Chapter I

The global economic crisis: causes and

transmission

Impact, response and recovery

The recent financial and economic crisis—the worst since the Great Depression
of the 1930s—originated in the United States and quickly spread through
multiple channels to other industrialized countries, low- and middle-income
countries, as well as economies in transition. The result has been the still-
unfolding global financial, economic and social crises now often referred to as
the “Great Recession”.
The global economy contracted by 2 per cent in 2009 in sharp contrast
to the several preceding years of high growth in excess of 3 per cent annually
(United Nations, 2010c; 2011). While many rich countries experienced
economic contraction, the rate of economic growth in developing countries
slowed significantly to 2.4 per cent for 2009. In 2009, 52 countries experienced
declines in per capita income. In the same year, output in economies in transition
as a group contracted sharply by 6.7 per cent as Russian output declined by
almost 8 per cent. Also in 2009, economies in Latin America and the Caribbean
contracted by 2 per cent, as Mexican output fell by 6.5 per cent. Western Asia
was the other developing part of the world experiencing negative growth (United
Nations, 2011).
Global trade volumes fell from the end of 2008 through the first half of 2009
as a result of declining imports by developed countries, especially in the United
States which accounted for 15 per cent of the global total (United Nations,
2009a; 2010b). At the height of the crisis, between July 2008 and April 2009, the
value of imports of the European Union, Japan and the United States plummeted
by almost 40 per cent and triggered a worldwide collapse in international trade.7
Despite the gradual recovery of the past two years, the value of imports of the
three largest developed economies was still about 25 per cent below pre-crisis
peaks by August 2010. Global trade is expected to grow by about 6.5 per cent
in 2011 and 2012, significantly less than the 10.5 per cent rebound in 2010
(United Nations, 2011).

7 The volume of imports of the three major developed economies fell by about 18 per cent
during that period, a situation which was compounded by a decline of about 24 per cent in
import prices.
14 The Global Social Crisis

The extent as well as manner in which a country is integrated into the global
economy has determined the severity of the crisis in different countries. The effects
of the crisis spread to developing countries, primarily through declines in trade
and commodity prices and reduced access to credit, as lower demand in developed
countries hurt the export sectors and slowed growth in developing countries. The
plight of many developing countries heavily dependent on the export of primary
commodities was especially worsened by falling commodity prices. At the same
time, international bank loans and foreign direct investment (FDI) declined.
While some of these flows have since recovered, the cost of finance is still high
and access to bank loans remains especially tight with stringent implementation
of the regulations introduced by the Basel Committee on Banking Supervision.
The effects of the crisis also spread through secondary transmission channels,
such as lowered remittance flows to some countries and reduced earnings from
tourism, of particular importance for many small island States.
Sub-Saharan Africa has not been immune to the effects of the crisis despite
its marginal role in the global economy. That region has experienced significant
slowing of economic growth and poverty reduction but the impacts were less severe
there than elsewhere. Although parts of the Asian region have led the recovery,
the crisis has reduced the region’s remittance inflows and export earnings. Some
countries in Latin America with strong ties to crisis-affected Spain and the United
States have suffered quite badly, although overall the region has proven quite
resilient (United Nations, 2010b; World Bank, 2010a). Central Asian countries
were also relatively less affected, except for Kazakhstan which had fuelled its rapid
growth with heavy private sector external borrowings from foreign capital markets.
The crisis spread through the operations of the banking subsidiaries in Kazakhstan
to other countries in that subregion. The other channel of contagion was the drop
in remittances of migrant workers, mostly from Tajikistan and Kyrgyzstan, working
in Kazakhstan and the Russian Federation. The worst affected area was Eastern
Europe, which suffered heavily because of its exposure to toxic assets in the United
States. Almost all countries in that part of Europe experienced declines in real
gross domestic product (GDP) in 2009. The most severely affected countries were
Estonia, Latvia and Lithuania, where real GDP fell by 15 to 18 per cent in 2009
and did not recover in 2010. The unemployment rate in Latvia rose to 22.5 per
cent in 2009 and to 15 per cent in the other two Baltic countries. In 2010, the
unemployment rates were 20 per cent in Latvia, 19 per cent in Estonia and 17.3
per cent in Lithuania (Eurostat, 2011).

