The Hindu Business Line : `Channelising funds for poverty reduction will be a challenge'

THE North and the South stand to gain from the recovery currently underway in the global economy which has coincided with a "rebound" in financial flows to the developing countries; but the critical question to policymakers is how to channel these gains "into investments that promote development and sustainable poverty reduction," says the World Bank's Global Development Finance Report for 2004 issued ahead of the Spring Meeting of the Bank and the International Monetary Fund.

The report takes note of the fact that the external environment for the developing countries improved in 2003 as global growth gained momentum and in the recovery of private capital flows after a gap of five years. The recovery in private flows "was encouraged by expansionary monetary policies in advanced economies and structural improvements in the developing world," the World Bank has said.

The net private flows increased sharply to $200 billions with all regions of the world excepting West Asia and North Africa benefiting with flows to Central Asia and Europe being particularly strong. Net capital flows in 2003 including official flows reached $228 billions or 3.6 per cent of developing nations' GDP or up from the 2002 figures of $191 billions or 3.2 per cent of the GDP.

One of the things pointed out in the report is that the recovery in capital flows is heavily influenced by cyclical factors in particular the boost to liquidity arising from stimulative monetary policy in the advanced economies.

"The net external liability position of developing countries has strengthened and the large-scale build-up in developing countries' official reserves...has introduced a new dimension to the relationship between the developed and the developing worlds. More than ever, global capital flows, trade and exchange rate policies are intricately linked," the World Bank says.

The bank is stressing that the challenge will be to ensure that the cyclical recovery in flows can be sustained over the medium term and that this could be channelled into such areas as infrastructure which can lay the foundation for sustained growth and poverty reduction so that the goals of the Millennium Development could be met.

Flows of foreign direct investment (FDI) declined for the second consecutive year in 2003 and were pegged at $135 billions or a little over 20 per cent below the level reached in 2001. But FDI flows are expected to recover in 2004 in line with the global economic recovery; but here again it will depend on the liberalisation of the service sectors in the developing countries. "Concern over regulatory risks may have a particular impact on the FDI in the banking and utilities industries," the World Bank has maintained.

Like a recent report of the United Nations, the World Bank's Development Finance assessment is that the world economic growth can be expected to jump to 3.7 per cent in 2004, going even to the extent of saying that the recent modest increases in long term interest rates is unlikely to cut into the economic growth. That said the World Bank's emphasis is that there can be no room for complacency, an advice that would seem pertinent to both the developed and the developing economies.

Developing nations, for example, should maintain prudent macroeconomic policies and persevere with reforms that are needed to keep up with sustainable growth; and among other things "maintain the confidence of investors and creditors particularly in the face of political pressures from forthcoming elections in several countries," it is being pointed out.

The Global Development Finance report makes the point that while net official development assistance (ODA) did increase to $58 billions in 2002, it is still well below "historical levels and what is required to meet the Millennium Development Goals". In fact, one half of the $6 billion increase in nominal ODA reflects debt relief and a further $1 billion in higher assistance to Pakistan and Afghanistan.