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Impact of the Global Slowdown
on Developing Countries
Jeffrey Lewis
Senior Advisor, The World Bank
Presentation to the OECD Global Forum on Development
December 9, 2008
1
Current Status of the World Economy
2
Impact of the Financial Crisis on
Developing Countries
3
Policy Challenges and Responses
Current Status of the World Economy
The world economy entering a major downturn
OECD countries in recession, enormous financial sector dislocation,
unknown fiscal costs of bailouts, severe real economy dislocations,
stagflation potential
Developing country growth rate ex China & India down by half
Emerging markets witnessing international reserves declining,
volatile equity and foreign exchange markets
Weakening global trade - world trade likely to decrease in 2009 for
the first time since the 1982 recession, remittances dropping
Volatile commodity prices pose risks for importers & exporters
Financial stress sweeps through global markets
MSCI equity price indexes, January 2005=100
250
Emerging markets
200
Euro Area
150
USA
100
Oct-2007
Source: World Bank, Global Economic Prospects, 2009
M
9
20
08
M
5
20
08
M
1
20
08
M
9
20
07
M
5
20
07
M
1
20
07
M
9
20
06
M
5
20
06
M
1
20
06
M
9
20
05
M
5
05
20
20
05
M
1
50
Deteriorating growth conditions in major markets will
depress expansion in developing countries
Real GDP, percentage change
Forecast
% change
8
Developing countries
6
4
2
High-income countries
0
1980
1985
1990
1995
2000
2005
Shape of the coming recession: V, U or L?
Source: World Bank, Global Economic Prospects, 2009
2010
?
Impact of the Financial Crisis on Developing Countries
Massive capital outflows, drastic drop off from previous record highs
(from $1 trillion to nearly $500b, from 7.6 to 3 percent of GDP)
Many hard hit developing countries already had:
– Fiscally precarious positions
– High levels of initial poverty and malnutrition
– Limited capacity to implement targeted policy response
Crisis transmission channels
– Affect wages and employment as inflation passes through (headline
inflation up 5% in most, >10% in more than half)
– Sharp drop in investment, which has been driver of growth
– Falling remittances
– Long term cost of coping mechanisms, loss of fiscal cushions
Financial flows are likely to drop precipitously
Net private capital flows to developing countries
$ billions
1000
Possible
2008-09
$998 billion in 2007
800
600
East Asia Crisis
400
200
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
0
20 6
07
20 e
08
20 P
09
P
0
Source: World Bank staff estimates
Trade finance has dried up and is dragging down exports
Banks are refusing to honor letters of credits from other banks
and holding back guarantees commodity buyers and sellers
need to ship their commodities
For agriculture commodity traders, it is reported that the price
has risen to 4 percent of the value of the contract, up from 1
percent before the collapse of Lehman Brothers
As market confidence is eroding, there is a growing risk of
resurgence of barter trade between countries
Source: World Bank, staff
Remittances are likely to slacken
Remittances have been one of the most dependable sources of
finance for developing, especially poor ones
Often bigger than largest commodity earnings, or larger than
capital inflows
These have often gone to the poorest segments of recipient
countries, with strong poverty reduction impact
But these may not be sustainable at the high levels of 2007…
As labor markets weaken in rich countries, unemployment
adversely affects unskilled workers, a principal source of
remittances
Crackdowns on illegal border crossing are already beginning to
take effect in the US and perhaps Europe.
Transactions costs may raise as banks fear counter-party risk
Policy Challenges and Responses
The effect of the crisis on poverty alleviation efforts and MDGs is still
being felt – up to 100m at risk of poverty from food and fuel,
financial crisis still working through
What should global community focus on?
Aid flows from donors should not weaken: with the current liquidity
squeeze, capacity of countries to obtain external finance already weak
Trade financing should not dry up: developed countries should maintain
export credits to developing countries and ensure that capacity is sufficient
to support international trade flows
Create conditions for recovery: Need to help Governments ensure that
capital (physical and human) investment is not crowded out, as this will be
key to restoring long-run growth
Policy options for developing countries
Counter-cyclical policies: But only open to countries
with access to noninflationary sources of finance and a
sound investment climate
Policies to support the poor: tariff reductions on food
imports, conditional cash transfers, stay in school
programs, and possibly public employment programs
Public investments: in labor-intensive and trade-related
infrastructure, such as rural roads
Policies to reduce trade costs: border reforms,
customs reform, port reforms, and improving logistics
management
Fiscal and debt sustainability has become an even bigger
issue in the current context
The capacity for fiscal response (and exploring fiscal space) is
influenced by debt management (including debt strategy)
Weak debt management capacity in many LICs curtails debt
management strategies based on prudent cost-risk considerations
Challenges for debt management in the current crisis include
– Widening fiscal deficits (higher expenditures; lower revenues)
– Rollover risk in difficult global financial environment
– Realization of contingent liabilities
While only borrowing LICs can ensure that debt remains
manageable over the long term, international community must
support efforts to improve debt management practices in LICs
Policy responses where developed countries can help
Multilateral efforts to stem financial crisis and reignite growth in
home markets – including fiscal stimulus and coordinated
monetary policies as well as new consistent regulation
New commitments for development assistance to finance fiscal
expansion in poor countries in next two years
Maintain market access or open markets further, particularly in
textile, clothing, and agricultural products
Conclude Doha Development Agenda
World Bank pursuing measures to triple IBRD lending, accelerate
IDA access, and expand IFC support to trade finance, bank
recapitalization, and infrastructure investment
Impact of the Global Slowdown
on Developing Countries
Jeffrey Lewis
Senior Advisor, The World Bank
Presentation to the OECD Global Forum on Development
December 9, 2008