Global Studies Review

BY AGNIESZKA PACZYNSKA

Over the last three years food and fuel price increases followed by the global financial crisis have placed tremendous strains on fragile and post-conflict states, raising concerns about their ability to maintain political and social stability. At the same time, what these multiple crises have revealed is that even countries in remote corners of the world, seemingly bypassed by globalization processes, are deeply integrated into the global economy and not immune to the fast-spreading global financial crisis.

The crises have had a severe social impact across the globe. International organizations and donor governments have been increasingly alarmed about the potential of political instability among emerging market economies and in developing countries.¹ These concerns are magnified in cases of fragile and post-conflict states, where state and social institutions are weak, social cleavages and tensions often run deep, and financial reserves are low, thus exacerbating the economic and social impact of the crisis.² As Alastair McKechenie, director of the World Bank’s Fragile and Conflict-Affected Countries Group recently noted, “[fragile] countries, almost by definition, are less able to cope with external shocks and crises. Therefore, there is a risk that social tension and violence could increase in some countries.”³ Although systematic data is scarce, there is indeed evidence that since 2006 the number of episodes of social unrest sparked by these crises have increased.

The depth of the unfolding crisis surprised most observers.⁴ What began as a subprime mortgage loan crisis in the United States, quickly spread across the globe. Initially, many analysts expected developing countries to get through the financial crisis relatively unscathed because of their limited integration into the global economy. And indeed many developing countries were spared the direct, first wave of the financial crisis. By 2009, however, as the crisis deepened, it was clear that these expectations were misplaced. Throughout most of 2009 projections of how fast the global economy would contract continued to be revised downward. In April 2009, the World Bank projected a 1.7 percent contraction. By June, the Bank announced new projections, anticipating 3 percent shrinking of the global economy. Although most recent estimates by the Bank indicate that the global economy is showing some signs of recovery in high-income countries, the crisis continues to have a severe and negative impact on the world’s poorest countries. In its June 2009 report, the World Bank announced it anticipated developing countries’ GDP growth to shrink from 5.9 percent in 2008 to 1.2 percent in 2009.⁵ As Robert Zoellick, president of the World Bank, pointed out: “It’s quite clear that even if the developed world starts on a path to recovery, for many developing countries it will take longer. Some of these fragile developing economies don’t have any cushion.”⁶ Thus, for the poorest developing countries, the crisis is far from over as they continue to suffer “the consequences of global recession.”⁷

PATHS AND CONTAGION
Although most developing countries had few links to the embattled banks struggling with the fallout of the mortgage debacle, there were other crisis transmission mechanisms. The global economic crisis is experienced differently by developing countries depending on their geographic location and production profile. In the Asia-Pacific region, for instance, the impact of the crisis has been most acutely felt in countries dependent on manufacturing exports, while in Sub-Saharan Africa it is primary commodity exporters who are most severely affected by the economic downturn. Despite these regional differences, there are a number of common global crisis paths of contagion, which call for a closer examination.

As the economic crisis deepened, global demand for manufacturing goods and commodities declined, leading to fall in revenues in fragile states which are heavily dependent on such exports. At the same time, trade financing has dried up, making it especially difficult for small and medium enterprises in these countries to secure funds. Fragile states are also struggling with the consequences of the fall in capital flows. These flows to developing and emerging markets are expected to decline by close to 8 percent, from $929 billion in 2007 to $165 billion in 2009.⁸ Fragile countries, seen as particularly risky, have seen foreign direct investment falling dramatically, with many projects canceled or delayed.⁹

Remittances flows are another path through which crisis was transmitted. In many fragile states, remittances represent a major source of foreign exchange. As a case in point, they account for an estimated 45% of GDP in Tajikistan, 24.5% in Lebanon, 20% in Haiti, and 15.5% in Nepal. They are also an important source of income in Bangladesh, Pakistan, the Philippines and Sri Lanka. In 2009, remittances to developing countries are expected to drop by between $25 and $67 billion.¹⁰ Finally, there are growing concerns that Official Development Aid (OAD) is likely to contract as major donor countries face increasing budget pressures, with analysts predicting declines ranging from a few percentage points to as much as one third.

IMPACT OF THE CRISIS ON GROWTH AND POVERTY LEVELS
Much of the developing world entered the current period of global economic recession with financial resources depleted by the food and fuel price hikes of 2007-2008. In 2008 food prices reached alarming levels. The IMF’s index of internationally traded food commodities increased 130 percent from January 2002 to June 2008 and 56 percent between January 2007 and June 2008.¹¹ In 2009 prices stabilized somewhat but many food products remained unaffordable for the poor and prices remained volatile creating uncertainty. Already in 2008, the United Nations World Food Program estimated that the high food prices could set back progress in implementing Millennium Development Goals (MDG) by as much as seven years.¹² The global economic crisis made reaching these goals in the near future all but impossible.

