Guillaume Grosso Chief Operating Officer Policy Counsellor OECD Development Centre The Global Crisis: Implications for Developing Countries AN OECD DEVELOPMENT CENTRE’S PERSPECTIVE World Civic Forum 7 May 2009, Seoul

The crisis contagion Real economic activities and employment Net capital flows Why are low income countries particularly vulnerable? Heavy dependence on external capital flows Difficulties in sustaining external debt Shifting wealth, a capacity for resilience? Trade portfolio diversification South-South linkages Recommendations Outline The Global Crisis: Implications for Developing Countries

The crisis contagion Contracting demand in OECD countries will impact real economic activities and employment Emerging economies  Singapore’s economy shrunk at an annualised rate of 17% in 2008  Chinese Taipei’s economy may contract by 11% in 2009  India reported a year-on-year trade decline of 15% for October 2008 (Source: The Economist, 2009) Low income countries  Ethiopia is vulnerable to a slowdown in international air-traffic (Ethiopian Airlines being one of the country’s main earners of foreign exchange)  Cambodia’s textile industry reportedly orders are down 60%  Mozambique could be adversely affected by the decline of the automobile industry (Alumina being its leading export)

4 Net capital flows to emerging economies are estimated to be USD165 billion in % decrease The crisis contagion

High dependence on external financing  Aid budget averages around 9 per cent of Africa’s GDP Why are LICs particularly vulnerable? Aid as an average percentage of net capital flows Source: McCulloch (2008)

 Remittances are now larger than commodities as a foreign exchange earner in 28 developing countries. e.g. Sub-Saharan Africa: USD 19 billion for 2008 (Source: WB) Why are LICs particularly vulnerable? Strong reliance on remittances as a source of foreign exchange reserve Source: Authors, based on World Bank and OECD data Net Capital Flows to Developing Countries,

Why are LICs particularly vulnerable? Country50-70%Country70-100% Rwanda70Madagascar100 Côte d'Ivoire66Mozambique100 Tanzania66Peru95 Ghana65Mexico82 Burkina Faso65Uganda80 Niger59El Salvador78 Mali57Botswana77 Zimbabwe51 Share of banking assets held by foreign banks with majority ownership, 2006 Modified from World Bank, Global Development Finance (2008)‏ High share of banking sector in foreign ownership

Net flows (in USD billions) to Sub-Saharan Africa, Source: World Bank, Global Development Finance, 2008 Global FDI inflows fell by about 21 per cent in 2008 and likely to fall further in Resource seeking FDI projects could suffer from the decline in world demand and in prices. In times of crisis, due to profit remittances, FDI can be an expensive form of financing. FDI investors may easily pull out financial resources. (Source: UNCTAD) Dependence on FDI as a major form of capital flow Why are LICs particularly vulnerable?

Debt service to GDP ratio (%) Source: World Bank Global Development Finance (2008) Why are LICs particularly vulnerable? Increasing difficulties in servicing debt  Due to a combination of: 1) Endogenous debt dynamics: USD appreciation Drop in export revenues Need to increase social spending 2) Debt relief process slow down 3) Closing down of new channels of financing: Sovereign bond issues

High degree of openness to international trade risk affecting the current account in times of crisis but portfolio have been diversified Source: UNCTAD Least Developed Countries Report, p. 158 Destination of exports in Least Developed Countries, 2006 Shifting wealth, a capacity for resilience ?

Sub-Saharan Africa: Real GDP Growth Correlations – (1) Excluding Sub-Saharan Africa Source: IMF, Regional Economic Outlook: Sub-Saharan Africa April 2008 Can South-South linkages compensate for the economic slowdown in the North? Correlation of growth rates in SSA with growth rates in Latin America and Asia is just as high as the correlation with its traditional trading partners in Europe Correlation of growth rates in SSA with growth rates in the US amounts to only 0.01 Shifting wealth, a capacity for resilience ?

Recommendations OECD countries must provide effective and coordinated response. OECD countries must:  deliver on pledges of aid efficiency: we should not add an 'aid crisis‘ to the financial crisis The financial crisis should give a new impetus to governments’ efforts to improve aid effectiveness, as set out in the Paris Declaration and the Accra Agenda for Action and allocate aid budgets in a way that is pro-poor.  reject trade and investment protectionism  preserve innovation as an engine for growth  not use the crisis as an excuse to weaken efforts to achieve long term green economic growth and promote clean alternatives The IMF and the World Bank have put in place facilities to help LICs deal with exogenous shocks. Coordinated and rapid response is needed. Conditionality could potentially still be a problem. Donor community must prioritize pro-poor public expenditures, social protection and safety nets.

Recommendations Developing countries must focus on domestic resource mobilisation. They must prioritize aid budgets towards pro-poor public expenditures, social protection and safety nets for the most vulnerable people. They should diversity their trade portfolio to create more South-South linkages.

Thank you