Poor Nations Will Get Less Financing For Development

The poorer countries do get foreign aid from richer nations, but it cannot be expected that current levels of aid (low as they actually are) can be maintained as donor nations themselves go through financial crisis. As such the Millennium Development Goals to address many concerns such as halving poverty and hunger around the world, will be affected.

Almost an aside, the issue of tax havens is important for many poor countries. Tax havens result in capital moving out of poor countries into havens. An important source of revenue, domestic tax revenues account for just 13% of low income countries’ earnings, whereas it is 36% for the rich countries, as Inter Press Service notes.

A UN-sponsored conference slated for November 2008 to address this issue is unlikely to get much attention or be successful due to the recession fears and the financial crisis. But this capital flight is estimated to cost poor countries from $350 billion to $500 billion in lost revenue, outweighing foreign aid by almost a factor of 5.

This lost tax revenue is significant for poor countries. It could reduce, or eliminate the need for foreign aid (which many in rich countries do not like giving, anyway), could help poor countries pay off (legitimate) debts, and also help themselves become more independent from the influence of wealthy creditor nations.

Politically, it may be this latter point that prevents many rich countries doing more to help the poor, when monetarily it would be so easy to do so.

But public pressure has had an effect. Governments of the US, UK and others are slowly increasing pressure on tax havens, though with mixed results, and some tax havens are on the defensive, some trying to justify themselves.

Some havens, such as Jersey have been pressured into signing agreements that will increase their transparency. Whether it will work, or if it is just a token gesture is hard to say at this time, however.

Human Rights Conditions Made Worse By The Crisis

Human rights has long been a concern. Recent years have seen increasing acknowledgment that human rights and economic issues such as development go hand in hand.

Long before the global financial crisis took hold, human rights concerns were high the world over, as annual reports from Amnesty International and other human rights organizations repeatedly warned about.

The global financial crisis has led to an economic crisis which in turn has led to a human rights crisis, says Amnesty in their 2009 report.

They find that as millions more slide into poverty as a result of the current crisis, social unrest increases resulting in more protests. These protests are sometimes met with a lot of suppression. Other times, people are exploited further.

The World Bank agrees. According to the BBC, the World Bank has warned of a “human catastrophe” in the world’s poorest countries unless more is done to tackle the global economic crisis and fears massive social upheaval if more is not done to address the crisis.

Image: G20 Protests in the City.(© Amnesty International)

When the G20 held a summit in UK in April 2009, much was made by local media about the apparent use of excessive force by police against protesters, and even led to the death of a passer by mistaken as a protester (a small minority of whom were also violent). (George Monbiot also raises concerns about how campaigners andprotesters are being rebranding as “domestic extremists”.)

But as a news article accompanying the report from Amnesty summarizes, many nations have seen protests against economic decline and social conditions which have been met by violence, arrests and detentions without charge:

Across Africa, people demonstrated against desperate social and economic situations and sharp rises in living costs. … Some demonstrations turned violent; the authorities often repressed protests with excessive force.

Social tensions and economic disparities led to thousands of protests throughout China. In the Americas, social protest at economic conditions increased in Peru; in Chile there were demonstrations throughout 2008 on Indigenous People’s rights and rising living costs.

In the Middle East and North Africa, the economic and social insecurity was highlighted by strikes and protests in several countries, including Egypt. In Tunisia, strikes and protests were put down with force, causing two deaths, many injuries and more than 2,000 prosecutions of alleged organizers, some culminating in long prison sentences.

A Crisis Of Poverty For Much Of Humanity

In poorer countries, poverty is not always the fault of the individual alone, but a combination of personal, regional, national, and—importantly—international influences. There is little in the way of bail out for these people, many of whom are not to blame for their own predicament, unlike with the financial crisis.

There are some grand strategies to try and address global poverty, such as the UN Millennium Development Goals, but these are not only lofty ideals and under threat from the effects of the financial crisis (which would reduce funds available for the goals), but they only aim to halve poverty and other problems. While this of course is better than nothing it signifies that many leading nations have not had the political will to go further and aim for more ambitious targets, but are willing to find far more to save their own banks, for example.

A Crisis In Context

While much mainstream media attention is on the details of the financial crisis, and some of its causes, it also needs to be put into context (though not diminishing its severity).

Plummeting stock markets have wiped out 33% of the value of companies, $14.5 trillion. Taxpayers will be bailing out their banks and financial institutions with large amounts of money. US taxpayers alone will spend some $9.7 trillion in bailout packages and plans, according to Bloomberg. The UK and other European countries have also spent some $2 trillion on rescues and bailout packages. More is expected. Much more.

Such numbers, made quickly available, are enough to wipe many individual’s mortgages, or clear out third world debt many times over. Even the high military spending figures are dwarfed by the bailout plans to date.

