Hot Topic: Global Economic Crisis

This hot topic pulls together the key findings from a series of recent GSDRC helpdesk research reports which explore the potential impacts of the current economic crisis on developing countries.

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Overview of key findings

Much of the developing world is now beginning to suffer the impacts of the global economic crisis. In the Asia-Pacific region the countries expected to suffer the greatest impact are those with recent rapid labour force growth and slowing economies that are heavily reliant on exports. In the case of Sub-saharan Africa, the most affected countries are likely to be those whose economies are highly dependent on primary commodities, especially when combined with poor governance and weak state institutions. Declining investment in and demand for commodity exports and services has already resulted in the cancellation of projects, cutbacks in mining and other industries, and resultant rises in unemployment.

There are concerns that some governments will be unable to provide social safety nets, and may cut back spending on social services and infrastructure, because of the devaluation of reserves, falls in revenues, and potential cuts in foreign aid. In the longer term, reorientation away from productive export sectors towards lower productivity sectors, and decreasing investment in infrastructure may negatively impact future growth prospects and poverty reduction.

The combination of drops in real wages, unemployment, rising food and fuel prices, the retrenchment of migrants and reductions in remittances are resulting in insufficient income for food and other necessities, increasing malnutrition and susceptibility to illness and disease. With sustained low incomes, households may be forced to sell assets, including ones upon which their livelihoods are based. Additional concerns include increases in youth employment, the withdrawal of children from education, and the threat of increased child labour.

Those most at risk are the poor, women labourers in the manufacturing sector, the youngest and oldest populations, and socially excluded groups. Many women, for example, work in export processing zones, or in industries with very low wages, poor working conditions and no job security. They also tend to bear the responsibility of caring for the sick, older persons and children, and suffer most from the decline in food resources by eating least and last.

Social/political stability

Experience from previous economic crises suggests the potential for social unrest, although this tends to be highly context specific. During the crises in both Argentina (2001) and Indonesia (1997) protests were partly a result of pre-existing tensions awakened in the context of economic hardship and weakened state institutions. These tensions included:

already high unemployment rates;
poverty;
lack of labour union support;
repressive and clientelist political practices;
previously suppressed divisions along regional, class, and cultural lines;
corruption; and
organised crime

Nevertheless, according to a recent US Senate intelligence briefing, almost a quarter of all countries have already experienced low-level instability as a result of the current global economic crisis. There is concern that should the crisis persist over one or two years, the danger of regime-threatening instability will increase. Some of the key areas of concern include:

Migration: anti-immigrant violence and resentment towards returning migrants
Socio-economic tensions: social violence and increased religious intensity linked to a greater awareness of socio-economic differences along religions and ethnic-cultural lines
Crime: increases in the power and activities of organised crime and increasing crime rates among youth
Political unrest: loss of confidence in government and mobilisation of demonstrations by political groups leading to social unrest
Security: decreases in national defence spending and international conflict prevention and peacekeeping commitments

Policy responses

One of the recurring lessons from previous crises is the importance of social insurance systems and safety nets. Experience from the 1997-98 Asian financial crisis suggests that employment creation programmes, cash transfers, and education, nutrition and healthcare programmes played a critical role in alleviating poverty. Safety nets were also crucial in avoiding the need for poor families to resort to often harmful coping mechanisms, such as reducing meals, eating less nutritious foods, taking children out of school, selling livestock and other assets, and/or borrowing money to feed their families.

In Argentina, the principle policy response to the crisis aimed to provide direct income support for families with dependents for whom the head had become unemployed due to the crisis. Although the programme was seen as a partial success, it has been criticised for ineffective targeting and for reducing incentives to search for work in the long-term.

In the case of Indonesia, social safety net programmes were implemented to improve food security, stimulate the economy, and provide basic health and education services. There were serious doubts, however, both internationally and within Indonesia, about the programmes’ effectiveness and targeting, and about the potential for corruption.