Institute of Development Studies

The Global Financial Crisis: Implications for International Development

17 October 2008 - Lawrence Haddad

We are living in times where billions of dollars seem like small change; where add-ons to bank bailouts are as large as annual global aid flows; where every sentence of newsprint seems to end with ‘unprecedented’. What does all of this mean for international development? Is development on the edge? Are we looking at a decade of arrested development? Here are some of my current personal ‘take-aways’ for development.

Global crises require global solutions

This is a well-worn statement, but when was the last time we saw such massive coordinated action on a global scale, involving not only the EU but also the USA and China? If the Asian financial crisis told us about contagion, this crisis has told us about coordination. The US (and its Bretton Woods institutions) still matters, but not as much as before. Much of the crisis is due to actions in the US (the risky lending, low interest rates, deregulation etc.) and the lead that others took from the US. But the US was not able – on its own – to stem the financial tide. Will the current global coordination in the financial sector increase the propensity for multilaterlism in other areas such as addressing climate change? Much, it seems, depends on the outcome of the US elections. But the inter-government muscles of cooperation must not be allowed to go flabby – we are going to need them for other challenges.

Institutions to deal with risk exposure and shock management have lagged behind the institutions promoting the returns to globalisation

It is striking how many of the interventions of the last three weeks were seemingly made on the hoof. The world may have reached the limits of its ability to pool risk under the current patchwork rules of the game. Next time (and there will be one) we need to have some kind of international social protection mechanism in place to deal with the uncertainties that globalisation lives with and contributes to. We need to begin now on determining what that mechanism will look like. 

The G7 is more important for global coordination and management than the Bretton Woods and UN system

Nothing strips away facades quite like a crisis, and when it mattered, the G7 met to initiate action. Both for more credibility and more capacity, the G7 needs to be expanded to include the largest 12-16 economies. With an expanded membership, the potential for blocking behaviour also expands, but then some actions need to be blocked. The G7 should be as much as about prevention as reaction. The current crisis is also perhaps the best opportunity to reform the World Bank and IMF to make their governance more inclusive and to make the UN more effective at coordination. 

The donor-country governance agenda needs to extend beyond the national level and beyond state activity to look at the governance of markets at the national and international levels

Good governance is about more than fighting corruption: indices of capacity, accountability and responsiveness must be applied to the governance of markets and to international governance mechanisms. Weak governance is also contagious.

Don't think sub-Saharan Africa will avoid this storm

A focus on nontradables and a weak infrastructure may protect some of the least productive regions from the immediate negative impacts, but the most dynamic regions will be affected, either through decreased activity in tradables (such as natural resources) or through lower aid flows and lower domestic tax revenues. Now is not the time to forget Africa, but to redouble efforts to support its growth.

Aid flows will be affected

Senator Joe Biden said as much in the recent Vice Presidential debate. Charity shops in the UK are striving to maintain donations. When will the 0.7 per cent commitments to aid begin to look more like a luxury rather than enlightened self interest? Resource flows from the large foundations will be affected, if not this year, then next. The imperative to deliver and use aid more effectively – and to demonstrate this – will become ever stronger.

Development gains will be threatened and effective social protection will be vital to minimise short and medium term negative impacts

Recent food price increases are estimated to have put 100m people below the poverty line. This financial crisis will also have real effects as farmers find it harder to borrow to buy inputs and process outputs, as employers – formal and informal – find it harder to afford to pay wages, as trade decreases, as assets are sold, and as children are pulled out of school. Social protection – protecting productive capacities while helping families cope with shortfalls – will be more important than ever, but so too will exit strategies that allow the numbers helped to ebb and flow with the changing economic circumstances.

Lawrence Haddad is Director of the Institute of Development Studies

Image: Jason Larkin/ Panos