Global Trends by Martin Khor
Monday 9 March 2009
How developing countries are hit by global crisis
crisis started in the West and now developing countries like
There doesn’t seem
to be respite to the global economic downswing, as the latest reports
show another 651,000 jobs lost in the
In the middle of
last week, the stock markets briefly rose at a report that
Although much of the global news of the crisis has focused on the West, it is the developing countries which are suffering more.
The GNP fell by
3-4 per cent in the
The crisis began
as a financial crisis in the
There was a lag time before the effects reached developing countries, in the few months before the end of last year. Now the effects are really being felt. The global crisis is like a train wreck in slow motion.
The developing countries are being affected in many ways. But there is a diversity among them: no two countries are affected in the same way.
There are two main ways in which the Western crisis is being transmitted to developing countries – through the routes of finance and trade.
In the finance route,
firstly, some countries have been hit through investing in toxic or
depreciating assets. The sovereign wealth funds in
in Hong Kong and
has been a big drop in funds flowing to developing countries. Net capital
flows to emerging markets are estimated to fall from US$929 billion
in 2007 to US$466 billion in 2008 and further to US$165 billion this
year, according to the
Of these capital
flows, portfolio investment which surged into developing countries has
been flowing out, especially from the sale of shares in the stock markets.
There is also a severe reverse flow in bank credit. The IFI expects that this year the banks will take out more in debt repayment in emerging markets that they provide in new loans.
Thirdly, the flow of FDI worldwide is slowing down. It fell by 21% to US$1.4 trillion last year, according to UNCTAD data. So far the developed countries have been affected more by this. The FDI flow to developing countries still grew by 4% in 2008, but this was much slower than 21% in 2007.
In the trade transmission
route, developing countries are also affected in many ways. Firstly,
their exports to the
Last week, it was
Besides the fall in demand for developing countries’ manufactured exports such as electronic products and components and textiles and clothing, many countries have also seen a sudden drop in the demand and prices of their export commodities.
The most publicized fall is in the price of oil, which dropped from its peak of US$140 a barrel to around US$40 at present. This is a blow to oil producing countries, but benefits oil importing countries.
Prices of a wide
range of other commodities have also dropped sharply. In
On 24 February, The Economist’s commodity-price dollar index for all items had fallen by 42% compared to a year ago. The index for food was 30% down, for non-food agricultural products 45% down and for metals 60% down.
For poorer countries,
such as in
in services is also affected. For example, global tourist arrivals
fell by 1% in the second half of 2008. In the
Countries like India that have benefited outsourcing by US multinationals (for services ranging from accountancy to being call centers) are expected to be affected as the business of the Western firms shrink.
Many developing countries also depend on the remittances sent home by their migrant workers. So far the migrants’ flow of money home has been resilient to the crisis, with the World Bank estimating that remittances to developing countries actually rose from US$281 billion in 2007 to US$305 billion in 2008.
The Bank however predicts a likely fall of 6% in 2009, as migration flow slows down or as workers are sent home.
Thirdly, developing countries are facing a worsening of trade financing as banks have tightened their supply of credit even for routine import and export business. It was reported at a World Trade Organisation meeting that there is a US$25 billion shortfall in trade financing that now needs to be filled.
The reduced flows or outflows in finance and the fall in exports of goods and services have led to a deterioration in the balance of payments and the stock of foreign reserves in many developing countries. Some have also seen their currencies devalued, making it more difficult to service their external loans.
A few countries
The developing countries
have also experienced slower
Thus the transmission
through the finance and trade routes is working its way through to the
real economy of output, trade and jobs. And this is only the beginning,
as the recession in the