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G8 urged to remember developing world

June 13, 2009

by Guy Dinmore in Lecce, Italy

Published on FT on June 13 2008

Talk among G8 finance ministers of “exit strategies” — how to avoid the inflationary impact of spending their way out of recession — is prompting alarm among development agencies and international institutions who warn the worst of the crisis is yet to hit the developing world.

“I’m worried about that,” Kanayo Nwanze, head of the UN International Fund for Agricultural Development, told the Financial Times on Saturday in the southern Italian city of Lecce where he was invited to address leading finance ministers of the developed world.“The impact of the financial crisis on developing countries is going to be more visible in several months,”
he said, warning that African governments would encounter budget problems in paying civil servants and subsidising food in urban areas.

Mr Nwanze is lobbying the G8 for a significant increase in food security programmes and agricultural investment as a driver of economic growth. Agriculture is back on the agenda, he said, after two decades of neglect, but the concern remains that as food prices drop back “governments will look inwards again”.

Robert Zoellick, head of the World Bank, echoed these
concerns on his way to Lecce, noting that economies of the
developed world were contracting at a slower rate but that
he still expected “wave effects” to hit poorer countries
hardest. The World Bank has just revised its forecast of
global economic contraction to 3.0 per cent this year from
its previous estimate of 1.7 per cent.

Aftershocks for the developing world will be seen in
falling exports, less foreign investment, and cuts in
remittances from overseas workers. Many countries would be
“hard pressed” to meet their debt payments, he said.

“There is a critical need to continue to provide economic
support,” he said.

A senior delegate from another international institution
attending the G8 talks, who asked not to be named, said it
was ridiculous that finance ministers should be talking now
of “exit strategies”.

Reuters news agency quoted a G8 source as saying finance
ministers were expected to agree to commission a study by
the International Monetary Fund on how to unwind policies to
rescue their economies.

Peer Steinbrueck, German finance minister, said he would
support the request to the IMF to work out options for exit
strategies, warning that the dangers of inflation far
outweighed deflationary pressures in the short term.

A jump in long-term government bond yields in recent weeks
underlines market concern that vast sums of money pumped
into economies would fuel inflation and wreck government
budgets.

Aid organisations are understandably concerned that
countries like Italy — with large debt and budget deficits
— will be driven to cut public spending, jeopardising
commitments to increase overseas aid that are far from being
honoured. This week, a report published by ONE, a campaign
and advocacy group, blasted the slow progress by France and
Italy in meeting
increased aid targets promised at the G8 Gleneagles summit
in 2005.

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