[ IMF and World Bank ]
Financial crisis spilling over
Talk of emerging markets being economically decoupled from the OECD nations has subsided amidst recent global turmoil. The sheer scope of the financial meltdown has made international investors risk-averse. Policymakers in poor and newly industrialising countries now worry about capital flight, tumbling currencies, credit freezes, inflation and lower growth.
Emerging countries contributed around half of global growth in the past ten years. They became economically more self-sufficient, no longer exporting exclusively to OECD-countries. Regional trade grew significantly. Many governments implemented structural reforms, strengthening currencies and making markets more resilient. To a large extent, that was a consequence of the Asian Crisis that also rocked Eastern Europe and Latin America a decade ago.
Nonetheless, these reforms mean more integration into the global economy. So while the immediate dependence on the business cycle of rich nations has decreased, world-market trends matter very much to the countries concerned. The spill over on real economies all over the world is particularly relevant (also note interview on page 427).
In the past weeks, currencies like the South Korean won, the Indian rupee and the Pakistani rupee suffered sharp drops in value as investors bought safer seeming US dollars and reconsidered the outlook for export-oriented emerging economies. Near economic paralysis in Argentina and Pakistan, and in smaller economies that cannot repay loans, showed developing countries were not insulated from the crisis on Wall Street.
Mexico and Brazil, for example, spent recent years building up foreign exchange reserves and boosting confidence in their currencies. But investors’ recent reversion to the dollar as a safe haven sent the peso and the real tumbling. Accordingly, import costs have risen for those countries’ businesses. This trend could exacerbate inflation, requiring interest rate increases just as a recession looms.
At the same time, exporters of manufactured goods are also feeling the pain. In late October, China had to report a sharp decline in its growth rate. The government in Beijing announced steps to help exporters and to boost the property market.
The world’s poorest countries, however, are likely to suffer most from the global crisis. World Bank President Robert Zoellick said 100 million people have been driven into poverty this year. Sub-Saharan Africa could also experience less foreign investment and aid, as Shanta Devarajan, the Bank’s chief economist for Africa, told the World Bank/IMF annual meeting in Washington in October. Because of looming economic slowdown, food and fuel prices have dropped to some extent. That should help many of the world’s poorest. On the other hand, lower commodity prices adversely affect those developing countries that benefited from rising prices in recent years.
That is already evident in Latin America. According to Augusto de la Torre, the World Bank’s chief economist for that region, over 90 % of the people there reside in countries that are net commodity exporters. In his view, declining stock-market indices and currency swings could make things worse, as might falling remittances from nationals living abroad or higher borrowing costs domestically. De la Torre said regional growth may decline to between 2.5 and 3.5 percent in 2009, down from 5.6 percent in 2007.
In Washington, it was also pointed out that countries with high short-term debt-to-reserve ratios are facing credit-refinancing risks. IMF and World Bank officers demanded that policymakers provide liquidity to domestic capital markets and help troubled banks. Some smaller countries even seem to be following the path of Iceland, which borrowed heavily to fund the boom in recent years, and, now that credit has dried up, is unable to obtain loans to repay debts.
Dominique Strauss-Kahn, the IMF chief, said the fund has “plenty of liquidity”, and would help countries in need. He urged rich nations not to cut aid budgets. Governments concerned, however, have also turned to Russia, China and other countries with high for-ex reserves for help. As D+C was going to press, Pakistan announced it was in discussions with the IMF and others over a $ 10 billion to $ 15 billion support package. The IMF had been considered a lame duck in recent years, because its support had hardly been needed anymore. However, several countries – including Hungary, Ukraine and Iceland, for instance – were turning to this Washington-based institution again. Observers said its conditions were comparativly mild.
In the meantime, the Fund’s executive board scolded Strauss-Kahn for bad judgment in an affair with a staff member. However, the board did not find him guilty of having abused his authority.
Ellen Thalman
D+C, 2008/11, Monitor, Page 400-401
