financing development following the global economic crisis bangkok 21 august 2009
TRANSCRIPT
Financing Development
Following The Global Economic
Crisis
Bangkok21 August 2009
2
Crisis Unexpected?• A crisis foretold• Unsustainable global imbalances • International financial architecture• Ideology: deregulation, self-regulation,
inadequate and inappropriate regulationcapital account liberalization
• Financial Globalization: growth, stability?• Most developing countries innocent victims• Policy responses: inadequate; double
standards• International cooperation: G7, G20, UN
3
Globalization: finance>trade
0
20
40
60
80
100
120
140
160
180
1980 1990 1995 2000 2006
US
$ T
rillio
ns
0
50
100
150
200
250
300
350
As
pe
rce
nt
of
GD
P, in
dic
es
19
80
=1
00
Global financial assets
Global merchandise trade
) Global financial assets as a percentage of GDP(right axis
) Global merchandise trade as a percentage of GDP(right axis
4
Finance-investment nexus?
0.00
0.05
0.10
0.15
0.20
0.25
0.30
Gross Fixed Capital Formation
Gross Financial Investment Abroad
Financial globalization
•Net capital flows from South to North (US largest borrower)
•Cost of funds not generally lower due to financial deepening (more intermediation, financial rents)
•Higher volatility•Lower growth, higher instability
Short-term capital inflows
problematic•No real contribution to investment,
growth rates•Asset (shares, real estate) price +
related (e.g. construction) bubbles instead
•Cheaper finance for consumption binges•Over-investment excess capacity•All exacerbate instability, pro-cyclicality
7
Contagion: crisis spreadsFinancial sector contagion (incl. vicious circles):Sub-prime crisis financial crisis asset price deflation liquidity/credit crunch
Financial crisis Economic recession(including feedback loops)Real economy contagion (incl. vicious circles): Less investment, especially abroad (FDI) Less consumption
Reduced demand for imports, i.e. for exports of others Prices, output declines globally Growth, employment declines globally
Deflationary spiral•Asset (stock, property) markets
deflating negative wealth effect
more bank insolvency generalized credit squeeze
•Lower external demand, world trade excess capacity investment slowdown
•Depressed domestic demand lower prices, outputrices, output lower employment, incomes
9
Financial impacts on developing countries• Despite non-involvement in sub-prime debacle:
Emerging stock markets collapse greater Reversal of capital flows, FDI also down Spreads rise, much higher borrowing costs
• But financial positions stronger than during Asian + LA crises (more foreign reserves, better fiscal balances)But reserves rapidly evaporating with export collapse; fiscal space also disappearing
Developing countries’ borrowing costs still high
0
2
4
6
8
10
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Africa
Asia
Latin America
Europe
11
Globalization: Parallel fates
-4
-2
0
2
4
6
8
2003 2004 2005 2006 2007 2008 2009 (P)
Developing countries
Developed countries
World
Preliminary, revised forecast
World economy in recession, recovery uncertain
3.9
2.1
-2.6
1.6
3.9
3.5
2.7
4.0
-3
-2
-1
0
1
2
3
4
5
2003 2004 2005 2006 2007 2008 2009 2010
Optimistic
Pessimistic
14
Recession in most developed
economies
1.1
-0.6
0.7
4.0
-3.5
-7.1
-3.7
-1.7
1.01.5
-0.1
1.5
0.00.4
-1.1-0.4
-8
-6
-4
-2
0
2
4
6
USA Japan EU15 NewEU
GD
P g
row
th r
ate,
%
2008 2009 2010 Baseline 2010 Pessimistic scenario
15
Transition economies too
4.2
5.4
-1.9
-5.4
1.01.5
-0.3 -0.6
-6
-4
-2
0
2
4
6
8
South-eastern Europe CIS
GD
P g
row
th r
ate,
%
2008 2009 2010 Baseline 2010 Pessimistic scenario
16
Growth slowed in all developing countries
5.44.9
6.16.8
4.54.0
1.40.9
3.0
4.1
-0.7
-1.8
4.3 4.0
5.6 5.4
2.9
1.72
1.7
3.9
3.1
-1.1-0.7
-3
-2
-1
0
1
2
3
4
5
6
7
8
Developingcountries
Africa East Asia South Asia WesternAsia
LatinAmerica
GD
