Effects of Crisis on Developing Countries Essay

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Global Financial Crisis and the Challenges for Developing Countries

The Challenges

Global financial crisis is known to generally hit the developed economies and cause a slowdown in the economy and even negative growth. This is primarily due to the slack demand in the local market and he surrounding markets. For the developing countries the impact of a global financial meltdown is directly related to the importance of exports and the dependence on capital inflow of foreign funds for local industries and to the economy.

The Challenges

For example in the countries of South Asian countries, for example more than 22% of the Gross Domestic Products is formed by exports of goods and services. The percentages of such exports of the GDP is 26% in the Latin America and the Caribbean countries, 35% in sub-Saharan Africa, 40% in central Asia while it is nearly half of the GDP in countries of East Asia (de Paiva Abreu et al., n.d.).

For the developing countries with relatively bigger economies like Brazil, India, China, Indonesia and Mexico have exports to the tune of 15%, 23%, 40%, 31% and 32% respectively (de Paiva Abreu et al., n.d.).

Most of these exports from the developing economies go to the developed economies Therefore a slowdown in demand in the developed nations would directly affect the economies of the developing countries. In However in the globalized economy, export is one of major backbones of the developing economies and the underdeveloped economies have become developed primarily due to the rise in creation and exports of goods (World Bank, 2008). A decline in exports therefore also depletes the developing economies of critical foreign reserves that the countries often use for the procurement of vital commodities like oil and food grains. The developing countries that had depended on the export of primary commodities other than oil are the ones that have been and would continue to be in future global meltdowns.

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This is due to the decreasing demands in foreign countries and the consequent decrease in export prices. In many cases, developing economies have been seen to grow on the rising prices of commodities and that resulted in a reduction of terms-of-trade losses. This boosted the economies of such developing countries. Such countries are the ones that are likely to be hit by global financial crisis (Napolitano, 2011). Often these commodities are the items like crops and indigenous products that are produced for export. When the prices of such commodities falls, entire economies melt down and crumble. Even oil exporting countries of the Middle East have been hit by global financial slowdown due to lack of demand primarily in the developed economies.

Another challenge for the developing economies is the rapid withdrawal of foreign capital investments in the economies. Prior to global financial crisis, developing economies are the most attractive areas for foreign institutional funding. These funding are again primarily from the developed economies where investors look for better, greener and fast developing economies to invest. Developing economies are the ones which generally see the largest rate of growth among world economies including developed economies and markets. For example, growth rates prior to 2008-09 global financial crisis, countries like Brazil, China and India showed near to double digit growth for consecutive years (Sen, 2011). At the same time the largest of economies like those of the U.S. And Europe had grown rather slowly. Thus the developing economies are always a favorite destination for small time investors who want to ride the crescent of the wave of economic growth (World Bank, 2008).

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