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Monitoring the monitors. The financial crisis and developing countries

Written by Dirk Willem te Velde


The G-20 London summit is over. The numbers have been agreed. Some really good promises on aid and finance, but now we need to wait and see whether and how the $50 billion earmarked for low-income developing countries will actually flow to those who need it, under what conditions, and through which reformed institutions. We need to wait and see whether the G-20 countries refrain from becoming more protectionist, and whether they will engage in a rainbow stimulus, investing in aid for trade, protecting the poorest, and low-carbon technologies. We need to wait and see whether global financial regulation will be improved. But there is at least one action that can be pursued immediately. The G-20 has asked for the monitoring of the effects of the global financial crisis on developing countries. Can you help?

Today, the Overseas Development Institute launches the initial results of a unique monitoring study that has, at its heart, research by 40 researchers, 30 of them working in 10 developing countries: Bangladesh, Benin, Bolivia, Cambodia, Ghana, Kenya, Indonesia, Nigeria, Uganda and Zambia. Our previous research reviewed the main transmission belts that are spreading a developed country-created economic and financial crisis to developing countries, such as trade, private capital flows, remittances and aid. The current research goes further, to examine the different ways in which different countries are being affected. Even though there is some inevitable time lag between the impact in the north and the impact in the south, and while it is always difficult to interpret high frequency data, the research has already found clear signs of stress.

  • Portfolio investment flows experienced a dramatic drop in 2008 in most countries, resulting in some large net outflows and a significant drop in equity markets in 2008 and into 2009. There is evidence of the increased tightening of credit conditions for bank lending in Cambodia, Ghana and Zambia. Foreign Direct Investment (FDI) has been affected less, but this varies across countries. The financial contagion is not, however, the severest of the shocks revealed in our results so far.
  • The real shock facing the 10 countries reviewed is far worse: export values are falling. Indonesian exports of electronic products (which account for 15% of total exports) fell by 25% in value between January 2008 and 2009. In Cambodia, garment export values at the beginning of this year had dropped alarmingly from a monthly average of $250 million in 2008 to just $100 million in January 2009. 
  • In Kenya, remittances were down 27% in January 2009, compared to January 2008, after a year of volatility.
  • Aid to Uganda fell in 2008.
  • In Bangladesh, emigration fell by 38.8% between February 2008 and February 2009.
  • Growth predictions have had to be revised significantly in all ten countries. Cambodian growth, for example, is set to decline from more than 10% in 2007 to close to zero in 2009.
  • There are significant job losses. Cambodia has already lost 51,000 garment jobs lost in recent months, and 15,000 jobs in construction.
  • Zambia lost 8,100 (25%) of its 30,000 mining jobs in 2008.

Economic policy responses to the global financial crisis vary widely, from ‘business as usual’ to more pro-active approaches. Some countries are considering, implementing or accelerating growth policies (e.g. Cambodia), or even implementing a fiscal stimulus (Indonesia). But others have responded with only very small monetary policy steps, and not much else (e.g. Kenya or Uganda).

There is also a wide range of social policy responses in the 10 countries. These range from significant reductions in overall social sector allocations (Nigeria and Zambia) to countries where, with donor support, social protection provision is being extended rapidly from a low base (Cambodia), to others where an already well developed system is being expanded to respond to increased need (Indonesia). The scale of the social protection response may be determined by the extent of revenue contraction, the ability of the government to access resources to finance the fiscal deficit, and the pre-existence of a social protection system.

The institutional context for policy responses varies. The research has found that some countries (e.g. Kenya, Ghana, Bangladesh, Nigeria) have established crisis task forces that may help them to respond to the crisis.

The ODI study is one of the monitoring initiatives already underway or in the pipeline. A
A quick tour of current monitoring efforts shows that:

It will be important to continue the monitoring of the effects of the global financial crisis on developing countries and to understand developing country policy responses. Monitoring alone will not help the poorest, but it may well lead to faster and better informed action to address the fall out of the global financial crisis on developing countries.

Please respond to this blog if you have important monitoring news to add or have any comments on our new synthesis report.