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CGD’s work in this area focuses on strengthening financial systems in development countries through innovation and regulation.
Greater access for the poor to the formal financial system—including payments, savings, credit, and insurance—can greatly improve household stability and development prospects. CGD examines how to strengthen, broaden, and deepen financial systems in developing countries through innovation and regulation. We also study the effects of financial crises, to avoid and mitigate future shocks, and how developing countries can improve their business climates to spur inward investment.
A new report issued last week in Davos by former UN Secretary-General Kofi Annan on behalf of the Africa Progress Panel draws in part on CGD research to argue that Africa is both at risk from the global economic crisis and potentially an important part of the solution.
The report says that experiences of past financial crises suggest that aid to Africa may be cut. But it also sees a silver lining to the crisis: measures to help Africa—including trade and investment initiatives, as well as aid—should be an important part of a global stimulus package in response to the global financial crisis.
"Africa can be an important part in a global economic stimulus plan," said Annan, who chairs the Africa Progress Panel, which is composed of leaders from Africa and high-income countries. "The scope for investment in Africa is vast."
Documenting the economic growth and positive political trends of the last few years, the report states that "Africa's medium to long term prospects are better now than at any time since independence."
However, the report also cautions that "the global crisis could arrest and even reverse steady, and in some cases dramatic, gains that have been made over the last decade." Citing research by CGD research fellow David Roodman, the report warns that despite promises to the contrary, evidence from financial crises shows that rich countries have generally reduced the level of aid in the aftermath of a financial crisis.
The panel report says that "it is more important than ever that Africa's partners honor their commitments" in terms of aid. Alluding to a new aid delivery mechanism being proposed by CGD president Nancy Birdsall called Cash on Delivery Aid, the report suggests that "rich countries can also link aid to outcomes in order to reduce the burden on African governments and improve aid effectiveness."
Africa Progress Panel Report, Preserving Progress at a Time of Global Crisis
Session on the State of Africa at Davos
Kofi Annan's Davos Diary
The report also asserts that "a real partnership between Africa and her supporters is the only way for progress to be achieved." This requires that global governance reforms "include means by which Africans are represented in a legitimate and effective manner."
Annan launched the report at Davos at a session focusing on the State of Africa with leaders from across the continent. Speaking at the session, he said:
"Economic recovery in industrialized countries is needed for Africa—for trade, remittance flows, investment, and aid levels. However, Africa is also integral to immediate efforts to reboot global growth. World leaders must grasp the opportunity to support African development as a means of driving their own economic recovery."
Annan also had strong words about the situation in Zimbabwe, stating that the African Union "did not have the courage" to back the conclusions of its own election observers.
"The crisis in Zimbabwe is man-made, unnecessary, and only getting worse," he said. "The recent cholera outbreak that has taken thousands of innocent lives is only the latest sign of the collapse of a once-thriving nation. Responsibility for this calamity falls squarely on the shoulders of Zimbabwe’s leaders, who have shown great callousness toward their own people and nothing but contempt for the exercise of their political voice and freedoms. Zimbabwe’s neighbors, the African Union, and regional bodies such as the Southern African Development Community (SADC) need to act more purposefully to bring about political change and facilitate recovery and reconstruction."
CGD senior fellow Vijaya Ramachandran served as rapporteur for the 2008 report of the Africa Progress Panel and assisted with the Davos report. "It is extremely important for the urgent issues of infrastructure investment, aid effectiveness, trade, and agriculture to remain as priorities during these times of crisis," she said. "While we are preoccupied with corporate irresponsibility and financial bailouts in the rich world, we must not forget our commitment to economic development and political stability in Africa."
The report urges three steps to mitigate the worst effects of the crisis on Africa, and to enable the continent to become a driver of global economic recovery and stability:
Rich-country governments and institutions must lend strong support to address the problems of climate change by investing in adaptation and in the prevention of deforestation and by increasing funding for renewable energy in Africa.
Africa's own potential for a green revolution in food production must be realized. Technical and financial support is required as well as additional investments in rural infrastructure to ensure farmers’ access to inputs and market outlets.
There has been no progress on multilateral trade negotiations. While pressing for the impasse post-Doha to be broken, an early harvesting of gains in trade liberalization for Africa is needed.
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Collective action by the world’s largest economies coordinated through G-20 summits in Washington and London has gone a long way to avert a global economic crisis. But the G-20 is not yet an adequate forum for addressing urgent global problems, and other crises threaten. Will the third G-20 summit, to be held in Pittsburgh later this month, rise to these challenges? How can U.S. leadership make a difference?
CGD president Nancy Birdsall addresses these questions—and offer practical policy suggestions—in a talk titled "The Crisis Next Time: U.S. Leadership at the Pittsburgh G-20 and Beyond."
From the speech:
Today I want to offer two proposals for the G-20 leaders in Pittsburgh to look beyond the current crisis and follow through on their pledge in the London Communiqué to make the global economy green, sustainable, and inclusive. Because the G-20 and other world leader summits are declaring and committing bodies rather than implementing bodies, both of my proposals involve providing instructions to international institutions.
