Reinvigorate the Rich to Help the Poor

WASHINGTON, DC – For the third time in five years, the world’s poorest countries are at risk of being hit by a crisis not of their making – a prospective downturn brought on by financial turmoil in the world’s most advanced economies. Having gone through the food and fuel shock of 2007-2008 and the global financial crisis that followed, low-income countries may now face even larger disruptions in 2012. And, given the interdependence of today’s globalized world, poor countries’ distress will invariably have unwelcome consequences for everyone, rich and poor alike.

At the height of the global crisis in 2009, many low-income countries experienced a slowdown in growth marked by falling exports, lower remittances from expatriate workers, and subdued foreign investment. The social consequences were severe: the World Bank estimates that an additional 64 million people were left in extreme poverty by the end of 2010.

Yet it could have been much worse. Thanks to greatly improved policy performance over the previous decade, low-income countries entered the crisis far better positioned to withstand shocks than in the past. They had smaller fiscal and current-account deficits, lower inflation, larger international reserves, and – thanks in part to debt relief – lower debt burdens.

As a result, most countries were able to maintain or even increase spending, despite lower revenues, and allow fiscal deficits to widen. This propped up economic growth, while also boosting outlays for critical investments and social programs needed to lessen the hardships faced by the poorest people. The downturn was also relatively short-lived, partly as a result of the greater openness to world trade that lower-income countries have embraced over the past decade.