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Q&A: Money Crisis May Hit Development Assistance

Sabina Zaccaro interviews PAMELA COX from the World Bank

ROME, Oct 8 2008 (IPS) - The global financial crisis and rising food prices are certain to impact Latin America despite the growth in recent years, says Pamela Cox, the World Bank's vice-president for Latin America and the Caribbean.

Latin American countries are certainly "better positioned than they were ten years ago, so they are certainly better placed to weather a crisis, but they are going to see impacts, and are already seeing impacts," she says.

Cox was in Rome last week to meet representatives of the Italian government and the Rome-based U.N. food agencies, the International Fund for Agricultural Development (IFAD), the Food and Agriculture Organisation (FAO) and the World Food Programme (WFP), to discuss joint commitments to tackle the food crisis.

IPS: How is the food crisis affecting the Latin American region? Pamela Cox: There are many impacts on the region. There is an economic impact and there's a human impact.

Latin American countries have reduced their debt, they are running budget surpluses, they have strengthened their financial systems and developed their domestic credit markets, and therefore they're carrying less external debt. Despite this, impacts can be seen already.

Stock markets are down in the region, we see currency movements, we are seeing falling commodities prices, which is especially important for the region since regional growth in the last five years has been much linked to high commodity prices.

We are seeing inflationary pressures because of the high food and fuel prices, and countries are feeling this impact, so probably they see declining demand, particularly those countries that are linked to the U.S. economy like Mexico and the Caribbean. And they are seeing falling remittances; Mexico remittances from the U.S. are down 12 percent.

IPS: What about the human consequences? PC: The poor are the most affected when there is inflation, and are most affected when food prices go up, because they can spend up to 70 percent of their income on food.

So, in particular we've been working with countries on safety nets for the poor, what you can do with school feeding programmes, with conditioned cash transfers, what you can do to bring food prices down – for example move import tariffs on food.

I think if this crisis goes forward it's not just how we cope on the macro side. It's how we cope on the human side too.

TerraViva's Ramesh Jaura speaks with Pamela Cox

IPS: Despite growth, Latin America still has high social inequality. Could that be a cause of persisting poverty in some areas? Is the World Bank addressing this? PC: In the last five years the region has grown an average of five percent a year. But despite the fact that Latin America is a middle income region, it is one of the most unequal regions in the world. And this has been very stubborn, very difficult to reduce. Inequality is coming down a bit now in Brazil with growth, but it is also because of the investments Brazil has made in human capital and conditional cash transfers.

We have just released a tool meant for policy makers to help target their public interventions, and reduce inequality in Latin America and the Caribbean. The Human Opportunity Index is based on data representing 200 million children, and covers roughly the last decade, focusing on basic services such as education, water, sanitation, electricity, and to what extent they are equitably distributed in the largest Latin American countries.

These findings are helping to measure opportunities in the region as well as how those opportunities are distributed amongst citizens. Between one quarter and half of the income inequality that we observe among adults in Latin America is due to the circumstances they faced in childhood. And while their race, gender and location all played a role, no circumstances are more powerful than their mother's education and their father's income.

The HOI (Human Opportunity Index) has isolated the areas where investment pays off. It shows very clearly which people in the population will get the most from these investments, and governments can track this all the time. What we are trying to do is give policy makers a tool to track progress using real data to show that public investments are paying off in reducing inequality. Of course, it's up to governments to use it. Brazil, Uruguay and Chile have already asked for more detailed opportunity assessment.

IPS: On the global emergencies again, President Bush said the government's financial rescue plan to bolster the U.S. economy will take some time. How does the World Bank expect the global markets crisis to affect Latin America? PC: The countries are in a better position; financial regulations are stronger than they were ten years ago. That said, we have already seen currency movements, and we are seeing contraction of credit, which means that it will be much more difficult for private businesses to get credit.

We will probably see a decline in official development assistance as governments cut back on their programmes. It hasn't happened yet but it could happen.

It's very difficult to say exactly how the crisis will end up, because each day we see a new development, something happens and the markets react.

But the Bank can play a very important countercyclical role. We have some new debt instruments called development drawdown options where we make the loan but countries don't have to draw it down, it just sits there until they need it; several countries are using this. We have the same instrument for catastrophes too, countries can take one of these out and just keep it there, and in case of natural catastrophes like earthquake or hurricane, we disburse.

We are looking at working with some countries on the financial sector, helping them strengthen their balance sheet. We already have heavy investments in conditioned cash transferred programmes. It is very easy in a crisis when you have this set-up to put more money through these programmes, so people can buy more food.

We are also expanding our investments in agricultural production aimed at small farmers. We have done operations in Honduras for 300 million dollars, and then in Argentina and Nicaragua. There's a variety of ways that we can come in and help in such a crisis.

IPS: Do you think that the scenario resulting from this crisis is going to change the role of the World Bank and other financial institutions? PC: The role of the World Bank is already changing. Over the last five or six years we have changed our approach in many ways.

One strategic theme is working better with middle-income clients and be more responsive to what they want. We have done a lot of innovations in the last four years, particularly in Latin America, by introducing new financial products in response to what countries want. Where countries want longer terms, we have introduced longer terms; we have introduced these development drawdown options, and reduced their pricing. And we have helped to develop domestic capital markets by issuing in domestic currencies or doing swaps.

We are trying to be very responsive to what governments want. So, I think it is a very different Bank. The Bank does play a countercyclical role; we have a very healthy balance sheet, we just placed 25 years bonds at a very good interest rate so we obviously can still land, because we are essentially working credit cooperative. We are in a very good position to help countries through this crisis.

But I have to point out that the amount of money we are talking about is probably beyond just the World Bank. I mean, we do on the IBRD (International Bank for Reconstruction Development, the main component organisation of the World Bank) side and IDA side (International Development Association) only about 21 billion dollars a year globally, and if you look at bailout package in the U.S. of 700 billion…I'm just giving the order of magnitude here. So, obviously we can come in, but the World Bank's resources alone would never be able to completely stave off the crisis.