Beyond the financial crisis

The  international economic crisis has hit many developing countries hard, inflicting devastating social costs and calling into question the  prospects for sustained economic recovery and long-term development. Has  the crisis interrupted or ended recent economic growth rates? How  successful had growth been anyway in improving living standards? Will  economic policies now change? As governments grapple with the  challenges, journalists are crucial to raising public debate about the  issues at stake, and how they affect poorer citizens.

What is this media brief for?

This  is a briefing document for journalists on economic growth and poverty  reduction. It sets out the main issues around the topic and gives tips  on reporting it. It aims to help journalists consider issues and  debates, and research their own stories.

You can download the  brief in the left-hand column, or read through our online version of  the brief by using the tabs above. In addition Panos London has assembled a series of resources relating to the brief

  • Beyond the financial crisis: what next for economic growth and poverty reduction in developing countries? This  new media brief, contains selected references to key research, looks at  how the international financial crisis has affected the economy and  people in Africa and South Asia. It looks at emerging trends as  governments make decisions on future growth and economic development,  and provides tips for how journalists can cover the issues at stake in  the public interest.
  • The Beyond the financial crisis literature review (Pro-poor growth in the context of the financial crisis)  provides a background overview of research literature on the  much-debated relationship between economic growth and poverty reduction.  It complements the media brief by providing further information and  analysis on key economic growth and poverty reduction issues, and  contains a complete set of research references on pages 31-38.
  • An annotated bibliography provides further insights for journalists interested in finding out  more about the issues raised by selected examples of the research  covered in the literature review.
  • A glossary of important terms provides journalists with the definitions they may need to understand  in reporting on economic growth and poverty reduction and in using  research to do so. The glossary extends the shorter list on page 10 of  the media brief.
  • Tax matters: a media guide to research on tax and governance provides information and tips for journalists keen to cover tax  policies. Tax underpins the state-citizen relationship, and policies in  this area are vital as governments seek to deal with the impact of the  international crisis on public finances, encourage growth and share its  rewards.
  • Making or missing the links? The politics of trade reform and poverty reduction encourages journalists to report on the costs and benefits of trade  reforms for people in their countries. The export markets of many poor  countries have been badly affected by the international financial  crisis. But even before recent events, the link between trade, growth  and poverty reduction was a hot topic of debate. This media brief  explains why.

Key Issues

From surging growth to the ‘triple crisis’

Until  2007, a significant acceleration in economic growth occurred in the  developing world, including the poorest countries (see ‘End of the boom’  below).

The effects of the international financial crisis, which  entered an acute phase from late 2008, led to projections for growth  being revised downwards in many lower-income countries. According to  estimates from the Overseas Development Institute (ODI, 2009), Africa as  a whole was expected to see strong growth turn into negative  performance in 2009. South Asia was affected too – according to the  Pakistan Institute of Development Economics (PIDE, 2009), annual growth  in Pakistan of more than 7 per cent in 2004–07 was set to collapse to 2  per cent in 2009.

In fact, the first decade of the new millennium  ended with a ‘triple crisis’ affecting prospects for development – of  finance, fuel and food prices, and climate change. For instance,  increases in the price of food and fuel had already pushed up to a  further 150 million people into poverty in 2007–2008. It is important to  disentangle the distinct causes and effects of each of these crises,  although there are some links between them.

The financial crisis  in the rich countries has complex causes. These relate to the importance  of the financial sector in the growth strategies of leading rich  countries such as the US and the UK. Liberalisation and poor regulation  of financial markets allowed the emergence of complex and risky  financial products, including the repackaging and re-selling of debts.  These products were traded internationally, so when the crisis was  triggered – by unsustainable levels of credit-fuelled debt in the US  housing market – it spread rapidly to other countries’ economies.

The  credit crisis led to recession in rich countries, and their falling  demand for goods and services has inflicted major costs on many  developing countries.

Links can also be identified between  problems in rich countries’ financial markets and the food and fuel  crises in developing countries. For example, the sharp rise in oil and  food prices in 2007–08 was partly because of speculation in commodities,  as international investors pulled out of property and shares due to the  emerging housing market crisis and tried to invest their money  elsewhere.

End of the boom?

