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The Credit Crunch And Developing Countries
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The Credit Crunch And Developing Countries



Dr Ben Thirkell-White on Global poverty and the credit crunch 16 Sept 2009. ...

Dr Ben Thirkell-White on Global poverty and the credit crunch 16 Sept 2009.

Collapse of Western excess is creating a crisis for developing countries caught in the tailwind. 2.8 billion survive on less than two dollars a day. After significant gains in the last decade, which saw GDP growing across Africa at an average of 5%, latest figures indicate this is dropped to less than 3%. The solutions are complex, will be incremental, and require action at both macro (intergovernmental) and micro-levels (individuals and NGOs assisting economic development on the ground). There is no silver bullet, but only realistic and committed action at all levels.



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The Credit Crunch And Developing Countries The Credit Crunch And Developing Countries Presentation Transcript

  • Ben Thirkell-White Politics and IR Victoria University of Wellington September 2009
  • Themes
    • Developing world in tail wind of crisis made elsewhere
    • Crisis highlights marginality of our concern for the poor
    • As ‘fictional wealth’ vanishes, everyone spends less and people stop buying what developing countries were selling
    • Note that it’s a collapse of Western excess that is harming developing countries....
    • Developing world marginal part of response – which is all about ‘fixing us’. Loads of resources spent at home while aid flows ‘maintained’
  • Bubble bursts, banks panic Housing bubble bursts Banks don’t understand mortgage exposure Banks stop lending to business No new mortgages Banks stop lending to each other People feel poor People stop buying Business struggles
  • Response
    • Loosen monetary policy
      • Reduce interest rates to boost lending and borrowing
    • Controversial fiscal stimulus (and bank bailout)
    • Thousands of billions of dollars of gvt funds miraculously emerge
      • Left wing – gets spending going and breaks cycle
      • Right wing
        • Boosts government debt
        • Takes resources from private sector
        • More tax in future
      • Left wing
        • spending now makes everyone richer
        • no choice other than Great Depressiondevestation
  • Just when it was all going so well...
    • After ‘lost decade’ – fiscal problems strain political legitimacy
    • African growth rises to around 5% GDP from 2000
    • Building new relationships through PRSP and HIPC
  • New relationships
    • Debt cancellation (HIPC) leverages donor influence
    • More to offer and a more population-friendly approach (PRSP)
    • New resources mean government has more to offer
    • Can build social contract with population
    • Cemented by participatory planning processes
    • Not perfect, not universally successful but increased aid is helping growth and poverty reduction in some places
  • Crisis as reverse debt cancellation
    • Resources shrink
    • Risks reversing the economic gains
    • And disrupting relationships
      • Adjustment to tough times creates conflict everywhere
  • Not avoiding the crisis
    • Not involved in CDO, MBS etc.
    • Asia ‘de-coupled’ from global economy?’
    • From banking crisis to recession – hopes fade
    • Main channels
      • Collapsing commodity price (still 70% of LDC exports)
      • Reduced tourism
      • Declining remittances
      • Finance flows US$900Bn 2007 US$165Bn2009 (FDI/China)
  • Crisis dynamics
    • Lower export prices reduce growth
    • Lower government revenue (taxes) so can’t easily pursue stimulus
      • Governments lose money directly in oil/min resource countries (lower impact on employment)
      • Agricultural exporters immediate impact on job/livelihood, filters through to lower gvt revenue
    • Reduced earnings put pressure for greater safety-net spending
    • Against background of fiscal stretch from food crisis in 2008 (family and gvt run down savings)
  • Some (very rough) Numbers
    • Growth 3% below previous projections (of 5-6)
    • IMF 1% growth drop = 2% increase in poverty
    • Bank says 50 million extra poor 2009, 40 million 2010 (reversal of previous trend of decline)
    • Bank - direct and indirect costs could create extra 2-400,000 infant deaths per year until 2015
    • Non-numbers – remember potential political fragility
  • Domestic policy options (according to BWIs)
    • Governments need to walk a tightrope to
      • (A) Conserve gains in economic stability
      • (B) Without aggravating the impact of external demand on domestic activity and especially on the poor
  • IMF emphasises stability
    • Economic shock produced externally, so stimulus less relevant
    • Badly targeted stimulus will increase imports without solving problem
    • So target poor (they spend more, and for equity reasons)
    • Borrowing dangerous in current climate
      • High prices, risks ‘crowding out’ private sector
      • Risk of further problems with domestic banking anyway
    • Don’t know how long it will last so hard to budget
    • Doesn’t want to damage ‘discipline’ achieved in past
    • Some new money but mostly ‘use it better’
  • World Bank more concerned with growth
    • Also concerned at limited space for stimulus
    • But talks about dangers of delayed infrastructure spending
    • And of poor losing out on eg. Education
    • Calls for global vulnerability fund 0.7% of stimulus
      • Support infrastructure
      • Keep microcredit flowing
      • Pay for additional safety nets
    • Even Bank says nothing about politics
  • International Politics
    • G20 thinks it’s broke
    • Africa not macro-economically significant
    • Middle Income countries in crisis will get most of new IMF resources
    • Commit to keeping trade open
    • Commit to existing spending but.....
    • Nothing else on agenda
    • Crisis is not about the poor....the poor are irrelevant to the crisis (????!!!)
  • International politics medium-term
    • Keynesian economics is back in vogue
    • IMF reform
      • Want greater surveillance
      • Change voting structure
      • Growing Chinese power as good or bad?
    • The IMF will be left with more money to spend after this
  • Standing up! Action points to make a difference
    • Political responses: Currently NZ aid stands at 0.35% GDP. This needs to go to 0.7% – our official target. Politicians need to take this seriously. You can:
      • Write to the Minister of Finance, Minister of Foreign Affairs and your MP – make it clear to politicians that aid is an electoral issue (currently about $100 per person per year, should be about $200)
    • Direct responses: NGO money is falling off particularly fast. Yet macro-economic development is important. You can:
      • Join an NGO working efficiently in an area that interests you. Support them financially and get involved in their activities.
      • If joining an organisation isn’t your thing, then act directly: you can make small loans to individual developing-world entrepreneurs at www.kiva.org
      • Become informed about the issues, so you can gain confidence in talking to friends and family about the need to everyone for to action.
    • Consumer responses:
      • Buy Fair Trade where possible. Let your local supermarket know that you want Fair Trade products. Note that Fair Trade often has green impacts as well.
  • More reading…
    • Reports for April’s G20
    • World Bank Swimming against the tide: how developing countries are coping with global crisis
    • IMF The Implications of the Global Financial Crisis for Low-Income Countries (and another for Africa )
    • And June report from UK Overseas Development Institute: The global financial crisis and developing countries: Synthesis of the findings of 10 country case studies Working Paper 306