L. Alan Winters Chief Economist Department for International Development, London, and Professor of...

L. Alan Winters

Chief EconomistDepartment for International Development, London,

andProfessor of Economics, University of Sussex, UK

Where does the crisis leave globalisation?

Page 227th January 2010 University of Nottingham

Disclaimer

The opinions expressed in this work are the author’s alone and may not represent those of his employers.


Globalisation

• In principle – the extent to which one’s fate is determined abroad

• In practice: simple pragmatic definition• Extent of commercial intercourse with RoW• Also, loosely, the policy stance associated

with achieving relatively high levels of intercourse.


TradeTrade (X+M) as % GDP

0

10

20

30

40

50

60

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

per

cen

t

Source: World Development Indicators, Online


Foreign Direct InvestmentForeign direct investment, net inflows (% of GDP)

0

1

2

3

4

5

6

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

per

cen

t


Portfolio Investment

Portfolio Investment as % of GDP

-1%

0%

1%

1%

2%

2%

3%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

per

cen

t


Remittances

Remittances as % of GDP

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

per

cen

t


Economic Growth

GDP, PPP, 1995 prices

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006


The Financial Crisis• Financial stress since August 2007

• Northern Rock • Wholesale creditors’ problems

• Crash September 2008 • Lehman Brothers• AIG, etc• Solvency, not just liquidity

• Followed by ………


Recession• Worst for 80 years• ¾% off world GDP for 2008• About 5% in 2009, • Stock markets 40-60% off• Citi, BoA, RBS need rescuing• Oil price from $147 to $40• Diamond prices fall by 80%• World trade falls by 12% in 2009


How Deep, How Long?• 2009 was less bad than expected in March

• 2% GDP growth for developing economies • India 5.6%; China 8.5%• LICs in Africa > 4% growth

• 2010 recovery to 3.9% (DCs 6%) – IMF• World trade growth resumes - 6%

• Strong policy response• But not all over – by a long way

The opinions expressed in this

work are the author’s alone.


Real Output Growth

-6

-4

-2

0

2

4

6

8

10

1980 1984 1988 1992 1996 2000 2004 2008 2012

%

Emerging & developing economies

Advanced Economies

Source: IMF

A Global Crisis


Real Output Growth

-7

-5

-3

-1

1

3

5

7

9

11

2005 2006 2007 2008 2009 2010 2011

%

Sub-Saharan Africa Central and Eastern EuropeCIS Developing Asia Western Hemisphere

Source: IMF

Significant Regional Variation


World Trade (monthly US$ billion)

1250

1000

750

500

250

250

500

750

1000

1250

1250 1000 750 500 250 250 500 750 1000 1250

2007

2008

2009

January

February

March

April

May

June

July

August

SeptemberOctober

November

December

Sources: IMF staff estimates.


The Causes of the Crisis• Two necessary conditions

Regulatory laxness

Global imbalances


Whence it came (I) Global Imbalances

• Huge labour force growth• Asian Crisis 1997-8

• Export led recovery; Reserves for insurance• Structural challenges

• Export led growth; Lack of social protection• Accommodating policy in advanced

economies• Saving the world • Hedonism • Hubris


Whence it came (II) Regulation & Policy

• Loose monetary & fiscal policy• In response to previous crises;

• Financial innovation to boost returns• Weak risk management; Perverse incentives• Strong lobbying & political connections

• Regulatory failures• Unwarranted confidence; wrong model?• Political weakness – unwillingness to hear


Developing Countries are Coupled

• the direct impact of the financial collapse • the tightening of credit,

• Trade credit, investment• Aid flows

• the effects on the real economy • Exports, commodity prices (terms of trade),

remittances, • knock-on effects: fiscal, financial


Transmission channels• Trade: -12.3% (volume) 2009 y-o-y• Remittances: 6.1% fall in 2009 • Net Capital Flows:

•Peaked at $1.2 trillion in 2007. Expected to fall to $460 bn in 2009

• Official Development Assistance: •Ireland; Italy; Sweden; Netherlands; Denmark


Policy Responses• Stimulus packages:

• US, UK, China, India, ….• Bangladesh, Vietnam, ….• Many others maintained expenditures –

benefits of sound fiscal positions• Monetary expansion in advanced econ.s• International

• Swap arrangements with Fed• IMF resources• Other IFIs


What lies ahead (IMF analysis)

• Optimistic projections still not encouraging• Rebalancing: long drawn out process

• China’s consumption is only ¼ of that of US and EU deficit countries

• Germany and Japan have to increase S (not C) to deal with ageing populations

• Weak adjustment by surplus countries • Because surpluses largely intentional

• Low income countries too small to matter


Projected Imbalances (IMF)


Trade did boost growth pre-crisis

• Many pieces of evidence• Cross-country regressions• Time series – except perhaps in poorest Africa• Growth Commission narratives• Conditional on other policies/conditions

• Not sufficient, probably necessary


Trade and GDP pc growth 1960-1995

Source: Feyrer, 2009


Did capital flows stimulate growth?

• Balance in favour of FDI and bank lending• Little general evidence for portfolio inv.• ODA: mixed but on balance favourable• But:• Sudden stops disruptive (unjustified?) • Poor regulation or poor policy

• E.g. unmatched balance sheets, bubbles


How damaging was the crisis?

• So far, …….• East Asia Pacific – 4 months growth• Africa 10 months (less for LICs)• CEE about 2 years; CIS 2.5 years

• Strongly related to quality of previous policy and financial exposure


Did trade transmit the crisis? First Hit

Early impact

Late impact

not yet

total

low VS 19 36 27 82 high VS 40 32 11 83 total 59 68 38 165

Low VS – below median of sample (approx 43%)

Early: 2008, late 2009 Jan-Mar; not yet – no residual < -2σ


Average Depth of First Hit

Low HighTotal -0.452 -0.311

RegionEAP -0.599 -0.201ECA -0.372 -0.431HIC -0.408 -0.284LAC -0.472 -0.390MNA -0.325 -0.355SAS -0.521 -0.210SSA -0.552 -0.333

Residual of log(exports) from trend


Crises and Migration: 1860-1913

De-trended emigration rates Hatton and Williamson, 2007


Migration now• Net immigration to US:1m p.a. in 2000-6

to 0.5m 2006-7. • Emigration from Mexico 1m Feb 06-07 to

0.8m Feb 07-08.• A8 emigration to the UK, down 54%

between Q1’08 and Q1’09, down 57% to Ireland.

• Outflows from Bangladesh – down by about 40% yr-on-yr.


Capital Flows 2008-11 (IIF)


Should we scale back globalisation?

• Nearly all markets worked well • financial markets didn’t

• Commodity markets? • Imperfect, but what alternative? Seize it.

• Financial markets • Regulate• Structure• Be cautious


THANK YOU

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