By Elliot Schwartz and Charles Johnson
The G-20 summit will not piece together the intricacies of the global financial system overnight. The April 2 meeting of leaders of the Group of 20 nations (G-20) should be seen as just the beginning of what will likely be a long, complex process to reinvigorate the global economy through financial market reforms and other measures. But that's not to say that the attendees can't move mountains. In fact, members of the G-20 can take a big step towards mitigating human suffering in low-income countries made even worse by the financial crisis.
The global economic crisis -- through its financial contraction, declining commodity prices, reduced global trade, decreased net capital flows, and plummeting remittances -- exacerbates myriad problems that already plague low-income countries. The World Bank estimates that the financial crisis will increase poverty by 46 million people. That number itself obscures more than it reveals. Many of the millions soon to be classified as impoverished already suffer from malnutrition and lack of access to basic health services, potable water, or schools with walls or textbooks, let alone teachers.
The sale of natural resource commodities contributes substantially to the revenue of many developing countries. The Congo, Equatorial Guinea, Gabon and Nigeria all rely on oil for more than half of total revenues. Similarly, over the last couple of years, commodity revenue constituted 22 and 12 percent of GDP respectively for Trinidad and Tobago and for Bolivia. Over the second half of 2008, due to drops in aggregate demand, oil prices fell 69 percent, while non-energy commodity prices dropped 38 percent.
Trade in manufactured goods is no different. Advanced economies provide a critical market for the exports of low-income countries. The IMF projects that because of slouching demand, advanced country imports will contract by 3.1 percent this year. As a result, exports from emerging economies will decrease by close to one percent. These are not small numbers. Already, Cambodia's garment sector, a key export industry, shed 30,000 jobs, or 10 percent of the workforce. Over the last three months of 2008, India lost half a million jobs across a number of export-oriented sectors, such as textile production, auto manufacturing, gems and jewelry.
Low-income countries will also face a considerable gap as net capital flows dry up. According to the Institute for International Finance, net private capital flows to developing countries in 2008 declined to half their 2007 level (a drop of $467 billion). Not surprisingly, forecasts project another sharp decline in 2009. As a consequence, the World Bank estimates that 104 of 129 developing countries will have current account surpluses inadequate to cover private debt due to creditors. According to the Bank, the resulting financing gap will be between $268 billion and $700 billion, depending upon rollover rates and capital flight.
Unfortunately, remittances and other private aid won't assume the role of the great equalizer. Both are expected to decline. For many developing countries, remittances make up a small component of GDP. But for others, remittance inflows constitute one quarter (Guyana) to one half (Tajikistan) of GDP, with a number of countries within that range. And as the World Bank points out, the decline in remittance inflows is only aggravated by adverse exchange rate movements.
The decline in commodity prices, manufacturing trade, capital flows and remittances might not conjure an especially dire image. But these declines mean that national governments will be forced to cut critical expenditures on expanding access to health care, on improving old schools or constructing new ones, on hiring teachers, on sanitation or other vital infrastructure projects, on small businesses driven by social entrepreneurs, or on basic services, like the provision of food and water. Cutting back on such expenditures carries great costs: deteriorating health means a less productive workforce; fewer small business enterprises mean a less dynamic economy; and fewer educated children means a darker future for any country. Observers like Nicholas Kristof help show the terrifyingly real, human cost. He points in a recent column to Haiti's largest slum, Cite Soleil, where enrollment at a one-room public school dropped from 150 to 60 due to a decline in remittances; where students no longer enjoy free breakfasts because the charity that provided the food stopped doing so due to fewer donations; and where children literally starve to death.
Experts agree that, unlike the United States, very few low-income countries have the economic capacity and political credibility to mitigate these problems through fiscal stimulus. Acting alone just won't do. As a consequence, Robert Zoellick, President of the World Bank, recently proposed that 0.7 percent of each developed country stimulus package be pledged to a vulnerability fund to assist the poorest developing countries. For the United States, the proposal would amount to $6 billion of the $825 billion stimulus package. In total, Nancy Birdsall, President of the Center for Global Development, believes $1 trillion will be required to avoid an untenable drop in expenditures by developing countries. Others, like World Bank Chief Economist Justin Lin, suggest that more than $2 trillion will be needed.
It's up to members of the G-20 to take action against the advance of abject poverty -- if not because it is the right thing to do, which it is, then out of self-interest. We've learned at great expense how interconnected the world economy is. If members of the G-20 don't tackle these issues, or at a minimum, set the stage for future action, then jobs will be lost, infrastructure projects left unfinished, schools unconstructed and health services unprovided not just in developing countries, but in the advanced nations as well. At the same time, inaction risks political and social instability in the developing world, which could easily spill over into other countries.
In short, if the G-20 doesn't act to help vulnerable, low-income countries, years of economic and social progress will be rolled back, and we will have much bigger problems not far down the road.
Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development.
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