Latin America And The Financial Crisis

Much of Latin America depends on trade with the United States (which absorbs half of Latin America’s exports, alone, for example). As such Latin America will also feel the effect of the US financial crisis and slower growth in Latin America is expected.

Due to its proximity to the US and its close relationship via the NAFTA and other agreements, Mexico is expected to have one of the lowest growth rates for the region next year at 1.9%, compared to a downgraded forecast of 3% for the rest of the region.

A number of countries in the region have come together in the form of the Latin American Pacific Arc and are hoping to improve trade and investment with Asia. Diversifying in this way might be good for the region and help provide some stability against future crises. For the moment, the integration is going ahead, despite concerns about the financial crisis.

However, the problems of a regional blocs, Mercosur (the Southern Common Market), shows that not all is well. While Mercosur is its relevance being questioned, an IPSoverview of its recent challenges also highlights that a number of South American countries are raising trade barriers against their neighbors as the crisis starts to bite more. Rather than regional integration and a unified position to present to the rest of the world, concerns of fragmentation are increasing. This also affects Brazil, as the regional economic superpower; more bickering within its sphere means distraction from the global scene.

Africa And The Financial Crisis

Perhaps ironically, Africa’s generally weak integration with the rest of the global economy may mean that many African countries will not be affected from the crisis, at least not initially, as suggested by Reuters in September 2008.

The wealthier ones who do have some exposure to the rest of the world, however, may face some problems.

In recent years, there has been more interest in Africa from Asian countries such as China. As the financial crisis is hitting the Western nations the hardest, Africa may yet enjoy increased trade for a while.

These earlier hopes for Africa, above, may be short lived, unfortunately. In May 2009, the International Monetary Fund (IMF) warned that Africa’s economic growth will plummet because of the world economic downturn, predicting growth in sub-Saharan Africa will slow to 1.5% in 2009, below the rate of population growth (revising downward a March 2009 prediction of 3.25% growth due to the the slump in commodity prices and the credit squeeze).

South Africa, Africa’s largest economy, has entered into recession for the first time since 1992, due to a sharp decline in the key manufacturing and mining sectors.

The IMF has promised more aid to the region, importantly with looser conditions, whichin the past have been very detrimental to Africa. Many will likely remain skeptical of IMF loans given this past, as Stiglitz and others have already voiced concerns about (see further below).

In the long run, it can be expected that foreign investment in Africa will reduce as the credit squeeze takes hold. Furthermore, foreign aid, which is important for a number of African countries, is likely to diminish. (Effectiveness of aid is a separate issue which the previous link details.)

African countries could face increasing pressure for debt repayment, however. As the crisis gets deeper and the international institutions and western banks that have lent money to Africa need to shore up their reserves more, one way could be to demand debt repayment. This could cause further cuts in social services such as health and education, which have already been reduced due to crises and policies from previous eras.

Much of the debts owed by African nations are odious, or unjust debts, as detailed further below, which would make any more aggressive demands of repayment all the more worrisome.

Some African countries have already started to cut their health and HIV budgets due to the economic crisis. Their health budgets and resources have been constrained for many years already, so this crisis makes a bad situation worse. As IPS reports,

Already, large percentages of households in Sub-Saharan Africa are poor, and the large number of people on treatment means ever-increasing treatment program costs.

Yet, Sub-Saharan Africa only accounts for one percent of global health expenditure and two percent of the global health workforce. Currently, only one third of HIV-positive Africans in need of antiretroviral (ARV) treatment can access it.

… Dr Bactrin Killingo, chairperson of the Nairobi-based Collaborative Fund for HIV Treatment Preparedness [says, ] “If current cost constraints faced by HIV treatment programmes are not addressed, while the demand for expensive second-line treatment increases, we will soon find ourselves in a situation similar to the 1990s, where millions of lives were lost unnecessarily because people could not afford the treatment they needed to stay alive.”

— Kristin Palitza, Health-Africa: Global Financial Crisis Leads to HIV Budget Cuts, Inter Press Service, May 18, 2009

And it is not just poor nations’ health funds at risk. IPS adds that even international donor organizations have started to feel the financial crunch:

The Global Fund to Fight AIDS, Tuberculosis and Malaria recently announced it is at least $4 billion short of the money it will need to continue funding essential HIV, TB and malaria services in 2010. The coalition believes there is a $10.7 billion funding gap for regional implementation of the Global Plan to Stop TB alone.

Asia And The Financial Crisis

Countries in Asia are increasingly worried about what is happening in the West. A number of nations urged the US to provide meaningful assurances and bailout packages for the US economy, as that would have a knock-on effect of reassuring foreign investors and helping ease concerns in other parts of the world.

