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The Global Economic Crisis and Its Impact on Africa Cairo 6 June 2009 Crisis Unexpected? • • • • • • • • A crisis foretold Unsustainable global imbalances International financial architecture Ideology: deregulation, self-regulation, inadequate and inappropriate regulation capital account liberalization Financial Globalization: growth, stability? Most developing countries innocent victims Policy responses: inadequate; double standards International cooperation: G7, G20, UN 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 3 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 4 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 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 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 7 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 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 9 Globalization: Parallel fates 8 Developing countries 6 World 4 2 Developed countries 0 -2 Preliminary, revised forecast -4 10 2003 2004 2005 2006 2007 2008 2009 (P) World economy in recession, 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 Recession in most developed economies 6 4.0 GDP growth rate, % 4 2 1.1 1.5 1.5 1.0 0.4 0.0 0.7 -0.1 0 -0.4 -0.6 -1.1 -2 -4 -1.7 -3.5 -3.7 -6 -7.1 -8 USA Japan EU15 NewEU 13 2008 2009 2010 Baseline 2010 Pessimistic scenario Transition economies too 8 6 5.4 GDP growth rate, % 4.2 4 2 1.5 1.0 0 -0.3 -2 -0.6 -1.9 -4 -6 -5.4 South-eastern Europe CIS 14 2008 2009 2010 Baseline 2010 Pessimistic scenario Growth slowed in all developing countries 8 6.8 7 GDP growth rate, % 6 6.1 5.6 5.4 4.9 5 4.3 4.0 3.9 4 3.0 3 2 5.4 2 4.5 4.1 4.0 3.1 2.9 1.7 1.4 1.7 0.9 1 0 -1 -0.7 -2 -0.7 -1.1 -1.8 -3 Developing countries Africa 2008 East Asia 2009 2010 Baseline South Asia Western Asia 2010 Pessimistic scenario Latin America 15 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 Growth by main regional groups Per capita GDP growth rate World Developed economies USA Japan European Union Economies in transition Developing economies Africa North Africa Sub-Saharan Africa East and South Asia East Asia South Asia West Asia Latin America + Caribbean LDCs LDCs excl. Bangladesh 2004-07 2.6 2.1 1.6 2.1 2.4 7.7 5.7 3.4 3.6 3.6 7.3 7.8 6.5 3.7 4.0 5.2 5.4 2008 0.9 0.3 0.1 -0.6 0.7 5.5 4.0 2.5 3.6 2.2 5.0 5.3 4.9 2.6 2.7 3.6 3.4 2009 -3.4 -4.1 -4.4 -5.9 -3.4 -2.6 0.1 -1.0 1.4 -1.9 1.8 1.8 2.6 -1.2 -3.0 0.3 -0.6 Change in growth rate 2009/ 2008 -4.3 -4.4 -4.6 -5.3 -4.1 -8.1 -3.9 -3.5 -2.3 -4.1 -3.2 -3.5 -2.4 -3.8 -5.8 -3.3 -3.9 2009/ 2004-7 -6.0 -6.1 -6.0 -8.0 -5.8 -10.2 -5.6 -4.4 -2.2 -5.5 -5.5 -6.0 -3.9 -5.0 -7.0 -4.9 -6.0 Regional GDP growth rates in PPP terms, 2007-2010 2007 World Advanced Economies 2008 European Union 2009 Emerging & Developing Economies 2010 SubSaharan Africa Central & Eastern Europe Middle East Note: The IMF World Economic Outlook classification of the Middle East region includes Egypt, Iran, and Libya. Source: IMF, World Economic Outlook Update, January, 2009. Recent African growth over 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 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Monthly Crude Oil Prices ($/barrel) Food prices will remain higher 350 300 250 200 150 100 50 2000 2001 2002 2003 2004 Wheat 2005 2006 Maize 2007 2008 2009 Rice 2010 2011 World trade collapsing 12 10.9 9.2 7.7 Annual percentage change 8 6.6 4.1 4 2.4 0.5 0 2004 2005 2006 2007 2008 2009 2010 -4 -8 -12 -11.1 29 Trade collapse consensus 10.0 6.0 5.0 % change 2.2 0.0 -5.0 -10.0 -9.0 -13.2 -15.0 WTO 2007 2008 OECD 2009 Forecasts South exports fall more (volume index, 1998 = 100) 280 Developing and other non-OECD country exports 260 240 220 World trade 200 180 160 OECD country exports 140 120 20 06 M 20 1 06 M 20 3 06 M 20 5 06 M 20 7 06 M 00 9 6M 20 11 07 M 20 1 07 M 20 3 07 M 20 5 07 M 20 7 07 M 00 9 7M 20 11 08 M 20 1 08 M 20 3 08 M 20 5 08 M 20 7 08 M 00 9 8M 20 11 09 M 1 100 Source: CPB African export growth over Agricultural prices rose + fell Source: THE-Ambrosetti based on IMF data; January 2000 = 100; f = forecast Oil, metal prices more Africa’s main trading partners (US$bn) Global imbalances narrow with deflation 600 United States 400 Japan Billion US$ 200 0 European Union -200 -400 -600 Developing countries (excl China) and EiT -800 China 2004 2005 2006 2007 2008 2009 36 Trade impacts: summary • Exports decline all developing countries • Terms of trade primary exporters • Trade surpluses, reserves may run down quickly • But lower energy, food prices help net food and oil-importers 37 90 Apr 09 Jan 09 Oct 08 Jul 08 Apr 08 Jan 08 Oct 07 Jul 07 Apr 07 Jan 07 