Financial crisis and global health
Special Representative to the United Nations and the World Trade Organization
We applaud WHO's Director-General, Margaret Chan, for convoking this timely session on the health consequences of the current financial crisis, and appreciate the opportunity to speak at this consultation. *
I should like to make three points: regarding the duration of the crisis, the current crisis is rapidly spreading to the global economy, and, while most forecasters see the beginnings of recovery in late 2009 or early 2010, the actual duration of the recession depends on the speed and effectiveness of policies in the developed countries. In terms of the consequences for developing countries, the full force of the global recession has not yet hit developing countries, so countries should begin to design macroeconomic and trade strategies now to weather the storm. With regard to the effects on health in low-income countries, the silver lining around this otherwise dark cloud is that, for now at least, no forecaster is predicting the kind of devastating economic collapse seen in East Asia during the 1997 crisis, in Mexico in 1995, or in Argentina in 2001; so the consequences for health may not be catastrophic. However, they will be severe, so the lessons of those episodes are important. The most immediate effects are likely to be through the scissors of rising health costs and diminished resources. The cost of imported health inputs rise because of depreciating currencies; resources shrink as lower incomes depress private spending on health and slower growth cuts into tax revenues that would otherwise be available for public health. Key priorities are programmes that maintain or expand health services to the poor and encouraging donors to keep development assistance, which is critical to health financing.
Time permitting, I shall say a bit about the World Bank’s response to the crisis.The current crisis is rapidly spreading to the whole world economy, and while most forecasters see it lasting for another 12 months or so, the actual duration of the recession will depend on the speed and effectiveness of policies in the developed countries. The European Union, Japan and the United States of America – which account for some 70% of world's gross domestic product – are now in recession. Most forecasters see a deepening recession in 2009 that will rival only that of the 1980's in post-war severity. However, in contrast to the 1980's deep recession, where the crisis originated in developing countries themselves, this crisis emanated from the United States. This means, first, it is likely to hit the developing countries with a short lag, so the worst is still to come. But second, and this is the silver lining, it means that most developing countries may yet avoid economic contraction and the shattering effects of previous crises, such as in East Asia in 1997 or Latin America during the 1980's. Finally, it also means that policies in high-income countries hold the key to recovery.
How long will the crisis last? The duration will depend on the success of policies in high-income countries in three arenas: First, success in stabilizing the financial sectors and getting credit flowing again. Here, only modest progress is evident so far. Interbank lending rates have come down and stabilized, but banks are not yet lending. This will take time, more aggressive write downs of bad assets, and unfortunately probably more public capital. Second, the quality of fiscal stimulus is as important as its quantity. The United States contemplates a US$ 820 billion stimulus package over two years. Amounts in Europe are somewhat less. The trick will be convincing the financial markets that stimulus now will be followed by a return to lower deficits once recovery gets traction: the quality of the stimulus is therefore critical: public expenditures, especially on unemployment insurance, food stamps, and programmes to help the poor weather the crisis, have much stronger multiplier effects than tax cuts. More importantly, these programmes are also much easier to phase-out than tax cuts once growth resumes. If the stimulus takes the form of tax cuts benefiting the wealthy, subsidies to declining industries, or appears to increase the deficit permanently, investors may well turn their back on government paper, leading eventually to currency depreciation, and the recession could be prolonged. Third, success in keeping global trade open. Governments have to resist the temptation to adopt "beggar thy neighbour" trade policies. This proved fatal during the Great Depression – and it would prove fatal now. So far governments – for the most part – have resisted this temptation.
Most forecasters are predicting the beginnings of recovery only very late in 2009 or early 2010. The Consensus Forecast, which averages 26 leading private and academic forecasts, indicates a contraction in the United States of 1.8% in 2009 – with contraction in every quarter through 2009, and growth beginning in 2010, reaching 2.3 % for the year. This pattern is likely to be echoed in Europe and Japan, with recession somewhat less steep and recovery somewhat less strong.
Here, let me remind you that there is a reason why economics is called "the dismal science". Even if governments act aggressively and take the best policy path, there is considerable uncertainty and risk. We simply do not know when banks will begin lending again. We do not know with certainty the willingness of investors to hold increased public liabilities associated with the fiscal stimulus. And we do not know when beleaguered consumers, now trying to reconstitute their decimated wealth position, will feel comfortable in beginning to spend. So we should take all forecasts with a grain of salt and, these days, maybe the whole salt shaker.
