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The impacts of the international crises on the economies of the LDCs GIOVANNI VALENSISI UNCTAD - Division for Africa, Least Developed Countries and Special Programmes Short courses for delegates, Geneva, 6 July 2012 Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission and factors of resilience • Key policy lessons Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission and factors of resilience • Key policy lessons Growth rate of real GDP per capita (const 2005 USD) 8 6 4 2 20 10 20 08 20 06 20 04 20 02 20 00 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 -2 19 82 0 19 80 LDCs witnessed a significant growth acceleration during the early and mid 2000s. -4 -6 Developed economies Developing economies excluding LDCs LDCs Number of LDCs with negative real GDP growth in each year 16 14 12 10 8 6 4 2 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 0 Though in general oil & mineral exporters benefited disproportionately, growth resumption was relatively broad-based. Real GDP per capita in LDCs relative to other country groups (const. 2005 USD) 2.5% 45% 40% 2.0% 35% 30% 1.5% 25% 20% 1.0% 15% 10% 0.5% 5% 0.0% 0% 70 9 72 9 74 9 76 9 78 9 80 9 82 9 84 9 86 9 88 9 90 9 92 9 94 9 96 9 98 0 00 0 02 0 04 0 06 0 08 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 Developed economies Developing economies excl. LDCs (right scale) Nonetheless, in spite of rapid and relatively stable growth in the 2000s, still LONG-TERM INCOME DIVERGENCE. Even during the boom, LDCs continued to play a marginal role in the world economy. In 2009 • 12% of world population; • 0.9% of world GDP • 1% of world merchandise exports (0.6% excl. oil) • 2.5% of world FDI During the boom period (2000-2008) 13 LDCs, as well as the LDCs as a group achieved the BPOA target of 7% GDP growth. Afghanistan Laos Angola Mozambique Bhutan Myanmar Cambodia Rwanda Chad Sierra Leone Equatorial Guinea Sudan Ethiopia Further, 11 LDCs achieved the BPOA target of 25% investment-toGDP ratio. Bhutan Lesotho Chad Mauritania Equatorial Guinea Sao Tome & Principe Guinea Timor-Leste Kiribati Tuvalu Laos LDCs' economic boom in the 2000s was largely underpinned by external factors, above all the expansion of international trade and high commodities prices. Volume indices of exports (2000=100) Terms of trade (2000=100) 200 250 180 160 200 140 120 150 100 80 100 60 40 50 20 0 0 2000 2001 2002 2003 2004 LDCs: Africa and Haiti 2005 2006 LDCs: Asia 2007 2008 2009 LDCs: Islands 2010 2000 2001 2002 2003 2004 LDCs: Africa and Haiti 2005 2006 LDCs: Asia 2007 2008 2009 LDCs: Islands The pace of export boom has been paralleled and even surpassed by the rise in imports volumes. 2010 The boom was also underpinned by a significant, though unevenly distributed, surge in external financing (including inter alia debt relief). Capital flows to LDCs (million current USD) 100'000 90'000 80'000 70'000 60'000 50'000 40'000 30'000 20'000 10'000 Remittances inflows ODA net disbursements (excl. Debt relief) 20 10 20 08 20 06 20 04 20 02 20 00 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 0 FDI inflows ODA remains the main source of external finance for LDCs. CAPITAL ACCUMULATION LDCs excluding oil exporters All LDCs 25 25 20 20 15 15 10 10 5 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Domestic savings as % of GDP Gross fixed capital formation as % of GDP 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Gross domestic savings as % of GDP Gross fixed capital formation as % of GDP • Investment rose slightly to 21% of GDP, but is still significantly lower than in other developing countries (26% of GDP); • Except in oil exporters, capital accumulation was increasingly dependent on external resources. Composition of output (% share of GDP, period average) 70 60 50 40 30 20 10 0 2000-2002 2006-2008 2000-2002 2006-2008 2000-2002 2006-2008 2000-2002 2006-2008 Agriculture LDCs total • • • Manufacturing LDCs: Africa and Haiti Industry, excl. Manufacturing LDCs: Asia Services LDCs: Islands Agricultural stagnation (esp. in African LDCs); De-industrialization in 27 LDCs; Inability to generate productive employment outside agriculture. 