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