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GMR 2009: Factsheet: Global Financial Crisis and Impact on Developing Countries

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Key point: Chapter 1 (741 KB) | Full Report (9 MB)  

  • The deepening global recession, rising unemployment, and volatile commodity prices in 2008 and 2009 are seriously affecting progress toward poverty reduction. The recent food crisis has thrown millions into extreme poverty. Deteriorating growth prospects in developing countries will further slow the pace of poverty reduction.
  • Recovery prospects depend on effective policies that restore confidence in the financial system and counter falling global demand. While the responsibility for restoring global growth lies largely with rich countries, emerging and developing countries have a key role to play in improving the growth outlook, maintaining macroeconomic stability, and strengthening the international financial system.

Severest crisis since the Great Depression

  • The world faces the severest credit crunch and recession since the Great Depression. In the second half of 2008, the world economy came to a halt. On an annualized basis, global GDP growth1 slowed to 2 percent after averaging 5 percent over 2003-07.
  • World trade flows collapsed in the last quarter of 2008, with global exports projected to decline in 2009 for the first time since 1982.
  • GDP in rich countries is projected to contract by 3.8 percent in 2009, as against 0.9 percent growth in 2008. Growth in developing countries is projected to slow to 1.6 percent in 2009, compared with 6.1 percent growth in 2008.

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The crisis is hitting developing countries hard
  • Though it began in rich countries, the crisis is hitting developing countries hard through trade and financial market channels.
  • While transmission channels may differ, both emerging market and low-income countries will be severely affected.
    • With contracting world trade, slowing domestic demand and sharply reduced access to external financing, emerging market growth is expected to decline sharply to 1.5 percent in 2009, from 6.1 percent in 2008. This is the weakest growth rate since the 1990s.
    • In general, low-income countries have been less affected by the financial contagion, but slowing exports and falling prices for commodity exporters will increasingly affect growth prospects in 2009. Growth in Sub-Saharan Africa, for instance, will drop to 1.7 percent from 5.5 percent in 2008.
  • Overall, fiscal positions in emerging and developing economies are weakening because of slowing domestic revenues, increased spending on social programs in response to the crisis, and deteriorating terms of trade for commodity exporters.
  • While some recovery of access to finance for sovereign borrowers has become visible since early 2009, funding conditions for the corporate sectors of developing countries remain extremely difficult.
  • Net private capital flows to emerging market economies fell from 7.3 percent of GDP in 2007 to 4.9 percent in 2008, and are projected to turn negative in 2009.
  • Remittances to developing countries slowed down in the third quarter of 2008. These flows are projected to fall between 5 percent and 8 percent in 2009.
  • Total foreign exchange receipts by poor countries will drop sharply in 2009, resulting in an additional financing need of at least $25 billion.

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The pace of poverty reduction has slowed
  • As a result of the food and financial crises, the pace of poverty reduction has slowed. Poverty will decline in 2009, but the World Bank estimates that about 55 million more people will live on less than $1.25 a day (in 2005 purchasing power parity terms) in developing countries this year than expected pre-crisis.
  • MDG1 for poverty reduction remains achievable at the global level, but the crisis adds new risks. Low-income countries overall are likely to fall short of the target.

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Official aid must be increased to help countries cope with the crisis

  • The world must act decisively to support low-income countries that cannot respond to the effects of the crisis without burdening their poorest people. This underscores the urgency of increasing official development aid.

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Economic policy responses should be adapted to country circumstances

  • Macroeconomic policies to address the confidence crisis in financial markets and stop its fallout in the real economy should be adapted to country circumstances.
    • Countries with strong fundamentals may have room for monetary and fiscal stimulus. Several emerging markets have taken steps this year to stimulate economic activity through expansionary monetary and fiscal policy, and further stimulus may be needed in 2010.
    • Countries in weaker macroeconomic position—facing unsustainable fiscal and current account deficits, less access to external financing, and large external debt—will have less room for maneuver. They may have no choice but to prioritize improving their fiscal and external accounts, while seeking to mitigate negative effects on domestic growth prospects.
  • Policymakers should not lose sight of long-term priorities. Unsustainable subsidies should be phased out and social protection schemes fine-tuned. Well-targeted, flexible measures like direct income support (including conditional cash transfers such as Mexico’s Progresa/Oportunidades and Brazil’s Bolsa Escola) and workfare programs (such as those used to help respond to or prevent famines in Sub-Saharan Africa) help poor people while limiting government spending.

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Comprehensive action needed to resolve problems in banking system

  • Advanced, emerging and developing countries should take comprehensive action to resolve liquidity and solvency problems in the banking system.
  • The financial crisis has exposed numerous shortcomings in countries’ supervisory frameworks. While many of the lessons of the crisis focus on more mature markets, most are also relevant for emerging and developing economies.
  • Policies aimed at strengthening the financial system should be tailored along four dimensions to include those that:
    • seek to strengthen individual institutions
    • solidify the contingency planning and crisis management framework
    • mitigate risks from cross-border exposures and spillover effects
    • adopt a broader macroeconomic orientation for financial surveillance
  • The IMF-World Bank Financial Sector Assessment Program (FSAP) has helped shape policy advice on prudential supervision and market regulation during the financial crisis. Such assessments carefully consider the complementarities and trade-offs between financial stability and development. Since 2007, 21 assessments (mostly updates) have taken place.
    These are available at: http://www.imf.org/external/np/fsap

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