Financing for Development
     Following The
 Global Economic Crisis

 Commonwealth Secretariat, London
             6 Jul...
Crisis Unexpected?
•   A crisis foretold
•   Unsustainable global imbalances
•   International financial architecture
•   ...
Globalization: finance>trade
                180                                                                   350



...
Finance-investment nexus?
0.30



0.25



                                              Gross Fixed Capital Formation
0.20...
Financial globalization
  • Net capital flows from South to North
       (US largest borrower)
  • Cost of funds not gener...
Short-term capital
  inflows problematic
• No real contribution to investment,
  growth rates
• Asset (shares, real estate...
Contagion: crisis spreads
Financial sector contagion (incl. vicious circles):
    Sub-prime crisis  financial crisis
    ...
Deflationary spiral
• Asset (stock, property) markets deflating
    negative wealth effect
    more bank insolvency
   ...
Financial impacts on
developing countries
• Despite non-involvement in sub-prime debacle:
   Emerging stock markets colla...
Globalization: Parallel fates
8
                                                   Developing
6                           ...
Synchronous growth: The US,
  transition & developing economies
9
                     7.9
8
                             ...
World economy in recession,
 recovery uncertain
5
            4.0           3.9
4                                   3.9

 ...
Recession in most
                  developed economies
                     6
                                           ...
Transition economies too
                     8

                     6                                               5.4
...
Growth slowed in all
developing countries
                     8
                                                         ...
Growth by main
  country groups
                P r c p GDP
                 e a ita       C ng in
                       ...
Growth by main
  regional groups          P r c p GDP g w ra
                            e a ita     ro th te      C ng in...
Regional GDP growth rates
  in PPP terms, 2007-2010
                                        2007      2008       2009  ...
Recent African growth over
60 developing countries will see
    declining incomes in 2009
70
                                  60   Developed countri...
Strong US demand lifted
   developing country exports      400


                                   350


                ...
Manufacturing demand supported
   high primary commodity prices
                                500                       ...
High commodity prices over
  • Last 5 years: rare opportunity for many
       developing countries – including LDCs
      ...
Oil prices roller-coaster
               160
                                   Nominal price
               140          ...
Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08
         Monthly Crude Oil
...
Non-oil commodity prices
      U.S. dollars
450
400
350
300
250
200
150
100
 50
  0
   2001 2002 2003 2004 2005 2006 2007 ...
Index 2000 = 100




          100
                150
                      200
                             250
        ...
Food prices will
  remain higher
35 0


30 0


25 0


20 0


15 0


10 0


 50
  2000   2001   2002   2003   2004   2005  ...
World trade collapsing
                           12    10.9
                                               9.2
          ...
Trade collapse consensus
           10.0

                   6.0
            5.0
                          2.2


         ...
South exports fall more
                    (volume index, 1998 = 100)
280
                             Develop ing and ot...
African export growth over
Agricultural prices rose +
fell




      Source: THE-Ambrosetti based on IMF data; January 2000 = 100; f = forecast
Oil, metal prices more
Global imbalances narrow
   with deflation
              600                                              United States

 ...
Trade impacts: summary
• Exports decline 
     all developing countries
• Terms of trade  primary exporters
• Trade surp...
90
                            105
                                   120
                                          135
Ja...
Capital inflows contract

             750
$ Billions




             500




             250




               0
     ...
Share of global FDI
Credit crunch continues
      Percentage of lenders tightening standards, by size of enterprise seeking loans
            ...
Borrowing costs
10
  remain high
     Africa
     Asia
 8   Latin America
     Europe
 6


