Financial crisis: Lessons we missed

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Despite a recognition that poor countries will be hardest hit by the crisis even though they did not cause it, the development perspective has been largely absent from G20 debate, and therefore the political response to the financial crisis so far.

CAFOD partner NGO Forum on Cambodia met with European Policy makers at the European Development Days, in October, funded by DFID and BOND,  as part of an effort to address this gap. They urged that “no country should be left behind” in the global recovery.

Developing countries have not been completely ignored. Unprecedented commitments by the G20 to examine innovative financing, efforts to put their own houses in order and support for protecting the poorest will help developing countries overcome the impacts of the global downturn, but they are only part of the picture.

A genuine development response to the global downturn would help developing countries to answer the same questions the major economies are addressing:  How can they manage the impact of the financial sector? How can they achieve the ‘inclusive, green and sustainable recovery’ that the G20 is striving for?

This means learning lessons for economic and other policies in developing countries and, more important, for the advice and activities of donors and institutions such as the World Bank within those countries. These are the missing elements of the discussion so far.

To take the example of the financial sector. The current approach to the financial sector of developing countries is one of integration – removing restrictions on movements, opening up to foreign banks and financial services actors, and increased participation in cross-border transactions.

Following the financial crisis, this policy formula may well change to reflect a shift in objectives from promoting efficiency and competitiveness in this key sector to achieving inclusive, stable and green economies.

For example, opening up to new instruments such as derivatives might boost economic activity but might not be appropriate when adequate regulatory capacity does not exist to manage the risks this presents.

Similarly, foreign banks might introduce better practice but they have tended not to serve poor customers well – as they are high-risk and low-return – cutting off vital services to small-scale farmers and entrepreneurs. Donors and international organisations should support this shift in thinking.

International cooperation is also needed to ensure that rules in third markets and globally mean that the financial sector promotes investment in activities that have a genuine economic value and positive environmental and social impacts, and do not reward activities that increase risk, such as speculation.

NGO Forum’s experience in Cambodia demonstrates that similar shifts in thinking and practice are needed economy-wide, to rebuild in an inclusive, sustainable way following the financial crisis.

Their research finds that the poorest households are simultaneously hardest hit by the global downturn and least able to cope with its impacts. They recommend that donors should focus on building resilience of these groups and, for example, increase their investment in the agricultural sector where they are predominantly employed.

These kinds of findings are important as despite our best efforts, this will not be the only major economic crisis that developing countries will face. Understanding which countries and which groups within them are most vulnerable to crises, why this is the case, as well as how to increase their resilience must become more prominent policy goals post-crisis.

Again, donors and international organisations should support a potential shift in policies that this might provoke, from ones that achieve maximum growth, to ones that also achieve diversification of economic activities and that take account of who bears the risks and reaps the rewards of increased economic activity.

NGO Forum’s experience also points to the need for a different approach to greening the economies of poor countries to one that is more sustainable in a developing country context and one that is more coherent with poverty eradication objectives.

The current ‘low carbon growth’ agenda overemphasizes the goal of reducing carbon and the role of importing technologies in the form of services, goods and investments into developing countries.

A “low carbon development” approach would help Cambodia to meet both green development and poverty eradication objectives. International funding is likely to be available for hydro power and a coal fired power plant. Hydro power might reduce dependence on fossil fuels, but will increase methane emissions and jeopardize the livelihoods of rural poor employed in the fishery. Electricity produced from coal will pollute the air, impact human health, and increase green house gases which will contribute to the global warming and climate change.

How can Cambodia green its development? NGO Forum found that ” an international fund should be increased and provided to Cambodia to be able to access clean energy technology, promote small scale hydro power and decentralized rather than centralised energy rather than centralized energy to address energy security”.

Agriculture is another sector that is important with respect to climate change. Again, NGO Forum find that the interests and role of local groups in the sector are being ignored. The ability of poor farmers to provide knowledge, innovation and local solutions to problems in climate change mitigation and adaptation and their role in providing and ensuring food security are largely overlooked. They recommend that an approach that combines transfer of high-level technology with local knowledge as most appropriate and effective.

The return to business as usual is not an option either among G20 countries or in developing countries.  Developing countries have the difficult double task of combating poverty and achieving a green recovery. A debate on how international donors and institutions can best support them in this is increasingly urgent.

Posted by Christina Weller

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