As of yesterday the US Congress had not yet reached agreement on the proposed US$700 billion bailout of the US financial system; in fact, early yesterday morning it was reported that talks had stalled. Bad news for financial institutions some of which had obviously been hanging on by a mere thread, as evidenced by Thursday’s seizure and sale of Washington Mutual Bank, deemed the largest failure of a US bank so far. Predictions are that the bailout, if and when it is agreed to, will not be the cure-all of this global crisis. Financial markets will not bounce back immediately and the focus of those controlling the purse strings of the world will be the building back, which is bound to be slow.
This does not augur well for the economies of aid-dependent developing countries as this crisis, compounded by the global hike in the prices of food and fuel will likely translate into a rise in poverty levels. At the UN on Thursday, Secretary-General Ban Ki-moon, and British Prime Minister Gordon Brown, pushed for there to be no backsliding in the commitments made by rich donor countries to meeting the Millennium Development Goal of halving global poverty by 2015. However, there was no unanimity in this call as some donors, France in particular, are already preoccupied with overcoming the current crisis.
Countries like Guyana, which receive US and global aid, and whose economies are heavily bolstered by remittances, particularly from the US, are likely to feel the squeeze twice. Several ongoing projects and programmes would fail if, in a worst-case scenario, aid commitments could not be met. Several others, which have been planned, would not get off the ground.
If job loss and uncertainty continue, there will be an almost immediate dip in remittances in response. US-based Guyanese, Mexicans, Hondurans and natives of other countries in Latin America and the Caribbean will not be able to send money home at the rate at which they would have done previously, if they have lost their jobs or are unsure about whether they will be able to hang onto them.
Already, since the US mortgage crisis began earlier this year, Mexico’s Central Bank had reported a 2.9 per cent drop in remittances from the US for the first quarter of this year, when compared with the same period last year. No doubt, if other countries did similar studies the results would probably be the same. Perhaps, some might even find the decrease was higher than 2.9 per cent, which is not an insignificant figure. And given the fact that the crisis has worsened, the second quarter drop-off could possibly be much higher. Economists had warned, years ago when it never seemed likely that the US could find itself in such a position, that the reliance on remittances was not viable as an economic policy.
According to the IDB, which has been conducting an annual study of remittances from the US since 2000, remittances last year from the US to Guyana totalled US$424 million and were 43% of its gross domestic product (GDP). Haiti received US$1.8 billion, which was 35% of its GDP; Honduras, US$2.5 billion, 25% of GDP; El Salvador, US$3.6 billion, 18% of GDP; Jamaica, $1.9 billion, 18% of GDP; and Mexico $23.9 billion, about two to three per cent of its GDP. One needs neither a rocket scientist nor a crystal ball to see which countries would quicker find themselves on the slippery slope to economic morass if remittances fell significantly, as the signs seem to indicate they can.
Developing countries are caught between the proverbial rock and a hard place where they must wait out the current crisis with a lot of belt-tightening. But in the meantime, they must also look towards long-term plans for reducing dependency on the developed nations and for greater self-sufficiency. Guyana’s ‘grow more food’ campaign could be just the ticket were it not for the changing weather patterns already wreaking havoc with farmers’ lives.
