BACKGROUND PAPERS Roundtable Discussions

Transcription

1 BACKGROUND PAPERS Roundtable Discussions Special Ministerial Meeting for Millennium Development Goals Review in Asia and the Pacific : Run Up to 2015 Jakarta, 3-4 August 2010

2 Roundtable Discussion 1: Closing the MDG Gaps in Asia-Pacific: Resource Costs and Policy Challenges Prepared by UN- ESCAP Special Ministerial Meeting for Millennium Development Goals Review in Asia and the Pacific : Run Up to 2015 Jakarta, 3-4 August 2010

3 Closing the MDG Gaps in Asia-Pacific: Resource Costs and Policy Challenges 1 A background paper for the Special Ministerial Meeting The Context: Tremendous progress yet large gaps exist The Asia-Pacific region has made significant progress towards the Millennium Development Goals. Many countries have achieved rapid economic growth which has helped lift millions of people out of poverty. And governments have made substantial investments in education and health services and in protecting their most vulnerable people. Nevertheless, most countries are still off track on many MDG indicators. The region has already almost halved the proportion of the population living below the poverty line of $1.25-a-day. But it has had less success in attacking hunger: between 1990 and 2007, it only managed to reduce the proportion of under-five children underweight from 36 to 28 per cent. The region has made good progress in primary education reaching 92 per cent net enrolment, but it has had less success in keeping those children at school. For child mortality the prospects remain gloomy: the under-five mortality rate in 2007 was 54 deaths per 1,000 live births. And the situation was similar for maternal mortality, with the number of deaths per 100,000 live births as high as 490 in South Asia. Investment required to meet the MDGs What would it take for all countries in the region to meet their MDG targets? In many cases they can achieve a great deal simply by pursuing existing policies more effectively. But they may also need extra financial investment. This report estimates what countries that are currently off track will need to do to fulfil their commitments to the Millennium Development Goals. Closing the income-poverty gap One of the principal tasks is to get on track for the poverty goal. Failing to meet the MDG poverty target would mean an additional 128 million people living in poverty. Additional means on top of the 420 million people who would still be extremely poor even if the target were reached. Based on their past performance, eleven Asia-Pacific countries with poverty headcounts above 5 per cent are likely to miss the income-poverty target: Bangladesh, Cambodia, Georgia, India, Kyrgyzstan, Lao PDR, Mongolia, Nepal, Philippines, Sri Lanka and Uzbekistan. For addressing poverty the main strategy should be to increase economic growth while making sure its benefits are distributed equitably. Faster economic growth will only reduce poverty if income distribution either does not deteriorate or, preferably, improves. Whether growth or distribution offers the greatest potential for reducing poverty depends on the level of development. Generally, the poorer countries will benefit more from promoting economic growth that leads to an increase in average household consumption. Among the economies that would benefit most would be Bangladesh and rural India where every percentage point increase in mean consumption per capita would reduce poverty by 0.7 percentage points. Lao PDR, Uzbekistan and urban India would also benefit significantly from such a strategy, with a reduction of more than half a percentage point. As countries become richer, the benefits from increasing household consumption become relatively less significant and it becomes more important to focus on equity. In Sri Lanka, for example, a 1 per 1 This paper is based on an ESCAP, Financing an Inclusive and Green Future: A Supportive Financial System and Green Growth for Achieving the Millennium Development Goals in Asia-Pacific, Bangkok: UN-ESCAP, 2010; ST/ESCAP/2575

