The Financial Crisis, a Development Emergency, and the Need for Aid

EDITOR’S NOTE: As the developing world fears recession-hit, wealthy nations will cut development assistance, Homi Kharas, senior fellow at the Wolfensohn Center for Development at Brookings, is calling on aid agencies to speed up the disbursement of approved funding, valued at $60 billion, to effectively assist poor countries amid the ailing global economy. A few excerpts:

Poor countries depend on foreign aid for much of their basic needs-food, primary education, health care, and minimal levels of public investment in infrastructure-and the world has responded by providing about $100 billion each year in aid. This is not the time to debate whether aid “works” or doesn’t work. No one believes that a rapid cut-back in aid would help countries in the short-run. Yet that is exactly what is happening, and it is forcing poor countries to cut back public spending. Not a single poor country has had the resources to implement a fiscal stimulus.

Some rich countries, like France and Italy, have already announced aid cuts, citing ballooning domestic budget deficits as the cost of bailouts mushrooms. Others, like the UK, bravely promise to continue to provide aid at promised levels. But even in these cases, the money that aid recipient countries receive has less value. Thanks to the financial crisis, each pound sterling today is worth 38 cents less than in 2008. Every euro is worth 18 cents less. Overall, currency movements alone will wipe out almost $5 billion in aid in 2009-even after allowing for the fact that some aid, like technical assistance and debt relief, is not cash.

It turns out that a considerable amount of aid money-an astonishing $60 billion-is already in the pipeline, but procedural requirements have stalled its delivery to poor countries. $33 billion of this sum is sitting in Washington, DC in the World Bank’s International Development Association (IDA) portfolio. These funds have already been allocated and budgeted by rich countries. The projects have been vetted as important for development. Yet, the delivery of this money has been slow.

Accelerating disbursements-the flow of money to already approved projects-is the surest way of helping poor countries today. There are several tricks that can be used. First, some of the money can be reprogrammed into budget support-freeing the funds from slow moving projects and consultant contracts and infusing it directly into the coffers of poor governments. Second, aid agencies can relax the amount of counterpart, or matching, funds that poor countries are supposed to provide. Cost-sharing, while perhaps ideal, may be unrealistic and harmful when treasuries are broke. Third, emergency procedures can be used for some countries that have sound policies and programs in place. When there are major calamities, aid agencies suspend some of their standard rules and procedures in order to get money out of the door fast.

That is why the G20 should consider declaring a development emergency for 2009. They should urge aid agencies to take every step possible to accelerate the disbursement of already approved funds. They should support staff and managers for taking risks to speed up the flow of money. Their representatives on the boards of these agencies should monitor progress. Poor countries need the money, and they need it now. Rich countries have already paid for this. Now they just need to demand speedier results.

Re-published with permission by the Wolfensohn Center for Development at Brookings. Visit the original article.

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