International financial crisis and development

Well another week is over and we are still reading a lot of articles, mostly about digital divides... Instead of taking about what we read, I decided to do an article about the consequences of the international financial crisis for people living in less developed countries, LDC.

As we live in a globalised economy the problems experienced in America, will influence both our European economy as well as the rest of the worlds. Let's therefore start by looking at the crisis from a macro level or a top-down approach. For almost all countries it will mean a slower growth and a rising inequality. LDC's will most likely experience a reduction in capital inflows because of higher interest rates and also a falling export because of a slower growth in industrial countries. This will lead to a required national budget reduction, which will most likely cut expenditures such as social programs and infrastructure projects. Poor people will be the first to feel such reductions, hence leading to inequalities. This was a quick view of the macro level of course the impact for the individual LDC depends on the actual reliance on export, financial situation and national assets, such as gold or oil.

Looking at the crisis from a micro level or bottoms-up view is a little difficult, as you would have to take the individual person's context into consideration. But "generalising" the micro view the prospect will look something like this. Until today it has already been very difficult for poor people to borrow money through their local bank, and hence in the international financial system. Noticeable exceptions to this is the concept of Microfinance e.g. Grameen bank and MyC4.com and Microcredit such as kiva.org. These initiatives gives poor people the possibility to connect with people or institutions who are willing to lend them money, often with a background charity motive and hence willing to accept a greater risk. If this is true, it will be possible for poor people with good ideas to get funding for their projects, and creating new jobs in their local context. Putting all these local contexts together, thus minimized the impact of the international financial crisis.

Having presented these two view, let my elaborate a little on my own thoughts about this. Kenneth might very well look completely different on this, and probably does. This is complete my own view. Something which I think should not be forgotten here is that history shows that in situations like this, it is always the poorest people who are hit the most. This holds true both in LDC's but also in the industrialised countries. Hence I lean towards the macro view on this topic, acknowledging that the microfinanced or microcredited loans will make a huge difference where they are provided, but not nearly enough to actually make a real difference. With a micro view, development is often associated with just economic growth, but remember that it is also e.g. education and good health to the individual.

What will happen by the end of this month when the interest rate is due for everybody? Hopefully the Bush administration reaches an agreement on how to eliminate the current credit mistrust between the financial institutions before this interest rate is due. Otherwise the consequences will be enormous.

What do you think? Have I forgotten something very important? Perhaps you think that I'm right in my analysis about the macro view but would like see the micro view succeed? If so, go to myc4.com and start lending people in LDCs money. If you have a blog, you can go to blogactionday.org and register. Blogactionday.org is on October 15, and is an annual nonprofit event that aims to unite the world’s bloggers to post about the same issue on the same day. The advertisement profit your blog generates on this day, can then be used to lend to entrepreneurs through e.g. kiva.org, further enabling the point of the micro level view.