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Thorvaldur Gylfason How A we got to where we are brief history How innocent bystanders are affected by crisis Implications Where From for Africa to go from here good governance to greater helpworthiness through reform Financial crises follow man like pandemics, with persistent regularity About every 20 years or so in United States at least from 1792 until Great Depression 1929-39 Then, long-lasting stability, with intermittent minor crises A Why? Confluence of two forces, to be described And then, threat of another big one in 2008 following collapse of Lehman Brothers big one now seems to have been averted How? Lessons from history 0 -5 -10 -15 -20 -25 2003 1999 1995 1991 1987 1983 1979 1975 1971 1967 1963 1959 1955 1951 1947 1943 1939 1935 1931 1927 1923 1919 1915 1911 1907 1903 1899 1895 1891 1887 1883 1879 1875 1871 20 15 10 5 0 -5 -10 -15 1831 1835 1839 1843 1847 1851 1855 1859 1863 1867 1871 1875 1879 1883 1887 1891 1895 1899 1903 1907 1911 1915 1919 1923 1927 1931 1935 1939 1943 1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 15 10 5 In 1970s, onslaught in academic circles against active stabilization policies Theoretical and practical grounds Government intrusion into private markets Not very influential in Finance Ministries and Central Banks In 1980s, similarly motivated attack on regulation, esp. financial regulation Same forces that had condemned stabilization This time, more influential in political arena Significant reversal of 1930s financial regulation Commercial vs. investment banks: Firewall torn down Appears plausible to infer that deregulation encouraged banks to take excessive risks Subprime loans in US, housing bubble, etc. But willingness to apply stabilization policies was still in place Concerted action by industrial countries seems to have turned the tide G20 agreed to inject $1.1 trillion into circulation Some think that the action should have been more ambitious Emerging consensus on need for reregulation How exactly remains to be worked out Real GDP growth (%) 2007 2008 2009 2010 World economy 5.2 3.2 -1.3 1.9 Advanced economies 2.7 0.9 -3.8 0.0 Emerging and developing 8.3 6.1 1.6 4.0 Sub-Saharan Africa 6.9 5.5 1.7 3.8 Advanced economies Strong output contraction, with negative growth in 2009 Emerging and developing economies Much smaller per capita output contraction in 2009, followed by return of brisk growth Even so, deepest world recession since 1960 First time world output declines since then In Africa, hard-won economic gains are at stake despite relatively weak financial linkages with advanced economies Reduced demand for African exports Fall in commodity prices (e.g., Angola) Reduced FDI due to tighter credit, flight to quality Also, smaller worker remittances Also, reversed portfolio investment flows, putting pressure on exchange rates, equity prices, and reserves Reduced overseas development assistance These external shocks cause severe slowdown Especially in Angola, Botswana, South Africa Further Substantial deterioration in fiscal and external balances, especially in commodity exporting countries Financing is strained due to tight credit worldwide Risks challenges are tilted to downside If fiscal stimulus in advanced economies proves too small, problems may persist, or worse Domestic banking systems may weaken as slow growth reduces credit quality and asset losses Without well-functioning safety nets, crisis could lead to significant increase in poverty in some countries Main challenges Contain adverse impact of crisis on economic growth and poverty Preserve hard-won gains of recent years Macroeconomic stability Debt sustainability How? Fiscal policy to cushion pernicious effects of crisis There is fiscal space provided debts are low Otherwise, rely on automatic stabilizers Monetary stimulus may be feasible as long as inflation remains under control Monitor financial institutions and their balance sheets Real GDP growth (%) 2007 2008 2009 2010 Angola 20.3 14.8 -3.6 9.3 Botswana 4.4 2.9 -10.4 14.3 Kenya 7.0 2.0 3.0 4.0 Lesotho 5.1 3.5 0.6 3.0 Malawi 8.6 9.7 6.9 6.0 Mozambique 7.0 6.2 4.3 4.0 Namibia 4.1 2.9 -0.7 1.8 Rwanda 7.9 11.2 5.6 5.8 Swaziland 3.5 2.5 0.5 2.6 Tanzania 7.1 7.5 5.0 5.7 Uganda 8.6 9.5 6.2 5.5 Zambia 6.3 6.0 4.0 4.5 Zimbabwe -6.1 -30 3.7 6.0 6000 5000 4000 3000 2000 1000 Angola Botswana Kenya Lesotho Malawi Mozambique Namibia Rwanda Swaziland Tanzania Uganda Zambia Zimbabwe Total 0 -1000 -2000 Source: World Bank, World Development Indicators 2008 Political on FDI risk has significant, negative impact Inflation also has negative impact, but not robust GDP growth rate, literacy, and openness have significant, positive impact on total FDI GDP per capita and infrastructure also have positive impact, but not robust Conclusion is obvious Political risk and inflation need to be kept at bay Growth, education, openness, and infrastructure need to be promoted through public policy What is good for FDI is almost always good in itself, and is also good for growth FDI encourages growth of host country by augmenting domestic capital and enhancing efficiency through transfer of new technology, marketing and managerial skills, innovation, and best practices Even so, literature suggests that FDI has both benefits and costs depending on country specific conditions and policies, including Ability to diversify Absorption capacity Targeting of FDI Opportunities for linkages between FDI and domestic investment 10000 Angola Botswana 8000 Kenya Lesotho Malawi 6000 Mozambique Namibia Rwanda 4000 Swaziland Tanzania Uganda 2000 Zambia Zimbabwe Total 0 -2000 Source: World Bank, World Development Indicators 2008 One major determinant: Political goodwill … … which, increasingly, depends on helpworthiness as perceived by donors Helpworthiness can by built up by reforming policies and institutions through Freer trade to enhance efficiency More and better education to promote better, longer lives in smaller families More FDI, without sacrificing resources or rights Infrastructure, including energy grids to facilitate – yes! – air conditioning Monetary integration, as planned, to beat inflation Now, as always, is the time to reform Marked, but uneven progress in recent years Botswana’s per capita GDP has grown by 5% a year since 1980 Secondary school enrolment is 75%, up from 48% in 1991 Births per woman have decreased from nearly 7 in 1960 to 3 Life expectancy is rising again after tragic drop due to Aids Important economic and social gains are now threatened by global crisis The right way to react to this threat is to invigorate reforms of policies and institutions Now, as always, is the time to reform