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Recession Hits the Poorest of the Poor 06/01/09


Student Reading
For the past two centuries, the percentage of the world's population living in poverty has been falling even as the world population grew. The World Bank defines absolute poverty as living on the equivalent of less than $1.25 a day, and for the past two decades, not only the percentage, but the actual number of poor in the world has fallen. There are actually fewer poor people in the world today than there were 20 years ago. The decline in poverty around the world is the result of unprecedented economic growth. But, the current economic crisis reminds us that just as economic growth helps raise standards of living of the poor, a world-wide recession in which rates of growth fall, sends many back into poverty.

In February, the World Bank reported on this threat to the world's poor:

Crisis Hitting Poor Hard in Developing World, World Bank Says (The World Bank - News & Report, February 12, 2009)

...The spreading global economic crisis is trapping up to 53 million more people in poverty in developing countries and, with child mortality rates set to soar, poses a serious threat to achieving internationally agreed targets to overcome poverty, the World Bank Group said.

New estimates for 2009 suggest that lower economic growth rates will trap 46 million more people on less than $1.25 a day than was expected prior to the crisis. An extra 53 million will stay trapped on less than $2 a day. This is on top of the 130-155 million people pushed into poverty in 2008 because of soaring food and fuel prices... http://web.worldbank.org/WBSITE/EXTERNAL

So, over a two-year time span, the poverty trap will have closed or tightened its jaws on as many as 250 million people - many of whom would have risen above the $1.25/day benchmark had their economies continued to grow. But how, exactly, is the financial crisis that began in the wealthy nations having such an impact on the poor? In simplest terms, in an inter-connected world, no one is immune.

The toxins trickle downward (The Economist, March 12, 2009)

"POOR countries are innocent," says Ngozi Okonjo-Iweala, the Nigerian managing director of the World Bank. They did not contribute one jot to the global credit crunch, and their banks and firms have few links to global capital markets. For a while, it seemed as if the rich world's mess might even pass them by... But innocence, it seems, will not protect anyone. A financial crisis that began in New York and London and spread to manufacturing in rich, then industrialising countries, has now hit the "bottom billion". . . .

...The poor are being hit not by the financial tsunami itself but by second-order waves of trouble. So the impact has been delayed-but it may also be prolonged. http://www.economist.com/world

The article goes on to explain three ways in which the "global meltdown" is affecting poor countries:

1. Capital. In this case, capital refers to money flowing into poor countries. As private investors in western countries are recuperating from their own financial losses, they are not investing as much in poor countries. This means there's less money available for borrowers in poor countries. This flow of private money into poor countries is what is known as net private capital flows.

According to the Institute of International Finance, a think-tank in Washington, DC, net private capital flows to poor countries will slump from almost $1 trillion in 2007 to $165 billion in 2009. The main victims are big emerging markets in East Asia and eastern Europe. But African countries have been turning to private capital too. In 2007 they raised $6.5 billion in international bonds, trivial in global terms but not to Africa. In 2008, they raised nothing. http://www.economist.com/world

Just as private investors have been hurt and are lending and investing less in poor countries, governments that have traditionally given much in aid to developing countries are hurting, too. Some donor countries give a percentage of their GDP as aid to poor countries. As GDP falls during the recession, the amount they give in aid falls even if the percentage remains constant. And, some countries (Italy and Ireland, for example) have cut their aid entirely while others are "front-loading" or borrowing from future years in order to give aid today. If the recession continues, that would mean aide from those countries could fall even more in the future.

2. Commodity prices. The volatility of commodity prices has been a curse for many poor countries. An online investment glossary defines a commodity as a " . . . basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers."Source  Translate the jargon and you have agricultural products, natural resources, and energy resources, which, it should occur to you, are the major products of poor countries the world over.

The drop in oil and commodity prices in 2008 benefited oil- and food-importers. But this followed a sharp price rise and, for many, relief has come too late. The food crisis of 2007-08 increased the number of people suffering from malnutrition by 44m. Farmers and oil exporters benefited then. No longer.

