The global financial crisis: Are developing countries prepared for a slowdown in 2009?

Last week’s startling news that Chinese trade shrank for the first time since 2001 and that India’s industrial output fell for the first time since 1994 will have dispelled any remaining hope that developing countries would be insulated from the global financial crisis.

Developing countries’ economies have been growing faster than those of developed countries for some time, including remarkable growth in African countries. But it is now clear that the financial crisis that emerged in the financial sector in developed countries and then spread to developed countries’ real sectors, such as manufacturing, has already affected confidence in the financial markets of emerging economies, and is starting to affect poorer countries.

Our research shows that there are also risks to the more successful African economies such as Ghana, Kenya, Mali, Mozambique, Rwanda, Senegal, Tanzania, and Uganda, with some effects already visible. Experts here at ODI and in the developing world are now carrying out a systematic review of the impact at country level, with any new information appearing on our new financial web pages:

http://www.odi.org.uk/odi-on/financial-crisis

Last week at a conference in Berlin organised by the German Development Institute, The German Federal Ministry for Economic Cooperation and Development (BMZ), GTZ and Inwent, I suggested a three-pronged policy response:

  • developing countries need to better understand and be better prepared for the macro economic shocks that they are experiencing, through no no fault of their own;
  • the international community needs to design rules to ensure that a financial crisis of this magnitude will not happen again; and
  • developed countries need to overcome, not exacerbate, the impact of the fallout of this crisis for developing countries by launching ambitious fiscal stimuli in both developed and developing countries.

 First, all countries need to be prepared to address the fallout of the global financial crisis:

  • The International Monetary Fund had already downgraded their forecasts for world growth significantly and now expects growth of just 2.7% for 2009, with an equal downgrading for developed and developing countries. The latest forecasts are more pessimistic (with China’s economy expected to grow by less than 6% in 2009).
  • The World Bank’s Global Economic Prospects released last week expects world growth of 1.9% next year (compared to 4.9% in 2007), with world trade falling by 2.1%. Growth in developing countries will slow from 7.9% in 2007 to 6.3% this year and 4.5% next year.
  • The Asian Development Bank downgraded its forecasts for growth in developing Asia in last week and expects 5.8% in 2009, down from 9% in 2007.

 While there is a reasonable consensus about the broad transmission mechanisms such as international private capital flows, remittances and trade, little is known about how the crisis will affect individual countries.

  • How, for example, could Kenya best respond to a recent 40% decline in remittances, 30% decline in stock prices and 30% decline in tourism bookings?
  • How could Zambia cope with mining job losses in mining associated with a halving of copper prices over the past few months?
  • Are South Africa’s black economic empowerment deals at risk?
  • What will Mauritius’ emergency budget look like?
  • Will Indonesia turn protectionist?
  • Shouldn’t each country put in place a crisis response team to promote appropriate policy responses?
  • How will countries regulate services in the future?

Second, it has become even clearer now that poor countries have a direct interest in better global financial rules, even though they lack a direct voice in negotiations on such rules. Developed country financial institutions will need much better rules relating to the funding of their assets. In addition, new capital adequacy rules need to ensure that cyclical lending is less damaging.

The G-20 process is planning a key meeting on 2 April 2009 in London and it is important that this incorporates the voices of poor countries in designing such rules. Regulators should not be designing new rules as if they are national public goods without this global perspective. Finally, while developed countries announced their aid commitments at the Gleneagles G8 summit in 2005, the case for aid is stronger now than it was before the crisis. Donor agencies can incentivise development finance institutions to make up for losses in international capital flows to developing countries.

What is more, they can provide more aid, more effectively. Last week, the EU agreed a €200 billion fiscal stimulus to kick start the economy and promote green growth. Part of this stimulus should be undertaken in developing countries where growth might, at present, be most effectively promoted. Surely, it would be a bitter irony if Africa’s growth success stories were to succumb to a problem caused by a governance deficit in developed countries. 2009 has to be the year in which experts and policy-makers come to understand and respond to this crisis.

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Authors

Head of Programme - International Economic Development Group
Dr Dirk Willem te Velde is a Principal Research Fellow and head of the International Economic [...]