A time of crisis, a time for change Ottawa 19 October 2009

2 Crisis Unexpected? A crisis foretold Unsustainable global imbalances International financial architecture Ideology: deregulation, self-regulation, inadequate and inappropriate regulation capital account liberalization Financial Globalization: No growth, stability Developing countries innocent victims Policy responses: inadequate; double standards International cooperation: G7, G20, UN

3 Global imbalances ballooned United States Oil exporters Euro Area Japan China Other Asia Other industrialised Central and Eastern Europe Latin America USD bn.

4 Net Capital Importers

US macro-financial policies International monetary + financial ‘non-system’ Prolonged loose macroeconomic policies Lax financial regulation + policies Low US savings rate US over-consumption, E Asian surpluses US, UK economic hubris

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

7 Globalization: finance>trade

8 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

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

12 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

Capital inflows contract

Credit crunch: US, EU

Borrowing costs for Southremain high

16 Finance reform 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

17 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

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

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

20 Globalization: Parallel fates

21 Strong US demand lifted developing country exports

22 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

23 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 over 2008 price spikes for energy and food due to increased speculation following flight from ‘Wall Street’ (finance) to ‘Chicago’ (commodity futures), other factors

24 World food prices declining after spikes

Food prices remain higher

26 World trade collapse

Trade collapse consensus

South exports fall more Source: CPB

Oil, metal prices fell more

30 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

World economy contracted, recovery uncertain

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

60 developing countries will see declining incomes in 2009

Livelihoods threatened Declining living standards Many livelihoods under threat, especially when social protection not well- developed Prolonged slowdown in world economy likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth

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

Aid flows unreliable

ODA for Africa vs G20 recovery efforts

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

Remittances to developing countries declining Historically, remittances to home countries in crisis rise 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

40 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

Stimulus lags delay recovery

Global recovery with coordinated vs uncoordinated stimuli,

Output, jobs recovery lags, 1991, 2001

45 Constraints on developing country responses IMF imposes fiscal requirements for stimulus IMF: developing country efforts likely to fail Policy -- especially fiscal -- space constrained Monetary policy less effective, worse with independent central banks, fiscal authority Systemic, market, institutional pro-cyclicality Lost productive capacities due to openness

Multilateral 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 June 09 summit on crisis + impact on developing countries UN PGA (Stiglitz) Commission of Experts

New Bretton Woods moment? Bretton Woods, 1944: United Nations conference on monetary + financial affairs 15 years after 1929 Depression Middle of WW2 US initiative vs UK Treasury stance 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 monetary and financial stability

48 Thank you Please visit UN-DESA andwww.un.org G24 websiteswww.g24.org Research papers Policy briefs Other documents Acknowledgements: UN-DESA, ILO