Financial Crisis, Recession, and the Development Agenda Financial Crisis, Recession, and the Development Agenda Richard Newfarmer Special Representative to UN and WTO World Bank ECOSOCGeneva July 9, 2009

Financial panic plunges GDP in high income countries into severe recession… Source: World Bank. Q Q Q1 2009

Contracting consumption in rich countries transmits recession to poor countries – as world trade collapses Percentage change Annual growth of global trade volumes Source: World Bank, Global Economic Prospects, 2009

Sovereign EMBIG composite Corporate CEMBI composite Spread over US Treas., basis points … and costs of borrowing have skyrocketed… and capital flows have dried up Forecast East Asia Crisis $1,158 billion in 2007 US$ b. Private capital flows to dev’ing countries

…leading to global recession…. for the first time in the last 70 years World High Income Developing Growth of real GDP Percent Source: World Bank, DEC Prospects Group, Consensus Forecast, May 2009.

Crisis effects growth regions differently in 2009 GDP growth, percent Crisis effects growth regions differently in 2009 GDP growth, percent Source: World Bank.

Developing countries High-income countries GDP annual growth rates (%) Forecast Outlook? Recovery could begin late this year or next …but strength and duration is uncertain % change ? Source: World Bank, Global Development Finance, 2009

Green shoots? Tentative signs that recession is bottoming out …led by developing countries industrial production, percentage change (saar) Source: World Bank through Thomson/Datastream. World (excluding China)** High-income OECD Developing (excluding China) ** China is excluded due to vagaries in recent data tied to the Lunar New Year.

Low-income countries are at particular risk… Especially those that: export only a few commodities have large % in poverty have weak fiscal positions have low reserves/ high debt “fragile states” Source: IMF, 2009 Implications of slowdown… 200 million likely to be trapped in poverty 200 million likely to be trapped in poverty Unemployment will certainly rise thru 2010 Unemployment will certainly rise thru 2010 Infant mortality and child mortality rises – 200, ,000 infants annually Infant mortality and child mortality rises – 200, ,000 infants annually Health services cutback Health services cutback

Daunting challenges: Providing support to workers and the poor Widening fiscal deficits will put pressures on social safety nets Poor households suffer declines in remittances …and continued higher food and fuel prices Source: World Bank, Prospects Group

Daunting challenges: Providing support to workers and the poor Widening fiscal deficits will put pressures on social safety nets Poor households suffer declines in remittances …and continued higher food and fuel prices Firms will face tighter credit conditions and weaker demand, so they will be slow to create new jobs… and unemployment will rise Source: JP Morgan, World Financial Markets, June 2009

Risks… Inattention to the long term development agenda For example, climate change Countries in brown and yellow likely to experience: More droughts More droughts More severe storms More severe storms Rising water scarcity Rising water scarcity Rising sea levels Rising sea levels Countries vulnerable to climate change are the same as those to recession Both forces could produce unprecedented: Declines in food production Declines in food production Pressures on migration Pressures on migration

Split on Recession Cure, Leaders Try 3 Approaches Accelerated restructuring of banks and increased regulation Accelerated restructuring of banks and increased regulation Pledge to avoid protection Pledge to avoid protection Fiscal stimulus and expansive monetary policy Fiscal stimulus and expansive monetary policy Mobilization of more capital for developing countries Mobilization of more capital for developing countries IMF – $700- b. New arrangement to borrow (NAB) IMF – $700- b. New arrangement to borrow (NAB) World Bank MDBs – Capital increase for ADB World Bank MDBs – Capital increase for ADB Reform of the IMF and World Bank – Increased capital, new voting, merit selection of leaders Reform of the IMF and World Bank – Increased capital, new voting, merit selection of leaders The crisis requires a multilateral response… and the G20 leaders strive to coordinate actions… G20 Summit April 2 Agreed:

Improving the multilateral response requires… Fulfilling pledges for development assistance, and augmenting these with a “vulnerability fund” – Need for social safety nets, labor –intensive infrastructure, SMEs, “aid for trade” – Financing gaps may be between $ billion – Problem: 2010 when fiscal pressures in rich countries become more acute Resisting pressures for trade protection will require vigilance and determination – and renewing a commitment to the Doha Development agenda Improving regulation of financial markets will require careful balancing of national regulatory authorities with international cooperation

World Bank Group is increasing financial flows Increasing financial support for the poorest countries: IBRD and IDA funds: Increasing financial support for the poorest countries: IBRD and IDA funds: Substantially increasing IBRD lending ($100 billion over next 3 years) Substantially increasing IBRD lending ($100 billion over next 3 years) Fast-tracking IDA funds ($42.5 billion over next 3 years) Fast-tracking IDA funds ($42.5 billion over next 3 years) Food crisis response Food crisis response Shoring up the private sector: $30 billion over next 3 years from IFC and: Ensure trade flows Ensure trade flows Bolster distressed banking systems Bolster distressed banking systems Keep infrastructure projects on track Keep infrastructure projects on track Other support: Creation of a vulnerability financing facility – to finance social safety nets, infrastructure and SMEs Creation of a vulnerability financing facility – to finance social safety nets, infrastructure and SMEs Trade Facilitation Facility -- $40 m. to as aid for trade Trade Facilitation Facility -- $40 m. to as aid for trade Ensuring liquidity (MIGA) Ensuring liquidity (MIGA) Technical analysis, advice, and diagnostic tools Technical analysis, advice, and diagnostic tools

Financial Crisis, Recession, and the Development Agenda Financial Crisis, Recession, and the Development Agenda Richard Newfarmer Special Representative to UN and WTO World Bank ECOSOCGeneva July 9, 2009