Now, falling export earnings are exacerbating poor countries' woes. . . . American imports from middle-income countries fell 3% in the year to November 2008. But imports from poor countries fell 6%; those from sub-Saharan Africa, 12%. http://www.economist.com/world

In order for Americans to buy or import goods from other countries, they must trade their dollars for those other currencies. That leaves individuals in other countries with dollars which they can then use to buy goods from America. These currency trades take place in what is referred to as the foreign exchange market, and they happen because individuals have a demand for goods and services from other countries. If individuals and businesses in wealthier countries are buying less from the poorest countries in sub-Saharan Africa, people in those poor countries are now able to buy less from the rest of the world. Just as improvements in their ability to trade with the rest of the world helped bring people out of poverty, decreased trade with the world will make the poverty trap harder to escape.

Paul Krugman, winner of last year's Nobel prize in economics helped explain the important relationship between imports and exports when he wrote in 1993: "What a country really gains from trade is the ability to import things it wants. Exports are not an objective in and of themselves; the need to export is a burden that a country must bear because its import suppliers are crass enough to demand payment." http://www.economist.com/finance

Another article, appearing in the Economist on May 7th, 2009, further explained why imports are just as important to poor countries as exports.

Opening the floodgates (The Economist, May 7, 2009)

...As part of [International Monetary Fund] reforms, India slashed tariffs on imports from an average of 90% in 1991 to 30% in 1997. Not surprisingly, imports doubled in value over this period. But the effects on Indian manufacturing were not what the prophets of doom had predicted: output grew by over 50% in that time. And by looking carefully at what was imported and what it was used to make, the researchers found that cheaper and more accessible imports gave a big boost to India's domestic industrial growth in the 1990s.

This was because the tariff cuts meant more than Indian consumers being able to satisfy their cravings for imported chocolate (though they did that, too). It gave Indian manufacturers access to a variety of intermediate and capital goods which had earlier been too expensive.

...Theory suggests several ways in which greater access to imports can improve domestic manufacturing. First, cheaper imports may allow firms to produce existing goods using the same inputs as before, but at a lower cost. They could also open up new ways of producing existing goods, and even allow entirely new goods to be made. http://www.economist.com/finance

3. Labor. The third way the global meltdown is affecting poor countries is through labor markets. Many workers in poor countries were employed making export goods. During a recession, consumers buy less and that decrease in spending and purchasing has left many of those workers in poor countries unemployed. India, for example lost 500,000 export jobs in the fourth quarter of 2008. In times of economic growth, one alternative is for workers to leave poor countries for work elsewhere and send their incomes (referred to as "remittances") back to their families. Some poor countries depend heavily on that money sent home, but the recession is drying up demand for workers abroad.

...[Remittances] account for 45% of GDP in Tajikistan, 38% in Moldova and 24% in Lebanon and Guyana. Remittances had been rising fast in 2005-07; now they are falling... Malaysia recently revoked work visas for 55,000 Bangladeshis in order to boost job prospects for locals. Countries which send workers to Russia are doubly hit: many work in the crisis-affected oil industry and send money back in fast-depreciating roubles.

Tragically, these problems follow a decade of growth that has lifted millions out of poverty. According to Martin Ravallion of the World Bank, roughly one person in six in emerging markets had raised themselves above the $2-a-day poverty line in 2005, though they still got less than $3 a day. Many may now slip back. Mr Ravallion thinks that 65m people will fall below the $2-a-day poverty line this year, 12m more than he had expected a month ago; 53m will fall below the level of absolute poverty, which is $1.25 a day-compared with 46m expected last month.

