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Financial Crisis, Recession, and the
Development Agenda
Richard Newfarmer
Special Representative to UN and WTO
World Bank
ECOSOC
Geneva
July 9, 2009
Financial panic plunges GDP in high income
countries into severe recession…
Q3
2008
Q4 Q1
2008 2009
Source: World Bank.
Contracting consumption in rich countries transmits
recession to poor countries – as world trade collapses
Percentage change
Annual growth of global trade volumes
15
12
9
6
3
-1
-4 1981
1984
1987
1990
1993
1996
-7
-10
Source: World Bank, Global Economic Prospects, 2009
1999
2002
2005
2008
… and costs of borrowing have skyrocketed… and
capital flows have dried up
Spread over US Treas., basis points
US$ b.
Private capital flows to dev’ing countries
Forecast
Corporate
CEMBI composite
2008-09
$1,158 billion in
2007
East Asia Crisis
Sovereign
EMBIG composite
…leading to global recession…. for the first time in
the last 70 years
Percent
Growth of real GDP
Developing
World
Source: World Bank, DEC Prospects Group, Consensus Forecast,
May 2009.
High Income
Crisis effects growth regions differently in 2009
GDP growth, percent
Source: World Bank.
Outlook? Recovery could begin late this year or next
…but strength and duration is uncertain
GDP annual growth rates (%)
Forecast
% change
7
Developing countries
5
3
1
-1 1980
High-income countries
1985
1990
1995
-3
-5
Source: World Bank, Global Development Finance, 2009
2000
2005
2010
?
Green shoots? Tentative signs that recession is
bottoming out …led by developing countries
industrial production, percentage change (saar)
Developing
(excluding China)
World
(excluding China)**
High-income
OECD
** China is excluded due to vagaries in recent data tied to the Lunar New Year.
Source: World Bank through Thomson/Datastream.
Low-income countries are at particular risk…
Especially those that:
• export only a few commodities
• have large % in poverty
• have weak fiscal positions
• have low reserves/ high debt
• “fragile states”
Implications of slowdown…
• 200 million likely to be trapped in poverty
• Unemployment will certainly rise thru 2010
• Infant mortality and child mortality rises –
200,000- 400,000 infants annually
• Health services cutback
Source: IMF, 2009
Risks… Inattention to the long term development agenda
For example, climate change
Countries in brown and
yellow likely to experience:
• More droughts
• More severe storms
• Rising water scarcity
• Rising sea levels
Countries vulnerable to climate
change are the same as those to
recession
Both forces could produce
unprecedented:
• Declines in food production
• Pressures on migration
The crisis requires a multilateral response… and the
G20 leaders strive to coordinate actions…
G20 Summit
April 2
Agreed:
Accelerated restructuring of banks and increased regulation
Pledge to avoid protection
Fiscal stimulus and expansive monetary policy
Mobilization of more capital for developing countries
• IMF – $700- b. New arrangement to borrow (NAB)
• World Bank MDBs – Capital increase for ADB
• Reform of the IMF and World Bank – Increased capital , new voting, merit selection of leaders
•
•
•
•
Improving the multilateral response requires…
Fulfilling pledges for development assistance, and augmenting these with a
“vulnerability fund”
– Need for social safety nets, labor –intensive infrastructure, SMEs, “aid
for trade”
– Financing gaps may be between $200-700 billion
– Problem: 2010 when fiscal pressures in rich countries become more
acute
Resisting pressures for trade protection will require vigilance and
determination – and renewing a commitment to the Doha Development
agenda
Improving regulation of financial markets will require careful balancing of
national regulatory authorities with international cooperation
Financial Crisis, Recession, and the
Development Agenda
Richard Newfarmer
Special Representative to UN and WTO
World Bank
ECOSOC
Geneva
July 9, 2009