Economic crises

The Financial and Economic Crisis and Developing Countries

Developing countries were hit hard by the financial and economic crisis, although the impact was somewhat delayed. Every country had different challenges to master. The closer the developing countries are interconnected with the world economy, the crasser the effects. And the incipient recovery that is becoming noticeable is, for the time being, restricted to only a few countries and regions.
The crisis was transmitted primarily by trade and financial flows forcing millions back into poverty. Attainment of the Millennium Development Goals is seriously jeopardised in many countries. Many developing countries did not and do not have the resources to stimulate the economy and protect their socially disadvantaged populations to the same extent as the industrialised countries. However, many countries have made considerable efforts to mitigate the effects.

Developing countries have also increased their cooperation with one another and are urgently demanding a greater voice in global economic affairs.
The industrialised countries are for the most part more concerned with their own problems. Their readiness to provide more extensive aid is limited. They are under pressure from the international institutions to relax their previous dominance in favour of the increasingly strong emerging countries. A shift in power and influence that was already noticeable before the financial crisis is deepening.

Introduction

The worldwide measures to deal with the gravest economic crisis since the Great Depression in the 1930s began to show the first signs of recovery in late summer and early autumn 2009. Most predictions are still cautious. Thus, immediately prior to the meeting of the Group of 20 (G-20) ministers of finance in London at the beginning of September the Managing Director of the International Monetary Fund (IMF), Dominique Strauss-Kahn, was concerned that the recovery was both fragile and slow-moving. He warned against growth without employment and against discontinuing the economic stimulation programmes too early, and he also demanded coordinated measures on an international plane (Strauss-Kahn 2009).

The various predictions, particularly for China, India, Brazil, Japan and a few other Asian countries, were optimistic. The United Nations (UN) Economic Commission for Latin America and the Caribbean also predicted a return to positive growth in 2010. But by far not all the countries and regions reported a brightening of the economic prospects in early autumn. The crisis is by no means over for the majority of the developing and transition countries.

Introduction CONTINUED

As inconsistent as the recovery pattern is now, there was a similar lack of consistence in the impact of the financial and economic crisis on the individual countries and regions worldwide. For a long time it was hoped that the threshold and developing countries would be able to disconnect from the financial crisis in the developed countries of America and Europe due to their improved macro-economic structural conditions. However, the notion of disconnecting from the crisis proved false. The crisis did impact the developing countries, principally via financial flows and through trade. The developing countries and international organisations took a number of steps to mitigate the effects of the crisis, but with varying results. The agenda of international discussions is still set bearing in mind the interests of the rich countries.

2. Effects of the crisis on the developing and transition countries

he crisis originated in the major financial centres in the developed countries. The force of impact on the developing and transition countries became apparent only gradually. The situation is new; previous crises spread from the developing countries. This time developing countries are the victims of the crisis, but they did not cause it. “The causes of the global financial crisis are to be found in the financial and economic policies of the developed countries, primarily the United States (US). Developing countries are not responsible for it, but they are now seriously affected,” wrote Martin Khor, the new Director of the South Centre in Geneva.1

The Effects

The Third World Network (2008) reported that the UN Economic Commission for Asia and the Pacific had in fact registered a “phase of heightened instability”, but at that time they reduced their growth predictions only minimally. In the IMF July 2008 update of the Global Financial Stability Report (IMF GFSR)2 the IMF, for its part, registered a weakening of growth in the threshold countries and a heightened risk of inflation.

Borrowing abroad became more expensive; investors had become more risk-conscious. But the IMF still characterised the threshold countries as fairly crisis-resistant. The full force of the global financial and economic crisis impacted the developing and threshold countries in the course of 2008. Subsequently the IMF, the World Bank and other institutions continually downgraded their growth predictions for Asia, Latin America and above all Africa.3 High growth rates disappeared and many countries even had to put up with shrinking economic production.

According to the IMF April 2009 World Economic Outlook (IMF WEO), the growth setbacks in the threshold and developing countries were higher than in the industrialised countries. Compared with their growth potential, the developing and threshold countries are therefore harder hit by the global financial and economic crisis than the industrialised countries that caused it.

The regression in economic growth entailed a sinking per capita income, at least in countries with high population growth rates. Macro-economically the crisis manifested itself in mounting deficits in trade and payment balances, dwindling currency reserves, currency devaluations, increasing rates of inflation, higher indebtedness and soaring public budget deficits.