Impact of global recession on developing countries

Open economies, which are highly trade dependent and export only a small range of products to few markets, are affected most by the trade transmission mechanism. This helps to understand the wider economic and social effects of the 2009 global downturn. The recession has affected developing countries in many different ways including the following:

1. Declines in foreign direct investment especially reductions in access to loans from banks – some developing countries have set up their own sovereign wealth funds to offset this

2. Falls in export revenues due to lower demand (and falling prices) for commodities and a sharp reduction in demand for manufactured goods from many emerging market countries. (This article looks at the collapse of export earnings in Latin American countries). The previous chart shows the volatility in export prices and export revenues for developing countries. Much of the strong GDP growth enjoyed by these nations was due to rising demand for and prices of primary commodities which improved the terms of trade of developing exporters. This reversed from the middle of 2008 onwards although there are signs of a rebound in export revenue since the spring of 2009.

3. Recession has cut export prices – but another key effect has been increased volatility of prices – this increases revenue uncertainty for commodity-dependent countries and acts as a barrier against much-needed capital investment

4. A decline in remittances from overseas migrants working in developed countries – the World Bank has forecast that remittance flows to developing countries will decline by 7-10 percent in 2009. The World Bank estimates that there are over 250 million people living overseas who send some of their earned income back - remittances to all countries topped $305bn in 2008.

5. A recession in global tourism – often a significant share of GDP for many poorer nations

6. Rising food prices has created a huge problem of food poverty – the World Bank called this a silent tsunami

7. Increased unemployment, under-employment and loss of income. Many laid-off formal sector workers are forced into low-income jobs in the informal and rural sectors (China is a good example)

8. Weaker growth and rising unemployment puts huge pressure on government finances and in many countries there is not a widespread social welfare system as a safety net

9. Some countries have been hit by multiple macroeconomic shocks. A good example is Nigeria – whose export revenues have declined following a 70% fall in crude oil prices, a sharp fall in domestic share prices (which has made funding investment tougher) – both of which contributed to a depreciation of the naira by 20% which has worsened their terms of trade, increased the cost of servicing foreign debts and increased the prices of imported foods.

10. Overall the recession has worsened prospects for developing countries meeting the Millennium Development Goals. The World Bank has estimated that up to 90 million extra people world-wide (62 million in Asia) will live in extreme income poverty (less than US$1.25 per day) in 2009 as a result of the global economic slowdown

The effects of the recession vary widely across the developing world – some countries have avoided recession and have started to recover more quickly than expected – the obvious example here is China, largely as a result of a gigantic fiscal stimulus programme.