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Poor countries hit harder than expected by global financial and economic crisis

Written by Dirk Willem te Velde


The global financial and economic crisis is hitting developing countries harder than previously thought, according to a ground-breaking study coordinated by the Overseas Development Institute. ODI and developing country researchers have examined the impact of the crisis, and country level policy responses in ten countries: Bangladesh; Benin; Bolivia; Cambodia; Ghana; Indonesia; Kenya; Nigeria; Uganda; and Zambia.

While different countries are affected in different ways, and it is too soon to assess the full impact, it is clear that 2009 will be worse than 2008. What is more, the slowdown in these countries follows a period of strong economic growth and threatens many hard-won development success stories.  

More than 40 researchers from developed and developing countries have examined the main ‘transmission belts’ that have been affected – trade, private capital flows, remittances and aid – and that are now carrying the crisis to the developing world. They have also examined the impact on growth and development and the policy responses so far.

While many developing country politicians and observers thought initially that this crisis would affect only the west, it is now clear that this is no longer the case. In St. Lucia, where we are meeting to discuss the impact of the crisis on small states, financial contagion is only part of the problem. The bigger concerns stem from hotels that are 80% empty and offering 60% discounts, the 2,200 jobs lost in 2008 and public discontent over wage restraints that may affect the country’s resilience and its ability to bounce back.

In addition to the monitoring study, we are launching three studies on the transmission belts. The study on remittances from migrants, led by Massimiliano Cali, suggests that they may fall this year by between 4-14%, creating, potentially, an even worse situation than predicted in previous studies. The study on private capital flows, led by Isabella Massa reinforces the importance of distinguishing between different types of private capital flows to Africa; for instance foreign direct investment (FDI), international bank lending  and portfolio flows are affected differently and have different effects on African growth. The study on trade by Jane Kennan and Mareike Meyn shows that the devil is in the product detail when it comes to which countries are vulnerable to trade effects.

A synthesis pulls together the main conclusions: countries will be affected in different ways, because of their differences in openness, aid and remittance dependency, financial integration, economic and trade structures, and institutions. But one thing is crystal clear: they will all be affected, and sooner or later they will all need to respond. The search is now on for new growth and development strategies.

Key findings: transmission belts

While the same transmission belts (trade, private finance, aid, remittances) affect countries in different ways, the key findings are as follows:

  • Private financial flows have been affected, but there is a need for disaggregation. Portfolio investment flows fell dramatically in 2008 in most countries, and there were even shifts from inflows to large net outflows, as well as a significant drop in equity markets in 2008 and into 2009. There are signs of the 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, deteriorated during 2008. The issuing of bonds has been put on hold in Ghana, Kenya and Uganda.
  • The value of trade is declining. Indonesian exports of electronic products, for example, which account for 15% of total exports, experienced a fall of 25% (in value terms) in January 2009 compared to January 2008 The value of garment exports in Cambodia dropped from a monthly average of $250 million in 2008 to $100 million in January 2009. Prices of most commodities such as copper and oil declined dramatically, affecting countries such as Nigeria, Zambia and Bolivia. Cocoa and gold prices did not decline, however, which is good news for countries such as Ghana. Imports bills for fertilizer and oil have declined, taking some pressure off the current account in oil importing countries.
  • Remittances are down in nearly all the countries studied. In Kenya, for example, remittances were down by 27% in January 2009 compared to January 2008, following a volatile year. In Bangladesh emigration fell by 38.8% between February 2008 and February 2009, jeopardising future remittances.
  • There is little evidence of an aid pull out so far. While there was a fall in aid to Uganda in 2008, it may be too soon to blame this on the crisis.

Key findings: Economic growth

The actual and expected impact on economic growth also varies across countries, but some trends are clear:

  • There was a general slowdown in economic growth throughout 2008 in countries with quarterly statistics. The case studies point to even worse effects in 2009 and this is consistent with forecasts from the International Monetary Fund (IMF) of declining GDP per capita for several countries in 2010.
  • Growth forecasts have been revised downwards in all countries, contrasting with excellent growth records for developing countries in the years leading up to 2007 and even into 2008Cambodian growth, for example, is set to fall from more than 10% in 2007 to close to zero in 2009. Kenyan growth may reach only 3-4% in 2009, down from 7% in 2007, after a sluggish 2008 dominated by political turmoil. Some other countries such as Zambia have seen their growth prospects affected less, despite the impact of the global financial crisis on the mining industry.
  • Growth in countries is affected differently because of sector composition:  tourism is affected in Kenya and Cambodia; manufacturing in Asian countries; and commodities in Bolivia and Zambia.
  • Manufacturing has been hit hard, especially in Asian countries that specialise in exports such as garments (Cambodia) and electronics (Indonesia).

Countries that depend on exports have suffered disproportionately, such as Cambodia. Growth in Indonesia, however, has been driven by overall consumption and services, so reductions in its exports have not had such an impact.

Key findings: employment

We are already seeing some significant impact on employment:

  • The garment industry, which employed around 350,000 people, has been hardest hit, with approximately 51,000 people – many of them women – laid off between September 2008 and March 2009.
  • FDI-generated employment in Ghana dropped from 15,526 people at the end of 2007 to 10,022 at the end of 2008.
  • In Indonesia, 37,905 workers had been laid off by February 2009 as a result of the crisis.
  • In Kenya, the labour-intensive horticultural industry, which employs an estimated three million people, had to cut around 1,200 jobs this year and suffered a 35% drop in exports of flowers.
  • In Zambia, 8,100 of the 30,000 workers in the mining sector lost their jobs in 2008.

Key findings: poverty

Simple back-of-the-envelope calculations suggest that the number of households in poverty may rise far more as a result of the crisis than would otherwise have been the case. Estimates suggest that the number of poor households may rise by:

  • 300,000 in Bangladesh (0.2% of the population);
  • 110,000 in Cambodia (0.8% of the population);
  • 233,000 in Uganda (0.8% of the population);
  • 230,000 in Ghana (1% of the population); and
  • 650,000 in Indonesia (0.3% of the population).

Key findings: economic policy responses

Economic policy responses to address the fallout of the global financial crisis range from ‘business as usual’ to more proactive approaches. Some countries, such as Cambodia, are considering, implementing or accelerating growth policies, or implementing fiscal stimuli, as in Indonesia. Elsewhere, we are seeing very small monetary policy steps and not much else (e.g. Kenya). The impact on national balance books varies, from those with lower tax receipts such as Uganda, to lower government fuel import bills in Bangladesh andthe evaporation of the hoped-for increases in tax receipts from Zambian mining. The ODI study has found that some countries (e.g. Kenya, Ghana, Bangladesh, Nigeria) have established crisis task forces to help them respond to the global financial crisis.


Poor countries have been affected by the crisis in various ways and more than previously thought. Our study, based on research by developing country researchers, sheds some light on what is really happening at the country level, and goes beyond vulnerability studies or global forecasts. We hope it will inform international fora such as the forthcoming UN High Level conference and G-8 meetings. We need to continue to monitor the effects of the crisis to stimulate the policy responses that are needed as a matter of urgency – policy responses that have not, to date, been forthcoming. Both developing and developed countries need to build their resilience to economic shocks and ask themselves whether growth and development strategies, economic policies and institutions need a complete rethink in these turbulent times.