Debt crisis stares developing nations

The attention of policymakers is being drawn to addressing fiscal policy and financial issues in an effort to close the credit crunch and release financial flows, especially investment.

This focus on financial flows by governments and finance ministers is understandable. They have come under tremendous pressure to secure additional financial resources to meet current and emerging needs, such as stimulating the economy in the midst of declining revenues, exports, remittances, aid and investment flows. This is a depressing situation for emerging economies in need of a fresh injection of funds to revive growth.
The situation can lead countries to borrow from international markets paving the way for another debt crisis. The international community must be ready to deal with this potential new crisis. The dire situation could be aggravated by rising prices for food and fuel.
Some of the lessons learnt from the Asian financial crisis that started in mid-1997 can help us find ways to mitigate or avert an impending debt and development crisis. These lessons are to borrow less so as to have little debt; to accumulate reserves through savings; and to improve policy soundness.

On openness, it must be said that developing countries are among the most open in the world today. Openness—as measured by the export-to-GDP ratio—increased from 26 per cent in 1995 to 51 pc in 2007. The level of openness is even greater for the Least Developed Countries (LDCs), for which that ratio soared from 17 pc to 45 pc over the same period.

They have been good pupils of openness, yet they have also been the ones to suffer the most from the global economic crisis. All countries have been affected by the crisis, but those that are the most open—mainly developing countries and especially the weak and vulnerable among them—have been hit the hardest.

This raises the question of how to make effective use of openness. In responding, the international community should not be concerned only about protectionist tendencies, but also about the rise of rational economic nationalism, which can undermine the use of openness. A number of priorities should be mentioned on the way forward.

First, the Doha Round should be revived. Countries must be decisive about delivering on the development agenda and should even harvest some elements—such as duty-free, quota-free treatment for LDCs exports, aid for trade, the cotton issue, the banana issue, and trade facilitation, which is of key importance, especially to landlocked developing countries. Non-tariff barriers, especially unjustified product standards that disrupt trade, should be avoided.

Second, trade among developing countries is still growing, but at a slower rate, because of the crisis. This growth performance is due to the fact that these countries are trading in relatively cheaper products, which are affordable to people at the income levels of developing countries—a yearly average of $2,700.

Thus, strengthening South-South trade, including through enhancing regional economic integration processes, can provide an avenue for a sustainable exit from the global crisis. A point worth mentioning here is the economic partnership agreements now being negotiated between the European Union (EU) and African, Caribbean and Pacific (ACP) states. These partnerships should help promote regional integration among ACP states.
Third, trade financing is of critical importance to making trade flow smoothly. The April G20 meeting agreed to provide $250 billion to meet trade financing needs that emerged with the credit crunch. A key question is how this financing source will be allocated among developing countries in Africa, Asia and Latin America and the Caribbean. Even during normal periods, accessing trade financing can be difficult, so the question of easier access to these promised funds for countries in need has to be addressed.

Lastly, social safety nets are urgently needed to address the most marginalised and vulnerable sectors and people affected by the crisis, including women workers in the textile industry.
Planning an exit strategy from the global economic crisis and downturn in trade must take into account the realities existing in developing countries and how to respond to them. Such a reality check is important in identifying measures that can have a meaningful and sustained impact.