International response averts deeper recession

The leaders of major economies came forward and took unprecedented
coordinated actions, adopting stimulus packages and furnishing resources to
boost the lending capacity of the IMF and multilateral development banks. These
actions succeeded in averting a deeper recession. The global recovery has proven
15 The Global Social Crisis

to be stronger than had been initially forecast, though it is still uneven and the
potential for volatility remains high. The policy response has weakened since
2010, and many Governments, particularly those in developed countries, have
shifted to fiscal austerity. Partly as a result of these policy shifts, global economic
growth started to decelerate in mid-2010. Government policies are expected to be
much less expansionary in the near term, especially as widening fiscal deficits and
rising public debt have undermined support for further fiscal stimulus measures.
Therefore, slower growth is expected to continue into 2011 and 2012.

Recovery: tepid, uneven and uncertain

The global economy grew by about 3.6 per cent in 2010. Asia has led the
recovery among developing regions, while Europe and the Commonwealth of
Independent States are still lagging behind. The United Nations estimates that
the global economy will grow by 3.1 per cent in 2011 and 3.5 per cent in 2012.
The recovery may, however, suffer setbacks and slow to below an annual rate of
2 per cent, while some developed economies may slip back into recession should
several downside risks materialize (United Nations, 2011).
Many fundamental causes of the crisis have not been addressed, such as
insufficient financial sector regulation, unrealistically high executive compensation
(salaries and bonuses), stagnating real wages and consequently rising inequality
and debt-financed consumption. Some countries have continued, or even
intensified, expansionary monetary policies (low interest rates and “quantitative
easing”) to support economic activities while fiscal stimulus measures are being
phased out and to help financial sectors return to normalcy. However, these
actions have created new risks such as greater exchange-rate volatility among major
currencies and a surge of volatile capital flows to emerging economies. These
developments have already become a source of economic tension and weakened
the commitment to coordinate policies at the international level to deal with the
global imbalances and other structural problems. This could harm recovery in the
near term and make it difficult to respond to more challenging emerging issues.

Background
In the years preceding the crisis, most economies experienced high rates of growth,
low inflation and monetary stability. Many countries, particularly in Africa, grew
at historically high rates not seen for decades, largely as a result of the boom in
commodity prices. Developing countries became increasingly integrated into the
global economy as liberalization, deregulation, trade and financial globalization
spread, with the encouragement of the international financial institutions.
This relatively long period of economic growth with low inflation gave rise to
a number of dangerous illusions. First was the notion of a “great moderation” in
16 The Global Social Crisis

