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The Impact of the Financial Crisis on
Developing Countries
L. Alan Winters
DFID Chief Economist
11th January 2010
A Global Crisis
Real Output Grow th
10
Emerging & developing
economies
8
6
%
4
2
0
1980
1984
1988
1992
1996
2000
2004
2008
2012
-2
-4
Advanced Economies
-6
Source: IMF
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Significant Regional Variation
Real Output Growth
11
9
7
%
5
3
1
-1
2005
2006
2007
2008
2009
2010
2011
-3
-5
-7
Sub-Saharan Africa
CIS
Wes tern Hem is phere
Central and Eas tern Europe
Developing As ia
Source: IMF
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Identifying Vulnerabilities
Factors that influence a country’s vulnerability to the
crisis:
• Exposure to contracting financial sector
• Dependence on external sources of private finance
• Extent and nature of trade with world economy
• Dependence on aid
• State of the economy and public finances entering the
crisis
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Downturn transmitted through several
• Trade: -11.9% channels
(volume) 2009 y-o-y
• Remittances: 6.1% fall in 2009
• Net Capital Flows: Peaked at $1.2 trillion in
2007. Expected to fall to $363 bn in 2009
• Official Development Assistance:
Ireland; Italy; Sweden; Netherlands; Denmark
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Africa
DRC
Ethiopia
Ghana
Kenya
Malawi
Mozam.
Sudan
2008
6.2
2009F
2.7
Tanzania
2008
7.4
2009F
5
11.6
7.3
1.7
9.7
7.5
4.5
2.7
6.4
Uganda
Zambia
Zimbabwe
Nigeria
9
6
-14.1
6
7
4
3.7
2.9
6.2
6.8
4.3
4
Rwanda
S. Leone
11.2
5.5
5.3
4
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Asia
2008
Middle East
2008
2009F
2009F
Afghanistan
Bangladesh
Cambodia
India
3.4
6
6.7
7.3
15.7
5.4
-2.7
5.4
Nepal
Pakistan
Vietnam
4.7
2
6.2
4
2
4.6
Yemen
3.6
4.2
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Who’s been affected: is it the poor?
‘The near poor are in danger of becoming the new
poor. It is not the chronic poor who have been
most affected by the crisis, but the near and
working poor, whose lives had improved
significantly over the previous decade’
Ban Ki-Moon, UN Secretary-General
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Identifying the poverty impact
Increase in the number of people living in extreme
poverty
150
Global
Financial and
Economic
Crisis, 90
millions
120
Food Crisis,
130
90
60
30
Energy Crisis,
25
0
Source
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The Policy Response: some examples
• G20: indirect measures far larger than direct stimulus
action
• Developing countries: e.g. Vietnam & Bangladesh.
• Multilateral
•IMF: $50 billion for Low Income Countries
•World Bank : Front loading of programme funds; trade
credit
•UN: Global Impact and Vulnerability Alert System
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A Sustained Global Recovery I?
• Fiscal sustainability of aggregate demand policies
Fiscal Balances, %GDP
2007
(Pre-crisis)
2009
2010
World
-0.5
-6.7
-5.6
Advance
-1/2
-8.9
-8.1
Emerging
0.7
-4.0
-2.8
Low-Income
-0.2
-3.8
-2.0
Source: IMF
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A Sustained Global Recovery II?
•A resurgence in commodity prices
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A Sustained Global Recovery III?
• A period of sustained loose monetary conditions a
catalyst for a new asset bubble
Policy Rates
7
UK Base Rate
6
US Federal Target Rate
5
%
4
3
2
1
0
03/01/06
03/01/07
03/01/08
03/01/09
03/01/10
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A Sustained Global Recovery IV?
Addressing the cause of the crisis: Global imbalances
and lax regulation
• Global imbalances as a % global GDP increased from
just over 1% up to 2000 to around 2.5% by 2007-08
• US net borrowing from abroad doubled in 10 years
- average of 2.5% GDP between 1987-2002 to an
average of 5% of GDP between 2003-08
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Global imbalances – the numbers
• Capital flowed ‘up hill’
• Emerging and Developing economies became net lenders
• Net lending averaged 4% of GDP 2005-8 (cf. -2% of
GDP 1987-94 and -0.5% GDP 1995-2002)
• Oil exporters average net lending increased from 4.3%
GDP 1995-2002 to 15% 2005-08
• China’s current account surplus increased from 2%
GDP in 2003 to 10% GDP in 2007
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Addressing Global Imbalances: Implications
• Rebalancing will be a long drawn out process
• US: Consumer of last resort and highly leveraged.
Higher savings equivalent to huge demand shock
• China: Substitute savings for domestic demand?
China’s consumption is only one quarter of
consumption of US and EU deficit countries
• Low income countries too small a share of global
GDP to make a difference
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Conclusion
• Economic prospects have improved but any recovery is
still fragile
• The underlying cause of the crisis has to be tackled to
avoid a repeat of events
• Identifying the social impacts and understanding what
needs to be done to achieve the MDGs
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