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Environment

Developing nations continue to suffer from financial crisis

Billions less in development aid spending is just one of the follow-up effects of the global economic crisis that developing nations are dealing with. But they also face other consequences of the financial meltdown.

Labourers offload grain form a truck which just arrived the world food programme

There is less work and fewer remittances due to the crisis

In addition to nations choosing to cut development aid spending, lay-offs of immigrant workers in industrialized countries have resulted in less in remittances going back to families, which results in less spending in these countries.

But drops in development aid pose one of the most serious problems, according to Tobias Hauschild, a policy advisor on essential services and aid financing at Oxfam Germany, because countries often first decide to cut social and health services.

"The Tanzanian government had to cut the budget for the fight against HIV and AIDS by a quarter," he said. "That's only one example, there are other examples. If industrialized countries cut their aid it has this direct effect in the developing world."

Montage of an EU flag, a stock curve and piles of euro notes

EU nations spent billions bailing out banks and have less to spend on aid

As a result of the global economic crisis European Union members are spending about 19 billion euro ($24.7 billion) less in development aid this year, which is hitting developing nations hard, according to the European Commission.

The world's 56 poorest countries face a $65 billion (50 billion euro) deficit as a result of the crisis, according to Oxfam. In the area of microfinance, Florian Grohs from the microfinance organization Oikocredit said Bulgaria, Romania and Russia are also having difficulties, proving that problems are affecting the developed world as well.

"We have, for instance, a financing credit cooperative in Russia, in the remote areas in Saratov," he said. "There we saw that all of a sudden micro-entrepreneurs that sell goods on the open markets had 40 percent less turn-over and then also some difficulties to repay their loans."

Series of reforms necessary

Separating food and commodity markets from financial speculation is another major area or concern for developing nations. In 2007 and 2008 food prices were driven up by speculation, which hit the world's poorest hardest.

The United States is looking at imposing regulations on agricultural speculation - much like they did in the banking sector - but the EU is still lagging behind, according to Sony Kapoor, a former investment banker who is now head of the Re-Define think tank, which aims to reform global financial markets.

A stock trader in Frankfurt with his head down on a desk

Bankers aren't thrilled at the prospect of taxes and levies

"The sensible thing to do, because it's a matter of life and death, is to go for the more conservative option and say that we forbid or strictly limit the amount of financial speculation that can go into anything to do with basic commodity markets - food in particular," he said.

Many are calling for a major overhaul of the financial system, which they through deregulation and tax havens has spiraled out of control. One important change would be to make financial investments focus on the long term rather than turning quick profits that can lead to bubbles like the one experienced in the real estate market, Kapoor said.

Bank levies and transactions taxes

Foreign cash going moving into far-away real estate, such as in London or other industrialized areas, pushes locals out of the housing market, creating instability, he said. While that's a problem for people looking to buy affordable homes, it also creates a dire situation in the developing world.

"Money which should have stayed in Russia, which should have stayed in Africa, which should have stayed in Latin America and contributed and been invested in domestic businesses doesn't stay there," he said. "That significantly hinders development."

A financial transaction tax, a bank levy and a cap on bonuses are also necessary steps to shore up the financial system and development, Kapoor said.

"A financial transaction tax will primarily fall on the shadow-banking system, which is the financial market, hedge funds and such," he said. "It is complimentary to a bank levy which will fall primarily on the commercial banking system and the investment banking system. And having one without the other could lead to some distortion, so having both is good."

Support often hard to find

Piles of euro notes

Society would benefit from the money a financial tax would generate, Oxfam said

Germany, France and the United Kingdom have already agreed to introduce a bank levy from January next year, but it's been more difficult to convince the entire European Union. There seems to be more support for an EU-wide financial transaction tax, which according to the Austrian Institute of Economic Research, could raise 200 billion euros.

Marita Wiggerthale, an agriculture and trade expert at Oxfam Germany, said a financial tax would benefit society in a number of ways.

"Oxfam is very much supporting a financial transaction tax not only because it would allow to raise money needed in order to achieve Millennium Development Goals, in order to combat poverty and hunger, but also to curb speculation and to make sure these kind of crises do not occur again," she said.

Wiggerthale said she would like to see tax havens closed and a debt moratorium for developing countries whose debt increased because of the crisis.

Author: Cinnamon Nippard (sms)

Editor: Nathan Witkop

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