Table I.1
Growth of global output, 2006-2012

Annual percentage change

2006 2007 2008 2009 2010 a 2011 b 2012 b
Global output c 4.0 3.9 1.6 -2.0 3.6 3.1 3.5
of which:
Developed economies 2.8 2.5 0.1 -3.5 2.3 1.9 2.3
Euro area 3.0 2.8 0.5 -4.1 1.6 1.3 1.7
Japan 2.0 2.4 -1.2 -5.2 2.7 1.1 1.4
United Kingdom 2.8 2.7 -0.1 -4.9 1.8 2.1 2.6
United States 2.7 1.9 0.0 -2.6 2.6 2.2 2.8
Economies in transition 8.3 8.6 5.2 -6.7 3.8 4.0 4.2
Russian Federation 8.2 8.5 5.2 -7.9 3.9 3.7 3.9
Developing economies 7.3 7.6 5.4 2.4 7.1 6.0 6.1
Africa 5.9 6.1 5.0 2.3 4.7 5.0 5.1
Nigeria 6.2 7.0 6.0 7.0 7.1 6.5 5.8
South Africa 5.6 5.5 3.7 -1.8 2.6 3.2 3.2
East and South Asia 8.6 9.3 6.2 5.1 8.4 7.1 7.3
China 11.6 13.0 9.6 9.1 10.1 8.9 9.0
India 9.6 9.4 7.5 6.7 8.4 8.2 8.4
West Asia 6.1 5.1 4.4 -1.0 5.5 4.7 4.4
Israel 5.7 5.4 4.2 0.8 4.0 3.5 3.0
Turkey 6.9 4.7 0.7 -4.7 7.4 4.6 5.0
Latin America and the
5.6 5.6 4.0 -2.1 5.6 4.1 4.3
Caribbean
Brazil 4.0 6.1 5.1 -0.2 7.6 4.5 5.2
Mexico 4.9 3.3 1.5 -6.5 5.0 3.4 3.5
of which:
Least developed countries 7.6 8.1 6.7 4.0 5.2 5.5 5.7

Source: (United Nations, 2011), p. 5.

a Partly estimated.
b Forecasts, based in part on Project LINK and baseline projections of the United Nations World Economic
Forecasting Model.
c Calculated as a weighted average of individual country growth rates of gross domestic product (GDP), where
weights are based on GDP in 2005 prices and exchange rates.

developed countries, meaning that the monetary authorities had achieved growth with
low inflation by taming the business cycle with inflation-targeting policies. This bred
a sense of collective complacency about the future and heightened optimism about
the efficiency of financial markets and the creativity of recent financial innovations. 8

8 For details of this complacency see box 1 in the overview quoting the Independent Evaluation
Office of the International Monetary Fund (2011) p. v.
17 The Global Social Crisis

The second pernicious notion was the so-called decoupling of developed and
developing economies. As economies have become more intertwined through
trade and finance, the proponents of this belief argued that globalization or
international economic integration and decoupling can coexist. This is possible
because the opening up of economies not only boosts the trade of poor countries,
but also spurs rapid productivity growth, which helps to raise their domestic
incomes and spending. Thus, developing countries can continue to grow even
with a slowdown in developed economies. The so-called decoupling argument
ignored the fact that much of the pre-crisis growth in developing countries,
especially those in Africa, was due to booming commodity exports, with
hardly any productivity growth or rapid structural change. The idea seduced
policymakers in developing countries into believing that there was no need for
industrial, investment or technology policies to diversify their economies or to
dynamically induce productivity growth. Their collective complacency favoured
liberalization of trade and finance, privatization and deregulation.
There was also the presumption that growth is good for the poor.9 This allowed
policymakers to ignore rising inequality, both within and between countries, which
many observers believed was due to globalization and deregulation.10 The collective
complacency about inequality and globalization can be gleaned from a remark by the
then President of the United States, William Clinton, at the 2000 World Economic
Forum at Davos: “We have to reaffirm unambiguously that open markets are the best
engine we know of to lift living standards and build shared prosperity”.
The epicentre of the financial collapse was the United States, the world’s
largest economy. Despite relatively higher economic growth rates before the
crisis, the wages and purchasing power of most Americans were stagnating. The
benefits of the country’s growth largely accrued to the wealthiest Americans, as
wealth and income inequality worsened. The globalization of labour markets—
including through outsourcing jobs from developed countries to lower-wage
economies, the weakening of unions and collective bargaining power, increasing
returns to capital relative to labour and a falling minimum wage11 —in effect
contributed to wage stagnation in real terms.
Despite static wages for more than two decades among middle-class
Americans and growing inequality, consumer spending remained at levels which
kept the United States economy growing. This was possibly due to the country’s
low-interest monetary policy which kept credit relatively cheap. The easy access
to credit increasingly fuelled consumption, and household debt increased from
48 per cent of GDP in the early 1980s to nearly 100 per cent just before the crisis.