P g
row
th r
ate,
%
2008 2009 2010 Baseline 2010 Pessimistic scenario
Growth by main country groups
Per capita GDP growth rate
Change in growth rate
2004-07 2008 2009
2009/
2008
2009/ 2004-
7World 2.6 0.9 -3.4 -4.3 -6.0Developed
economies 2.1 0.3 -4.1 -4.4 -6.1
Economies in transition 7.7 5.5 -2.6 -8.1 -10.2
Developing economies 5.7 4.0 0.1 -3.9 -5.6
LDCs 5.2 3.6 0.3 -3.3 -4.9
Growth by main regional groups
Per capita GDP growth rateChange in growth
rate
2004-07 2008 20092009/
20082009/
2004-7
World 2.6 0.9 -3.4 -4.3 -6.0
Developed economies 2.1 0.3 -4.1 -4.4 -6.1
USA 1.6 0.1 -4.4 -4.6 -6.0
Japan 2.1 -0.6 -5.9 -5.3 -8.0
European Union 2.4 0.7 -3.4 -4.1 -5.8
Economies in transition 7.7 5.5 -2.6 -8.1 -10.2
Developing economies 5.7 4.0 0.1 -3.9 -5.6
Africa 3.4 2.5 -1.0 -3.5 -4.4
North Africa 3.6 3.6 1.4 -2.3 -2.2
Sub-Saharan Africa 3.6 2.2 -1.9 -4.1 -5.5
East and South Asia 7.3 5.0 1.8 -3.2 -5.5
East Asia 7.8 5.3 1.8 -3.5 -6.0
South Asia 6.5 4.9 2.6 -2.4 -3.9
West Asia 3.7 2.6 -1.2 -3.8 -5.0 Latin America +
Caribbean 4.0 2.7 -3.0 -5.8 -7.0
LDCs 5.2 3.6 0.3 -3.3 -4.9
LDCs excl. Bangladesh 5.4 3.4 -0.6 -3.9 -6.0
Regional GDP growth rates in PPP terms, 2007-2010
Note: The IMF World Economic Outlook classification of the Middle East region includes Egypt, Iran, and Libya. Source: IMF, World Economic Outlook Update, January, 2009.
WorldAdvanced Economies
EuropeanUnion
Emerging &
DevelopingEconomies
Sub-Saharan
Africa
Central &Eastern Europe
Middle East
2007 2008 2009 2010
60 developing countries will see declining incomes in 2009
12
33
18
1
14
2
13
60
22
0
10
20
30
40
50
60
70
2008 2009 2010
Developed countries
Economies in transition
Developing countries
Monthly Crude Oil Prices ($/barrel)
Jan
-08
Feb
-08
Mar
-08
Ap
r-08
May
-08
Jun
-08
Jul-
08
Au
g-0
8
Sep
-08
Oct
-08
No
v-0
8
Dec
-08
Jan
-09
Food prices will remain higher
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Wheat Maize Rice
29
World trade collapsing
10.9
7.7
9.2
6.6
2.4
-11.1
4.1
-12
-8
-4
0
4
8
12
2004 2005 2006 2007 2008 2009 2010
Ann
ual p
erce
ntag
e ch
ange
0.5
Trade collapse consensus
6.0
2.2
-9.0
-13.2-15.0
-10.0
-5.0
0.0
5.0
10.0
WTO OECD
2007 2008 2009 Forecasts
% c
ha
ng
e
South exports fall more
(volume index, 1998 = 100)
100
120
140
160
180
200
220
240
260
280
2006M
1
2006M
3
2006M
5
2006M
7
2006M
9
2006M
11
2007M
1
2007M
3
2007M
5
2007M
7
2007M
9
2007M
11
2008M
1
2008M
3
2008M
5
2008M
7
2008M
9
2008M
11
2009M
1
World trade
Developing and other non-OECD country exports
OECD country exports
Source: CPB
Source: THE-Ambrosetti based on IMF data; January 2000 = 100; f = forecast
Agricultural prices rose + fell
Oil, metal prices more
34
Global imbalances narrow with deflation
-800
-600
-400
-200
0
200
400
600
2004 2005 2006 2007 2008 2009
Bil
lio
n U
S$
United States
Japan
European Union
Developingcountries (exclChina) and EiT
China
35
Trade impacts: summary•Exports decline all developing countries
•Terms of trade primary exporters
•Trade surpluses, reserves may run down quickly
•But lower energy, food prices help net food and oil-importers
Dollar volatility continues
65
75
85
95
105
115
Jun-
08
Jul-0
8
Aug
-08
Sep-
08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb-
09
Mar
-09
Apr
-09
May
-09
0.60
0.65
0.70
0.75
0.80
0.85
Yen/$ (LHS) Euro/$ (RHS)
Capital inflows contract
0
250
500
750
2005 2006 2007 2008 2009*
$ B
illio
ns
Source: IFF *Projection
Share of global FDI
Credit crunch continuesPercentage of lenders tightening standards, by size of enterprise seeking loans
Panel A: United States Panel B: European Union
-20
0
20
40
60
80
100
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2006 2007 2008
Large and Medium Small
0
20
40
60
80
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2006 2007 2008
Small & Medium Large
Borrowing costs remain high
0
2
4
6
8
10
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Africa
