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 2009. 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

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

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 00 01 02 03 04 05 06 07 USD bn . 3

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

Net capital importers 5

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.

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

Globalization: finance>trade 8 8

Finance-investment nexus? 9 9

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

Net transfer of financial resources from South to North

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

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

Credit crunch: US, EU

Borrowing costs high External financing costs for emerging economies and other developing countries have surged since late 2008. The Emerging Markets Bond Index (EMBI), soared from 250 to about 800 basis points within a few weeks in the third quarter of 2008. The latest surge has been uniform, suggesting that contagion and generalized aversion to investing in emerging markets has taken hold among investors.

Dollar volatility continues 2004-2009

Dollar volatility, June 2008- June 2009

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

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

Globalization: Parallel fates

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

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.

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

Aid flows unreliable

ODA for Africa vs G20 recovery efforts

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

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

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

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

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

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?

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

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

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

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

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