Learn how the World Bank Group is helping countries with COVID-19 (coronavirus). Find Out

FEATURE STORY

Crisis Takes a Mounting Toll on Developing Countries

March 13, 2009


March 13, 2009—Bangkok cook Witaya Rakswong, 37, makes less than half of what he made two years ago as a sous chef at a luxury hotel.

“If you spend it wisely, you’d be able to get by,” he says of his 10,000 baht ($294) per month salary. His reduced wages have forced him to send 20 percent less money home to his mother.

Like Rakswong, people in developing countries are coping with less as the global economy shrinks this year for the first time since World War II.

Millions have lost jobs as mines and factories close and construction slows in formerly fast-growing countries amid possibly the largest decline in world trade in 80 years.

A new World Bank paper prepared for the G20 finance ministers’ meeting in Horsham , UK, this weekend warns that the financial crisis could have long-term implications for developing countries.

Many developing countries face deteriorating financial conditions that threaten to reduce services for the poor such as health and education. The Bank estimates the financing gap for 98 countries at $270-$700 billion.

Only a quarter of vulnerable countries will have the financial resources to lessen the impact of the financial downturn with social safety net or job-creation programs, says the Bank.

The crisis could push 53 million more people into poverty in 2009, based on a daily income under $2, and cause people to sell assets on which their livelihoods depend, withdraw their children from school, and suffer malnutrition, according to the Bank research.

Regional Snapshot

East Asia and Pacific

While East Asian countries entered the current crisis substantially better prepared than they were for the 1997 Asian financial crisis, they have experienced the sharpest trade losses, reflecting falling exports, price declines and currency depreciations, according to the G20 background paper(PDF).

China’s exports are down 25 percent from a year earlier, the government reported March 11. The Ministry of Labor estimates some 20 million people in China are out of work.

China has begun to implement a $586 billion stimulus plan. Several other countries in the region (notably Korea, Malaysia and Thailand) have proposed large fiscal stimulus packages for 2009 to compensate for the slowdown in export growth, according to the World Bank’s East Asia and Pacific Update.

Europe and Central Asia

Eastern Europe and Central Asia have been particularly hard hit by rapidly falling exports, foreign investment, remittances, and tightening credit, says the Bank’s G20 paper.

The World Bank Group joined forces with the European Investment Bank and European Bank for Reconstruction and Development to provide up to €24.5 billionto support the banking sectors in the region and to fund lending to businesses hit by the global economic crisis.

Countries in the region could be further affected if remittances decline as expected, according to World Bank research. Several countries depend heavily on money from workers abroad and two are among the top global recipients of remittances, based on percentage of GDP: Tajikistan (45 percent) and Moldova (38 percent).

Africa

Initially shielded from the financial crisis, some low-income countries in Sub-Saharan Africa have come under fiscal pressure from the effects of lower commodity prices, a major source of government revenue, according to the G20 background paper.

The steep drop in oil prices has impacted countries such as Congo, Equatorial Guinea, Gabon and Nigeria, where it generates more than half of all revenues. The drop in non-oil commodities has hit Cote d’Ivoire, Guinea, and several other countries, the paper says.

It says low-income countries in the region are heavily dependent on aid, but that even before the onset of the crisis, developed countries were falling short of pledges by about $39 billion a year.

Middle East and North Africa

Like Sub-Saharan Africa, the banking sector in the Middle East and North Africa was less exposed to the financial crisis because it was less integrated in the world economy, notes the G20 background paper.

However, the biggest concern is with the impact on the real economy and people.  Most MENA countries are already experiencing a marked decline in export growthas a result of the global economic downturn and lower oil prices.  Some oil exporters with large populations but limited foreign reserves are expected to experience a decline of over 20 percent of GDP in their current account balance and a much reduced fiscal space to meet social needs.  Countries that have grown to depend on jobs, remittances and FDI from Gulf countries, are already seeing signs of stress.  Non-oil exporting, diversified countries with strong links with Europe in trade and tourism are likely to feel the greatest economic impact through the depressed European demand for imports and tourism spending and constrained foreign direct investment from Europe. These vulnerabilities raise the need for well-designed and adequately funded fiscal stimulus programs in many of MENA counties.

South Asia

When the financial crisis hit, South Asia had barely recovered from the global food and fuel price crisis last year, during which current account and fiscal balances worsened sharply and inflation surged to unprecedented levels, according to World Bank analysis.

The region is now particularly vulnerable to falling remittances from migrant workers in the Gulf countries, the G20 background paper says.

It notes India registered its first ever year-over-year decline in exports (of 15 percent) following growth of 35 percent in the previous five months.

Latin America and the Caribbean

After five years of sustained growth (average of 5.3 percent per year), Latin America is feeling the impact of the global crisis mainly through the real economy. Slowing global growth, higher costs of international finance, weaker commodity prices, and falling remittances are hitting Latin Americain the wake of the global slowdown.

Industrial production is declining and GDP growth is slowing, according to the Office of the Chief Economist for World Bank’s Latin America and Caribbean region.

Brazil reported its first trade deficit in eight years in December, as exports plunged 29 percent, says the G20 background paper.

New Economic Realities Confronting Developing Countries

  • Non-energy commodities—the main source of income for many countries—plunged 38 percent in the second half of 2008 as demand dropped. Oil prices fell 69 percent between July and December.
  • Global trade is collapsing as rich countries import less from each other and from developing countries that are heavily dependent on advanced country markets for their exports.
  • Private capital flows to emerging markets and developing countries are disappearing. The Institute for International Finance estimates such flows declined to $467 billion in 2008, half of their 2007 level, and forecasts a further sharp drop to $165 billion in 2009.
  • Migrant workers are projected to send less money home this year, deepening poverty and inequality in many countries where remittances make up a large percentage of the GDP.
  • Official development assistance on which many low-income countries depend is uncertain as some donors signal a need to scale back their ODA budgets.

Api
Api