According to the paper, released during the United Nations International Conference on Financing for Development in Doha, Qatar, interventions such as the conditional cash-transfer programs in Mexico and Brazil, are cost-effective and can cost less than one percent of GDP. For many developing countries, spending on targeted safety nets is a smart investment since the effects of malnutrition in children is lifelong. "Governments will be facing a significant global downturn, which in turn will raise demands for public expenditure, some of which will need to be accommodated," said Leipziger.
The global economy is forecast to grow by only 1 percent, with growth in high income countries expected to go from 2.5 percent in 2007 to a contraction of 0.1 percent in 2009, and developing country growth expected to fall from 7.9 percent in 2007 to 4.5 percent in 2009. The World Bank estimates each 1 percent drop in growth could trap another 20 million people in poverty.
Weathering the Storm notes that the financial crisis will translate into less demand for labor in many developing countries and in lower wages and unemployment. Therefore, it recommends policies to support the incomes of the working poor, such as conditional cash transfers, and increasing social and disability pensions, and unemployment benefits, among others.
Likewise, the report stresses the need to take advantage of the financial crisis to remove constraints to growth and unlock new sources of productivity, such as ensuring the tax burden is not excessive, that public spending is efficient, that there are clear rules and transparency in the state ownership of banks and financial entities. Other actions include increasing trade financing of imports and exports to overcome the current credit crunch and resisting protectionism.
According to Weathering the Storm, developing countries’ ability to undertake policies to protect growth and poverty reduction will depend on their macroeconomic positions and their vulnerability to shocks.
· Some 40 per cent of the countries examined in the paper, which had relatively small fiscal and current account balances in 2007, will have more room to undertake some expansionary policies.
· At the other extreme, about a quarter of economies with both large current accounts and fiscal deficits will be under pressure to adjust on both fronts, and also might risk financial sector stress because of very rapid growth in bank credit in recent years.
· About a quarter of the countries with relative prudent fiscal balances but large external deficits - due to high borrowing of the private sectors - could face retrenchment in private spending, so expansive fiscal policies will be more difficult.
"After shielding the most vulnerable, the next priority is to protect long term growth and ensure that the preconditions for recovery are readied" said Leipziger. "This means that investments in infrastructure and policies to promote competitiveness become crucial."
