Financial Crisis Hits Developing Countries Harder than Expected
Dirk Willem te Velde | Overseas Development Institute | November 2009
The financial crisis has hit poor, developing countries to a greater extent than anticipated. An additional 50 million people have slid into poverty there. Developing countries are set to lose 750 billion dollars in income by the end of 2009, as a result of the international financial upheaval. For developing countries, the financial crisis has brought about a crisis in confidence in the wisdom of the industrialized countries' financial and economic prescriptions. This notwithstanding, the present crisis also represents a unique opportunity to develop new and sustainable, as well as crisis-resistant, development strategies.
The main problem for developing economies remains their lack of diversification. That is what makes them susceptible to crisis. For example, textile exports dropped by half in Cambodia as a result of the present crisis and led to the loss of one-fifth of the jobs in the textile sector. Today nothing is left of Cambodia's impressive growth rate of 10% in 2007. Falling commodity prices for copper and oil have brought other states to their knees as well, e.g. the Democratic Republic of Congo. Hence, the diversification of developing economies is an urgent priority. Smaller land-locked countries without access to the sea, and therefore high transportation costs, would do well to reorient their economies away from the production of manufactured goods toward knowledge-intensive products. Furthermore, net capital flows to the developing world declined by one quarter in the period 2007 to 2009 as a result of the financial crisis. On the other hand, the crisis has shown that investors in rich countries would have done better to invest in real projects in the developing world rather than in dubious financial products.
What the world needs is a crisis-resistant agreement for economic growth between rich and poor countries. Furthermore a global poverty alert system, perhaps functioning on the level of the UN Commonwealth Secretariat, could investigate the consequences of a crisis when it arises and help respond in a timely fashion. In fighting the present crisis, the International Monetary Fund should provide more assistance to poor, developing countries. At present, only 50 million dollars have been allocated to these, compared to 1.1 trillion for medium-income countries. Increased liquidity in poor countries might also be a more effective means of meeting the challenges of the crisis in the medium term. The United Nation should take an active role in the coordination and implementation of crisis-resistant growth strategies in developing countries, not least of all to regain their confidence. There will always be crises - but it should nonetheless be possible to alleviate their more devastating effects.
This summary was prepared by the Atlantic Community editorial team from "The Global Financial Crisis and Developing Countries: Taking Stock, Taking Action" published here by the Overseas Development Institute.
