Developing country governments are dragging their feet over the global crisis

May 1, 2009

     By Duncan Green     

What are developing country governments doing to respond to the damage being inflicted by the global economic crisis? Answer, according to two new papers: not much, and they could be doing a lot more.

A study from the Overseas Development Institute pulls together the draft findings from studies in ten countries. The ODI finds that in terms of economic policy responses, a few countries are considering, implementing or accelerating growth policies (e.g. Cambodia), or implementing fiscal stimuli (Indonesia), yet in others there has been a very small monetary policy step and not much else (e.g. Kenya). Overall, ‘in most countries it is still business as usual.’

In contrast, the study finds a wider range of social policy responses. These range from taking the axe to social spending budgets (Nigeria and Zambia) to using aid to expand social protection from a low base, in response to the crisis (Cambodia), to others where a well developed system is being expanded to respond to increased need (Indonesia).

A paper from Stephany Griffith-Jones and José Antonio Ocampo published by the International Policy Centre for Inclusive Growth argues that most developing countries actually have more options than in previous financial crises. Countries with stabilization funds (generally, energy exporters and some metal exporters) will be able to use past savings to cushion the effect of commodity price downswings. The nature of the policy packages to be adopted will vary. For those countries with a low debt burden and large foreign exchange reserves but weak fiscal position (e.g. running a big deficit), the room for manoeuvre lies more in monetary policy (lowering interest rates) than with fiscal policy (increasing spending).

The strategy will also depend on each country’s social policy framework. The authors argue that universal social policies in the areas of nutrition, basic education and health should be the major policy focus, but targeted programs for the poor, such as conditional cash transfers, make sense in middle income countries (in poorer countries, by definition, poverty is widespread and universal programs are superior). Special emergency job programmes should be the essential complement, since unemployment insurance, the traditional automatic stabilizer of industrial countries during a downturn, is generally absent in developing countries.

But while most developing countries do have larger room for manoeuvre to adopt counter-cyclical policies than in the past, the major regional exception is Central and Eastern Europe, where the ‘traditional mix’ of current account and fiscal deficits prevails. That mix is infrequent elsewhere, though there are two notable cases in South Asia (Pakistan and Sri Lanka). Griffith Jones and Ocampo believe these countries will have to undergo some traditional macroeconomic adjustment. They argue that it is essential, however, that in these cases the fiscal adjustment is done in such a way as to avoid the worst of pro-cyclical fiscal adjustments of the past, and is able in particular to maintain good levels of public sector spending in the social sector and in infrastructure. In the past, fiscal reform packages that focus on strengthening government revenues have shown themselves to be preferable to sharp spending reduction packages.

Over the next few months, I hope to be moving on from our work on the development impact of the crisis to do more on the way different developing country governments are responding to the crisis. Any suggestion, links, references etc would be very welcome.