9 For details of this hypothesis see Dollar and Kraay (2001).

10 United Nations (2005) drew attention to the predicament of rising inequality.
11 Since the minimum wage has not kept pace with inflation, its real value has fallen.
18 The Global Social Crisis

Rising income inequality in the United States and elsewhere also contributed
to the financial crisis. In the United States, in the mid-1970s, the richest 1 per cent
of the population captured about 8 per cent of national income; by the 2000s,
this group received double that proportion, or 16 per cent. The income share of
the bottom 90 per cent of the population declined from 65.4 per cent in 1980
to 51.8 per cent in 2008 (Johnston, 2010). Such high income concentration in
the hands of so few had not existed since 1929, just before the start of the Great
Depression. This massive wealth accumulation sought profitable investment
opportunities and increased the pressure on the financial sector to make
increasingly risky investments in more unregulated environments.12 Insufficient
regulation, despite the emergence of many new financial instruments, enabled
financial institutions to become overleveraged as overconfident investors moved
into riskier assets, presuming the continuation of high economic growth rates
(Milanovic, 2009; Rajan, 2010).

United States crisis becomes global

Recent globalization has been characterized by widespread trade and capital
account liberalization, either voluntarily or as a condition for receiving loans or aid.
The dominant view, at least prior to the current crisis, had been that freer markets
would enhance economic efficiency. That view held that trade liberalization
and economic openness should enable countries to maximize resource use and
comparative advantage, attract FDI and increase capital formation. The benefits
of the ensuing growth would then trickle down to the majority of the population.
This approach, however, did not achieve the promised results in many countries,
and in fact worsened the effects of the crisis (van der Hoeven, 2010).
The global crisis was, in part, precipitated by the lack of international
regulatory coordination. Globalization of financial markets has meant that much
credit and capital are no longer under the jurisdiction of national regulatory
bodies. Existing national regulation also proved insufficient to protect investors
from excessive risk. Governments’ failure to more effectively regulate banks
and other financial institutions allowed those institutions to take advantage of
loopholes in their search for greater profits, ultimately causing them to become
overleveraged (United Nations, 2010b)
Globalization in the years prior to the crisis accelerated the broad economic
integration that facilitated the spread throughout the world of the repercussions of
unsustainable overleveraging in the United States. The crisis spread through financial
market interlinkages across Europe and quickly extended to the real economy as
needed loans and investment finance became increasingly unavailable. While the
impact of the crisis on economic growth and employment has been most severe in