The global recession has not yet hit developing countries with full force, but warning signs are evident, so countries should begin now to design macroeconomic and trade strategies now to weather the storm. The recession in the North will be transmitted to the South through three principal channels. Declining incomes in the North will mean slower growth of trade with the South – and indeed initial reports from some countries indicate that trade contraction is looming. Growth of exports was negative in December for all of the major developing countries - Brazil, China, India, Russian Federation, South Africa – as well as countries as diverse as Argentina and Thailand. Moreover, global trade is expected to contract in 2009. This would be the first global contraction since since 1982. A second channel is commodity prices. These have fallen from their historic levels, hurting the countries that rely on those exports, while helping countries that import them. Price movements transmit directly to the rural sector where most of the world’s poor live. Over the longer term, prices are expected to remain higher than during the 1990s for the next 20 years. Oil prices are likely to average about $75 a barrel for the next five years. Food prices are expected to remain about 25 percent higher than they were in the 1990s. Third, private financial flows are likely to be reduced by half – from about US$ 1 000 billion to about US$ 500 billion. With rising unemployment in the North, remittances from the diaspora of immigrants into the United States and Europe are likely to fall, though not as sharply. This is one reason why maintaining development assistance is so important.
What are the growth prospects for developing countries? GDP growth in the developing world is likely to fall from its average in the last three years of more than 7% to the neighborhood of 4.5% or somewhat less in 2009. While these forecasts are subject to an unusually high degree of uncertainty, and revisions have trended downward, few analysts are yet predicting economic recession in developing countries. That said, several countries are at exceptional risk: conflict countries, countries going into the crisis with unstable macroeconomic environments, countries suffering sharply adverse terms of trade, and countries relying heavily on trade with the high-income countries in recession (for example, Mexico with the United States and the eastern European countries with the European Union).
Everything possible should be done to ensure that the slowdown does not turn into a recession in developing countries because the situation would become much worse. Past recessions – such as those in Indonesia, Thailand after July 1997, Argentina in 2000, and Mexico 1995 -- have shown that women and children have born the brunt of crises. During recessions, infant mortality rises; the under-five mortality rate rises as children go unvaccinated or do not have access to health services; and the number of women dying of birth complications increases.
To avoid more severe slowdowns, the prudent course for developing countries is to avoid complacency and prepare for the worst with three sets of actions: many countries can afford a modest increase in deficit spending to finance targeted programmes that affect the poor. Some deficit spending will counteract export losses in the short term. Countries now have some headroom to borrow. Moreover, the World Bank, the International Monetary Fund, and other multilateral development banks are making available new lines of financing, so this increase in fiscal activity need not be inflationary or destabilizing. The World Banks intends to make available US$ 100 billion over three years for middle income countries and front load its soft-loan window, recently replenished with US$ 42 billion of donor contributions, for low income countries. Actively promote exports – including by designing strategies to improve competitiveness that keep exports growing. This means making sure that prices encourage exports, that backbone services such as telecoms and transportation are as efficient as possible, and that the costs of exporting (including customs procedures and port delays) are cut to a minimum. Here, too, the World Bank and regional banks have programmes to help. Accelerating, not delaying, reforms that improve the efficiency of the economy: slowdown always brings pleas from affected parties to “implement programmes more gradually.” While some may have merit, now is a time to accelerate reform, not delay it.
The crisis will undoubtedly have an impact on health in developing countries, with the most immediate effects through lower private spending on health as income growth slows and through tighter national budgets that will constrain public health expenditures. The economic slowdown comes right after price surges in food and fuel have - by Bank estimates - already pushed more than 100 million people into extreme poverty, and the number of people suffering permanent cognitive damage due to malnutrition amounted to an extra 44 million people in 2008. Slower growth will compound these effects by increasing unemployment: incomes of groups living close to the poverty line may contract, and women and children suffer. On aggregate, we know that a three percentage point decline in the growth rate of developing countries leaves about 60 million people stranded in poverty who would have otherwise been lifted above the poverty line.
The health effects are potentially severe.The crisis has put health systems in the scissors of rising costs and diminishing resources. Costs are likely to rise as currency devaluations occur in many countries as an unavoidable side effect of the crisis. Devaluations increase the costs in local currencies of all imported health expenditures: medicines, autoclaves, syringes, X-ray machines and other hospital equipment. Already, several major currencies have fallen against the US dollar by 10-40%. For example, the largest countries – Brazil, India, Russian Federation, and South Africa – have experienced nominal devaluations averaging about 38% since their peaks in 2007-2008.
Meanwhile, resources for health are contracting. Lower incomes will constrain private expenditure on health. Surveys in the wake of the Argentine crisis of 2001-2002 indicated that 38% of households cut back on expenditures for their children's preventive care. Public spending will also become constrained. Slower growth means lower tax revenues and, possibly, lower spending on health. This underscores the importance of maintaining development assistance. In Ethiopia and Rwanda, more than 50% of government expenditures is financed by donors, and off-budget donor funding for health is more than 100% of government health expenditures. In 2006, 23 countries had more than 30% of total health expenditures funded by external sources.