In  2007 the overall growth rate among the least developed countries (LDCs)  was 7.6 per cent, a sharp rise from annual averages of around 2.2 per  cent between 1980 and 1990, and around 4.7 per cent from 1990 to 2005.  This rapid growth was led by exports. The main driver was high demand  and prices on the world’s commodity markets, especially for energy  products and minerals. In 2007 developing countries’ exports were worth  51 per cent of their total GDP, nearly double the 1995 figure of 26 per  cent. The highest growth rates were found in oil-producing countries  such as Angola, while mining prospered in countries like Zambia and  Tanzania. The United Nations Conference on Trade and Development  (UNCTAD, 2008) warned at the time that growth needed to be based on a  broader range of sectors and economic linkages if it was to provide a  long-term platform for development.

The effects of the financial crisis

The  effects of the international financial crisis and the recession in rich  countries have been transmitted to developing countries in numerous  ways. These macro-level shocks, which have affected major aspects of the  economy, have in turn increased stress and uncertainty among poor and  vulnerable people.

Hitting economies

The financial crisis has affected the economies of many developing countries in the following areas:

Falling trade. The declining value of trade has had the most damaging  effect. The crisis was transmitted to poorer countries by a fall in  international demand for their exports and a corresponding decline in  commodity prices. For example, copper and oil price falls affected  countries such as Zambia, Nigeria and Angola. Major earners in the  services sector (eg tourism) were also hit, which affected countries  such as Kenya, Tanzania, the Gambia, Mauritius and Nepal.

Falling investment and lending. Private capital flows to developing  countries, including stock market investment, international bank lending  and foreign direct investment (FDI), were estimated to be 82 per cent  less in 2009 compared to 2007 according to the Institute of  International Finance (IIF, 2009). Major investment plans, for example  for mining exploration in Tanzania, were put on hold or cut in size (as  in Uganda). In lower-income countries where foreign banks had a strong  presence, worries emerged about falling bank lending, which would deny  credit to producers and undermine consumer demand.

Falling  remittances. Private money transfers sent home by migrants working  abroad are an important source of income for both people and the balance  of payments figures in many poorer economies. With less employment in  richer countries, the World Bank predicted a decline of up to 5 per cent  in such remittances in 2009.

Threats to international aid. In  many lower-income countries, aid from international donors pays for a  high percentage of investment and government expenditure. With the  financial crisis putting donor governments’ own budgets under pressure,  there are signs that many will be more reluctant to maintain foreign aid  commitments.

Hitting governments

The  financial crisis has worsened many lower-income countries’ budget  deficit problems, because economic slowdown has meant that they cannot  raise as much money as planned from taxation. In Kenya, for example, the  government was forced to revise its 2008–09 budget several times,  eventually cutting ministry budgets and freezing expenditure on  infrastructure projects.

Some governments in Africa and Asia have  also experienced problems with inflation. This is demonstrated by  rapidly increasing prices in Pakistan, where the government introduced  stabilisation measures backed by the International Monetary Fund (IMF)  in late 2008.

Hitting people

According to research, the shocks of the financial crisis have affected people mainly in the following ways:

Jobs, income and working conditions. In Zambia, 27 per cent of jobs in  copper mining were lost in 2008 as companies cut back (ODI, 2009). In a  report for the global activist network Women in Informal Employment  Globalizing and Organizing (WIEGO, 2009), Zoe Elena Horn found that  informal businesses have also experienced decreasing demand, rising  costs of supplies and inputs, and increasing price volatility. In  general, unemployment increased in low-paid industries, and in many  places employment conditions worsened. Women workers are often the first  to suffer job cuts, for example in the export manufacturing sector  where they are the mainstay of the workforce in many countries.

Prices. Food prices in many countries remain well above where they were  before the sharp increases of 2007 and 2008. Increased prices for food,  and to a lesser extent for fuel, affect poor people more than others  because they spend a large part of their income on these items. ( Read more on our What we do resource page)

Remittances and public spending. Falling remittances have affected poor  people more than others. Meanwhile, public spending also faces pressure  as governments find it hard to maintain expenditure on social services  or finance social protection measures. Loss of jobs and income often  leads to cutbacks in household expenditure and the selling of assets,  which in turn further depress demand, incomes and employment.

Before the crisis: growing the economy, sharing the rewards?

Governments  have signed up to the UN’s Millennium Development Goals for reducing  extreme poverty with an overall deadline of 2015. However, the severe  effects of the financial crisis have thrown into further doubt whether  countries, particularly in Africa, will achieve those goals.

Even  in the years before the crisis, there were doubts in many countries  about the extent to which rising economic growth was leading to improved  standards of living for the majority. Whether and how economic rowth  could support poverty reduction has been the subject of much  discussion  among researchers, civil society activists and policymakers. The jargon  used to describe the challenge is ‘pro-poor growth’, but the term means  different things to different people (see box ‘Can growth alone end  poverty?’).

