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Financial turmoil could threaten poverty reduction gains

David Dollar's picture

During the annual meetings of the World Bank and IMF, World Bank President Robert Zoellick made a plea to the leaders of the world’s richest countries not to forget developing nations, even as they hammer out ideas to steady their own economies. Watch his speech
I spent the last week in Washington, DC, at the annual meetings of the World Bank and the IMF. There were several things on my mind as I left Beijing ten days ago. I was looking forward to a seminar of Asian policy makers focusing on the food inflation crisis and its impact on the poor. And I was going to speak on a panel on climate change, how poor countries can adapt and what to do to mitigate greenhouse gas emissions.

The financial crisis, however, hijacked the meetings. The panel on food prices was canceled at the last minute and it was hard to get anyone to focus on long-term issues such as climate change. And attention was definitely drawn away from poor countries and poor people to focus on the wild ride in the U.S. and other advanced stock markets.

This financial crisis originated in the developed countries, especially the U.S. And it will have some serious effects on those countries, all of which will have to tighten their belts, increase savings, and re-regulate their financial systems. But the crisis will also have a big effect on the developing world and hence on the poor. They did not participate much in the binge that preceded the crisis, but they will share in the hangover. There is a real risk that major gains that have been made in the fight against poverty in the past 10 years will be lost.

It is hard to say for sure how the financial crisis will affect poor countries, but here is some speculation. Most developing countries will have little direct exposure to the failing financial institutions and toxic assets of the developed countries. The effects are more likely to be indirect. The sharp slowdown in global growth has already had a visible effect on commodity prices—oil, copper, other metals. The effect on any particular developing country is complex. Mongolia, for example, benefits from the drop in oil price (a big import), but appears set to lose even more from the drop in copper price (its big export). So, Mongolia will suddenly have a big challenge balancing both its fiscal account and its external trade. Many developing countries are net primary exporters, and some of them will be sharp losers in this global contraction. At the same time, the ability of developing countries—even well managed ones—to borrow internationally will decline as liquidity dries up and risks are re-priced.

The World Bank and other development banks can help with some of the needed financing, but it is unlikely that they can make up all the shortfall.

So, what's particularly unfair about the crisis is that some developing countries that have managed themselves well will now have to cut back their public spending and development plans because of financial problems that are not of their making.

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