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Financial Times

Poor countries caught in downturn trap: Commodity-dependent economies are likely to suffer the knock-on effects of recession long after rich nations have recovered, writes Alan Beattie. Jan 30, 2002

While investors fret over how the US economy is coping with the global downturn, some of the most enduring economic damage may be wrought elsewhere.

Some of the countries more vulnerable to permanent damage are the poorest, particularly those dependent on commodity exports. "To be undeveloped is to be vulnerable," says Nancy Birdsall, president of the Center for Global Development in Washington.

Emerging market countries dependent on capital flows and export demand have faced sharp dislocations as the downturn has deepened. But the rebuilding of corporate and government balance sheets among relatively developed east Asian countries since the Asian crisis suggests they have the capacity to weather the downturn without a catastrophe. And with private capital flows weak for several years, most emerging markets - with obvious exceptions such as Argentina - have already learned to cope without importing huge amounts of capital from abroad.

But the poorest countries, although largely untouched by the direct effects of turmoil in developed financial markets, are nonetheless suffering as the downturn has given new impetus to the downward trend in their export prices. "Commodity prices have been in a chronically declining spiral for the last two to three years, and while the post-September 11 slowdown did not create this, it may well have made it worse," says Matthew Martin of the consultancy Debt Relief International.

Shocks to global demand are often transmitted swiftly through the commodity markets, compounding the effects of increases in supply in recent years.

A small recovery in global non-energy commodity prices in 2000, on the International Monetary Fund's measure, has been snuffed out. Coffee prices have fallen by half in two years and cotton by two-thirds since 1995, damaging many sub-Saharan African and Latin American countries. While lower oil prices have been a boon to industrialised countries, boosting real incomes and allowing them to cut interest rates, vulnerable poor oil exporters such as Nigeria find them less welcome.

The full effects of these shocks may take time to become apparent; the IMF estimates that for non-fuel commodity exporters, the main effects do not come through for a year. But in its global December forecast, the IMF revised down its prediction for economic growth in Africa almost as much as for rich countries. Current account balances, which had been staging a recovery, are expected to plunge back into the red.

Critics say that so far, the attempts to cushion these blows are less than impressive. Several years ago the World Bank set up a taskforce to examine offering insurance to poor farmers to allow them to weather changes in commodity prices. But it is only now being piloted in four countries, and the contracts are expected only to be around six months long, essentially covering only one harvest.

The IMF has a special lending facility, the compensatory financing facility (CFF), designed to tide countries over temporary shortfalls in their balance of payments. But Mr Martin says the CFF is "next to useless" for poor countries because it is not available at a lower, concessional, interest rate, so few can afford to use it.

Unlike for many rich countries, for poor nations downturns are not simply short-or medium-term inconveniences to be weathered. Many have large debt burdens precariously balanced on a stream of dollar earnings that is now being dried up by the global downturn. There is now a serious risk that more poor countries will be forced into the international debt relief programme, and that the relief on offer to those already qualifying will be inadequate to break them out of the downward spiral of more debt and lower growth.

Eurodad, the network of European non-governmental organisations, says that the debt sustainability analyses underlying the international debt relief programme rely on optimistic predictions of commodity prices for the poorest countries. "Long-term predictions have rarely been matched by actual price movements," a recent Eurodad report says. Moreover, the predictions were made when the IMF and World Bank were forecasting global economic growth would surge forward.

"The most important thing which consistently derails IMF programmes in poor countries is external shocks," Mr Martin says. The knock-on effects of prolonged weakness in the global economy could still be pushing the poorest countries off course long after the US is back on its feet.