Development Centre

The Poor Must Not Pay for the Crisis


Poor people in poor countries are severely affected by the turmoil originating in rich ones. OECD countries must stimulate the world economy for the benefit of the poorest, and ultimately the benefit of all. These are some of the main messages heard at the OECD Global Forum on Development special session on the implications of the crisis for development finance. Amongst the proposals that came to light: renewed Official Development Assistance commitments by the aid community –in line with the OECD’s call for an aid pledge–, greater regulatory independence in the governance of the international financial system, and higher quotas for emerging economies in regional development banks.


Just published

Taking stock of the credit crunch: Implications for development finance and global governance

 In the wake of the G-20 summit in London, this new working paper  explores the prospects for development finance and global governance, especially from the perspective of low-income countries. These countries were not responsible for the crisis but are now suffering its consequences. To avoid turning the credit crisis into a credibility crisis, global governance and regulatory reform will need to fully take into account their voices and interests. Download the Working Paper.




What is Mauritius doing to tackle the crisis?

Rama Sithanen, Vice- Prime Minister of Mauritius


Qué medidas ha tomado el Gobierno de la República Dominicana para combatir la crisis?

Juan Montás, ministro de Economía de la República Dominicana.


Guest speakers of the OECD Global Forum on Development included Maria Isabel Rezende Aboim, Head of Financial Affairs of the Brazilian Development Bank (BNDES), Amar Bhattacharya, Director of the G-24, Debapriya Bhattacharya, Ambassador of Bangladesh to the WTO, Jeff Lewis, Senior Advisor at the World Bank,Hugh Bredenkamp,  Deputy Director at the International Monetary Fund and Helmut Reisen, Head of Research of the OECD Development Centre.



Ahead of this special session, the Development Centre disseminated a series of 5 Policy Insights¸ each tackling a specific set of the crisis’ implications:


Forum Highlights


The jury is still out on the final count on the economic and social cost to developing countries that will arise from the global credit crisis. Much will depend on the shape of OECD recession and recovery: “V”, “L”, or “U”-shaped? V stands for quick recovery, U for protracted recession; L for yearlong stagnation. As the global crisis has caused a bank balance-sheet recession with need for bank recapitalisation or nationalisation, available evidence suggest a U-form, as such recessions had a peak-to-trough duration of eight quarters on average since the 1930s. To avoid a protracted recession, co-ordination of macroeconomic stimulus is required: in the past, it has proved twice as effective as isolated stimulation policies.


Ahead of the crisis, developing-country growth was led by trade, savings and investment. As OECD governments may feel their inter-temporal budget constraint harden (to the extent that their debt can be sold to investors at rising risk premia) in the wake of massive bank bailouts and fiscal repercussions of stimulation measures, the growth features of poorer countries suggest to channel much of the stimulation funds through ODA budgets in order to maximise expansionary multiplier effects. One model is the Clean Development Mechanism, an arrangement under the Kyoto protocol allowing industrialised countries with a CO2 reduction commitment to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own count.


Such stimulation is all the more important that Low Income Countries (LICs) risk to be severely affected both through direct financial channels and through spillovers from recessions in developed countries. In order to remain on track for achieving the MDGs, LICs should implement countercyclical fiscal policies. In addition to commitments to increase aid flows –which remain a tiny fraction of the rescue costs for the financial sector in advanced economies-- developed economies should support LICs by carrying on with pro-poor policies, reducing trade costs and creating conditions for recovery.


The emerging market economies face merely a liquidity, not a solvency problem. They are being called upon --especially those who have accumulated large foreign-exchange reserves-- to help OECD governments in supporting development finance. One way to do this would be to raise their quotas in regional development banks, so that a small part of these reserves is used to fund capital increases; another option would be the creation of special facilities.


The multilateral finance system is failing. It will need less spin, less rhetoric, more honesty and more deeds. Asymmetric surveillance, as observed in the run-up to the crisis, should make room for balanced surveillance, including of the leading industrial nations. The influence of the financial industry has to be cut down to allow for regulatory independence in the governance of the financial system. That regulation has to strengthen counter-cyclical elements, broaden the voice of small poor countries and bring the universal UN system back into the mainstream.

On earlier occasions, Javier Santiso, Helmut Reisen and Andrew Mold addressed the consequences of the financial crisis for developing economies and development finance:






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