In examining whether policies on economic growth  support improvement in the living standards of poorer citizens, research  suggests it is useful to distinguish between direct and indirect links  and benefits. For example, policies can deliberately aim to promote  growth in the economic sectors and geographical areas where poorer  groups work and live, and seek directly to boost their employment,  productivity, income and working conditions. On the other hand, as  Klasen (2003) notes, high growth of any sort can be made pro-poor if  governments, through appropriate taxation, are able to raise resources  for more generous social spending, redistribute wealth, or invest in the  structures needed to promote more inclusive economic development.

Meanwhile,  the International Policy Centre for Inclusive Growth (2007) argues that  policies to empower women are vital to both economic growth and poverty  reduction, given their significant roles in production and trading, as  well as in the household and community.

The different arguments  surrounding growth and poverty reduction take on even greater  significance during times of economic difficulty.

When the  economy is growing quickly it can be politically easier to produce  benefits for everyone, but when the going gets tough there are fewer  resources to go round and sensitive adjustments may have to be made.  Reductions in income and damage to other factors vital for better living  standards affect poorer people much more than economically richer  groups.

To what extent and in what ways are policies on growth pro-poor in your country?

Beyond the crisis: tracking responses and choices

The  financial crisis has sparked renewed debate about the success or  failure of the recent market reforms backed by the World Bank and the  IMF. A recent conference of the African Economic Research Consortium in  2009 asked: Do such policies need to be strengthened, adjusted or  changed?

Until the 1980s, it had been thought that governments  should promote economic development by supporting domestic industries to  substitute for imports (for example by shielding national producers  from outside competition through tariff protection). The emphasis then  moved to a market- rather than state-driven approach: relying on exports  and allowing markets to operate ‘freely’, both within each country and  internationally. In the new millennium, the focus increasingly shifted  to the need for ‘institutions’ (such as regulatory bodies and better  systems for providing credit to producers) to enable markets to work  better. Some supporters of market reforms, such as Krueger (2004), claim  that the reforms have not been applied consistently enough to achieve  proper success.

Faced with the financial crisis, rich country  governments have intervened in the markets to tackle market failure and  cope with recession. Whether this will lead to wider changes in economic  governance elsewhere is unclear. UNCTAD (2009) suggests that this could  prompt a rethink of the role of the state in the world’s poorest  countries. As governments in poorer countries respond to the  international financial crisis, the coming years will be crucial both  for the future direction of economic policies and for vulnerable groups  within them.

Back to the future? State intervention and governance

If  the state in poorer countries is to intervene in the economy more  assertively – and if one of its aims is to bring economic development  and gains for poorer citizens – how will it avoid the old traps of  patronage and inefficiency?

In some countries, for example,  there is a cautious return to agricultural subsidies. Research by Minde  (2008) and others claimed that these schemes had not proved successful  in Zambia, but other research in Malawi reported that they had boosted  production considerably (Harrigan, 2008). Malawi’s success in increasing  access to food, however, was also matched by concerns about whether the  subsidy programme was sustainable and – as in Kenya – alleged  corruption.

Some suggest that new forms of state intervention  should be considered to help poorer groups to organise and have a  greater say in how markets operate and are governed. UNCTAD, in its  World Investment Report 2009, stresses the value of investment in  agriculture, and suggests that small producers can be better organised  to negotiate with transnational corporations in supply chains. It also  suggests that appropriate regulation, such as effective competition  laws, can help prevent abuses of market power, such as large companies  dictating the prices paid to producers.

Resources

Issues to consider

Journalists  covering stories on the economy will want to report the implications  for the wider public. This includes poorer citizens and less influential  socio-economic groups. While powerful groups generally drive decisions  on the economy, covering the views of poorer citizens and less  influential groups in stories can lead to new insights into economic  policy and raise issues that might otherwise be overlooked by the public  and policymakers.

The challenge is to connect often technical  policy decisions and debates on the economy to their social and  political implications, and the effects they will have on people’s  everyday lives.

For instance, monetary policy (which governs the  amount of money in circulation in the economy and interest rates) and  fiscal policies (government decisions on taxation, spending and  borrowing) are subject to conflicting economic views.

Orthodox  economists argue that prudent policies ensure economic stability and  avoid problems such as budget deficits and inflation. Their critics  meanwhile say that unnecessarily strict controls on the money supply and  public spending prevent ambitious growth strategies. These debates are  important, as the decisions affect prices, job creation, wages, credit  for producers and how much tax different groups pay.

