The Financial Crisis: Implications for Developing Countries

On November 15, 2008, leaders from 20 of the world's largest economic powers (G20), which account for 85 percent of the world economy and approximately two-thirds of its population, will be meeting in Washington, D.C. to discuss the current economic crisis and possible solutions. We are in the early stages of realizing the consequences of the global financial crisis in industrialized nations, which include a rise in unemployment, increased costs of energy and food, and looming inflation problem. However, we are still quantifying the effects of the economic crisis has on emerging or developing economies. According to The World Bank Group's website, The Financial Crisis: Implications for Developing Countries, "Developing countries are now much more vulnerable, with dwindling capital flows, huge withdrawals of capital leading to losses in equity markets, and skyrocketing interest rates. GDP growth in developing countries—only recently expected to increase by 6.4 percent in 2009—is now likely to be only 4.5 percent, according to economists at the World Bank. And rich countries are now expected to contract by 0.1 percent next year." (Graphic courtesy of AFP)

Although people in developing and emerging economies are spending less, the frozen credit market is having a toll on small and mediums-sized enterprises. Having access to credit markets or additional sources of liquidity is essential to business growth. In addition, the global economic crisis is having an adverse affect on remittances to developing countries, which according to the Bank, "were larger than revenues from the most important commodity export, and in 36 countries they were larger than private and public capital inflows."

During the past few years, we have seen a spike in food and energy prices. While these prices have dropped in recent weeks, they are still significant higher compared to 2007. Furthermore, developing economies are commodity-price driven and higher prices have benefited these markets. Despite the falling prices on commodities, inflation risk remains a great problem rising to as high as five percentage points. Developing markets may soon be seeing stagflation, the economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.

According to its press release, "World Bank Group Boosts Support for Developing Countries," the Bank's International Bank for Reconstruction and Development could make new commitments of up to US$100 billion over the next three years. In 2008, the Bank's lending could almost triple to more than US$35 billion compared to US$13.5 billion in 2007. The increase in financial support would support countries facing significant budget short-falls and help sustain long-term investments. To maximize success and reduce the amount of money wasted by multiple layers of bureaucracy, corruption, and a general lack of oversight and inefficient strategic planning, donor countries should be required to create a transparent, definable, and measured growth strategy with clear accountable results.

Part of the historical challenge for the Bank is defining its purpose beyond providing financial and technical assistance to developing countries around the world. The global financial crisis is an opportunity for the Bank to serve as a negotiator between donor countries and countries receiving financial assistance. As a mediator, the Bank can strengthen is role in gathering information, forming ideas, and implementing solutions to eradicate poverty and raise the standard of living for the world's poorest people.

Equally important, however, is the need to strengthen the trade and economic relationship and close the gap between industrialized and developing nations. Whether you live in Haiti, South Africa, Spain or Canada, we live in a global society and we need global solutions. Meetings of world leaders are often more about discussions and not enough decision making, but I hope the G20 summit will facilitate turning ideas into sustainable solutions.