2023 and The Challenges

Faced by Developing
Countries
Michael Coffman

Michael Coffman

Compliance Intern - Financial Services

Published Mar 6, 2023

After two years of Covid, the ongoing conflict with Russia and Ukraine, and a looming
recession, many people, businesses, and countries are faced with the challenges of a slowing
global economy. When faced with a global slowdown in the economy, many developing nations
face more challenges than that of a developed nation. In this article, we will briefly dive into how
these challenges are present and the impact it may have on both the developed nations as well as
the developing nations.

Developing countries tend to struggle more in a recession for several reasons. One being that
developing nations are burdened with high levels of debt. This is because many developing
countries rely on borrowing to finance projects and social programs which their citizens and
economies rely on. In a recession, debt becomes more difficult to service due to declines in
revenues and increased economic uncertainty. In developed nations, this is often felt by the
citizens and businesses more so than the government (not to say that the government doesn’t feel
a crunch).

High levels of debt can limit the ability of developing countries to respond to a recession as they
are less able to increase their spending and less likely to implement new stimulus measures for
their citizens. If a developing nation were to spend more, they would have to borrow more which
can hinder development post-recession as their recovery is partly spent on paying back debts
(usually obtained at a higher rate). Today’s rise of the “federal funds rate” has a direct impact on
other countries which rely on US dollars or other developed currencies as they borrow at a higher
rate which can impact the length of time which their recovery may take.

Since the pandemic in 2020, we have seen a significant impact on the global economy, with
many countries experiencing economic downturns and struggling to recover. Developing
countries have been particularly hard hit, with many facing multiple challenges, including high
levels of debt, limited fiscal space, and limited access to vaccines and medical resources.
Many developing countries entered the pandemic with high levels of debt, and the economic
downturn caused by the pandemic has made it more difficult for these countries to service their
debt. This has led to calls for debt relief and restructuring to help alleviate the burden on these
countries. While these calls have been heard on mostly deaf ears, these countries face the
potential of default on outstanding debt or rampant inflation to pay back their debts. For a
developing nation which already faces issues with poverty, inadequate infrastructure and lack of
basic resources, default and inflation are not the answer.

Another challenge faced by developing countries is the limited fiscal space which they operate
in. This is essentially saying that developing nations often have limited resources to invest in
social programs, infrastructure, and other areas which promote economic growth and
development. When faced with a global slowdown, governments are faced with budget
constraints that limit their ability to invest in these fiscal spaces. We have seen that the pandemic
has exacerbated this challenge, with many countries not being able to meet their fiscal needs.

Access to vaccines and medical resources is another challenge faced by developing countries.
The distribution of vaccines has been uneven, with many developing countries struggling to
secure enough doses to vaccinate their populations. This has made it difficult for these countries
to fully reopen their economies and recover from the pandemic. For the developing nations to
thrive, they need to have basic health needs met and a strong working class to build their
economics. Many Non-Governmental Organizations such as: GAVI, UNICEF, and WHO, have
offered resources to developing nations in hopes that their economies and population would not
collapse. While the distribution of care remains unbalanced, it is still a start for these developing
nations during hard times.

In addition to the pandemic of 2020, we have seen a major geo-political conflict between Russia
and Ukraine. While this conflict remains an international threat today, developing nations face a
unique challenge, being imports and exports of commodities and natural resources. Many
developing countries which rely heavily on exports of natural resources such as oil, minerals, and
agricultural products have to understand who is and isn’t acceptable to trade with.

This is a problem for these nations as they rely on the mining, production, refinement, and export
of resources to build their economy. With restraints of who they may trade during this
international conflict, these developing nations face challenges of political backlash, loss of
support, and revenue. In addition to trade restrictions developing nations face, they must also
figure out how to comply with the diplomatic, economic, and environmental sanctions.

Overall, the state of the global economy and the challenges faced by developing countries is a
complex issue that requires careful consideration and attention. There are many factors which
play an important role of a developing nations economy which weren’t outlined above. Some
other considerations to take account include: vulnerability to external shocks, limited access to
credit, political instability, poverty, and social safety nets. It is important to continue to monitor
this issue and work towards solutions that can help promote economic growth and development
in developing countries.