Wednesday, March 25, 2009

Impact on emerging economies

The ongoing crisis offers conclusive evidence of the fact that globalization and increasing economic inter-connectedness among the economies of the world have left left everyone - developed and developing economies, rich and poor, urban and rural - vulnerable to the vagaries of global economic events and forces. The Economist outlines a few of the problems facing emerging economies

1. It has devastated equity markets in emerging economies and deprived them of much needed private capital, the inflows of which fell from $928 billion in 2007 to $466 billion last year and is estimated to fall to $165 billion this year. In 2007 African countries raised $6.5 billion in international bonds, trivial in global terms but not to Africa. In 2008, they raised nothing.

2. Remittances are a major source of income for many developing economies, accounting for 45% of GDP in Tajikistan, 38% in Moldova and 24% in Lebanon and Guyana. These were rising fast in 2005-07 and was worth $300 billion in 2008, more than aid. Now, with emigrant domestic helps and oil and construction workers in many emerging economies being laid off, these inflows are dwindling.

3. Aid, which in any case was plateauing in 2005-07, is estimated to fall by about a fifth, or $20 billion, this year.

4. Commodity exports generate a major share of income for most African economies. The double effect of declining exports and falling commodity prices have hit them hard.

American imports from middle-income countries fell 3% in the year to November 2008. But imports from poor countries fell 6%; those from sub-Saharan Africa, 12%. The African Development Bank says African current accounts, in surplus by 3.8% of GDP in 2007, will be 6% in the red this year. The fall in commodity prices puts further pressure on African budgets, already hit by declining aid, which have accordingly swung from a healthy surplus of 3% of GDP in 2007 to a forecast deficit of the same amount in 2009. This leaves no room for economic stimulus.

5. As capital inflows and export earnings vanish, poor countries face a mountain of debt: $2.5 trillion-3 trillion of emerging-market debt falls due in 2009 — as much as the American and European budget deficits, plus Europe’s bank bailout costs. The World Bank puts emerging markets’ financing shortfall between $270 billion and $700 billion.

6. Martin Ravallion estimates that 65m people will fall below the $2-a-day poverty line this year, 12m more than he had expected a month ago; 53m will fall below the level of absolute poverty, which is $1.25 a day—compared with 46m expected last month. In contrast, roughly one person in six in emerging markets had raised themselves above the $2-a-day poverty line in 2005. The World Bank reckons that between 200,000 and 400,000 more children will die every year between now and 2015 than would have perished without the crisis.

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