225'000 200'000 175'000 150'000 125'000 100'000 75'000 50'000 25'000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Food and agricultural raw material (SITC 0 + 1 + 2 + 4, less 27 and 28) Ores, metals and precious stones (SITC 27 + 28 + 667 + 68 + 971) Fuels (SITC 3) Manufactured goods (SITC 5 to 8 less 667 and 68) Other goods not elsewhere specified Services Double-digit growth rates for all products, though fuels eroded the weight of all other categories and stand now at ≈ 50% of the total. Fuels & minerals pulled the exports boom in many fast-growing LDCs. Manufactures played subdued role except in Bangladesh, Cambodia, and some small ec. (Bhutan, Gambia, Lesotho). • • Increasing concentration of exports and primary commodity dependence; Widening import bill for sensitive products (→ food and fuel crisis in 2008). Economic growth has been accompanied by some improvements in LDCs macroeconomic fundamentals (esp. lower inflation, better business environment). In most cases, however, growth contributed only weakly to the development of LDCs’ productive capacities. LDCs’ economic performance during the 2000s is “best understood in terms of boom-bust cycle which have been typical of their development experience over the long term”. (LDCR 2010) Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission and factors of resilience • Key policy lessons Agriculture value added per worker (constant 2000 US$) 900 30'000 800 25'000 700 600 20'000 500 15'000 400 300 10'000 200 5'000 100 0 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 0 LDCs (left scale) Middle-income countries (left scale) High-income countries (right scale) Growth did not reverse AGRICULTURAL STAGNATION! Yet, the agricultural sector employs 60% of L force in the LDCs, and is crucial for poverty 1990 LDC population doubled since 1980 and is forecasted to double once more by 2050. Young population structure and the youth bulge is expected to persist over the medium-term (by 2015 in 27 LDCs >40% of pop. will be below 15). Youth are also increasingly educated (primary enrolment ↑ to 80%, and secondary enrolment to 31% in 2009). Growing pressure on the L market, and natural resources. 2000 +60 +60 50-59 50-59 40-49 40-49 30-39 30-39 20-29 20-29 10-19 10-19 0-9 0-9 40 30 20 10 0 Women 10 20 30 40 40 30 Men +60 50-59 50-59 40-49 40-49 30-39 30-39 20-29 20-29 10-19 10-19 0-9 0-9 20 10 0 Women 0 10 20 30 40 30 40 Men 2015 (forecast) +60 30 10 Women 2008 40 20 10 Men 20 30 40 40 30 20 10 0 Women 10 20 Men The pattern of growth and structural change had only weak effects for poverty reduction. In 2007 53% of the population was living on less than 1.25 $ a day (59% in 2000). The number of extreme poor increased even during the boom. In spite of the “new bottom billion” narrative, given current trends over time LDCs will become the major locus of extreme poverty in the world. Monthly price indexes for various commodities (2000=100) 500 450 400 350 300 250 200 150 100 50 Ja n2 00 0 Ju l2 00 0 Ja n2 00 1 Ju l2 00 1 Ja n2 00 2 Ju l2 00 2 Ja n2 00 3 Ju l2 00 3 Ja n2 00 4 Ju l2 00 4 Ja n2 00 5 Ju l2 00 5 Ja n2 00 6 Ju l2 00 6 Ja n2 00 7 Ju l2 00 7 Ja n2 00 8 Ju l2 00 8 Ja n2 00 9 Ju l2 00 9 Ja n2 01 0 0 Food and tropical beverages Vegetable oilseeds and oil Minerals, ores and metals Crude petroleum Agricultural raw materials No evidence of declining volatility On the long term, greater correlation across commodities Some evidence of asymmetric pass-through LDC import bill for food and fuels 60'000 USD million 50'000 40'000 30'000 20'000 10'000 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 0 All food items Fuels Absent a meaningful supply response, the rise in prices has led to a mounting import bill (four-fold increase) New elements: commodity financializatioin, bio-fuels. THE GREAT RECESSION OF 2009 LDCs severely affected by the 2008 food & fuel crisis, but far from the epicenter of the financial crisis (→ shallow financial integration) In general, LDCs suffered sharp growth slowdown due to the fallout of the global recession (in 2009 GDP growth ≈ 3% lower than in 2000-2007) Heterogeneous impact according to structural conditions (in over 1/3 of the 49 LDCs the slowdown was > 6%, while there was no slowdown in other 15 of them); Oil exporters and most Island LDCs were the worst hit. Real GDP growth ( const. 