 4


 2


 0
Aid flows unreliable
8%

                                                                                                 ...
Net Aid Transfer?
• Net ODA is net of principal payments,
      but not of interest received on such loans
• Net Aid Trans...
Livelihoods threatened
• Declining living standards
• Many livelihoods under threat, especially when
     social protectio...
Remittances to developing
    countries, 2008-2010
                            300
                                  2008 ...
Domestic demand
• Need to stimulate to offset weakened foreign
  demand for exports
[Problem: domestic productive capaciti...
Policy priorities
 • Contain spread of financial crisis
   - Across borders (contagion)
   - To real economy (ensuring liq...
Finance priorities
• Prudential risk management,
     including capital controls
• Counter-cyclical: limit pro-cyclicality...
Why stimulus?
• Need to stimulate to offset weakened foreign
  demand for exports
[Problem: domestic productive capacities...
Global recovery with coordinated vs
uncoordinated stimuli, 2010-2015
Social impacts
• ILO: >200 m. more working poor
• ILO: Unemployment to rise by 51m
• ILO projections based on IMF 0811
• M...
Poverty reduction set back
                      Slowdown in poverty
                      reduction compared
            ...
Extreme poverty worsens
                          C ng in e m p ve (< $ 5 a
                           ha e xtre e o rty  ...
Social protection
   counter-cyclical
• Employment crucial for incomes, esp. for
  domestic demand, poverty reduction,
  m...
Output, jobs recovery
  lags, 1991, 2001
Duration of output recovery and job market recovery after the 1991 and
          ...
Lags delay recovery
Im m ediate and
   s us tained
    s tim ulus
      efforts




 3 m onth delay




                  ...
Coordination failure
                     Table 7: Economic Stimulus in 2009

                                  As a % of ...
Social protection
   counter-cyclical
• Employment crucial for incomes, esp. for
  domestic demand, poverty reduction,
  m...
Social spending
   low priority (11%)
                                     Tax Cuts, 21.5




 Other Spending, 39.8



   ...
Financing for Development
 • FfD process Member State --
   esp. MICs -- driven from outset
 • Post-Asian (1997-98) crisis...
Monterrey Consensus
 • 6 chapters:
 1. domestic resource mobilization,
 2. K flows, 3. Trade, 4. ODA, 5. Debt,
 6. Systemi...
Domestic resource mobilization
• Experience: Savings rate follows,
     does not lead investment rate
• Governance indicat...
Capital flows 1
• Financial globalization
      instability rises, growth slower
     1 Net flows from South to North
   ...
Net transfer of financial
resources from South to North

                          200

                            0

   ...
Capital flows 2
• FDI, 1990s: brown-field M&As (>80%)
     > green-field FDI (2000 WIR)
• Remember: FDI generally follows,...
Trade
• Terms of trade:
    1 Prebisch-Singer
    2 Lewis
    3 manufactures
• WTO: trade liberalization end in itself,
  ...
Aid for trade

 1. compensation (lost revenue,
        productive/X capacities)
 2. new capacity + capability
        deve...
ODA 1
• Aid: no +ve effect on devt?
     Not if take out politically driven aid
• WB IEG on no conditionality
    reductio...
ODA 2
• ODA: development aid or ‘welfare
           colonialism’?
• Aid should focus on productive sectors
     for growth...
Debt sustainability
• Debt necessary for, but also
  obstacle to development
• HIPC limited success –
  acknowledge, but w...
Systemic issues
• BWIs governance democratic deficit –
    modest shift in IMF voting rights;
• WB – development bank -- g...
Systemic issues 2
• Significant interest in regional monetary
     and financial cooperation, but modest
• Recent consensu...
Emerging issues
• Innovative sources of financing: currency
     transaction (Tobin) tax; airline tax
• Aid for trade
• Fi...
• North/South asymmetry in international
  development cooperation negotiations,
  including FfD
• North development minis...
• 2005 Summit: Ecosoc reform (AMR, DCF)
• 2008: series of events building up to
     Doha (DCF, Accra, MDGs, G20)
• Recent...
Constraints on developing
   country responses
• IMF fiscal requirement for stimulus
• IMF claims developing countries lik...
International responses
• UN, BIS forecasts more accurate than others;
     IMF, WB upbeat till late 2008
• IMF, WB also m...
New Bretton Woods
moment?
Bretton Woods, 1944: United Nations
  conference on monetary and financial
  affairs
• 15 years ...
UN leadership?
• Universal, legitimate  lead reform
  process?
• Ensure comprehensive systemic reform
• Ensure developmen...
Thank you
Please visit UN-DESA www.un.org
  G24 www.g24.org and PGA
  www.un.org/ga/president/63/ websites
• Research pape...
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Financing For Development