12 For details refer to Torres (2010) and van der Hoeven (2010).
19 The Global Social Crisis

Box I.1
The Community Reinvestment Act
and the United States subprime crisis

The 1977 Community Reinvestment Act was intended to stop discriminatory lending
practices—known as redlining—against individuals in low-income and ethnic minority
neighbourhoods by requiring lending institutions to apply the same conditions to all
borrowers. Some critics attribute the rise in subprime loans and the subprime mortgage crisis
to implementation of that Act. They argue that it required banks to lower their credit standards
and offer higher-risk mortgage products in order to make loans to lower-income applicants.
Subprime loans are high-risk loans intended for people who do not qualify for other loans
owing to their low income or poor or limited credit histories. Such loans typically have higher
interest rates than do prime loans along with more or higher fees and penalties. The subprime
market experienced many abusive lending practices, including the steering of borrowers who
would be eligible for prime loans towards taking subprime loans and pushing loans with low
“teaser” rates that would rise sharply over time.
Only 9 per cent of subprime loans made to low-income borrowers or to those in low-
income neighbourhoods were compliant with the Act’s regulations (Park, 2008). This argument
against financial inclusion overlooks several important facts. Subprime loans generated higher
revenue for mortgage companies, so the incentive structure encouraged lenders to push
these loans towards potential borrowers. However, 60 to 70 per cent of so-called subprime
loans went to borrowers at middle- or higher-income levels and with good credit who should
have been eligible for prime loans (Aalbers, 2009). Additionally, the Act could not exercise
regulatory control over non-bank lenders. Independent mortgage companies had been the
source of the majority of subprime loans in the United States.
Easy access to home loans contributed to a “housing bubble” in the United States, and
this situation was at the heart of the crisis. With home ownership long part of the “American
Dream”, the idea that all Americans, including those with low incomes and poor credit histories,
should be able to own their own homes became increasingly prevalent. Inadequate financial
regulation and lax monetary policy encouraged lending to applicants not qualified to obtain
such loans.
Low interest rates, lack of information, poor judgment and predatory lending practices
– encouraged by commission-based mortgage sales – led many home buyers to take risky
mortgages. The regularity with which home values increased yearly led to overly optimistic
assumptions, as home owners borrowed and spent against inflated home values. By 2006, 48
per cent of all mortgages were subprime (Verick and Islam, 2010). In the same year, interest
rates began to rise and borrowers with adjustable-rate mortgages or low introductory “teaser”
rates were soon faced with the stark reality that they could no longer afford their monthly
payments; the delinquency rate on home mortgages subsequently rose.
As house prices fell, owners found that they owed more than their homes were worth,
further fuelling the delinquency rate. Of all subprime loans issued in 2006, at least 40 per cent
were delinquent by the end of 2008 (United Nations, 2009a). As lenders spread the risk around,
exposure broadened more than ever.1

1
“Mortgages were sold on by the originators to third-parties, which were then repackaged as
mortgage-backed securities (MBS) and sold to investors. This enabled lenders to take the loans off their
books. In particular, special investment vehicles (SIVs) were pressed into service and kept off the balance
sheet, which allowed financial institutions to increase leverage and returns on their investments. Thus,
mortgages that were in the past the domain of the traditional banking system could now be traded in open
markets both within the US and outside its borders, beyond the scope of regulatory measures (because they
were conducted as an over-the-counter transaction thus avoiding the regulations pertaining to the stock
market)” (Verick and Islam, 2010).
20 The Global Social Crisis

some high-income countries, there have also been negative impacts on developing
countries. Declining global trade and commodity prices hurt export sectors, as the
credit squeeze spread to developing countries and transition economies.

Trade
Triggered by a collapse of import demand in major developed countries and
much less trade finance, trade flows fell between 30 and 50 per cent in most
economies in late 2008 and early 2009, with East Asian economies experiencing
the sharpest decline. The financial crisis also abruptly reversed the upward trend
of oil and non-oil primary commodity prices experienced since 2002. Oil prices
plummeted by as much as 70 per cent from their peak levels in 2008 before
rebounding. In the same period, metal prices declined even more sharply to
about a third of their peak levels. Prices of agricultural products, including basic
food grains, also declined significantly (United Nations, 2010b).
As a result, many developing countries suffered strong swings in their terms
of trade. In particular, net exporters of oil and minerals felt very strong adverse
export price shocks on top of declines in global demand due to the recession.
Although net importers of food and energy saw their import bills fall during the
crisis, the related terms of trade gain was more than offset by the steep drop in
demand for their exports at the nadir of the recession (United Nations, 2010b).
As noted in the United Nations World Economic Situation and Prospects 2010,
trade protectionism increased as the crisis evolved. A good number of developed
and developing countries raised tariffs and introduced new non-tariff measures. The
fiscal stimulus packages and bail-out measures also contain protectionist elements,
such as direct subsidies and support for domestic industries, or restrictions on the
use of these resources to buy foreign products. Some countries also reintroduced
previously eliminated export subsidies for some agricultural products.13
Yet, world trade continued to recover in 2010 mainly due to strong import
demand from the emerging economies, and grew by about 10.5 per cent. However,
there is considerable doubt whether emerging economies can continue to act as the
engines of world trade growth particularly as the dynamics of the initial phase of the
recovery seem to be fading and as growth in developed countries remains sluggish.
According to the United Nations World Economic Situation and Prospects 2011
world trade is expected to moderate to about 6.5 per cent in both 2011 and 2012.

