Responding to the Global Recession
Context
The past year has seen a dramatic change in the prospects of developing countries due to the effects of the global recession. Declines in foreign direct investment, export revenue, remittances, tourism and other adverse impacts of the recession will reduce economic growth and, in turn, may unravel progress towards the Millennium Development Goals (MDGs). World Bank forecasts released on 31 March 2009 indicate that global economic growth will contract by 1.7 per cent in 2009, compared to 1.9 per cent positive growth in 2008. Developing countries' combined growth will fall to 2.1 per cent, or to zero per cent excluding China and India.1
The impacts on growth will vary across the developing world2 but overall will have an enormous human cost. Poverty reduction gains will be substantially lower as a result of the recession. Based on economic growth projections made in late March, it is estimated that up to 90 million extra people world-wide (62 million in Asia) will live in extreme income poverty in 2009 as a result of the global economic slowdown. This represents not just a slowing but a reversal in the global extreme poverty reduction trend since 2005, with the global number of extreme income poor rising to over 1.2 billion people in 2009 (see Diagram 2).3 Further upward revisions to poverty projections may occur as further information becomes available on the depth and extent of the global recession.
Diagram 2: Global Trends in Extreme Poverty
An obvious manifestation of the global economic slowdown in developing countries will be increased unemployment, under‑employment and loss of income. Numbers of working poor are projected to rise by more than 200 million.4 For example, many laid‑off formal sector workers will be forced into low‑income jobs in the informal and rural sectors.
The United Nations Children's Fund (UNICEF) has raised the prospect that the global recession will create inter-generational poverty traps as children leave school to find employment to supplement family incomes or are withdrawn by parents no longer able to afford education costs.5 Previous economic crises have displayed evidence of increases in child mortality and morbidity, child exploitation, violence against women and children and other forms of abuse.6 Current World Bank projections indicate that an average of 200,000 to 400,000 more infants may die each year if the current recession persists.7 Widespread job losses in urban, export-oriented sectors will increase unemployment and push more workers into low‑income occupations and working poverty. Women are likely to be disproportionately affected, increasing vulnerability to trafficking or exploitation.
The global recession will generate enormous difficulties for developing country governments. While needing to help newly vulnerable populations, they will have less tax and other revenue to fund crisis responses and to maintain basic services such as health and education. This places a special responsibility on donor governments to support developing country counterparts to generate employment and help limit the scale of the human impacts.
The recession is a global challenge requiring global solutions. G‑20 members, including Australia, have reaffirmed their commitment to achieving the MDGs. G‑20 members have recognised that the current crisis will impact disproportionately on the vulnerable in the poorest countries and that there is a collective responsibility to mitigate its social impact.
Response
Major new multi‑year commitments will be made to improve food security and build community resilience through rural development ($464.2 million over four years) and support high priority infrastructure needs ($454.2 million over four years). Australia's funding will also assist partner governments sequence and implement key reforms through performance‑linked aid ($336.1 million over four years).
A Global Economic Crisis Taskforce has been established in AusAID to coordinate a comprehensive aid response to the global recession, as part of broader whole-of-government efforts. The AusAID taskforce has overseen a rapid review of existing programs to assess partner government needs arising from the recession and to identify the most effective means of support.
The objective of Australia's aid response to the global recession is to maintain progress towards the MDGs and to support early, sustainable recovery. Priority will be given to generating employment and restoring growth; supporting delivery of basic services, such as health care and education, to the poor; and helping the vulnerable. AusAID will strengthen monitoring and analysis on the path and impacts of the recession, ensure existing programs are responsive to changing needs, and seek opportunities to support priority policy and structural reforms.
Australia will work closely with other donors, in particular the World Bank and the Asian Development Bank (ADB) to support global response efforts and to analyse regional and country‑specific needs and design appropriate responses. Australia will contribute to a 200 per cent general capital increase for the ADB (see page 66 for details). This contribution will significantly expand the ADB's capacity to lend to developing member countries in the Asia‑Pacific region, assisting governments and the private sector reduce poverty.
Generating Employment and Restoring Growth
Increased efforts to generate employment will be an essential component of an effective response to the global recession in almost all developing countries. Keeping people in work, even on minimal incomes, helps to maintain essential household purchases and promotes social stability, especially in countries where systems of social protection are weak.
The employment generation impacts of existing aid programs in infrastructure and enterprise development will be boosted significantly by 2009‑10 budget initiatives in rural development and food security (see page 20 for details) and economic infrastructure (see page 23 for details). Emphasis will be given to labour-intensive public works programs, such as road maintenance, especially in regional areas, where alternative employment opportunities are scarce. Programs to increase employment opportunities will be targeted to groups most affected by the recession, such as women in export‑oriented industries or rural youth. Australian support for technical and vocational training will also continue to be expanded.
Sustaining investment in infrastructure, including maintenance, is also critical to avoid exacerbating future infrastructure bottlenecks which will lengthen the impact of the recession and slow economic recovery.8
Established and successful programs of support in economic governance in the Asia‑Pacific region have positioned Australia well to assist developing country partners to implement structural changes that will better prepare them for economic recovery and increase their overall resilience to future economic shocks. Potential areas for increased support may include efforts to promote private sector activity, including privatisation of poorly performing state‑owned enterprises, increased tendering of inefficient government services such as road maintenance and wider efforts to improve the business‑enabling environment.
The need for policy and regulatory reform to address the causes of the global recession is widely recognised. The global recession provides both an opportunity and a rationale to move more quickly to address overdue reforms, in areas as diverse as financial regulation, trade, competition and public sector improvement.
Supporting Service Delivery
Maintaining and increasing aid spending in education and health will have a positive impact on society's most vulnerable. It will, for example, reduce the pressures on children to leave school. Such assistance will also have an impact on the longer‑term human capacity in developing countries by minimising serious regression or lags in basic education for the current generation of children. There is likely to be greater demand for basic public health services at the community and facility level with less ability to pay out‑of‑pocket expenses. Australia will work with partner countries to ensure aid spending is effectively targeted towards minimising recession impacts on the delivery of essential services. Appropriate actions to support maintenance of basic health and education services may include increased school‑based grants, fee relief, and funding to maintain essential pharmaceutical supplies to health centres.
As government revenues decline it will be important to focus limited resources on essential health, education, and economic infrastructure services. Australia will assist partner countries to assess fiscal gaps, re-prioritise expenditures and improve the quality of budgeting and expenditure management. Budget initiatives in 2009‑10 to increase the use of performance‑linked aid (see page 34) and improve transparency and accountability in government (see page 33) will support partner country efforts.
Helping the Vulnerable
The impact of the global recession will be felt differently in different countries, with particular groups more vulnerable in some countries than others. The most vulnerable groups include:
- those just above the poverty line who have limited access to alternate sources of income in an economic downturn;
- children of poorer households who may suffer malnutrition, be subject to neglect or violence or who may need to leave school to seek work;
- those engaged in trade‑exposed industries;
- poor pregnant women, newborn babies and infants who may have less access to appropriate medication and nutrition; and
- marginalised groups, such as ethnic minorities, the rural poor and people with a disability.
Australia will work with partner governments, civil society groups and other development partners to improve the quality and timeliness of vulnerability assessments particularly in the Asia‑Pacific region.
To support those most at risk of falling into extreme poverty and avoid the risks of life‑long 'poverty traps' social protection programs may include:
- conditional cash transfer programs, such as payments made to parents for children attending school;
- nutrition and feeding programs in schools or for pregnant and lactating women and infants; and
- micro‑insurance programs to support informal sector livelihoods.
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