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Randy Spence PEP Forum on The Impact of the Global Financial Crisis Manila, Feb. 17 2009 For Discussion.

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Presentation on theme: "Randy Spence PEP Forum on The Impact of the Global Financial Crisis Manila, Feb. 17 2009 For Discussion."— Presentation transcript:

1 Randy Spence PEP Forum on The Impact of the Global Financial Crisis Manila, Feb For Discussion

2 Contents International Transmission Channels Domestic Transmission Micro Impacts Poor and Disadvantaged Populations Coping Mechanisms Mitigation Measures All in broad brush only – the next 2 days will fill in much more detail

3 International Transmission Channels Portfolio investment plummets bonds and stocks held, short term credit provided from foreign to local banks almost immediately after peak (October) of financial crisis de-leveraging of Western/OECD banks outflows of capital in most other countries large exchange rate fall

4 Indian Rupee

5 Philippine Peso

6 Kenya Shilling

7 Peruvian Nueva Sol

8 Chinese Yuan

9 International Transmission Channels And as economies begin to contract: Exports decline and imports, given exchange rates net change (X-M) could be + or – (likely -) Foreign Direct Investment falls net flow may reverse as multinationals de-lever plant closure and job loss – quite quickly Remittances fall where foreign workers lose jobs / return where the foreign currency depreciates more

10 International Transmission Channels Tourism declines AID declines overall ODA, other official flows, NGO/voluntary flows Knowledge flows decline both proprietary IP flow (in and outside FDI) and open knowledge investment / content Reinforcement ; capital outflows continue as domestic economy declines

11 Domestic Transmission What has been hit? Credit and bank / financial system liquidity Investment – initially mainly foreign Remittances Exports Tourism and AID Large cumulative effect on exchange rates Large immediate welfare loss Complexities – which exchange rates, trade partners..?

12 Domestic Transmission ‘Panic’ & domestically originated de-leveraging credit and liquidity – banks de-lever and market investors move to safer ground real investment falls as firms shelve plans consumption falls as consumers save government spending – left to fill expenditure gap, as well as rescue the financial system Drop in consumption, equity investment, real investment, sales, production, jobs and incomes

13 Domestic Transmission Remembering that financial system impacts continue, & reinforce real impacts in C, I, G, X-M Keynesian terms If expenditure C+I+G + (X-M) initially falls 4%, due to falls in exports, tourism, remittances, FDI, AID End-effect is 10% if multiplier is 2.5 Indonesia in Indonesia crisis; 17% loss of GDP, back to initial level in 3-4 years This is my current best guess about present crisis

14 Micro Impacts Can lower-level (micro) impacts be projected? sector, region – production, employment, incomes household – income, employment, health, security etc. And is it essential to do this? compared to focus on monitoring and mitigating? put another way, if the situation of HH is monitored, how much more is gained by knowing ‘why’ and ‘how’ as well as ‘what’ has happened to (poor) people? My answer (below) has mostly to do with targeting

15 Micro Impacts GE approach is tempting but CGE models probably impossible to adapt to this wide a range of financial, quantity and price shocks lack of CGE analysis of other financial crises (Asia Crisis) seems to support this view Each country will be different in terms of sectors hit hardest because of different importance of sectors in the economy different exposure of sectors to international and domestic transmission mechanisms

16 Micro Impacts Some partial equilibrium analysis likely useful projecting and tracking main immediate impacts (follow the money) identifying where to look for the big micro impacts For example financial sector/workers, export industries remittance-dependent populations foreign-company workers, tourism sector/workers commodity producers, luxury goods/services suppliers

17 Micro Impacts Why is it useful to predict micro impacts, as opposed to simply monitoring them? for selection of sites to monitor, given that (in CBMS), full country coverage won’t be feasible for survey indicators and questions for choice and design of mitigation policies and interventions Knowing ‘what’ is more important than knowing ‘why,’ (my view) and there are real limits to knowing ‘why’ with so many transmission channels

18 Poorer Populations What about impacts on the poor and BoP? To what extent are poor population groups ‘decoupled’ from the market economy? From a HH view – what can decline or disappear? markets/sales – agriculture, informal production, services (incl. tourism), jobs and intermittent work public and social services; security, health, education.. prices – net effect of deflation on incomes & purchases remittances, credit to survive, etc.

19 Poorer Populations Gender impacts and impacts on children (UNICEF) women are typically poorer across and within HH complex reasons, but well studied in general (non- crisis) conditions CBMS in many countries is capable of gender and age differentiated monitoring; this should be done CBMS monitoring strategies to consider gender & children’s issues in their design (next 2 days)

20 Coping Mechanisms The range of mechanisms recently studied for the food crisis provides a good reference point: Food and nutrition reducing consumption, cheaper foods and sources etc. Fuel, electricity and water cheaper fuels (wood, less cooking etc. Education children withdrawn from school, moved from private to public schools etc.

21 Coping Mechanisms Health reduction in seeking services, substitution of public and traditional for private, traditional and generic medicines for branded, etc. Communications and transport – many forms Savings reduction, drawing on savings Selling & pawning assets – productive and other Incomes – multiple jobs, borrowing (if possible) etc. Substitution of necessities for luxuries (travel, entertainment recreation etc.)

22 Coping Mechanisms Often a fine line between coping & simply being poorer – reducing food intake when already malnourished Poor HH have fewer coping mechanisms available Women typically have fewer coping options, or have coping options which undermine their health & wellbeing more again the importance of gender differentiated monitoring Dependency ratios and relationships important

23 Mitigation Measures In terms of the CBMS initiative, probably we are looking mostly at safety nets but an eye to generation of (local) economic activity, & longer term economic development will be useful crisis can be a good time to accomplish structural changes and reforms - carefully Some dimensions of safety net targeting general (cash transfers) and more purposeful (health insurance, education incentives)

24 Mitigation Measures general (stimulus) and location-specific (hard hit areas) shorter and longer term – e.g. children who leave school tend not to go back; keeping kids in school is a long term investment, and very useful in a crisis Monitoring should be over several years, and ideally for the same sites those who suffer are often NOT those who gain during recovery Mitigation & assistance for long term victims

25 Mitigation Measures Financing mitigation measures Many in society do not lose, even gain (e.g. from secure jobs/incomes and lower prices) Tax the secure and take care of the victims (Robin Hood model) – but tax increases are contractionary So run deficits and take care of the victims – but typically limits to Govt. borrowing in crisis times International financing mechanisms important - a trusted IMF with enough resources, W.B., regional development banks etc.

26 Mitigation Measures A good time for ‘Liberal’ economic policy For small open economies, best survival paths are mainly matters of redistribution Supporting efficient redistribution is not only (as always) the right thing to do; It also may benefit you, as very few jobs and incomes are completely secure A well designed CBMS initiative can be very helpful in achieving efficient redistribution and economic security


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