13 For details see Gamberoni and Newfarmer (2009).

21 The Global Social Crisis

Tourism
The effects of the economic crisis have also spread from high- to middle- and
low-income countries through declines in international tourism. According to
the United Nations World Tourism Organization (UNWTO), tourism registered
a strong growth in developing countries, especially in least developed countries
(LDCs) since 2001 until the crisis hit. For example, international tourist arrivals
grew by 42.5 per cent in LDCs and 30.8 per cent in developing countries as
a whole during 2001-2005. Commensurate with this, international tourism
receipts grew by over 50 per cent in LDCs and over 33 per cent in developing
countries during the same period. Tourism is highly reactive to and dependent
on economic conditions in tourist-sending countries, so it is not surprising
that international tourism receipts dropped by $89 billion, from $939 billion
in 2008 to $850 billion in 2009. All regions suffered lower receipts, with an
average decline of 5.7 per cent globally compared with 2008 (World Tourism
Organization, 2010a). The biggest losers were the Americas, down 9.6 per cent,
and Europe, down 6.6 per cent. Asia and the Pacific saw uneven trends, with
South and South-East Asia declining by 3.5 and 7.2 per cent, respectively, and
Oceania and North-East Asia increasing by 5.2 and 0.7 per cent, respectively
(World Tourism Organization, 2010b).
A slow recovery in global tourism started in the fourth quarter of 2009 and
gained speed through 2010, driven by the emerging economies. International
tourist arrivals increased by 6.7 per cent in 2010 compared with 2009, with
the Middle East and Asian regions leading increases by 14 and 13 per cent,
respectively, followed by the Americas at 8 per cent and Africa at 6 per cent.
Europe trailed behind with 3 per cent growth (World Tourism Organization,
2011). International tourist arrivals are expected to grow by about 4 per cent in
2011 (World Tourism Organization, 2010a).

International finance14
Net private capital inflows to emerging economies declined precipitously in
late 2008 and early 2009. After peaking at about $1.2 trillion in 2007, inflows
halved in 2008 and plunged further to an estimated $350 billion in 2009. The
sharpest drop was in international bank lending to emerging economies, with a
total net inflow of $400 billion in 2007, which became a net outflow of more than
$80 billion in 2009. The economies in transition, especially the Russian Federation,
Ukraine and a few other countries in Central and Eastern Europe, experienced the
most dramatic reversal in access to bank lending. Non-bank lending flows also
declined significantly during the crisis. Large outflows of net portfolio equity were
registered in the second half of 2008. These flows have recovered markedly since

14 This section draws on United Nations (2010b).

22 The Global Social Crisis

Box I.2
Greek tourism sector adversely affected by crisis

Tourism comprises almost a fifth of Greek national income. In 2009, the country’s fiscal deficit
was approximately 13.6 per cent of gross domestic product (GDP), with a total public debt
of 115 per cent of GDP (United Nations, 2010d). The country’s debt rating plummeted as it
lost investor confidence, putting Greece on the verge of defaulting on its loan obligations.
A default was forestalled with assistance from the International Monetary Fund and the
European Union. However, by mid-2011 it became apparent that further assistance would
be necessary to prevent a default.
In December 2009, the Government began to implement a series of austerity
measures, slashing public spending, raising taxes and raising the retirement age. The public
has reacted strongly, with massive—and, at times, violent—protests beginning in February
2010. Major labour strikes further disrupted economic activity, especially in the country’s
crucial tourism sector (BBC, 2010). In the first half of 2011 protests against further budget
cuts and tax increases escalated in Athens.
After two years of sharp decline, there is cautious optimism that Greek tourism
revenues could increase by up to 10 percent in 2011 (Melander, 2011). Tourism in Greece,
Spain and Portugal has risen in the first half of 2011 as tourists who might have opted
for destinations such as Egypt and Tunisia are opting for alternative travel locations
(Bawden, 2011).

