Financing Development Following The Global Economic Crisis Bangkok 21 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?

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 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

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 rices, output  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

Developing countries’ borrowing costs still high

11 Globalization: Parallel fates

12 Synchronous growth: The US, transition & developing economies b USEc. in TransitionDeveloping Ec.

World economy in recession, recovery uncertain

14 Recession in most developed economies

15 Transition economies too

16 Growth slowed in all developing countries

Growth by main country groups Per capita GDP growth rate Change in growth rate / / World Developed economies Economies in transition Developing economies LDCs

Growth by main regional groups Per capita GDP growth rateChange in growth rate / / World Developed economies USA Japan European Union Economies in transition Developing economies Africa North Africa Sub-Saharan Africa East and South Asia East Asia South Asia West Asia Latin America + Caribbean LDCs LDCs excl. Bangladesh

Regional GDP growth rates in PPP terms, Note: The IMF World Economic Outlook classification of the Middle East region includes Egypt, Iran, and Libya. Source: IMF, World Economic Outlook Update, January, World Advanced Economies European Union Emerging & Developing Economies Sub- Saharan Africa Central & Eastern Europe Middle East

60 developing countries will see declining incomes in 2009

21 Strong US demand lifted developing country exports

22 Manufacturing demand supported high primary commodity prices [Billion $ dollars base 2000] Price index relative to price of manufact. External balance primary exporters Manufactured exports from the developing world (1st difference) Price of energy (relative to manufactures). RHS Price of raw materials & food (relative to manufactures). RHS

23 High commodity prices over Last 5 years: rare opportunity for many developing countries – including LDCs – to generate substantial financial resources from higher primary commodity exports for investments and growth – largely over 2008 price spikes for energy and food due to increased speculation following flight from ‘Wall Street’ (finance) to ‘Chicago’ (commodity futures), other factors

24 Oil prices roller-coaster

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

26 Non-oil commodity prices

27 World food prices declining after spikes

Food prices will remain higher

29 World trade collapsing

Trade collapse consensus

South exports fall more 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

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

Capital inflows contract

Share of global FDI

Credit crunch continues

Borrowing costs remain high

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,

43 Domestic demand Need to stimulate to offset weakened foreign demand for exports [Problem: domestic productive capacities and capabilities lost with economic liberalization] Most countries’ fiscal space limited  need more policy space to cope Need domestic -- not external -- financing Build + improve infrastructure Strengthen social services, protection

44 Policy priorities Contain spread of financial crisis -Across borders (contagion) -To real economy (ensuring liquidity) Reflate economy -Fiscal measures (fiscal space needed) -Monetary measures (monetary space) Appropriate regulatory reform - National -International

45 Finance priorities Prudential risk management, including capital controls Counter-cyclical: limit pro-cyclicality Finance growth (output, employment) Development finance, e.g. crucial for investment + technology policies Inclusive finance

46 Why stimulus? Need to stimulate to offset weakened foreign demand for exports [Problem: domestic productive capacities and capabilities lost with economic liberalization] Most countries’ fiscal space limited  need more policy space to cope Need domestic -- not external -- financing Build + improve infrastructure Strengthen social services, protection

Global recovery with coordinated vs uncoordinated stimuli,

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

50 Social protection counter-cyclical Employment crucial for incomes, esp. for domestic demand, poverty reduction, multiplier effects Fiscal stimulus, esp. for job creation Conditional cash/income transfers Universal vs targeted social protection Social protection  demand maintenance

Output, jobs recovery lags, 1991, 2001

Lags delay recovery

Coordination failure

54 Social protection counter-cyclical Employment crucial for incomes, esp. for domestic demand, poverty reduction, multiplier effects Fiscal stimulus, esp. for job creation Conditional cash/income transfers Universal vs targeted social protection Social protection  demand maintenance

Social spending low priority (11%)

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 North 2 Costs not lower 3 Instability increase When net inflows, 1 asset price bubbles 2 consumer binges 3 ‘over-investment’

Net transfer of financial resources from South to North

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-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)

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. Systemic issues

62 Constraints on developing country responses IMF fiscal requirement for stimulus IMF claims developing countries likely to fail Policy -- including fiscal -- space constrained Monetary policy less effective, worse with independent central banks, fiscal authority Systemic, market, institutional pro-cyclicality Lost productive capacities due to openness

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 you Please visit the following websites: UN-DESA G24 PGA IDEAs Policy briefs Research papers Other documents Acknowledgements: UN-DESA, ILO