International Responses to the Financial and Economic Crisis

This paper examines some salient features of the G20 responses, particularly those aimed at supporting developing countries, and crisis lending by the International Monetary Fund. A closer look reveals that the pledges made by the G8 and G20 countries to help poor countries cope with the Great Recession largely involve repackaging previous aid commitments. There is little in the way of providing new funds so that poor countries could protect their progress in social development. In 2009, the President of the World Bank Group called for developed countries to commit 0.7 per cent of their stimulus packages to the newly created “vulnerability fund” to foster recovery and strengthen social protection in those developing countries with inadequate fiscal means to do so on their own resources. Available evidence suggests that new commitments in the area of education, for example, have fallen far short of the amounts requested (United Nations Educational, Scientific and Cultural Organization, 2010).

More worry some, the austerity programmes that many donor countries are now implementing are likely to result in cuts in their aid budgets at a time when low-income countries have the greatest need for such aid support. In particular, low-income countries with limited fiscal space need additional ODA in order to finance the expansion of social services and programmes to meet the Millennium Development Goal targets, as well as to pursue counter-cyclical and broader development policies. These increased needs contrast with the significant shortfalls in aid delivery against the long-standing commitments made by donor countries. Apart from delivering on existing aid commitments, donor countries should “delink” aid flows from their own business cycles in order to prevent delivery shortfalls during downturns, when the need for development aid is most urgent (United Nations, 2010e).

In response to the call for an internationally coordinated and funded response to the crisis, the international financial institutions have started to rethink their approach and acknowledged the importance of stimulus spending, including maintaining and increasing social spending to address the crisis. This represented a departure from the previous approach of these institutions. However, there is significant evidence of a disconnect between policy pronouncements and actions as actual policies and operations have not fully reflected the new thinking. If there is to be any hope of success in meeting the Millennium Development Goal targets by 2015, rich countries will need to support social and economic recovery in the poorest countries by fulfilling their aid commitments and expanding debt forgiveness and workouts.

Finally, Governments in developed countries should seriously evaluate the social impacts of their austerity measures. They are not only directly reducing social spending and contributing to joblessness in their own countries, but are also placing national and global recovery at risk, making it even more challenging for poor countries to protect the gains they have made towards achieving the Millennium Development Goal targets and accelerating social progress.