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The Global Crisis: Implications for Developing Countries AN OECD DEVELOPMENT CENTRE’S PERSPECTIVE Guillaume Grosso Chief Operating Officer Policy Counsellor OECD Development Centre World Civic Forum 7 May 2009, Seoul The Global Crisis: Implications for Developing Countries Outline • The crisis contagion Real economic activities and employment Net capital flows • Why are low income countries particularly vulnerable? Heavy dependence on external capital flows Difficulties in sustaining external debt • Shifting wealth, a capacity for resilience? Trade portfolio diversification South-South linkages • Recommendations The crisis contagion Contracting demand in OECD countries will impact real economic activities and employment Emerging economies Singapore’s economy shrunk at an annualised rate of 17% in 2008 Chinese Taipei’s economy may contract by 11% in 2009 India reported a year-on-year trade decline of 15% for October 2008 (Source: The Economist, 2009) Low income countries Ethiopia is vulnerable to a slowdown in international air-traffic (Ethiopian Airlines being one of the country’s main earners of foreign exchange) Cambodia’s textile industry reportedly orders are down 60% Mozambique could be adversely affected by the decline of the automobile industry (Alumina being its leading export) The crisis contagion Net capital flows to emerging economies are estimated to be USD165 billion in 2009 Net capital flows to emerging economies (in USD billion) 1000 900 800 700 600 500 400 82% decrease 300 200 100 0 2007 2008 2009 (Source: Insitute of International Finance) 4 Why are LICs particularly vulnerable? High dependence on external financing Aid budget averages around 9 per cent of Africa’s GDP Aid as an average percentage of net capital flows 2000-06 Developing countries Sub-Saharan Africa Private flows 84.9 38.4 Overseas development aid 19.5 65.4 Other official flows -4.4 -3.9 Total 100.0 100.0 Source: McCulloch (2008) Why are LICs particularly vulnerable? Strong reliance on remittances as a source of foreign exchange reserve Remittances are now larger than commodities as a foreign exchange earner in 28 developing countries. e.g. Sub-Saharan Africa: USD 19 billion for 2008 (Source: WB) Net Capital Flows to Developing Countries, 1980-2006 Source: Authors, based on World Bank and OECD data Why are LICs particularly vulnerable? High share of banking sector in foreign ownership Share of banking assets held by foreign banks with majority ownership, 2006 Country 50-70% Country 70-100% Rwanda 70 Madagascar 100 Côte d'Ivoire 66 Mozambique 100 Tanzania 66 Peru 95 Ghana 65 Mexico 82 Burkina Faso 65 Uganda 80 Niger 59 El Salvador 78 Mali 57 Botswana 77 Zimbabwe 51 Modified from World Bank, Global Development Finance (2008) Why are LICs particularly vulnerable? Dependence on FDI as a major form of capital flow Net flows (in USD billions) to Sub-Saharan Africa,1999-2007 • Global FDI inflows fell by about 21 per cent in 2008 and likely to fall further in 2009. 30 25 • Resource seeking FDI projects could suffer from the decline in world demand and in prices. 20 15 10 • In times of crisis, due to profit remittances, FDI can be an expensive form of financing. 5 0 1999 -5 2000 2001 2002 2003 2004 2005 2006 2007 Net FDI inflows Net portfolio equity inflows Net debt flows official creditors Net debt flows private creditors Source: World Bank, Global Development Finance, 2008 • FDI investors may easily pull out financial resources. (Source: UNCTAD) Why are LICs particularly vulnerable? Increasing difficulties in servicing debt Due to a combination of: Debt service to GDP ratio (%) Madagascar Rwanda Eritrea Mozambique Uganda Ethiopia Togo Niger Nigeria Sudan Sierra Leone Tanzania Burkina Faso Mali Malawi Chad Congo, Rep. Ghana Benin Zambia Mongolia Kenya Senegal Swaziland Cote d'Ivoire Cameroon Guinea Burundi Mauritania Central African R. Sao Tome and P. Gambia, The Comoros Lesotho Congo, Dem. Rep. Guinea-Bissau 10 9 8 7 6 5 4 3 2 1 0 Source: World Bank Global Development Finance (2008) 1) Endogenous debt dynamics: •USD appreciation •Drop in export revenues •Need to increase social spending 2) Debt relief process slow down 3) Closing down of new channels of financing: Sovereign bond issues Shifting wealth, a capacity for resilience ? High degree of openness to international trade risk affecting the current account in times of crisis but portfolio have been diversified Destination of exports in Least Developed Countries, 2006 India, 3% China , 19% others , 29% USA & Canada, 24% EU 25, 20% Japan, 5% Source: UNCTAD Least Developed Countries Report, p. 158 Shifting wealth, a capacity for resilience ? Can South-South linkages compensate for the economic slowdown in the North? Sub-Saharan Africa: Real GDP Growth Correlations – 1980-2007 Rest of the World European Union United States (1) Developing Countries Asia Latin America (1) (1) 0.60 0.32 0.01 0.54 0.30 0.32 Excluding Sub-Saharan Africa Source: IMF, Regional Economic Outlook: Sub-Saharan Africa April 2008 • Correlation of growth rates in SSA with growth rates in Latin America and Asia is just as high as the correlation with its traditional trading partners in Europe • Correlation of growth rates in SSA with growth rates in the US amounts to only 0.01 Recommendations OECD countries must provide effective and coordinated response. • OECD countries must: deliver on pledges of aid efficiency: we should not add an 'aid crisis‘ to the financial crisis The financial crisis should give a new impetus to governments’ efforts to improve aid effectiveness, as set out in the Paris Declaration and the Accra Agenda for Action and allocate aid budgets in a way that is pro-poor. reject trade and investment protectionism preserve innovation as an engine for growth not use the crisis as an excuse to weaken efforts to achieve long term green economic growth and promote clean alternatives • The IMF and the World Bank have put in place facilities to help LICs deal with exogenous shocks. Coordinated and rapid response is needed. Conditionality could potentially still be a problem. • Donor community must prioritize pro-poor public expenditures, social protection and safety nets. Recommendations Developing countries must focus on domestic resource mobilisation. • They must prioritize aid budgets towards pro-poor public expenditures, social protection and safety nets for the most vulnerable people. • They should diversity their trade portfolio to create more South-South linkages. Thank you