How to Unlock the $1 Trillion that Developing Countries Urgently Need to Cope with the Crisis

February 17, 2009

Five billion people in developing countries are innocent victims of the global economic crisis. How well they cope will be crucial to sustained global recovery. In this CGD Note, Nancy Birdsall estimates that developing countries may need $1 trillion for bank rescues, for fiscal stimulus, and to maintain their minimal social safety nets over the next couple of years. She then explains how these funds could be unlocked from existing resources.

From the paper:

“How much official finance is needed to help the developing world weather the storm unleashed by rich-world regulatory failures? As much as $1 trillion would make sense. Dealing with the problems of rolling over sovereign debt as well as existing bank and corporate debt (some of it implicitly if not explicitly government guaranteed) in Latin America, Eastern Europe, and Asia might absorb as much as half that amount—and of course having $500 billion available might reassure markets and reduce the amounts actually needed.

The other half would be available to fill revenue gaps (which may also rise in countries relying on aid for 20 percent or more of government budgets, if bilateral aid declines) and for emergency job and food programs—relief and fiscal stimulus that these countries cannot finance through normal borrowing because U.S. government borrowing and bank rescues are sucking capital out of the rest of the world. To put a half-trillion-dollar developing-world stimulus package in perspective: $500 billion is equal to about 3 percent of the GDP of all developing countries. By way of comparison, the U.S. fiscal stimulus is equal to more than 7 percent of U.S. GDP, and the Chinese stimulus package is equal to more than 10 percent of China’s GDP.

Still, a trillion dollars is a lot of money. Luckily, given the political and fiscal pressures that the rich countries’ own stimulus packages are creating, it is possible to make $1 trillion at almost no immediate cost to the traditional donors. The International Monetary Fund and the multilateral development banks already have the wherewithal to put as much as $1 trillion on the table over the next 12 to 18 months. They also have the mechanisms in place to help developing countries to use those resources well. At the April summit, the G-20 heads of state should announce that number—and the steps that I describe at the end of this note that are needed to make that number possible.”

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