Effects of global financial crisis on developing countries [ ATN12, Accra, August’09 ] Michael Herrmann Economic Affairs Officer Macroeconomics and Development Policies UNCTAD, Geneva, Switzerland

This presentation Financial effects Economic effects –Economic slowdown –Commodity price decline –Possible aid effects Political effects Concluding thoughts –The make-up of crisis –Policies to discourage future crisis –Policies to address unraveling crisis

Financial effects

Economic effects: Economic slowdown

Economic slowdown… … discourages exports of all countries, but especially of countries with high exports to developed countries. … encourages fall commodity prices, which affects many of the poorest developing countries. … discourages investment in all countries, but especially in poorer developing countries which are perceived to be riskier. … encourages increased profit remittances from developing countries to developed. … discourages workers’ remittances from developed countries to developing countries.

Economic Effects: Commodity price decline

Political effect: Possible aid effect

Concluding thoughts The make-up of financial and economic crisis

Concluding thoughts Policies to discourage future crisis: Strengthen micro-prudential regulations –Focus: Stability of individual financial institutions – Risk management (capital adequacy ratio, i.e. capital/ risk, where risk is assets), corporate governance, accountability, transparency, long- term horizon of management –Agency: Financial supervisory agencies Strengthen macro-prudential regulations –Focus: Stability of financial system – Risk management (counter- cyclical regulations, incl. capital adequacy requirements, reserve requirements), moral hazard, buy-in of financial institutions –Key agencies: financial supervisory agencies and central banks

Concluding thoughts Policies to discourage future crisis (contd.): Consider prudential controls on capital inflows –Tobin-type taxes: Reduce reliance on short-term, volatile capital inflows; exposure to maturity and currency mismatches; volatility of exchange rates; upward pressure on currencies. Encourage timely alignments of exchange rates –International macroeconomic coordination to encourage prevent large and prolonged exchange rate misalignments and build-up of large and sustained external imbalances; companies can go out of business, countries cannot.

Concluding thoughts Policies to address unraveling crisis: Controls on capital outflows Blank guarantees for deposits Rescue of systemically relevant financial institutions Pursuit of counter-cyclical macroeconomic policies Leakages in open economies Risk of protectionism Risk of other bagger-thy-neighbor policies Importance of intl. policy coordination Importance of social protection

Concluding thoughts “Financial markets have for some time had an independent capacity to destabilize developing countries; there are now increasing indications of the vulnerability of all countries to financial crisis. […] Overall, there appears to be a need for more collective control and guidance over international finance. ” The Trade and Development Report 1990.