by Martin Khor
to developing countries
The global financial
crisis started in the West, but developing countries are now being hit
hard as their stock markets and currencies fall and billions of dollars
of foreign funds start to move out.
In recent days, the world financial crisis has expanded as stock markets
continued to tumble to new lows, currencies have gyrated wildly, while
more developing countries are now affected by currency, financial and
On Monday, the Asian stock markets continued to plunge, with the Nikkei
index in Tokyo
closing 6.4% down to its lowest level since 1982. The indices in other
markets also fell sharply, Hong Kong by 12.7%, Shanghai
by 6.3% and India
This follows the bad performance of stock markets globally last week,
especially the rout on Friday (24 October) which saw falls of 8 to 11
per cent in Japan, Korea, Singapore and Hong Kong, 5% in Britain and
Germany, and 3.6% in the US Dow Jones industrial average.
Each day brings news of new signs of recession. The United Kingdom's economic output shrank
0.5% in the third quarter, and an index of private sector output in
the euro-zone (15 European countries) fell in October at the sharpest
rate in 10 years.
J.P. Morgan economists estimated the US gross domestic product fell 0.5%
in the third quarter and will fall 4% in the fourth quarter, and that
European countries will have steeper GDP
falls until mid-2009.
There is also news of a fall in sales in retail shops, and of motor
vehicles, signs of a decline in consumer spending as the recession bites
into household incomes in rich countries. Profits of European companies
are expected to fall by 40% by the end of 2009, according to a report
in today's Financial Times.
Many developing countries and East European economies have quickly slid
into deep trouble, with a few already entering the debt-default zone
and others nearing it.
Some prominent people are no longer describing the situation as the
worst since the Great Depression, but as being worse than that. "This
is a once in a lifetime crisis and possibly the largest financial crisis
of its kind in human history," said Bank of England
Deputy Governor Charles Bean.
Developing countries were once thought to be "decoupled" from
a Western recession but that theory has been shot to bits as the crisis
is hitting them even harder than the developed countries.
The crisis has jeopardised everything the United Nations has done to
help the world's poor, warned UN secretary general Ban Ki Moon at a
meeting last Friday of the UN's top officials in its chief executives'
"It threatens to undermine all our achievements and all our progress,"
he said. "Our progress in eradicating poverty and disease. Our
efforts to fight climate change and
promote development. To ensure that people have enough to eat...It could
be the final blow that many of the poorest of the world's poor simply
The developing countries have been affected through various routes --
the sharp fall in prices of commodities, reduced demand for their exports,
the sudden outflow of foreign capital, currency depreciation in many
The fall in commodity prices has been deep and sudden, moving in opposite
direction from record high prices just a few months ago. For example,
palm oil exporting countries in Southeast Asia
have been hit by the shocking price fall. Crude palm oil futures in
Malaysia tumbled from an all-time
high of Malaysian ringgit 4,500 per tonne in early March to about RM1,700
Other examples: the price of copper on 22 October was 54% below its
peak in July
and 39% below a year ago, while the price of wheat has fallen by 45%
between March and the first week of October.
The oil price has plunged from a peak of $140 a barrel just a few months
ago to $61-62 on 24 October despite OPEC's announcement of a production
cut. While reducing the import bill of importers, this has adversely
affected revenues of oil-exporting developing countries.
Developing countries which have significant trade and current account
deficits are having their currencies come under attack. Foreign capital
is also moving out of many developing countries. Those countries
like Pakistan that
have low foreign reserves are especially susceptible to debt difficulties
or default. But even other countries like South Korea that have high reserves
but current account deficits are also coming under pressure, and their
currency depreciation worsens the situation.
There were large movements of foreign capital last week due to the unwinding
of the "yen carry trade" as funds returned to Japan from other countries as hedge
funds and other speculative investors liquidated their investments in
these countries to re-pay their yen loans.
had borrowed yen in Japan due to its
very low interest rate and invested in assets in other countries that
yielded higher interest. As these countries' currencies depreciated
and the yen value rose, it became unprofitable to keep these assets
and there has been a stampede to re-pay the yen loans, which has in
turn further boosted the yen's value (in just one week, by 8% against
the US dollar, 13% against the euro and 18% against the Australian dollar).
The stock market fall has also been sharp in emerging markets, with
the MSCI emerging equities index dropping 15% over last week to levels
of four years ago.
Emerging market stocks, bonds and currencies suffered steep falls amid
growing risk aversion, reported the Financial Times. Among those hit
hard were South Korea, South
Ukraine, Hungary, Serbia
They are considered extremely risky because of their large debts while
even stronger economies like China
have been savaged, according to the report.
In the past few days, political leaders have announced intentions to
act against the crisis. First was US President George Bush's invitation
to a summit meeting in Washington for
the G20 countries in Washington
on 15 November to discuss the crisis and possible changes to the financial
architecture. Details of the agenda are still to be defined.
Second was the UN General Assembly President's announcement of the formation
of a UN task force led by American economist Joseph Stiglitz to recommend
reforms to the system.
Third was a meeting of the UN Chief Executives Board (comprising heads
of UN agencies, the IMF, World Bank and WTO) on 24 October which issued
a statement calling for immediate action to protect people, jobs, shelter
It said the crisis should not deflect attention from other challenges
like climate change and the Millennium Development Goals, while ODA
is even more important to poor countries facing declining liquidity
and worsening balance of payments positions.
UN Secretary General Ban Ki-Moon told the meeting that drastic measures
are needed, including the IMF and major central banks setting up substantial
standby lines of credit so that banks in developing countries have adequate
funds to draw on during an emergency, according to a UN press release.
Last Saturday (25 October), a summit meeting of European and Asian leaders
in Beijing (the 7th Asia-Europe Meeting) issued a statement on the international
financial situation pledging to take national measures and to strengthen
coordination to take comprehensive measures to restore market confidence,
stabilize markets and promote growth.
On international reform, the statement said: "Leaders pledged to
undertake effective and comprehensive reform of the international monetary
and financial systems. They agreed to take quickly appropriate initiatives
in this respect ...The IMF and other international financial institutions
should bring into play their mandated role in the international financial
system, to help stabilize the international financial situation."
A meeting of leaders of ASEAN-plus-3 (ASEAN countries, China, Japan
and South Korea) held in Beijing on the eve of the ASEM meeting reaffirmed
their intention (originally made in May) to set up a regional crisis
fund to help countries in financial distress by enabling them to defend
The $80 billion fund is understood to be a foreign-exchange reserve
pool. ASEAN Secretary-General Surin Pitsuwan said that the fund is meant
to enable the defence
of the region's currencies but this original mandate could be widened
to also cover
domestic liquidity issues.
The operational details and the timeline for establishing the fund is
however still under discussion. In May, the ASEAN-plus-3 leaders
had agreed on such a fund, which would supersede the Chiang Mai Initiative
(formed in 2000).
The preliminary agreement in May was to create a foreign exchange reserve
pool of $80 billion, with China,
Japan and South Korea to provide 80% or $64
billion, and ASEAN members providing the remaining $16 billion, according
to a report by Xinhuanet, a Chinese news agency.
The above measures are signs of world leaders and global agencies trying
to get their act together to stem the carnage caused by this worst-ever
financial crisis. However, the crisis is moving faster than almost anyone
anticipated, shifting towards the developing countries and extending
into a real-economy recessionary crisis, which in turn has a negative
impact back on the world of finance.
In fact, the crisis -- both of finance and the real economy -- is only
at the beginning stage and will have a long way to go, and the really
serious problems still ahead, especially for the developing countries.
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