4 cent increase in household consumption per capita would reduce poverty by only about half as much as it would in Bangladesh; on the other hand, a 1 per cent decrease in inequality would reduce poverty by 0.58 percentage points compared with only 0.47 percentage points in Bangladesh. In practice, economic growth is typically accompanied by a rise in inequality. If this happened in these 11 countries then in order to hit their poverty targets they would need to boost economic growth considerably in some cases more that doubling it. But if they could hold inequality constant the prospects would brighten significantly. Kyrgyzstan, for example, would achieve the target by 2015, and other countries would not be far behind: India would reach it by 2016; the Philippines by 2017; and Lao PDR by Indeed, with only moderately faster growth all three could hit the target: India, for example, would need to increase the average growth rate from 7.9 to 8.9 per cent. Furthermore, a 1% increase in average household consumption per capita in addition to holding inequalities constant would further accelerate achievement of poverty target for Lao PDR by 2012 while India and Mongolia by Closing the other MDG gaps Millions of people will also suffer if the region misses the other MDG targets. This would result, for example, in the deaths in 2015 of an extra 1 million children between 1 and five years of age. In addition, 31 million more children would be suffering from hunger and 7 million more would be out of school. Many mothers would also be affected 14 million more would have to give birth without the assistance of skilled professionals and 8 million more would be without any kind of antenatal care. How much investment would it take for the countries of the region to meet these other MDG gaps? Based on a needs assessment carried out by the UN Millennium Project this report estimates the corresponding costs in Asia and the Pacific. This suggests that some of the MDG gaps can be closed with relatively low investment. The underweight children target, for example, can be reached if countries that are off-track invest in total an additional $23 billion. The gap in the provision of clean water and basic sanitation in rural areas can be closed by investing $3 billion and $8 billion, respectively. Overall, it should also be noted that the cost of reaching the targets in rural areas is much less than in urban areas between one tenth and one fourth and around twice as many people would benefit. To meet the gaps across the region on all the indicators would mean an additional total cost until 2015 of $636 billion $96 billion per year in 2010, rising to $117 billion in For the region as a whole, the costs may not seem daunting, but for individual countries they can be steep. The greatest costs, expressed as a percentage of GDP, are in Afghanistan, Nepal and Timor-Leste. On a positive note, however, it should be pointed out that of the 20 LDCs and middle-income countries, more than half could close the gaps with expenditure equivalent to 2 per cent of GDP or less. Financing the MDGs How much are governments currently spending on MDG priorities? The ESCAP Study analyses the government budgets in the Asia-Pacific region for 23 economies to examine the trends and patterns in outlays on MDG sectors which include health, education, housing and community amenities, environmental protection, and those on safety nets such as school feeding programmes. This shows a very diverse pattern. As a proportion of GDP, the Maldives spends more than 20 per cent on MDG priorities, while China and Pakistan spend less than 1 per cent. In terms of trends, however, it is worrying that, since the Millennium Summit, expenditure on MDG priorities, as a percentage of GDP, has increased in only six of these countries: Georgia, Nepal, Russian Federation, Sri Lanka, Iran and Maldives. Elsewhere it has remained stable or decreased, suggesting that governments have generally not been aiming to make greater progress towards the MDGs through changes in fiscal policy.

5 One reason why government expenditure on the MDGs might fall short is a concern about fiscal deficits. Indeed, the trend is one of increasing fiscal conservatism: most countries have moved in the direction of larger surpluses or smaller deficits. Governments have been driven towards limiting the fiscal deficits to a general rule of thumb of 3% of GDP as a part of the economic orthodoxy disregarding the level of development, rate of economic expansion, needs for public expenditure and extent of social protection. Optimal level of budget deficit would vary according to national circumstances and in many developing countries there may be greater fiscal space than is realized. It can be argued, however, that if countries in Asia and the Pacific target deficits at all they should raise the limit to say 5 per cent, as long this investment is being invested in MDG priorities, since this would not only immediately improve nutrition, health and education but also result in productivity gains that would help contain inflation inflationary pressures arising out of a larger deficit. Reorienting public expenditure Spending more on MDG priorities would also probably mean diverting resources from other government expenditure. In some countries half of this is for the administrative function which includes defence, public order and safety some of which could be diverted into more direct MDG spending. Some are also spending significant sums servicing public debt; while no Asia-Pacific country has a debt crisis, some nevertheless still have sizable servicing commitments. Some domestic debt liabilities might be extinguished using the proceeds from privatizing government assets, while foreign debt liabilities can be reduced by seeking concessional international aid that carries a lower interest burden. In the spirit of MDG-8, the poorest countries should also be able to rely on debt waivers. A number of countries also devote considerable funds to subsidizing fossil fuels. Such subsidies have a number of disadvantages beyond their large costs. One is that the benefits are frequently skewed towards the rich; another is that they encourage the use of fuels which add to pollution and the production of CO 2. Augmenting government revenue and making fiscal incentives MDG-friendly As well as changing spending priorities, governments will also want to boost domestic revenue that they could dedicate to the MDGs. A number of countries in the region have the fiscal space to raise revenue domestically, especially, through better tax administration. The developing countries gain most of their revenue from indirect taxes. These may be easier to administer but are regressive as everyone pays the same rates meaning that the poor pay a higher proportion of their income in tax than do the rich. Direct taxes, while generally more progressive, requires comprehensive systems for keeping track of incomes. Nevertheless, they can widen their tax bases by ensuring that the wealthy do at least file tax returns and by simplifying their tax systems to reduce the range of exemptions and loopholes, and strengthening the tax administration. As governments consider ways of raising more revenue, they can also use fiscal policy to adjust the pattern of development and to promote employment. For example, corporate tax laws usually provide an allowance for depreciation which gives companies an incentive to invest in new equipment. Instead governments could offer incentives for generating new employment. Governments may also use fiscal policy to create win-win scenarios for environment and employment through ecological tax reform or similar approaches. The theory behind these approaches is to apply taxes on pollution or inefficient use of energy and resources and use the proceedings to lower the cost of labour to employers, so as to generate incentives to lower pollution and economize on resources and use more labour. This tax shift requires balancing taxation levels so as to maintain revenue-neutrality and progressiveness, as well as measures to protect the most vulnerable.