Evidence from past economic downturns suggests that many human development measures deteriorate quickly with the onset of a crisis and are slow to recover even once the crisis passes and economic recovery beings. Thus, even with the crisis easing in the developed world, the developing world, including fragile and post-conflict states, are likely to continue experiencing the crisis’ aftershocks.  Furthermore, the consequences of many of these negative changes outlive the original crisis and are often irreversible. For instance, children who are pulled out of school because of economic contraction often do not return to school once the recession is over; and children who experience severe malnutrition during an economic crisis will often face life-long health challenges. This is especially true in the poorest countries.

Long-term assessments of the impact of the crisis on growth and poverty are difficult. The future trajectory of the crisis is not known and the policy responses to the crisis are still evolving. However, initial assessments are sobering. World Bank anticipates that 46 million additional people are expected to fall into poverty in 2009. United Kingdom Department for International Development (DFID) estimates that the financial and economic crisis will push an additional 90 million people into poverty in poor countries by 2011. This is on top of the additional 130 million who were pushed to subsisting on less than $1.25 a day during the 2005-2008 food price increases and the additional 25 million who were pushed below this poverty level during the past two years as a consequence of the increase in fuel costs.¹³ This slide into poverty is the result of employment losses, depressed wages, and lower levels of remittances. Although most developing countries will experience declines in growth rates and increases in poverty, the political consequences of the crisis may be most challenging to manage for fragile and post-conflict states.

CRISIS AND POLITICAL STABILITY
According to the MDG, “Poverty, inequality and disease are chief causes of violent conflict, civil war and state failure. A world of inequality is a world of insecurity.” The relationship between poverty and conflict, however, is not direct and is mediated by existing state institutions and the socio-economic fabric of a society. Much empirical research suggests that when state and social institutions are robust, conflicts can be resolved and grievances addressed through well-established institutional channels. When they are weak, however, there is a greater probability that conflicts will be resolved through violence. Moreover, whether economic inequalities overlay other group identities within a society plays a key role in whether poverty and inequality precipitate violence.  Especially combustible are contexts where economic exploitation coincides with ethnic, religious, cultural, racial or regional social divisions.

Studies of previous economic crises’ impact on social dynamics suggest that although these are context specific, such crises tend to increase social unrest. One study that examined the relationship between external conflict, internal conflict and the business cycle in 150 countries from 1950 to 1992 found that recession alone increases the probability of internal conflict.¹⁴ Other research found that a negative growth shock of 5 percent increased the likelihood of major civil conflict by more than 50 percent.¹⁵ Evidence from previous economic crises also indicates that the distributional impacts of crises are highly uneven and income inequality often worsens during a crisis, adding further pressure to poverty levels.

Studies of the current crisis, suggest a similar dynamic. The Political Instability Index developed by the Economic Intelligence Unit finds that a significant number of countries, as a consequence of worsening economic distress indicators, are at risk of social instability. Furthermore, with the deepening and global widening of the crisis, the number of states rated as being at very high or high risk of instability jumped from 35 in 2007 to 95 in 2009. Among those are many fragile states, including Afghanistan, Zimbabwe, Sudan, Pakistan, Tajikistan, and Moldova.¹⁶

The global economic crisis is particularly difficult for countries emerging out of conflict where state, economic and social institutions are either destroyed or fragile, social cleavages and tensions run deep, and international aid is often insufficient. As the economist Paul Collier recently remarked: “It takes over a decade of putting money, combined with peacekeeping and rehabilitation to build up states post-conflict. Instead we’ve used short-terminism and denied reality. Post-conflict states have very little room to maneuver out of financial crisis. The scope of government response is limited. There is no fiscal space.”¹⁷

CONCLUSION
The policy-making community has increasingly recognized the urgency of addressing the impact of global financial crisis on developing countries. The World Bank, for example, has decided that it will continue functioning in an emergency mode it entered when it focused on responding to the food and fuel crisis in 2008 and will provide debt relief, policy advice and will make funding available in a more expeditious manner.¹⁸ The G-20 has also pledged to increase financial support to the developing world to enable it to better withstand the crisis. The United Nations Secretary-General, Ban Ki-moon has called on the international community to adopt a four-pronged strategy to address the fallout from the economic crisis, including a global stimulus plan which would include assistance to the most vulnerable poor countries, cash aid and long-term lending by development banks; reviving the Doha Round of trade negotiations and reforming the global financial institutions and architecture.¹⁹ This international support to developing countries and in particular to fragile and post-conflict states will need to be sustained over the long-term to enable economic recovery in these countries. Likewise, a reform of the global financial architecture will also need to be followed through to ensure a more representative system and one that reflects the current international environment. Whether either will succeed remains an open question as donor governments themselves struggle with the aftershocks of the global financial crisis.

