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Georg Stoll {*}

A little Help is not Enough

The Financial Crisis Exacerbates the Situation of Poor Countries


From: Herder Korrespondenz, 1/2010, P. 39-43
webmaster's own, not authorized translation


    The group of little or scarcely developed countries is particularly affected by the indirect consequences of the financial crisis. They exacerbate the already precarious living conditions and render some laboriously-achieved progress towards poverty reduction void. Many civil society actors are deeply disappointed in particular about the kind of international crisis management.


The problems already start with the terms. About what kind of crisis are we actually talking exactly? For television viewers and newspaper readers in the Western industrialized nations this is not an issue. It's about the crisis that began with the notorious subprime mortgages in the United States. It led to the collapse of banks like Lehman Brothers and induced governments to make available billions for the rescue of other banks. It helped this neighbour to get a new car through the scrapping premium, and cost the other neighbour his job. A crisis that has in the media superseded other crises, as e.g. energy price crisis, food price crisis and climate crisis, causes new piles of debts in the public budgets, and is now hopefully soon overcome through economic stimulus programs (see this issue, 16 ff, and HK, May 2009, 237 ff, and September 2008, 460 et seq.)

This crisis is largely unknown in most developing countries. Here no financial institutions had to be saved (felix culpa of the often scolded lack of integration into the global financial markets!). But here also no multi-billion economic stimulus programs were issued. And the food price crisis is anything but forgotten. The situation of the poor in developing countries has undoubtedly worsened in recent months, and is likely to deteriorate further. The relationship of this degradation of the living conditions to "our" financial and economic crisis is also clearly visible. But the awareness in the South differs significantly from that in the North. This clearly follows from the analysis presented in talks, publications and events by the partner organizations of the Episcopal Relief Organization Misereor. In the North by a majority the idea prevails of an acute disease similar to the pandemic swine flu, which is now apparently brought under control by correspondingly high medical costs, whereas in the South the awareness of the crisis corresponds rather to the metaphor of a malaria fever phase: a new acute aggravation of a chronic disease in the treatment of which hardly anyone seems really to be interested.


The Most Problematic Distinction Between Developing and Developed Countries

The difference is insofar important as it once again demonstrates the powerlessness in which many people in the South feel trapped. They feel like victims not only of the current crisis but already of the "normal" functioning of the globally dominant financial and economic system. In its logic jobs, food prices, and environmental pollution are only parameters in a calculation that is oriented towards reducing the business costs and maximizing profit. However, this version of the story is virtually falling on deaf ears: on the stage of the international crisis conferences (with the exception of the United Nations Conference in July 2009, which revealingly has hardly met with any response) as well as in global institutions like World Bank, International Monetary Fund or the many specialized agencies whose names were until now known only to specialists, and in the media.

Even though through the strengthening of the G20 group of countries a significant geopolitical readjustment towards the South happened. However, it is also here evident that the commonly-used terms rather obscure than throw light upon the problems. For at the latest by the political upgrading of the G20 as the new shadow cabinet in the wake of the global financial crisis, the fragility of the already problematic category of "developing countries" has become apparent. The term still equally covers both "emerging economies" like China, India, Brazil and South Africa and states as the 49 so-called Least Developed Countries. From this group, which globally constitutes at least one quarter of all countries, there is no country in the G20.



Thus, they are excluded both from the public debate about the interpretation of the global financial crisis and from the search for international solutions. However, even within these countries the picture is more differentiated than the traditional division into developed and developing countries suggests. In numerous "developing countries" e.g. a growing number of people see themselves as winners of globalization - while at the same time in the same countries the number of poor is stagnating at a high level or even rises again.


The High Dependence on Raw Material Exports Exacerbates the Situation

But this latter group of the poor is now particularly affected by the consequences of the financial crisis. For the simple reason that they are outside the endangered financial circuits, they were largely spared from the immediate consequences, such as the collapse of banks or the price drop at the stock markets. But the indirect effects have, with a time lag, reached them now. They exacerbate the already precarious living conditions and render again some hard-won progress on poverty reduction void.