6 Strengthening the global partnership In addition to raising more of their own resources for investing in the MDGs, the developing countries, LDCs in particular, should also be able to rely on substantial support from other countries, both within the region and beyond. Official development assistance Since the adoption of the MDGs, donors have generally been providing more official development assistance (ODA), even though most of them, the large ones in particular, are yet to reach the target 0.7 per cent of gross national income. Asia and the Pacific will probably continue to get a steadily declining proportion of this. Any reduction in aid flows will be of particular concern to countries such as Cambodia and Vanuatu, where ODA plays a significant role in the economy. Although it is somewhat uncertain about the ability of the donors to sustain the flow of ODA, there does seem to be solid political will and public support for ODA within donor countries partly because of the recognition that developing countries are victims of a crisis which originated in the developed world. And this is reflected in some of the decisions of the G20 summits to increase the flow of finances through multilateral agencies such as the IMF, the World Bank and the ADB. South-South economic assistance More aid now takes the form of transfers from one developing country to another, which within Asia and the Pacific primarily means the better-off developing countries helping their neighbours. China, for example, is Cambodia s biggest aid donor as is India for Nepal and Bhutan. Similarly, Thailand is the largest donor to Lao PDR and the second largest to Myanmar. Much of this South-South aid thus goes to LDCs where it is likely to be used in support of the MDGs. Workers remittances In 2008, countries in the region that were the sources of labour migrants received a total of $169 billion in remittances. These have provided a stable source of foreign exchange at times when trade and other flows have been more volatile so have helped stabilize currencies. At the micro level, families have been able to use remittances to boost human development frequently using the funds to invest in their children s education. Private capital inflows Private capital inflows, particularly foreign direct investment, should help create employment and thus contribute to the MDGs. Following the economic crisis, even though global FDI inflows have declined, FDI inflows to Asia-Pacific have continued to expand from $ 333 bn in 2007 to $ 389 bn in Emergence of new sources of FDI in the region such as China, Russian Federation, Hong Kong, China, India, Malaysia among others, is likely to further enhance FDI inflows in the region. The region is also receiving growing amounts of portfolio foreign investments that tend to be highly volatile in nature seeking speculative returns on the capital markets, real estate, currency and commodity futures and lead to formation of asset bubbles, inflation and appreciation of exchange rates. The region s governments may consider taking steps to moderate these inflows through some sort of capital controls in view of massive expansion of liquidity in the western markets which may find outlet in the region. New innovative sources of finance- Prompted by a recognition that ODA is unpredictable and needs to be supplemented, recent times has seen some international initiatives involving governments, charitable foundations, NGOs, and prominent individuals to develop some new innovative sources of finance for development. Three such initiatives are already functioning in the area of health. These are (i) UNITAID and the solidarity levy on airline tickets, (ii) The International Finance Facility for Immunization (IFFIm) / Global Alliance for Vaccines and Immunisation (GAVI), and (iii) Advance Market Commitment for pneumococcal vaccines (AMC-PV). There are also examples from the region of government trying to find innovative sources of finance for funding MDGs.

7 Governments have also been trying to find innovative sources of finance for funding MDGs. India, for example, levies an education cess on the total income tax payable by individuals to finance the provision of school education for all children and imposes a diesel cess diesel to finance the expansion of its highway network; Maldives has proposed to levy a green tourist tax of $3 per tourist per day as a climate tax. There is also a considerable debate on the relevance of a tax on international financial transactions. Such a tax could help in moderating the volatility of the shortterm and speculative capital flows besides yielding a substantial revenue that could be used to fund global public goods such as MDG achievement. Even a small tax of 0.1 per cent on global foreign exchange transactions running at around $3.2 trillion per day could yield revenues of about $640 billion annually assuming that the volume of financial transactions will go down by a third as a result of the tax. This scale f revenue is more than 3.5 times the total ODA in While the ideal would be a tax that operated globally, this may take a long time to achieve. As a stepping stone towards a global tax the countries of Asia and the Pacific could cooperate on a regional version. Development of Regional Architecture for financial cooperation The lack of a well developed regional financial architecture prevented efficient intermediation between the region s growing foreign exchange reserves and its substantial unmet investment needs and leaving the central banks no option but to invest their reserves in low yielding US treasury bills. Besides crisis prevention and intermediation between savings and investment in the region, a regional financial architecture could also be instrumental in exchange rate coordination, and in evolving a regional perspective and coordinated voice for reform of international financial architecture. So far only significant regional cooperative financial arrangement is the Chiang Mai Initiative (CMI) that has been expanded in early 2010 to have a pool of $120 billion and has been multilateralized. However it is limited to only to be a facility for short term liquidity support rather than development financing. With combined foreign exchange reserves of nearly US$ 5 trillion, the region has now the capability of developing an ambitious architecture to fund infrastructure gaps in the region estimated to be requiring annual investment of more than $800 billion in transport, energy, water and telecommunications. This architecture could include among other forms an infrastructure development fund, for instance, mobilizing just 5% of region s reserves of nearly $ 5 trillion, thus providing a start up capital of nearly $ 250 billion besides ability to borrow from the central banks of the region. By co-financing viable projects along with other sources, such an architecture could expedite investments in infrastructure development especially cross border connectivity projects linking poorer parts of the Asia-Pacific region with the region s growth centres, hence assisting them in their rapid development and MDG achievement. ESCAP, at its 66 th Session held in Incheon, Republic of Korea, May 2010 has been requested by its member states to assist the region in development of such an architecture by creating a task force or expert group to come up with a solid design for a stable and development-friendly regional financial architecture. Concluding remarks The Asia-Pacific region has many gaps to close to meet the MDG targets by However, with reorientation of development policies in favour of those that promote the consumption of poor and reduce inequalities along with growth, and mobilizing domestic resources to redouble their efforts to close these gaps and with enhanced support from regional and global partners, it can meet the challenge.

