Global Response to the 2008 Crisis

This assignment analyzes the international community's efforts to address the 2008 global financial crisis. It highlights the role of the G20 in providing aid to developing countries, promoting inclusive growth, and reforming institutions like the World Bank. The text emphasizes the need for a fair global trading system through the Doha Development Round and achieving the Millennium Development Goals to ensure sustainable recovery and shared prosperity.

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Volume 1, Issue 1
January 2010
Pages 118–120
Practitioner Commentary
The Impact of the Economic Crisis on the World’s
Poorest Countries
Authors
 Douglas Alexander
1.
 First published: 27 January 2010Full publication history
 DOI: 10.1111/j.1758-5899.2009.00018.x View/save citation
 Cited by (CrossRef): 4 articlesCheck for updates
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When G20 leaders gathered in London in April 2009, they
confronted the greatest challenge to the world economy since
the Great Depression, as global output was falling, trade
flows drying up and jobs disappearing around the world. Yet
whereas the failure of world leaders to act together in the
1930s led to terrible consequences, the decisive action taken
by the G20 in London – in the shape of the largest global
fiscal stimulus ever – prevented the precipitous decline of the
global economy into depression (G20, 2009a).

Today, while the recovery is not assured, the banking system
has been stabilised, industrial output is rising again across
major and emerging economies, international trade is starting
to recover and confidence has improved.
With the process of recovery far from complete and 61
million people unemployed as a result of this crisis (ILO,
2009), we must continue to guard against complacency.
Sustained assistance will be vital not only for the G20
economies, but also for the more than 160 countries that lie
outside that grouping – particularly the low-income countries
that are home to the ‘bottom billion’ (Collier, 2007). Far
from being insulated from the financial crisis, as many
observers had thought, people in these countries are finding
their livelihoods – even their lives – under threat.
In this article I examine the impact of the global economic
crisis on these low-income countries, outline the impact of
the immediate response package agreed by the G20 and
suggest three priorities for collaborative global action this
year in order to ensure that low-income countries are part of
the recovery: reforming the World Bank; completing the
Doha Round; and committing to a partnership for
development in order to meet the Millennium Development
Goals (MDGs) by 2015.
Impact of the Downturn on
Developing Countries
The impact of the downturn has varied widely across
developing countries. While the larger emerging economies

of China and India still managed enviable growth rates of
above 5 per cent, the average of low-income countries saw
the growth of incomes per head fall nearly to zero, and in
sub-Saharan Africa average real per capita GDP is
contracting for the first time in a decade (IMF, 2009a).
While the low-income countries were not as affected as the
developed world by the first wave of the financial crisis, the
resulting impact on market confidence saw the transmission
of the crisis through falling trade, investment and
remittances. The flight from risk has seen a rapid decline in
net capital flows to developing countries – expected to fall
from $1.2 trillion in 2007 to $363 billion in 2009 (World
Bank, 2009). The Investment Finance Corporation estimates
that 450 investment commitments in African infrastructure
projects were cancelled in 2008 alone (IFC, 2008).
Alongside this capital flight, world trade volumes are
expected to have fallen by perhaps as much as 12 per cent in
2009 compared with the previous year (IMF, 2009a). The
collapse of trade has particularly hit Southeast Asia, where
recent impressive growth rates have largely been export led.
In Vietnam, where the value of exports is equivalent to 77
per cent of GDP, the government estimates that as many as
400,000 people – most of them from the textiles and
garments industries – will have lost their jobs throughout the
course of 2009 (DFID, 2009).
Yet the impact of falling trade has also reached Africa.
Twelve African countries receive over 75 per cent of their
export earnings from nonfuel commodities. Year on year, the
International Monetary Fund’s (IMF’s) index of nonfuel

commodity prices has fallen by 23 per cent from 2008 to
2009 – with real impact on employment prospects across
Africa.
The global recession has hit an important form of income for
the poorest families – remittances. Globally worth over $300
billion a year, remittances are significantly larger than global
aid flows. Because 80 per cent of remittances to developing
countries come from high-income countries, this source of
income is vulnerable to economic crises – and indeed is
expected to have fallen by between $25 billion and $66
billion over 2009 (Cali and Dell’Erba, 2009).
This collapse in economic activity – from investment to trade
and remittances – has turned the financial crisis into a social
crisis. For the poorest people in the least developed
countries, this comes shortly after the rise in food prices in
2008 that is estimated to have pushed between 130 and 155
million people into poverty (World Bank, 2008). The
United Nations has estimated that the worldwide recession
has pushed 100 million more people below the poverty line
(UN, 2009). That could set back progress towards meeting
the first of the Millennium Development Goals – to halve
extreme poverty – by up to three years (Alexander, 2008).
This collapse in economic activity – from investment to trade
and remittances – has turned the financial crisis into a social
crisis.
Many more families are now being faced with the toughest
decisions of extreme poverty: pulling children out of school
to help provide for the family; forgoing medicines; and even
choosing which of their children to feed. Indeed lives are

