HURRICANE Mitch struck Honduras in October 1998, causing catastrophic floods and landslides. The human costs were enormous: over 13,000 people died or disappeared and another 12,500 were injured; about half a million people lost their homes. Overall, about one and a half million people were affected by the hurricane. Direct damages were estimated at $2.2 billion, about 47 percent of the country’s 1997 GDP.
In Zimbabwe, the 1991–92 drought reduced the production of maize (the staple food crop) by 83 percent, cotton by 72 percent, and sugarcane by 61 percent: these three crops had accounted for about one-third of agricultural output in the previous year. Over one million cattle, or 23 percent of the national herd, were wiped out. Water shortages affected the processing quality of tobacco (a main export crop), lowering its price on the international market, and drastically reduced hydroelectric generation, leading, in turn, to power rationing.
A fall in world cocoa prices and an increase in oil prices in 1999–2000 reduced Ghana’s foreign exchange earnings by about $900 million, or 13 percent of its 1998 GDP. The decline in cocoa prices also cut into rural incomes because most cocoa producers were small farmers (about 1.6 million producers each holding less than 3 hectares). Similarly, when cotton prices fell by 25 percent in 1992 and remained depressed in 1993, Mali lost about $95 million in export earnings, about 4 percent of 1991 GDP.
Natural disasters, large changes in the price for a country’s exports or imports, and conflict in neighboring countries are all negative external shocks—sudden events beyond a country’s control that can significantly hurt its economy. Although low-income countries have raised growth rates in recent years, this progress is fragile, in part because of their vulnerability to such shocks. Recently, this issue has attracted significant attention in policy circles and explains, in part, why the IMF, along with the rest of the international community, is stepping up efforts to help low-income countries mitigate the impact of shocks. Without such assistance, these countries face an even greater struggle to achieve the Millennium Development Goals (MDGs) by 2015.