Read more: download the speech
On the eve of the London Summit, CGD president Nancy Birdsall discusses what the global development community might reasonably expect from a one-day meeting of the G-20 that is focused on addressing the global economic crisis. Will developing countries' needs be addressed?
Q: What's the single most important thing that you would like to see come out of the London Summit--and believe to actually be possible?
A: A long and deep global recession would be a catastrophe for many people in the developing world. To prevent that requires a serious and robust globally coordinated fiscal stimulus. Development advocates should bemoan the failure of courage (or of domestic politics) that is limiting European stimulus packages and cross their fingers that what's already on the table--mostly the United States and China--will be sufficient to sustain global demand. And they should hope that the G-20 leaders will support the UN Secretary-General's call to make at least $1 trillion available over the next two years for transfers to developing and transitional economies, including the poorest among them, to cope with the global downturn. The addition of $500 million borrowing capacity at the IMF is a big step in that direction, though it will not increase resources for the poorest countries (see Vijaya Ramachandran’s blog post: At the G20 Summit: Nothing for Africa). As I've argued, a good part of that sum can be made available by more aggressively tapping existing resources, not just at the IMF and but at the multilateral banks as well.
Q: At the Washington Summit in November, the participants pledged to avoid protectionist measures, but since then, 17 of the 20 participating countries have engaged in some type of protectionist behavior, according to the World Bank. What could the G-20 do in London to make such pledges more credible going forward?
A: I am not keen on another failed resolution to complete the Doha Round—the call by the G-20 at their November summit for completion by the end of 2008 only led to cynicism about summits. Besides, as Subramanian and Mattoo argued in Multilateralism Beyond Doha, a Doha Round trade agreement would not address new challenges to open markets, such as the WTO-consistent Buy America provisions inserted into the U.S. stimulus package or, for that matter, the food export restrictions India and other developing countries imposed last year. These new ways of intervening in global markets come at high cost to the world's poor.
Q: So what can the G-20 do to discourage such actions?
A: Subramanian and Mattoo have called for a special "crisis round" in which countries would agree to temporarily abstain from WTO-consistent but trade-destructive measures, such as increases in tariffs within the allowed levels. I’m inclined to agree with Kim Elliott that a crisis round may be overambitious but that there is real merit in Subramanian and Matoo's call for the G-20 to agree on an expedited dispute settlement mechanism. The G-20 could endorse this principle in their communiqué and ask their trade ministers to come up with a proposal within a specified time, perhaps a few weeks. They know that they need to do something concrete beyond pledging to complete Doha. This could be just what they need.
Q: The UN has also argued that the current economic crisis, coupled with new and increasingly grim evidence of climate change, makes adopting a new climate framework all the more urgent. Is this realistic, or should the G-20 focus on fixing the global economy first?
A: Both crises will hurt poor people, and both require timely action. In fact, the recession, with slack demand and lower prices (including for energy) offers an opportunity to put in place cap-and-trade or other carbon emissions charges, as David Wheeler has argued. Moreover, since public spending has to fill the hole left by a sudden decline in private demand, it makes eminent sense for governments to try to generate green jobs. And developing countries offer excellent opportunities for investing in renewable technologies that are already close to commercially attractive (and which would be profitable today with CO2 emissions priced at as little as $30 a ton), as Wheeler has shown in a recent paper, Desert Power: The Economics of Solar Thermal Electricity for Europe, North Africa, and the Middle East.
Q: Are the right countries participating in the London Summit? Who decides which countries should attend, and on what basis?
A: Precedent matters, and so do the preferences of the host country (the UK in this case). The current meeting amounts to a G-20 Plus—the 20 leading economies that participated in a 1998 financial crisis summit plus the heads of the IMF, World Bank, the United Nations, and the NEPAD. There are some anomalies: for example, the EU is represented by the head of the European Commission, yet European countries are also represented individually.
Personally, I think there's a trade-off at the G-20 between the advantages of a more objective and transparent method of deciding who participates (for example, Rueda-Sabater and Ramachandran suggest 2 percent of world population or world GDP as the cut-off point) and the value of letting the issues of the day and the savvy of the host prevail. I suspect that efforts to improve the representation of less rich and powerful economies in decision-making on global economic matters are better concentrated on changes at the official institutions such as the IMF, the World Bank, the Financial Stability Forum, and so on.
Q: Do you see any signs of progress in reforming the governance of these international financial institutions?
A: The communiqué of the G-20 finance ministers who met in mid-March called for open and meritocratic elections of the future heads of the IMF and World Bank, but they left out the key words "without regard to nationality." Allegedly this was because of U.S. resistance—but who knows? I hope President Obama bites the bullet and supports adding those words.
Of course, there is more to governance reform at these two institutions than leadership selection, but that's the one issue that this summit could pronounce on, and with tremendous positive effect. Personally, I think it would be great if they also alluded to the logic of double majority voting on leadership selection. The newly released final report of a commission on IMF governance reform headed by South African finance minister Trevor Manuel recommended considering double majority voting as a means for "ensuring that decisions affecting key aspects of the institution command the support of the majority of members." For other fresh ideas on improved global governance, see CGD's Bretton Woods Non-Commission.