The global financial crisis is already beginning to have an impact on the ?real economy? in poorer countries around the world. However, the debate in the west about the impact of the crisis has largely ignored its impact on the developing world, and the voices of people from these countries are rarely heard.
This report presents snapshots of the financial crisis as seen by 21 thinkers, academics and policymakers in 14 developing countries. IDS invited them to present their views on the likely impacts and possible responses to the crisis. Most importantly, results show that developing countries cannot be treated as a homogenous block ? concerns vary significantly across countries, depending on their current economic situation, exposure to specific impacts and capacity to respond. Isolation from world financial markets will not protect the poorest countries, as the indirect impacts are likely to be severe.
The report identifies six main pathways of impact:
- lower demand for exports. In Bangladesh, orders for ready-made garments from Europe and the US dropped 7 per cent in September. In Kenya, the cut flower industry is suffering as European customers are hit by the crisis;
- fall in portfolio and direct foreign investment. Investors shy away from markets that are perceived to be riskier. The Ethiopian Electric Power Corporation has indicated that its investment plans will be severely affected due to the crisis;
- falls in exchange rate. The sudden withdrawal of foreign capital from several developing countries has caused dramatic falls in their exchange rate. Companies and governments with substantial foreign currency denominated debts may contract or even collapse as a result;
- rising risk premiums and interest rates for developing countries on global capital markets;
- decline in remittances from workers in recession affected countries;
- foreign aid decline. Richer countries will reduce aid as governments reassess their fiscal priorities during a downturn. This could have particularly negative consequences for Africa.
Policy responses must take the following points into consideration:
- countries will be affected differently by the pathways listed above. Developing a typography of countries will allow for different responses to address their specific needs;
- within national economies some people will have more exposure to the affects than others;
- there are governance implications at international and national levels.
The authors propose three specific policies:
* increase in aid flows
* enhancing social protection
* restructuring International Financial Institutions.
