1. A time of crisis, a time for change The global crisis and economic governance Jomo Kwame Sundaram UN Assistant Secretary-General for Economic Development Recovery towards what? Finance, Justice, Sustainability Congress Centre, London, 6 November 2009
Pleased to present Chapter One of the United Nations World Economic Situation and Prospects The full report will be out in the first days of January.
WESP is a joint product of UN DESA, the UNCTAD and the five UN Regional Commissions 1

2. Crisis Unexpected? A crisis foretold Unsustainable global imbalances
International financial architecture: non-system
Ideology: deregulation, self-regulation,
inadequate and inappropriate regulation
capital account liberalization
Financial Globalization: growth, stability?
Developing countries innocent victims
Policy responses: inadequate; double standards
International cooperation: G7, G20, UN

3. Global imbalances grow
United States
Oil exporters
Euro Area
Japan
China
Other Asia
Other industrialised
Central and Eastern
Europe
Latin America
-1000
-800
-600
-400
-200
200
400
600
800
1000
90 91
92 93
94 95
96 97
98 99
04 05
06 07
USD bn . 3

4. Then narrow with deflation
At the same time, however, the situation is pushing the external indebtedness of the United States to new heights, possibly precipitating a renewed slide of the dollar once the process of de-leveraging has ended.
While, current-account imbalances across countries narrowed somewhat in 2008 and are expected to narrow further in 2009, they remain large and unsustainable.
Consequently, the disorderly adjustment of the global imbalances and a hard landing of the dollar remain major downside risks to the global economy, as an accelerated fall of the dollar could cause renewed turmoil in financial markets. Investors might renew their flight to safety, though this time away from dollar-denominated assets, thereby forcing the United States economy into a hard landing and pulling the global economy into a deeper recession. This may upset financial markets, pushing the global economy further in recession. . 4 4

5. Net capital importers 5

6. US macro-financial policies
International monetary + financial
‘non-system’
Prolonged loose macroeconomic policies
Lax financial regulation + policies
Low US savings rate
US over-consumption, East Asian surpluses
US, UK economic hubris
prolonged loose macroeconomic policies have stimulated the expansion of public expenditures and household consumption and has continuously driving down the savings rate;
lax financial regulatory policies have spurred massive financial innovation and provided incentives for consumption on credit, which fueled excessive borrowing and pushed down savings rate of the household sector, and thus brewed huge risks.
Moreover, the international monetary system dominated by particular reserve currencies, has facilitated this growth pattern. With the collapse of the Bretton Woods system and the delink of dollar from gold, there is no longer any ceiling on the volume of dollar issuance. As a result, the U.S., as a major currency issuer, is able to gain free access to low cost borrowing in the international financial markets through bond issuance, which further fed its growth model featuring high consumption and low saving.
The performance of U.S. economy augmented an euphoria sentiment in the market, which in turn influenced the saving and consumption behaviors of the U.S. residents.

7. Broad Liquidity Easier!
964％ of World GDP
78％ of
Total
10％ of
11％ of
138％ of World GDP
1％ of
122％ of World GDP
9％ of World GDP
Derivatives
Securitized Debt
Broad Money
Power Money 7

8. Globalization: finance>trade8 8

9. Finance-investment nexus?9 9

10. 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

11. Net transfer of financial resources from South to North

12. 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

13. 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
Spill-over effects through financial markets likely will hit strongest on the middle-income countries
All developing countries will be affected through slowing trade.
Oil and other commodity exporting counties in Latin America and Africa will see deterioration in terms of trade.
Manufacturing exporting countries, such as those in Asia, will see some improvement in their terms of trade.
Of course, in such a big financial crisis, the effects of change in terms of trade may not be as important as other factors to affect the growth of developing countries.
Financing constraints likely will emerge in growing number of countries 13 13

14. Credit crunch: US, EU

15. Borrowing costs high
External financing costs for emerging economies and other developing countries have surged since late The Emerging Markets Bond Index (EMBI), soared from 250 to about 800 basis points within a few weeks in the third quarter of The latest surge has been uniform, suggesting that contagion and generalized aversion to investing in emerging markets has taken hold among investors.

16. Dollar volatility continues 2004-2009

17. Dollar volatility, June 2008- June 2009

18. 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. others’ Xs
Prices, output declines globally
Growth, employment declines globally 18 18 18

19. 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
 lower prices, output
 lower employment, incomes

20. Globalization: Parallel fates

21. Growth by main country groups
Per capita GDP growth rate
Change in
growth rate
2004
-07
2008
2009
2009/
2004-7
World
2.6
0.9
-3.4
-4.3
-6.0
Developed economies
2.1
0.3
-4.1
-4.4
-6.1
Economies in transition
7.7
5.5
-2.6
-8.1
-10.2
Developing economies
5.7
4.0
0.1
-3.9
-5.6
LDCs
5.2
3.6
-3.3
-4.9

22. 60 developing countries will see declining incomes in 2009
At least 60 developing countries (of 107 countries for which data are available) are expected to suffer declining per-capita incomes, while only 7 would register per-capita GDP growth of 3 per cent or higher – considered as the minimum required growth rate for achieving significant reduction in poverty – down from 69 countries in 2007 and 51 in 2008.

