Page last updated at 17:00 GMT, Thursday, 4 September 2008 18:00 UK

Slowdown 'to hit poor countries'

By Steve Schifferes
Economics reporter, BBC News

A worker stand next to copper cathode sheets being loaded into a truck at the Dachang refinery in Shanghai
Commodity exports have boosted economic growth in many countries

The world's poorest countries could see the impact of the credit crunch worsen next year, a UN report has warned.

Growth in developing countries is expected to be 1% lower this year as a result of the world slowdown.

But the pain could be greater next year, according to Unctad, the UN agency that speaks for developing countries.

It warns that a combination of high food and oil prices, and slowing global demand, could squeeze poor countries.

Inflation threat over-stated

Unctad's Secretary General, Supachai Panaitchpadki, told BBC News that both rich and poor countries should be "wary" of raising interest rates to curb inflation.

"In the current fragile condition of the global economy, measures to tighten monetary policy would exacerbate the global slowdown," Unctad's Trade and Development Report says.

Unctad believes that the danger of inflation is over-stated, as the slowdown will curb inflationary pressures, and commodity and oil prices will stabilise broadly around current levels.

However, it says that the lack of "policy coordination" on both monetary policy and exchange rates is hurting the prospects for recovery.

Unctad says it is extraordinary that in the US, interest rates have been cut, while in Europe they have been raised during the crisis.

And it warns that further adjustments in the dollar will be painful unless the current account surplus countries, including Germany, Japan and China, expand their domestic economies.

"These divergent policies may invite renewed speculation in foreign exchange markets instead of calming the system," the report adds.

Global imbalances

Poor countries are completely dependant on donor countries due to global economic crunch. I fear that hundreds of thousands more people in poor countries will go beyond poverty line.
Syed A Mateen , Karachi, Pakistan

Dr Supachai says that competition among Asian exporters by keeping exchange rates low will ultimately prove counter-productive - and he argues that China should move more quickly to adjust its over-valued currency.

He says that the imbalance between a closely-regulated system of world trade, and a much more loosely regulated international financial system has become more apparent since the credit crunch began.

"The financial turbulence, the speculative forces contributing to commodity price hikes and instability, and the apparent failure of foreign-exchange markets to bring about changes in exchange rates that reflect current-account trends suggest that there is an urgent need for reviewing the institutional framework of the global economy," the report says.

Commodity worries

Unctad says that high commodity prices for food, minerals and oil are having mixed effects on developing countries.

While some primary product exporters are enjoying boom conditions, the money is not trickling down to reach the poor.

The higher price of food, in particular, is hitting the urban poor and making it more difficult to reach the Millennium Development Goals.

And the dependence on one or two primary products for exports makes many developing countries vulnerable to rapid changes in commodity prices.

This is particularly true in Africa, which is expected to grow on average by 6% in 2008, stronger than in many years, on the back of higher oil and mineral prices.

Most African countries - 45 in total - depend on commodities for 50% of their exports, and in more than half of them, one single commodity makes up 50% of exports.

The same is true of 20 of 38 Least Developed Countries.

Unctad says that the commodity boom, though fundamentally driven by the economic expansion in emerging market countries, was pushed higher by speculation in financial markets.

It is therefore concerned that such speculation could also "amplify the downward movement" especially if "forecasts for global growth need to be adjusted downwards as a result of further turmoil in financial markets".

Tax on petrol

Unctad says that in order to meet the Millennium Development Goals, rich countries must increase their aid flows by around 50%, to between $50bn (28bn) and $60bn, as promised but not delivered at the Gleneagles Summit.

And it says that more money is needed if poor developing countries are to increase their economic growth rates.

The report suggests that new financing mechanisms might be considered to raise such sums, including a possible one cent tax on petrol worldwide - which it says could raise $180bn for development.

Previous suggestions for such global taxation have fallen on deaf ears, including an earlier plan to tax global foreign currency taxation, and a solidarity levy on global air travel (which has been introduced by France and five other countries, and is yielding 200m euros yearly to fight diseases in poor countries).

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