ODI, in collaboration with its partners in 11 developing countries, continues to monitor the effects of the global financial crisis and the policy responses, following the publication of a joint monitoring study in May 2009. From Bangladesh to Uganda, governments are using these monitoring studies to inform their policies.
The research teams have now prepared monitoring updates which will be developed in the coming few months. Here is a summary:
Updating what we know
- The research suggests that growth forecasts in poor countries have been revised downward in 2009, in stark contrast to the excellent economic growth records recently, but in very different ways from large effects (Democratic Republic of Congo, Cambodia) to no growth effects (e.g. Bangladesh). Employment levels in Cambodian garments have weakened further.
- Only very few indicators suggest that an OECD recovery is affecting low-income countries. For example, portfolio flows have not returned as fast as they were withdrawn.
- Trade values have declined in most countries, but with surprising results, e.g. garment exports were affected in Cambodia but not in Bangladesh. Coffee exports in Uganda and flower exports in East African countries fell sharply.
- Prices of copper and oil fell, affecting countries such as Sudan, Zambia, and DRC, but have rebounded in recent months, adding to an already volatile situation.
- Foreign Direct Investment to poor countries has taken a hit, sometimes with possible long term consequences (Tanzania, Cambodia).
- Remittances fell sharply in Bolivia and Kenya, following years of increases, confirming our fears.
The monitoring updates suggest that some countries are better able to address the crisis. For example,
- Countries that have diversified their trade have been able to cushion the impact of the crisis; e.g. regional trade in maize, beans and cement has helped Uganda cushion the impact of export declines in coffee and flowers to other destinations and in Mauritius strong growth in the ICT sector compensated in part for loss of tourism;
- Bangladeshi exports are tagged into different value chains and in different product categories compared to Cambodia, with Cambodia being affected more than others;
- Countries that have received support from the IMF (in DRC the level of reserves had dwindled to a few days of imports) or had their own reserves (Bolivia) were able to address the macro challenges posed by the crisis, although they are still facing large growth and development challenges;
- Countries that have followed a prudent fiscal path have been able to engage in a significant fiscal stimulus (for example, Mauritius was better placed for a stimulus than St Lucia, with both countries facing similar shocks).
- Countries using bad assumptions for their budget forecasts have run into problems. Sudan relied on record high oil prices as the basis for government revenues, and any decline in oil prices therefore jeopardises transfers consistent with the peace agreement between North and South.
- Countries producing at lower costs are in a better position. To boost exports, DRC needs the price of copper to be around $4,500 per tonne, compared to around $3,000 per tonne for Zambia
Messages for the G-20 leaders
While the G-20 leaders are likely to celebrate their bold and quick actions to prevent developed countries from the worst impact, it is important that they do not forget poor country interests (beyond Brazil, India, Russia, and China) and how these might be evolving.
The recovery is not yet secure: there is no reason to believe that all poor countries are in a position to start from where they ended up just before the crisis. Crises can have permanent effects, and it is important to keep monitoring the effects and policy responses.
The G-20 leaders need to take note of some of the implications:
- It is clear that the experience of poor countries varies. While China and India are included in the G-20, this does not mean that the interests of all smaller and poor countries are taken into account in G-20 decisions automatically. Yes, consultations with low income countries have improved, but the G-20 need to remain focused on developing country interests in the months ahead.
- Developing countries need support to cope, e.g. what can be done for the newly unemployed or liquidity constrained firms? But there are also structural issues that need to be addressed. On balance, it is becoming increasingly important to support growth, competitiveness and the supply side - or countries risk losing growth forever.
- Global, external, responses can be valuable; DRC in particular was rescued by the IMF, this surely is a new way of working with developing countries; domestic revenue generation can also be useful (Bolivia) as this would not lead to the need for countries to repay back loans after 5 years.
- Finally, it is clear that promoting diversified productive capacities can act as a very useful cushion to the crisis (as explained above in the case of Uganda), so that supply side support is key, not just to gain from a future recovery but also to prevent vulnerability to future crises in the first place.