Trade and  investment policies can also be controversial as they determine how open  or closed a domestic market is to foreign goods and services. These  decisions affect producers, traders and consumers, putting at stake the  price and quality of goods, access to food or water, and the  availability of jobs.

As countries adjust their economic  policies to try and promote recovery in the aftermath of the financial  crisis, there is an opportunity not only to examine the effects of the  crisis on your country but also to question whether the future direction  of policies on growth will benefit poorer citizens. The following are  some issues and trends that could arise in future policy decisions,  along with possible consequences for different sectors and the wider  public, especially poorer groups.

Can growth alone end poverty?

A  much-debated research paper by Dollar and Kraay (2002) argued that  growth itself is sufficient to benefit poor people. But this automatic  association has been questioned.

Numerous definitions of  ‘pro-poor growth’ have emerged in research, typically based on relative  or absolute definitions. Take the vital issue of income. According to  the relative definition, growth is only pro-poor if the incomes of poor  people grow at a higher rate than those of the better off, say analysts  such as Saad-Filho (2007) and Roy and Weeks (2004). Over time, such  growth would reduce inequality as well as poverty. Stiglitz (2009)  argues that rising income inequality itself is bad for growth, as money  is transferred from those who are likely to spend it and create new  demand to those who have more than they can spend already.

Others,  however, say that a rigid insistence on tackling social inequality  fails to reflect the positive changes that growth can achieve in the  absolute wellbeing of the poor. If poor people’s incomes rise  significantly, that must mean an improvement in their lives, they argue.

Even so, there is no guarantee that rising GDP will translate  into rising incomes. A research paper by Ravallion (2004) suggests that  income benefits can vary widely, depending on the pace of economic  growth (how much and how quickly GDP increases) and the pattern of  growth (how it is distributed throughout the economy).

Questions to ask:

Spending on public services and social protection

As  key sources of finance were affected by the crisis, governments may  have fewer resources to compensate for lost growth and to sustain public  finances. The sharp downturn in domestic revenue was estimated by the  IMF to amount to 5 per cent of GDP for sub-Saharan Africa in 2009.

Ask: Has your government reined in public spending? Which areas of the  budget and plans have been affected or protected? Which groups or  regions will be most affected by cuts? Has the government sustained or  cut spending on wages, social services, or fuel and food subsidies?

Room for expansion

Even  in lower-income countries, which do not have the same resources as rich  countries, there is still debate on whether increased government  spending is necessary to promote recovery, and what size and approach  stimulus packages should take. In 2009, for example, Tanzania launched  one of the largest stimulus packages in Africa in terms of the size of  its economy (worth 6.4 per cent of GDP) while both Kenya and Uganda  increased government expenditure significantly for 2009–10.

Ask: Is there a stimulus package in your country? Which economic sectors and  groups are benefiting? Is it aimed at boosting demand for domestic  goods and services, and creating local jobs and income or will it be  spent on imports from other countries? What resources are available to  increase public spending and investment? Do they depend on support from  international financial institutions (IFIs) and aid donors? What  conditions are attached to these loans?

Investing in production

With  levels of foreign direct investment in LDCs falling, governments may  consider new approaches to raise the finance needed to support  productive activities. Mozambique has launched a district development  fund to support economic livelihoods. An earlier proposal for a national  development bank did not go ahead, partly because it proved unpopular  with international donors concerned about alleged state inefficiency and  corruption. Many countries are desperate to attract foreign investors  but unless investment is linked to local business and job creation,  there may not be widespread benefits for the economy.

Ask: How is your government promoting investment? Does this involve public  funds? Does public investment encourage or discourage national or  foreign private investment? Will private investment promote development  of local businesses and job creation for poorer workers?

Looking for sources of finance beyond aid

International  aid remains vital for the poorest countries, but there is growing  debate on new sources of finance, including the importance of taxation.  Governments may seek to bring in revenue through increasing indirect  taxation such as Value Added Tax (VAT), which has become a more  important source of revenue in recent years. This will affect the price  of goods and services. They may also consider whether or how to increase  direct taxation of recent growth sectors such as mining. But balancing  effective taxation of income from natural resources with the need to  attract investors is a challenge. The amount of revenue from natural  resources – and whether it is transparent and accountable – is the focus  of public attention in countries such as Zambia, Tanzania, Mozambique  and Uganda.

Ask: How successfully is your  government using taxation policies to encourage economic growth and  share its rewards? What share of tax do different economic groups pay?  Who avoids paying? Who is given tax exemptions?