8 Roundtable Discussion 2: Financing for the MDGs Prepared by the ADB Special Ministerial Meeting for Millennium Development Goals Review in Asia and the Pacific : Run Up to 2015 Jakarta, 3-4 August 2010

9 Background Note on Roundtable 2 on Financing for the MDGs 1. Gaps in MDG Financing A few studies have been conducted in the Asia and Pacific region to estimate the financing gap in achieving the MDGs. Appendix Table 1 shows the results for six countries, and includes both direct costs (for creating essential facilities such as building more hospitals and clinics, providing medicines and equipment, and appointing sufficient nurses and doctors, in the case of the health targets) and indirect costs such as building rural roads for providing access, etc. Rough estimates of the MDG gaps can be also calculated for other countries. These are presented in Appendix Table 2. This shows that additional annual spending necessary for the least developed countries in the Asia and Pacific region has been estimated at $8 billion per annum until For the 29 low income countries receiving concessional Asian Development Fund (ADF) resources from the Asian Development Bank (ADB), it was estimated at around $25 billion per annum. As part of the General Capital Increase (GCI) exercise, ADB also made an estimate for the group of 22 countries receiving loans from its market based Ordinary Capital Resources (OCR) loan window, at $53 billion per annum. As some ADF and OCR receiving countries overlap, for ADB s developing member countries as a whole, the rough magnitude of the resources gap would be around $60-70 billion per annum. Cost estimates for indirect infrastructure, such as roads and energy, for achieving the MDGs are high, as evident from the Appendix Table 1, but are also essential if the MDGs are to be achieved. A joint study done by the Asian Development Bank Institute and ADB suggests that the total infrastructure financing for Asia as a whole amounts to about $700 billion per annum indicating the large resource gap for infrastructure financing in general. Of this, indirect basic infrastructure in support of the MDGs will be a large proportion. 2. Ways to raise resources for the MDGs (i) Raising economic growth: Historical associations between economic growth and the MDG indicators suggest that a fairly strong inter-relationship exists between growth and the MDGs. Growth leads to increases in private incomes and therefore enables more people to access education, health, clean water and sanitation facilities, etc., improving MDG outcomes. Growth also provides more revenue resources to Governments allowing them to spend more on MDG related expenditures. This indicates that maximizing growth is an important policy objective to attempt. The 2008 ADB-ESCAP-UNDP joint MDG Report 2 estimated the impacts of raising growth. It shows, however, that growth alone will not be able to help in MDG achievement. If growth were raised by 3%, for example, as shown in the Appendix Table 3, only two additional countries would meet the hunger target while 17 would still not. This story is similar for the other indicators. Only if growth were increased by more than 5% would a significant impact be made. However, such increases are very unlikely, and so other measures need to be considered than merely relying on growth. (ii) Raising more revenues. Countries can make more vigorous efforts to increase their revenues. Appendix Table 4 shows tax revenues as a percentage of GDP in sub-regions of Asia and the Pacific compared to OECD countries and industrialized countries. The latter groups collect significantly more than countries in the Asia and Pacific region. Although reaching the tax effort 2 United Nations Economic and Social Commission for Asia and the Pacific, Asian Development Bank, and United Nations Development Programme A Future Within Reach 2008: Regional Partnerships for the Millennium Development Goals in Asia and the Pacific. Bangkok.

