Title: The Impact of the Economic Crisis on the World’s Poorest Countries
Abstract: When G20 leaders gathered in London in April 2009, they confronted the greatest challenge to the world economy since the Great Depression, as global output was falling, trade flows drying up and jobs disappearing around the world. Yet whereas the failure of world leaders to act together in the 1930s led to terrible consequences, the decisive action taken by the G20 in London – in the shape of the largest global fiscal stimulus ever – prevented the precipitous decline of the global economy into depression (G20, 2009a). Today, while the recovery is not assured, the banking system has been stabilised, industrial output is rising again across major and emerging economies, international trade is starting to recover and confidence has improved. With the process of recovery far from complete and 61 million people unemployed as a result of this crisis (ILO, 2009), we must continue to guard against complacency. Sustained assistance will be vital not only for the G20 economies, but also for the more than 160 countries that lie outside that grouping – particularly the low-income countries that are home to the 'bottom billion' (Collier, 2007). Far from being insulated from the financial crisis, as many observers had thought, people in these countries are finding their livelihoods – even their lives – under threat. In this article I examine the impact of the global economic crisis on these low-income countries, outline the impact of the immediate response package agreed by the G20 and suggest three priorities for collaborative global action this year in order to ensure that low-income countries are part of the recovery: reforming the World Bank; completing the Doha Round; and committing to a partnership for development in order to meet the Millennium Development Goals (MDGs) by 2015. The impact of the downturn has varied widely across developing countries. While the larger emerging economies of China and India still managed enviable growth rates of above 5 per cent, the average of low-income countries saw the growth of incomes per head fall nearly to zero, and in sub-Saharan Africa average real per capita GDP is contracting for the first time in a decade (IMF, 2009a). While the low-income countries were not as affected as the developed world by the first wave of the financial crisis, the resulting impact on market confidence saw the transmission of the crisis through falling trade, investment and remittances. The flight from risk has seen a rapid decline in net capital flows to developing countries – expected to fall from $1.2 trillion in 2007 to $363 billion in 2009 (World Bank, 2009). The Investment Finance Corporation estimates that 450 investment commitments in African infrastructure projects were cancelled in 2008 alone (IFC, 2008). Alongside this capital flight, world trade volumes are expected to have fallen by perhaps as much as 12 per cent in 2009 compared with the previous year (IMF, 2009a). The collapse of trade has particularly hit Southeast Asia, where recent impressive growth rates have largely been export led. In Vietnam, where the value of exports is equivalent to 77 per cent of GDP, the government estimates that as many as 400,000 people – most of them from the textiles and garments industries – will have lost their jobs throughout the course of 2009 (DFID, 2009). Yet the impact of falling trade has also reached Africa. Twelve African countries receive over 75 per cent of their export earnings from nonfuel commodities. Year on year, the International Monetary Fund's (IMF's) index of nonfuel commodity prices has fallen by 23 per cent from 2008 to 2009 – with real impact on employment prospects across Africa. The global recession has hit an important form of income for the poorest families – remittances. Globally worth over $300 billion a year, remittances are significantly larger than global aid flows. Because 80 per cent of remittances to developing countries come from high-income countries, this source of income is vulnerable to economic crises – and indeed is expected to have fallen by between $25 billion and $66 billion over 2009 (Cali and Dell'Erba, 2009). This collapse in economic activity – from investment to trade and remittances – has turned the financial crisis into a social crisis. For the poorest people in the least developed countries, this comes shortly after the rise in food prices in 2008 that is estimated to have pushed between 130 and 155 million people into poverty (World Bank, 2008). The United Nations has estimated that the worldwide recession has pushed 100 million more people below the poverty line (UN, 2009). That could set back progress towards meeting the first of the Millennium Development Goals – to halve extreme poverty – by up to three years (Alexander, 2008). This collapse in economic activity – from investment to trade and remittances – has turned the financial crisis into a social crisis. Many more families are now being faced with the toughest decisions of extreme poverty: pulling children out of school to help provide for the family; forgoing medicines; and even choosing which of their children to feed. Indeed lives are threatened – infant mortality rates