The recent global economic crisis has been unprecedented since the great depression of 1929-32. The low-income countries have been affected by the crisis severely, particularly because of their low capacity to take external shocks. The commodity boom of 2003-08 allowed increases in national savings, investment and the acceleration of GDP and market value added (MVA) of low-income countries. Nevertheless, it was followed by a “bust” with detrimental impact on their long-term industrialization and development. Food and fuel importing countries, in particular, suffered from both the “boom” and the “bust”; the emergence of the financial crisis took place at the time they were facing high international prices of food and petroleum. In other words, they faced three ‘F’(food, fuel, financial) crises.
As a result of the global economic crisis, the prices of non-oil primary commodities and petroleum fell, from the peak to the trough, by over 36 per cent and 68 per cent, respectively. Nevertheless, food prices did not fall as much as the prices of other commodities and have picked up faster than other commodities after they reached their trough in December 2008.
African countries will be particularly affected, some of which are predicted to show negative GDP growth in 2009. The demand for manufactures, in general, will suffer not only from the fall in exports, but also from changes in domestic demand as a result of the decline in the rate of growth of private consumption. That growth is projected to fall by 3 per cent, for example, in Sub-Saharan African countries — most of which are among low-income countries. The decline in workers’ remittances is another important cause of the decline in domestic demand for manufactured goods in many cases. For example, for six African countries remittances were equivalent to more than 100 per cent of their total exports in 2007; the fall in the remittances is projected to reach over three per cent of GDP in some cases, particularly in the case of low-income countries which are “manufactures exporter.” For example, in 2008, workers’ remittances as a percentage of GDP reached over 27 per cent in the case of Lesotho, and 18 per cent, 17.8 per cent and 11 per cent in the cases of Haiti, Nepal and Bangladesh, respectively. Moreover, what is axed more is investment which has detrimental effects on the growth of their production capacity. The deterioration in the balance of payments and fiscal constraints has led to a reduction in financial resources available for investment, and thus cancellation of some projects and a significant drop in investment outlays. For example, the rate of growth of investment is projected to decline, e.g. by over 12 per cent in Sub-Saharan Africa.
The combination of fall in external and domestic demand has imposed a shock on the fragile manufacturing sector of these countries, which had been increasingly exposed to competitive pressure in internal and international markets. Changes in the global economy — including rapid technological change, globalization, new methods of production, and the emergence of China as a massive exporter of labour intensive products, had already increased the competitive pressure on the manufacturing sector of low-income countries, particularly textiles and clothing, which account for over two-thirds of their manufactured exports. Such changes have increased the need for nurturing the manufacturing sector in countries which are at early stages of industrialization. Yet, the policy space available to them has diminished. The increased competitive pressure has taken place not only due to changes in the rules of the game on competition in the international market, but also due to the premature trade liberalization and the pursuance of “market oriented” strategies imposed on economies of low-income countries by International Financial Institutions (IFIs) and bilateral donors.
As a result, despite acceleration of growth in the MVA of some of the low-income countries during the boom years, most of them had already been facing de-industrialization. The global crisis caused closure of a number of their factories in low-income countries causing unemployment and further de-industrialization. Yet, during the crisis the IFIs imposed pro-cyclical macroeconomic policies on some low-income countries, such as Malawi, causing further fall in effective demand, sluggish, or negative growth, and further de-industrialization. The global economic crisis is a wake-up call, particularly for low-income countries.
Root cause for global financial crisis is the technic of cross border M & As in vertical motivation without much cognizance to horizontal motivation shifting capital formation from developed world to developing and LDC world. Imbalances are created. In the process big investors and owner managers of the corporate world benefitted who could lobby by establishing tax heavens and bank heavens with bilaterial treaties coupled with all possible opportunities of shifting their profits and savings into such bank heavens. A thorough research study is made by me on cross border M & As for the Institute of Chartered Accountants of India in which conclusions are drawn for possible implementation to get out of the problem of the present global financial crisis.
The global financial crisis brings a more coercive task for developing countries, specially the Sub-Saharan countries. In the case of Mozambique, the crisis had not yet a great impact but, it calls the attention for changing the production and investment structure of the economy, that are mainly dependent on foreign capital, namely FDI and Aid inflows. So, the dominant opinion in the critical view, calls for a diversification and articulation of the productive base of Mozambican economy as a way to minimize the impact of future crisis, buy investing in domestic capabilities, reducing the foreign dependence and use the public expenditure to more productive areas, such as infrastructures, technological capabilities, human resources, etc.
Yes, such countries as Mozambique and others in Africa and elsewhere need to diversify their economies. To do so, however, they need some policy space to undertake the type of policies and measures needed. But their policy space has become limited by the International Financial Institutions,bilateral donors and WTO rules. If they also agree with finalizing EPA, under the pressure from EU, it would be the last nail in the coffin of their prospects for diversification, industrialization and development. They will be locked in the production of raw materials and other primary commodities, dependence on food imports (due to EU on US agricultural policies)and foreign aid.