Effects of Crisis on Developing Countries

Global Financial Crisis and the Challenges for Developing Countries The Challenges Global financial crisis is known to generally hit the developed economies and cause a slowdown in the economy and even negative growth. This is primarily due to the slack demand in the local market and he surrounding markets. For the developing countries the impact of a global financial meltdown is directly related to the importance of exports and the dependence on capital inflow of foreign funds for local industries and to the economy.

The Challenges For example in the countries of South Asian countries, for example more than 22% of the Gross Domestic Products is formed by exports of goods and services. The percentages of such exports of the GDP is 26% in the Latin America and the Caribbean countries, 35% in sub-Saharan Africa, 40% in central Asia while it is nearly half of the GDP in countries of East Asia (de Paiva Abreu et al., n.d.).

For the developing countries with relatively bigger economies like Brazil, India, China, Indonesia and Mexico have exports to the tune of 15%, 23%, 40%, 31% and 32% respectively (de Paiva Abreu et al., n.d.). Most of these exports from the developing economies go to the developed economies Therefore a slowdown in demand in the developed nations would directly affect the economies of the developing countries.

In However in the globalized economy, export is one of major backbones of the developing economies and the underdeveloped economies have become developed primarily due to the rise in creation and exports of goods (World Bank, 2008). A decline in exports therefore also depletes the developing economies of critical foreign reserves that the countries often use for the procurement of vital commodities like oil and food grains.

The developing countries that had depended on the export of primary commodities other than oil are the ones that have been and would continue to be in future global meltdowns. This is due to the decreasing demands in foreign countries and the consequent decrease in export prices. In many cases, developing economies have been seen to grow on the rising prices of commodities and that resulted in a reduction of terms-of-trade losses. This boosted the economies of such developing countries.

Such countries are the ones that are likely to be hit by global financial crisis (Napolitano, 2011). Often these commodities are the items like crops and indigenous products that are produced for export. When the prices of such commodities falls, entire economies melt down and crumble. Even oil exporting countries of the Middle East have been hit by global financial slowdown due to lack of demand primarily in the developed economies. Another challenge for the developing economies is the rapid withdrawal of foreign capital investments in the economies.

Prior to global financial crisis, developing economies are the most attractive areas for foreign institutional funding. These funding are again primarily from the developed economies where investors look for better, greener and fast developing economies to invest. Developing economies are the ones which generally see the largest rate of growth among world economies including developed economies and markets. For example, growth rates prior to 2008-09 global financial crisis, countries like Brazil, China and India showed near to double digit growth for consecutive years (Sen, 2011).

At the same time the largest of economies like those of the U.S. And Europe had grown rather slowly. Thus the developing economies are always a favorite destination for small time investors who want to ride the crescent of the wave of economic growth (World Bank, 2008). Such foreign direct investments, primarily in the financial markets, originate often in the developed nations and a crash down of the home economy puts such investors under strain and they exit the developing economies with whatever profit that they are able to make.

The phenomenon is often the first trigger reaction that happens in markets that come under the threat of financial slowdown. Apart from the withdrawal and reduction in foreign direct investments, foreign financial institutions withdraw their investments and money from the stock exchanges of the in developing countries and repatriating the amounts to either to the home country or to some other safe economies (Koksal & Orhan, n.d.).

This causes a sudden crash in the share market and the capital markets of the developing economies which causes losses to companies invested and listed in such stock exchanges and markets. The sudden outflow of foreign investments, either direct or in the stock market, results in devaluation of the currencies of the developing countries and devaluation of the exports and appreciation of the imports. Exports become less costly and imports costlier.

Therefore such economies and countries struggle to cope up with the depleting foreign exchange situation and slack demand of exports. Investments in developing countries and economies get hurt critically due to the fall in capital markets and stock prices. The situation becomes more critical as the slowdown hits the domestic market. The reduction in stock prices and foreign direct investments often results in reduced production and slowdown in demand and then the developing economies officially get into recession as GDP decreases and growth slows down (McCulloch & Sumner, 2009).

The Solutions The challenges that developing countries face from global economic crisis can only be tackled through effective and quick policy decisions on the hint of a slowdown. Such measures can include steps in the short-term like the adoption of expansionary monetary policy like the decline in the interest rates that are charged by the central banks so that industries are encouraged to get into economic activities that can help to counter the decline in economic activity caused due to global economic slowdown.

During the economic crisis of 2008-09, many of the developing countries and the developed countries drastically reduced their lending rates thus trying to trigger economic activities. Changes in fiscal policies also help develop economic activities. However there is risk of an increasing budget deficits of the governments which can a problem in itself in an environment of global economic slowdown (Koksal & Orhan, n.d.).

Attempts to increase liquidity in the market often lead to reduction in cash reserves of banks of developing countries as well as reduction in international credit. In such situations, developing economies can take the help of international financial agencies like the International Monetary Fund (IMF) by the injection of money. The reduction of lending rates and increase of liquidity in the market can be coupled up with decreasing government spending to have a decent fiscal deficit of.