Davos, the global financial crisis and the world's poorest

MANY in the world's poorest countries had looked forward to this year's World Economic Forum (held every year in Davos, Switzerland) and had hoped that the world's political and financial leadership would be able to provide assurances that the worst of the international financial crisis had passed and that a new dawn was round the corner. It wasn't to be. Things turned out to be different. Instead of the usual celebration of the triumph of global capitalism there was an ambience of gloom and recriminations about the deepening global economic crisis.
Davos this year was replete with apocalyptic assessments. There was also agreement that the free market mechanism does not necessarily fix all problems.
While international bankers and hedge fund managers kept a low profile, the prime ministers of Russia and China blamed the US for the global crisis and called for radical reform of the world financial system. In a manner of speaking, this was a continuation of the war of worlds that had been initiated earlier between China and the US when the new US Treasury Secretary Tim Geithner criticized China for 'currency manipulation' that had led to the extremely high US trade deficits.
It was interesting to see Chinese Premier Wen Jiabao place the blame for the crisis this time squarely on the shoulders of the US authorities. In this context he cited 'inappropriate macro-economic policies of some economies and their unsustainable model of development' -- a clear swipe at the low savings and high consumption rate of the US economy. There was also reference to the failure of financial supervision and regulation. Wen also targeted the banks and blamed them for their 'blind pursuit of profit' and 'lack of self-discipline'. Putin was equally abrasive and pointed out that 'poor quality regulation' had led to the collapse of the existing financial system and the creation of the most difficult situation since the Great Depression.
It was also significant that the Russian Prime Minister raised the question of the world's dependence on the US Dollar. He pointed out that this was 'dangerous for the world economy' and had led to a serious malfunction in the system of global economic growth.
The level of response from the US was low-key given the fact that key US policymakers were busy passing the $819 billion economic stimulus package through Congress.
Developing countries, including the least developed ones, however watched the proceedings in Davos with great care. Most of them have been particularly badly affected by the global economic crisis, coupled with recent increases in fuel and food prices. Their interest was partially evoked from the anxiety that this on-going crisis could lead to cuts in Overseas Development Assistance (ODA) from richer countries, exacerbating the situation. They feel that efforts have to be undertaken to mitigate the impact of the downturn by strengthening international coordination to resist calls for a reduction in ODA.
The poorer countries have been particularly badly affected by the convergence of the three 'fs' crises -- finance, fuel and food. They believe that this might result in cut -- backs in Official Development Assistance (ODA), making it more difficult for countries to meet the Millennium Development Goals (MDGs). This aspect has assumed greater concern because most ODA loans and grants normally have strings attached and part of these funds is "ploughed back to the source."
Discussion in Davos also reaffirmed that the economic crisis will most likely result in the juxtaposition of a sharp decline in poor countries' export earnings and fewer net inflows making the achievement of MDGs unlikely. It may be recalled here that with the exception of the Netherlands and Scandinavian countries, other OECD countries have failed to live up to their ODA commitments.
The current "financial tsunami" has had dire consequences. It has moved from the housing market to banking and then the financial sector and then onto the real economy. In the US alone, this had resulted in a Euro 9 trillion loss of wealth. World trade is also expected to contract for the first time since 1982, with negative growth in 2009.
In South Asia, economists expect that this will definitely lead to a slowdown, weakening industrial production and reducing growth from 6.3% to around 4.8% of GDP. It is also believed that this grim outlook for South Asia is likely to continue, with a deeper and more prolonged credit crunch, contraction in investment and export growth, a marked fall-off in FDI and weak domestic banking sector. In other words, this would constitute as a recession.
Remittances, however, a critical source of funding (in India they constitute 27% of GDP, in Bangladesh about 11% and in Nepal 18%) within the region, are not expected to be reduced significantly for the moment. Partially, because of this factor, despite this gloomy economic picture, the numbers of those living in absolute poverty in South Asia are likely to fall from 595.6 million in 2005 to 403.9 million in 2015 (a fall from 17% to 7% of the total population). Compared to this, in Sub-Saharan Africa, poverty is likely to increase from 356.4 million in 2005 to 388.4 million in 2015 (although as a percentage of the total population this will be a fall from 51% to 37%).
In the light of general concern about the effects of the economic crisis on the developing world, United Nations Secretary-General Ban Ki-moon has indicated in Davos that the UN could introduce a global stimulus package. Such a step will be particularly welcome because developing countries will be affected as FDI declines and becomes less risk-averse, more concentrated, selective and sheltered. The UN initiative will also be helpful because as international reserves erode through their use as stabilization funds, it will become that much more difficult to access international capital markets amid an environment of possible growing trade protectionism. Borrowing will also be more expensive, making it almost impossible for small entrepreneurs in the developing world to borrow money.
However, while aid to the poorest countries could increase through such a UN package, the focus in this context needs to be on the redynamising of the economy, supporting employment in SMEs and creating stability within foreign trade. The European Union could also respond to the crisis by strengthening bilateral partnerships and programming instruments and refocusing its external policies. The EU also needs to contribute to the reform of the international financial institutions, and be ready to increase resources to support lending to third countries. The EU could also help to mitigate the impact of the downturn on the world's poorest by strengthening international coordination to resist calls for a reduction in ODA.
In such an extraordinary situation one axiom needs to be accepted as universal -- the world will only work better when the world works together. It would therefore be worthwhile for the G-20 leaders to agree (when they meet next time in London later this year) that the way out lies in creating an appropriate nexus between monetary policy and a coordinated global regulatory framework. That is the key to getting the global economy back on track. British Prime Minister Brown has hinted this during his intervention in Davos. He needs to carry it through in London with the help of President Obama.
Muhammad Zamir is a former Secretary and Ambassador and can be reached at [email protected]