Africa hardest hit by global recession

A new report by anti-poverty organisation ActionAid has found that developing countries are hardest hit by Global Financial Crisis. The report "Where does it hurt? The impact of the financial crisis on developing countries" (my thanks to ActionAid media officer Lindiwe Tshabalala for providing me a copy - unfortunately it not on the website at the time of writing) says Africa will suffer a drop in income of $49 billion in the two years from the start of the crisis in 2007 to the end of 2009. This represents a 13 percent drop in financial inflows to the continent. The report says the benefits of financial liberalisation have been oversold and that countries with the most open economies have suffered the most.

ActionAid say there are actually two problems – a financial crisis and a recession. The financial crisis impacts bank lending, investments, bonds and interest rates while the recession impacts trade flows. While both problems are the fault of the rich north, they are both are hitting developing countries the hardest. Africa is predicted to lose $22b due to the financial crisis while losing another $27b to earning exports, aid and income from rich countries in recession. This latter problem also impacts money sent home by relatives working in rich countries.

Of the money flowing into developing countries, bank lending has suffered the most. The international association of financial institutions known as The Institute of International Finance (IIF), estimates that foreign lending to developing countries in 2008 was just 40 per cent of the 2007 level. It gets worse this year when the drop is predicted to hit 100 percent. This means that more money will be leaving the continent to overseas banks than will be paid out in loans.

There will also be a negative flow on to equity markets in developing countries as their stocks are deemed too great a risk by international traders. The IIF predicts an 82 percent downturn in equities while foreign direct investment will also dip by a third. The crisis has also pushed up the costs of raising money by issuing bonds. Poor countries suffer disproportionately (despite not being responsible for the crisis) as lenders look for less risky places to put their money.

Trade losses from the recession that follows the crisis will also be severely felt in Africa and the global south. Most countries in ActionAid’s survey will expect a drop in export earnings of over 10 percent with Nigeria hardest hit at 25 percent. The combination of impacts on local economies is likely to lead to a worsening of poverty and ActionAid predicts “terrible consequences for individuals”. They are not alone in believing the worst. The World Bank’s chief economist for Africa predicts that 700,000 children under the age of one may well die over the next few years as a result of the financial crisis and the ensuing recession.

The survey results show that vulnerability to the crisis is directly proportional to a country’s exposure to international trade. The biggest factors are export revenues, level of concentration of exports, trade balance and reserves. Many countries have also increased foreign direct investment and private bank lending despite their being no provable correlation between financial integration and growth. In 2008 Rodrik and Subramanian found that on the international front, the benefits of financial globalisation were hard to find, even leaving financial crises aside.

The report concluded that domestic generated development was best. It needed to be shored up by diversified financial flows, controlling risk, a commitment to transparency, regulated financial markets, and the importance of involving developing nations in global market decisions. The report also made several recommendations to the G20 summit next month. They involved controlling risk, improving transparency and developing regionally based financial markets. The report also recommended assistance to countries who cannot afford their own stimulus packages.

ActionAid’s head of policy, Claire Melamed said the report showed there was a large risk that development will start to go backwards in many countries as the money dries up. “The recession will lead to worsening poverty and terrible consequences for the men, women and children caught in its grip,” she said. "Although developing countries didn't make this crisis, it has become all too clear that they are in the firing line when it comes to suffering its worst effects.”