By Vinod Thomas and Marvin Taylor-Dormond:


The current economic crisis could push nearly 90 million people into poverty worldwide, including some 8 million in Latin America and the Caribbean. Sounder macroeconomic policies and healthier financial sectors in the region today more than during earlier crises episodes allow to weather it better. But the socio-economic effects of the crisis are still severe, especially in rising unemployment and growing credit gaps.

Dealing with such impacts requires re-invigorated financial flows and more effective use of funds. Similar volumes of spending in the past have been seen to have produced vastly different development outcomes. The World Bank Group’s Independent Evaluation Group, based on reviews of countries, including several in this region, highlights factors regarding the quantity and quality of the crisis response.

First, financial flows need to be adequate and timely, especially in the face of growing fiscal gaps. During the current crisis, official flows from multilateral sources have been at record levels in answer to country needs. In this situation, it is essential to recognize that sustained recovery depends not only on the volume of spending but also on its quality and its structure.

Currently, the World Bank Group is seeking a substantial capital increase to help clients confront the severity of the economic slowdown, especially its social impacts.

Within the World Bank Group, this year’s commitments by the International Bank for Reconstruction and Development (lending to middle-income governments) have tripled to $33 billion; and by the International Development Association (lending to low-income governments) increased 25 percent, to $14 billion. Some 30 percent of this increase by the World Bank is to Argentina, Brazil, Colombia, Mexico, and Peru. The International Finance Corporation (the private sector arm) invested $10.5 billion in 2009, and has focused its crisis response on strengthening the financial sector and facilitating trade. Some examples include the new IFC Capitalization Fund that made its first investments in a systemic Paraguayan bank; IFC’s trading platforms that help banks in the Caribbean, Central America, Mexico, and South America to maintain their trade facilities, as well as investments in infrastructure and support for micro, small, and medium enterprises in the region, as has been done in Caribbean countries.

However, to sustain the economic revival, private capital flows must be re-invigorated. Those to developing countries fell from $1,200 billion in 2007 to $360 billion in 2009. Reversing this trend is fundamental, as the poorer developing countries worldwide face a $12 billion financing gap this year, and may not be able to cover even the most essential social spending.

Second, the macroeconomic implications of the crisis response, in particular the growing government deficits, need to be handled well. Fiscal deficits in 2009 are estimated to be nearly 7 percentage points of GDP higher than in 2007 in G-20 nations, and about 5 percentage points higher in G-20 emerging economies. Meanwhile, the ratio of public debt-to-GDP in the G-20 could, by one estimate, rise by nearly 15 percentage points between these years. Going forward, a sharp fiscal adjustment and stronger growth will be needed to pay down the debt.

Equally, to generate economic growth, the spending needs to be directed to high-productivity areas, such as infrastructure projects that have been seen to have produced higher payoffs than providing untargeted subsidies. But even here, just any spending on infrastructure would not automatically generate growth. Only a few countries have, during the crisis response, put in place the much-needed mechanisms for analyzing, tracking, evaluating project costs and benefits.

Third, considerations of poverty and unemployment are paramount. During past financial crises, poverty issues did not receive sufficient attention. Signals are that this time, social safety nets, such as conditional cash transfers, are better established and better protected, with support from official sources such as the World Bank Group. Given the long-term damages of crises for the poor, it is vital to protect vulnerable groups early on.

Finally, the rising pressures of the financial crisis should not dilute the attention to the environment and climate. The fiscal stimulus presents a unique opportunity to shift to sustainable investments—as Mexico is doing to some degree.

Every crisis is unique, yet lessons from past crisis responses are informative. The speed and scale of response needs to be matched by careful attention to the quality of the interventions. Together with improved coordination across organizations, the World Bank Group, drawing on these lessons, can support countries in the hemisphere to mitigate the crisis impacts.

Vinod Thomas is the Director-General and Marvin Taylor-Dormond is Director of the Independent Evaluation Group at the World Bank Group.

December 26, 2009

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