The World Bank and the IMF warned e.g. in their Global Monitoring Report 2009 that most of the so-called Millennium Development Goals will probably not be achieved until 2015. The report expressly mentions the objectives of combating hunger, reducing child and maternal mortality, universal primary education and reversing the trend in the fight against HIV / AIDS, malaria and other diseases. Nutrition, health, education: The impact of the financial crisis worsens the already chronic violation of social human rights. The report, which was published in April 2009, furthermore assumes that in more than half of the "developing countries" the number of extremely poor people (with a daily maximal income of 1.25 U.S. dollars) will again increase.

For sub-Saharan Africa the estimate even is at 75 per cent. The number of people who are constantly hungry, says the report, will in 2009 exceed the billion mark. This apprehension has been confirmed in the meantime. In its latest World Food report for example, the FAO in October 2009 informed that the number of hungry people was globally at an all time high of 1.02 billion people. While the first Millennium Development Goal gives as guideline the (still incredibly high) number of 420 million people - to be reached until 2015.

There is meanwhile a broad consensus on the correlations between the financial crisis and the setbacks in poverty reduction. Especially in the industrialized countries and emergent economies, the bursting of the credit bubble has brought numerous operations financed on credit to a standstill and also impedes refinancing and new investments. This spread of the financial crisis to the real economy now shows in different ways effects also with the poor and poorest countries: dramatic falls in export revenues, the absence of remittances from migrant workers, rising unemployment as a result of plant closures and the decline in tourism, a significant decrease in direct investment from abroad.

The already tight public and private budgets are further strained. There are hardly any alternatives, and so the attempts to cope with the situation immediately have palpable impacts. One saves as regards quantity and quality of food. One goes on foot to work and school. Children stay away from school, and necessary medical measures are postponed or canceled. At the same time the national debt as well as the private debt significantly increases, and has in some cases reached again threatening proportions.

The relatively high rates of economic growth, which we in recent years have seen also with the majority of developing countries, are to a considerable extent owed to rising export earnings from raw materials; here both the quantities exported and the prices had, due to growing demand especially from emerging economies such as China, a clear upward trend. This heavy dependence on the export of raw materials now shows the disadvantages. After seven consecutive years with export growth the volume of exports from developing and emerging countries will decline from 2008 to 2009 by eight percent and its value even by 25 percent (IMF, World Economic Outlook, October 2009).

Those are averages, which in individual cases can even be somewhat higher. In Zambia, for example, which economically heavily depends on copper exports (about 70 percent of total exports), the revenues from trade with this metal have been halved. In Zambia as in many other developing countries the resulting trade deficit has generated devaluation pressure on the local currency, even against the weakened dollar, and has thus simultaneously - due to rising import costs - fueled inflation; this in turn causes the rise of interests on credits and makes the debt service more expensive.

According to calculations of the Jesuit Centre for Theological Reflection in Lusaka, the living costs for an average family of six have risen by 18 per cent within a year. In Zambia this is approximately equivalent to the actual expenditures for one year secondary school education. The monthly living costs equivalent to 483 U.S. dollars (November 2009) can today no longer be covered by e.g. a normal teacher's salary of maximal U.S. $ 350.



The world market prices for food continue to be a major problem. According to UNCTAD they admittedly declined by an average of 12 per cent during the year 2008, but they were thus still 39 per cent higher than last year (and by 130 per cent above the 2002 prices).


A Significant Part of Jobs will be Lost Permanently

The situation becomes dramatic, if not only the expenditures rise but at the same time the family income collapses through unemployment. In Zambia several thousand miners have already been made redundant in the past year. Formerly, the state mines in these cases constituted a sort of social safety net, whereas the mines, which are meanwhile almost all in foreign ownership after the privatization enforced by the World Bank and IMF in recent years, respond immediately to cyclical changes and dismiss their workers. There are no expensive short-time work programmes or unemployment benefits, in Zambia as well as in most other developing countries.

