Responses: Olu Ajakaiye - Director of Research - African Economic Research Consortium

The global financial and economic crisis is already wreaking havoc in developed and developing world, alike.  However, while the developed world has the wherewithal to respond in various ways to the crisis, the developing world is incapable of doing the same.  First, their [developing countries] external balances even of countries that benefitted from the speculation induced commodity boom, are  deteriorating fast constraining their ability to finance their own rescue packages.  The drying up of credit in an environment where virtually all investment projects  require external financial component resulted in suspension and even termination of investment projects thus compromising early recovery and growth prospects in the medium term.  When the inflationary consequences of the burgeoning fiscal stimulus by the advanced countries show up in future, the developing  countries will face high cost of imports with the attendant imported inflation thus further complicating their macroeconomic framework.  The outcome of this situation is that by the time economic recovery begins in the developed world, recovery in the developing world will be delayed, if at all. Consequently, poverty will remain endemic with the gap between the rich and poor nations remaining a challenge.

In order to ameliorate the situation and assist the developing countries to weather the storm as well as commence recovery soon after the recovery would have started in the developed world, the World Bank and IMF will need to be adaptable and responsive to the needs of these countries.  First, it should be recognized that the problem is more structural than macroeconomic imbalances.  Therefore, the World Bank, as opposed to the IMF, should take the lead.  This calls for significant increase in the financial resources available to the Bank.  Specifically, I support the following proposals for action by the World Bank and the IMF.  Quite a number of these proposals have been made by several individuals and organizations, especially the African Development Bank, the UN and its agencies, the South Centre and Civil Society Organizations.  Emphasis, however, is on the African countries:

• The World Bank, in partnership with the African Development Bank,  should provide financial and technical support (70% grant and 30% long term low cost loans) to African countries where capacity to articulate a robust development strategy aimed at diversifying their economies and markets has been degraded during the last 30 years.
• The World Bank, in partnership with the African Development Bank,  should also resume funding of development projects in tertiary, secondary and primary health and education sectors thereby initiating and/or reigniting economic growth and development in African countries under a programme of investing in people.
• The World Bank, in partnership with the African Development Bank, should support regional development projects, especially in transport infrastructure, power , technology and telecommunications in the context of regional economic communities under a programme of investing in investment ;
•  There should be  a moratorium on debt payments for all developing countries until their recovery process might have commence; the so-called debt standstill;
• There should be new allocations of SDR to African countries to enable them meet the offshore components of their development programmes in the wake of the drying up of credits in the advanced countries
• IMF should play complementary role to the development support activities of the World Bank by supporting suitable policy space in monetary and financial spheres in its interactions with African countries.  Specifically, they should disengage from the erstwhile one-size-fits all advice  and conditionality and allow the monetary authorities to nuance their objectives by judicious combination of inflation and growth/development.  In that regard, the IMF should not impose structural conditions nor insist on macroeconomic policy adjustments  especially because the on-going deterioration in external balance positions of African countries such as those caused by the recent commodity bursts in resource rich African countries are exogenously induced.
• In general, donor assistance to African countries should shift towards grants and away from loans so as to avoid the dangers of another debt crisis in the medium term.
• The on-going reform of the governance of IMF and the World Bank should continue, especially those aimed at strengthening the voice of developing country members, making the appointment of the leadership of these institutions more inclusive and merit based and enhancing accountability to all constituencies on an even handed way.