3.0 Economic Crisis Transmission Chains
The crisis did not impact all regions, countries and population groups equally or on the same time scale. The patterns developed differently for each country. On the other hand, the transmission channel patterns are clear (Te Velde 2008; IDS 2008; Toporowski 2009). The financial and economic crisis of the industrialised States spread to the developing countries primarily via financial flows and through trade. The closer a developing country is coupled with the global economy, the stronger and more rapid the impact of the crisis.3.1. Transmission via financial flows
10Obviously the collapse of the stock exchanges in the great finance centres in May 2008 was also promptly transmitted to the stock exchanges in the most important emerging countries. The stock exchanges in China, India, Russia, South Africa and Brazil, for example, followed suit immediately. Within a week the Morgan Stanley Capital International Emerging Market Index, which reflects the stock markets in the threshold countries, fell by 23%. It is characteristic of these countries that they already have a highly developed finance sector that is coupled with other countries. The weaker the regulations in the country, the more susceptible it is to risk.
11Particularly severely impacted were the countries whose Sovereign Wealth Funds had been invested in toxic, now drastically devalued values such as Singapore and the oil-producing States in the Middle East. Stock market losses also had a sharp impact on countries like Chile, whose pension funds include shares from the industrialised countries.
12Net capital flows to the developing countries sank sharply. According to the World Bank, capital flows to the developing countries sank to USD 727 billion in 2008. In the previous year they had still amounted to nearly USD 1,160 billion (see table 1). The World Bank and the IMF expect a slump for the current year. The Institute of International Financeconfirmed the pronounced reverse and in June 2009 predicted capital flows in the current year in vigorously emerging markets (28 threshold countries) of USD 141 billion, less than half the figure for 2008 (USD 392 billion) and only one-fifth of the flow in 2007 which amounted to USD 888 billion (IIF 2009). Above all, the countries in Eastern Europe, and particularly Russia and Ukraine, were very hard hit. The withdrawal of foreign capital led to devaluation of currencies in the developing countries.
13Consequently, not only were the flows of portfolio and direct investments to the developing countries significantly lower, but commercial bank credits and non-bank financing were also reduced. Regarding foreign direct investment (FDI) in the developing countries, the United Nations Conference on Trade and Development (UNCTAD) posted a weak growth of 7% on a sinking curve for 2008. In 2007 the growth had still been as much as 21% (UNCTAD 2009). For the first quarter of 2009 UNCTAD predicts that the FDI will fall by 25% in the developing countries and by 40% in the transition countries. Investors transferred their funds to supposedly lower-risk countries. Poorer economic prospects kept investment plans down. Planned takeovers5 were postponed or annulled. The credit crunch rendered the financing of such projects increasingly difficult.
14The global banks currently experiencing difficulties granted less and less credit to developing and threshold countries. In 2009 there was even a net withdrawal of credits. Towards the end of 2008 taking up loans by governments and private enterprises in developing countries was virtually at a standstill. There was a notable rise in risk premiums and rates of interest for developing countries on the bond markets. During the first nine months of 2008 Brazil experienced a capital drain of USD 13 billion, Argentina USD 20 billion, Mexico and Venezuela USD 19 billion each.6 Finally, credit business was terminated where funds had been borrowed at low rates, e.g. in Japan or Switzerland, and invested in high-interest countries (“carry trade”).
15In numerous countries remittances by migrants which had been rising continually in recent years stagnated or even sank. Countries where the proportion of remittances in the capital flow was considerable, such as Central American States and India, were particularly hard hit (World Bank 2009; Awad 2009; Burki and Mordasini 2009). The standstill or reverse in remittances was often coupled with a freeze in engagement of foreign labour or even the repatriation of foreign workers.7
16Finally, there is a threat of regression or at least stagnation in official development assistance (ODA). However, for the year 2008 the Organisation for Economic Co-operation and Development (OECD) reported a rise in ODA contributed by member countries to 0.3% of the gross national income (GNI) (OECD 2009). According to OECD, should the quantitative targets set for 2010 be achieved, the member countries would have to increase their aid even further.8 During previous crises the donor States always reduced their aid. Donor States with substantial budget deficits and mounting public debt downgrade the priority of development aid.9 This would exert pressure above all on those developing countries where ODA accounts for a high proportion of incoming capital.
3.2. Transmission via trade
17On account of the world economic recession, there was a sharp fall in the demand for goods and services from the developing and emerging countries. The fall in growth in China and India also entailed a drop in their demand for energy and mineral raw materials, particularly from Africa. Sinking prices and export volumes led to a collapse in export income (UNCTAD 2009c). The 49 poorest developing countries saw their export income reduced by 43.8% during the first six months of 2009.10 The more important the developing country exports to the US, Europe or the larger threshold countries, or the greater income flexibility of the prices of export goods, the stronger the impact on the country’s exports. In view of its proximity to the US, Mexico is a significant example. The Bangladeshi monthly growth rates for textile exports decreased until April 2009; since then they have been negative. In July 2009 Bangladesh exported 10% less than in the same month the previous year. In Kenya the central bank warned of a fall in exports of flowers. In Zambia export earnings for copper crashed by 54% during the first quarter of 2009. The tourist destinations in the Caribbean and Africa were faced with slumps in income. The higher the proportion of exports in the gross domestic product (GDP) of a country, the harder the impact of dwindling demand during a crisis. A country where a single sector accounts for a high proportion of the economy was particularly susceptible to a clumping risk, as in the case of the Slovak Republic with its automotive industry and Ukraine with its steel industry.
18Lower State income may also be coupled with sinking export income, as in the case of Côte d’Ivoire, Lesotho and Swaziland where 40-50% of State income derives from customs duties (IMF 2009e).
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