Evidence is increasing that the global recession is having a particularly strong effect on the world’s poorer countries, which have fewer ways to protect themselves. The World Bank has predicted that 53 million more people will fall into poverty in 2009 (defined as subsistence living on less than 1.25 dollars a day), which comes on top of “soaring food and fuel prices of recent years, which pushed 130 to 155 million people into extreme poverty, many of whom have still not recovered." DFID’s predictions are that 90 million more people could be fall into poverty by the end of 2010.

National income

At the national level, low-income countries are suffering from:

• Reductions in aid. The Overseas Development Institute estimates that aid in 2009 will be 20% lower than in previous years, because of the affect of the recession on GDP in the aid-giving countries and also because of exchange rate fluctuations.
• Reduction in other national income, e.g. from exports, trade taxes and also possibly from greater protectionism in the developed world. The prices of natural resources have collapsed, from diamonds to oil, and it is estimated that already 300,000 jobs have been lost in the mining industry of DR Congo.
• Reductions in other potential sources of finance. International banks are reassessing their risks and reducing investments in far-flung markets – according to the Institute of International Finance, capital flows to emerging economies are forecast at $165bn for 2009, down from $466bn in 2008 and from the peak of $929bn in 2007.

In low-income countries, relatively low amounts of the total tax receipts come from income tax or corporate taxes. Such countries also typically have limited welfare budgets. This means that government revenue will be less affected by reductions in jobs and increases in unemployment, compared to richer countries. However, the reductions in aid and other national income, and the difficulties of borrowing, are likely to have knock-on effects on the delivery of public services and governments’ ability to pay their workers.

Individual income

This means that many public workers – medical staff, teachers, agricultural/irrigation workers and so on - may either lose their jobs or, perhaps more probably, not be paid. This will lead directly to worsening nutrition, health and education and other fundamentals of human development, and probably also in some places to social unrest and even conflict.

In addition to these problems with public sector salaries, families in developing countries are facing reductions in income from “remittances” from relatives working abroad. There is some debate as to how resilient remittances will be in the recession, but in the worst case scenario forecast by the World Bank, remittances may decrease by 6% globally in 2009, with Middle-East (13%) and Africa (7%) the worst-affected regions

The global response

The response to these threats has so far been focused on the role of, and funding available through, the IMF, and to a lesser extent the World Bank. Announcements in 2009 have included:

• The launch of a new ‘Flexible Credit Line’, without the traditional IMF policy strings attached
• A new issue of $250bn ‘Special Drawing Rights (SDRs), to help ease liquidity in developing countries
• Specific funds for social protection to help the hardest hit, through the World Bank’s ‘Vulnerability Financing Facility’, including increased commitments for the Rapid Social Response programme
• Bringing forward the sale of IMF gold reserves, the proceeds of which will be allocated to increase IMF support for low-income countries

However, there is much scepticism about these proposals in developing countries. Recourse to IMF funding is still seen as a stigma by many, as evidence by Pakistan’s attempts to arrange financing from other governments before finally agreeing to an IMF bail-out in November 2008. Some of the positive announcements do not stand up to closer scrutiny – for example, most of the $250bn SDRs to be issued will go to rich countries, allocated according to IMF country quotas. Several announcements have turned out to be old news repackaged – for example, the proposed sale of IMG gold reserves. There is little solid money behind the Rapid Social Response programme beyond a £200m contribution from DFID, which is not a large amount of money compared to the scale of the problem.

It remains to be seen how the global financial crisis will affect low-income countries. The situation may not be as negative in the very poorest countries as it currently seems - for example, private capital inflows to Africa are predicted to stay at similar (relatively low) levels as before. However, if the multilateral funding bodies do not translate their announcements into actual transfers of funds, then some of the world’s poorer governments and individuals may face drastic consequences.

In this context, making sure that governments in low-income countries are functioning as well as possible is even more important than before. Improving tax systems and overall public financial management, increasing government efficiency and scrutiny of value for money, removing barriers to investment, ensuring that justice systems can resolve disputes before they escalate, and involving civil society more in policy formulation – all these can contribute to better government performance and greater government legitimacy in the eyes of the people. Atos Consulting has wide-ranging experience of working across all these areas, and a reputation built up over many years of being able to implement positive change in difficult circumstances.