10 levels of industrialized countries may take time, several actions such as improving tax governance and attempting to expand the tax base can be taken. (iii) Increasing budgets for the MDGs. Allocating more budgetary resources for basic social services such as education and health which are essential for the MDGs is another critical measure to bridge the gap in resources for the MDGs. Appendix Table 5 shows public spending on education and health as a proportion of total government expenditure in selected countries in the Asia and Pacific region. The table reveals that there is considerable variation in allocation of budgets towards these vital social sectors among countries in the region and so there is scope for lagging countries to prioritize more budgetary resources towards these areas. (iv) Additional resources from private sector participation. Considering the large gap in resources for the MDGs and the need to substantially increase resources within the next five years to achieve the MDGs by 2015, the need to involve the private sector in support of achieving the MDGs is urgent. While many areas of basic service provision may not appear attractive for the private sector at present, more can be done to involve private businesses in areas such as water and sanitation, health insurance, rural roads and rural electrification through public - private partnerships. In health insurance, for example, a private-public partnership can involve government subsidization of private health insurance premiums for the poor. In infrastructure, more than 70% investments have traditionally been made by the public sector. Governments can provide more tax incentives and undertake cost sharing in sectors where social returns are high. (v) Encouraging more trade and foreign investments. Many estimates have been made about the benefits of a successful completion of the Doha round for developing countries which show large benefits from greater market access for them. Similarly, countries in the Asia and Pacific region can also benefit from greater inflows of private foreign investments. Increasingly, intraregional trade and investments are taking a larger share of total trade and investment and more could be done to increase regional cooperation in these areas. 3 (vi) Greater flow of international assistance. Despite all the above measures, some countries in the Asia and Pacific region, particularly the least developed countries, will need more international assistance to meet the MDG targets. As shown in Appendix Table 6, aid received by Asia on per capita terms is the lowest amongst all developing regions. While Africa received $45 per person in net ODA in 2008, Asia received only $12. Also as indicated in Appendix Table 7, the proportion of aid going to the social sectors which support the MDGs has remained below 40% of total aid. More regional cooperation efforts can also help augment aid from better off countries to the least developed in the region. Such intra-regional flows already exist as shown in Appendix Table 8. These may need to be augmented. 3 See Chapter IV of United Nations Economic and Social Commission for Asia and the Pacific, Asian Development Bank, and United Nations Development Programme Achieving the Millennium Development Goals in an Era of Global Uncertainty: Asia-Pacific Regional Report 2009/10. Bangkok.

11 Appendixes Appendix Table 1: MDG investment requirements, $ per capita, based on needs assessments Source: United Nations Economic and Social Commission for Asia and the Pacific, Asian Development Bank, and United Nations Development Programme A Future Within Reach 2008: Regional Partnerships for the Millennium Development Goals in Asia and the Pacific. Bangkok. Appendix Table 2: MDG resource gap in Asia-Pacific Number of countries Annual resource gap Total ($ billion) LDCs 14 8 ADF-receiving countries OCR countries Source: United Nations Economic and Social Commission for Asia and the Pacific, Asian Development Bank, and United Nations Development Programme A Future Within Reach 2008: Regional Partnerships for the Millennium Development Goals in Asia and the Pacific. Bangkok; and ADB The fifth general capital increase tripled ADB s capital base to $165 billion (Update). ADB In Focus Series: General Capital Increase V (GCI V). Manila.

12 Appendix Table 3: Per capita GDP growth gap to achieve MDG targets Number of countries Countries with growth gap Countries growth gap 0-1% Countries growth gap 1-2% Countries with GDP growth gap 2-3% Countries with GDP growth gap 3-4% Countries with GDP growth gap 4-5% Countries with GDP growth gap >5% Goal 1 Target 1 Goal 1 Target 1 Goal 1 Target 2 Goal 2 Target 3 Goal 2 Target 3 Goal 3 Target 4 Goal 3 Target 4 Goal 3 Target 4 Goal 4 Target 5 Goal 4 Target 5 Goal 4 Target 5 Population below $1/day (PPP) consumption Poverty gap ratio Population undernourishe d (%) Net enrolment ratio in primary education, both sexes Primary completion rate, both sexes Gender Parity Index in primary level enrolment Gender Parity Index in secondary level enrolment Gender Parity Index in tertiary level enrolment Maternal mortality ratio per 100,000 live births Children under five mortality rate per 1,000 live births Mortality rate (0-1 year) per 1,000 live births Source: United Nations Economic and Social Commission for Asia and the Pacific, Asian Development Bank, and United Nations Development Programme A Future Within Reach 2008: Regional Partnerships for the Millennium Development Goals in Asia and the Pacific. Bangkok.

13 Appendix Table 4: Tax revenue as % of GDP Tax effort (% of GDP) Year World East Asia and Pacific South Asia Industrialized countries OECD Source: The World Bank Group. World Development Indicators and Global Development Finance Databank. Retrieved from DimensionId=WDI_SERIES (accessed 26 July 2010). Appendix Table 5: Public expenditure on health and education as % of total government expenditure Public Expenditure on Health (2006) Public Expenditure on Education ( ) South and South-West Asia Bangladesh Bhutan India Iran Nepal Pakistan Sri Lanka 8.3 Turkey 16.5 South-East Asia Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore 5.4 Thailand Viet Nam 6.8 East and North-East Asia China 9.9 Mongolia 11.0 Republic of Korea Source: United Nations Development Programme Human Development Report 2009 Overcoming barriers: Human mobility and development. New York.