  1. 1. Financing for Development Following The Global Economic Crisis Commonwealth Secretariat, London 6 July 2009
  2. 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: growth, stability? • Most developing countries innocent victims • Policy responses: inadequate; double standards • International cooperation: G7, G20, UN
  3. 3. Globalization: finance>trade 180 350 As percent of GDP, indices 1980=100 160 300 140 250 US$ Trillions 120 100 200 80 150 60 100 40 50 20 0 0 1980 1990 1995 2000 2006 Global financial assets Global merchandise trade (Global financial assets as a percentage of GDP (right axis 3 (Global merchandise trade as a percentage of GDP (right axis
  4. 4. Finance-investment nexus? 0.30 0.25 Gross Fixed Capital Formation 0.20 0.15 Gross Financial Investment Abroad 0.10 0.05 0.00 4 70 74 76 80 82 84 86 88 90 92 94 98 00 04 06 72 78 96 02 19 19 20 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20
  5. 5. 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
  6. 6. 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
  7. 7. 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 7  Growth, employment declines globally
  8. 8. 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  lower prices, output  lower employment, incomes
  9. 9. 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 9 collapse; fiscal space also disappearing
  10. 10. Globalization: Parallel fates 8 Developing 6 countries World 4 2 Developed countries 0 -2 Preliminary, revised forecast -4 10 2003 2004 2005 2006 2007 2008 2009 (P)
  11. 11. Synchronous growth: The US, transition & developing economies 9 7.9 8 7.6 7.5 7.2 7.1 7 6.9 6.6 6.5 6 5.7 5.7 5.4 5.1 5 4.5 3.8 3.7 3.9 3.9 4 3.5 3.2 3.3 3 2.8 2.5 2 1.6 1 0.8 0 1999 2000 2001 2002 2003 2004 2005 2006b 11 US Ec. in Transition Developing Ec.
  12. 12. World economy in recession, recovery uncertain 5 4.0 3.9 4 3.9 3.5 3 Optimistic 2.7 2.1 2 1.6 1 0 Pessimistic 2003 2004 2005 2006 2007 2008 2009 2010 -1 -2 -2.6 -3
  13. 13. Recession in most developed economies 6 4.0 4 2 1.5 1.5 GDP growth rate, % 1.1 1.0 0.4 0.7 0.0 -0.1 0 -0.6 -0.4 -1.1 -2 -1.7 -4 -3.5 -3.7 -6 -7.1 -8 USA Japan EU15 NewEU 13 2008 2009 2010 Baseline 2010 Pessimistic scenario
  14. 14. Transition economies too 8 6 5.4 4.2 4 GDP growth rate, % 2 1.0 1.5 0 -0.3 -0.6 -2 -1.9 -4 -6 -5.4 South-eastern Europe CIS 14 2008 2009 2010 Baseline 2010 Pessimistic scenario
  15. 15. Growth slowed in all developing countries 8 6.8 7 6.1 6 5.4 5.6 5.4 4.9 5 4.5 GDP growth rate, % 4.3 4.1 4.0 4.0 3.9 4 3.0 3.1 2.9 3 2 1.7 1.7 2 1.4 0.9 1 0 -1 -0.7 -0.7 -1.1 -2 -1.8 -3 Developing Africa East Asia South Asia Western Latin countries Asia America 15 2008 2009 2010 Baseline 2010 Pessimistic scenario
  16. 16. Growth by main country groups P r c p GDP e a ita C ng in ha e g w ra ro th te g w ra ro th te 2004 2009/ 2009/ -07 2008 2009 2008 2004-7 W rld o 2.6 0.9 -3.4 -4.3 -6.0 De lo e ve p d eo m s c no ie 2.1 0.3 -4.1 -4.4 -6.1 Ec no ie in o ms tra itio ns n 7.7 5.5 -2.6 -8.1 -10.2 De lo ing ve p eo m s c no ie 5.7 4.0 0.1 -3.9 -5.6 LDCs 5.2 3.6 0.3 -3.3 -4.9
