The impact of the current financial crisis on the developing countries and the slide of the major industrial countries into recession pose several interesting questions for the international community and the growth commission which released its report in 2008.
Two of these questions/issues will be singled out for attention in this brief note. Firstly, the Commission predicated its findings on an open and expanding global economy in which developing countries could import ideas, technology and know how from the rest of the world, and, secondly, the importance of leadership, effective government and experimental policy making to facilitate poor countries in achieving high and sustainable growth rates over an extended period of time.
In the first case, the current crisis has in fact confirmed the proposition as the slow down in growth has negatively affected the growth performance of the developing countries.
The once mooted concept of decoupling has gone by the board as even China, which has attained unprecedented rates of growth over the last three decades has faltered. IMF projections have indicated a substantial fall in the growth rates of developing countries from 6.25 per cent in 1008 to 3.25 per cent in 2009.
The recession has had a cascading effect on the performance of countries all across the development spectrum as identified by the Commission, that is, sub Saharan Africa, small states, resource rich countries, and middle income countries.
In the early phases the unprecedented increase in the price of oil and then food, had significant negative impacts on the balance of payments of most countries. In the current phase, the fall in the prices of commodities and manufacturing goods due to decreasing demand from the industrialised countries has limited foreign exchange inflows. Those economies which are dependent on tourism have also experienced dramatic falls in foreign exchange receipts. The situation has been further compounded by the decline in foreign direct investment and the slow down in remittances from citizens who have emigrated to metropolitan countries. A further complication which is beginning to occur in many countries is a flight to safety of domestic capital from developing countries to safe investments (government securities) in the industrialised countries.
The down side to a shrinking global economy has been quite traumatic and poses important questions for those involved in policy making making in the development community. We all tend to be caught up in the hubris and euphoria which emanates from the centers of growth in the boom but are caught flat footed in the downturn with fewer policy tools, inadequate safety nets and coping mechanisms to mitigate precipitated declines in growth and living standards.
This is indeed a wake up call for the international community in general , and developing countries in particular. If a growing global economy is a necessary condition for catch-up growth, then it follows that developing countries have a vested interest in a stable and growing world economy and by extension its governance and coordinating arrangements.
This gives a certain urgency to the call by the President of the World Bank,
Robert Zoellick, for what he describes as the new multilateralism.
New governance mechanisms involving new players which gives a more representative flavour to the international system, increased voice and participation by all countries in the IMF, World Bank and WTO, and a protective mechanism for the weaker members of the international community an international social and economic safety net, so to speak, are vital requirements for the new dispensation.
The downside to globalisation and increased interdependence, in the light of this crisis, particularly if it is unduly prolonged, could be a major set back to the aspirations of developing countries.
The latent and active resentment of globalisation could be fuelled in a way that could impede growth into the future. Anti immigration sentiments, protectionism and beggar thy neighbour policies could further impede the flows of goods, services and labour. The drying up of credit markets has curtailed the flows of foreign direct investment, while the fracturing of the banking system has raised levels of uncertainty and the vulnerability of success to new heights.
In these circumstances what is required is effective leadership and vision at the international level to address what are marked shifts in the structure of the global economy and the emergence of a new era of geopolitics as new states come to the fore and others must either cede power or recede from center stage.
One of the major threats to the international system which must be carefully managed would be the increased competition for scarce resources at both the international and national levels. This has already manifested itself in the case of oil and food and is becoming increasingly evident in the competition for water resources. There is also a clash of objectives with respect to environmental issues. The traditional polluters having achieved developed status, are locked in a major controversy with newly emerging countries with respect to the ravages to the environment given their mode of development.
The trade-offs here are very difficult in terms of meaningful compromise as countries like India and China, with huge populations and millions of poor people who are migrating into the cities with prospects of moving into the middle class, will not be denied the trappings of that class such as the ubiquitous motor car. The solution may lie not only in efforts of moral suasion to change consumption patterns in all countries, but also massive efforts in science and technology which are international in scope and based on the open system principle. In short, some of the same principles which fanned the revolution in information technology must be applied to the revolution in environmental science.
The importance of leadership, effective government, and experimental policy making becomes that much more important in the scenarios described above.
The basis for sustained economic growth and development lies not only in investment, but in the political, administrative and technical capabilities of the nation state and it is leaders in the public and private sectors. The creation and support of institutions and organisations which not only set the framework and agenda for political, social and economic intercourse, but also access, sift and distribute information and knowledge, are essential. They also act as repositories of such knowledge through time, acting in a sense as the DNA of the economic and socio political systems, a point of referral for successes and failures. A critical feature of these institutions and organisations would be to integrate themselves into wider regional and international networks so that they can extract knowledge and information which could be useful for policy making. The current crisis for instance, is so severe, that nothing of its kind has been experienced since the Great Depression. Since the current policy makers were not around at that time they have to depend on historical records, new tools of analysis and policy making and experimentation. The response to the crisis in the advanced countries has followed this pattern as central banks and fiscal authorities have de facto torn up the current rule books.
This opens new and interesting vistas for policy makers and policy making in developing countries. The unorthodoxy now being exhibited by policy makers in advanced countries should, other things being equal, legitimise and provide the incentive for policy experimentation in developing countries. There are boundaries to such experimentation quite naturally. These lie in fiscal constraints and the capacity to accumulate debt. However, policies which create alternative sources of finance and technology, and enable countries to access resources from the rest of the world, on terms favourable to themselves, are vital to stability and progress.
Developing countries must therefore pay serious attention to the type and resilience of the institutional arrangements that will provide the foundation and capability for addressing policy issues arising out of domestic disequilibria and resource misallocation as well as the impact of external shocks and natural disasters.
A specific example would be the creation of domestic money and capital markets which are well regulated and have a reasonable measure of depth, breadth and resilience to provide at least a first point of access when external sources dry up as a result of events such as the current crisis. It is conceivable that if such a system has the confidence of national and regional players that it would not only stop the outflow of finance but may encourage the repatriation of funds.
In the final analysis the lessons to be learned from this crisis must lead to a higher level of international cooperation and coordination and an enhanced governance structure that mitigates the impact of future crises on the international economy. This should provide the framework and environment for developing countries to create the space for policy experimentation and the access to ideas, technology and knowledge that will facilitate catch-up growth.