14 Appendix Table 6: Net ODA receipts per person in 2008, $ Source: United Nations Economic and Social Commission for Asia and the Pacific, Asian Development Bank, and United Nations Development Programme. 2010, July 21. Paths to 2015: MDG Priorities in Asia and the Pacific (Asia- Pacific MDG Report 2010/11). (under preparation). Appendix Table 7: Aid commitment to Social Sectors Source: United Nations Economic and Social Commission for Asia and the Pacific, Asian Development Bank, and United Nations Development Programme A Future Within Reach 2008: Regional Partnerships for the Millennium Development Goals in Asia and the Pacific. Bangkok.

15 Appendix Table 8: Intraregional flows of official development assistance Source: United Nations Economic and Social Commission for Asia and the Pacific, Asian Development Bank, and United Nations Development Programme A Future Within Reach: Reshaping Institutions in a Region of Disparities to Meet the Millennium Development Goals in Asia and the Pacific. Bangkok.

16 Roundtable Discussion 3: Promoting an Inclusive and Sustainable Development for Advancing the MDGs for 2015 and Beyond Prepared by the World Bank Special Ministerial Meeting for Millennium Development Goals Review in Asia and the Pacific : Run Up to 2015 Jakarta, 3-4 August 2010

17 Promoting an Inclusive and Sustainable Development for Advancing the MDGs for 2015 and Beyond Background Paper Prepared by the World Bank The Changing Global Landscape As the second decade of the 21 st century begins, we face a global landscape that has been transformed. Only a few years ago, the global economy was riding a wave of robust and widespread expansion, fueled by plentiful and low-cost capital and driven by rapidly expanding trade. For those focused on development challenges, the news was favorable as well average growth among developing countries was at record levels, with key emerging markets playing an increasingly important role in driving the global expansion. Building on a sound macroeconomic foundation, many developing countries that had been left out of previous global expansions were globalizing and growing. Events of the last two years have changed this outlook. The sequence of crises first high food prices, then high and volatile fuel prices, finally a string of financial shocks and institutional failures created the ingredients leading to global recession, the first such downturn since the Depression. Global growth fell at least 5 percentage points below potential, and world trade registered its largest decline in 80 years. The global contraction has been unprecedented, not only in its breadth and depth, but also in the magnitude and coordination of the policy response. Most signs suggest that the most damaging phase of the crisis is now behind us. Most advanced economies have emerged from recession. More normal conditions are steadily returning to global financial markets, and for many of the most dynamic emerging market economies, growth rates are climbing toward or even past pre-crisis levels. But it is too soon to declare victory continuing tremors in financial markets and growing concerns over fiscal sustainability highlight global tensions, and the nascent recovery could still stall, with a resulting slide into a second recession or a protracted period of anemic and jobless growth. Beyond the risks associated with the global recovery, the fallout from the crisis will change the landscape for finance and growth over the next decade. Developing countries are likely to face reduced access to global capital flows for a protracted period. In particular, cross-border bond and bank lending, as well as portfolio equity flows, are likely to be constrained in the new global financial environment. Foreign bank participation in developing country financial systems may also be limited by the need for parent banks in advanced countries to build up capital in a more restrictive regulatory environment, as well as through financial protectionism that places pressure on banks to concentrate on home markets. LICs may suffer the most from this shrinkage, as their already small share of total private capital flows (2.6 percent in 2007) dwindles to almost nothing in 2010 and is not expected to bounce back anytime soon. The Development Challenges Ahead Amid these changes, development challenges remain complex and daunting. Efforts to reduce poverty and meet the Millennium Development Goals (MDGs) have taken on increasing urgency and new dimensions. Beyond this agenda, new challenges have also emerged: the need to foster multi-polar growth; respond to complex global interactions; and anticipate risks, potential new shocks and unpredictable crises.

