 As the economic stimulus is passed by the U.S. Congress, media coverage focuses on how the U.S. is responding to the economic crisis. Much emphasis is placed on the U.S. response because it will have world-wide impact. Yet the economic crisis is being felt by people, NGOs, corporations, and governments from around the world.
International trade is slowing down, as demand decreases, capital flows shrink, and commodity prices decline. Withdrawal of international capital and flights to refuge currencies (i.e. dollar, euro, Swiss Franc) puts increased pressure on developing countries’ currencies. A potential downward cycle for emerging economies includes increased debt (in dollars), increased lending rates by Central Banks to protect their currency, and a shift in the balance of payments equilibrium. Already in October 2008, the IMF conducted emergency interventions in Iceland, Ukraine, Hungary, and Pakistan to address monetary crises in these countries.1
Asian countries are facing the steepest economic declines, while Latin America and Eastern Europe are also getting hard hit. J.P. Morgan notes that 11 emerging economies, including South Korea, Russia, Mexico, Taiwan, and Turkey, will shrink in 2009 while another 4 countries will experience zero growth.2
How is the developing world responding to the crisis; what roles can international development organizations, such as the IMF and the World Bank, play in mitigating the negative impacts of the crisis?
State of the Developing World
The extent of the impact of the global financial crisis on developing countries depends on how dependent these countries are on foreign aid, foreign direct investment (FDI), foreign portfolio investment, exports to Western countries, and remittances, all of which were increasing until the recent economic downturn.
Countries which rely on FDI for local industry growth will be hard hit as companies face difficulties obtaining credit lines, as banks reassess risk and/or have less credit and higher interest rates for projects in emerging markets. Countries that have a high current account deficit will face pressure to change exchange and inflation rates to attract foreign investment.3
Another factor, foreign aid decreases, can be seen in Mozambique; 52 percent of its budget comes from overseas development assistance (ODA). It is common within Africa for 70 percent of the health services and 90 percent of the HIV services to come from outside support. Developing countries’ health sectors have the potential to be extremely hard hit in this crisis, as donor countries reduce aid and/or are unable to fulfill existing pledges.4
BRIC countries (Brazil, Russia, India, and China) will be hard hit as investors look for profits elsewhere. The Chinese and Indian markets previously fueled international commodity markets, as they needed copper, oil and other natural resources to expand their infrastructures. Their downturn will negatively impact Africa and other suppliers of these resources.5 Russia has been hits with a weakened stock market; it stopped trading twice in recent months (other stock markets have fluctuated in response to U.S. or European markets as well)6 and also by speculations in its equity markets, which were driven to dizzying heights before they crashed.7
Positive Impacts of the Crisis
There is increased South-South trade, meaning that developing countries are trading more with other developing countries. The WTO notes that South-South trade increased from 11.5 percent in 2000 to 16.4% ($14 trillion) in 2007.8 China, India, and Brazil will start to rely more on each-other than on trade with Europe or the U.S. For example, South Africa is planning a meeting to discuss a trade agreement with Mercosur, the Latin American trade bloc, and India. The impulse to raise tariffs will be a key challenge in making South-South trade successful.9
Another positive outcome is that job scarcity in developed countries may lead to a reverse-brain drain of top talent back to their home countries. In a New York Times editorial, Thomas Friedman notes that if the U.S. does not change its immigrations rules for top-tiered visas, then the U.S. may lose this talent to home countries, such as India.
Policies Solutions
Justin Yifu Lin of the World Bank recommends that developing countries focus on:10
1) preventing financial contagion from crippling domestic banking and non-banking financial sectors, by increasing deposit guarantees, seeking loans from international financial institutions instead of commercial banks (especially if the country has large balance-of-payments and fiscal deficits), and using a fiscal stimulus to generate domestic demand to offset lost foreign demand;
2) investing in social protection and human development, by increasing social safety nets for the poorest sectors of the society and creating public infrastructure projects to increase employment opportunities.
Furthmore, Lin recommends that the IMF help emerging countries with balance-of-payments adjustments and that the World Bank expand lending and grants to structural and social areas and double the IBRD lending to middle income countries.
The World Bank also calls for a two-trillion dollar stimulus for projects in the developing world, a "global recovery fund in the spirit of the Marshall Plan." The funds should be delivered over a 5-year period to clear economic bottlenecks in poor South Asian and African countries.11
Additionally, the World Bank President has called for developed countries to give .7% of their stimulus plans to developing countries; this call has not yet yielded any results.12
In April 2009, the London Summit will follow-up on recommendations made in November 2008 at the G8 summit, in which 11 emerging economies participated (Mexico, Brazil, Argentina, China, South Korea, India, Indonesia, Australia, Saudi Arabia and Turkey). The principals of the response will address 1) coordinated recovery using budgetary means to support demand and mobilize increased aid for emerging and developing countries; 2) new financial market regulations to prevent future crisis; 3) new avenues for global economic governance to help emerging and developing economies; and 4)push for free trade and to prevent protectionist measures.
Conclusion
Unfortunately most analysts concur that the damage wrought by the financial crisis is just beginning. If developed countries, such as Iceland, can completely implode, then less stable, poorer countries have much to fear. While the not the cause of the crisis, developing countries will be greatly impacted. The developed world has a responsibility for helping strengthen not only their economies, but to provide assistance to poorer countries, who do not have the same resources.
1 “Towards an international response to the financial crisis.”
2 Slater, Johanna and Antonio Regalado. “Slowdown hits emerging markets.” Wall Street Journal. February 10, 2009
3 Velde, Dirk Willam te. “The global financial crisis and developing countries.” Background Note. Overseas Development Institute. October 2008.
4 Garrett, Laurie. “Davos, the Poor, and the Crash of ’08.” Council on Foreign Relations. February 9, 2009.
5 Velde, Dirk Willam te. “The global financial crisis and developing countries.” Background Note. Overseas Development Institute. October 2008.
6 Ibid.
7 Lin, Justin Yifu. “The Impact of the Financial Crisis on Developing Countries.” The World Bank Korea Development Institute, Seoul October 31, 2008.
8 Lynne, Jonathan. “Developing countries turn to South-South trade.” Reuters. February 8, 2009.
9 Ibid.
10 Lin, Justin Yifu. “The Impact of the Financial Crisis on Developing Countries.” The World Bank Korea Development Institute, Seoul October 31, 2008.
11 Lynch, David. “World Bank economist urges new ‘Marshall Plan.’” USA Today. February 10, 2009.
12 “Towards an international response to the financial crisis.”
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