Ref. :  000002891
Date :  2002-02-20
Language :  English
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World Bank estimates cost of reaching the millennium development goals at $40-60 billion annually in additional aid

Many countries have improved policies but much will depend on extent of further reforms and also on policies of rich countries


WASHINGTON, February 20, 2002 - The World Bank estimates that financing the successful achievement of a key set of development goals known as the United Nation Millennium Development Goals (MDGs) could cost in the range of $US 40-60 billion a year in additional aid for the next decade and a half. The Goals call for a halving of extreme poverty and for substantial improvements in health and education in developing countries by 2015.

However, the Bank warns that while this level of funding is crucial to meeting these global targets, developing countries would also need to reform their health, education, and institutional policies to improve the effectiveness of development aid.

"These numbers show that without additional resources we will not meet the development goals. But they also underscore why success lies in a partnership of action between developing countries and rich countries" said James D Wolfensohn, President of the World Bank, who has called on rich countries to double their overseas aid from the current level of about $57 billion a year and dramatically cut their agricultural subsidies. " Since September 11th, there has been a strong sense of global solidarity that the world's poor need better health, good quality education, and more promising lives not only as a moral principle but also because these are the ingredients for a more stable, secure world. As we now see, this global solidarity has a price. It may look intimidating in total but it may prove to be one of the most profoundly transforming investments the world community ever makes."

The World Bank says that developing countries and aid donors need to work together on how to use additional aid finance most effectively so that it yields the substantial gains in reducing income poverty and improving peoples' health and education by 2015 that are in our grasp. Policy reforms to promote productivity and growth, and improvements in delivering quality healthcare and schooling, will be as important as money. Foreign aid is most effective in countries where sound policies and institutions create the right conditions to reduce poverty in all of its dimensions.

"While money is not the only input, or even the most important input, it is crucial for reaching the goals," says Shanta Devarajan, co-author of the new costing assessment and Chief Economist of the World Bank's Human Development Network. "However, if the aid goes to countries with poor policies and institutions, it is likely to be wasted. The question, therefore, is: If the necessary changes in policies and institutions are forthcoming, how much additional financial resources will be needed to achieve the 2015 goals?"

Devarajan says the Bank's preliminary estimate of the cost of reaching the MDGs is in the range of $US40-60 billion and roughly consistent with the assessments of other international agencies such as the World Health Organization and UNESCO. The estimate in the recent Zedillo report of the United Nations of $50 billion in additional financing, and echoed subsequently by UK Chancellor of the Exchequer Gordon Brown, also lies in this range. The Bank has been sharing its preliminary analysis with these other agencies and partners.

The challenge is to meet this goal in each country. There are 65 countries which are unlikely to meet the goal without further external assistance and/or policy changes.

The Bank estimates that, of these 65 countries, 43 could effectively absorb more aid today, and would require an additional $39 billion per year to reach the poverty goal by 2015.

For a remaining 22 countries, with weak policies, the Bank assumes that if these countries are able to bring their policies and institutions up to the average of the better-performing countries, then an additional $15 billion per year would be needed to assist these countries in reaching the poverty goal. Thus the additional aid required for this goal ranges from $39 billion to $54 billion depending on whether the worse performers do or do not improve their policies. The upper end of this range represents a doubling of current levels of Official Development Assistance ($57 billion in 1999).

Another 33 countries seem to be on target to meet these goals although substantial extra inroads into poverty in these countries would flow from an increase in their aid to GDP ratios.

All of these calculations assume that, with the exception of foreign aid, all other international exchanges continue as "business as usual." Specifically, this assumes that private capital flows, already quite small in these countries, will not increase as a share of GDP over the medium term.

The assessment also assumes that the world trading system will remain essentially unchanged—becoming neither more protectionist nor more open. If the Doha summit of the World Trade Organization produces tangible results, these would include providing greater market access for developing countries. There would be substantial gains for both developed and developing countries. For developing countries as a group, the benefits of the increased market access will be much larger than financial transfers through official development assistance over the period to 2015.

But it is important to note that these gains would not substitute for development assistance in helping all countries reach the MDGs. The geographic distribution of trade-related benefits favors the high-trading, middle-income countries. A preliminary model-based simulation of reducing protection by half worldwide yields a welfare gain in 2015 of about $200 billion for developing countries as a whole. But only a small proportion of these gains would accrue to sub-Saharan Africa and South Asia outside India.

