OPINION

Social sector in the downturn

On the eve of their spring meetings, the World Bank and the International Monetary Fund have identified some important steps to be taken to help the world recover from its worst economic downturn since the Great Depression. One, made clear by the IMF in its “Global Financial Stability Report: Responding to the Financial Crisis and Measuring Systemic Risks,” is the reshaping of global financial regulation. From a diagnostic viewpoint, breaking what the IMF describes as the “downward spiral between the financial system and the global economy” will be a key challenge. Central to this will be the effectiveness of the multilateral bodies in redesigning the financial system, specifically the monitoring and regulatory functions, with the IMF estimating the worldwide losses for financial institutions at $4.1 trillion. As lax regulation was a major contributory factor, the IMF report’s call for bolder steps by governments, including nationalisation where necessary, merits high priority.

Another important step is to put in place mechanisms that protect developing countries from the impact of the economic meltdown, and ensure that the projected slower growth rates do not lead to reduced allocation for the social sector in national budgets. The World Bank’s decision to triple its investment in social protection programmes for 2009-10 from about $4 billion two years before the economic crisis is welcome. The Bank estimates in the Global Monitoring Report, 2009 — an important backgrounder for the spring meetings — that close to 90 per cent of the developing countries could be highly or moderately exposed to the impact of the crisis, as they face slowing economic growth, high levels of poverty, or both. Experience from the Latin American countries points to the effectiveness of well-designed social protection programmes in stimulating public spending, apart from boosting human development through better education and healthcare. The vulnerable sections in the developing world — for instance, those without any form of social safety nets — should be the focus of such programmes. The G20 summit and the Stiglitz Commission, in its preliminary recommendations, have emphasised the need for reforms in the international financial and economic governance and for greater assistance to the developing world. The Bretton Woods twins should now take this process forward.

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