The consequence will be dreadful. The World Bank reckons that between 200,000 and 400,000 more children will die every year between now and 2015 than would have perished without the crisis. Progress towards a richer, more equitable world has been set back years. http://www.economist.com/world

Questions for Discussion:

  1. The article mentions "the poor are being hit not by the financial tsunami itself but by second-order waves of trouble." What are those second-order waves?
  2. What should or should not be done to help those in the poorest countries? Examine the following list of potential policies. Identify the costs and benefits of each and determine if and how each would affect the world's poorest people.
    • The International Monetary Fund hopes to double the amount of money it can lend to poor countries to $11 billion.
    • The IMF loosens restrictions and conditions on which it will lend money to poor countries.
    • Communities across America launch "Buy Local" campaigns in an effort to increase economic activity and protect jobs in their own communities.
    • In 2005, donor countries committed to doubling their annual aide to Africa to $50 billion and raising it to $75 billion by 2015. What would be the costs and benefits of keeping such a commitment?
    • In many low-income countries much of the banking sector is foreign owned and the parent banks are bringing back funds to the home countries.
    • Countries increase tariffs, import quotas, regulations, and other barriers to trade.

Teacher Guide to Discussion Questions

  1. The article mentions "the poor are being hit not by the financial tsunami itself but by second-order waves of trouble." What are those second-order waves?
    2. The flight of money from foreign investors and donor countries out of poor countries, the volatility of commodity prices, and the falling demand for poor countries' exports and labor.
  2. What should or should not be done to help those in the poorest countries? Examine following list potential policies. Identify the costs and benefits of each and determine if and how each would affect the world's poorest people.
Answers will vary. Below are some examples of costs and benefits for each policy.
  • The International Monetary Fund hopes to double the amount of money it can lend to poor countries to $11 billion.
Costs: Increasing the available loans will require greater contributions by member nations of the IMF, which may impact their abilities to deal with their own recessions.
Benefits: Poor nations that belong to the IMF will have greater access to money that could be borrowed and used to stimulate their economies. Depending on how the money is used, it could mean expansion of social programs and government safety nets for the poor.
  • The IMF loosens restrictions and conditions on which it will lend money to poor countries.
Costs: Often, IMF loans come with restrictions or "strings attached." Without requiring such concessions, governments or banks in receipt of the loans may be allowed to continue practices that helped get them in the trouble they are currently in. 
Benefits: By not requiring concessions, the money can flow more quickly to the countries in need. And again, depending on how the money is used, it may mean expansion of social programs that would directly affect the poor. It could also be used to shore up banks or industries which may protect some jobs for the poor. Additionally, there has been controversy over whether or not the IMF "strings" are helpful, and loosening them may free countries to innovate. 
  • Communities across America launch "Buy Local" campaigns in an effort to increase economic activity and protect jobs in their own communities.
Costs: "Buy local" means buy fewer imports. That could mean the loss of jobs in exporting industries in poor countries as well as in the import sector of importing countries. It is also likely to mean higher prices for consumers - even those who don't support the movement. 
Benefits: "Buying local" may protect some specific jobs in the local area.
  • In 2005, donor countries committed to doubling their annual aide to Africa to $50 billion and raising it to $75 billion by 2015. What would be the costs and benefits of keeping such a commitment?
Costs: Increased money spent to aid African nations is money that governments can't use elsewhere in their already tight budgets. Ultimately the money used for such aid comes from tax payers, and that's money that can't be saved or spent by them privately. 
Benefits: Increased aid to African nations would come at a time when they are hurting most. The aid could offset the lack of government stimulus in countries where the government is financially unable to take actions to stimulate their own economy. 
  • In many low-income countries much of the banking sector is foreign-owned and the parent banks are bringing back funds to the home countries.
Costs: The flight of money and available loans from poor countries will mean less investment and economic growth and fewer jobs.
Benefits: By bringing the money "home," it may mean greater availability of loans in the home country. It may help save the bank from failure, in which case, it could return to the poor country later on. If it effectively aids the recovery in the home country, demand for the poor countries' exports may increase.
  • Countries increase tariffs, import quotas, regulations, and other barriers to trade. 
Costs: This will raise the price of goods and services for both domestic and foreign consumers. It will mean the loss of jobs in exporting industries around the world. The world's poor will be hurt by both the higher prices as well as the loss of jobs. 
Benefits: Such policies will benefit - at least in the short term - those whose jobs are protected from foreign competition.

