Policies responses to unfettered finance Pablo Heidrich October 20 th, 2009

LICs at glance LICs: 43 countries Rwanda, Bangladesh, Haiti, Senegal, Benin, Kenya, Sierra Leone, Burkina Faso, Somalia, Burundi, Kyrgyz Republic, Tajikistan, Cambodia, Laos, Tanzania, Central African Republic, Liberia, Togo, Chad, Madagascar, Uganda, Comoros, Malawi, Uzbekistan, Congo, Mali, Vietnam, Eritrea, Mauritania, Yemen, Ethiopia, Mozambique, Zambia, Gambia, Myanmar, Zimbabwe, Ghana, Nepal, Guinea, Niger Total 1 billion Total GDP: US$ 1.2 trillion Fiscal expenditures: 22% of GDP Current account: US$ -37bn (2008) Openness to trade (X+M / GDP): 45% Aid received: $45 bn (2008)

Crisis transmission mechanisms Exports down by 30% so far (July 2009) Trade balance worsened by US$ 20bn Remittances down by US$ 4bn, at US$ 36bn FDI inflows down by US$ 15bn, at US$ 13bn Aid constant at US$ 45bn IMF and other multilateral aid re-conditioned

Crisis effects Rise in poverty: – At least 100 million people more living on US$1.25 per day Fall of 2% in average per capita income in only 9 months Worsening social indicators in public health, education and security due to rising fiscal deficits Increased political instability and rising levels of violence in fragile states

So, what can be done? Just looking at transmission mechanisms, under the assumptions that: –This crisis has significant effects that can be reduced –Other crises will arise in the near to medium term future

What can be done on trade? Short term: protect against protectionism –Maintain MDBs trade financing schemes one more year –Support LICs in WTO disputes and negotiations Mid-term: build hedging capacity –Help LICs diversify in products and destinations –Regulate speculation on commodity prices Long-term: trade income for development –Support state-led efforts to channel gains from trade into domestic economy

What can be done on FDI? Short term goal: reduce income shortfall –Take responsibility for FDI withdrawals in aid commitments –Pressure MNCs to review withdrawals Mid-term: increase policy space –Review TRIMs and stop selling CSR as its substitute –Revise BITs and ICSID’s referee role Long-term: incorporate development –FDI must create entrepreneurial and technical capacities instead of enclaves

What can be done on financial flows? Short term: expand emergency funding –IMF-WB new facilities are under-committed and represent not much new –Review conditionality and pre-conditionality to actually increase lending Mid-term: make private flows sustainable –Help restructure debt bonds to reflect actual payment capacity –Assist debt renegotiations to protect LICs, not only OECD- based creditors or debt issuers. Long-term: a permanent anti-shock facility –Adjust fund availability to LICs needs, defined in terms of their populations’ welfare, not current account indicators.

What can be done on remittances? Short term: extend social safety nets –Acknowledge migrants and temporary foreign workers contributions –Keep pressing banks to reduce commissions on wire- transfers Mid-term: pressure UMICs and others to improve –½ of LICs migrants go to other developing countries, where often wages are more volatile, deportations more frequent, and migrants have worse financial security Long-term: take a hard look at your “developmental” self –Northern protectionism engineering Southern migration (ie. services in NAFTA, agriculture in EU and East Asia).

What can be done on aid? Short term: map out your responsibility & act on it ! –Follow up on your MNCs, your reduced imports, your deported migrants or refused temporary foreign workers and target your aid accordingly. –Understand that crises are intrinsic to a globalized economy, not an exception to be treated ad-hoc Mid- to long-term: revise international frameworks –Expand ownership criteria to allow real and changing priorities of LICs governments –Balance longer term Northern global goals with shorter term Southern demands