Financial Crisis has created huge new problems for governments in Third World countries

The financial crisis has driven millions of people into poverty and put many more at risk according to a new report published by Oxfam. Written by Katerina Kyrili and Matthew Martin of Development Finance International this report shows that the world's poorest countries are struggling to fill huge budget deficits with less help from richer nations.

With the deadline for meeting the Millennium Development Goals (MDG) of slashing poverty just five years away, and aid budgets under pressure from the downturn, Oxfam is stressing the urgent need for new sources of help, such as a 'Robin Hood tax' on financial transactions.

This report examines the impact of the global financial crisis on the budgets of low-income countries, especially their spending to reach the Millennium Development Goals.

The crisis created a huge budget revenue short-fall of $65bn. Aid has filled only one-third of this gap. As a result, after some fiscal stimulus to combat the crisis in 2009, most Low Income Countries (LICs) are cutting MDG spending, especially on education and social protection.

These countries have also had to borrow expensive domestic loans, and increase anti-poor sales taxes. Almost all LICs could absorb much more aid without negative economic consequences (whereas they have much less space to borrow or to raise taxes).

The report therefore urges the international community to make strong new aid commitments at the Millennium Summit in September 2010, funded by financial transaction taxes or other innovative financing:

• The IMF to encourage LICs to spend more on MDG goals and on combating climate change and to report regularly on such spending;
• LIC governments to increase spending on social protection and education; taxation of income; property and foreign investors; and efforts to fight tax avoidance.

Oxfam wants a tax on banks (such as a Robin Hood tax or a Tobin Tax) to save poor countries from financial disaster

Oxfam argues that much of the focus during and after the credit crunch has been on the fate of richer countries such as Greece, the US, Britain and Ireland, while continued growth in emerging markets such as Brazil and India has largely been taken as a sign the crisis was restricted to developed nations.

But this study of the budgets of 56 low-income countries, many of them in Africa, concludes that they too propped up their economies by borrowing in the earlier part of the crisis, and have now been left with gaping budget deficits.

Social Justices Irelands latest Socio Economic Review 2014 Chapter on Global South can be accessed here