As developing economies were recovering from the news of 100 million new poor from high food and fuel prices, the world financial crisis hit. For the poorest economies, the impact of the most recent crisis is significant, but mostly indirect. It runs through a decline in world commodity prices, slower demand for exports, lower investments, and a gradual decline in overseas remittances.  Together, these effects are likely to add to an increase in global poverty.

The new crisis also draws attention to an underlying tension in policy instruments to abate downturns: fuel and food inflation were tackled in targeted fashion, through a mix of price controls, export controls, tight monetary policy and targeted transfers, aimed at isolating the impoverishing effect of high prices from the more general workings of market economies (see Von Braun’s paper).

The financial crisis, on the other hand, is a global crisis with systemic effects over developing economies. Effective policy responses will likely be economy-wide (perhaps global),with  a mix of safety nets to smooth the downturn, and fiscal and monetary stimulus to promote growth –or at least avoid collapse as in past downturns (see Ravallion’s paper).  

What should be done at the bottom of the development ladder? Credit crunch, depressed commodity prices, capital flight, remittances collapse, and trade protectionism will divert aid and trade initiatives away from MDG goals, climate change and other key long term issues. We can expect a new round of action after the G-20 meetings that will predictably add to the policy overload.

One thing is certain. Downturns are more frequent in the developing world. Over the past 20 years, 30% were recession years in the poorest developing countries (see Cepal’s paper). We need a global agenda for getting out of crisis, but also one for accelerating achievements in the good years. This is perhaps the most important rationale for coordinated global action. The poorest economies cannot afford to muddle through either the best or worst of times.