Theglobal financial crisis has started in the West, but developing countries are now being hit hard as their stock markets and currencies fall, and foreign funds start to move out.

IN RECENT days the world financial crisis has continued as stock markets tumbled to new lows, currencies gyrated wildly, while more developing countries are now affected by the economic crisis.

Last Friday saw steep falls in the stock markets – by 8% to 11% in Japan, Korea, Singapore and Hong Kong, Korea, 5% in Britain and Germany, and 3.6% in Dow Jones industrial average in the United States.

More signs of recession have been announced. For example, Britain’s economic output shrank 0.5% in the third quarter, and an index of private sector output in the eurozone (15 European countries) fell in October at the sharpest rate in 10 years.

J.P. Morgan economists estimated the US gross domestic product fell 0.5% in the third quarter and will fall 4% in the fourth quarter, and that European countries will have steeper GDP falls until mid-2009.

There is also news of a fall in sales in retail shops, and of motor vehicles, signs of a decline in consumer spending as the recession bites into household incomes in rich countries.

Many developing countries and East European economies are also in deep trouble, with some entering the bankrupt zone and others nearing it.

Some prominent people are no longer describing the situation as the worst since the Great Depression, but as being worse than that.

“This is a once in a lifetime crisis and possibly the largest financial crisis of its kind in human history,” said Bank of England deputy governor Charles Bean.

Developing countries were once thought to be “decoupled” from a Western recession but that theory has been shot to bits as the crisis is hitting them even harder than the developed countries.

The crisis has jeopardised everything the United Nations has to help the world’s poor, warned UN secretary-general Ban Ki Moon at a meeting last Friday of the UN’s top officials.

“It threatens to undermine all our achievements and all our progress,” he said. “Our progress in eradicating poverty and disease. Our efforts to fight climate change and promote development. To ensure that people have enough to eat... It could be the final blow that many of the poorest of the world’s poor simply cannot survive.”

The developing countries have been affected by the falling prices of their export commodities.

Malaysia has been hit hard by the sharp fall in the price of palm oil. Other examples: the price of wheat has fallen by 45% between March and the first week of October, while the price of copper on Oct 22 was 54% below its peak in July and 39% below a year ago.

More countries are facing debt default as their currencies suddenly slump against the US dollar, or as their export earnings fall. Last week, Pakistan was talking to the International Monetary Fund about a possible loan to stave off a default.

Foreign capital is also moving out of many developing countries.

Those countries that do not have high foreign reserves are susceptible to crisis.

There were large movements of foreign capital last week due to the unwinding of the “yen carry trade” as funds returned to Japan from other countries as hedge funds and other speculative investors liquidated their investments in these countries to re-pay their yen loans.

The speculators had borrowed yen in Japan due to its very low interest rate and invested in assets in other countries that yielded higher interest.

As these countries’ currencies depreciated and the yen value rose, it became unprofitable to keep these assets and there has been a stampede to re-pay the yen loans, which has in turn further boosted the yen’s value (in just one week, by 8% against the US dollar, 13% against the euro and 18% against the Australian dollar).

The stock market fall has also been sharp in emerging markets, with the MSCI emerging equities index dropping 15% over last week to levels of four years ago.

The Financial Times reported that emerging market stocks, bonds and currencies suffered steep falls amid growing risk aversion.

Among those hit hard were South Korea, South Africa, Argentina, Ukraine, Hungary, Serbia and Turkey. They are considered extremely risky because of their large debts, according to the report, which added that even stronger economies like China and Brazil have been savaged.

In the past week, political leaders announced intentions to act against the crisis. First was US President George Bush’s invitation to a summit meeting for 20 countries in Washington in mid-November to discuss new regulations and rules for the global financial system.

Second was the UN General Assembly president’s announcement of the formation of a UN expert group led by American economist Joseph Stiglitz to recommend reforms to the system.

And last Saturday a summit meeting of European and Asian leaders in Beijing issued a declaration pledging to take measures and to reform the global system.

A meeting of Asean-plus-3 at the sidelines of the Beijing meeting reaffirmed the intention to set up a big regional fund to help countries in financial distress.

These announcements are unlikely to check the loss of investor confidence and the continuing market declines, since the recession is only starting and has quite a long way to go.

Governments will have to do more in monetary, fiscal and macro-economic terms to check the disaster that is evolving.