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The title of this year’s Global Monitoring Report is “A Development Emergency.” Appropriately so. We are in the midst of a global financial crisis for which there has been no equal in over 70 years. It is a dangerous time. The financial crisis that grew into an economic crisis is now becoming an unemployment crisis. It risks becoming a human and social crisis—with political implications. No region is immune. The poor countries are especially vulnerable, as they have much less cushion to withstand events. This poses serious threats to the hard-won gains in boosting the economic growth of many developing countries, especially in Africa, as well as achieving progress toward the Millennium Development Goals (MDGs). It also poses a threat to global recovery, because developing countries can provide a growth platform to help the global economy pull out of the crisis.

The global financial crisis, the most severe since the Great Depression, is rapidly turning into a human and development crisis. The financial crisis originated in the developed world, but it has spread quickly and inexorably to the developing world, sparing no country. Increasingly it appears that this will not be a short- lived crisis. The poor countries are especially vulnerable, as they lack the resources to respond with ameliorative actions. The crisis poses serious threats to their hard-won gains in boosting economic growth and achieving progress toward the Millennium Development Goals (MDGs). Poor people typically are the hardest hit, and have the least cushion. For millions of them, the crisis puts at risk their very survival.

The global financial crisis can seriously retard progress toward the MDGs. The impact will be felt on all MDGs, including the goals for poverty reduction and human development. Poor countries that are vulnerable to shocks and have the least capacity to respond with ameliorative actions are at particular risk of falling further behind. A recent assessment by the World Bank found that almost 40 percent of developing countries were highly exposed to the poverty effects of the crisis (with both declining growth rates and high levels of poverty); most of the others were moderately exposed, with fewer than 10 percent facing little risk. Three-quarters of the exposed countries had limited fiscal capacity to expand programs to curb the effects of the economic downturn. Within countries, the poor typically are more vulnerable and have the least cushion....
The poverty impact of the crisis would be even greater if the crisis deepens and growth in developing countries falters further than currently anticipated. Severe financial crises in the past that caused growth to turn negative produced sharp increases in poverty rates in the affected countries. During the East Asian crisis of the late 1990s, for example, the sharp reversal in growth and the associated rise in unemployment and decline in wages caused the poverty headcount index in Indonesia to rise by 11 percent in 1997 and a further 19.9 percent in 1998. In Thailand, the increases in the same crisis years were 9.8 percent and 12.9 percent, respectively....

The deepening global recession, rising unemployment, and high volatility of commodity prices in 2008 and 2009 have severely affected progress toward poverty reduction (Millennium Development Goal [MDG] 1). The steady increases in food prices in recent years, culminating in exceptional price shocks around mid-2008, have thrown millions into extreme poverty, and the deteriorating growth prospects in developing countries will further slow progress in poverty reduction. The prospects for an economic recovery, essential for alleviating poverty, are highly dependent on effective policy actions to restore confidence in the financial system and to counter falling international demand. While much of the responsibility for restoring global growth lies with policy makers in advanced economies, emerging and developing countries have a key role to play in improving the growth outlook, maintaining macroeconomic stability, and strengthening the international financial system.

Economic growth is central to achieving the Millennium Development Goals (MDGs) and related development outcomes, and a vigorous private sector is vital for strong and sustainable growth. The private sector drives job creation, increases in productivity, and economic growth.1 Private sector jobs provide most of the income in developing as well as developed countries. Revenues from private sector transactions and incomes pay for many of the public goods provided by governments. Competition can help spur technological advancements and productivity gains that are the key to sustained long-term growth.

The Millennium Development Goals (MDGs) strongly emphasize human development–related outcomes, with five of the eight MDGs having health, nutrition, and education results as key indicators for monitoring progress. Governments have a special responsibility to their citizens, especially their poorest citizens, to ensure attainment of primary education, basic maternal and child health and nutrition, and control of communicable diseases. Previous Global Monitoring Reports have largely focused on strengthening this government role. Yet experience in many countries, including some of the poorest, shows that the private sector is also extensively involved in the delivery of services that address these MDGs.

The global financial crisis is impacting an increasing number of developing countries. Low-income countries, which had previously been relatively shielded from the immediate effects of the crisis, are now particularly vulnerable. They are facing shrinking export markets, sharply lower commodity prices, and declining growth rates. The global crisis has raised the risk of poverty and hardship for households in poor countries—about 40 percent of developing countries are highly exposed to the poverty effects of the crisis, and a majority of them are in Sub-Saharan Africa. At the same time, the weakening of economic activity is depressing fiscal revenues in these countries, even as social, infrastructure, and other public spending needs are rising. More than half of low-income countries could see a decline in revenue-to-GDP ratios in 2009. But most low-income country governments will not be able to make up the shortfall in their budgets by borrowing domestically or internationally. The increased fiscal pressures are placing the delivery of basic services at risk and constraining these countries’ ability to undertake countercyclical spending.

External competitiveness and access to international markets are paramount for poor countries to realize the development promise of international trade. Pressing ahead with trade openness is a powerful means for countries to help mitigate the impact of the financial crisis and enhance prospects for economic recovery. The recent food, fuel, and financial crises have put great strain on the global trading system, slowing—and at times reversing— progress in trade integration. In early 2008 sharp increases in world food and fuel prices triggered disorderly and sometimes harmful trade policy responses, including the imposition of export taxes, quotas, or outright bans by some large food-exporting countries.
In late 2008 the financial crisis compounded the food crisis and led to a trade credit crunch and sharp increases in trade credit spreads. International trade slowed sharply in the last months of the year and is projected to contract in 2009—for the first time since 1982.

The international financial institutions (IFIs) have a crucial role to play in supporting an effective response to the global crisis and the development emergency that now confronts many developing countries. As a result, the focus of the IFIs has shifted to counteracting and mitigating the global private credit crunch and recession. This contrasts with 2007, when the impact of the IFIs stemmed largely from their ability to leverage private capital, which reached record levels of about $1 trillion in net terms in that year.
In 2008 credit conditions for developing countries deteriorated sharply as private flows dried up. Cross-border syndicated bank loans fell from $410 billion to $167 billion. Bond issuances fell from $170 billion to $72 billion. Equity investments fell from $269 billion to $174 billion. In 2009 net private capital flows to developing countries could fall still further, to less than one-fifth of the 2007 peak level, as private credits continue to contract. Indeed, net private flows could even turn negative in 2009 if difficulties in rolling over maturing debt intensify.

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