How the World’s Poorest Could Lose Out Again

At its London Summit in April 2009, the Group of 20 (G20) committed to “mitigate the social impact of the crisis to minimize long-lasting damage to global potential” for the most vulnerable citizens who had no hand in creating the global economic crisis. These world leaders — who represent 85 percent of global economic output — promised a total of $1.1 trillion to developing countries, 5 percent of which was committed to low-income countries. More than a year later, at their third post-crisis summit, the G20 continues to foster recovery in high and middle-income countries, but the world’s poorest suffer in economic anonymity.

The multilateral development banks (MDBs) benefitted from a historic mobilization of resources in the past year, spurred on by the G20’s promise of $100 billion in increased lending from these institutions. The Asian Development Bank, African Development Bank, Inter-American Development Bank, and World Bank have each secured political commitments from their shareholders for capital increases that dramatically upped these institutions’ resources.

However, because of the financing structures of the MDBs, middle-income countries have almost exclusive access to the additional resources from the capital increases. As part of this recovery package, low-income countries were promised $6 billion in concessional finance, a mere fraction of the promised increased lending. Poor countries’ citizens, apparently low on the G20 economic recovery priority list, get little consolation even though their jobs, health, and education are at stake.

More Money, Fewer Benefits

The nuances of Multilateral Development Bank financing structures make it seem as though the G20’s actions have earned more credit than they deserve on delivery of the April 2009 summit commitments. At first glance, rapid general capital increases seem to demonstrate political and financial support that fulfills the G20’s promise to deliver assistance through the MDBs. Following the G20’s commitment to increase MDB lending, the board of governors for both the African Development Bank (AfDB) and the Asian Development Bank (ADB) approved a 200 percent capital increase. The Inter-American Development Bank (IDB) and World Bank recently secured agreements for increases of $70 billion and $86 billion, respectively. Due to the unprecedented amounts and the efficiency with which it was approved, all MDBs were able to step up their middle-income and private lending as a way of promoting crisis recovery. The MDBs loaned $33 billion more in fiscal year 2009 than the previous fiscal year.

The hitch of General Capital Increases (GCIs) is that the billions pumped in over the past year will have only a negligible benefit for the poorest countries that rely on concessional finance from the MDBs. As low-income country governments struggle to meet the needs of their citizens in this challenging economic climate, they need grants and highly concessional finance, without harmful economic conditions, to ensure that their people have food to eat and access to education and health care. Yet, GCIs are targeted at the middle-income and emerging markets, not to low-income countries.

Poor countries, on the other hand, receive concessional loans or grants through MDB windows generally known as “The Funds.” The vast majority of resources for these grant and concessional windows are made available during replenishment processes. Because replenishment happens only every three to four years, there is virtually no flexibility to mobilize additional resources. In times of emergency the only option is to frontload pre-existing resources, which the World Bank did for some low-income countries in response to the economic crisis in 2009. Unfortunately, frontloading capital reduces the amount of resources available to low-income countries until the next replenishment occurs. In other words, low-income countries must sit on their hands and wait for the next replenishment process despite an increasing need for additional resources.

Thus, the total amount of truly additional resources mobilized by all the MDBs for low-income countries in 2009 was a mere $87 million (1.4 percent of the G20’s $6 billion commitment). Compare that to the recent $86 billion increase solely for the World Bank’s middle-income and private window, the International Bank for Reconstruction and Development (IBRD). This contrast begs the question: Why do the most vulnerable receive the fewest resources and the least financial flexibility in times of crisis? Despite a clear need for additional resources in order to continue recovery from the economic crisis, additional IDA resources will only be made available in the next replenishment period.

More Fall into Extreme Poverty

Currently, the World Bank and the African Development Bank (AfDB) are in the middle of negotiations for their next Fund replenishments. The total committed to the last replenishment processes, both in 2007, were $47.1 billion and $8.9 billion respectively. While the G20 stated its intent to support the upcoming replenishments, there are no solid projections for how much money will be committed. Given that governments have already committed billions for general capital increases for the MDBs, it could result in a tradeoff with less available for the replenishments.

The African Development Bank’s recent general capital increase of 200 percent will directly benefit only 12 African countries, which are considered middle-income. The remaining 41 African countries, which are low-income, receive financing exclusively through the African Development Fund, and it is unclear how much will be available for its replenishment. Meanwhile, the economic crisis has thrown more than 64 million more people into extreme poverty, and countries in sub-Saharan Africa are even further off track in meeting the Millennium Development Goals.

The economic crisis has created further need for assistance in poor countries, and those that have not received extra financing through MDBs have instead turned to internal sources. In this past year, the lack of substantial additional grants available from the World Bank and other MDB Funds, has forced low-income countries like Zambia and Malawi to borrow internally, leading to heavy domestic debt burdens. If these poor countries struggling to meet the Millennium Development Goals in the wake of reduced revenues continue this practice of borrowing from domestic and foreign non-concessional sources, we run the risk of creating yet another poor country debt crisis.

With only five years left to meet the Millennium Development Goals, it is time for the G20 to take bold action to reduce poverty.

A Need for Reform

Upcoming general capital increase processes are an opportunity to ensure comprehensive reform of the MDBs, including the way poor countries access resources within the institutions. The U.S. government can use its leverage as a large donor country to push for much-needed reforms.

In the short term, the U.S. government should condition any contribution toward general capital increases on institutional reforms that substantially increase transfers from middle-income and private-lending windows to the low-income, concessional funds. Furthermore, the U.S. government and other donor countries should ensure that these capital increases do not shortchange resources available for grant and highly concessional assistance to low-income countries.

While these short-term actions will mitigate the lack of resources for the time being, they do not address the roots of the problem, which lie in the very structure of the MDBs. The institutions are innately undemocratic and unaccountable to affected communities, with donor countries enjoying voting shares dependent on how much they are able to contribute. Poor countries, which are most dependent on the funding of MDBs, get limited say in how the institutions operate or how they spend money within their own country. There must be a fundamental shift in voice and vote shares resulting in more equitable voting power within the institutions. In addition, assistance from these institutions should not come with harsh economic conditions, which harm the poorest within recipient countries.

The G20 has a responsibility to ensure that low-income countries are not forgotten. Therefore, in addition to delivering significant additional resources for poor countries as grants, governments need to push for real MDB governance reform. By putting these issues onto the agenda, the G20 will have an opportunity to refocus on those whose lives, not just livelihoods, are at stake.