Credit crisis will hit developing countries hardest

By Pieternel Gruppen*
Radio Netherlands
25-09-2008

Bert KoendersThe Millennium Goals are supposed to be heading the agenda in New York, where the United Nations is holding its annual summit. But Wall Street is also dominating the discussions at the UN headquarters.

"People in Wall Street who turn out to have cheated everyone are receiving 38 billion in bonuses. That's equal to all the aid to Africa."Dutch Development Minister Bert Koenders (pictured) doesn't mince his words. He is concerned that the 700 billion dollar financial injection proposed by US President George W Bush will come at the cost of development aid.

"You can imagine that aid will suffer if economic growth falls and national governments have to take decisions on where money should be spent."

And this when massive sums are needed to reach the Millennium Goals, the targets for a drastic reduction of poverty around the world, agreed on by the international community in 2000. Rich countries promised to devote a total of 70 billion dollars annually to meeting the aims.

Spending power down
For the time being, the US and Europe will be focusing their attention inwards, predicts Ruerd Ruben, a development economist at the Radboud University Nijmegen. And the effect will chiefly be felt by exporting developing countries. The financial crisis is now starting to hit the real economy. Falling house prices and rising oil prices are whittling away consumer spending power. People are less likely to buy products they don't really need.

"A country like Mexico, which exports to the United States, will noticeably suffer."

A basket weaver in Ghana who mainly produces for the local market won't immediately feel the effect of the crisis, Mr Ruben thinks. But eventually the credit crisis will make nearly all the developing countries suffer. Only oil-producing countries like Nigeria and Venezuela are profiting from the crisis.

According to Mr Ruben, historically speaking it is always the developing countries that ultimately draw the short straw during a world economic crisis. That's despite the fact that people in these countries are more likely to meet their financial obligations. For micro-credit, small loans for people who want to set up a business, the repayment capacity is around 95 percent. For some mortgages extended in the US this was 50 percent. Because of unstable exchange rates, goods become more expensive, and this hits people in developing countries particularly hard in their pockets.

Mr Rubens says the same thing happened during the Great Depression of the 1930s.
"But then the Second World War followed, which actually meant developing countries flourished, because for the first time they operated independently of the Western world."

Now, however, trade between rich countries and developing countries is closely interlinked. In the World Trade Organisation's current Doha Development Round talks, agreements are supposed to be made on improving access for developing countries to Western markets. But Mr Koenders is concerned that because of the credit crisis, the United States and Europe will be even less inclined to bring down their trade barriers.
"I'm really afraid it will lead to increased protectionism, that it will be more difficult to reach agreement on the Doha Round, which is actually supposed to be development-friendly and offer developing countries greater possibilities to export."

Development economist Ruerd Ruben takes a more laconic attitude.

"The Doha Round is already on its last legs."

Mr Ruben thinks that sooner or later developing countries will be hit by the credit crisis. The degree to which they are affected will depend on the region. But he is sure of one thing:

"In the end, the weakest pay the bill."

* RNW translation (mb)
http://www.radionetherlands.nl/currentaffairs/globaldevelopment/080925-credit-crisis-mc