The Financial Crisis and the Developing World

An Interview With Jomo K.S.

Jomo Kwame Sundaram, better known as Jomo K.S., is the assistant secretary-general on economic development for the UN Department of Economic and Social Affairs. He is a visiting senior research fellow for the Asia Research Institute, National University of Singapore, and professor in the Applied Economics Department, University of Malaya, Kuala Lumpur. He is founder and chair of IDEAs, or International Development Economics Associates. Jomo K.S. would like to thank his colleagues Rob Vos, Pingfan Hong, Richard Kozul-Wright and Alex Izurieta for their contributions to these responses.

Multinational Monitor: The stock markets in developing countries — the “emerging markets” — are tumbling. What are the consequences for regular people in these countries? Does it matter?

Jomo K.S.: So far, stock markets in emerging economies have plunged by about 50 percent on average, some by more than 60 percent (China, Russia, for example) — much more than the average drop of about 30 percent in the rich countries.

It does matter to ordinary people, albeit in different ways. In most emerging markets, not only rich people, but many middle income households own equities. The losses in equity markets will have direct impacts on their income as well as their wealth.

For the poor, who don’t own any stocks, the indirect impact may also be significant: As stock markets plummet, especially in the current turmoil, the solvency of banks and firms depend on how much capital they own. If the value of their capital plunges, even solvent firms will suddenly look overleveraged and face problems.

Banks are now trying to shore up their capital positions, and many have stopped lending. This leads firms to cut their investment spending and use remaining earnings to cover operational costs, which may lead them to start laying off workers.

In the present situation, the drop in stock market prices is part of a downward spiral which will undoubtedly cause the world economy to slow down, causing increased unemployment and worsening work conditions. That will also affect government revenue and further limit the scope for government spending on social services and transfers to the poor.

So, the overall impact will be felt by all, albeit in different ways. Much will depend on how governments respond with counter-cyclical and social protection policies, and following the economic liberalization of recent decades, the latter is unlikely to be a major policy priority.