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The global financial crisis and developing countries: what happened, and what have we learned?

Written by Dirk Willem te Velde


In early 2009, a global network of 50 researchers coordinated by the Overseas Development Institute (ODI) embarked on a unique monitoring study on the economic and social impact of the global financial crisis in 10 developing countries. They revealed a clear impact by the time the G20 leaders met in London in April 2009, with the worst yet to come. Research teams in 11 countries have now updated the results, see: Bangladesh, Bolivia, Cambodia, Democratic Republic of Congo (DRC), Ethiopia, Kenya, Mozambique, Sudan, Tanzania, Uganda, Zambia.

Ten key points emerge from a synthesis of the current monitoring updates:

  1. Portfolio flows were hit hard in late 2008 and early 2009, confirming that there was global financial contagion with a universal flight to safety. However, there were signs of a recovery after the second quarter of 2009.
  2. Banking stresses were also seen in low income countries (LICs) that were expected to be ‘immune’ to the vagaries of the global banking climate. The non-performing loans (NPLs) to total assets ratio almost doubled in Zambia, for example, from 7% in the first quarter of 2009 to 13% in the third quarter of 2009.
  3. Foreign Direct Investment (FDI) – often seen as resilient to crises – fell dramatically in several countries. FDI inflows to Cambodia, for example, fell by 50% in 2009. In DRC, FDI tumbled from $1,713 million in 2008 to $374 million in 2009.
  4. Reserves in some countries became dangerously low. By the end of February 2009, gross official reserves in DRC had plunged to $33 million, the equivalent of less than one day of imports. The support of the IMF’s Exogenous Shocks Facility (ESF) helped to raise the reserves to nearly two weeks of imports.
  5. The impact on growth was varied.Cambodia saw a double digit growth rate reduce to zero in 2009. Kenya had a low growth rate of 2% last year, compared to 7% in 2007, although other crises also played a part. Uganda, Zambia and Tanzania saw less change in their growth rates.
  6. There were trade declines in many sectors. Between January and August 2009, Kenyan horticultural exports fell by 35% in volume terms compared with the same period in 2008. Tourist revenues in Tanzania fell to $302.1 million between January and April 2009 compared with $388.2 million for the same period in 2008.
  7. The greatest impact on employment was seen in the garment and mining sectors. At least 25,000 to 30,000 garments workers lost their jobs in the last eight months of 2009 in Bangladesh. Cambodia has lost 102,527 jobs since September 2009 (one-third of the industry’s workers). At one point, Zambia had lost 10,000 of its 30,000 mining jobs, but has managed to regain some of this lost ground. Three quarters of artisanal miners in DRC, or some 18,000 people, lost their jobs in an industry dominated by Chinese small scale enterprises. 
  8. The crisis hit remittances in the second half of 2008 (Bolivia, Kenya, Uganda) and the beginning of 2009 (Bangladesh, Bolivia, Ethiopia). Remittances in Bolivia, for example, were down 8% in the first three quarters of 2009, compared to the same period in 2008. Bangladesh was the only country where remittances continued to grow (22% in the 2008/09 financial year, compared to the previous year), although at a lower rate than in the pre-crisis period.
  9. With a few exceptions, including Cambodia and DRC, the impact has been manageable at the macro level. In Zambia, for example, the economy grew at 6.2% per annum, despite a weakening current account, and the effects of the crisis on Zambian mining.
  10. Emerging markets provided a cushion for low income countries during the crisis. Trade with emerging markets did not fall as much as trade with developed countries, while Chinese FDI to Africa increased in 2009. China is also the key donor in Cambodia and Sudan, and is becoming important in Kenya. At the China-Africa summit in November 2009, it pledged $10 billion in new low-cost loans to Africa over the next three years, doubling its previous commitment.

There are six key lessons to be drawn from the study:

  1. While every case study country is affected by the crisis in some way, the impact varies from marginal changes to major damage. Developing countries have not been shielded from the crisis, and have seen an additional 50 to 100 million people falling into poverty. While the effects may be manageable, our calculations on the basis of recent International Monetary Fund (IMF) data and forecasts, suggest that GDP in sub-Saharan African alone will have fallen 7% ($84 billion) by the end of 2010 compared with pre-crisis forecasts. 
  2. The crisis has exposed two myths on financial flows. First, that developing economies were not integrated into global economic and financial systems. In fact, banking and stock market collapses did carry the crisis into the developing world. Second, that FDI is always resilient in a crisis. As the ODI study has found, FDI fell significantly. 
  3. Economic and financial openness has led to increased exposure to shocks but this not always meant increased vulnerability. Bolivia and Tanzania, for example, have become more resilient through good macroeconomic management, including using mineral resources to build up reserves, and resilience.
  4. Protectionism did not really affect the case study countries, and trade finance was not seen as a binding constraint to trade, contrary to statements made early in the crisis.
  5. Flexible institutions proved their worth. Task forces in Bangladesh, Mauritius and Tanzania, for example, generated effective policy responses.
  6. Policy responses in many country case studies were well designed, using fiscal, financial and monetary policies to address economic management and there were no major policy reversals. In fact, so-called ‘doing business’ reforms continued.

Taken together, the findings and lessons drawn from the study confirm that countries need to promote crisis-resilient growth, if they are to be better prepared for shocks in the future. Good macroeconomic management today means better policy responses tomorrow, if and when disaster strikes.

But resilience is about more than good macro-economic management. It includes promoting responsive institutions and pursuing active policies towards diversification. Diversification is important for both growth and resilience and should be promoted in a market-friendly way so that policies are not detached from private sector needs. Diversification in sources of capital flows, such as FDI inflows, has also provided a cushion. Chinese FDI, for example, is now making up for some of the mining losses in Zambia – a reminder of the importance of links between emerging markets and low-income countries. Whilst the rise of emerging markets has offered new opportunities to low income countries, it is not without risks: emerging markets compete in light manufacturing (as the Bangladesh study highlighted) which poses new challenges for medium-term growth strategies over and above the need to promote crisis resilient growth.