Most Developing Countries Are Deemed Marginally Creditworthy

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Most Developing Countries Are Deemed Marginally
Creditworthy
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Aid flows rose in 1998 End of donor fatigue?
Billions of U.S. dollars
Percent
Percentage of GNP of DAC countries
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Few countries reached the aid target
UN Target 0.7
Average country effort
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Reduced aid flows but more efficient allocation
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The Enhanced HIPC Framework
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Official non-concessional flows declined in 1999

• Official non-concessional flows, including those
  from the IMF, fell to negative levels in 1999
  from unusually high levels in 1998 related to
  rescue packages for crisis countries.
• The role of such financing is changing in
  response to concerns about moral hazard and the
  need to bail-in the private sector.

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Short-term lending to developing countries rose
rapidly in the 1990s
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Short-term debt is pro-cyclical to economic growth
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The pro-cyclical response is worse during adverse
shocks
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Excessive short-term borrowing (relative to
reserves) has a strong association with crises
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Safeguarding against crisis the near-term agenda

• Safeguard measures are needed in the near-term,
  alongside longer-term measures, to reduce the
  risks of crisis
• An analysis of recent proposals suggest three
  main conclusions
• First, all such measures impose costs, but these
  costs are likely to be less than those of a
  full-fledged financial crisis, and especially for
  the poor.
• Second, none of these measures can substitute for
  the need for better macroeconomic fundamentals.
• Third, all such measures have their limitations
  and may need to be combined and adapted to each
  countrys circumstances

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Safeguards come with costs

• Chilean-style taxes on short-term borrowing
  require comprehensive coverage of all short-term
  inflows
• Prudential capital controls on the banking
  sectors international exposure raise costs for
  borrowers and may be difficult to implement
• Restrictions on capital outflows are even more
  difficult to implement
• Increasing the amount of international reserves
  imposes significant fiscal costs
• Privately contracted contingent credit lines
  require expensive collateral, may be offset by
  reduced lending, and are likely to be available
  only to the relatively creditworthy

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One hundred (and thirty) years of capital flows

• The past 130 years have seen at least four surges
  in private capital flows to emerging markets
• 1870 to WW-I
• Post-WW-I recovery to the Great Depression
• 1973-1982
• the 1990s

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Capital flows and crises were linked even before
the gold standard era
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Four messages from history

• Capital surges to emerging markets occur when
  communication is improving, growth and world
  trade is expanding, financial innovation is
  rapid, and the political climate is supportive.
• The capital flows boom of the 1990s was similar
  to earlier episodes in terms of its size but was
  different in the variety of financial
  instruments used and the variety of recipients
• All past episodes of surges in capital flows to
  emerging markets have ended in severe
  international financial crises.
• The next decade may well see another capital boom
  to emerging markets, accompanied again by high
  volatility of capital flows and potential crises.
  Countries need to adopt better policies and
  safety nets for the poor.

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Technology will provide one impetus to capital
flows