Poverty To Rise in Wake Of Terrorist Attacks in US

The September 11 terrorist attacks in the US will hurt economic growth in developing countries worldwide in 2001 and 2002, condemning as many as 10 million more people to live in poverty next year, and hampering the fight against childhood diseases and malnutrition, the World Bank says in a preliminary economic assessment released today.

Before September 11, the Bank expected developing country growth to fall from 5.5 percent in 2000 to 2.9 percent in 2001 as a result of slowdowns in the US, Japan and Europe, and then rebound to 4.3 percent in 2002. But because the attacks will delay the rich countries' recovery into 2002, the Bank now warns that developing countries' growth could be lower by 0.5-0.75 percentage points in 2002.

"We have seen the human toll the recent attacks wrought in the US, with citizens from some 80 nations perishing in New York, Washington and Pennsylvania," says World Bank President James D. Wolfensohn. "But there is another human toll that is largely unseen and one that will be felt in all parts of the developing world, especially Africa. We estimate that tens of thousands more children will die worldwide and some 10 million more people are likely to be living below the poverty line of $1 a day because of the terrorist attacks. This is simply from loss of income. Many, many more people will be thrown into poverty if development strategies are disrupted."


Ripples Felt Throughout World

Prior to the crisis, the Bank estimated that the US and other OECD countries would grow by 1.1 percent in 2001 and recover to 2.2 percent in 2002. But now, GDP growth rates in the OECD could be lower by 0.75-1.25 percentage points in 2002. This assumes that business returns to normal by mid-2002, that consumers eventually respond to lower interest rates as they have in the past recession, and that no new events shock the global economy.

Already, there are signs that higher costs and reduced economic activity are putting a damper on global trade. Insurance and security costs and delays at customs clearance are among the main factors pushing up the costs of trade. Major shipping lines, for example, have increased freight rates to India by 10 to 15 percent.

Tourism related trade flows are being hit exceptionally hard. Around 65 percent of the holidays booked for the Caribbean have been cancelled . The Middle East is also likely to suffer a sharp decline in tourism revenues during the coming winter.

The fallout from the September 11 attacks will affect different groups of developing countries in different ways, reflecting their particular vulnerabilities. For the poorest countries that stall or fall into recession as a result of a decline in exports, tourism, commodity prices, or foreign investment, the number of people living below $1 a day will rise. In countries that experience positive but slower growth, fewer people will be able to climb out of poverty than otherwise would have been the case.

The slower growth and recessions will hit the most vulnerable people in developing countries the hardest. The Bank estimates that an additional 20,000 - 40,000 children under five years old could die from the economic consequences of the September 11 attack as poverty worsens.

As investors flee to safer havens, the already weak flow of capital to developing countries will decline further and be increasingly concentrated in countries that are considered to be relatively immune from the crisis. The pattern established in the 1990s of private capital flows accounting for a much greater share of developing countries' financing needs is expected to be reversed in the near term as both equity and lending activities contract in lower risk countries. This will require greater support from bilateral and multilateral official sources if the financing needs of a growing number of developing countries are to be met.

Outside of the US and OECD countries, the ripples from the September 11 attacks will be felt across all of the world's regions, particularly in countries dependent on tourism, remittances from populations living overseas, and foreign investment.

The worst hit area will be Africa, where in addition to the possible increases in poverty of 2-3 million people as a result of lower growth and incomes, a further 2 million people may be condemned to living below $1 a day due to the effects of falling commodity prices. Commodity prices were forecast to fall 7.4 percent on average this year, and are likely to fall even more as a result of the events of September 11. Farmers, rural laborers, and others tied to agriculture will bear a major portion of the burden. Travel and tourism represent almost 10 percent of merchandise exports for the region and are also likely to be disrupted. The 300 million poor in Sub-Saharan Africa are particularly vulnerable because most countries have little or no safety nets, and poor households have minimal savings to cushion bad times. About half the additional child deaths worldwide are likely to be in Africa.