  17. 17. Growth by main regional groups P r c p GDP g w ra e a ita ro th te C ng in g w ra ha e ro th te 2009/ 2009/ 2004-07 2008 2009 2008 2004-7 World 2.6 0.9 -3.4 -4.3 -6.0 Developed economies 2.1 0.3 -4.1 -4.4 -6.1 USA 1.6 0.1 -4.4 -4.6 -6.0 Jp n aa 2 .1 -0.6 -5.9 -5.3 -8.0 Eu p a Unio ro e n n 2 .4 0.7 -3.4 -4.1 -5.8 Economies in transition 7.7 5.5 -2.6 -8.1 -10.2 Developing economies 5.7 4.0 0.1 -3.9 -5.6 Africa 3 .4 2.5 -1.0 -3.5 -4.4 No Afric rth a 3 .6 3.6 1.4 -2.3 -2.2 S -S ha n Afric ub a ra a 3 .6 2.2 -1.9 -4.1 -5.5 Ea t a S uth As s nd o ia 7 .3 5.0 1.8 -3.2 -5.5 Ea t As s ia 7 .8 5.3 1.8 -3.5 -6.0 S u As o th ia 6 .5 4.9 2.6 -2.4 -3.9 W s As e t ia 3 .7 2.6 -1.2 -3.8 -5.0 La Am ric + C rib e n tin e a a ba 4 .0 2.7 -3.0 -5.8 -7.0 LDCs 5.2 3.6 0.3 -3.3 -4.9 LDCs excl. Bangladesh 5.4 3.4 -0.6 -3.9 -6.0
  18. 18. Regional GDP growth rates in PPP terms, 2007-2010  2007  2008  2009  2010 Advanced European Emerging Sub- Central & Middle East World Economies Union & Saharan Eastern Developing Africa Europe Economies Note: The IMF World Economic Outlook classification of the Middle East region includes Egypt, Iran, and Libya. Source: IMF, World Economic Outlook Update, January, 2009.
  19. 19. Recent African growth over
  20. 20. 60 developing countries will see declining incomes in 2009 70 60 Developed countries 60 Economies in transition 50 Developing countries 40 33 30 22 18 20 14 12 13 10 1 2 0 2008 2009 2010
  21. 21. Strong US demand lifted developing country exports 400 350 300 250 200 [ Billion $ dollars base 2000 ] 150 100 50 0 -50 -100 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Domestic demand in the US (1st difference) Manufact. exports from the developing world (1st difference) 21 ÷>
  22. 22. Manufacturing demand supported high primary commodity prices 500 1.8 Price index relative to price of manufact. 450 1.6 [Billion $ dollars base 2000] 400 1.4 350 1.2 300 1.0 250 0.8 200 0.6 150 100 0.4 50 0.2 0 0.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 External balance primary exporters Manufactured exports from the developing world (1st difference) Price of energy (relative to manufactures). RHS 22 Price of raw materials & food (relative to manufactures). RHS
  23. 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 23
  24. 24. Oil prices roller-coaster 160 Nominal price 140 Real price 120 100 $ per barrel 80 60 40 20 0 24 2002 2003 2004 2005 2006 2007 2008
  25. 25. Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Monthly Crude Oil Prices ($/barrel) Jan-09
  26. 26. Non-oil commodity prices U.S. dollars 450 400 350 300 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 26
  27. 27. Index 2000 = 100 100 150 200 250 300 350 400 450 500 550 Jan-07 Mar-07 May-07 Wheat Jul-07 Sep-07 Maize Nov-07 Jan-08 World food prices Rice Mar-08 May-08 declining after spikes Jul-08 Sep-08 27 Nov-08
  28. 28. Food prices will remain higher 35 0 30 0 25 0 20 0 15 0 10 0 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Wheat Maize Rice
  29. 29. World trade collapsing 12 10.9 9.2 7.7 8 6.6 4.1 4 2.4 Annual percentage change 0.5 0 2004 2005 2006 2007 2008 2009 2010 -4 -8 -12 29 -11.1
  30. 30. Trade collapse consensus 10.0 6.0 5.0 2.2 0.0 % change -5.0 -10.0 -9.0 -13.2 -15.0 WTO OECD 2007 2008 2009 Forecasts
  31. 31. South exports fall more (volume index, 1998 = 100) 280 Develop ing and other non-OECD 260 country exports 240 220 200 W orld trade 180 160 OECD country exports 140 120 100 2 0 11 20 11 20 11 2 0 M9 20 M9 20 7 1 20 1 20 5 20 1 20 5 20 1 20 3 20 3 20 7 20 7 20 3 20 5 20 M9 M M M M M M M M M M M M M M M M S urc : C B o e P 06 06 06 07 08 07 08 06 07 07 08 08 09 06 07 08 06 07 08 20
  32. 32. African export growth over
  33. 33. Agricultural prices rose + fell Source: THE-Ambrosetti based on IMF data; January 2000 = 100; f = forecast
