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Financial crisis

Slowdown hits world’s poor

by Ellen Thalman
The global economic slowdown is battering the world’s lowest income countries, although they were once thought to be shielded from the financial crisis because of their low exposure to the types of investments that set off the meltdown. The World Bank warns that donors are falling behind in commitments to increase aid, and some are expected to cut aid budgets.

Rich countries, which are pouring money into their own rescue plans, are abandoning the hardest-hit victims of the crisis at the risk of destabilising already vulnerable regions. That could raise the number of impoverished people by 53 million this year alone, according to the World Bank. Coming on the heels of the food and fuel price shocks last year, the current downturn will force many more people to sell assets upon which their livelihood depends, take their children out of school to work and leave millions undernourished and without medical care.

“When this crisis began, people in developing countries, especially those in Africa, were the innocent bystanders,” World Bank Managing Director Ngozi Okonjo-Iweala said in March. Now these people “must bear the harsh consequences”. The Bank estimates that donors are behind by $ 39 billion in their commitment to increase aid made at the G8 Summit at Gleneagles at 2005.

Private sector creditors are also turning their backs on the developing world, according to the World Bank. A financing shortfall, which includes public and private debt and trade deficits for 129 countries, is estimated at between $ 270 billion to $ 700 billion this year. Only a quarter of the world’s most vulnerable countries have the resources to stem poverty by creating new jobs or installing safety nets.

Private capital flows to emerging markets were cut by half in 2008 from 2007, to $ 467 billion, according to the Washington-based Institute for International Finance, an industry think tank. In 2009, they are expected to fall to around $ 165 billion.

The World Bank believes that this year’s decline in world economic growth will be the worst in 80 years, with countries that had grown the fastest in recent years taking much of the strain. In a recent report by the Asian Development Bank (ADB). Haruhiko Kuroda, its president, said: “While some countries in South Asia have had relatively less exposure to the crisis from adverse impacts of capital flows, more than half of the 900 million people in developing Asia who survive on $ 1.25 a day live in the subregion, so any tempering of growth is a serious cause for concern.”

Besides using additional room for cutting interest rates and making sure economic stimulus packages are disbursed swiftly, the ADB says countries should consider currency swap arrangements and incentives for foreign workers to send money home, such as special savings instruments. Long-term economic diversification, cutting deficits, investing in infrastructure and encouraging intra-regional trade will help cushion the knock-on effect of lower demand from more developed countries.

The World Bank noted that several countries have implemented or proposed stimulus plans. South Korea, Malaysia and Thailand have proposed packages for 2009, while China has started a $ 586 billion stimulus plan. China’s exports are down 25 % from a year ago, the government said in March, while some 20 million people lost their jobs.

South Asia is especially vulnerable to the downturn in the Gulf region, where migrant workers are losing their jobs, causing remittances to fall. A similar phenomenon is occurring in Eastern Europe and Central Asia, where many countries depend heavily on remittances. Tajikistan and Moldova, for example, have the highest level of transfers as a percentage of GDP in the world, at 45 % and 38 %, respectively.

Countries dependent on a single source of income, such as commodity exporters, are also hurting. This is especially true of low-income countries in sub-Saharan Africa, where government revenues have declined as commodity prices plunged. According to the World Bank, the DR Congo, Equatorial Guinea, Gabon and Nigeria have suffered, as oil generates more than half of all revenues in those countries. The drop in non-oil commodities has affected Ivory Coast and Guinea.
According to the African Development Bank (AfDB), “initial effects of the financial crisis were slow to materialise in Africa”. However, the impact is said to be becoming clear now, sweeping away firms, mines, jobs, revenues and livelihoods. The AfDB speaks of a “full-blown development crisis” predicting “zero growth per capita” for the first time in a decade.

Experts would like to see developed economies commit 0.7 % of their own stimulus packages to assist poorer countries and hasten the delivery of existing commitments. According to the ADB, such measures are imperative to sustain recent investment levels, especially in infrastructure. Otherwise, it would be difficult to maintain the delicate foundations of growth established in recent years.

Meanwhile, Latin America, which had seen five years of sustained growth at an average of 5.3 %, is experiencing a decline in industrial production. Brazil reported its first trade deficit in eight years in December, as exports fell 29%, according to the World Bank.

Ellen Thalman