23. Trade impacts: summary
Exports decline 
all developing countries
Terms of trade  primary exporters
Trade surpluses, reserves run down quickly
But lower energy, food prices helped net food and oil importers
Spill-over effects through financial markets likely will hit strongest on the middle-income countries
All developing countries will be affected through slowing trade.
Oil and other commodity exporting counties in Latin America and Africa will see deterioration in terms of trade.
Manufacturing exporting countries, such as those in Asia, will see some improvement in their terms of trade.
Of course, in such a big financial crisis, the effects of change in terms of trade may not be as important as other factors to affect the growth of developing countries.
Financing constraints likely will emerge in growing number of countries 23 23

24. Aid flows unreliable

26. ODA for Africa vs G20 recovery efforts

27. Net aid transfers? Net ODA is net of principal payments,
but not of interest received on such loans
Net Aid Transfers (NAT) are net of both
Japan recently received >$2bn/year in interest on ODA loans
NAT excludes cancellation of old non-ODA loans, e.g. a 2003 Paris Club deal cancelled some $5bn in non-ODA official debt owed
That cancellation is ODA, but generated little additional net transfers, i.e. NAT
Hence, e.g. DRC received $5.4bn in ODA in 2003, but only $400m. in NAT

28. Remittances?
Historically, remittances to home countries rise in crisis
However, migrant workers in host countries now most adversely hit by job losses, lower incomes
Evidence uneven for different migrant workers by home country, host country, crisis impact
Debt sustainability redefined to include remittances, allowing greater debt

29. Social impacts ILO: >200 m. more working poor
ILO: Unemployment to rise by 51m
ILO projections based on IMF Nov 08
MDGs, IADGs, social spending at risk
Rising social, political unrest
US intelligence report, February 2009:
crisis -- greatest security risk

31. International responses
UN, BIS forecasts more accurate than others; IMF, WB upbeat till late 2008
IMF, WB also marginalized by G7, etc
IMF discouraging strong fiscal stimulus by developing countries without surplus
G7  G20: more inclusive? legitimate? crisis-management, but neither developmental nor equitable
UN PGA (Stiglitz) Commission of Experts
June 09 summit on crisis + impact on developing countries

32. New Bretton Woods moment?
Bretton Woods, 1944: United Nations conference on monetary and financial affairs
15 years after 1929 Depression
Middle of WW2
FDR initiative vs Churchill bilateral preference
44 countries (28 developing countries; 19 LA)
UN system: IMF, IBRD, ITO
Clear emphasis on sustaining growth, job creation, post-war reconstruction, post- colonial development, not just financial stability

33. Systemic reform agenda
Ensure macro-financial stability with counter- cyclical macroeconomic policies + prudential risk management, including capital controls
Finance growth (output, employment) with developmental financial system
Ensure inclusive financial system -- NEW
Monterrey policy coherence: Align IMF, WB with UN development agenda, IADGs
UN: universal, legitimate  lead comprehensive reform process?

34. Coordinated stimulus needs new finance
Developing countries require sources of finance to participate in global stimulus to make it more effective and not offset it
Developed countries to allocate 1% of their own stimulus for direct expenditure support in developing countries
additional to existing ODA commitments
avoid unsustainable debt burdens
Conclusion: New Financing Facility Required

35. Major institutional recommendations 1
Global Economic Coordination Council
democratically representative G-20/L27
include UN system chief executives and Heads of Government
coordinate international adjustment of imbalances
International Expert Panel
Patterned after Intergovernmental Panel on Climate Change
Provide independent advice on international policy issues

36. Major institutional recommendations 2
New Financing Facility
within or outside IFIs
new, more representative governance structure
Voice and Representation Reform in IFIs
New International Reserve Currency
reserve accumulation offsets stimulus
to provide symmetrical adjustment to international imbalances

37. Other Proposed Institutions
International Debt Restructuring Tribunal
Independent of IMF (unlike DRM proposal)
Replace World Bank’s ICSID
Foreign Debt Commission
Intergovernmental Commission on Tax
Cooperation
Multilateral Regulations
International Tax Compact
Global Financial Authority
New Policy Surveillance Mechanism
Independent of IMF
Support national capital account management

38. Thank you Please visit UN-DESA www.un.org and G24 www.g24.org websites
Research papers
Policy briefs
Other documents
Acknowledgements: UN-DESA, ILO 41 41