World Bank confirms sharp drop in financial flows to developing countries

Six months ago many in the South thought the financial crisis was mainly a problem of the North. In February, however, the head of the IMF, Dominique Strauss-Kahn warned that the impact on the developing countries could be devastating. In March, financier and philanthropist George Soros wrote in the Financial Times that the G20 had to take action to prevent both a financial and a human catastrophe for the countries of the South. This was in the lead-up to the London G20 Summit which announced a trillion US dollars of funding for the IMF to support countries in difficulty – developing countries of the South, and Central and Eastern European countries.

Now the World Bank confirms the warnings. In its Annual Global Development Finance report released yesterday, the bank says private capital flows to developing countries will fall almost to just one quarter of 2007 levels – to $363 billion for all countries from $1,200 billion in 2007. This drop in private flows is huge.

But it comes on top of a likely sharp drop in Official Development Assistance from government aid agencies – that is the pattern of previous downturns in the North. Moreover, NGOs and foundations have contributed significant resources for development in recent years, but they have been hit by the crisis too, especially US endowments.

The IMF funds are not the solution. Firstly, the actual contributions have not yet reached the one trillion ($1,000 billion) level promised in London. Secondly, they are being allocated subject to “old” IMF conditions, notably cuts in public sector spending. A colleague from Angola told the ITUC Executive Board yesterday that her government had announced a 30 percent cut in public sector spending for next year – and other developing countries will do likewise.

The World Bank said yesterday that developed nations are misguided in focusing efforts on restoring demand in their own economies. Prospects in developing countries will impact on growth prospects in the developed countries too, the Bank warns.

We agree. The trade union movement said that all along – see the Global Union Declaration to the G20 Summits in Washington and London.

When will they listen? And when will they act?

Sources: Global Unions Washington office, Financial times