Strengthening agriculture

As  governments become more concerned with food security, they have  launched initiatives to strengthen the agricultural sector. The World  Bank (2007) and other researchers have identified potential for growth,  economic diversification and poverty reduction from improved  agriculture. Kenya plans to restore irrigation schemes, expand food  reserves and promote indigenous crops, while Tanzania is developing an  ‘Agriculture Comes First’ strategy.

Ask: Is  your government reconsidering the potential of agriculture to drive  future growth and poverty reduction? Will government policies strengthen  poor people’s livelihoods and productivity, for example through access  to land, credit, technical support and training?

Promoting self-reliance and diversification

The  vulnerability highlighted by recent external shocks may prompt debate  on how countries could rely more on their own domestic sources of growth  or diversify economic activities, including exports. This could lead to  greater opportunities for small producers and entrepreneurs, and more  sustainable growth in the long term. But it is a challenge for countries  traditionally dependent on certain natural resources or commodities  such as Zambia, which relies on copper exports.

Ask: Is  the government trying to widen the range of your country’s economic  activities? What steps is it taking to ensure finance is available to  promote new goods and services, for example through investment in  research and development, better marketing or vital infrastructure (such  as transport)? Do the plans take into account the needs of poor  communities?

Regional opportunities

Some  countries are looking at developing markets in their own region. An ODI  report (2010) found that Uganda increased its cross-border trade by 45  per cent over the previous year in 2008–09, especially in industrial  products such as cement and steel.

Ask: Is your  government opening or closing its markets to regional neighbours? How  can countries coordinate cross-border trade for mutual benefit?

South–South trade

Recent  years have seen booming South–South trade between emerging powers such  as India, Brazil, Malaysia and China, and poorer developing countries.  There may be pros and cons to this trend – Africa’s growing trade and  investment ties with China, for example, have been the focus of much  comment and debate on whether they represent a major economic  opportunity or risk new patterns of economic dependency.

Ask: Which  areas of your country’s economy are the emerging Southern powers  involved in? How does this involvement affect growth and poverty  reduction? How does your government reach decisions on trade and  investment with other Southern partners? How pen and transparent is  government policy dialogue with Southern partners like China, in  comparison with that with Western countries and companies?

Sources on the inside, voices from the outside

Ministries  of finance, planning, and trade and industry usually play a leading  role in economic decision-making, and the way they consult with  departments on labour, agriculture or gender and social welfare is  important. Parliamentarians, senior civil servants, and business and  political leaders will also want a say. It is worth watching for who  else shapes economic policies, and who the government is most willing to  listen to. These might be domestic or foreign businesses, trade unions  or investment promotion agencies.

Financial institutions  (commercial banks, as well as international agencies like the World Bank  and IMF) could also have influence, as might other donor agencies or  civil society organisations.

It is just as important to see who  is missing from the government’s table – small entrepreneurs or informal  sector traders and workers, for example. Examining their situation, in  both urban and rural areas, to find out how policy affects them and how  they would like it to change can show the human consequences of economic  decisions. Poverty-monitoring groups exist in many countries and can  give information on incomes and livelihoods that may not be available  from government press offices.

Findings from academic research  can provide facts and valuable evidence on the social and political  effects of economic decisions. Research can be used for media outputs in  a variety of ways. For instance, research on rural livelihoods could  provide the basis for a photo essay or interviews with a farming family.  It is also worth interviewing the researchers, who may be able to give  pointers on how their research connects with people’s experience and  wider policy debates.

Poor people themselves have vital things  to say and experiences to share about how economic decisions affect  their lives. Communicating people’s voices though interviews, vox pops  and case studies adds immediacy to any story and allows their views and  experiences to be included in public debate.

Glossary

Some economic terms explained

Credit crunch – when banks and other suppliers of credit suddenly stop lending

Food security – state of confidence in having enough food available to meet needs, either on the part of a country or a household

Fiscal stimulus – adjustment of government spending and tax policy to stimulate demand

Macro-economic policies – the major policies used by governments to influence the level of  employment, the price level, economic growth and the balance of payments

Informal sector – the part of the economy that lies outside organised and officially recognised activities

Remittances – money sent back by international migrants and refugees to people in the country they came from

Shock – a sudden economic disturbance, such as a rise in the price of a commodity

Social protection – government measures to protect vulnerable members of society, such as  cash transfers, food-for-work programmes and health services

For a fuller list of economic terms please download our glossary in the left-hand column