Poorest hit hardest

2008-11-03 00:00

As the United States, Europe and rich countries throw billions in lifeboats to end the financial crisis, spare a thought for poorer developing nations, which without such means are facing absolute disaster.

For many developing countries already battling to contain food shortages and high fuel prices, the spill over from the financial crisis that started in rich nations will stunt growth and development for perhaps a generation. Yet, very few developing countries can effectively tackle the effects on their economies of the financial crisis because they lack the resources at the disposal of richer nations. But the financial crisis is likely to unleash waves of social instability that will dwarf the ones experienced in the recent food and fuel crises that battered many developing countries.

For one, because rich nations will invariably have to plug the holes that the multi-billion dollar rescue packages have left in their treasuries, money that would have gone to development and aid commitments to poorer countries will now plummet. Such flows from rich to developing countries had already trickled more slowly even before the financial crisis. Furthermore, a credit freeze in Western countries, caused by the fall in confidence because of the crisis, means that money generally available to finance economic projects in developing countries will now dry up. If rich nations are starting to feel the pinch in the real economy as a result of the financial crisis (factory and company closures and job losses) imagine what will happen in the real economies of poorer developing countries.

It is now beyond doubt that a resolution to the financial crisis demands a global response. Yet, in international efforts so far, developing countries are again left out of the loop in finding solutions to the problem. Indeed, rich nations can mostly look after themselves, through the Group of Seven (G7). This financial crisis, started by rich nations will affect developing countries disproportionally worse.

One of the reasons for the financial crisis is that the financial, trade and political system that underpins the world economy is simply outdated. In fact this financial crisis offers the opportunity to overhaul the International Monetary Fund (IMF), the World Bank, the World Trade Organisation (WTO) and the United Nations (UN) systems to make them more relevant. It is instructive to note that Iceland, facing unprecedented bankruptcy because of the financial crisis, turned down help from the IMF, and even considered seeking support from Russia. The financial crisis has discredited the laissez faire, unregulated, unsupervised “free market” model of capitalism. International financial institutions such as the World Bank and the IMF have forced this model as a one-size-fits-all on vulnerable developing countries. Recipients of such advice are now the worst off.

Furthermore, many developing, especially African, countries, desperate for foreign investment, allowed Western banks unfettered control. These banks often bought up all local banks, while developing country governments abandoned even basic regulation and supervision. In the financial collapse, these banks cut their operations in developing countries first, leaving such countries in a mess.

If there is anything close to a silver lining for developing countries in this crisis, it is this: many developing countries for some time now have complained that they lacked the freedom to come up with economic policies appropriate to their own circumstances — a handicap not restricting richer nations. For example, before this crisis, if the few developing countries with the means to do so had used public money to bail out struggling banks as the U.S. and EU-country governments have, they would have faced a market backlash. After this financial crisis developing countries may now have more freedom to come up with their own economic policies.

The short-term solution to the financial crisis is a concerted global effort to restore confidence. This will mean correcting market failures, such as providing public support, as the U.S., UK and Europe have done. But there also has to be an international financial facility to step in and to prop up institutions which, if they failed, would plunge an economy into bankruptcy. This must be made available to developing countries without them having to give up their ability to set their own economic policies, as has been the case when they turned to the IMF and the World Bank for help.

In the long term, industrial and developing countries will have to come up with a collective strategy that will transform outdated global financial, trade and political architecture. Both industrial and developing countries will have to be involved in writing new rules, regulation and supervision regimes in individual countries, and also globally. From now on there will have to be better regulation and supervision regimes to improve the functioning of financial markets at national and global levels.

This financial crisis is more than that; it is a moral crisis. So far Western governments have bailed out banks, but not punished those responsible. Hard-working citizens who have lost much and will continue to lose out — pensions, homes and savings — have all been thrown under the proverbial bus. Individuals who caused this crisis did so simply out of greed. To allow those responsible for this crisis to get away with that greed (for example, still receiving huge executive payouts) while millions suffer from their irresponsible behaviour, is compounding the moral failure.

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