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World Economic Situation and Prospects 2004

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World Economic Situation and Prospects 2004 Powered By Docstoc
					 A time of crisis,
a time for change
 The global crisis and
economic governance
       Jomo Kwame Sundaram
      UN Assistant Secretary-General
        for Economic Development

         Recovery towards what?
     Finance, Justice, Sustainability
 Congress Centre, London, 6 November 2009
    Crisis Unexpected?
•   A crisis foretold
•   Unsustainable global imbalances
•   International financial architecture: non-system
•   Ideology: deregulation, self-regulation,
        inadequate and inappropriate regulation
        capital account liberalization
•   Financial Globalization: growth, stability?
•   Developing countries innocent victims
•   Policy responses: inadequate; double
        standards
•   International cooperation: G7, G20, UN
Global imbalances grow
 USD bn


 1000
                                                                                      Latin America


                                                                                      Other industrialised
    800
                                                                                      Other Asia


                                                                                      China
    600
                                                                                      Japan


    400


                                                                                      Oil exporters

    200




          0

                                                               .



  -200



  -400
                                                                                      United States



  -600




  -800
                                                                                       Euro Area



-1000                                                                                 Central and Eastern


                                                                                              3     Europe
              90 91   92 93   94 95   96 97   98 99   00 01   02 03   04 05   06 07
Then narrow with deflation
              600                                              United States

              400

                                                               Japan
              200
Billion US$




                0
                                                               European Union
              -200


              -400
                                                               Developing
                                                               countries (excl
              -600                                             China) and EiT

              -800                                             China
                                                                         4
                     2004   2005   2006   2007   2008   2009
Net capital importers
                    Capital Importers
                         Turkey    Greece
    Others                 3%        3% Italy   Australia
                                          3%
     20%                                            3%
                                                            U.K.
                                                             9%




                                                                   Spain
                                                                    9%



             U.S.
             50%                                                    5
US macro-financial policies
• International monetary + financial
     ‘non-system’
• Prolonged loose macroeconomic
     policies
• Lax financial regulation + policies
• Low US savings rate
• US over-consumption, East Asian
     surpluses
• US, UK economic hubris
Broad Liquidity Easier!
964% of           Derivatives         78% of
World GDP                             Total

 138% of        Securitized Debt    11% of
 World GDP                          Total

    122% of
                    Broad          10% of
    World GDP       Money          Total

      9% of         Power       1% of
      World GDP     Money       Total
                                               7
      Globalization: finance>trade
                180                                                                   350

                160
                                                                                      300




                                                                                               As percent of GDP, indices 1980=100
                140
                                                                                      250
                120
US$ Trillions




                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         8
                       )Global merchandise trade as a percentage of GDP (right axis
  Finance-investment nexus?
0.30



0.25



                                                   Gross Fixed Capital Formation
0.20



0.15
                                                   Gross Financial Investment Abroad

0.10



0.05



0.00
                                                                                                                                                 9
    70


            72


                    74


                            76


                                    78


                                            80


                                                    82


                                                            84


                                                                    86


                                                                            88


                                                                                    90


                                                                                            92


                                                                                                    94


                                                                                                            96


                                                                                                                    98


                                                                                                                            00


                                                                                                                                    02


                                                                                                                                            04


                                                                                                                                                    06
 19


         19


                 19


                         19


                                 19


                                         19


                                                 19


                                                         19


                                                                 19


                                                                         19


                                                                                 19


                                                                                         19


                                                                                                 19


                                                                                                         19


                                                                                                                 19


                                                                                                                         20


                                                                                                                                 20


                                                                                                                                         20


                                                                                                                                                 20
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
       Net transfer of financial
       resources from South to North

                          200

                            0
Billions of US dollars




                          -200

                          -400

                          -600

                          -800

                         -1000


                           Developing economies      Africa      Eastern and Southern Asia         Western Asia   Latin America
                                           Source: UN World Economic Situation and Prospects 2008 (forthcoming)
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
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 13
      Credit crunch: US, EU
      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
80                                                                                                          Small & Medium   Large

                                                                                         60
60



40                                                                                       40


20

                                                                                         20
 0



-20
                                                                                         0
       Q1   Q2          Q3   Q4   Q1    Q2          Q3   Q4   Q1   Q2          Q3   Q4
                                                                                              Q1   Q2      Q3   Q4     Q1    Q2       Q3   Q4   Q1   Q2      Q3   Q4
                 2006                        2007                       2008
                                                                                                    2006                       2007                   2008
Borrowing costs high
10
                 Africa
                 Asia
 8               Latin America
                 Europe
 6


