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A time of crisis, a time for change Ottawa 19 October 2009 Crisis Unexpected? • • • • • • • • A crisis foretold Unsustainable global imbalances International financial architecture Ideology: deregulation, self-regulation, inadequate and inappropriate regulation capital account liberalization Financial Globalization: No growth, stability Developing countries innocent victims Policy responses: inadequate; double standards International cooperation: G7, G20, UN Global imbalances ballooned USD bn 1000 Latin America Other industrialised 800 Other Asia China 600 Japan 400 Oil exporters 200 0 . -200 -400 United States -600 -800 Euro Area Central and Eastern -1000 3 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Europe Net Capital Importers Capital Importers Turkey 3% Others 20% Greece 3% Italy 3% Australia 3% U.K. 9% Spain 9% U.S. 50% 4 US macro-financial policies • International monetary + financial ‘non-system’ • Prolonged loose macroeconomic policies • Lax financial regulation + policies • Low US savings rate • US over-consumption, E Asian surpluses • US, UK economic hubris Broad Liquidity! 964% of World GDP 138% of World GDP 122% of World GDP 9% of World GDP Derivatives 78% of Total Securitized Debt Broad Money Power Money 11% of Total 10% of Total 1% of Total 6 Globalization: finance>trade 180 350 160 140 250 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 )Global merchandise trade as a percentage of GDP (right axis 7 As percent of GDP, indices 1980=100 300 Finance-investment nexus? 0.30 0.25 Gross Fixed Capital Formation 0.20 0.15 Gross Financial Investment Abroad 0.10 0.05 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 19 78 19 76 19 74 8 19 72 19 70 0.00 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 Net transfer of financial resources from South to North 200 Billions of US dollars 0 -200 -400 -600 -800 -1000 Developing economies Africa Eastern and Southern Asia Western Asia Latin America 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 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 collapse; fiscal space also disappearing 12 Capital inflows contract $ Billions 750 500 250 0 2005 2006 2007 2008 2009* Credit crunch: US, EU Percentage of lenders tightening standards, by size of enterprise seeking loans Panel A: United States Panel B: European Union 100 80 Large and Medium Small Small & Medium 80 Large 60 60 40 40 20 20 0 -20 Q1 Q2 Q3 2006 Q4 Q1 Q2 Q3 2007 Q4 Q1 Q2 Q3 Q4 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2008 2006 2007 2008 Q3 Q4 Borrowing costs for South remain high 10 8 6 4 2 0 Africa Asia Latin America Europe 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 Growth, employment declines globally 17 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 Globalization: Parallel fates 8 Developing countries 6 World 4 2 Developed countries 0 -2 Preliminary, revised forecast -4 20 2003 2004 2005 2006 2007 2008 2009 (P) Food prices remain higher 350 300 250 200 150 100 50 2000 2001 2002 2003 2004 Wheat 2005 2006 Maize 2007 2008 2009 Rice 2010 2011 World trade collapse 12 10.9 9.2 7.7 Annual percentage change 8 6.6 4.1 4 2.4 0.5 0 2004 2005 2006 2007 2008 2009 2010 -4 -8 -12 -11.1 26 Trade collapse consensus 10.0 6.0 5.0 % change 2.2 0.0 -5.0 -10.0 -9.0 -13.2 -15.0 WTO 2007 2008 OECD 2009 Forecasts South exports fall more (volume index, 1998 = 100) 280 Developing and other non-OECD country exports 260 240 220 World trade 200 180 160 OECD country exports 140 120 20 06 M 20 1 06 M 20 3 06 M 20 5 06 M 20 7 06 M 00 9 6M 20 11 07 M 20 1 07 M 20 3 07 M 20 5 07 M 20 7 07 M 00 9 7M 20 11 08 M 20 1 08 M 20 3 08 M 20 5 08 M 20 7 08 M 00 9 8M 20 11 09 M 1 100 Source: CPB Oil, metal prices fell more Trade impacts: summary • Exports decline all developing countries • Terms of trade primary exporters • Trade surpluses, reserves run down quickly • But lower energy, food prices helped net food and oil importers 30 World economy contracted, recovery uncertain 5 4.0 3.9 4 3.9 3.5 3 Optimistic 2 2.7 2.1 1.6 1 0 Pessimistic 2003 2004 2005 2006 2007 2008 2009 -1 -2 -3 -2.6 2010 Growth by main country groups Per capita GDP Change in growth rate growth rate 2004 2009/ 2009/ -07 2008 2009 2008 2004-7 World Developed economies Economies in transition Developing economies 2.6 0.9 -3.4 -4.3 -6.0 2.1 0.3 -4.1 -4.4 -6.1 7.7 5.5 -2.6 -8.1 -10.2 5.7 4.0 0.1 -3.9 -5.6 LDCs 5.2 3.6 0.3 -3.3 -4.9 60 developing countries will see declining incomes in 2009 70 60 60 Developed countries Economies in transition Developing countries 50 40 33 30 22 18 20 13 12 14 10 2 1 0 2008 2009 2010 Livelihoods threatened • Declining living standards • Many livelihoods under threat, especially when social protection not welldeveloped • Prolonged slowdown in world economy likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth Social impacts • ILO: >200 m. more working poor • ILO: Unemployment to rise by 51m • ILO projections based on IMF Nov 08 • MDGs, IADGs, social spending at risk • Rising social, political unrest • US intelligence report, February 2009: crisis -- greatest security risk 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 ODA for19697 Africa vs G20 recovery efforts 20000 Billion US Dollar 15000 10000 5000 1591 26 0 G-20 total commitment G-20 fiscal stimulus, 2009 ODA to Africa, 2008 Net aid transfers? • 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, e.g. DRC received $5.4bn in ODA in 2003, but only $400m. in NAT Remittances to developing countries declining • Historically, remittances to home countries in crisis rise • However, migrant workers in host countries now most adversely hit by job losses, lower incomes • Evidence uneven for different migrant workers by home country, host country, crisis impact Stimulus 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 6Q4 Q1 Q2 8 Global recovery with coordinated vs uncoordinated stimuli, 2010-2015 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 Multilateral 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-management, but neither developmental nor equitable • June 09 summit on crisis + impact on developing countries • UN PGA (Stiglitz) Commission of Experts New Bretton Woods moment? Bretton Woods, 1944: United Nations conference on monetary + financial affairs • 15 years after 1929 Depression • Middle of WW2 • US initiative vs UK Treasury stance • 44 countries (28 developing countries; 19 LA) • UN system: IMF, IBRD, ITO • Clear emphasis on sustaining growth, job creation, post-war reconstruction, post-colonial development, not just monetary and financial stability Thank you Please visit UN-DESA www.un.org and G24 www.g24.org websites • Research papers • Policy briefs • Other documents Acknowledgements: UN-DESA, ILO 48