Financial crisis threatens aid for world's poorest

President Bush's $48 billion Emergency Plan for AIDS Relief could see cutbacks.

As concerns of a worldwide financial meltdown spurred wild gyrations in financial markets the past weeks, developing nations have been spared worrying about home foreclosures or imploding retirement accounts.

But the crisis is likely to be accompanied by cuts in foreign aid that will trigger jumps in poverty, unemployment, and school dropout rates, humanitarian workers and economic analysts say.

Already in the Palestinian territories there is concern that donor money that finances 50 percent of the government budget, as well as development projects, may be in danger.

"Donors might not be able to live up to their commitments over the next year," says Hanna Sinora, a copresident of the Israel Palestinian Center for Research and Information. "We are seeing the crisis spread … and for us it could be worse, because our only resource is what we get in international aid. Everywhere people are dependent on international aid, they will feel the same pinch."

The Palestinian Authority (PA) – one of the highest recipients of aid per capita in the world – is slated to get $1.3 billion in budgetary aid in 2009 and $700 million in aid for development projects.

At a late September meeting in New York, major PA donors Europe, Japan, and the US didn't indicate that any cutbacks would be coming, says Cairo Arafat, a Palestinian government official who oversees donor aid. But a final confirmation of foreign commitments isn't expected until the end of this year.

Yet government aid levels usually lag behind economic downturns. That means the fallout might not be seen for months, says Michael Bailey, a spokesman for Oxfam International based in Jerusalem.

"We will be advocating strongly that crisis should not be borne by international aid budgets. This is as true for the PA as it is for anyone," he says. "If there's no light at the end of the tunnel, it's much more difficult to keep up the enthusiasm and momentum."

Both presidential candidates have pledged to double US foreign aid to $50 billion, though at the vice presidential debate Joe Biden said that foreign aid may have to be reexamined as the US looks for places to cut spending.

International aid from developed countries in 2007 totaled about $104 billion. The financial crisis is expected to undermine a UN-sponsored effort to raise donor aid for antipoverty, health, and education programs to 0.7 percent of the gross national income of developed countries by 2015. In addition, corporate and private donations to nongovernmental organizations are also likely to be curtailed.

"It's not just official aid that is likely to be difficult to mobilize," says Homi Kharas, a senior fellow at the Brookings Institute in Washington. "Private giving has always been closely associated with wealth created from the stock market."

Poor countries face a "triple whammy," he says. In addition to aid, they are vulnerable to dropping prices for their commodity exports and for declining income sent home from nationals working abroad in richer countries.

In addition to the Palestinians, aid-dependant countries like Haiti, Tajikistan, and Papua New Guinea may be hit. But the majority of vulnerable countries are in Africa. Development experts also say that President Bush's $48 billion Emergency Plan for AIDS Relief program could be cut back.

At an International Monetary Fund (IMF) briefing over the weekend, three African finance ministers warned that cuts in aid from developed countries could seriously hurt their economies at a time of declining exports and rising food costs.

At stake for the US and its European allies is a potential drop in political influence around the world as a result of the expected drop in foreign assistance.

In Africa, the US could lose ground to China, whose budget won't come under the same kind of strains.

"There is a sense that foreign aid is a useful instrument for building relationships and friendships," says Mr. Kharas. "When foreign aid from one partner declines, and doesn't decline from other people, you can get a switching of alliances."