Policy Priorities in the face of the Global Economic Crisis IDEAs conference on Re-regulating Global Finance in the light of the Global Crisis Tsinghua University Beijing 9 April 2009

2 Contagion: crisis spreads Financial sector contagion Financial sector contagion (incl. vicious circles): Sub-prime crisis financial crisis asset price deflation liquidity/credit crunch asset price deflation liquidity/credit crunch Financial crisis Economic recession (including feedback loops) Real economy contagion Real economy contagion (incl. vicious circles): Less investment, especially abroad (FDI) Less investment, especially abroad (FDI) Less consumption Less consumption Reduced demand for imports, i.e. for exports of others Reduced demand for imports, i.e. for exports of others Prices, output declines globally Prices, output declines globally Growth, employment declines globally Growth, employment declines globally

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

4 Disorderly unwinding of global imbalances

5 Globalization: Parallel fates

6 Recession in most developed economies

7 Slowing growth in all developing countries

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

9 Strong US demand lifted developing country exports

10 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

11 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

12 Oil prices roller-coaster

13 Non-oil commodity prices

14 World food prices declining after spikes

15 World trade collapsing

16 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

Export Implosion in E. Asia % Japan China -2.8 S Korea Thailand Singapore Taiwan Malaysia -4.9 (Nov.) Dec exports y-o-y (%)

China: Exports, Imports Drop Sharply

China: Accumulation of Forex Reserves

China: Industrial Output Slows Down Rapidly

China: Inflation declines in 2008, after 2007

22 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

24 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

25 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

26 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

Responses to crisis UN, BIS forecasts more accurate than others; IMF, WB upbeat till late 2008 But 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

28 IMF deters reflation Prior fiscal surplus requirement for stimulusPrior fiscal surplus requirement for stimulus Strictly limits domestic public borrowingStrictly limits domestic public borrowing (e.g. via Article 4 consultations) Claims developing countries likely to failClaims developing countries likely to fail Emphasized inflationary threat (until recently, but operational significance unclear)Emphasized inflationary threat (until recently, but operational significance unclear) Recent IMF lending conditionalities no betterRecent IMF lending conditionalities no better G20 quadruples IMF resources, but no prior reform requirement legitimacy problemG20 quadruples IMF resources, but no prior reform requirement legitimacy problem

29 New IMF? DSK and the new IMF: mea culpaDSK and the new IMF: mea culpa IMF research:IMF research: deflation -- not inflation -- main problem Easier access: pre-conditionalityEasier access: pre-conditionality IMF emphasis on external financingIMF emphasis on external financing Article 4 consultation:Article 4 consultation: public sector borrowing limits UN 2 nd opinion (SMAC) capacity: differentUN 2 nd opinion (SMAC) capacity: different

30 Constraints on developing country responses 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 and capabilities due to prior economic liberalizationLost productive capacities and capabilities due to prior economic liberalization Economic liberalization difficult to reverseEconomic liberalization difficult to reverse Rapid response, strong multipliers unlikelyRapid response, strong multipliers unlikely

31 Thank you Please visit UN-DESA Please visit UN-DESA G24 and PGA websites Research papersResearch papers Policy briefsPolicy briefs Other documentsOther documents