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Taking Stock of the Credit Crunch: Implications for Development Finance and Global Governance

  • Andrew Mold
  • Sebastian Paulo
  • Annalisa Prizon

This paper examines how the different forms of development finance for low-income countries are likely to be affected by the global financial crisis, principally through reductions in remittances, aid flows and FDI. It argues that the channels of transmission of the crisis for particular countries will not necessarily be obvious ones. Despite initiatives to lower the debt burden for low-income countries over recent years, the crisis will also have consequences for the external debt sustainability as they struggle with falling export revenues, currency depreciations and rising fiscal deficits. In other senses, however, the crisis represents an opportunity for reform. With regard to aid, for instance, it is suggested that a hard-budget constraint on aid budgets may help focus attention on increasing aid efficiency. Moreover, it is argued that the prospects for the developing world depend not only on how the financial crisis evolves in the OECD countries, but also increasingly on how growth holds up in the rest of the developing world. In this sense, the paper discusses the possibility that South-South linkages are strengthened in the wake of this crisis. Finally, the paper looks at the global governance issues that arise from the crisis. In many areas, existing policy frameworks have been discredited by the crisis. It is argued that future reforms in global governance and regulatory structures need to take into account more fully the developing world to be effective. Ce Document examine l’impact de la crise financière mondiale sur les différentes formes du financement du développement pour les pays les plus pauvres, principalement à travers les transferts d’argent, l’aide au développement, et les investissements directs étrangers. Il montre que les canaux de transmission des effets de la crise ne sont pas nécessairement ceux auxquels on s’attendrait. La crise aura ainsi des conséquences majeures pour la soutenabilité de la dette extérieure des pays les plus pauvres — en dépit des initiatives de réduction dont ils bénéficient de la part de leurs créanciers — puisqu’ils sont affectés par une diminution des revenus d’exportation, des dépréciations monétaires et des déficits budgétaires croissants. La crise représente néanmoins une opportunité pour mettre en oeuvre certaines réformes. Ainsi, des budgets plus serrés pourraient stimuler les efforts d’amélioration de l’efficacité de l’aide publique au développement. Le Document souligne également que les perspectives pour les pays en voie de développement ne dépendent pas seulement de l’évolution de la crise financière dans les pays de l’OCDE, mais aussi de plus en plus des perspectives de croissance dans le reste du monde. A cet égard, les liens économiques entre les pays du Sud pourraient sortir renforcés de la crise. Enfin, étant donné le discrédit dont souffrent les structures de régulation existantes, le Document insiste sur la nécessité de mieux tenir compte des pays en voie de développement dans les réformes à venir de la gouvernance mondiale.

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Paper provided by OECD Publishing in its series OECD Development Centre Working Papers with number 277.

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Date of creation: 30 Mar 2009
Date of revision:
Handle: RePEc:oec:devaaa:277-en
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  1. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  2. Çigdem Akin & M. Ayhan Kose, 2007. "Changing Nature of North-South Linkages: Stylized Facts and Explanations," IMF Working Papers 07/280, International Monetary Fund.
  3. Chong, Alberto & Gradstein, Mark, 2008. "What determines foreign aid? The donors' perspective," Journal of Development Economics, Elsevier, vol. 87(1), pages 1-13, August.
  4. Hali J. Edison, 2003. "Do indicators of financial crises work? An evaluation of an early warning system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 11-53.
  5. Faini, Riccardo, 2006. "Foreign Aid and Fiscal Policy," CEPR Discussion Papers 5721, C.E.P.R. Discussion Papers.
  6. Round, Jeffery I. & Odedokun, Matthew, 2004. "Aid effort and its determinants," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 293-309.
  7. Simone Bertoli & Giovanni Andrea Cornia & Francesco Manaresi, 2008. "Aid Effort and Its Determinants: A Comparison of the Italian Performance with other OECD Donors," Working Papers - Economics wp2008_11.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  8. Amrita Narlikar & Diana Tussie, 2004. "The G20 at the Cancun Ministerial: Developing Countries and Their Evolving Coalitions in the WTO," The World Economy, Wiley Blackwell, vol. 27(7), pages 947-966, 07.
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