Global financial crisis

Impact on developing countries

The impact of the global financial crisis (GFC) is not limited to developed countries. The crisis is playing out as a human and development tragedy for developing countries and progress towards the Millennium Development Goals is in jeopardy. By April 2009, the World Bank and the IMF estimated that the crisis had already driven more than 50 million people into extreme poverty, in particular women and children.

According to the World Bank, only a quarter of vulnerable countries will have the financial resources to lessen the impact of the financial downturn with social safety net or job-creation programs. By March 2009, the garment industry had laid off 30,000 workers in Cambodia, which is 10 per cent of the workforce. In India, over 500,000 jobs in export-oriented sectors were lost in the last 3 months of 2008.

New economic realities for developing countries

In a background paper for the March 2009 G20 Finance Minister’s meeting, Swimming Against The Tide: How Developing Countries Are Coping With The Global Crisis, the World Bank predicted that growth rates for developing countries in 2009 would fall to less than half the pre-crisis rate. The paper listed five new economic realities developing countries are faced with including a drop in demand in non-energy commodities, a collapse of global trade as rich countries import less and disappearing private capital flows to emerging markets and developing countries. The Institute of International Finance estimates such flows declined to $467 billion in 2008, half of their 2007 level, and forecasts a further sharp drop to $165 billion in 2009.

The two other new realities are the projection that the level of remittances from migrant workers will decline, and that official development assistance (ODA) — on which many low-income countries depend — is uncertain as some donors signal a need to scale-back their ODA budgets.

These new economic realities directly undermine the progress made and reported in the UN Millennium Development Goals Report 2008 on a number of the MDGs, in particular MDG 1. The economic realities indirectly impact on the progress made thus far and further likely progress on all MDGs.

Global Monitoring Report 2009

The World Bank and IMF Global Monitoring Report 2009: A Development Emergency highlights the impact of the GFC on development in two ways: the impact and outlook for the MDGs; and the priorities for action. According to the report, most of the eight MDGs are unlikely to be met and the number of chronically hungry people is expected to climb to over 1 billion in 2009.

As a result of the financial and food crises the pace of poverty reduction has slowed. In Sub-Saharan Africa and South Asia the growth slowdown essentially eliminates the pre-crisis prospect of continued reductions in the poverty count in 2009. In Sub-Saharan Africa, the poverty count is most likely to rise in 2009. The report states: 'Experience suggests that growth collapses are costly for human development outcomes, which tend to deteriorate more quickly during growth decelerations than they improve during growth accelerations.'

The report identifies six priorities for action:

ensuring an adequate fiscal response to support economic growth and protect vulnerable groups from the impact of the crisis;
improving the climate for private investment and strengthening financial systems;
redoubling efforts toward human development goals and leveraging private sector role in this;
scaling up aid to poor and vulnerable countries hit hard by the crisis;
maintaining an open trade and finance system, including quick action on the Doha Round; and
ensuring that the multilateral system has the mandate, resources and instruments to support an effective global response.