threatened – infant mortality rates are set to rise by an
additional 200,000 to 400,000 deaths each year from now to
2015 if the crisis continues (UN, 2009).
There is, among these worrying predictions, some more
positive news. A recent report from the IMF suggests that
most economies across sub-Saharan Africa appear to be
responding to this global downturn better than to those of the
past (IMF, 2009b). Better management of African
economies resulting in lower inflation, lower fiscal deficits
and debt levels at the outset of the crisis has given policy
makers more room for manoeuvre.
But while many African countries have greatly improved
their prospects through better economic management, those
prospects will still also depend on the actions of policy
makes outside the region. Low-income countries and fragile
states will remain dependent on external assistance and
private financial inflows, including remittances; these are
themselves dependent on the progress the global economy
makes towards sustained recovery. A major concern remains
that further delay in improvements in public services will
prevent attainment of the MDGs and have long-lasting
effects on poverty for this generation and the next (IMF,
2009b).
But while many African countries have greatly improved
their prospects through better economic management, those
prospects will still also depend on the actions of policy
makers outside the region.

The Global Response: From Crisis
Response to Rebuilding
In response to the worsening crisis, Prime Minister Gordon
Brown urged G20 leaders gathering in London at the
beginning of April to ensure that this is the first recession in
history where the needs of the world’s poorest people are
consciously addressed. The G20 agreed to provide $50
billion to help poor countries to weather the storm, along
with a new global vulnerability alert system to provide real-
time information on the impact of the crisis on poor countries
and a rapid social response fund to help protect the most
marginal and the most vulnerable.
By the time of the Pittsburgh Summit, the poorest countries
had received over $3 billion in concessional loans from the
IMF, in addition to $20 billion in Special Drawing Rights,
with further indications that the IMF would lend over $8
billion instead of $2 billion over the next two years – with
such predictable financing already helping countries such as
Kenya and Tanzania to protect critical development
spending.
Yet as the G20 recognised at Pittsburgh, the challenge
beyond providing an effective emergency response package
is to make real the London Summit’s declarations that
‘prosperity is indivisible’ and that ‘growth, to be sustained,
has to be shared’– and to take further steps to integrate the
world’s poorest people into the global economy, and give the

world’s poorest countries a greater voice in international
economic bodies (G20, 2009b).
Completing the Doha trade round still provides the best
opportunity to create a more open and fair global trading
system.
International leaders can make progress in this ambition
through three critical areas during 2010: reforming the World
Bank; delivering on the promise of the Doha Development
Round of trade talks and agreeing a strategy for meeting the
Millennium Development Goals. Completing the Doha trade
round still provides the best opportunity to create a more
open and fair global trading system.
At the World Bank’s spring meetings in April, the Governors
of the Bank should agree reforms to make it more legitimate,
more effective and more responsive to crises. That means
establishing a new voting system that gives developing
countries more say, providing the right structures and
resources to help developing countries deal with the
challenges of today and tomorrow and making the Bank
more accountable to its shareholders. All of these reforms
should ensure that the Bank is fit to carry out its role as the
guardian of the poor.
This in turn would provide a massive boost to the global
economy, including low-income countries. Of course this is a
deal that has eluded the world for too long. I remember
distinctly the feeling of missed opportunity during the trade
talks in Geneva in 2008, as we came so close to making a
deal, but failed at the last. Yet the level of political

engagement I saw at the London Summit in April gives
reason for hope. The G20’s commitment, outlined in
Pittsburgh, to bring the round to a successful conclusion in
2010 offers us a new window – not of opportunity, but of
necessity for the poorest countries.
This must also be the year in which the world agrees a
strategy for accelerating progress towards the MDGs – a
critical element in building a responsible and inclusive global
economy. Agreed ten years ago, the deadline for meeting the
goals is 2015 – yet many of them will not be met for
100 years on present trends (Brown, 2009). A sustainable
recovery of the global economy will never be realised if we
leave one-fifth of the global population behind.
If the economic crisis has underlined the interdependence of
the 21st century, the response to it has shown that by
working together and eschewing zero-sum politics, countries
can yield benefits far beyond those possible through simply
acting alone. It is in all of our interests that we now grasp the
opportunity to bring about real and lasting change.