But even where social protection mechanisms exist, they already miss to a large extent those who earn their money in the informal sector. The large informal sector in developing countries means that accurate data on unemployment are not known. Since the jobs are often particularly vulnerable here, estimations based on previous empirically established figures assume that for every lost job in the formal sector several are lost in the informal sector.

But not only the loss of jobs causes worries. At the same time the number of those is rising who admittedly work but whose income is not enough for a living. According to the Society for Community Organization, a Misereor project partner, in Hong Kong, for example, their number increased to 500.000 people. Besides, the phenomenon is meanwhile no longer limited to youth and women workers but has also reached the group of well-educated male employees and workers. Furthermore, the view into the future is not much cause for hope. National observers as well as the International Labor Organization estimate that in the labour market the worst is yet to come. And they fear that, as in the past, with the starting boom a significant proportion of jobs will nevertheless be lost for ever, and the permanent high number of job seekers will press the wage levels down.

A special form of unemployment affects those countries where many families depend on the income that individual family members earn as migrant workers abroad.



Worldwide, in recent years these workers' remittances significantly increased, and with 338 billion U.S. dollars they have in 2008 reached three times the global development aid. In some countries, as e.g. Honduras or Nepal, they now account for 20 per cent or more of the gross domestic product.

This income was in the past an important buffer in times of crisis, whereas now in the global crisis it behaves pro-cyclically and aggravates the situation for the population in the countries affected. The World Bank therefore foresees a decrease by a good six percent from 2008 to 2009. This applies only to the officially ascertainable figures. Since many migrant workers pursue an occupation without legal residence status, their work and remittances are as little recorded statistically as the loss of their jobs.

When in the U.S. labour migrants from Central America or in the Gulf states building workers from South Asia are now dismissed, this is a double burden for their home countries: On the one hand urgently needed income is lacking, and at the same time the returnees must be additionally fed. Thus, as a project partner of Misereor reported, in Nepal the pressure on small-scale farming has in this way increased enormously. The government admittedly intends to respond to this situation by setting up a starting aid program for small businessmen. But also the government does not know how many of the former construction workers in the current difficult circumstances will be able to earn their living as successful small businessmen and to repay their loans. In Mexico, from where many people have illegally sought and found work in the U.S., in the meantime even reverse financial flows are observed. Families in Mexico try to support their unemployed relatives in the United States so that they do not have to come back. For a subsequent re-entry would hardly be possible, due to stricter border control.

In this situation many households see their only recourse in taking up loans. A network of Cambodian NGOs has recently conducted a survey of more than 1000 households in rural areas and collected terrifying figures. 71 per cent of households are currently indebted; here in turn 70 per cent of those debts had been incurred in the first half of 2009. Almost half of the debts had to be contracted in order to buy food. Other reasons were health care costs, redemption of old debts, and investment in agricultural production. Apart from the last point, it is about consumer credits born of necessity, the repayment of which will for a long time mean difficulties for those affected. This is also noticeable in the case of the much-praised micro-credits. More than half of the 400 microfinance institutions interviewed in March 2009 indicated that their clients, due to high food prices as well as to income and job losses, have repayment difficulties.

As far as the public finances are concerned, the situation is no better. Because of economic growth and the partial cancellation of debts in recent years the issue of indebtedness of developing countries had disappeared from the political agenda. Now it comes back. The last interim report from the World Bank on the implementation of the HIPC debt relief (HIPC: heavily indebted poor countries) sees already the serious risk of renewed indebtedness for nearly half of the countries that are in the debt relief process. Based on detailed analysis, the debt relief alliance "" reaches in its debt report 2009 an even more pessimistic assessment. According to it seven countries are acutely threatened by insolvency; another six face the high risk of becoming at short notice insolvent. All these countries are in Africa.


