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Global Forum on Development
The consequences of the global economic and
financial crisis How much do we know?
Helmut Reisen, Head of Research OECD Development
Centre
9 December 2008
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1. Current crisis impact on development finance

• RBS estimate outflows 2008 equal to 1/5 of
  2003-07 inflows (1trn.)?
• Portfolio equity bond outflows
• Commercial bank credit
• Trade credit
• FDI, MA
• Systemic Sudden Stop
• Calvo, Izquierda, Mejia, NBER Working Paper No.
  14026

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2. Lessons for the diagnosis of policy performance

• From decoupling to contagion, from hyperbole to
  endogeneity/cyclicality
• GDP growth rates
• Green vs black accounting
• Low risk spreads
• High commodity prices
• FX reserve levels
• Not huge forever
• Currency defense
• Bank recapitalisation cost
• Public budgets
• Deficits ? FX rates, Y ? debt ratios
• Be smarter than ratings agencies and
  (b)analysts

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3. Channels of crisis contagion

• Through foreign trade (monsoon effect)?
• Global demand, prices, remittances, tourism.
  China cant compensate US.
• Financial contagion
• CA deficits, currency slumps, balance sheet
  mismatches.
• Pure contagion
• (October 2008) breakdown of money and banking
  markets
• ? generalised risk aversion ? shedding of assets
  w/a public guarantees.
• Expectations matter

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4. Channels of crisis vulnerability

• Systemic sudden stops
• RER drop f
• Size of trade sector, external gap, portfolio
  integration.
• Partial insurance
• Reserves, debt management, local-currency bank
  debt.
• Strengthen your house even if you are innocent

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5. Development finance in a deleveraged world

• Impact of deleveraging
• Mid term push 2/3 pull 1/3
• With global growth down, flows down
• Hunger for yield satisfied
• Time to rebuild bank capital ? less bank credit
• FDI picks up post-crises
• Helped by SWFs (no debt leverage)?

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5. Development finance in a deleveraged world

• Multilateral ODA
• The Comeback Kids?
• Aid to be curtailed?
• Deep slumps vs cycles
• IFIs will crowd back in
• But will it be enough?
• Can Asian FX reserves be leveraged through IFIs?
• Stimulate private-flow insurance

Source OECD Development Centre, based on World
Bank Global Development Finance, 2008.
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6. Global Governance

• Less reliance on international soft law (EITI,
  DSF)?
• Less influence for Wall Street/City ? more
  regulatory independence?
• Less pro-cyclicality in bank capital regulation
• Less relevance for rating agencies
• More emphasis on guarantees and MDBs
• More emphasis on G20, less on G8, HDP, etc.
• Who represents Small Poor Countries?

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7. Positive aspects of the global credit crisis?

• Lower fuel food prices
• ? More PP for poor, less government subsidies?
• Lower rents ? less resource curse?
• Less chavismo?
• Tax heavens closed?
• More intergenerational justice as asset prices go
  down
• More talent allocated to real economy, less to
  finance

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