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The global financial crisis and developing countries: taking stock, taking action

Briefing/policy paper

Written by Dirk Willem te Velde

Briefing/policy paper

A year on from the collapse of Lehman Brothers and talk in developed countries has moved from recession to recovery. Recent OECD and International Monetary Fund reports suggest that financial conditions in developed countries have improved: there has been a boost in business confidence, export orders are growing, the US housing market has bottomed out and industrial production in emerging markets has begun to increase. Bolstered by successful implementation of fiscal stimuli and collective action to support financial markets, there is a new belief in the role of the state to correct market failures. But just as the financial crisis engulfed the world, affecting those who played no part in the original causes, it is crucial that any recovery from the crisis has the same global reach.

The crisis itself stems, mainly, from poorly regulated financial markets which allowed risky and complex financial products to develop, skewing financial flows and creating unsustainable global imbalances. The consequence was that world trade volumes plummeted and industrial production fell drastically. The economic crisis affected developing countries through declining private financial flows, trade, and remittances. By the end of 2009, developing countries may have lost incomes of at least $750 billion – more than $50 billion in sub-Saharan Africa. The human consequences include rising unemployment, poverty and hunger, and an additional 50 million people trapped in absolute poverty, with the number expected to rise to 90 million by December 2010 (DFID, 2009).

Politicians, under pressure from angry voters, may be veering towards protectionism and migration controls. Such responses undermine the prospects for sustainable recovery, increasing the risks of a double dip. But the crisis itself may have created a rare opportunity to reshape the financial and macro-economic systems that have failed poor countries, and to rethink growth strategies so that they are more resilient to future crises.

ODI led case studies in ten developing countries in early 2009 –Bangladesh, Benin, Bolivia, Cambodia, Ghana, Indonesia, Kenya, Nigeria, Uganda and Zambia – working with local researchers to see how the financial crisis is being felt on the ground; we are now extending this work to Sudan, Ethiopia, Democratic Republic of Congo, Mozambique and Tanzania. The research suggests that poor countries have been hit harder than was originally predicted, and 2009 is likely to be worse than 2008 (te Velde et al., 2009a).

Dirk Willem te Velde