The Industrialized Countries' Response to the Crisis might Worsen the Situation of Developing Countries

From this perspective, it is worrying when in the international response to the crisis the measures, which anyway are extremely modest in comparison to the rescue-packages for banks and economy, for low-income developing countries primarily focus on loans. The motto of World Bank and IMF, according to which the HIPC debt relief program is a one-off measure, becomes a whistling in the dark when now the two institutions, even with the order and blessing of the G20, make their procurement directives "more flexible" by giving large loans, the repayment of which seems already questionable when they are awarded.

But the industrialized countries are not prepared to give adequate financial aid, as it could quickly and against a number of concerns be mobilized for the local economic stimulus programs worth billions. The development aid expenditures (ODA: Official Development Assistance) admittedly increased in recent years, mainly due to the debt cancellations. But they are still considerably lower than the voluntary commitments oriented towards the implementation of the Millennium Development Goals. Moreover, just against the background of the financial and economic crisis clear signs are noticeable that now money is to be saved in the development budgets. Ireland has announced as the first EU country significant cuts in development aid.

In Germany, the new Federal Minister of Development Dirk Niebel has publicly called into question the intermediate target of 0.51 per cent ODA share of GDP, which is made mandatory in the EU's graduated scheme. Almost simultaneously, in the run-up to the Copenhagen Climate Change Negotiations the government parties have instructed the federal government to ensure that potential climate payments are considered as ODA to developing countries, without accordingly increasing the end goal of 0.7 per cent ODA.



The director of the Third World Network, Martin Khor fears e.g. that the industrialized countries' response to the crisis may even further worsen the initial situation of the developing countries. The subsidies and protectionist clauses, with the help of which the developed countries are currently strengthening their local economy, cause international competitive disadvantages for the corresponding sectors in developing countries. It would be an irony, said Khor, if in the wake of the financial crisis supported banks or other companies in developing countries take away market shares from their local competitors or straight away take them over entirely.

Many civil society actors in the South see their analysis confirmed through the kind of international crisis management. In their view, its overcoming follows the same pattern as in previous crises, and it has similar effects. There is an increasing influence of the politically and economically strong or, as in the case of emerging countries, increasingly powerful countries and of the institutions dominated by them, as e.g. G20, OECD, World Bank, IMF and WTO. The income gap continues to grow. Against one's better knowledge, urgent global problems such as food security, energy supply and climate change are be postponed for a long time in order to externalize costs as long as possible and to maximize profits. The fundamental discrepancy remains: there are on the one hand financial markets the actions of which are increasingly short-termed and intransparent and a policy that is equally short-winded and additionally limited to national interests, and on the other hand there is needed a global management of the common resources that is oriented toward justice and sustainability.

"Capitalism is organized crime", this statement of a participant in a NGO workshop on the financial and economic crisis in South Africa may be a singular pointed remark. But it reflects the noticeable impatience regarding the solution of persistent structural problems that repeatedly emerged in the crises of recent years.

The demands of civil society organizations in the South go therefore often beyond the target-orientated immediate aid for particularly affected poor population groups. Here the agenda is not new - who may be surprised by it? It's about juster international trade relations - e.g. by reducing subsidies, about a lasting solution of the problem of debt, about securing human rights in view of liberalized markets, about effective rules in the fight against public poverty and ruthless public private enrichment, about more transparency and democratic legitimacy of national and international political decision-making.

It's about "a new and deeper reflection on the meaning of economy and its goals," as it was demanded by John Paul II at the World Day of Peace in 2000. One billion hungry people in 2010 remind us of it. But we do not yet know how crisis and critique behave to each other: whether one seeks to overcome the crisis by admitting such fundamental questions or by warding off them.


    {*} The graduated theologian Georg Stoll (born in 1960) has been working since 1998 with Misereor in the department development policy as an expert on issues of development funding and civil society participation. His main topics are, inter alia, debt relief, good governance and tax equity.


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