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Eurozone crisis hitting developing economies

Photo: The colour of your money, Flickr/penguincakes.An economist has described the Eurozone crisis as “really worrying” for developing countries.

One consequence of the crisis is reduced aid: two new reports show that development aid commitments from EU members fell last year.

International investment is also being affected by the ongoing financial crisis. Although Foreign Direct Investment (FDI) inflows rose worldwide in 2011, economic uncertainty is likely to reduce growth in FDI in 2012, according to the UN agency, UNCTAD.

The picture in Africa last year was mixed. FDI flows fell steeply in 2011 in North Africa and in the Democratic Republic of Congo. However, total Foreign Direct Investment (FDI) inflows to sub-Saharan Africa grew from $29.5 billion in 2010 to $36.9 billion in 2011, just below the 2008 peak of $37.3 billion. Much of that increase in FDI was accounted for by South Africa (its FDI went from $1.23 billion to $5.81 billion last year).

Nevertheless, research from the Overseas Development Institute (ODI) suggests that the growth outlook for 2012-13 is weak for African and other developing economies. Exports, investment, remittances and aid are all likely to drop due to the continued Eurozone crisis.

The developing world faces an estimated total output loss of $238 billion, while a 1% drop in export growth could lower growth in poor countries by up to 0.5%, according to the research.

The lead author of the ODI Working Paper, Dr Isabella Massa, said:

“There are three broad ways in which the euro zone crisis will affect developing countries – through financial contagion, as a knock-on effect of fiscal consolidation in Europe to meet austerity needs, and through a drop in the value of currencies pegged to the euro.

“The EU remains the largest single export market for poorer countries, although it is the emerging BRIC economies which are their main source of imports.

“Poor countries are vulnerable to the euro crisis not only because of their exposure (due to dependence on trade flows, remittances, private capital flows and aid) but also because of their weaker resilience compared to 2007, before the onset of the global financial crisis.”

Massa concluded that the current situation is “really worrying for developing countries.”

Links

"Incredible progress in the fight against poverty" but funding is falling (July 16, 2012)

Prospects for EU development aid (January 13, 2012)

UNCTAD World Investment Report 2012 (press releases July 5, 2012)

Isabella Massa, Jodie Keane and Jane Kennan The euro zone crisis and developing countries (Overseas Development Institute, press release 21 June 2012)

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