Many believed Asia was sufficiently decoupled from the Western financial systems. Asia has not had a subprime mortgage crisis like many nations in the West have, for example. Many Asian nations have witnessed rapid growth and wealth creation in recent years. This lead to enormous investment in Western countries. In addition, there was increased foreign investment in Asia, mostly from the West.

However, this crisis has shown that in an increasingly inter-connected world means there are always knock-on effects and as a result, Asia has had more exposure to problems stemming from the West. Many Asian countries have seen their stock markets suffer and currency values going on a downward trend. Asian products and services are also global, and a slowdown in wealthy countries means increased chances of a slowdown in Asia and the risk of job losses and associated problems such as social unrest.

India and China are the among the world’s fastest growing nations and after Japan, are the largest economies in Asia. From 2007 to 2008 India’s economy grew by a whopping 9%. Much of it is fueled by its domestic market. However, even that has not been enough to shield it from the effect of the global financial crisis, and it is expected that in data will show that by March 2009 that India’s growth will have slowed quickly to 7.1%. Although this is a very impressive growth figure even in good times, the speed at which it has dropped—the sharp slowdown—is what is concerning.

China, similarly has also experienced a sharp slowdown and its growth is expected to slow down to 8% (still a good growth figure in normal conditions). However, China also has a growing crisis of unrest over job losses. Both have poured billions into recovery packages.

With China concerned about its economy, it has been trying to encourage its companies toinvest more overseas, hoping it will reduce the upward pressure on its currency, the Yuan.

China has also raised concerns about the world relying on mostly one foreign currency reserve, and called for the dollar to be replaced by a world reserve currency run by the IMF. Of course, the US has defended the dollar as a global currency reserve, which is to be expected given it is one of its main sources of global economic dominance. Whether a change like this would actually happen remains to be seen, but it is likely the US and its allies will be very resistant to the idea.

Japan, which has suffered its own crisis in the 1990s also faces trouble now. While their banks seem more secure compared to their Western counterparts, it is very dependent on exports. Japan is so exposed that in January alone, Japan’s industrial production fell by 10%, the biggest monthly drop since their records began.

Japan’s output for the first 3 months of 2009 plunged at its quickest pace since records began in 1955, mostly due to falling exports. A rise in industrial output in April was expected, but was positively more than initially estimated. However, with high unemployment and general lack of confidence, optimism for recovery has been dampened.

Towards the end of October 2008, a major meeting between the EU and a number of Asian nations resulted in a joint statement pledging a coordinated response to the global financial crisis. However, as Inter Press Service (IPS) reported, this coordinated response is dependent on the entry of Asia’s emerging economies into global policy-setting institutions.

This is very significant because Asian and other developing countries have often been treated as second-class citizens when it comes to international trade, finance and investment talks. This time, however, Asian countries are potentially trying to flex their muscle, maybe because they see an opportunity in this crisis, which at the moment mostly affects the rich West.

Asian leaders had called for “effective and comprehensive reform of the international monetary and financial systems.” For example, as IPS also noted in the same report, one of the Chinese state-controlled media outlets demanded that “We want the U.S. to give up its veto power at the International Monetary Fund and European countries to give up some more of their voting rights in order to make room for emerging and developing countries.” They also added, “And we want America to lower its protectionist barriers allowing an easier access to its markets for Chinese and other developing countries’ goods.”

Whether this will happen is hard to know. Similar calls by other developing countries and civil society around the world, for years, have come to no avail. This time however, the financial crisis could mean the US is less influential than before. A side-story of the emerging Chinese superpower versus the declining US superpower will be interesting to watch.

It would of course be too early to see China somehow using this opportunity to decimate the US, economically, as it has its own internal issues. While the Western mainstream media has often hyped up a “threat” posed by a growing China, the World Bank’s chief economist (Lin Yifu, a well respected Chinese academic) notes “Relatively speaking, China is a country with scarce capital funds and it is hardly the time for us to export these funds and pour them into a country profuse with capital like the U.S.”

China has, however, used this opportunity to attempt to attract neighboring nations into its orbit by attempting to foster better economic ties. According to an IPS analysis, this has been a goal for a while, but the recent financial crisis has provided more opportunities for China to step up to this.

An improved investment deal between China and Taiwan maybe one example of this improving engagement in the region. The economic crisis may also be encouraging greater ties in this manner, as it would be important for Taiwan in particular (as it has been in recession since the end of 2008).

Asian nations are mulling over the creation of an alternative Asia foreign exchange fund, but market shocks are making some Asian countries nervous and it is not clear if all will be able to commit.

What seems to be emerging is that Asian nations may have an opportunity to demand more fairness in the international arena, which would be good for other developing regions, too.