(back to Global Economic Crisis)
At the onset of the financial and economic crises, many commentators did expect the effects of the crisis to be by and large contained to the industrialized economies, which were home to tumbling or bankrupt banks. But it quickly became obvious, that the effects of the crisis could not be hedged. Through massive fallout in credit, investment and in demand, the crisis spread around the globe. And although some analysts still hold that developing economies are generally less hit, they are highly exposed to the crisis and face increasing poverty. This is especially true for most of the low-income countries. The triple constraints, which developing countries are facing, though to a varying degree, are the following:
Firstly, the single biggest impact for many developing countries is through declines in foreign direct investment (FDI). According to the World Bank, in 2008 private investment flows to developing countries plummeted by more than 40 percent. At the same time, private capital flows to developing countries plummeted from 8.6 percent of GDP in 2007 to just over 2 percent in 2009, a new negative record. As if dried up foreign investments weren’t enough, according to World Bank estimates, remittances will decrease by 7.3 percent in 2009, compared to the previous year. Concomitantly, overseas development aid budgets are under threat in many donor countries and thereby curtail the access to public foreign capital. In this environment, the external financing position was especially weakened for those developing countries that already have high levels of external debt, limited foreign reserves or large current-account deficits. They will face special hardship when seeking foreign financing sources as access to needed new credits might be scarce, interest rates are mounting and local currencies depreciate.
Secondly, the slump in global demand (projected to fall by 2.9 per cent for 2009 globally) and trade (a respective fall of 10 percent is assumed) affects those developing economies that are export-oriented. GDP in developing countries excluding China and India, is assumed to fall by 1.6 per cent in 2009. Countries such as Zambia, that heavily rely on the export of a single, or few resources feel the impact strongly, and have limited alternatives to which they could turn (see the feature on Zambia on ILO’s Global Jobs Crisis Observatory).
Thirdly, the scope of social security schemes is very narrow and the institutional capacity to react to the crisis is very low. Comprehensive social security systems are not in place and even social assistance, which could provide income support to the unemployed or underemployed working-age poor population, is very limited. The developing world is where the coverage gap is starkest. What we do find there, are small-scale pilot income support schemes of various nature providing cash benefits and/or employment to various targeted groups of population. But, these schemes are usually too limited to help in the current crisis beyond the relatively small groups covered.
In addition, many low-income countries, in particular in Sub-Saharan Africa, have already been facing mass poverty and underemployment well before the recent global economic crisis. As initial poverty is high, households are generally much more vulnerable and likely to experience acute negative consequences in the short- and long-term. And, in the developing world the financial and economic crisis followed the food crisis of summer 2008 afoot, which was accompanied by massive hikes in fuel prices, this already meant an increase in hunger and deprivation.
Against this background of poverty and underemployment, it becomes obvious that many developing countries are most direly in need for an extensive social security response to the crisis. But as a consequence of the factors listed above, the availability of such measures is clearly the most limited in low-income countries. This is due to fiscal as much as to capacity constraints. The missing capacities are gradually build in many places through the (pilot) income support schemes. These efforts have to be reinforced, also to make it possible to enlarge such small-scale projects with the objective to reach comprehensive coverage. At the same time, today and in the near future the decisive and missing factor in many cases is sustainable funding. Generally, financing sources have to come through long-term commitments of the governments in question. But to avoid preventable hardship, they might temporarily need the support from the donor community.
Even were funding is available and crucial support to those in need can be provided from domestic sources, a number of problems remain which cannot be solved on national level. In particular, for international trade and demand to pick up again, coordinated international efforts are needed. This is crucial for all countries that have embraced export-oriented growth strategies. The difference between coordinated and not coordinated fiscal stimuli to the (global) economy will be the biggest for developing countries, according to UN/DESA. With a view to developing countries and to low-income countries especially, this calls for strong coordinated international action.