early 2009, but returning portfolio flows may also reflect a renewed appetite for
riskier assets.
While flows of FDI tend to be less volatile than other components of private
capital flows, these declined by more than 30 per cent in 2009. External financing
costs for emerging market economies surged in late 2008. As a result, private sector
access to credit in emerging markets was curtailed, with this trend continuing well into
2009. Outflows of capital from emerging economies, particularly to other developing
countries, which had gathered some momentum prior to the global financial crisis,
also moderated during the period 2008-2009.
The declines in private capital flows were partially offset by increased official
inflows, particularly from the IMF and other multilateral financial institutions,
as their financial resources were boosted significantly at the G20 London Summit
and they started to disburse more lending. Emerging Europe received the lion’s
share of these net official flows. Bilateral official, non-concessional flows also
increased as central banks arranged foreign-exchange swaps to deal with reduced
international liquidity. However, net official flows to developing countries
remained negative in 2009 and 2010, continuing the trend of the past decade.
The return of net official flows (including ODA) from poor to rich countries was
about $120 billion per year between 2006 and 2008 (United Nations, 2010b).
There are also concerns about the conditionalities of the IMF’s new crisis lending,
which will be discussed further in chapter VI.
23 The Global Social Crisis

Development aid
Development aid can be an important source of support for economic and social
development and accounts for as much as 20 per cent of government spending in
some developing countries. At the 2002 Monterrey International Conference on
Financing for Development, developed countries once again made commitments
to providing 0.7 per cent of their gross national income (GNI) as development aid.
According to the United Nations MDG Gap Taskforce Report 2010, aid
from members of the Development Assistance Committee (DAC) reached almost
$120 billion in 2009, increasing by less than 1 per cent, in real terms. However,
the share of ODA in donor GNI was mere 0.31 per cent, well below the target of
0.7 per cent, which has been reached and exceeded by only five donor countries.
Aid budgets rose in Belgium, Finland, France, Norway, the Republic of
Korea, Switzerland and the United Kingdom of Great Britain and Northern
Ireland, but fell in some countries, particularly those experiencing debt crises.
Greece, Ireland, Portugal and Spain all reduced their aid budgets in 2009, along
with Austria, Canada, Germany, Japan and the Netherlands (Organization for
Economic Cooperation and Development, 2010).
However, based on earlier government aid cuts during previous economic
crises, such as in Finland and Sweden in 2001, the World Bank has predicted that
development aid may fall by nearly one quarter (World Bank, 2010b). Moreover,
even if donors maintain the ratios of their aid to national income, the amount of
aid will decline if national income falls. The aid budget has come under pressure
as many donor governments turned to fiscal austerity measures. According to
the United Nations World Economic Situation and Prospects 2011, the fragile
recovery in developed countries and the possible threat of a double-dip recession
create considerable uncertainty about the future volume of ODA flows, while aid
delivery is falling short of commitments by the donor community.

Remittances
Remittances have become a growing source of income in many developing
countries, reaching a high of $336 billion in 2008. In past crises, remittances
were counter-cyclical, going up when times were hard in receiving countries, thus
furnishing an important buffer against economic shocks. Overall, remittances
declined by 6.1 per cent, from $336 billion in 2008 to $315 billion in 2009
(World Bank, 2010). However, in the current crisis, remittances have proven
more resilient than private capital flows and are expected to rise again in 2010
and 2011 (Ratha, Mohapatra and Silwal, 2010).
The impact of the crisis on remittances varies by region. Remittance flows to
Latin America were down by 12 per cent in 2009. In Eastern Europe and Central
Asia, many countries that rely heavily on remittances saw these flows fall by an
24 The Global Social Crisis

estimated 21 per cent. Remittances, equivalent to over 50 per cent of national

income in Tajikistan and about 20 per cent in Armenia, have declined by 30 per
cent in both countries. North Africa has also been severely affected owing to high
unemployment in oil-rich countries. In sub-Saharan Africa, the impact has been
smaller, and in some countries, remittances went up. In South and East Asia,
remittances have continued to grow, although more slowly than in recent years
(Ratha, Mohapatra and Silwal, 2010).

