The global financial crisis and developing countries

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The global financial crisis and developing
countries

• Dirk Willem te Velde
• Overseas Development Institute
• ILEAP-EABC meeting, Nairobi, 26-28 February 2009

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Introduction

• The global financial crisis which originated in
  developed countries will affect developing
  countries.
• Which countries will be affected and how (ODI
  co-ordinates a 10 country study).
• What does this mean for policy
• In developing countries
• Global responses / e.g. G20 process (e.g.
  financial regulation, aid and development
  finance, trade etc)

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The effects expected to be serious especially for
developing countries
Revisions of forecasts for GDP per capita for
2009 (annual change, )
Source IMF and own calculations
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At country level, there is a need to understand

• What are the likely transmission mechanisms at
  national level
• What are the actual and likely effect on growth
  and development
• What are actual, possible and optimal policy
  responses

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Shock at national level

• Private capital flows (ODI, WB and IIF forecasts,
  e.g. from more than US 900 bn in 2007 to US 165
  bn 2009) stock markets down everywhere.
• Trade (shocking drops esp. Asia, 20 y-on-y drops
  in trade mining and oil exports tourism in
  Caribbean)
• Remittances (Mexico, Kenya?) and migration (e.g.
  Bangladesh)
• Aid (under pressure may not grow as much as
  thought in 2005)

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Trade and production in freefall
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The global financial crisis and trade in services
in poor countries

• Financial services
• Directly, limited?, although stock market
  changes
• Indirectly large
• Effect on trade policy?
• Tourism (booking down) luxury product
• Transport services (trade dropped)
• Migration and remittances down increase in
  protectionism

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Effects on growth and development

• Effects on growth. Output loss for 2008/9 at
  least 50bn in SSA, 800bn in developing, 2.4tr
  in world. Developing countries still to grow (but
  low in pc and large slowdown).
• Feedback real financial sectors (Nigerian
  banking and real estate)
• Employment, investment, poverty, social effect
• rural-urban / gender and garments (Cambodia),
• mining employment (Zambia),
• poor and tourism (Kenya)
• Government budget (e.g. commodity dependent
  exporters such as Bolivia, Nigeria and Zambia
  suffer)

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Developing country responses

• Economic policy measures (e.g. fiscal stimulus,
  early disbursements, need for IMF/BoP shock
  facilities, monetary easing, changed reserve
  requirements, eg Cambodia or Mauritius)
• Social policies (e.g. social protection, lending
  to SMEs)
• Normal growth and development policies
  (acceleration of investment climate support,
  trade liberalisation, infrastructure)
• ? Countries are beginning to respond, but not all
  (e.g. Cambodia vs Uganda)

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What will happen in/after crises?
Protectionism or window of opportunity?
Source WB presentation
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Global policy responses Financial globalisation

• All sources of finance and export revenues under
  pressure financial flows have been too cyclical
• International banks now required to hold more
  capital at home and hence withdraw lending
• Persaud/Goodhart change capital adequacy ratios
  / reserve requirements over the cycle
• Also transparency, supervisory colleges, tax
  haven and avoid financial mercantilism
  (safeguarding national deposit holders only)

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Global policy responses Aid

• The case for aid is stronger now than before
  (market failures in finance/climate change more
  visual). Aid needs to play the counter cyclical
  role it is likely that lack of capital is a
  binding constraint to growth.
• 1.5 Fiscal stimulus 2 trillion USD around the
  world risk of beggar-thy-neighbour economic
  nationalism against poor countries?
• Fiscal stimulus red, blue or green? Rainbow
  stimulus requires early disbursement with
  streamlined rules?

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Global policy responsesDevelopment Finance
Institutions

• Directed credit is back in fashion. DFI sector
  has experience in using state-backed guarantees
  from cash rich balance sheets in 2007 toward
  rationing in 2009?
• Recognise contribution of DFIs (USD 50 bn in
  2006/7)
• IFC increasing exposure
• EBRD increasing 20 to US 7bn
• AfDB, AsDB, EDFIs?

IFC Cap Adequacy
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Global policy responses Trade

• Doha Round at WTO a priority? Not really.
• Focus on
• Avoiding protectionist labeling of goods against
  developing country interests
• Monitor fiscal subsidies Resist domestic
  pressures to apply expensive protectionist
  measures or targeted trade distortionary
  subsidies
• Support the surveillance process that the WTO has
  put in place to track new protectionist measures
• Promote and enhance existing WTO rules
• Bring forward Aid for Trade allocations and
  address trade financing constraints

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Conclusions

• GFC has already had large development effects
  different countries affected differently. Worse
  is likely to come throughout 2009.
• Need for developing countries to monitor and
  respond to GFC. It also affects services and
  regulatory models.
• Global policies responses to include
  development concerns

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