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Financing Development Following The Global Economic Crisis Bangkok 21 August 2009

Financing Development Following The Global Economic Crisis Bangkok 21 August 2009. Crisis Unexpected?. A crisis foretold Unsustainable global imbalances International financial architecture Ideology : deregulation, self-regulation, inadequate and inappropriate regulation

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Financing Development Following The Global Economic Crisis Bangkok 21 August 2009

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  1. Financing DevelopmentFollowingThe 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 regulation capital 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

  4. Finance-investment nexus? 4

  5. 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

  6. 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 spreads Financial 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

  8. 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, 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 9

  10. Developing countries’ borrowing costs still high

  11. Globalization: Parallel fates

  12. World economy in recession, recovery uncertain

  13. Recession in most developed economies 14

  14. Transition economies too 15

  15. Growth slowed in all developing countries 16

  16. Growth by main country groups

  17. Growth by main regional groups

  18. 2007 2008 2009  2010 Advanced Economies European Union Emerging & Developing Economies Sub- Saharan Africa Central & Eastern Europe Middle East World

  19. 60 developing countries will see declining incomes in 2009

  20. Monthly Crude Oil Prices ($/barrel) Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09

  21. Food prices will remain higher

  22. World trade collapsing

  23. Trade collapse consensus

  24. South exports fall more Source: CPB

  25. Agricultural prices rose + fell Source: THE-Ambrosetti based on IMF data; January 2000 = 100; f = forecast

  26. Oil, metal prices more

  27. Global imbalances narrow with deflation 34

  28. 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 35

  29. Dollar volatility continues

  30. Capital inflows contract

  31. Share of global FDI

  32. Credit crunch continues

  33. Borrowing costs remain high

  34. 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

  35. Remittances to developing countries, 2008-2010

  36. Global recovery with coordinated vs uncoordinated stimuli, 2010-2015

  37. 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

  38. Output, jobs recovery lags, 1991, 2001

  39. Lags delay recovery

  40. Coordination failure

  41. Social spending low priority (11%)

  42. 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)

  43. Capital flows 1 • Financial globalization  instability rises, growth slower 1 Net flows from South to North 2 Costs not lower 3 Instability increase • When net inflows, 1 asset price bubbles 2 consumer binges 3 ‘over-investment’

  44. Net transfer of financial resources from South to North

  45. 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

  46. Trade • Terms of trade: 1 Prebisch-Singer 2 Lewis 3 manufactures • WTO: trade liberalization end in itself, despite ‘development round’ rhetoric • contrast ITO 1948 Havana Charter (trade reform for growth, employment)

  47. Systemic issues • Significant interest in regional monetary and 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.

  48. 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

  49. Thank you Please visit the following websites: UN-DESA www.un.org G24 www.g24.org PGAwww.un.org/ga/president/63/ IDEAswww.ideaswebsite.org Policy briefs Research papers Other documents Acknowledgements: UN-DESA, ILO 64

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