Policies can offset these effects. Those that have proven most effective include: policies aimed at financing specific services used by the poor – vaccines, primary health care and nutrition programmes; policies expanding the coverage of safety net programmes through low-cost insurance mechanisms (for example, the Bolsa Família programme in Brazil, and 30-Baht/universal coverage insurance in Thailand); conditional cash transfer programmes providing cash subsidies that require recipients to keep their kids in school, get immunized, or take advantage of health services to mothers and children; enlisting donor coordination can increase efficiency and resources through efforts like the International Health Partnership Plus (IHP+). These can provide greater levels of resources, greater continuity of resource flows, and greater efficiency in their deployment. (The Bank is proud to be a partner with WHO and others in the IHP programme.)
Let me close on a word of optimism. Developing countries may yet avoid recession, and its most devastating health consequences. But for this to occur, the United States and other high income countries have to manage their economic policy well – and so do developing countries. And everyone has an interest in maintaining the flow of development assistance to low-income countries. The World Bank is pleased to be working hand-in-hand with WHO and other development partners to maintain the flow of resources and provide adequate technical support. Working together we believe it is possible to ensure that the economic and financial crisis in high-income countries does not become a social crisis in low-income countries.
Response of the World Bank
The World Bank is working at several levels. These include:
- Increasing financial support for developing countries, particularly the poorest:
- IBRD could make new commitments of up to U$100 billion over the next three years. This year, lending could almost triple to U$ 35 billion.
- IDA: this facility is now in place to speed U$ 2 billion to help poorest countries deal with effects of the financial crisis. The money is to be used for safety nets, infrastructure, education and health which is part of the U$ 42 billion IDA 15 fund for the poorest people.
- Shoring up the private sector: New IFC facilities will:
- ensure trade flows. IFC plans to double its existing Global Trade Finance Programme to US$3 billion over a three-year period and mobilize funds from other sources.
- bolster distressed banking systems. IFC plans to launch a global equity fund to recapitalize distressed banks. IFC expects to invest US$1 billion over three years, and Japan plans to invest US$2 billion.
- keep infrastructure projects on track. IFC expects to invest at least US$ 300 million over three years and mobilize at least US$ 1.5 billion to provide rollover financing and recapitalize viable private infrastructure projects in financial distress.
- shift advisory support to help companies weather the crisis. IFC is refocusing advisory services programmes to help clients cope with the crisis. It estimates a financing need of at least US$ 40 million over three years.
- Ensuring liquidity and resources for specific activities:
- The Multilateral Investment Guarantee Agency supports developing country financial sectors by providing guarantees to foreign banks that help inject much-needed liquidity into these markets. Its planned support to such projects in Ukraine and the Russian Federation is expected to bolster confidence in the financial system in these countries. Similar guarantees are expected in Africa and eastern Europe.
- Energy for the Poor. The poor have been hard hit by the impact of rising fuel costs. The Bank is moving forward with a new programme to give rapid support so countries can strengthen their social safety nets.
- Food crisis response. Nearly US$ 900 million is approved or in the pipeline to help developing countries cope with the impact of high food prices through our US$ 1.2 ?food facility
- Technical analysis and advice - for example with contingency planning for small banking systems.
In health specifically, the World Bank Group activities are intensifying
We project nearly US$ 3.0 billion in health, nutrition and population commitments in Financial Year 09. About 40% has already been approved. This is an increased from sectoral commitments averaging US$ 1.4 billion between Financial Years 03 and 08. (Financial Year 08 had a particularly low total of US$ 0.95 billion.)
The second largest share of these new resources will go to Africa in Financial Year09 – nearly $800 million. Latin America is expected to have the largest health, nutrition and population sectoral commitments (US$ 864 million) in Financial Year 09, followed by South Asia (US$ 645 million). Ninety-one approvals are projected for that period, of which 75 are IBRD/IDA. Of the 75 IBRD/IDA approvals, 26 are managed by the HNP SB, but 53% of commitments is expected to be managed by the Health, Nutrition and Population School Breakfast programme.
Helping the private sector is also important. The IFC, the World Bank’s private sector arm, has established the Africa Health Sector Initiative: US$ 250-300 million over five years These funds will aid the private sector increase access to capital, improving regulatory framework, and provide small loans in medical education, risk pooling, pharmaceuticals, retail operations and service provisions. About 40% is social enterprise on non-profit.
* These remarks benefit from the work of Julian Schweitzer and Pablo Gottret of the World Bank’s health team, the World Bank’s Prospects Group, and the communications team of External Affairs.