How did the GFC affect developing countries?

Julia Pham


May 20th, 2017

This article first appeared in Short Supply 2017 – check out the full magazine via the Short Supply tab at the top of this page!

While the Global Financial Crisis originated in developed countries, developing countries were not immune to its effects. Reduced foreign investment, trade and remittances had a significant impact on the economies of the world’s poorest countries. The crisis manifested itself in growing budget and trade deficits, currency devaluations, higher rates of inflation, increasing public debt and dwindling currency reserves.

By the end of 2010, developing economies had lost an estimated US$2.6 trillion in output. Real GDP growth in emerging and developing economies fell from 8.3 per cent in 2008, to 6.1 per cent in 2008 and just 2.4 per cent in 2009. [1] The economic downturn, coupled with high population growth, resulted in a per capita income drop of 20 per cent for the poorest 390 million people in Africa. [2]

Progress towards achieving the Millennium Development Goals became harder than anticipated. The World Bank estimates the crisis added as much as 89 million to the number of people living on less than $1.25 a day. [3] The International Labour Organisation estimates the number of unemployed in developing countries as a result of the crisis to be near 50 million by the end of 2009. Despite efforts to mitigate the damage, developing countries are still feeling the effects of the crisis years later.

For a long time it was believed that the economies of low-income countries were more or less separate and independent from US and Western European economies. Even as late as December of 2008, the World Bank stated: “…some of the same (undesirable) factors that have kept a significant share of the developing world’s population in deep and persistent poverty—including a lack of connectivity to markets, and consequent lack of opportunity for economic advancement—will protect them to some degree from the crisis.” [4]

This decoupling myth has largely been busted. As low-income countries became gradually integrated into the global economy, their vulnerability to external shocks increased. Even though most developing countries had no direct exposure to risky sub-prime loans and other financial instruments, their economies suffered as a result of falling demand for imports and commodities in developed countries.

When demand fell, volumes and prices fell too. The fall in growth in China and India also triggered a drop in demand for energy and raw mineral materials, especially from Africa. In the years preceding the crisis, economies in Africa had been growing at historically high rates, largely as a result of a boom in commodity prices. The collapse in import demand coupled with a fall in commodity prices severely hurt energy and metal exporting countries in Africa. The price of energy fell by two-thirds, metals fell by more than 50 per cent and the dollar prices of agricultural goods dropped by more than 30 per cent. [5] During the first half of 2009, the 49 poorest developing countries saw their export income decrease by 43.8 per cent. [6] Higher debt-GDP ratios also further weakened growth prospects.

At the same time, international bank loans and foreign direct investment (FDI) declined, accompanied by steep falls in net capital flows. In 2008, capital flows to developing countries totalled US$727 billion after dropping from US$1.16 trillion the year before. [7] Faced with uncertainty, investors redirected their money(ironically) to ‘safe-haven’ assets such as US Treasury bills. With sudden withdrawals to private capital flows, countries resorted to using their foreign exchange reserves and borrowed from international financial institutions and to reduce financing gaps.

The declining flow of remittances to developing countries further exacerbated the economic downturn. In the face of domestic uncertainty in North America and Europe, migrants were less likely to send money to their families abroad. According to the World Bank, remittance flows to developing countries decreased 6 per cent from 2008 to 2009, however statistics are often understated due to the large amount of unofficial transfers. In many developing countries, inward remittances are a source of household income and comprise a large proportion of GDP.

The effect of lost remittances varies from region to region. Eastern Europe and Central Asia experienced the largest percentage drop (-20.7 per cent) followed by the Latin America and Caribbean region (-12.3 per cent). [8] Estimates by the IMF suggest that countries heavily reliant on remittances such as Morocco and Tunisia, could have lost up to 2 per cent of GDP as a result of declining flows.

In response to the crisis, the IMF has changed its policies and made its financial support of low-income countries more flexible and tailored to individual needs. Measures include varied levels of engagement with economic policy, repayment schedules as well as increasing lending amounts. During 2008-09, lending commitments exceeded US$158 billion to help member countries address financing gaps. The World Bank has likewise committed over US$88 billion in loans, grants, equity investments and guarantees.

Governments in developing countries employed a variety of methods to shore up their financial systems. As a form of expansionary fiscal policy, Uganda’s government increased its infrastructure and development expenditure. Despite a slowdown, economic growth has remained strong in the country as a result of investment in roads and energy, which has been driving the recovery. Similarly, inflows of foreign aid in Zambia have allowed the government to increase its agriculture, education and health expenditure, which has acted as a buffer to the crisis.

Policy makers are increasingly recognising that international financial stability is a global public good. While central banks and regulatory bodies may operate on a national level, their decisions have global reach. The growing interconnectedness of financial markets makes it difficult to understand and detect systemic risks.

In a 2016 policy paper, the IMF highlight a shift in “the centre of economic gravity” to emerging markets and developing countries, as they further integrate into the global economy. [9] We can only hope that global institutions and national bodies will work together to provide stability during this shift.


Julia is a fourth year Arts/Commerce student who for some reason is particularly interested in urban development and public infrastructure.


[1] International Monetary Fund 2010. World Economic Outlook: Rebalancing Growth, April 2010. Washington DC: International Monetary Fund

[2] UNESCO, 2009. The Global Financial and Economic Crisis: What Impact on Multilateralism and UNESCO? UNESCO Future Forum. 2 March. Power Point by Kevin Watkins.

[3] World Bank, 2010. Outlook for Remittance Flows 2010–11, Migration and Development Brief 12. Washington DC: World Bank.

[4] World Bank (Development Research Group), 2008. Lessons from World Bank research on financial crises. Policy Research Working Paper 4779. World Bank, Washington, DC p. 2.

[5] World Bank, 2010. Global Economic Prospects: Crisis, Finance, and Growth, p. 25.

[6] Gurtner, B.,2010. The Financial and Economic Crisis and Developing Countries. Revue internationale de politique de développement, (1), pp.189-213.

[7] World Bank, 2009. Global Development Finance. Table 2.1, p. 40.

[8] Ratha, D., Mohapatra, S., Silwal, A., 2010. Outlook for remittance flows 2010–2011: remittance flows to developing countries remained resilient in 2009, expected to recover during 2010–11. Migration and Development Brief 12. World Bank, Washington, DC.

[9] IMF, 2016. Strengthening the International Monetary System – A Stocktaking. Policy Paper, Marc, IMF, Washington. p. 11.

Image: ‘Washed and Graded Iron Ore’ by Peter Craven, Licence at

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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