OPINION:The global recession is proving to be the perfect storm for the world's poorest countries
ONE YEAR ago events on Wall Street sent global markets into free fall. Contagion from this has sparked a global recession the likes of which has not been seen since the Great Depression of the 1930s. The impact this is having on Ireland and the other rich economies of the world is well documented, but what of the poorest countries?
Initial indicators regarding how the poorest countries would fare were somewhat optimistic. Some predicted that sub-Saharan Africa, the least financially integrated part of the world, may come out of this crash better off. The prognosis, however, has since become much bleaker.
Due to their limited exposure to financial markets the poorest countries were least affected by the “first wave” of this crisis. But subsequent waves are hitting them much harder. There are worrying signs that the poorest countries could experience a series of social and economic reversals which could be catastrophic.
The reason for this rests in the structure of the economies of many of the poorest countries and the financial streams available to them. The group of least developed countries (LDCs) are characterised by their limited capacity to raise revenue from a domestic tax base. They rely heavily on four sources of finance: aid, trade, foreign capital flows and remittances. Each of these has suffered serious decline over the past year.
The past decade was marked by a steady increase in overseas aid, both official and voluntary. As part of signing up to the UN Millennium Development Goals, rich countries pledged to provide more aid directed at achieving the basic needs of people living in poverty. Global aid levels reached a record high in 2009 of $120 billion (€84 billion). Almost all rich countries set timetables for achieving the UN target of 0.7 per cent of national income going to overseas aid.
Until the crisis hit, many countries, including Ireland, were well on the way to reaching these targets. The situation has now changed dramatically. The crisis means that donors are facing their own fiscal problems and aid is now contracting dramatically.
A recent Aid Watch report shows that four EU governments, including Ireland, have cut aid in this year. This, however, is the thin end of the wedge and many others are in the process of following suit. The EU is now well off track in meeting its 2010 commitment of 0.51 per cent GNP to aid. Despite the high profile commitments aid has proven to be an easy target for cutbacks.
Just a few years ago the business world was beginning to see growing opportunities within the poorest countries. Prominent economists such as Paul Collier wrote convincingly about the potential of investing in the “bottom billion”. Despite the associated risks, foreign direct investment to the poorest countries was beginning to increase. Since September 2008, however, this pattern has reversed. The Institute of International Finance expects that private capital investment to Africa will have fallen from $929 billion in 2007 to $165 billion by the end of 2009.
With greater mobility of labour, remittances home from nationals working in wealthier countries have become a substantial source of finance for many countries. According to the latest World Bank figures, remittances by migrant workers to developing countries reached $305 billion in 2008, over double the amount received in development aid. The widespread impact of the crisis remains to be seen but anecdotal evidence shows that the impact on remittances is severe. In Kenya for example, remittances were said to be down 27 per cent in January 2009.
Many developing countries rely heavily on the export of basic commodities. Since last autumn the WTO reports that international trade has fallen by 9 per cent. Those countries most reliant on one or two commodities have been exposed most, with resulting problems in balance of payments and widespread unemployment. The actual value of basic commodities has fallen by around 38 per cent since last year due to weakness in global demand.
For the poorest countries the global recession is the perfect storm. The financial and economic crisis has come on the back of a food and fuel crisis in early 2008 which led to food riots on the streets of many countries. The latest statistics reveal some extremely worrying trends. The UN’s Food and Agriculture Organisation recently estimated that for the first time in history over one billion people are now going hungry; one in six people on the planet. Unemployment across the developing world is rising fast. Some 59 million could lose their jobs in 2009.
Zambia, for example, has already lost 8,100 of its 30,000 mining jobs due to falling global demand for copper. Globally, 200 million have been added to the ranks of the 1.3 billion people living on less than $2 a day in 2008.
Children are particularly vulnerable due to the difficult choices which families need to make around food, health and education. Immediate coping mechanisms for families are to eat less often and to prioritise who gets food first. The World Bank recently estimated that child deaths in Africa could grow by 700,000 a year. That’s an increase of 30 per cent on current levels.
The broader impact of the crisis is at a macro-economic level. Growth rates in Africa have been relatively high over the past decade, albeit from a very low base. The forecast for 2009 is now around 1.5 per cent, down from about 6 per cent. The World Bank estimates that developing countries will face a financing gap of between $270 and $700 billion in the current year and are now facing a rapidly deteriorating balance of payments problem. The old spectre of widespread debt default is raising its ugly head. Debt problems had never gone away but rapid economic growth and debt cancellation programmes over the past decade had provided a temporary reprieve for many countries. Some 38 out of 43 of the most vulnerable countries are on the brink of default. Zambia could soon face a debt-to-export ratio of 300 per cent.
Unlike western governments who can still borrow on international markets, the poorest countries realistically have only one place to go – the International Monetary Fund. It remains to be seen how the IMF will deal with a new round of debt defaults. Among
western analysts there is recognition that unfettered market policies were, in part, the cause of this crisis, yet the IMF continues to impose this same mix of market liberalisation on the poorest countries as a condition for its loans. The world is a very different place to one year ago. The fate of so many who were promised so much and did nothing to cause this situation now hangs in the balance. There is a growing temptation, faced with our own mounting problems, to block out the poor and to see aid as a luxury we indulge in when times are good. The Government has already cut Ireland’s aid budget by more than 20 per cent this year.
The UN’s Millennium Campaign has said that the amount of money made available to bail out banks in the past year is 10 times greater than all development assistance provided to poor countries in the last 50 years. Clearly, then, it’s a question of commitment rather than whether the money is available.
As a nation we should honour our aid commitments, ensuring that money is available to urgently increase social safety nets for the most vulnerable people. Their lives may depend on it.
Justin Kilcullen is director of Trócaire