Download The Global Crisis Jomo K. Sundaram 13 March 2009, Mumbai TISS & IDEAs

The Global Crisis
Jomo K. Sundaram
13 March 2009, Mumbai
TISS & IDEAs
Department of Economic and Social Affairs,
United Nations, New York
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Chronicle of the Crisis
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No One Expected? Crisis foretold
Preceding global imbalances: unsustainable
International financial architecture?
Ideology: deregulation, self-regulation,
capital account liberalization
Financial Globalization: growth, stability?
Policy responses: double standards
Rescues not for innocent victims
International cooperation: G7, G20, UN
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Globalization: finance > trade
Figure 1
Finance driven globalization
180
350
160
140
250
120
200
100
80
150
60
100
40
50
20
0
0
1980
1990
1995
2000
2006
Years
Global financial assets
Global financial assets as a percentage of GDP (right axis)
Global merchandise trade
Global merchandise trade as a percentage of GDP (right axis)
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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
06
20
04
20
02
20
00
20
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
19
72
4
19
19
70
0.00
Global imbalances remain,
but shifting
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Crisis unfolds: 3 vectors
Financial vector:
vector
Sub-prime crisis Æ financial crisis Æ asset price
deflation Æ de-leveraging Æ credit crunch
Financial crisis Æ Real economy contraction
Real economy vector (including vicious circle):
ÆLess investment
ÆLess consumption
ÆReduced demand for imports,
i.e. for exports of others
ÆPrices, output decline
ÆGrowth, employment decline
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Major Consequences
• Emerging stock markets drop
Æ negative wealth effect
• Bank lending growth down
• Foreign demand Æ commodity prices
• Contracting export markets
• Domestic demand down too
• Employment, incomes, demand lower
• Domestic investments down
• FDI slow down
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World economy
in recession
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Globalization: Parallel fates
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Recession in most
developed economies
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6.5
6.0
6
4.8
5
4.9
4
3
2.9 2.8
2.9
2.4
2.0
2
1.9
2.1
3.1
2.7
1.8
1.2
1.1
1
0.4
0.4
0
-0.3
-0.6
-1
-1.0
-2
-0.7
-1.6
-1.9
United States
2005
2006
Japan
2007
EU-15
2008
2009 base
New EU members
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2009 pessimistic
Slowing growth in all
developing countries
8.5
9
8
7.2
6.9
7
6
4.6
5
6.0
6.0
5.9
5.5
5.1
4.5
4.1
4.74.9
4.3
4
2.7
2.7
3
2.3
1.6
2
1
0.1
0
-1
Developing
2005
2006
Africa
2007
East and
South Asia
2008
Western Asia
2009 pessimistic
-0.2
Latin
America
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Pessimistic
Synchronous growth: The US,
transition & developing countries
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7.9
8
7.1
7
4
6.9
6.6 6.5
6
5
7.5
7.6
7.2
5.7
5.7
5.4
5.1
4.5
3.8
3.5
3.9
3.9
3.7
3.2
2.8
3
2
3.3
2.5
1.6
0.8
1
0
1999
2000
US
2001
2002
2003
Ec. in Transition
2004
2005
Developing
2006b
Ec. 12
World income per capita
will decline in 2009
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Developing countries
6
5
4
World
3
2
Developed countries
1
0
-1
-2
-3
2003
2004
2005
2006
Dashed lines represent pessimistic scenario
2007
2008
2009
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Financial Impacts
• Financial markets crisis Æ
emerging markets collapse greater
• Reversal of capital flows
• FDI down
• Borrowing costs, margins much higher
• Financial positions of many developing
countries much stronger than
during financial crises in Asia + LA,
due to strong foreign reserves,
better fiscal balances
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Trade impacts
• Exports decline: all developing
countries
• Terms of trade: primary exporters
• Trade surpluses,
reserves may run down quickly
• Lower energy, food prices Æ
net food and oil-importers
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Strong US demand lifted
developing country exports
400
350
300
250
[ Billion $ dollars base 2000 ]
200
150
100
50
0
-50
-100
1990
1991
1992
1993
1994
1995
1996
1997
1998
Domestic demand in the US (1st difference)
Manufact. exports from the developing world (1st difference)
÷>
1999
2000
2001
2002
2003
2004
2005
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500
1.8
450
1.6
400
1.4
350
1.2
300
1.0
250
0.8
200
0.6
150
100
0.4
50
0.2
0
0.0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
External balance primary exporters
Manufactured exports from the developing world (1st difference)
Price of energy (relative to manufactures). RHS
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Price of raw materials & food (relative to manufactures). RHS
Price index relative to price of manufact.