Oct 06 Jul 06 Yen/US$ Apr 06 Jan 06 Oct 05 Jul 05 Apr 05 Jan 05 Oct 04 Jul 04 Apr 04 Jan 04 Dollar volatility continues 135 0.90 120 0.80 105 0.70 Euro/US$ 0.60 Capital inflows contract $ Billions 750 500 250 0 2005 2006 2007 2008 2009* Share of global FDI FDI inflows to Africa (US$bn) Credit crunch continues Percentage of lenders tightening standards, by size of enterprise seeking loans Panel A: United States Panel B: European Union 100 80 Large and Medium Small Small & Medium 80 Large 60 60 40 40 20 20 0 -20 Q1 Q2 Q3 2006 Q4 Q1 Q2 Q3 2007 Q4 Q1 Q2 Q3 Q4 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2008 2006 2007 2008 Q3 Q4 Borrowing costs remain high 10 8 6 4 2 0 Africa Asia Latin America Europe Aid flows unreliable 8% LDCs 7% 6% 5% 4% Sub-Saharan Africa 3% 2% Other LICs 1% 0% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 African Aid Trends Bilateral ODA (US$bn) 120 All Recipients 100 Africa 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 200 ODA to Africa 5.0 4.5 4.0 % of GDP 3.5 3.0 2.5 2.0 Africa 1.5 Sub-Saharan Africa 1.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 Can you see the ODA for Africa against the G20 recovery effort? 20000 19697 Billion US Dollar 15000 10000 5000 1591 26 0 G-20 total commitment G-20 fiscal stimulus, 2009 ODA to Africa, 2008 Main DAC donors to Africa (US$m) Net Aid Transfer? • 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, DRC received $5.4bn in ODA in 2003, but only $400m. in NAT Livelihoods threatened • Declining living standards • Many livelihoods under threat, especially when social protection not well-developed • Migrant workers especially vulnerable • Prolonged slowdown in world economy likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth Remittances to developing countries, 2008-2010 (billions of US dollars) 300 2008 250 2009 200 2010 260 239 238 150 100 50 45 41 42 0 Low-income countries Middle-income countries Global recovery with coordinated vs uncoordinated stimuli, 2010-2015 Social impacts • ILO: >200 m. more working poor • ILO: Unemployment to rise by 51m • ILO projections based on IMF 0811 • MDGs, IADGs, social spending at risk • Rising social unrest • US intelligence report: crisis -- greatest security risk Poverty reduction set back Slowdown in poverty reduction compared with pre-crisis growth Total 73 – 103 million Africa 12 – 16 million East and South Asia 56 – 80 million Latin America and Caribbean ~ 4 million Extreme poverty worsens Change in extreme poverty (< $1.25/day) No. of Poor Change in poverty ’09/‘04-’07 ’09/‘08 ’09/‘04-’07 ’09/‘08 0.6 0.6 0.3% 0.3% 111.1 73.5 1.8% 1.2% 5.9 4.2 1.2% 0.9% 0.1 5.8 101.0 0.1 4.1 65.6 0.1% 1.6% 2.0% 0.1% 1.1% 1.3% East Asia 16.2 27.5 0.8% 1.3% South Asia 84.2 37.8 3.0% 1.3% West Asia LAC 0.6 4.1 0.2 3.7 0.5% 0.7% 0.2% 0.7% Transition economies Developing economies Africa North Africa Sub-Saharan Africa East and South Asia 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 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 Coordination failure Table 7: Economic Stimulus in 2009 Total Advanced Economies Developing & Emerging Economies As a % of GDP As a % of World GDP 1.7 1.4 1.3 - 2.7 - Africa: % with <US$1/day Children who completed primary school (%) Girls/boys primary school enrollment Under five mortality/1000 HIV prevalence (%): women 15-24 yrs Social spending low priority (11%) Tax Cuts, 21.5 Other Spending, 39.8 Transfers to Low Income, 9.2 Employment Measures, 1.8 Infrastructure Spending, 27.8 International 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-, but not developmental or equitable • PGA (Stiglitz) Commission of Experts • Doha Declaration: June 09 summit on impact of crisis on developing countries New Bretton Woods moment? Bretton Woods, 1944: United Nations conference on monetary and financial affairs • 15 years after 1929 Depression • Middle of WW2 • US initiative vs UK Treasury stance • 44 countries (28 developing countries; 19 LA) • IMF, IBRD, ITO – UN system • Clear emphasis on sustaining growth, employment creation, development, not just financial stability • But BWIs very different governance arrangements UN leadership? Universal, legitimate lead reform process? Ensure comprehensive systemic reform Ensure developmental financial system Ensure inclusive financial system Develop capacity for offering 2nd opinion to interested member states • Align IMF, WB with UNDA (including FfD), IADGs to ensure policy coherence • • • • • Thank you Please visit UN-DESA www.un.org G24 www.g24.org and PGA www.un.org/ga/president/63/ websites • Research papers • Policy briefs • Other documents Acknowledgements: UN-DESA, ILO, ESCWA 77