are set to rise by an additional 200,000 to 400,000 deaths each year from now to 2015 if the crisis continues (UN, 2009). There is, among these worrying predictions, some more positive news. A recent report from the IMF suggests that most economies across sub-Saharan Africa appear to be responding to this global downturn better than to those of the past (IMF, 2009b). Better management of African economies resulting in lower inflation, lower fiscal deficits and debt levels at the outset of the crisis has given policy makers more room for manoeuvre. But while many African countries have greatly improved their prospects through better economic management, those prospects will still also depend on the actions of policy makes outside the region. Low-income countries and fragile states will remain dependent on external assistance and private financial inflows, including remittances; these are themselves dependent on the progress the global economy makes towards sustained recovery. A major concern remains that further delay in improvements in public services will prevent attainment of the MDGs and have long-lasting effects on poverty for this generation and the next (IMF, 2009b). But while many African countries have greatly improved their prospects through better economic management, those prospects will still also depend on the actions of policy makers outside the region. In response to the worsening crisis, Prime Minister Gordon Brown urged G20 leaders gathering in London at the beginning of April to ensure that this is the first recession in history where the needs of the world's poorest people are consciously addressed. The G20 agreed to provide $50 billion to help poor countries to weather the storm, along with a new global vulnerability alert system to provide real-time information on the impact of the crisis on poor countries and a rapid social response fund to help protect the most marginal and the most vulnerable. By the time of the Pittsburgh Summit, the poorest countries had received over $3 billion in concessional loans from the IMF, in addition to $20 billion in Special Drawing Rights, with further indications that the IMF would lend over $8 billion instead of $2 billion over the next two years – with such predictable financing already helping countries such as Kenya and Tanzania to protect critical development spending. Yet as the G20 recognised at Pittsburgh, the challenge beyond providing an effective emergency response package is to make real the London Summit's declarations that 'prosperity is indivisible' and that 'growth, to be sustained, has to be shared'– and to take further steps to integrate the world's poorest people into the global economy, and give the world's poorest countries a greater voice in international economic bodies (G20, 2009b). Completing the Doha trade round still provides the best opportunity to create a more open and fair global trading system. International leaders can make progress in this ambition through three critical areas during 2010: reforming the World Bank; delivering on the promise of the Doha Development Round of trade talks and agreeing a strategy for meeting the Millennium Development Goals. Completing the Doha trade round still provides the best opportunity to create a more open and fair global trading system. At the World Bank's spring meetings in April, the Governors of the Bank should agree reforms to make it more legitimate, more effective and more responsive to crises. That means establishing a new voting system that gives developing countries more say, providing the right structures and resources to help developing countries deal with the challenges of today and tomorrow and making the Bank more accountable to its shareholders. All of these reforms should ensure that the Bank is fit to carry out its role as the guardian of the poor. This in turn would provide a massive boost to the global economy, including low-income countries. Of course this is a deal that has eluded the world for too long. I remember distinctly the feeling of missed opportunity during the trade talks in Geneva in 2008, as we came so close to making a deal, but failed at the last. Yet the level of political engagement I saw at the London Summit in April gives reason for hope. The G20's commitment, outlined in Pittsburgh, to bring the round to a successful conclusion in 2010 offers us a new window – not of opportunity, but of necessity for the poorest countries. This must also be the year in which the world agrees a strategy for accelerating progress towards the MDGs – a critical element in building a responsible and inclusive global economy. Agreed ten years ago, the deadline for meeting the goals is 2015 – yet many of them will not be met for 100 years on present trends (Brown, 2009). A sustainable recovery of the global economy will never be realised if we leave one-fifth of the global population behind. If the economic crisis has underlined the interdependence of the 21st century, the response to it has shown that by working together and eschewing zero-sum politics, countries can yield benefits far beyond those possible through simply acting alone. It is in all of our interests that we now grasp the opportunity to bring about real and lasting change.