The Global Economic Crisis and Policy Responses in West Asia ESCWA, Damascus, Syria 5 May 2009

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

3 Globalization: finance>trade

4 Finance-investment nexus?

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

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

7 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. for exports of others  Prices, output declines globally  Growth, employment declines globally

Middle East market indices (Feb 2008-Feb 2009 change in per cent) Abu Dhabi Securities Market Amman Stock Exchange Bahrain Stock Exchange Beirut Stock Exchange Doha Securities Market Dubai Financial Market Kuwait Stock Market Muscat Securities Market Palestine Securities Exchange Saudi Stock Market Composite* Change in percent

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 rices, output  lower prices, output  lower employment, incomes

10 Disorderly unwinding of global imbalances

11 Globalization: Parallel fates

12 Synchronous growth: The US, transition & developing economies b USEc. in TransitionDeveloping Ec.

13 Recession in most developed economies

14 Slower growth in all developing countries

Growth by main country groups Per capita GDP growth rateChange in growth rate / / World Developed economies USA Japan European Union Economies in transition Developing economies Africa North Africa Sub-Saharan Africa East and South Asia East Asia South Asia West Asia Latin America + Caribbean LDCs LDCs excl. Bangladesh

Growth by main country groups Per capita GDP growth rate Change in growth rate / / World Developed economies Economies in transition Developing economies West Asia LDCs

Real growth and consumer inflation, Real GrowthConsumer inflation Country/Group Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates GCC countries Egypt Iraq Jordan Lebanon Occupied Palestine Sudan Syrian Arab Republic Yemen More Diversified Economies ESCWA region

Regional GDP growth rates in PPP terms, Note: The IMF World Economic Outlook classification of the Middle East region includes Egypt, Iran, and Libya. Source: IMF, World Economic Outlook Update, January, World Advanced Economies European Union Emerging & Developing Economies Sub- Saharan Africa Central & Eastern Europe Middle East

Real GDP growth in Arab States,

N Unemployment rate in per cent Unemployment rates in the Middle East (% of labour force) ▲ Total ♦ Males Females

Unemployment scenarios for 2009 Middle East. World TotalMalesFemales TotalMales Females

WA: Limited impact so far Most of region’s financial markets have declined significantly So far, impact on real economy relatively limited due to: -mass surplus liquidity (GCC countries) from oil boom -relative insulation -low market capitalization

But worse yet to come But crisis going to hit more forcefully Real GDP growth projected to drop to 4% in 2009 (6% in 2007) Unemployment rates to climb from 9.4% to 10.8%

Past growth problems Regional economic growth spurred by: - oil revenue - real estate investment - housing - tourism - foreign assistance --- rather than productive activity Surpluses not used to build up strong industry, infrastructure, skills

25 Strong US demand lifted developing country exports

26 Manufacturing demand supported high primary commodity prices [Billion $ dollars base 2000] Price index relative to price of manufact. External balance primary exporters Manufactured exports from the developing world (1st difference) Price of energy (relative to manufactures). RHS Price of raw materials & food (relative to manufactures). RHS

27 High commodity prices over Last 5 years: rare opportunity for many developing countries – including LDCs – to generate substantial financial resources from higher primary commodity exports for investments and growth – largely overLast 5 years: rare opportunity for many developing countries – including LDCs – to generate substantial financial resources from higher primary commodity exports for investments and growth – largely over 2008 price spikes for energy and food due to increased speculation following flight from ‘Wall Street’ (finance) to ‘Chicago’ (commodity futures), other factors2008 price spikes for energy and food due to increased speculation following flight from ‘Wall Street’ (finance) to ‘Chicago’ (commodity futures), other factors

28 Oil prices roller-coaster

Monthly Crude Oil Prices ($/barrel) Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09

30 Non-oil commodity prices

31 World food prices declining after spikes

Food prices will remain higher

33 World trade collapsing

Collapsing world trade Source: CPB

ME current account

ME oil exporters too

Volatile aid flows

Official aid (USD$/capita) Iraq (2003) Jordan Lebanon Syria (2006) Yemen Egypt (2006) (2006) (2006) (2006).

