The question on everyone’s mind these days is what will the impact of the financial crisis be? The major economies, like the US, EU and Japan are experiencing difficult times and the end is not yet in sight. However, the hardest blow of the crisis will be felt in developing countries. Or to use the metaphor of Prof Jacques van der Gaag: ‘If America sneezes, Europe catches a cold, Asia the flu and Africa tuberculosis.’ Van der Gaag is Professor in Development Economics at the University of Amsterdam and Economic Advisor to the Health Insurance Fund. ‘These countries will be thrown back into poverty.’
Van der Gaag (left) and Gillárd (right) in debate in the entrance hall of the Univerity of Amsterdam
He used this expression during a debate with member of the Dutch Parliament Chantal Gillárd about the consequences of the crisis for developing countries, held at the University of Amsterdam. Gillárd is the spokesperson on development cooperation for the Dutch Social Democrats. She agreed that indeed the prospects for developing countries, foremost in Africa, do not look promising. Since the start of the crisis, already over a 100 million people have fallen below the poverty threshold of having less then a dollar a day to live on. Therefore, both acknowledged that now is the worst time to walk away from our global responsibilities. And they also saw opportunities, although different ones, in what can be done to help these countries.
Ten years back in time
The gloomy reality Van der Gaag sketches for developing countries is caused by a complete standstill of the world economy. Developing countries are experiencing a major drop in their exports as a result of a collapse in world demand for, foremost, commodities. The capital flows to their countries are drying up. Investors are pulling out and transferring money back to the rich countries. And less remittance is sent by relatives abroad. Remittance make up a substantial percentage of the capital flows to developing countries. According to Van der Gaag these developments could undo everything achieved in developing countries in the past ten years.
On top of this the budget for developmental cooperation worldwide is under pressure. The benefit of development cooperation is being questioned, which can result in substantial internal political pressure to reduce budgets. Besides, most budgets will automatically reduce as they are a percentage of the gross domestic product (GDP), which are currently in decline. The Netherlands, with a development budget of 0,8 percent of the GDP, has 350 million euros less to spent on development cooperation in 2009 compared to 2008.
Gillárd was, however, positive that a majority in the Dutch parliament will see the necessity to keep the remaining budget intact. And she believed that most donor countries will understand the potential consequences if they cut their budget further.
Van der Gaag looked at the decreasing budget from a different angle. Basically less money is available, so how can one still achieve the same or even more? He suggested that now is a good moment to look critically at the existing structures and to examine innovative ways of cooperation.
Microfinance has, first of all, in his eyes proven to be an effective innovative example. Investing in bankable start ups using small loans can breed employment and thus stimulate economic growth. The international community should seize this effective opportunity with both hands. The good news is that already 15 billion dollars for micro loans has been promised by the international community. However, he called on development banks to follow this example and to allow riskier investments in small start ups.
Second, and in his words the most promising innovative development is micro insurance. Through insurance a social safety net can be built, which can be used to tackle a crisis in the future. If people in developing countries are able to insure their health, their harvest, or other assets, it will make them less vulnerable. Future shocks will therefore not have the same impact in these countries as they are experiencing now.
He mentioned the work of the Health Insurance Fund as an example of how insurance in low income countries function, in this case health insurance. These innovative health insurance schemes use the private sector and subsidized insurance for a targeted low-income community to build quality health care for these people.
Van der Gaag expressed his hope that more donors would recognize the positive effect of the insurance mechanism and praised the Dutch Minister for Development Cooperation Bert Koenders for supporting this project and other innovative mechanisms. Minister Koenders is the first Minister for Development Cooperation to spend a large sum ten percent, of his budget directly on developing the private sector in developing countries.
Gillárd recognized the importance of exploring these innovative mechanisms, but would still like to see a more active role of the international organizations such as IMF and the World Bank in tackling this crisis. These organizations can in her eyes redistribute wealth in a way that enables countries to get a fair chance of building a functioning state. As long as they listen to the needs of developing countries and developed countries donate enough.
Shortly after the debate the news came out that the Ministers of Finance of the EU countries agreed to double the IMF resources to help head off new problems in countries already hit hard by the global economic and financial crisis.