Effects of global financial crisis on poor countries

The world is presently in the throes of the most severe recession since the Great Depression of the 1930s.
African Development Bank president, Donat Kaberuka ponders the new challenge.
African Development Bank president, Donat Kaberuka ponders the new challenge.

The world is presently in the throes of the most severe recession since the Great Depression of the 1930s.

Although it began in the American sub-prime mortgage market and was further exacerbated by poorly-regulated financiers across the developed world, the effects of the downturn will be felt globally. Africa, sadly, will not be exempt.

In fact, it is the poorest countries of the world which will be hardest hit.

As the recession in the West deepens and endures, the real impact of the financial crisis will be felt by countries in the developing world.

A fall in crucial investment, a decline in demand for exports and plummeting commodity prices will mean that growth in some of the poorest countries in the world will be severely stunted.

“The Rwandan government expects GDP growth in the country to drop to 6.1 percent in 2010 from a peak of 11.2 percent in 2008,” says James Musoni, the Minister of Finance while discussing the national budget recently.

The implications of such a dramatic slow-down will be great, particularly in a country where in recent years so much progress has been made towards development.

But firstly, it is important to understand how the financial crisis, which started so many miles away in the United States, could affect Rwanda and its African neighbours.

For the answer, we have to go back to the very beginning of the crisis. After having given out loans recklessly, without thought for the normal checks and balances, commercial banks were unsure of how much money they actually had in their coffers.

When panic set in, they began to desperately hoard what little they had – credit simply dried up. As a result, direct foreign investment - which is often a driving force behind growth in developing countries - has fallen sharply.

Secondly, the financial crisis has affected global demand. In a recession, consumption of normal and luxury goods drops, as consumer’s perception of their own wealth and their confidence in the market fall.

This affects prices for commodities such as oil and food worldwide. The World Bank has forecast that in 2009 tea prices will fall by 13 percent and coffee prices by 15 percent. In cash terms, these are the two major agricultural exports out of Rwanda.

Moreover, governments in the West are exacerbating the issue by promoting protectionist policies, such as the ‘buy American’ provision in the US stimulus package.

By acting in the interests of their own countries, Western policy-makers are causing serious damage to the economies of developing countries such as Rwanda.

In total, the ‘Global Monitoring Report’ by UNESCO estimates that; “the cost to sub-Saharan Africa of the fall in exports, commodity prices and investment caused by the financial crisis could be up to US18 billion- or in other words, US46 per person – a huge figure”.

Furthermore, it places Rwanda on the list of countries ‘most at-risk’ from the effects of the financial crisis.

Worse still for developing economies is the fact that aid from developed countries will also be reduced by the crisis.

The EU’s guidelines on aid are expressed as a percentage of GDP, so as GDP contracts quarter by quarter, the amount of money given as aid to developing countries shrinks. The UNESCO report reckons that this will mean a drop in aid of no less than US4.6 billion by 2010.

Considering how many countries across Africa and the world rely on foreign aid for essentials such as food and health provision, these statistics make grim reading.

However, for Rwanda, the story is not all bad. According to the IMF, emerging and developing countries on average will see GDP growth shrink to 2 percent in 2009; whereas forecasts for Rwanda are relatively high at 5.7 percent , rising to 6.1 percent  in 2010. So it would seem that the economy is well-placed to weather the storm.

But with this UNESCO report predicting that the 390 million poorest Africans will see a 20% fall in their income, there can be no denying the scale of this crisis.

Moreover, there is always the possibility that this could lead to social unrest or humanitarian crises across the continent.

The study raises the worrying prospect of an increase in child mortality of up to 400 000, due to malnutrition. It was a crisis created by some of the richest people in the world, in some of the richest countries in the world; and yet, it is the most innocent people of all who are now paying the highest price.

It was the greed and carelessness of those financiers that brought about the crisis, but although these people and their economies are now suffering as a result, it is ultimately the world’s poorest who will be worst hit.


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