Trickle Down Misery

Analysis by Abid Aslam
March 4, 2009
Courtesy Of Inter Press Service

WASHINGTON, Mar 4 (IPS) - The world's poorest people had nothing to do with the financial gimmickry that has brought the global economy to its knees but they are paying a heavy price for it and relief seems a long way off.

Poverty is increasing and the spectre of political upheaval looms over developing countries whose export earnings have dwindled amid tumbling commodity prices and sluggish global trade. Foreign investment and aid budgets are being cut. The resilience of remittances from migrant workers is being tested by a deep and still-unfolding recession.

As Dominique Strauss-Kahn, head of the International Monetary Fund (IMF), puts it: "After hitting first the advanced economies and then the emerging economies, a third wave from the global financial crisis is now hitting the world's poorest and most vulnerable countries."

In jeopardy, he adds, are "the major achievements of higher growth, lower poverty, and greater political stability that many low-income countries have made over the past decade."

Soaring food and fuel prices pushed 130 million to 155 million people in developing countries into poverty in 2008 and the World Bank reckons another 53 million people could join them this year. This would bring the total of those living at or below the international poverty line of two dollars a day to more than 1.5 billion people.

In Africa south of the Sahara this year, the crisis will rob 18 billion dollars from 390 million people who eke out a living below the international extreme-poverty line of one dollar a day. At 46 dollars per person the figure seems small but it represents fully one-fifth of their annual earnings, says the U.N. Educational, Scientific and Cultural Organisation (UNESCO).

An additional 200,000-400,000 children will die every year that the crisis persists, says the World Bank. By 2015, the additional death toll could rise to 2.8 million people. Those who survive will face cognitive damage inflicted by malnutrition as more go hungry. Yet, according to UNESCO, 43 of the world's 48 low-income countries lack the money to provide a "pro-poor fiscal stimulus".

Worse still, says the IMF, at least 22 of these countries could go bankrupt this year. Depending on just how bad things get, the cash-strapped governments will need an extra 25 billion to 140 billion dollars in grants and cheap loans to keep their external reserves at a "safe" level of around three to four months of imports. Even at its smallest, the sum represents about 80 percent of annual aid to all low-income countries in recent years.

Despite the additional need, the fund expects donors to cut their giving this year to 30 percent less than in 2008. The European Union (EU) has promised to provide 0.56 percent of national income in aid by 2010. Even if it keeps its word, the actual financial value of this commitment will shrink as member economies stall.

If current trends do not worsen in the interim, the EU commitment will have shrunk by 4.6 billion dollars, according to UNESCO. Kevin Watkins, the agency's top expert on education financing, says donors "could clearly do more to protect the world's poorest people from a crisis manufactured by the world's richest financiers".

Banks in rich countries lapped up 380 billion dollars of public money in the last three months of 2008 alone, he says. By contrast, seven billion dollars in extra aid would enable low-income countries to meet key education goals agreed by the international community.

Nor are global investors likely to be of use. Net flows of private capital to emerging markets - the wealthiest of the developing countries - plunged by nearly 50 percent from 929 billion dollars in 2007 to 466 billion dollars in 2008, according to the Institute of International Finance. The global banking lobby expects this year's total to fall to 165 billion dollars.

In many cases, critical financing will have to come not from donors or investors but from migrant workers who send money to their families back home. In good times and bad, these remittances have eclipsed official aid to countries ranging from Jamaica to Pakistan and the Philippines, in some cases generating up to one-fifth of national income.

Migrant workers sent home 305 billion dollars in 2008, up from 281 billion dollars in 2007, even as private investment in the developing world collapsed, the World Bank reckons. Unlike donors, almost all of which have yet to honour 1970s promises to allot less than one percent of national income for aid, migrants typically remit around five percent of their earnings.

Here, too, the outlook is worrying. Remittances grew last year but at a slower rate. In Mexico, they actually fell by 3.6 percent. No one seems to know what impact a severe global recession would have but the bank expects remittances to fall by about six percent this year before recovering in 2010.

The bank's prediction could prove overly optimistic. Jobs are evaporating everywhere as businesses fold or announce cuts in posts and plant. The International Labour Organisation (ILO) expects the global unemployment rate to reach 6.5 percent this year, with 30 million more people out of work than in 2007. The rate could rise further, to 7.1 percent for a loss of 50 million jobs since 2007, it says. Official figures tend to understate the problem.

Even those with jobs will find themselves increasingly vulnerable. Over the course of this year, says the ILO, 53 percent of people in formal employment could find themselves walking a high wire with no safety net to catch them if they suddenly lose their income.

If migrants lose their jobs and return home in significant numbers, remittances will swell as they repatriate their savings but then fall dramatically as a longstanding source of economic lifeblood dries up.