[Billion $ dollars base 2000]
Manufacturing demand supported
high primary commodity prices
High commodity prices over
• Last 5 years rare opportunity for many
developing countries – including LDCs
– to generate substantial financial
resources from higher primary
commodity exports for investments and
growth – largely over
• 2008 price spikes for energy and food
due to speculation following flight
from ‘Wall Street’ (finance) to ‘Chicago’
(commodity futures), other factors
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Oil prices roller-coaster
160
Nominal price
Real price
140
$ per barrel
120
100
80
60
40
20
0
19
2002
2003
2004
2005
2006
2007
2008
Non-oil commodity prices
450
U.S . dollars
400
350
300
250
200
150
100
50
0
2001 2002 2003 2004 2005 2006 2007 2008
F ood
A gricultural raw m aterials
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M inerals
Sep-08
Jul-08
May-08
Mar-08
21
Nov-08
Maize
Jan-08
Nov-07
Wheat
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Index 2000 = 100
World food prices
declining after spikes
550
500
Rice
450
400
350
300
250
200
150
100
World trade growth
decelerating rapidly
11.2
12
9.3
Annual percentage growth
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7.4
8
5.6
6
4.4
6.4
4.4
4
2.1
2
0
-2
-4
-0.8
Pessimistic
scenario
-3.1
2001 2002 2003 2004 2005 2006 2007 2008 2009
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East Asia Export Implosion
Dec. 2008 exports year-on-year
%
Japan
China
S Korea
Thailand
Singapore
Taiwan (Province of China)
Malaysia
-35.0
-2.8
-17.4
-15.7
-20.0
-41.9
-4.9 (Nov.)
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Crisis policy priorities
• Limit spread of financial crisis
- Across borders (contagion)
- To real economy (ensuring liquidity)
• Reflate economy
- Fiscal measures (fiscal space needed)
- Monetary measures (monetary space)
• Appropriate regulatory reform
- National
- International
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Financial regulation
• Prudential risk management,
including capital controls
• Counter-cyclical: limit pro-cyclicality
• Finance growth (output, employment)
• Development finance: Support
investment + technology policies
• Inclusive finance
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Domestic demand
• Need fiscal stimulus to offset lower
foreign + domestic demand
• Most countries’ fiscal space limited
Æ need more policy space to cope
• Domestic, not foreign borrowing needed
• Build + improve physical infrastructure
• Strengthen social services, protection
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Social protection
counter-cyclical
• Employment crucial,
especially for poverty reduction
• Fiscal stimulus, esp. for job creation
• Conditional cash/income transfers
• Universal vs targeted social protection
• Incomes Æ demand maintenance
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Constraints on developing
country responses
• Policy, including fiscal space constrained
• IMF requirement for fiscal stimulus:
most countries (including US) not eligible
• Monetary policy less effective,
worse with independent central banks
• Systemic, institutional, market pro-cyclicality
• Declining aid likely to worsen
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Crisis response
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UN WESP > IMF wrong
IMF, WB also marginalized
IMF discouraging fiscal stimulus
G7 Æ G20: not inclusive, legitimate,
crisis-, but not development-, equity
or people-focused
• Stiglitz Commission
• Doha Declaration: summit on impact
of crisis on developing countries
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Thank you
Please visit UN-DESA www.un.org and
G24 www.g24.org websites
• Research papers
• Policy briefs
• Other documents
IDEAs website: www.ideaswebsite.org
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