effects of global financial crisis on developing countries [ atn12, accra, august’09 ] michael...
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Financial effectsTRANSCRIPT
Effects of global financial crisis on developing countries
[presented @ ATN12, Accra, August’09]
Michael HerrmannEconomic Affairs Officer
Macroeconomics and Development PoliciesUNCTAD, Geneva, Switzerland
UNITED NATIONS CONFERENCE ON TRADE AND
DEVELOPMENT (UNCTAD)
CONFÉRENCE DES NATIONS UNIES SUR LE COMMERCE ET LE DÉVELOPPEMENT (CNUCED)
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 Figure 2. MSCI Emerging Markets Price Index
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Figure 3. Emerging Markets Spread
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Economic effects: Economic slowdown
Real GDP growth (annual percent change)
2008 2009 2008 2009 2008 2009World 3.7 3.8 3.2 -1.3 -0.5 -5.1
Developed economies 1.3 1.3 0.9 -3.8 -0.4 -5.1Developing economies 6.7 6.6 6.1 1.6 -0.6 -5.0
Africa 6.3 6.4 5.2 2.0 -1.1 -4.4Asia 8.2 8.4 7.7 4.8 -0.5 -3.6Latin America 4.4 3.6 4.2 -1.5 -0.2 -5.1Middle East 6.1 6.1 5.9 2.5 -0.2 -3.6
Note: 2008 are estimates, 2009 are projections
IMF WEO, April 2008 IMF, WEO, April 2009 Difference
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
Commodity price deveopments, major categories, Jan. 2000 - Sep. 2008
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Food Tropical beveragesVegetable oilseed and oil Agricultural raw materialsMinerals, ores and metals Crude petroleum
Political effect: Possible aid effect
Finland Banking Crisis
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1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
ODA Commitments ODA Disbursements
Finland Banking Crisis
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-6
-4
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8
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
GDP Growth
Political effect: Possible aid effectMDG financing needs, ODA disbursements and estimated ODA pledges, 2000–2015(Billions of current dollars)
ODA disbursements less bilateral debt relief (2000–2007)Estimated ODA pledges (2008–2010)Estimated ODA needed to meet MDGs (Sachs Report )Estimated ODA needed to meet MDGs (Zedillo Report )
Source: UNCTAD secretariat calculations, based on OECD-IDS;G-8 (2005); Zedillo Report (United Nations, 2001); and Sachs Report (UN Millennium Project, 2005).
Note: The data, as reported by donors, are in current dollars and represent net disbursements. 40
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2000 2005 2010 2015
ODA disbursements lessbilateral debt relief(2000–2007)
Estimated ODA pledges(2008–2010)
Estimated ODA needed tomeet MDGs (Sachs Report)
Estimated ODA needed tomeet MDGs (ZedilloReport)
Trend (ODA disbursementsless bilateral debt relief,2000–2007)
Concluding thoughtsThe make-up of financial and economic crisis
During boom During bustPerceived risk is low Sell of assets by multiple institutions
Erosion of credit standards Fall of asset pricesRise of risk premium
Load-up on exposure Rise of interbank rates (Otherwise perception of underutilization and decline of the
institutions' stock values) Failures of over-leveraged institutions Increase of leverage (gearing)
(Use of debt to supplement equity) Reluctance/ inability to provide creditIncrease of maturity mismatch Onset of credit crunch
(Use of cheap, short-term funds for long-term investment)
Possible Increase of currency mismatch Spillovers to the real sector(Use of foreign currency loans for local spending) Fall in investment
Accumulation of (overvalued) assets Rise of unemployment/ underemployment(Increase of reckless, speculative lending) Fall in demand, exports, commodity prices
Accumulation of (unsustainable) debt Deceleration of economic growth
Increase of non-performing loans
Shedding of exposureSell of assetsDe-leveraging
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.