2005 USD) 10 LDCs faced a growth slowdown of 3%, less than ODC, but also had a weaker recovery. 8 6 4 2 0 2006 2007 2008 2009 2010 -2 -4 -6 Developed economies Developing economies excluding LDCs LDCs 25 31 LDCs suffered growth slowdown, of which 4 had open recession. Real GDP growth rate 2009-2010 20 15 Ethiopia 10 Myanmar Timor Leste Malawi 5 Rwanda Gambia Liberia Guinea Bissau TogoBurundi Burkina Faso Sierra Leone Angola Uganda Mauritania Eritrea Cambodia Central African Republic Tuvalu Chad 0 Guinea Samoa -5 0 -Haiti 5 Madagascar 10 Afghanistan Equatorial Guinea 15 -Kiribati -5 Real GDP growth rate 2000-2008 20 25 However GDP p.c. fell in 16 LDCs in 2009, & in 10 LDCs in 2010. Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission & factors of resilience • Key policy lessons CHANNELS OF TRANSMISSION TO LDCs Direct financial contagion has been sometimes acute (esp. where foreign actors played a big role), but relatively circumscribed due to LDCs shallow financial mkt. Main channel of transmission to LDCs has been the fallout of the global recession: A. TRADE SHOCK (world AD ↓, terms of trade?) B. FDI inflows ↓ & profit repatriation ↑, except in countries where developing partners invested heavily C. REMITTANCES mostly ↓ D. PUBLIC REVENUES ↓ 2008-2009 export shock, volume and price effects -80% TRADE SHOCK (1) LDCs’ export revenues plummeted by 26% in 2009. Price movements hit hard commodities exporters, esp. oil & minerals AD conditions penalized the majority of LDCs, but export composition and trade partners mattered -60% -40% -20% 0% 20% Af ghanistan Angola Bangladesh Benin Bhutan Burkina Faso Burundi Cambodia Central Af rican Rep. Chad Comoros Dem. Rep. of Congo Djibouti Equatorial Guinea Eritrea Ethiopia Gambia Guinea Guinea-Bissau Haiti Kiribati Lao People's Dem. Rep. Lesotho Liberia Madagascar Malawi Maldives Mali Mauritania Mozambique Myanmar Nepal Niger Rwanda Samoa Sao Tome and Principe Senegal Sierra Leone Solomon Islands Somalia Sudan Togo Uganda United Rep. of Tanzania Vanuatu Yemen Zambia LDC median LDC weighted average % change in export volumes % change in unit value of export 40% South-South trade and the 2009 shock to LDCs exports TRADE SHOCK (2) Volume indices of exports (% change 20082009) 40% S-S trade proved more resilient 30% 20% 10% 0% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% -20% -30% y = 0.2699x - 0.1739 R2 = 0.1612 -40% -50% -60% -70% Share of South-South m erchandise exports in 2008 Mineral commodity dependence and the 2009 shock to LDCs exports Unit value of exports (% change 2008-2009) 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% -10% -20% -30% y = -0.2941x + 0.0021 R2 = 0.6153 -40% Share of fuels and minerals in total merchandise exports in 2008 90% 100% Heightened commodity dependence proved to be a risk factor 100% Terms of trade and import compression 2008-2009 -40% TRADE SHOCK (3) Terms of trade movements penalized commodities exporters, but “benefitted” net importers Reduction in import volumes were avoided in most LDCs, with oil exporters and Island LDCs being the exception -20% 0% 20% 40% Af ghanistan Angola Bangladesh Benin Bhutan Burkina Faso Burundi Cambodia Central Af rican Rep. Chad Comoros Dem. Rep. of Congo Djibouti Equatorial Guinea Eritrea Ethiopia Gambia Guinea Guinea-Bissau Haiti Kiribati Lao People's Dem. Rep. Lesotho Liberia Madagascar Malawi Maldives Mali Mauritania Mozambique Myanmar Nepal Niger Rwanda Samoa Sao Tome and Principe Senegal Sierra Leone Solomon Islands Somalia Sudan Togo Uganda United Rep. of Tanzania Vanuatu Yemen Zambia LDC median LDC weighted average % change in import volumes % change in terms of trade 60% DECLINE IN FDI FDI inflows fell from 32 bln. in 2008 to $28 bln. in 2009, & have not yet recovered. Significant decline, albeit lower than in other regions. Some mostly small countries saw rising