Concluding remarks: bleak prospects for social development

Despite signs of early recovery, the fallout of the Great Recession of 2008-2009
in terms of increased poverty, hunger and unemployment has been significant
and will continue to adversely impact on social development. While it is still too
soon to quantify with much accuracy the full impact of the crisis on many social
outcomes, the current predicament has almost certainly contributed to rising
unemployment in developed countries and increasingly vulnerable employment
in developing countries. Unemployment is not expected to return to lower pre-
crisis levels for many years. As more Governments in developed countries are
embarking on fiscal tightening, the prospects for a quick recovery of employment
look even gloomier.
Yet, unemployment figures do not tell the whole story: the number of
discouraged workers—those who have given up looking for a job and hence are
no longer included in unemployment figures—has risen further. The longer-term
employment consequences of the current crisis are already becoming visible, as the
share of structural or long-term unemployment has increased significantly in most
developed countries since 2007. Problems consequent to long-term unemployment
will linger, particularly in wealthy countries, and vulnerable employment is likely
to persist in developing countries. In many countries, job-rich economic growth
remains elusive.
Malnutrition, already on the rise prior to the crisis, remains a grave threat to
human well-being. The economic crisis reinforced the effects of the food and fuel
price hikes in 2007 and 2008. Although the target under Goal 1 of halving global
poverty rates by 2015 (from 1990 levels) is apparently on track to be achieved
for the world as a whole,15 the joint International Monetary Fund–World Bank
Global Monitoring Report 2010 estimated that by 2010 an additional 64 million
people fell into extreme poverty as a result of the economic crisis alone.
The crisis has also significantly increased the challenge of achieving the
Millennium Development Goal targets for universal primary education, child
and maternal mortality, and environmental and sanitary conditions. The

15 For details see: www.un.org/millenniumgoals/poverty.shtml.

25 The Global Social Crisis

economic slowdown has reduced the funds available to support social spending
in developing countries due to falling revenues and smaller tax bases. Even before
the crisis, the requirements for stepping up economic growth and social spending
posed significant macroeconomic challenges. These have become all the more
pressing, especially where the setbacks caused by the crisis have been the greatest.
The growing pressure for fiscal consolidation has also put social spending at
risk in developed countries. To make matters worse, food prices are rising again
and have recently passed the previous peak. Extreme weather conditions, likely
linked to climate change, threaten food security as never before. The effects of
diverting food products to the production of biofuels and as feed for animals
and much greater commodity price speculation and volatility with financial asset
diversification and lax monetary policies have pushed up food and energy prices
again, undermining efforts to reduce poverty and hunger.
Stimulus measures implemented by many Governments have been essential
to initiating the global recovery. While a deeper and prolonged global recession
was averted, the recovery remains fragile and uneven. The main underlying roots
of the crisis have not been addressed, threatening the sustainability of the recovery.
There are still significant uncertainties and risks. Continued high
unemployment, financial fragility, exchange-rate instability as well as heightened
perceptions of sovereign debt distress and inadequate policy responses could
further undermine business and consumer confidence in developed countries.
The much hoped for rise in business confidence with the phasing out of the
stimulus packages has not materialized in a robust way as overall demand remains
depressed. In countries imposing austerity measures, budget cuts are leading to
the loss of public sector jobs, a situation which leads in turn to a decline in the
ability of people to access publicly provided social services. Thus, with premature
withdrawal of various stimulus packages and the imposition of fiscal austerity, the
prospect of a double-dip recession cannot be discounted. Recent trends in some
European countries underscore this risk.