The Economic Crisis

The financial crisis has led governments in developed countries to focus more inwards and spend trillions of dollars in domestic rescue packages. Businesses are playing safe, holding back investments or having to lay off workers. As people in richer countries are losing their jobs or fear to do so, they consume and travel less. When they do consume or travel, they are urged to buy locally-produced products or travel domestically, to support the economy. Also, as the governments in industrialized countries focus on tackling their problems, the consequences are felt throughout the developing world.

Demand for developing countries' products is decreasing

This slower more domestically-oriented economy leads to a decreased demand for products from developing countries and fewer investments in emerging markets. For example, in Brazil several automakers are either placing factory workers on paid leave or cutting jobs in the face of an economic slowdown and credit crunch that have hit the auto industry especially hard.

In countries where the garment industry is an important employer and tax provider for the government, like in Cambodia and Pakistan, the shrinking demand for clothes leads to massive unemployment. This especially affects poorer women who are responsible for whole families. In Cambodia alone, almost every tenth employee has lost his or her job.

As demand for garments decrease, the cotton industry will be next in line to feel the slowing trade. This will affect countries such as Benin, where cotton is the sole export crop, leading to even more unemployment.

Export

International trade is contracting rapidly and is expected to decelerate further in 2009. For example, in Viet Nam, exports in January 2009 were 24 percent lower compared to the same period in 2008.

Developing countries with undiversified economies - dependent on the exports of only one or two commodities such as coffee, cotton or minerals - will be particularly hard hit as prices on these products decline due to decreased demand. Mongolia, for example, is dependent on its export of copper. When the price of copper fell up to 70 percent, the Mongolian budget balance went from a surplus to a deficit equivalent of five percent of its Gross Domestic Product.

Decline in investments

The majority of countries reported actual or expected declines in both foreign and domestic investment due to deterioration in access to credit or capital markets. Among the industries most immediately affected are residential and hotel construction, such as in Cambodia, Grenada, Egypt, Jordan, Morocco, and Thailand. In Romania, foreign direct investment is expected to nearly halve from € 9 billion in 2008 to € 4-5 billion. Other industries reported to be affected are mining, as less funding is available to raise capital, as for example in Liberia.

Domestic investment is also experiencing a decline. In Romania, industrial production plunged by 9.4 percent in November 2008 and almost 9,000 companies went bankrupt that same year. In Turkey, the automotive industry is experiencing a major decline and layoff of staff. In Morocco, plans for building a large factory by Nissan have recently been abandoned, while in Samoa, a supplier for Toyota and the single largest employer, was forced to lay off a third of its workers and reduce the length of the work week.

Less tourism leads to fewer business opportunities

As people in developed countries hold on to their wallets and travel less, important business opportunities in tourism-dependent countries decrease. In Belize, the tourism sector is the largest employer and 14 percent of the people who work in the industry have lost their jobs. In Egypt, where tourism is one of the most important economic sectors, tourism revenues declined by 7.8 percent in the fourth quarter of 2008, compared to a growth of 38.3 percent in the same period in 2007.

Migrant workers have less money to send home

At the same time, migrant workers in developed countries are also losing their jobs and have less money to send home to their families in developing countries. Remittances are four times the size of international development assistance. They are expected to shrink significantly in 2009 and consequently will directly affect these families’ social welfare. Many migrants will also have to return home, which can increase the risk for social unrest as the competition for work tightens. For example, 14 percent of Romanian migrants have returned home from Italy, Spain and the United Kingdom. In Kenya, remittances declined by 13.3 percent in the fourth quarter of 2008 compared with the same period in 2007.

Decreasing business affects state safety nets

Large, as well as small, employers all over the world have to lay off workers to cope with falling demand. As companies shrink so do state revenues making it harder for developing countries to invest in social safety nets or even food, education, and access to medicines.

Mixed impact on the financial and banking system

Unlike trade, investment and remittances, the impact of the economic crisis on the financial and banking sectors in the world’s poorest countries has not been significant. Nevertheless, countries with higher levels of income and/or those with financial systems more integrated into the global financial system have felt considerable repercussions on their capital markets and banking systems. For instance, Central and Eastern European countries have been affected due to high levels of foreign currency borrowing. In Morocco, the crisis has primarily affected banks with majority foreign ownership, which control 30 percent of the Moroccan banking system capital.

The global economic crisis could reverse hard fought progress towards the Millennium Development Goals

Governments are responding

Governments around the world are giving high priority to monitoring and responding to the financial and economic crisis. They are churning out action plans and budget plans. In a number of countries, action is still only at the level of discussion and debate. In other cases, governments have been very proactive. In Mauritius, the Government and the private sector established a social contract to protect employment and incomes.

Special priority is being given to agriculture, to ensure food security and to support livelihoods. In Liberia, which imports 70 percent of its food needs, the Government removed tariffs on rice imports. Kenya’s Government tabled a proposal to the Parliament, which includes provision of fertilizers to small farmers.

Several developing country governments seek to provide short-term economic stimuli to revive demand. China announced a US$587 billion stimulus package, the largest package among developing countries. Turkey has recently extended an incentive program, which covers 49 provinces, to 2009. Egypt is launching an implementation of public-private partnership projects worth 15 billion Egyptian pounds, to build schools, hospitals, and water and sewage facilities.

UNDP is acting

UNDP is drawing on its global network of experts to advise on, analyze, design, and implement responses which aim to protect the most vulnerable taking into account the particular situation in that country. UNDP is working with developing country partners to ensure urgent needs are met, in particular: the design of social protection programmes and safety nets, as is happening in Cambodia; job creation through investment in labour-intensive infrastructure, as in Ukraine and Romania; increasing the income and productivity of small farmers, as in Mali and Malawi; better monitoring of the human development impacts of crisis, as in Ethiopia and Moldova; and ensuring the continued financing of essential public services like education and health. In Russia, UNDP is advising on how to deal with massive layoffs, especially in one-factory towns.