The global financial crisis: financial flows to developing countries

Abstract

The impact of the crisis on developing countries will vary depending on their direct and indirect trade links to crisis affected countries, the structure of trade, the share of remittances and private financial flows from crisis affected countries, and the extent to which their fiscal and trade balance allow governments to respond.This background note discusses a number of critical questions for those interested in development. What does the global turmoil mean for financial resources to developing countries? What are the channels through which the crisis spreads to developing countries and how are they feeling the effects? What evidence is already available? And what does this mean for the upcomingDohaconference on Finance for Development and G20 crisis meeting?The remainder of the note is structured as follows. The second section examines how the current financial crisis affects development finance resource flows to developing countries. The third section describes the evidence so far on the effects of the financial turmoil on flows and indicators of development finance resources, and includes a summary table on the potential effects of the financial crisis on developing country financial resources. Finally, the fourth section presents policy implications.Increased financial integration of developing countries can increase economic growth rates, but may also potentially increase the speed and the number of channels through which financial crises in general, and the current financial turmoil in the specific case, may propagate across the developing world. Indeed, crossborder capital flows between developed and developing countries are sensitive to macroeconomic and financial conditions not only in developing economies but also in mature markets, and the transmission of shocks through these financial channels is much quicker than through real channels. For example, a shock in income growth in a developed country may have a gradual impact on a developing country through trade channels, but could have a much quicker effect on economic activity of that country through correlations in stock market fluctuations.Trade and development finance are important sources of external finance for developing countries. Export credit is short term finance that enables trade to take place. Recently, developing country firms have funded themselves in developed countries by issuing bonds and arranging loans which means that the financial crisis affects such firms. These effects are also felt through the lack of export credits as these are important for countries heavily dependent on exports. Розглянуто основні аспекти та наслідки світової фінансової кризи. Наведено аналіз руху фінансових потоків та їх вплив на стабілізацію економіки країн, що розвиваються. Виявлено вплив фінансової кризи на банківський сектор України, а також зарубіжних країн.