25 November 2008
Earlier this month, on Saturday 15 November, representatives of the world's largest economies - the G20 - met in Washington D.C. to consider a global response to the most pressing global financial issues. Below we consider the impact of the current financial crisis on the developing world and set out how the UK Government is responding.
The direct impact of the banking crisis is likely to be greatest in emerging markets, with poorer countries having small and relatively insulated banking sectors.
The secondary effects look set to have a much more significant impact on poor countries, although we still do not have a full picture of how most low income countries will be affected. Many developing countries are more resilient now than they were during the recession of the 1990s because of better policies. But a number of factors are likely to put these countries under stress.
Economic slowdown in rich countries will reduce demand for goods from developing countries. So too will slower growth in China and India, important drivers of export demand and investments in poor countries. Their growth is expected to be 3% lower in 2009 than it was in 2006/7
In addition, we are already witnessing a fall in foreign private investment, a key driver of growth. Particularly vulnerable will be those countries already running current account deficits. Neither poor nor many emerging market economies can match developed country governments’ guarantees of their own borrowing. On top of this, if trade credit dries up it will be harder for businesses to continue to trade.
Developing countries are also being affected by falling remittances from overseas workers, as recession impacts on their wages. Volatility compounds the difficulties that developing countries face in managing their finances, potentially creating incentives for them to sell off national assets cheaply or to borrow unsustainably to meet short term funding needs.
Although food and fuel prices have eased from their peaks, the effects of those earlier crises on budgets, balance of payments and inflation in poor countries have been severe. In Sub-Saharan Africa this year, inflation is expected to be 11.7% after four successive years of single digit inflation.
All this is likely to add up to a fall in growth in developing countries. Growth in Sub-Saharan Africa is expected to be 5.5% in 2008 and 5.1% in 2009, after four successive years of growth above 6% .
But poor countries will not be affected uniformly. The impact depends upon the size of their reserves, the extent of their reliance on external capital flows, the strength of macroeconomic fundamentals such as rates of inflation and the extent of their reliance on exports.
Within developing countries, the poor are most vulnerable to shocks such as rising food and fuel prices and an economic slowdown because they have few means of insulating themselves from the impacts. The poor typically spend 50% of their income on food and many have been left more vulnerable by the recent shock of high food prices, having had to sell assets like livestock to survive.
The current crisis threatens progress made towards the Millennium Development Goals and the development plans of most poor countries, pushing more people into poverty. The UK believes however that, with a coordinated and sustained effort on the part of the international community, we can respond to the crisis in a way that supports recent achievements in reducing poverty.
DFID is working with governments in our partner countries and with other international agencies to monitor the impact of the crises on poor countries and develop effective responses at international and country levels.
As growth slows and flows of private sector finance to developing countries reduce, it is essential that donors stick to their commitments on official development assistance. Following the recession of the early 1990s, many donor governments let aid efforts decline, with real impacts on agricultural production, infrastructure, social welfare and political stability in poorer countries. It took 13 years for aid levels to recover to those of 1992. Today, in a world where one billion people live on less than 65p a day, the moral case for aid remains unchanged; but there is now an even more pressing need to deliver security, stability and prosperity for us all.
The UK Government remains on track to provide 0.7% of GNI in overseas aid by 2013, and is pressing other governments to renew their own commitments. But more aid alone will not be enough, and we will continue to build on agreements made at Accra to improve the effectiveness of the aid that we already provide and to deliver concrete results.
Reform of the international financial system is necessary to restore global prosperity which will, in turn, translate into more exports, remittances and investment for poor countries. In pursuit of this, the UK Government will seek to ensure that it also meet the needs of developing countries, in particular safeguarding their access to finance and fostering their financial development.
The G20 Summit on November 15 committed to support to developing countries in implementing new regulations and to explore ways to help restore emerging and developing countries' access to credit and resume private capital flows.
The Summit also called for comprehensive reform of the international financial institutions to make them more representative, effective and responsive to global challenges. The UK Government will be working closely with G20 members, developing country partners and other donors on specific proposals to take this work forward urgently so that decisions and further action can be taken before the next G20 Summit in 2009.
A significant outcome of the Summit was the shared determination to secure a world trade deal. A successful conclusion to the Doha Development Agenda would boost confidence and trade, contribute to reform of world agriculture markets, and help to subvert protectionist sentiment.
In parallel, the UK continues to act as a world leader in Aid For Trade and Secretary of State Douglas Alexander will be launching the UK's Aid for Trade Strategy at the Doha Financing for Development Conference on 1 December. This will set out how the UK's commitment to spend up to $400 million a year to 2010 will help boost trade and support growth and development in developing countries.
The economic slowdown could, on top of the earlier food and fuel crises, have a significant impact on progress towards the MDGs in poor countries. The UK will work with others to maintain international support for developing countries, whilst pressing for a deal on trade and more representative and effective global institutions. Finally, the UK will continue to show flexibility in addressing the specific needs of our partner countries.
Bookmark with:
What are Bookmarks?