FDI even in 2009 (China effect?). FDI mostly natural-resourceseeking, except in Island LDCs. Change in FDI inflows (2008-2009) Nepal Equatorial Guinea Guinea-Bissau Solomon Islands Eritrea Togo Chad Liberia Mozambique Niger Haiti Burkina Faso Bhutan Comoros Sudan Rwanda Myanmar Kiribati São Tomé and Principe Zambia Uganda Tanzania Lesotho Ethiopia Vanuatu Maldives Angola Senegal LDC tot Burundi Laos Gambia Bangladesh Cambodia Sierra Leone Afghanistan Mali Congo, Dem. Rep. of Benin Timor-Leste Madagascar Djibouti Guinea Central African Rep. Malawi Samoa Yemen Mauritania -24% -150% -100% -50% 0% 50% 100% 150% Remittances proved somewhat more resilient, but still fell in the large majority of LDCs. Inflows to big Asian recipients grew even in 2009, though at a lower rate (destination matters). Remittances as share of GDP in 2008 30% -25% Lesotho Samoa 25% Nepal Haiti 20% 15% Bangladesh Togo Senegal Gambia10% Sierra Leone Liberia 5% Uganda Ethiopia 0% -20% -15% -10% -5% 0% 5% 10% 15% 20% Expected percentage change in remittances 2008-2009 25% FISCAL IMPACT AND POLICY RESPONSES Gov. revenues fell (as % of GDP) in about half of African LDCs, esp. due to ↓ mineral-related revenues and duties. Expenditure rose on average by ≈2% of GDP, but fiscal policy contained procyclical elements in more than 1/3 of the countries considered. Several LDCs incurred additional debt to cope with the crisis; meanwhile debt vulnerabilities remain a serious concern (10 LDCs in debt distress & other 10 at high risk). INTERNATIONAL POLICY RESPONSES In both 2008 and 2009, the World Bank, IMF and regional development banks increased their lending significantly to the LDCs. Although the bulk of its intervention in the aftermath of the crisis benefited MIC, IMF financing to LDCs also increased from SDR 1,089 million in 2005–2007 to SDR 2,691 million in the period 2008–2010. Surveys of lending agreements concluded with the IMF during the global recession show that there has been very little fundamental change with respect to the use of procyclical conditionalities. Macroeconomic factors attenuating the downturn Price movements favoring net importers of food & fuel (i.e. most LDCs) at the trough of the crisis; Timely involvement of multilateral lenders (ex. Zambia, Dem. Rep. Congo); Pickup of commodity prices since Q2 of 2009 Mothly price indices for primary commodities (2000=100) 500 450 400 350 300 250 200 Current deficits actually shrunk in most LDCs except oil exporters in 2009 150 100 50 0 Food and tropical beverages Agricultural raw materials Crude petroleum Vegetable oilseeds and oil Minerals, ores and metals Considerable downside risks remain LDCs’ rebound ultimately depends on world recovery, which is still uneven and fragile (European periphery). Debt vulnerabilities remain a serious concern for LDCs (10 LDCs in debt distress and other 10 at high risk), and several LDCs incurred additional debt to cope with the crisis. Prospects for future ODA flows are uncertain/pessimistic as traditional donor strive to restore government balances. The recent spikes in food prices put pressure on LDCs balance of payments, & threaten to trigger another food crisis. Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission and factors of resilience • Key policy lessons KEY LESSONS FROM THE DOWNTURN Sound fundamentals are necessary, but without development of productive capacities you remain prone to shocks. Regional integration and export diversification were useful in containing the impact of the downturn on export sectors (ex. East Africa). Timely policy responses were critical, but LDCs often lack resources to adopt countercyclical policies → domestic resource mobilization. KEY LESSONS FROM THE DOWNTURN Agricultural modernization is essential to improve the food security outlook in LDCs, and alleviate the pressure on the BoP. Proactive policies are crucial for LDCs to achieve economic diversification. The social impact of the crises can be long-lasting, as many “survival strategies” poor households put in place affect their long-term well-being. 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