorest and most vulnerable countries which will suffer. The recent risk aversion of Western banks, in addition to their liquidity problems and needs to write off toxic loans, will dry up financing flows to poor countries.
It is in this situation that the need for OECD countries to honour their commitments to increase official development assistance to poor countries, becomes even more important. While also the present ODA levels in the amount of less than 110 bill $ are only a drop in the wide sea, given the large financing needs, both global solidarity and the self-interest of developed countries to maintain the development success of the past few years commands us to take seriously the commitments to increase the ODA share in GDP to .51% by 2010 and to .70 by 2015.