The current world economic crisis originated in the financial sector of the advanced economies, beginning with the sup-prime mortgage problem and the meltdown of mortgage backed securities in the US. The financial crisis had its immediate reverberations in those developing countries that were closely linked to the global financial markets, as capital took refuge in safe havens and there was a rapid flight of capital from emerging markets to the advanced economies and particularly the US. This initial impact on the LDCs, however, was less pronounced as they were less integrated into the global financial markets. With the deepening of the financial crisis, freezing of credit, and the sharp fall in the market value of private wealth, the financial crisis turned into a crisis of the real economy beginning in the fall of 2008. The LDCs have been affected more during this later phase of real economic crisis. The global economic crisis has led to a sharp reduction in world trade and rapid decline in commodity prices. This is one of the main mechanisms through which LDCs have been affected. Foreign direct investment (FDI) flows which achieved their highest level in 2007 have been declining rapidly since the onset of the financial crisis. The decline in FDI is the second channel through which the LDC economies have been affected. A third transmission mechanism, which can be of critical importance for some LDCs, is the slowdown in migrant workers remittance flows. As unemployment in the advanced countries increases and the end of commodity export boom in some of the labour importing developing countries reduces the demand for migrant labour, the labour exporting LDCs may experience noticeable declines in remittance flows. The economic crisis has led to a sharp deterioration in the fiscal position of all advanced economies which is expected to continue past 2010. This can put pressure of ODA budget of the OECD countries, which can potentially have dire consequences for the LDCs.
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