The Financial Crisis and the Poor

A World Bank report released on 8 March projects that global GDP will decline this year for the first time since World War II. The new report revised earlier estimates that emerging markets would sustain and grow the world economy even as the economies of developed countries contracted. The report was released ahead of the G20 finance ministers’ meeting to be held in London later this week. The report predicts that developing countries face a financial gap of $270-$700 billion caused by the global recession, and warns that even at the lower end of this range, international financial institutions such as the World Bank and IMF cannot by themselves currently cover the shortfall that includes mounting public and private debt and trade deficits.

The report also highlighted earlier analysis that poverty (people living below $1.25 per day) will increase by around 46 million people in 2009 (and by 53 million for those living below $2 per day), caused by adverse effects on employment and wages as well as slowing remittance flows. The crisis will be a major setback to the progress towards the Millennium Development Goals, as the long run consequences of the crisis may be more severe than those observed in the short run. For example, when poor households withdraw their children from school, there is a significant risk that they will not return once the crisis is over, or that they will not be able to recover the learning gaps resulting from the missed months or years of school attendance. The World Bank also warns that infant deaths in developing countries may be 200,000-400,000 per year higher on average between 2009 and the MDG target year of 2015 than they would have been in the absence of the crisis, according to its preliminary analysis.

The report concludes that stabilization, protecting longer-term growth and development, and protecting the vulnerable will be the main challenges for developing and emerging market countries, but pursuing these objectives requires significant resources which low income countries lack. As a response to the crisis, the World Bank is calling on developed nations to dedicate 0.7% of the money they spend on stimulus programmes (the G20’s announced fiscal stimulus collectively amounts to almost $1 trillion for 2008 and 2009 as of end of January, with a further $650 billion in 2010) toward a Vulnerability Fund to help developing countries absorb the shock of the financial crisis. Some G20 countries such as the UK have expressed interest in this idea, but to date, none of the countries has committed to it. The upcoming G20 finance ministers’ meeting will be an important moment to discuss this proposal.

-Mikiko Imai