Remittances to developing countries,

Jordan (2007) Lebanon Oman (2006) Syria (2007) oPt (2007) Yemen (2007) (2007) Total remittances as % of national GDP

Remittances from Saudi Arabia, 2005

Remittances from Saudi Arabia as % of GDP of receiving Arab country, 2005 Percentage of GDP 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

Impact of crisis on extreme poverty Change in extreme poverty (< $1.25/day) No. of PoorChange in poverty ’09/‘04-’07’09/‘08’09/‘04-’07’09/‘08 Transition economies % Developing economies %1.2% Africa %0.9% North Africa % Sub-Saharan Africa %1.1% East and South Asia %1.3% East Asia %1.3% South Asia %1.3% West Asia %0.2% LAC %

Livelihoods threatened Declining living standards, increasing inequality of concern for some time Many livelihoods under threat, especially when social protection not well-developed Migrant workers > 60% in most GCC countries Prolonged slowdown in world economy likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth

Policy priorities Promote growth of productive sector Encourage pro-poor growth Strengthen social protection Oppose discrimination Emphasize human development, decent work

46 Trade impacts: summary Exports decline  all developing countries Terms of trade  primary exporters Trade surpluses, reserves may run down quickly But lower energy, food prices help net food and oil-importers

47 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

Social, political impacts >200 m. more working poor ILO: Unemployment to rise by 51m Government social spending at risk Rising social unrest US intelligence report: crisis -- greatest security risk

49 Policy priorities Contain spread of financial crisis -Across borders (contagion) -To real economy (ensuring liquidity) Reflate economy -Fiscal measures (fiscal space needed) -Monetary measures (monetary space) Appropriate regulatory reform - National -International

50 Regulatory priorities Prudential risk management, including capital controls Counter-cyclical: limit pro-cyclicality Finance growth (output, employment) Development finance, e.g. crucial for investment + technology policies Inclusive finance

51 Domestic demand Need to stimulate to offset weakened foreign demand for exports [Problem: domestic productive capacities and capabilities lost with economic liberalization] Most countries’ fiscal space limited  need more policy space to cope Need domestic -- not external -- financing Build + improve infrastructure Strengthen social services, protection

52 Social protection counter-cyclical Employment crucial for incomes, esp. for domestic demand, poverty reduction, multiplier effects Fiscal stimulus, esp. for job creation Conditional cash/income transfers Universal vs targeted social protection Social protection  demand maintenance

53 Constraints on developing country responses IMF fiscal requirement for stimulusIMF fiscal requirement for stimulus IMF claims developing countries likely to failIMF claims developing countries likely to fail Policy -- including fiscal -- space constrainedPolicy -- including fiscal -- space constrained Monetary policy less effective, worse with independent central banks, fiscal authorityMonetary policy less effective, worse with independent central banks, fiscal authority Systemic, market, institutional pro-cyclicalitySystemic, market, institutional pro-cyclicality Lost productive capacities due to opennessLost productive capacities due to openness

New Bretton Woods moment? Bretton Woods, 1944: United Nations conference on monetary and financial affairs 15 years after 1929 Depression Middle of WW2 US initiative vs UK Treasury stance 44 countries (28 developing countries; 19 LA) IMF, IBRD, ITO – UN system Clear emphasis on sustaining growth, employment creation, development, not just financial stability But BWIs very different governance arrangements

Responses to crisis 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-, but not developmental or equitable PGA (Stiglitz) Commission of Experts Doha Declaration: June 09 summit on impact of crisis on developing countries

UN role? Universal, legitimate  lead reform process? Ensure comprehensive systemic reform Ensure developmental financial system Ensure inclusive financial system Develop capacity for offering 2 nd opinion to interested member states Align IMF, WB with UNDA (including FfD), IADGs to ensure policy coherence

57 Thank you Please visit UN-DESA Please visit UN-DESA G24 and PGA websites G24 and PGA websiteswww.g24.org Research papersResearch papers Policy briefsPolicy briefs Other documentsOther documents Acknowledgements: UN-DESA, ILO, ESCWA