Extension Activities

1. Have students listen to the following EconTalk pod casts that include interviews with authors on the subjects of the poorest nations, inequality, globalization, and the winners and losers from trade.

Collier on the Bottom Billion. January 28, 2008. Collier discusses his book, The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It. Available online: http://www.econtalk.org/archives

Don Boudreaux on Globalization and Trade Deficits. January 21, 2008. Boudreaux discusses the ideas in his book, Globalization including comparative advantage, the winners and losers from trade, trade deficits, and inequality. Available online: http://www.econtalk.org/archives

2. Use the following FTE lesson from the popular curriculum unit "Is Capitalism Good for the Poor?" to help your students understand the difference between relative and absolute poverty as well as how poverty is measured around the world.

Is Capitalism Good for the Poor? - Lesson 1: Defining Terms.

Available online: http://www.fte.org/capitalism/lessons

3. Below, is a list of several countries mentioned in the original articles. Have your students choose a country and then use the current and past editions of the CIA World Factbook (all available online) to see how that country interacts with the world economically and how those interactions have changed in the past 3 years. Note: In January 2009, the CIA discontinued their print editions of the World Factbook. The online edition features updates every 2 weeks and the new re-designed Factbook website is scheduled to be released Spring 2009.

DIRECTIONS: Find your country's information page in the CIA World Factbook. Scroll down to the "Economy" section to find the answers to the following questions. Note: The 2008 Factbook includes 3 years of data for several economic indicators. For those indicators that do not include past years' data, you may need to reference the 2007 and 2006 Factbooks.

 

  • What are the country's main exports and imports?
  • Create a table to show how the dollar amount of goods and services the country exports and imports has changed over the past 3 years.
  • Real GDP (Real Gross Domestic Product) refers to the value of all final goods and services produced within a nation in a year. Find the category titled "GDP - real growth rate" for your country. This tells you in percentage terms (and adjusted for inflation) how much GDP grew on an annual basis. Over the last 3 years, has the rate of growth in real GDP been increasing or decreasing for your country?
  • Who are the country's main exporting and importing partners? Create a graph or chart to illustrate how their trade with these countries has changed over the past 3 years.
  • Considering the data you have collected and the information you read from the selected articles, hypothesize as to how you think the world-wide financial crisis and recession will affect the country you selected in the near-future. Support your argument with evidence.

COUNTRIES

Nigeria

Côte d'Ivoire

Tajikistan

Moldova

Lebanon

Guyana

Malaysia

Bangladesh

Morocco

CIA WORLD FACTBOOKS

The World Factbook 2008 (updated May 14, 2009): https://www.cia.gov/library/publications

The World Factbook 2007 (updated May 15, 2007): http://www.umsl.edu/services/govdocs

The World Factbook 2006 (updated June 13, 2006): http://www.umsl.edu/services/govdocs

Resources:

"Africa Conference Debates Way Forward Amid Crisis." IMF Survey Magazine. March 13, 2009. Available online: http://www.imf.org/external

"Crisis Hitting Poor Hard in Developing World, World Bank Says." The World Bank - News & Report. February 12, 2009. Available online: http://web.worldbank.org/WBSITE/EXTERNAL

"Economic Crisis Starts to Hit World's Poorest Countries." IMF Survey Magazine. March 3, 2009. Available online: http://www.imf.org/external

"Opening the Floodgates." The Economist. May 7th, 2009. Available online: http://www.economist.com/finance

"The toxins trickle downward." The Economist. March 12, 2009. Available online: http://www.economist.com/world/international

Walton, Gary M. "A Long-term Economic Perspective on Recent Human Progress." Foundation for Teaching Economics. Available online: http://www.fte.org/capitalism

 

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The Heartland FoundationThanks to FTE partner The Heartland Foundation for it's assistance in providing articles and columns used in compiling the Hot Topic student handouts.