A study was conducted using a multi-country, multi-sector model that simulates the impact of a slowdown in economic activity in the developed countries on world trade, prices, production, demand, and welfare across the globe, with a focus on the least developed countries in sub-Saharan Africa and Asia. The model, called GLOBE, distinguishes 32 regions including 28 developing countries and regions. A number of simulations were done to measure the impacts on world trade and welfare in poor countries of a recession in the rich countries. This briefing reports the results of a single simulation with a decline of five per cent in gross domestic product (GDP) of the high-income countries. In designing the simulation, the study focused only on changes in trade and world prices, assuming no changes in capital flows, foreign investment, or current account balances. The findings show that the global financial crisis and evolving recession in the developed countries and emerging economies will affect developing countries through two major channels: changes in international trade flows and world prices; and movements in global capital flows and foreign investment away from developing countries.
IDS In Focus Policy Briefing 7.7, Institute of Development Studies at the University of Sussex Brighton, UK, 2 pp.