18 Redoubling efforts to meet the MDGs: With only five years remaining before the deadline to reach the MDGs, there is an urgent need to intensify efforts to achieve these targets, with special attention to increasing investment in girls and women and identifying innovative and targeted approaches, particularly in Sub-Saharan Africa, where 38 percent of the population, or 366 million people, will be living on less than $1.25 per day by The upcoming High Level Plenary Meeting of the UN General Assembly on the Millennium Development Goals provides the final review opportunity on MDG progress prior to the 2015 target, and will hopefully encourage a recommitment to and renewed energy for the MDG process by member states and development institutions. Fostering multi-polar growth and integrating rising economic powers: The stronger relative growth of developing countries over the last decade has led to a growing share in global economic activity with some economies emerging as dynamic and competitive growth poles. These countries, if well-supported, can help expand global demand further by creating new markets and investment opportunities, with benefits for both developing and developed countries. Supporting multi-polar growth requires large investments in physical and human capital going well beyond the traditional focus on poverty reduction and the MDGs. For example, larger investment needs are materializing for middle-income countries (MICs) in transportation and communication, while the need to innovate and improve competitiveness is raising demand for secondary and tertiary education. Responding effectively to complex global interactions: As globalization deepens linkages among countries and across regions, and global interactions become more complex, the global public goods (GPG) arena presents unprecedented challenges, one of the most notable of which is climate change. As the world struggles to cope with the myriad effects of climate change, recent events in Copenhagen illustrate the difficulty in identifying a basis for a durable, equitable, and effective global agreement. In addition to environment, there is a need to strengthen the global trading system while minimizing protectionism, strengthen the international financial architecture, respond to agriculture and food security needs, and find and implement win-win solutions to address water scarcity and security. Special attention should be given to promoting stability in fragile and post-conflict environments, which create risks that can cross borders through civil conflict, illegal trade in narcotics, human trafficking, terrorism, and humanitarian crises. Promoting environmentally and socially sustainable development: Beyond climate change, there is a broader sustainability agenda that must be addressed. The shifting economic center of gravity makes more prominent issues such as social exclusion and gender inequality and complex growing economies require institutions and policies to help address these issues. Protecting against irreversible environmental damage such as biodiversity loss, fisheries collapse, and water pollution is critical. Demand for energy in developing countries is expected to increase dramatically in coming decades, with 1.6 billion people currently lacking access to electricity. Meeting their needs in an environmentally-sustainable manner is an urgent yet difficult challenge, requiring innovative policies and instruments. Managing risks and anticipating potential shocks and new crises: With increasing global integration, the speed at which problems can be transmitted from one country to another is also increasing. Periodic crises, aggravated by inadequate strategies and weak institutional capacity, have slowed down the development of many countries. One overriding lesson from previous crises and driven home again in the current environment is the importance of laying the groundwork for a crisis response before it is needed.

19 Post-Crisis Development Priorities Setting development priorities in a post-crisis environment requires balance in several dimensions. First, the balance between the traditional focus on poverty reduction and the MDGs, and the emergence of new and to some extent, more complex priorities and challenges. Second, the balance between comprehensiveness and the urgent need for selectivity and a greater focus on what can work most effectively in particular environments. Finally, the balance between the urge to expand instruments and institutions to address new problems and the need to avoid further fragmentation of the development effort. One of many possible conceptual frameworks that can help organize these complexities identifies five distinct themes: 4 Target the Poor and Vulnerable: While overcoming poverty remains a core development objective, it must be recognized that the characteristics of the poor and vulnerable are changing. First, the geographic dimensions of poverty have shifted; in some countries and regions, substantial progress has been achieved, with the result that extreme poverty (measured at less than $1.25 a day) has become less of a concern. Extreme poverty was projected (before the crisis) to fall to almost insignificant levels in East Asia by 2015, concentrating most of the remaining one billion poor in South Asia and Sub-Saharan Africa, each accounting for roughly 40 percent of global poverty. On the other hand, deep poverty (below $2 a day) was expected to remain widespread, at close to 2 billion people by 2015, with two-thirds living outside IDA-only countries. In most of these countries, poverty is regionally and/or ethnically concentrated. Second, progress on non-income MDGs was more limited, so that even as millions benefited from rising incomes, wide gaps remained in access to basic services, leaving households vulnerable to shocks and downturns in the short run, and less able to sustain improvement in their well-being in the long run. Looking ahead, short-term vulnerability must be addressed by improving the targeting and effectiveness of existing social safety nets so they can be scaled up or established where none exist. Addressing long-term vulnerability (e.g. food, water and sanitation, education, maternal and child health) requires expanding access, quality and affordability of basic services to enhance opportunities to invest in human capital and help those facing discrimination and empower families and communities in lagging regions and areas. Create Opportunities for Growth: Evidence indicates that sustained growth offers the most robust and durable path to overcome poverty. Promoting environmentally- and socially-sustainable growth calls for a broad range of policy actions, ranging from improving investment climates to enhancing opportunities for human capital creation (especially empowering women and girls) to fostering innovation and competitiveness. In the aftermath of a crisis, creating productive jobs is particularly important since employment opportunities and income are expected to recover only slowly and with a lag, leaving lasting scars on human capital, labor productivity, and prospects for long-term growth and poverty reduction. The next decades will also see growing pressure to create jobs in LICs in the face of labor supply growth due to sharp increases in working age population and rising female labor market participation rates. But LIC labor markets, particularly in fragile states, tend to have small bases of productive wage employment, with extremely high rates of self- and informal employment. In such environments, policies that enhance the productivity of micro and small enterprises will be required. Traditional active labor markets policies that might work in MICs might not adequately serve poorer and more fragile economies. 4 These themes underpin the recent paper on the post-crisis strategic directions for the World Bank Group, as described in New World, New World Bank Group: (I) Post-Crisis Directions, April 2010.