  34. 34. Oil, metal prices more
  35. 35. Global imbalances narrow with deflation 600 United States 400 Japan 200 Billion US$ 0 European Union -200 -400 Developing countries (excl -600 China) and EiT -800 China 35 2004 2005 2006 2007 2008 2009
  36. 36. 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 36
  37. 37. 90 105 120 135 Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Yen/US$ Oct 05 Jan 06 Apr 06 Jul 06 Euro/US$ Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Dollar volatility continues Oct 08 Jan 09 Apr 09 0.60 0.70 0.80 0.90
  38. 38. Capital inflows contract 750 $ Billions 500 250 0 2005 2006 2007 2008 2009*
  39. 39. Share of global FDI
  40. 40. Credit crunch continues Percentage of lenders tightening standards, by size of enterprise seeking loans Panel A: United States Panel B: European Union 100 80 Large and M edi um Smal l 80 Small & Medium Large 60 60 40 40 20 20 0 -20 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2006 2007 2008 2006 2007 2008
  41. 41. Borrowing costs 10 remain high Africa Asia 8 Latin America Europe 6 4 2 0
  42. 42. Aid flows unreliable 8% LDCs 7% 6% 5% 4% Sub-Saharan Africa 3% 2% Other LICs 1% 0% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
  43. 43. Net Aid Transfer? • 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, DRC received $5.4bn in ODA in 2003, but only $400m. in NAT
  44. 44. Livelihoods threatened • Declining living standards • Many livelihoods under threat, especially when social protection not well-developed • Migrant workers especially vulnerable • Prolonged slowdown in world economy likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth
  45. 45. Remittances to developing countries, 2008-2010 300 2008 260 250 239 238 2009 (billions of US dollar s) 200 2010 150 100 45 41 42 50 0 Low-income countrie s Middle-income countries
  46. 46. 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 46
  47. 47. 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 47
  48. 48. Finance 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 48
  49. 49. Why stimulus? • 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 49
  50. 50. Global recovery with coordinated vs uncoordinated stimuli, 2010-2015
  51. 51. Social impacts • ILO: >200 m. more working poor • ILO: Unemployment to rise by 51m • ILO projections based on IMF 0811 • MDGs, IADGs, social spending at risk • Rising social unrest • US intelligence report: crisis -- greatest security risk
  52. 52. Poverty reduction set back Slowdown in poverty reduction compared with pre-crisis growth Total 73 – 103 million Africa 12 – 16 million East and South Asia 56 – 80 million Latin America and ~ 4 million Caribbean
  53. 53. Extreme poverty worsens C ng in e m p ve (< $ 5 a ha e xtre e o rty 1.2 /d y) No. of Poor Change in poverty ’ /‘ -’ 0 0 0 9 4 7 ’ /‘ 0 0 9 8 ’ /‘ -’ 0 0 0 9 4 7 ’ /‘ 0 0 9 8 Transition economies 0.6 0.6 0.3% 0.3% Developing economies 111.1 73.5 1.8% 1.2% Africa 5.9 4.2 1.2% 0 % .9 No Afric rth a 0.1 0.1 0.1% 0.1% S -S ha n Afric ub a ra a 5.8 4.1 1.6% 1.1% Ea t a S uth As s nd o ia 101.0 6 .6 5 2 % .0 1.3% Ea t As s ia 16.2 27.5 0 % .8 1.3% S uth As o ia 8 .2 4 37.8 3 % .0 1.3% W s As e t ia 0.6 0.2 0 % .5 0 % .2 LAC 4.1 3.7 0.7% 0.7%
  54. 54. 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 maintenance55
  55. 55. Output, jobs recovery lags, 1991, 2001 Duration of output recovery and job market recovery after the 1991 and 2001 US recessions (in months) 60 1991 2001 50 40 30 20 10 0 Output Job market recovery
