By Jonathan Hayden
The Daily Cardinal
As the financial meltdown that originated in the U.S. housing market continues to tighten its grip on the global economy, one issue that continues to receive little attention is the impact of the crisis on the developing world. Granted, it may be hard to equate the epic fail of mortgage-backed securities, credit default swaps and other complex financial derivatives with the well-being of the typical subsistence farmer or sweatshop worker, but their relationship is a testament to the ever-increasing interconnectedness of the international marketplace.
In a reportWorld Bank released last Tuesday, experts believe Third World countries will be among the hardest hit, due in large part to the continued effects of soaring food and oil prices that plagued the developing world for much of the spring and summer. The number of people who have sunk to the depths of extreme poverty (a measurement defined as earning less than one dollar per day) since the beginning of the food shortage is estimated at 100 million, with the World Bank projecting this number to increase by 20 million with each percentage point decline in GDP growth. While the impact of the financial crisis has been felt first and foremost by developed countries who stand to bear the brunt of negative effects in absolute terms, it is only a matter of time before the Third World is adversely affected.
As the repercussions of the crisis cascade across sectors and down the global economic hierarchy, underdeveloped countries will be affected most in relative terms; a $500 decrease in annual income may merely be a drop in the bucket for Americans, but would constitute more than an entire year's wages for many living in sub-Saharan Africa or southeast Asia. At the root of these grim projections are three main fears facing developing countries.
First, the financial crisis has resulted in skyrocketing interest rates that provide disincentives for entrepreneurs to take out loans to invest in a low-income country's economy, reducing capital inflows that are significant factors for the development of industry and job creation. Governments in these countries, both as a result of reduced tax revenue and an inability to obtain manageable loans themselves, will have much less money available to spend on such essentials as health care, education and infrastructure.
Second, the global scope of the crisis will reduce international demand for exports, with World Bank President Robert Zoellick projecting a decrease in trade for the first time since 1982. Third, wealthy nations will most likely cut developmental aid to low-income countries in an effort to alleviate their own financial troubles.
This fear was confirmed in October's vice-presidential debate, when Vice Presidential-elect Joe Biden claimed, The one thing we might have to slow down is a commitment we made to double foreign assistance,"" a slightly embarrassing prospect considering the U.S. already contributes the smallest share of GDP to developmental aid of any high-income country, at a paltry 0.14 percent. Such a decrease in commitment to aid is mutually detrimental, however, as it is widely acknowledged that poverty and the despair it engenders is a breeding ground for intolerance and hate, often directed at those fortunate enough to escape the clutches of destitution.
All is not lost however, as both the World Bank and International Monetary Fund have pledged substantial loans and grants to countries projected to suffer the most, albeit with strict preconditions requiring institutional reforms. Investment in social safety nets like Mexico's Oportunidades and Brazil's Bolsa Familia have been met with great success as well, costing just 0.4 percent of their respective GDPs while being able to shield populations from the worst effects of the crisis. The harsh reality is such measures are increasingly being viewed as essential to avoid seeing trickle-down economics manifest itself in an acutely sinister fashion.
Jonathan Hayden is a junior majoring in political science. Please send responses to opinion@dailycardinal.com.
