November 19, 2010 / 5:42 AM / in 9 years

Poverty reduction falls victim to crisis: World Bank

WASHINGTON (Reuters) - The World Bank disbursed some $80.6 billion in 2009 and 2010 to soften the blow from the economic crisis but warns that increased poverty stemming from the downturn will be a major future problem.

In a lengthy report on member banks’ response to the crisis that began in 2008, the World Bank said that 64 million more will fall into extreme poverty by the end of this year than would have been the case.

The bank defines extreme poverty as life on less than $1.25 a day, a challenge faced in many developing countries that suffered further setbacks because of the crisis that originated in wealthy countries, principally the United States.

It will be hard to reverse the bulge in global poverty.

“Even with rapid economic recovery, some 71 million people will remain in extreme poverty by 2020 who would have escaped it had the crisis not occurred, coupled with unemployment rates that remain high in several countries,” the bank said.

The World Bank set up a group to appraise the effectiveness of its response to the global downturn that stemmed from a U.S. collapse in subprime mortgage markets, triggering a credit crisis and eventually sending markets plunging globally in rich and poor countries.

It said there were “notable variations” in how well the various members that make up the World Bank Group responded.

“The World Bank (consisting of the International Bank for Reconstruction and Development and International Development Association) while responding to the crisis with some delay, has demonstrated preparedness based on its knowledge of poverty impacts, long-term dialogue with country authorities and ability to expand lending,” the report said.

It said the International Development Association had offered “moderately higher financing” and the International Finance Corporation and Multilateral Investment Guarantee Agency had responded adequately.

But the report cited some areas of concern, noting the World Bank must boost its ability to act quickly in the event of crises and bolster its preparedness for intervening in the financial sector when that becomes necessary to stabilize markets.

For example, it said the International Finance Corporation was creative in soliciting funds to help clients deal with the effect of the crisis. “But opportunities were missed, and the effectiveness of the initiatives has been diluted by design and implementations weaknesses — such as the time needed for fund-raising and internal capacity building,” the report said.

Given that the crisis originated in the financial sector of developed countries, the World Bank’s sister organization, the International Monetary Fund, had a more natural role in sounding the alarm about and leading in efforts to deal with it, the report said.

The report deplored the lasting damage done by the crisis to already-poor countries the World Bank tries to help with low-interest loans, interest-free credits and grants to boost investment in health, education and development.

“The crisis reversed the decline in poverty of the last decade,” the report said. It said the World Bank “was not ready when the crisis struck” and now needs to do a better job of sharing information among its members to improve its ability to respond more swiftly if it must do so in future.

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