1. Financial Crisis Impacts
Sargon Nissan
nef (the new economics foundation)

2. Analysing the Crisis Impact
nef embarking on study analysing vulnerability of developing countries to the financial crisis
Considering impact of continued financial liberalisation and financial dependence How exposed are Developing Countries?
What determines vulnerability?

3. Some context - Crisis Headlines

4. Risk Pricing
Market valuation of risk is good at shutting the door after the horse bolts
The worst time to invest in banking stocks was not now but 12 months ago!

5. Run-up to the crisis

6. Liberalisation’s Logic
Increased investment
Stability
Better targeted investment (efficiency)
Growth
Justify financial market and banking sector de- or re-regulation

7. Exposure and Vulnerability
Exposure; direct
Direct consequences in terms of financial and asset positions
Lost income from exports, currency exposure, increased debt servicing costs
Vulnerability; contingent
Economic and political features which are contingent
Extent to which countries can respond to and resist
Highlights importance of linkages amongst different dynamics in financial markets and how they determine impact
Different evolutions of crisis will have different implications across countries

8. Exposure and Vulnerability
In particular factors impacting sovereign autonomy
Foreign banks’ involvement in Developing Countries (grown)
FDI restrictions in banking sector
Asset share of bank assets by foreign banks
Reserve accumulation
Fluidity of flows
Net private inflows vs gross outflows
FDI outflows, including from ‘non-official’ sources
Caution!
Distinction is also necessary because a direct analysis of the scale of the impact would probably suggest N Korea

9. Exposure and Vulnerability
Vulnerability, not just exposure
Why the distinction? A final thought
Considering direct impacts/exposure to the crisis to reveal the most ‘non-vulnerable’ country could suggest N. Korea is best positioned to withstand it.
Countries can influence both the dynamics of the crisis and some have a degree of agency over how exposed they are and how the c

10. Analysing Crisis Impact
Examining three major factors
Reliance on exports
Need to examine which sort, e.g. oil vs luxury cars
Reliance on international finance
Some forms of reliance are inherently more precarious, e.g. extent of FDI accounted for by portfolio flows, bank lending…
External penetration of the financial system
Raises issues of home bias, lack of local knowledge, regulatory power of domestic authority

11. Analysing Crisis Impact
Reliance on exports: Trade
Trade openness
Current account balance
Export focus (to whom?)
South-south links
Extent of presumed ‘decoupling’ – looks like we’re all in it together
Export vulnerability (Elasticity of demand for key exports)

12. Analysing Crisis Impact
Reliance on international finance
Openness of capital account
Capital inflows as % of GDP
Bank flows as % of GDP
Portfolio flows as % of GDP
% of domestic assets and liabilities in domestic banks’ portfolios
% of foreign currency denominated debt
Level of private external debt (and short-term debt) to GDP
Reserves to GDP
Ability to offset foreign shortfalls
Currency denomination of foreign exchange reserves
Impact of falling US dollar
Correlation of domestic and international interest rates
Impact on domestic cost of capital

13. Analysing Crisis Impact
External penetration of the financial system
Foreign ownership of banking system
Impact on domestic credit creation
Asymmetric information Larger, more distant banks are not equipped to lend effectively or appropriately after crises when home markets have to be prioritised
Current and projected losses + credit impact
% of gross national savings comprised of foreign private savings (correlation between domestic saving and domestic investment rates)

14. Other Impacts
Consequences of crisis not restricted to direct economic impacts, implications of changed character of financial sector ownership or future regulatory models
Impacts on other key areas of negotiation particularly where proposals incorporate private financing or rely on assumptions about economic activity or growth

15. These two risks are of course related
Other Impacts
Crisis reveals financial system’s inability to value risk appropriately
In economic sense
In environmental sense
These two risks are of course related

16. Financing Climate Change Adaptation
Range of options currently discussed
Slowdown in growth expectations affecting revenue assumptions
Raised financing costs
Key issues
Equity
Efficacy
Sufficiency (to reach e.g. $50 bn)
Implications for advocacy
Need for renewed analysis of the appropriateness of approaches
Potential reduction in amounts raised
Extent to which models still reflect an efficient and/or equitable approach in relation to each other

17. Financing Climate Change Adaptation
EU proposal
Domestic Scheme
Involves auctioning emission permits to the private sector entities
20% is envisaged to be used for a number of climate change related activities, including helping developing countries adapt. With particular priority to the LDCs
The Aviation scheme
Opportunity to overcome some of the ‘domestic revenue problem’
Auctioning by member states who will also determine the use to which proceeds are put to.
UNFCCC predict this kind of auctioning could raise $22bn in at $23.6/tCO2.
World Bank proposal
Chinese proposal
EU: Domestic Chances are that large amounts will actually go to priorities that are closer to home.

18. Financing Climate Change Adaptation
US proposal
Bi and Multilateral Carbon Auction Levy Funding (The US International Climate Change Adaptation and National Security Fund)
To be established in the US Treasury, with the aim of financing international climate change adaptation from 2012 till 2050.
Administrator of the US Environmental Protection Agency (EPA) would auction a percentage of the annual emission allowances of the proposed US emission trading scheme, starting with 2012: 1%, and raising gradually to 7% in 2050.
Amounts to around $1bn in 2012 increasing to $6bn by 2030.
60% of the funds can go into international funds provided they meet certain UN framework requirements.
Estimate from Waskow (2008)

19. Financing Climate Change Adaptation
Chinese proposal
0.5% of GDP will be paid by developed countries on top of existing ODA, to help address climate change in developing countries
This would amount to around $185bn per annum
Focus on equity via GDP as proxy
Issues raised by crisis
Pressure on additionality
Revenue estimates out of date
Equitable principles to be tested
Estimate from Waskow (2008)

20. Implications of Crisis Impact
Solidarity
Different countries will be impacted differently, challenging in novel ways the capacity to develop a collective response from the South
Vulnerability and agency (or lack of) reveal new cracks in collective bargaining positions
Regulation without Governance
Potential for renewed emphasis on bilateral forms of influence versus multilateral structures of negotiation, such as collective trade or finance rules
Implications for FFD process of EU
Altered regulatory regimes, both de jure (e.g. Basle II) and de facto (ratings agencies and other institutional gatekeepers)
Unclear what will emerge subsequently to ‘hold the ring’
Risk of a technocratic approach being taken
Risk of a repeat of crises responses a decade ago leading to eventual Basle II settlement which exacerbated pro-cyclicality and systemic over-leverage
Back-pedalling from recent statements?

21. Implications of Crisis Impact
Institutional power
Outflow of nations from IMF/World Bank influence may now be checked
Potentially reinvigorating consequences for these institutions as political and economic actors.
Governance issue had waned as their significance and centrality contracted but could once again be a crucial component of any new settlement
Changing of the guard, not the system?
New countervailing centres of financial power
Should the deat of old centres of power be proclaimed?
OR will the name-plates change?