Developing Countries and the Perfect Storm Part I: What Should Developed Countries Do?

By Daud Khan
ROME, Jun 1 2022 – Developing countries – in Africa, in Asia, in Latin America and in the Middle East – are facing a combination of crises that are unprecedented in recent times. Over the last three years they have had to face the COVID-19 crisis, the food crisis, the energy crisis, the climate change crisis, the debt crisis and, on top of all this, a global recession. The crises have overlapped, and each has added to the problems created by the previous ones.

Daud Khan

First among the crises relates to food – the most basic of human needs. Even before the events in Ukraine there were shortages and uncertainties. International food prices rose by 40% over their level of 2020 – with increases of almost 90% in the price of vegetable oil – pushing up domestic food prices in both importing and exporting countries, and driving millions towards food insecurity. And then came the Ukraine crisis; and price of cereals and cooking oils spiked yet again – up 20% for cereal and 30% for vegetable oils.

And it is not just an issue of prices. Supplies are hard to come by. In April 2022 Ukraine exported only 1 million tons of grain as opposed to a normal export volume of 5 million tons and Indonesia banned exports of palm oil. On top of this came climate change. Low rainfall and drought-like conditions have also affected production in several major wheat exporting countries such as France and the USA. Scorching temperatures across northern India and Pakistan have reduced wheat output by 20% and in response, India has now banned exports of wheat.

The second crisis relates to the price of energy. Energy prices before the Ukraine crisis has risen 75% in twelve months and another 25% since then. This has raised costs of transport, manufacturing and services. Prices of natural gas, which drives the prices of urea fertilizer, rose by over 140% and this will impact plantings, yields and output of food crops in coming years. The prices of phosphate fertilizers have also risen – by over 200% the last year – with about a third of the increase coming since January 2022, mainly as a result of disruption of supplies.

The next punch in the belly for developing countries came from interest rates increases. Developing country debt has boomed in over the past decades years, fueled by the easy availability of savings and real interest rates of virtually zero. With rising inflation, the US Federal Reserve Board has hiked up interest rates. This has not only increased interest payments but also the value of the US$ in which much developing country debt is denominated. This is making debt servicing vastly more expensive and balance of payments problems are looming large for many countries. Higher debt servicing is also putting pressure on Government budgets and is resulting in large cuts in development and social spending.

And we are not finished yet. Global GDP and trade are slowing down. This reflects the recessionary cocktail of high energy prices, supply bottlenecks, rising interest rates and political uncertainties around the globe, as well as COVID-related lockdowns in China.

This perfect storm is mostly the result of the policies of the big economies – the ongoing US/Russia/China rivalry; rapid globalization followed by the strict COVID-related lockdowns; and easy monetary policies which first pumped in huge sums of money into the economies and are now raising interest rates to rein in inflation. Climate change has much to do with large and continued emission of GHGs, the bulk of which comes from the big economies, including China. And now, speculative capital, mostly originating in the developed world, is further aggravating the situation in food, fuel and other commodity markets.

But the interlinked nature of the globalized world implies that in relative terms the financial and human burden of these actions falls heaviest on developing countries. After all it is one thing for food and energy prices to rise, or for GDP growth to slow in rich countries such as the USA, Europe and Australia, or even in China. In these countries living standards are high, infrastructure and services are well developed, and often well designed social safety nets are in place. It is quite different in developing countries, where large numbers continue to live with poverty and hunger; where basic services such as education, health and clean drinking water are scarce; and those facing old age, illness or loss of earnings can only rely on the goodwill of friends or family.

There is, quite rightly, much concern about the situation. Several high level meetings have been convened, including by the UN, and there are strong calls for increased aid flows and debt relief, as well as for the creation of special funds for the countries most affected by high prices, debt burdens or climate change. These actions are needed and necessary to avoid widespread suffering, political turbulence and increased migratory flows. And the developed countries will likely bear most of the financial burden of these measures.

But many of the measures, even if implemented, are short term palliatives and will not solve underlying problems. Moreover, developing countries cannot continue to rely indefinitely on goodwill and charity. The risk of doing this became very clear during the COVID crisis where little of the vaccines available and none of the vaccine production technology were shared.

However, times of crisis also create opportunities. There is a need for new thinking and for paradigm shifts in developing countries but also for Governments to undertake reforms that they have been postponing for years, if not decades, due to fears that such reforms would hurt vested interests and national elites. It is now time to act bravely.

Part two of this article will discuss some of the concrete measure that developing countries could take to address the various crises.

Daud Khan works as consultant and advisor for various Governments and international agencies. He has degrees in Economics from the LSE and Oxford – where he was a Rhodes Scholar; and a degree in Environmental Management from the Imperial College of Science and Technology. He lives partly in Italy and partly in Pakistan.

IPS UN Bureau

 


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