Financial crisis might make opportunity for poor countries

June 23, 2009

John Meadowcroft
– John Meadowcroft is Lecturer in Public Policy at King’s College London. He contributes to the Institute of Economic Affairs blog. The opinions expressed are his own. –

The present financial crisis may be understood as the hangover that inevitably follows a long period of excess. The contraction of world trade that it has brought is bad news for the citizens of least developed countries (LDC) who have not enjoyed the party but may now be required to share the costs.

It is also likely that as public spending is squeezed among the richer nations, development aid to LDCs will be cut. Here, however, the crisis may be a blessing in disguise if LDCs can use this as an opportunity to free themselves from the shackles of development aid.

The late development economist Peter Bauer famously described development aid as a “government to government transfer”; aid inevitably reaches the government of a country before it reaches its citizens. In a poor country, this means that the government acquires financial resources not possessed by others and the power that goes with the ability to distribute those resources. Hence, aid increases the salience and power of the state relative to civil society.

Government may therefore become “the only game in town” — those people who wish to maximize their incomes and provide the best for themselves and their families must seek to gain political power or favour, rather than put their talents at the service of others in the marketplace. This means that bright, young people are drawn to careers in government as politicians or bureaucrats, where the rewards will appear greater than those of a truly entrepreneurial career.

Moreover, in an undemocratic or unstable country where a violent coup may be the only means of gaining political power, increasing the salience of the state may increase the likelihood of civil unrest: if the only way of gaining wealth appears to be by seizing control of the state, then people are more likely to try to do so.

And simultaneously those who already hold political power will become more reluctant to relinquish it. The governments of many contemporary LDCs spend large amounts of money on arms while at the same time large numbers of their own people live mired in poverty. Development aid may help to prop up such corrupt and failing regimes because it gives them the resources to buy-off possible sources of opposition or to purchase military hardware to crush political opponents.

The reduction of development aid, and the contraction of international trade, in the coming years should be used by LDCs as an opportunity to develop their own economies from the bottom-up by developing small-scale local industries that are not reliant on donor support and by developing trading relationships with other LDCs rather than with rich nations. In this way, it is possible that some good may come of the financial crisis for the poorest people on the planet.

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