The Global Financial Crisis and Its Impacts on Developing Countries
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1.0 Origin of financial crisis………………………………………………………………… 3
2.0 causes of the financial crisis …………………………………………………………. 3-4
3.0 Channels of Transmitting Financial crisis ……………………………………………… 4 3.1 Transmission through financial flows ……………………………………….. 4-6 3.2 transmission through trade ……………………………………………………… 6
4.0 responses to the crisis by developing countries ………………………………………. 6 4.1 fiscal stimulation measures ………………………………………………….. 6-7 4.2 money policies ………………………………………………………………….. 7
5.0 reference ………………………………………………………………………………… 8

The Global Financial Crisis and Its Impacts on Developing Countries
Origin of Financial Crisis
The financial crisis originated form the United States’ economy. In the year 2007 during summer after two Bear Stearns Hedge Funds collapsed resulting to subprime mortgage crisis. This financial crisis reintroduced private defaults, bank failures, massive layoffs and credit crunch to the world. The financial crisis was as a result of too much foreign money from Asian countries like China flowing into the economy of US (Savona, Kirton, & Oldani, 2011).
Causes of the Financial Crisis
Creation of too much money by the banks had led to the crisis. New money is created when the banks give loans to the public. By giving loans, the banks created a large sums of money during the run up to the financial crisis. Many people had to borrow money from the banks due to availability of credit in order to buy properties which they could not afford (Obstfeld, Cho, & Mason, 2012).
After creating too much money between the year 2000 and 2007, that amount of money was put into use in push up for the prices of houses and as well as financial market speculation. Too little amount of money created during that period went into outside the financial sector for the purpose of business. Prices of houses were pushed faster than wages by the 31% of the money allocated to the residential property (Friedman, 2011).
Business property and office buildings which categorised as commercial real estate were allocated 20% of the money. During financial crisis, the same financial markets which belong to the financial sector imploded with allocation of 32% of the money. About 8% of the money created during that time was allocated to the businesses which were outside the financial sector. Personal loans and credit cards were allocated about 8% of the money created (Friedman, 2011).
These debts eventually became unpayable. The level of personal debts and the prices of houses were pushed up by lending huge sums of money to property markets. As the debts rise faster than the income, many people were not able to keep up with repayments eventually. All the loans that banks give have to be paid with interest (Savona, Kirton, & Oldani, 2011).
Due to these difficulties these people stop paying the loans while the banks get into problem of becoming bankrupt thus resulting to financial crisis. After the US borrowers were unable to pay their mortgages, investors lost all over the world together with customers losing their houses. Many investors lost their investments including hedge funds and banks (Friedman, 2011).
Channels of Transmitting Financial Crisis
The financial crisis impacted different regions, population groups and countries on different magnitudes and time scales. For different countries, patterns developed differently. Through trade and financial flows, the economic and financial crisis of the developed states spread to the developing states (Obstfeld, Cho, & Mason, 2012).
Transmission through Financial Flows
In year 2008 may, there was a collapse of the stock exchange in the centres of great finance transmitted to developing countries’ stock exchanges. There was an immediate follow of suit by stock exchanges of Brazil, South Africa, India, China and Russia. After about a week or so there was a 23% decrease in stock markets in the threshold countries shown by the Morgan Stanley Capital International Emerging Market index. These countries had a highly developed financial sector which is coupled with other countries. A country would be more susceptible to risk if its regulations are very weak (James, 2008).
Countries with toxic Sovereign wealth funds’ investments were severely impacted leading to devaluation of values such as oil- producing countries and Singapore in Middle East. Due to stock market losses, a severe impact was experienced by countries like Chile which include shares from developed countries into their pension funds.
Capital flows to the developing states reduced in the year 2008 to USD 727 billion from USD 1160 billion in the previous year. In the year 2009 June, Institute of International Finance predicted capital flows of USD 141 billion in the current year in vigorously emerging markets. This amount was less by more than half of the amount in the year 2008 which was USD 392 billion and about a fifth of the amount in the year 2007 ( USD 888 billion).
There are also some of the countries like Ukraine and Russia in Eastern Europe which were hit very hard. Devaluation of currencies in developing countries was as a result of withdrawal of foreign capital (World economic outlook: a survey by the staff of the international monetary fund, 1998).
Direct investments and portfolio flows to the developing countries decreased with decrease in non-bank financing and commercial bank credits. A weak growth of 7% was posted in United Nations Conference on Trade and Development in 2008 regarding foreign direct investment in developing countries. In the previous year the growth was 21%. A prediction was made for the first quarter of 2009 showing that there would be 40% decrease in transition countries and 25% in developing countries. Funds were transferred to lower risk states by investors. Investment plans were kept down by poorer economic prospects (World economic outlook: a survey by the staff of the international monetary fund, 1998).
Threshold and developing countries were granted less credit by global banks due to the difficulties that they experienced. Taking loans by the government and private enterprises in developing states was very important towards the end of 2008. This was different in 2009 where there was a net withdrawal of credits. For developing states, their bond markets increased rate of interest and risk premiums (James, 2008).
Transmission through Trade
In emerging and developing states, there was a decrease in demand for goods and services due economic recession of the world. Decrease in demand for mineral raw materials and energy from Africa resulted to decrease in growth in India and China. Collapse of export income was as a result of decrease in export volumes and prices.
During the first half of 2009, there was decrease in export income by 43.8% by 49 poorest developing states. Earnings from export of copper in Zambia decreased by 54% during the first three months of 2009. Kenya received warning from the central bank due to decrease in export of flowers (Engelen, Ertürk, & Froud, 2011).
Responses to the Crisis by Developing Countries
Developing countries vary in terms of their initial positions individually. Some of them have substantial inland markets while others have high international currency reserves.
Fiscal Stimulation Measures
Extensive fiscal interventions were used by wealthy countries to respond to crisis. Many developing countries developed such programmes as well. Most of the developing states have lower financial political scope which they use to stimulate social measures and programmes to establish protection to the poorest.
About 43 states out of 48 low income states which were examined by UNESCO, do not have any scope which is able to stimulate packages that are in favour of the poor. Higher liquidity aid and bilateral aid was used to make expansion on the options for those countries. These aids came from international financing institutions (James, 2008).
Money Policies
Some of the other states like India used other policies. India has high fiscal deficits that would create room for expenditure increment but it has no international currency reserves to call on. Monetary policy was the only measures to adopt. The money policies were strictly limited and thus making it easy for interest policy to have effects on exchange rate of the rate of inflation and the currency. There would be a limitation on the devaluation of currency as a specific export incentive measure (Rocha, 2008).

Reference
Savona, P., Kirton, J. J., & Oldani, C. (2011). Global financial crisis: Global impact and solutions. Farnham, Surrey, England: Ashgate.
Obstfeld, M., Cho, D., & Mason, A. (2012). Global economic crisis: Impacts, transmission and recovery. Cheltenham: Edward Elgar.
Friedman, J. (2011). What caused the financial crisis? Philadelphia: University of Pennsylvania Press.
Engelen, E., Ertürk, I., & Froud, J. (2011). After the Great Complacence: Financial Crisis and the Politics of Reform. Oxford: OUP Oxford.
Rocha, G. T. (2008). Development economics research trends. New York: Nova Science Publishers, Inc.
James, R. K. (2008). Crisis intervention strategies. Belmont, CA: Thomson Brooks/Cole.
World economic outlook: a survey by the staff of the international monetary fund. (1998). Washington: International Monetary Fund.