Monday, June 22, 2009

Ambitious plans and lapsed commitments: challenges for development funding in wake of financial crisis

Sources
Reuters: G8 should use any stimulus easing to help Africa
Financial Times: Kenya unveils record ‘stimulus’ budget
Italy and France draw fire over aid
African bank tries to triple capital base

This year marked the end of a five-year upward trend in Kenyan economic growth. A bitter combination of drought, inflation, post-election violence, and a deepening global financial crisis ground the nation’s once accelerating growth to a halt. In response, the government has unveiled an ambitious budget that includes more than $11 billion in fiscal stimulus spending. A sizeable portion of the budget is devoted to development spending (overall, an increase of 83 percent over last year’s development budget); aimed at road improvements, irrigation, water supply and energy programs. The plan will bring Kenya’s budget deficit up to 6.6 percent of gross domestic product in the fiscal year starting in July, with national debt rising to 44.5 percent of GDP. Government leaders plan to manage the budget without increasing taxes, hoping to meet targets by reducing wasteful, non-priority government spending.

While Kenya strives to fund its own development efforts in the face of global crisis, French and Italian leaders are receiving criticism for their failure to follow through on development aid commitments. By the end of 2009, the G7 countries as a whole will have delivered only half of their 2005-2010 promise, with Italy and France responsible for 80 percent of the shortfall. Reviews of Italy’s performance are especially critical, as it has delivered only an estimated 3 percent of the increase it promised in 2005. Italy acknowledged the figures but cited financial constraints as the cause of the failure, stating that it remained “fully committed to the objectives set at Gleneagles.” While other G7 countries are still fighting to keep pace with the 2010 goals, Italy is a striking example of the financial crisis’ harmful effects on development funding.

Donald Kaberuka, president of the African Development Bank (ADB), expects African economies to be affected more deeply and to recover more slowly than the rest of the world. In remarks timed to correspond with recent G8 meeting in Italy, he called for developed economies to devote “robust and greater attention” to the challenges facing low income countries as they plan their post-crisis exit strategies. In May of 2009, the ADB announced plans to triple its capital base in response to the financial crisis. An increase on that scale will require a large boost in funds from foreign donor shareholders. The foreign donors the ADB is counting on, like the French and Italian governments failing to meet their aid commitments, may struggle to prioritize development spending in today’s economic climate. Kenyan leaders hope they’re on the right track; welcoming aid and foreign investment, but working hard domestically to push their own economy back toward an upward trajectory.

Discussion
1. Is the Kenyan budget, with the significant increase in national debt that it entails, a prudent plan for the developing nation? How would a tax increase affect the feasibility and effectiveness of the budget?
2. Jamie Drummond, co-founder and executive director of One, an anti-poverty organization, says that Italian Prime Minister Silvio Berlusconi “needs to be censured by his peers” for his country’s failure to meet African aid commitments. As developed countries plan for economic recovery, to what extent should their leaders be bound by aid commitments?

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