Asia
Latin America
Europe
Livelihoods threatened• Declining living standards• Many livelihoods under threat,
especially when social protection not well-developed
• Migrant workers especially vulnerable• Prolonged slowdown in world economy
likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth
Remittances to developing countries, 2008-2010
45
260
41
239
42
238
0
50
100
150
200
250
300
Low-income countries Middle-income countries
(bil
lion
s of
US
doll
ars)
2008
2009
2010
Global recovery with coordinated vs uncoordinated stimuli, 2010-2015
Social impacts
•ILO: >200 m. more working poor •ILO: Unemployment to rise by 51m•ILO projections based on IMF 0811•MDGs, IADGs, social spending at risk
•Rising social unrest•US intelligence report:
crisis -- greatest security risk
Output, jobs recovery lags, 1991, 2001
Duration of output recovery and job market recovery after the 1991 and 2001 US recessions (in months)
0
10
20
30
40
50
60
Output Job market recovery
1991 2001
Lags delay recovery
0 2 4 6 8
3 month delay
Immediate andsustainedstimulus
efforts
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2009 2010 2011
Coordination failure
As a % of GDP As a % of World GDPTotal 1.7 1.4
Advanced Economies 1.3 -
Developing & Emerging Economies 2.7 -
Table 7: Economic Stimulus in 2009
Social spending low priority (11%)
Infrastructure Spending, 27.8
Employment Measures, 1.8
Transfers to Low Income, 9.2
Other Spending, 39.8
Tax Cuts, 21.5
Domestic resource mobilization•Experience: Savings rate follows,
does not lead investment rate •Governance indicators –
foreign perceptions (e.g. corruption)•Experience: development improves
governance, not vice versa•But need developmental (‘good enough’)
governance for development•Enhance international tax cooperation
(‘beggar my neighbour’ tax competition)
Capital flows 1•Financial globalization
instability rises, growth slower
1 Net flows from South to North2 Costs not lower3 Instability increase
•When net inflows, 1 asset price bubbles 2 consumer binges3 ‘over-investment’
Net transfer of financial resources from South to North
Source: UN World Economic Situation and Prospects 2008 )forthcoming(
-1000
-800
-600
-400
-200
0
200
Bill
ions
of U
S do
llars
Developing economies Africa Eastern and Southern Asia Western Asia Latin America
Capital flows 2•FDI, 1990s: brown-field M&As (>80%)
> green-field FDI (2000 WIR)•Remember: FDI generally follows,
does not lead domestic investment•In LDCs, mainly for resource, esp.
mineral, extraction; limited positive externalities
•Sovereign wealth funds: – recent political scrutiny, discrimination; – double standards
Trade•Terms of trade:
1 Prebisch-Singer2 Lewis3 manufactures
•WTO: trade liberalization end in itself,despite ‘development round’ rhetoric
•contrast ITO 1948 Havana Charter(trade reform for growth, employment)
• Significant interest in regional monetaryand financial cooperation, but modest
• Recent consensus on need for systemic reform• Current crisis creates conditions for
reform (but G7/G20, OECD not leading) • however, emphasis still crisis management,
recovery, macro coordination• Reform: multilateral? regulation? inclusive?• Regulatory reform not necessarily
developmental, e.g. Basel rules.
Systemic issues
New Bretton Woods moment?
Bretton Woods, 1944: United Nations conference on monetary and financial affairs
• 15 years after 1929 Depression• Middle of WW2• US initiative vs UK Treasury stance• 44 countries (28 developing countries; 19
LA)• IMF, IBRD, ITO – UN system• Clear emphasis on sustaining growth,
employment creation, development, not just financial stability
64
Thank youPlease visit the following websites:
UN-DESA www.un.org G24 www.g24.org PGA www.un.org/ga/president/63/ IDEAs www.ideaswebsite.org
• Policy briefs• Research papers • Other documents
Acknowledgements: UN-DESA, ILO