Agnieszka Paczynska is Associate Professor at the Institute for Conflict Analysis and Resolution at George Mason University.

ENDNOTES

1. See for example, Dennis C. Blair, the United States Director of National Intelligence, testimony before Congress in February 2009 during which he warned that “Instability in countries around the world caused by the current global economic crisis, rather than terrorism, is the primary near-term security threat to the United States.” http://www.dni.gov/testimonies/20090212_testimony.pdf. [↩]
2. In this article, fragile states (or Low Income Countries Under Stress – LICUS) are defined according to the World Bank criteria. http://www.worldbank.org/ieg/licus/licus05_map.html. [↩]
3. World Bank, “Crisis Impact: Fragile and Conflict-Affected Countries Face Greater Risks,” October 2, 2009; http://web.worldbank.org/WEBSITE/EXTERNAL/NEWS. [↩]
4. See for example, Jack Boorman, “The Impact of the Financial Crisis on Emerging Market Economies: The Transmission Mechanism, Policy Response and Lessons,” Emerging Markets Forum, Mumbai India, June 23, 2009; http://www.emergingmarketsforum.org/papers/pdf/2009-EMF-Global-Boorman_Financial_Crisis.pdf and Takatoshi Kato, “Impact of the Global Financial Crisis and Its Implications for the East Asian Economies,” October 16, 2009;  http://www.imf.org/external/np/speeches/2009/101609.htm. [↩]
5. The World Bank. Global Development Finance: Charting a Global Recovery. Washington, DC: the World Bank, June 2009. [↩]
6. New York Times, June 11, 2009. [↩]
7. World Bank, “Low Income Countries Face Long Recovery,” September 16, 2009; http://web.worldbank.org/WBSITE/EXTERNAL/NEWS. [↩]
8. United Kingdom Department for International Development (DFID), Crisis Update, March 26, 2009. [↩]
9. International Monetary Fund. Implications of the Global Financial Crisis For Low Income Countries. Washington, DC: International Monetary Fund, March 2009. [↩]
10. Missimilano Cali with Salvatore Dell-Erba, “The Global Financial Crisis and Remittances: What Past Evidence Suggests,” Working Paper 303, London: Overseas Development Institute, June 2009, 6. [↩]
11. International Monetary Fund. Primary Commodity Prices Database, 2008; http://www.imf.org/external/np/res/commod/index.asp. [↩]
12. World Food Program, June 2, 2008; http://www.wfp.org/node/7906. [↩]
13. DFID, “Crisis Update: 90 Million to be Pushed into Poverty by 2011,” March 26, 2009; http://www.dfid.gov.uk/Media-Room/News-Stories/2009/Crisis-update–90-million-to-be-pushed-into-poverty-by-2011/. [↩]
14. S. Brock Bloomberg and Gregory d. Hess, “The Temporal Links Between Conflict and Economic Activity,” Journal of Conflict Resolution, vol. 46, no. 1. [↩]
15. Edward Miguel, Shanker Satyanath and Ernest Sergenti, “Economic Shocks and Civil Conflict: An Instrumental Variables Approach,” unpublished paper, April 2003, http://web.mit.edu/14.773/www/conflict_15apr03.pdf. [↩]
16. Economic Intelligence Unit, “Manning the Barricades: Who’s at Risk as Deepening Economic Distress Foments Social Unrest,” Special Report, March 2009;  http://graphics.eiu.com/specialReport/manning_the_barricades.pdf. [↩]
17. “Africa: Helping Fragile States Survive the Financial Crisis,” May 14, 2009; http://www.irinnews.org/report.aspx?ReportId=84390. [↩]
18. World Bank, “Africa Likely to be Worst Hit by the Financial Crisis,” April 23, 2009. [↩]
19. UN News Center, “Economic Crisis Could Trigger Political Instability, Social Unrest, Warns Ban,” March 25, 2009. [↩]

Tags: Global Studies Review Vol. 6 No. 1 Spring 2010

 Print This Post

This entry was posted on Saturday, March 13th, 2010 at 2:03 am and is filed under Development, Foreign Aid, Globalization, Governance, Neoliberalism, Regulation, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.