1. L. Alan Winters Chief Economist Department for International Development, London, and Professor of Economics, University of Sussex, UK Where does the crisis leave globalisation?

2. Page 2 27th January 2010University of Nottingham Disclaimer The opinions expressed in this work are the author’s alone and may not represent those of his employers.

3. Page 3 27th January 2010University of Nottingham Globalisation In principle – the extent to which one’s fate is determined abroad In practice: simple pragmatic definition Extent of commercial intercourse with RoW Also, loosely, the policy stance associated with achieving relatively high levels of intercourse.

4. Page 4 27th January 2010University of Nottingham Trade Source: World Development Indicators, Online

5. Page 5 27th January 2010University of Nottingham Foreign Direct Investment

6. Page 6 27th January 2010University of Nottingham Portfolio Investment

7. Page 7 27th January 2010University of Nottingham Remittances

8. Page 8 27th January 2010University of Nottingham Economic Growth

9. Page 9 27th January 2010University of Nottingham The Financial Crisis Financial stress since August 2007 Northern Rock Wholesale creditors’ problems Crash September 2008 Lehman Brothers AIG, etc Solvency, not just liquidity Followed by ………

10. Page 10 27th January 2010University of Nottingham Recession Worst for 80 years ¾% off world GDP for 2008 About 5% in 2009, Stock markets 40-60% off Citi, BoA, RBS need rescuing Oil price from $147 to $40 Diamond prices fall by 80% World trade falls by 12% in 2009

11. Page 11 27th January 2010University of Nottingham How Deep, How Long? 2009 was less bad than expected in March 2% GDP growth for developing economies India 5.6%; China 8.5% LICs in Africa > 4% growth 2010 recovery to 3.9% (DCs 6%) – IMF World trade growth resumes - 6% Strong policy response But not all over – by a long way The opinions expressed in this work are the author’s alone.

12. Page 12 27th January 2010University of Nottingham Emerging & developing economies Advanced Economies Source: IMF A Global Crisis

13. Page 13 27th January 2010University of Nottingham Source: IMF Significant Regional Variation

14. Page 14 27th January 2010University of Nottingham

15. Page 15 27th January 2010University of Nottingham The Causes of the Crisis Two necessary conditions Regulatory laxness Global imbalances

16. Page 16 27th January 2010University of Nottingham Whence it came (I) Global Imbalances Huge labour force growth Asian Crisis 1997-8 Export led recovery; Reserves for insurance Structural challenges Export led growth; Lack of social protection Accommodating policy in advanced economies Saving the world Hedonism Hubris

17. Page 17 27th January 2010University of Nottingham Whence it came (II) Regulation & Policy Loose monetary & fiscal policy In response to previous crises; Financial innovation to boost returns Weak risk management; Perverse incentives Strong lobbying & political connections Regulatory failures Unwarranted confidence; wrong model? Political weakness – unwillingness to hear

18. Page 18 27th January 2010University of Nottingham Developing Countries are Coupled the direct impact of the financial collapse the tightening of credit, Trade credit, investment Aid flows the effects on the real economy Exports, commodity prices (terms of trade), remittances, knock-on effects: fiscal, financial

19. Page 19 27th January 2010University of Nottingham Transmission channels Trade: -12.3% (volume) 2009 y-o-y Remittances: 6.1% fall in 2009 Net Capital Flows: Peaked at $1.2 trillion in 2007. Expected to fall to $460 bn in 2009 Official Development Assistance: Ireland; Italy; Sweden; Netherlands; Denmark

20. Page 20 27th January 2010University of Nottingham Policy Responses Stimulus packages: US, UK, China, India, …. Bangladesh, Vietnam, …. Many others maintained expenditures – benefits of sound fiscal positions Monetary expansion in advanced econ.s International Swap arrangements with Fed IMF resources Other IFIs

21. Page 21 27th January 2010University of Nottingham What lies ahead ( IMF analysis) Optimistic projections still not encouraging Rebalancing: long drawn out process China’s consumption is only ¼ of that of US and EU deficit countries Germany and Japan have to increase S (not C) to deal with ageing populations Weak adjustment by surplus countries Because surpluses largely intentional Low income countries too small to matter

22. Page 22 27th January 2010University of Nottingham Projected Imbalances (IMF)

23. Page 23 27th January 2010University of Nottingham Trade did boost growth pre-crisis Many pieces of evidence Cross-country regressions Time series – except perhaps in poorest Africa Growth Commission narratives Conditional on other policies/conditions Not sufficient, probably necessary

24. Page 24 27th January 2010University of Nottingham Trade and GDP pc growth 1960-1995 Source: Feyrer, 2009

25. Page 25 27th January 2010University of Nottingham Did capital flows stimulate growth? Balance in favour of FDI and bank lending Little general evidence for portfolio inv. ODA: mixed but on balance favourable But: Sudden stops disruptive (unjustified?) Poor regulation or poor policy E.g. unmatched balance sheets, bubbles

26. Page 26 27th January 2010University of Nottingham How damaging was the crisis? So far, ……. East Asia Pacific – 4 months growth Africa 10 months (less for LICs) CEE about 2 years; CIS 2.5 years Strongly related to quality of previous policy and financial exposure

27. Page 27 27th January 2010University of Nottingham Did trade transmit the crisis? First Hit Low VS – below median of sample (approx 43%) Early: 2008, late 2009 Jan-Mar; not yet – no residual < -2σ

28. Page 28 27th January 2010University of Nottingham Average Depth of First Hit Residual of log(exports) from trend

29. Page 29 27th January 2010University of Nottingham Crises and Migration: 1860-1913 De-trended emigration rates Hatton and Williamson, 2007

30. Page 30 27th January 2010University of Nottingham Migration now Net immigration to US:1m p.a. in 2000-6 to 0.5m 2006-7. Emigration from Mexico 1m Feb 06-07 to 0.8m Feb 07-08. A8 emigration to the UK, down 54% between Q1’08 and Q1’09, down 57% to Ireland. Outflows from Bangladesh – down by about 40% yr-on-yr.

31. Page 31 27th January 2010University of Nottingham Capital Flows 2008-11 (IIF)

32. Page 32 27th January 2010University of Nottingham Should we scale back globalisation? Nearly all markets worked well financial markets didn’t Commodity markets? Imperfect, but what alternative? Seize it. Financial markets Regulate Structure Be cautious

33. Page 33 27th January 2010University of Nottingham THANK YOU