Development & Aid, Economy & Trade, Headlines, North America, Poverty & SDGs

FINANCE: Mixed Economic Results Bad News for Development Goals

Emad Mekay

WASHINGTON, Apr 19 2004 (IPS) - Private capital is returning to the developing world but mainly to a few middle-income nations, the World Bank said in a report released Monday.

According to the bank’s ‘Global Development Finance 2004’, net private capital flows to developing countries climbed to 200 billion dollars in 2003 from 155 billion dollars in 2002, but the bulk of the money, in bonds and bank loans, went to countries like Brazil, China, Indonesia, Mexico and Russia..

While the news was good for those nations, the bank said it was concerned that a small increase in overseas development assistance (ODA) from rich countries to poorer states was alarming because that aid is critical to the poorest nations.

The bank said net ODA rose by only six billion dollars, to 58 billion dollars in 2003, one-half of which came from debt relief rather than new aid to developing nations.

“This small increase in ODA is troubling,” said François Bourguignon, the bank’s chief economist, adding that the amount remained well below what is required to achieve the Millennium Development Goals (MDGs).

The eight MDGs, set by the United Nations in 2000, include halving the incidence of poverty from 1990 levels, achieving universal primary education and developing a global partnership for development, with targets for aid, trade and debt relief, all by 2015.

The bank said that another one billion dollars in the ODA hike came from fresh aid to Afghanistan and Pakistan, primarily as a result of their roles in the U.S. “war on terrorism”.

Sub-Saharan Africa was the largest recipient of ODA, accounting for 39.8 percent of flows in 2002, the report added.

Last year’s capital flows increases are due in part to low interest rates in industrial countries, and reflect a rebounding global economy, according to the bank.

The Washington-based organisation also attributed the rise to what it called “sounder fiscal policies” and “structural reforms” in many developing countries, two terms that indicate sets of economic changes championed by the bank and its sister financial institution, the International Monetary Fund (IMF).

Those policies include privatising state-owned assets, floating local currencies and deregulating local laws to allow the free movement of foreign capital.

Most international bodies, like the World Bank and the International Monetary Fund (IMF) say that foreign flows are central to countries’ development and many nations focus intently on attracting more foreign funds.

The bank said foreign direct investment (FDI) declined for the second consecutive year in 2003, dropping to 135 billion dollars, down 24 percent from its 2001 peak of 175 billion dollars.

Much of the decline can be attributed to weaker FDI in the services sectors, such as telecommunications and energy, after the privatisation push of the late 1990s had ebbed, according to the report.

The bank argued that the rise in private capital flows reflects improved global economic growth, which went from 1.8 percent in 2002 to 2.6 percent in 2003, and is expected to jump to 3.7 percent this year.

Developing countries, as a group, grew an estimated 4.8 percent in 2003, and are expected to reach a 5.4 percent growth rate in 2004, which would beat their previous 5.2-percent record high in 2000, adds the report.

The bank said the rebound was due to the easing of fiscal and monetary policies in rich countries, especially the United States, and to a 10-percent rise in non-oil commodity prices, upon which many developing countries heavily depend for foreign exchange..

The bank, which administers the Heavily Indebted Poor Countries (HIPC) initiative to forgive some debts of the poorest nations, said low debt levels improved developing nations’ economic performances in 2003. The total external debt of those states was 37 percent of gross domestic product (GDP) last year, down from 44 percent in 1999, according to the report.

But it also warned that the positive developments are threatened by deficits, which have grown since 2000 in many rich nations and imperil the flow of capital to developing ones. The U.S. account deficit is now at more than five percent of GDP.

“Fiscal deficits in the developed countries have widened to 3.7 percent of GDP,” said Uri Dadush, director of the bank’s development prospects group.

“If uncorrected, fiscal imbalances could push real interest rates higher globally as the recovery builds, potentially dampening capital flows to low and middle-income countries, as the public sector in the high-income countries competes with developing countries for access to global savings,” he added in a statement.

The warning comes days after the IMF said that the most serious risk to the economic recovery was “achieving an orderly resolution of global imbalances, notably the large U.S. current-account deficit and surpluses elsewhere”.

The IMF and the World Bank will hold their semi-annual meetings, known as the spring meetings, this weekend in Washington.