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

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.