The basic reason is that Africa and other very poor areas have inadequate infrastructure (e.g. roads, ports, power supply) and start from a very low level of exports to rich countries and thus gains from better prices for exports are initially smaller. These low-income countries are too poor to benefit fully from multilateral trade liberalization without aid. To take advantage of market access, they require hefty investments in trade infrastructure, transportation, and telecommunications, as well as investments in trade-related government institutions, such as better customs and tax administration, and overall management of public investment. These in turn require development assistance—"aid for trade".

In short, even though it will undoubtedly benefit developing countries by stimulating growth and reducing global poverty, reducing trade barriers is not sufficient, at least for several years, to eliminate the need for aid in those very poor countries with the largest MDG gaps.

" The world is living through a unique period where increasingly we all feel a new sense of internationalism, where we now have a deeper understanding of what makes development really work in a globalized economy, and where we can build on the mutual commitment of the internationally-agreed Millennium Development Goals. We have a special opportunity, and thus a special responsibility, to act now to create a better world," says Nicholas Stern, the World Bank's Chief Economist and Senior Vice President. "We cannot accept a world going forward where rich nations enjoy unprecedented wealth while the poorest nations and their people suffer extreme deprivation at the very margins of global life."

The Education, Health and Environment Goals:

The estimates just described of the cost of meeting the first goal are likely to embody policy improvements and extra resources which would go some way towards meeting the other goals. However, we can also estimate the cost of meeting the other goals directly. Measures to reach these other goals would embody actions likely to promote strong progress towards the first, income poverty, goal.

The World Bank estimates that the additional cost of achieving universal primary education by 2015 at some $10 billion to $15 billion a year, depending on whether regional, national or global averages are used. These preliminary figures are also close to those obtained by UNICEF in their "minimum global estimate" of $9.1 billion.

For the health goals, the Bank can identify specific inputs that contribute to reduction in infant or maternal mortality, and then estimate the costs of delivering these inputs. For example, re-hydration therapy, vaccinations and promotion of breast-feeding have all been shown to reduce infant mortality. Similarly, for the goal of reducing infectious diseases, there are specific interventions, such as insecticide-treated bed-nets for malaria, and the DOTS strategy for tuberculosis, for which cost estimates exist. The Bank calculates that the sum required to meet the health goals is in the range of $20 and $25 billion per year for the health-related goals.

Environment goal: Universal access to water and sanitation by 2015

The costs of achieving the environment goals (essentially water and sanitation) have been calculated by looking at a range of estimates, one for achieving universal coverage ($30 billion a year), another for reaching basic levels of coverage ($9 billion). These estimates should be approached cautiously, because there are some who believe that enough resources exist to achieve universal access to water supply—it is just, they argue, the institutional arrangements that prevent it from being achieved. Similarly, some of the improvements in access to sanitation are likely to be achieved through the pursuit of the health goal of reducing infant mortality.

Finally, the "City without Slums" program has estimated the cost of providing secure land tenure and upgrading slums to be $3.5 billion annually. Taking these estimates and their caveats together, the cost of reaching the environment goal is estimated at between $5 and $21 billion a year.

The sum of the estimated costs of reaching the individual goals produces a range which includes the $40-60 billion extra per annum calculated under the first method. The policy improvements and resources implied in the first calculation on income poverty would make substantial contribution in reaching the other goals; similarly the policy improvements and resources embodied in the second calculations would promote reduction in income poverty. To the extent that policies for the two types of goals do not overlap, some adding of the cost is necessary.

However, to the extent that policy from rich and poor countries improve and other inflows, including foreign direct investment, increase, the extent of the required additional aid is reduced. Thus given the uncertainties in the estimation, the range $40-60 billion in additional aid seems appropriate. These are estimates that will need further work. One important element in this work is staging over time.

Summary

The World Bank estimates that financing the successful achievement of a key set of development goals known as the Millennium Development Goals (MDGs) could cost in the range of $US 40-60 billion a year in additional aid up until 2015. However, the World Bank reiterates that while additional financing is one of many inputs required to reach the MDGs, money alone will not guarantee that the goals will be reached. Nevertheless, when countries have the appropriate macroeconomic and structural policies and institutional arrangements that will make additional aid effective, then additional resources can play a crucial role in accelerating progress towards reaching the development goals by 2015.


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