  56. 56. Lags delay recovery Im m ediate and s us tained s tim ulus efforts 3 m onth delay Q2 0 Q3 Q4 2 Q1 Q2 4 Q3 Q4 6 Q1 Q2 8
  57. 57. Coordination failure Table 7: Economic Stimulus in 2009 As a % of GDP As a % of World GDP Total 1.7 1.4 Advanced Economies 1.3 - Developing & Emerging Economies 2.7 -
  58. 58. 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 maintenance59
  59. 59. Social spending low priority (11%) Tax Cuts, 21.5 Other Spending, 39.8 Transfers to Low Income, 9.2 Employment Measures, 1.8 Infrastructure Spending, 27.8
  60. 60. Financing for Development • FfD process Member State -- esp. MICs -- driven from outset • Post-Asian (1997-98) crisis, post-9/11 ‘special moment’  • Doha Round, • Monterrey Consensus settled early
  61. 61. Monterrey Consensus • 6 chapters: 1. domestic resource mobilization, 2. K flows, 3. Trade, 4. ODA, 5. Debt, 6. Systemic issues Recent developments, new knowledge  new understanding  update/revise Consensus OR become irrelevant
  62. 62. Domestic resource mobilization • Experience: Savings rate follows, does not lead investment rate • Governance indicators – foreign perceptions (e.g. corruption) • Experience: development improves governance, not vice versa • But need developmental (‘good enough’) governance for development • Enhance international tax cooperation (‘beggar my neighbour’ tax competition)
  63. 63. Capital flows 1 • Financial globalization  instability rises, growth slower 1 Net flows from South to North 2 Costs not lower 3 Instability increase • When net inflows, 1 asset price bubbles 2 consumer binges 3 ‘over-investment’
  64. 64. Net transfer of financial resources from South to North 200 0 -200 Billions of US dollars -400 -600 -800 -1000 Developing economies Africa Eastern and Southern Asia Western Asia Latin America
  65. 65. Capital flows 2 • FDI, 1990s: brown-field M&As (>80%) > green-field FDI (2000 WIR) • Remember: FDI generally follows, does not lead domestic investment • In LDCs, mainly for resource, esp. mineral, extraction; limited positive externalities • Sovereign wealth funds: – recent political scrutiny, discrimination; – double standards
  66. 66. Trade • Terms of trade: 1 Prebisch-Singer 2 Lewis 3 manufactures • WTO: trade liberalization end in itself, despite ‘development round’ rhetoric • contrast ITO 1948 Havana Charter (trade reform for growth, employment)
  67. 67. Aid for trade 1. compensation (lost revenue, productive/X capacities) 2. new capacity + capability development (‘dynamic’ comparative advantage not automatic)
  68. 68. ODA 1 • Aid: no +ve effect on devt? Not if take out politically driven aid • WB IEG on no conditionality reduction due to ‘bunching’ • ODA system ‘incoherence’  national ownership impossible; higher transaction costs; burdensome  formula for failure  fatigue, disillusionment • Additional: aid for trade, climate change adaptation
  69. 69. ODA 2 • ODA: development aid or ‘welfare colonialism’? • Aid should focus on productive sectors for growth, employment • respect national ownership; eliminate conditionalities (Accra AA silent) • DCF: must independently complement DAC processes and accommodate creative tensions or risk irrelevance by being DAC footnote; • need to be forum/site for debates to advance development