Oil prices are now at $22/bbl, $5/bbl lower than just before September 11, after a brief upward spike following the attacks. Prices of non-oil commodities have also declined. Many agricultural futures have declined by 5 percent since the attacks. These declines are likely to set the stage for lower commodity prices, that are lower by 3 percent for agriculture and 5 percent for metals next year. These prices have never recovered the levels seen prior to the East Asia crisis of 1997-98, and now find themselves buffeted by yet another global downturn. For economies that are dependent on commodity exports, particularly for cotton and beverage exporters, this portends a potentially large terms of trade shock over and above the impacts of slower growth in GDP.


Aid, Trade and Policies Key to Sustaining Poverty Fight

The Bank's assessment is subject to revision in coming weeks and depends on how events unfold. But World Bank Chief Economist Nicholas Stern stresses that both rich and developing countries must be vigorous and vigilant to ensure that the global rebound occurs next year and continues strongly into 2003.

"Policy responses have to be swift and somewhat bolder in rich and poor countries because of the heightened level of risk to the global economy-and they have to be vigilant because the uncertainties associated with future political and military events are unusually large," says Stern. "Maintaining world trade is more important than ever, especially in the face of an economic slowdown which is often accompanied by pressures for increased protectionism."

Several steps are crucial in sustaining the global fight against poverty in the wake of September 11:

Boost Foreign Aid - Private capital flows to developing countries are going down sharply, reversing the trend of the last decade. They are estimated to fall from $240 billion last year to an estimated $160 billion this year. This makes it even more imperative that governments increase official assistance to fill the financing gap. Currently, aid claims only 0.22 percent of GNP of the OECD countries, far short of the 0.7 percent goal agreed to by the international community. The evidence from the Bank's work on aid effectiveness demonstrates that well-directed aid, combined with strong reform efforts, can greatly reduce poverty, and can also mitigate particular effects of crises, such as terms of trade shocks.

Reduce Trade Barriers - Now more than ever, the WTO summit must go ahead, and it must be a development round, one that is motivated primarily by a desire to use trade as a tool for poverty reduction and development. Substantial trade liberalization such as this would provide an additional cumulative income in developing countries of some $1.5 trillion over a decade.

More Coordination - The major industrial countries are likely to have a greater positive impact if their policies move in the same direction as they did immediately after the attacks. Building additional coordination into the conduct of economic policy, particularly monetary policy, could help counteract large shocks in the global financial system. Beyond reliance on all-important automatic stabilizers, fiscal policy may have to be better targeted in the coming months, particularly in providing assistance to low income groups and to affected regions, which are most likely to feel the immediate brunt of a slowdown and disruption.

Building Social Consensus for Continued Reforms - Only a limited number of developing countries can adopt counter-cyclical macroeconomic policies. Most countries are too small to counteract imported shocks, and many face limited financing capabilities. For these countries, accelerating reforms to improve the investment climate may help encourage foreign and domestic investment during this time of heightened uncertainty. Additional financing from the international financial institutions may help implement pro-poor programs and leverage directly or indirectly more private investment.


World Bank Group Support

The World Bank stands ready to do its part. Managers and staff-many of whom are stationed in the field-have been in contact with high-level officials in all client countries to assure them of the Bank's continued commitment to deliver on previously agreed programs, and to offer help in minimizing and mitigating adverse impacts from the heightened uncertainty, risk, and volatility in the current global economic environment.

Work is currently underway to assess needs on a country-by-country basis. Particular attention is being paid to Africa, given the extreme poverty and vulnerability to declining commodity prices of so many countries there. The IDA program, including possible additional debt relief under the HIPC Initiative, is being reviewed, and IFC is paying particular attention to its programs there. Countries in other parts of the world-especially those directly affected by an increased influx of refugees or a downturn in tourist receipts-also are getting special attention.

At the same time, the Bank is reviewing its lending instruments and financial resources to see how they might be best deployed in current circumstances. The menu of responses is likely to include quick disbursing policy-based adjustment lending, emergency recovery loans/credits, and supplements to existing loans/credits designed to protect essential programs. New investment lending and portfolio restructurings designed to target assistance to newly emerging priorities and to protect pro-poor programs also are being considered.