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A time of crisis,
a time for change
Ottawa
19 October 2009
Crisis Unexpected?
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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
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