  70. 70. Debt sustainability • Debt necessary for, but also obstacle to development • HIPC limited success – acknowledge, but what next? • ‘New donors’, ‘free rider’ issues • SDRM: do not throw baby out with [Krueger] bathwater
  71. 71. Systemic issues • BWIs governance democratic deficit – modest shift in IMF voting rights; • WB – development bank -- governance reform considerations should be different • ‘double majority’? • International financial architecture? No real movement since Asian crisis except for Financial Stability Forum, G20
  72. 72. Systemic issues 2 • Significant interest in regional monetary and financial cooperation, but modest • Recent consensus on need for systemic reform • Current crisis creates conditions for reform (but G7/G20, OECD not leading) • however, emphasis still crisis management, recovery, macro coordination • Reform: multilateral? regulation? inclusive? • Regulatory reform not necessarily developmental, e.g. Basel rules.
  73. 73. Emerging issues • Innovative sources of financing: currency transaction (Tobin) tax; airline tax • Aid for trade • Financing climate change mitigation and adaptation: * (historical and contemporary) equity issues * efficacy of carbon trading * new World Bank financing instruments * deforestation mitigation compensation
  74. 74. • North/South asymmetry in international development cooperation negotiations, including FfD • North development ministries’ ODA focus; macro, trade policies by other ministries • South govts’ planning/finance ministries  different concerns, priorities • Planning ministries: more holistic, all IADGs, not just MDG welfare indicators • Finance min: macro-financial focus, including aid predictability, debt sustainability, etc
  75. 75. • 2005 Summit: Ecosoc reform (AMR, DCF) • 2008: series of events building up to Doha (DCF, Accra, MDGs, G20) • Recent developments, new knowledge  new understanding  enhance Monterrey • UN: FfD process needs to be augmented or updated; if not, risk irrelevance Need: • greater international tax cooperation, • more effective FfD follow-up mechanism • new international financial architecture
  76. 76. Constraints on developing country responses • IMF fiscal requirement for stimulus • IMF claims developing countries likely to fail • Policy -- including 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 77
  77. 77. International 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-, but not developmental or equitable • PGA (Stiglitz) Commission of Experts • Doha Declaration: June 09 summit on impact of crisis on developing countries
  78. 78. New Bretton Woods moment? Bretton Woods, 1944: United Nations conference on monetary and financial affairs • 15 years after 1929 Depression • Middle of WW2 • US initiative vs UK Treasury stance • 44 countries (28 developing countries; 19 LA) • IMF, IBRD, ITO – UN system • Clear emphasis on sustaining growth, employment creation, development, not just financial stability
  79. 79. UN leadership? • Universal, legitimate  lead reform process? • Ensure comprehensive systemic reform • Ensure developmental financial system • Ensure inclusive financial system • Develop capacity for offering 2nd opinion to interested member states • Align IMF, WB with UNDA (including FfD), IADGs to ensure policy coherence
  80. 80. Thank you Please visit UN-DESA www.un.org G24 www.g24.org and PGA www.un.org/ga/president/63/ websites • Research papers • Policy briefs • Other documents Acknowledgements: UN-DESA, ILO, ESCWA 81
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