20 Expanding support for growth should center on addressing a set of critical challenges: promoting agriculture and food security; addressing pressing infrastructure needs, including efficient energy; fostering an investment climate and private sector that encourages innovation and productivity; harnessing trade opportunities through improved competitiveness; fostering women s economic empowerment; and addressing critical public finance challenges. Promote Global Collective Action: The recent wave of crises and the resulting need for comprehensive, coordinated and global responses highlights the importance of developing cooperative models for dealing with existing and emerging challenges. In this context, international institutions are critical to providing and managing global public goods (GPGs). They are needed to build on, reinforce and coordinate national actions, channel funds to national programs, and monitor and report on progress. Many multilateral and specialized institutions are already engaged in these areas, with some fully dedicated to a single issue, which suggests the need for careful consideration before new institutions or mechanisms are proposed. Looking ahead, one priority for the development community is to enhance the capacity of existing cooperative models to deal with global challenges, since the absence of internationally-agreed principles and frameworks in some areas (e.g. trade-distorting policies, financial market volatility, climate change) can disproportionately affect the poor. Promoting better aid coordination in lowincome countries will also be essential, especially in fragile states. The growing number of actors in the development arena puts pressure on the standard country-based model and strains the capacity of policymakers and implementing agencies within developing countries. As development efforts focus on overcoming poverty and improving lives for the poorest and most vulnerable, the need for leadership to reduce fragmentation and promote aid effectiveness becomes even more evident. Strengthen Governance: Good governance and institutional capacity are critical to sustainable development. They are essential for the efficient and adequate supply of public services, while checks and balances help ensure that governments are accountable to the public. Governments worldwide are asking how to more effectively manage resources, how to better support service delivery to achieve concrete results, and how to rebuild citizens trust in public institutions. The growing focus on strengthening governance stems from its link to poverty reduction a capable and accountable state creates opportunities for poor people, provides better services, supports growth and improves results. In contrast, weak governance results in poor economic outcomes and deterioration in public trust, and creates fertile ground for corruption. Moving ahead, work on this agenda at a country level requires bringing together knowledge of what has worked around the globe with detailed knowledge of country circumstances on the ground in core areas such as anti-corruption, public finance, public administration reform, decentralization, mechanisms for accountability, fiduciary systems and procurement, while at a global and regional level, it focuses on bringing together or supporting regional and global networks to focus on a wide range of key governance issues, such as transparency and governance, identifying and recovering proceeds of corruption, preventing illegal tax havens, and helping address the problem of non-cooperative jurisdictions. Manage Risk and Prepare for Crises: Two defining features of globalization are the extent to which economies have become interconnected, and the increasing speed with which problems that develop in one part of the world can spread to others. These factors are evident in the transmission of the financial crisis from industrialized countries to the rest of the world; in the spread of communicable diseases; and in the accelerating pace of global climate change. More often than

21 not, it is developing countries especially LICs that are least prepared and most vulnerable to emerging financial, environmental, epidemiological and other threats. The current downturn is estimated to have resulted in 30,000 to 50,000 additional infant deaths in sub-saharan Africa in 2009, with more girls than boys dying in all regions, underscoring the need for policies to protect girls in times of crisis. Periodic disasters aggravated with inadequate strategies and weak capacities to manage them have slowed the development of many countries. Future work on improving capacity to manage risk and prepare for crises should focus on: developing better global approaches to disaster and post-conflict needs assessments; helping countries design fiscal policy to smooth expenditures and revenues; developing risk-sharing mechanisms and political risk insurance products to ensure sustained lending to SMEs and facilitate better-designed PPP contracts to minimize adverse impact during downturns; designing innovative finance and insurance products to spread and manage risk; helping governments establish institutions and capacity to use market mechanisms to manage energy and food price movements; developing contingency plans for the financial sector, debt, and pensions; helping countries manage reserves to provide a better cushion against external shocks. The new global economic and financial architecture emerging from the crisis also calls for renewed efforts to provide appropriate knowledge and policy expertise to developing countries through customized development solutions integrating diagnostics, finance, technical assistance, risk management, and increasingly, peer (South-South) learning. Conclusion The world is changing. New global challenges, the global nature of crisis, and a new international economic power configuration are transforming the development landscape. As the economic center of gravity shifts, there is a pressing need to better integrate rising economic powers into the international system. The success of this integration will have profound implications for how the world comes up with solutions to address unprecedented global challenges. Global efforts that focus on: (1) targeting the poor and vulnerable; (2) creating opportunities for growth; (3) promoting collective action; (4) strengthening governance; and (5) managing risk and preparing for crisis can help underpin a development framework capable of making progress on the MDG targets while also opening up opportunities for more inclusive and sustainable growth through 2015 and beyond.