 4


 2


 0
 Jan-07 Apr-07    Jul-07   Oct-07 Jan-08 Apr-08   Jul-08   Oct-08 Jan-09 Apr-09
         90
                           105
                                  120
                                         135
Jan 04
Apr 04
Jul 04
Oct 04
Jan 05
Apr 05
Jul 05




                Yen/US$
Oct 05
Jan 06
Apr 06
                                             2004-2009



Jul 06


                Euro/US$
Oct 06
Jan 07
Apr 07
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
Oct 08
Jan 09
                                           Dollar volatility continues




Apr 09
         0.60
                           0.70
                                  0.80
                                         0.90
  Dollar volatility, June
115
    2008- June 2009                                                                                               0.85



105                                                                                                               0.80



95                                                                                                                0.75



85                                                                                                                0.70



75                                                          Yen/$ (LHS)                Euro/$ (RHS)               0.65



65                                                                                                                0.60


                                                                                       Mar-09


                                                                                                Apr-09
                                                                              Feb-09




                                                                                                         May-09
                                 Sep-08
      Jun-08




                        Aug-08
               Jul-08




                                          Oct-08




                                                            Dec-08


                                                                     Jan-09
                                                   Nov-08
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. others’ Xs
     Prices, output declines globally
     Growth, employment declines globally           18
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
Globalization: Parallel fates
8
                                                   Developing
6                                                   countries

                                 World
4

2
                           Developed countries
0

-2
                                   Preliminary,
                                   revised forecast
-4                                                              20
     2003   2004   2005   2006     2007          2008   2009 (P)
Growth by main
  country groups
               Per capita GDP growth   Change in
                          rate         growth rate
                2004                   2009/ 2009/
                 -07    2008   2009     2008 2004-7
World            2.6     0.9    -3.4    -4.3    -6.0
Developed
 economies       2.1     0.3    -4.1    -4.4    -6.1
Economies in
  transition     7.7     5.5    -2.6    -8.1   -10.2
Developing
  economies      5.7     4.0     0.1    -3.9    -5.6

LDCs             5.2     3.6     0.3    -3.3    -4.9
60 developing countries will see
declining incomes in 2009
70
                                  60   Developed countries
60                                     Economies in transition
                                       Developing countries
50

40
                      33
30
                                                       22
                                           18
20                         14
     12          13
10
           1                                     2
0
          2008             2009                 2010
Trade impacts:
   summary
• Exports decline 
     all developing countries
• Terms of trade  primary
    exporters
• Trade surpluses,
    reserves run down quickly
• But lower energy, food prices helped
    net food and oil importers      23
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
ODA for Africa vs G20 recovery efforts
                    20000          19697




                    15000
Billion US Dollar




                    10000




                     5000


                                                              1591
                                                                                         26
                        0
                            G-20 total commitment   G-20 fiscal stimulus, 2009   ODA to Africa, 2008
 Net aid transfers?
• Net ODA is net of principal payments,
     but not of interest received on such loans
• Net Aid Transfers (NAT) are net of both
• Japan recently received >$2bn/year in interest
     on ODA loans
• NAT excludes cancellation of old non-ODA
     loans, e.g. a 2003 Paris Club deal cancelled
     some $5bn in non-ODA official debt owed
• That cancellation is ODA, but generated little
     additional net transfers, i.e. NAT
• Hence, e.g. DRC received $5.4bn in ODA in
     2003, but only $400m. in NAT
Remittances?
• Historically, remittances to home
    countries rise in crisis
• However, migrant workers in host
    countries now most adversely hit
    by job losses, lower incomes
• Evidence uneven for different
    migrant workers by home country,
    host country, crisis impact
• Debt sustainability redefined to
    include remittances, allowing
    greater debt
Social impacts
•   ILO: >200 m. more working poor
•   ILO: Unemployment to rise by 51m
•   ILO projections based on IMF Nov 08
•   MDGs, IADGs, social spending at risk
•   Rising social, political unrest
•   US intelligence report, February 2009:
      crisis -- greatest security risk
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-management, but neither
    developmental nor equitable
• UN PGA (Stiglitz) Commission of Experts
• June 09 summit on crisis + impact 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
• FDR initiative vs Churchill bilateral preference
• 44 countries (28 developing countries; 19 LA)
• UN system: IMF, IBRD, ITO
• Clear emphasis on sustaining growth, job
     creation, post-war reconstruction, post-
     colonial development, not just financial
     stability
Systemic reform agenda
• Ensure macro-financial stability with counter-
     cyclical macroeconomic policies +
     prudential risk management, including
     capital controls
• Finance growth (output, employment) with
     developmental financial system
• Ensure inclusive financial system -- NEW
• Monterrey policy coherence: Align IMF, WB
     with UN development agenda, IADGs
• UN: universal, legitimate  lead
     comprehensive reform process?
Coordinated stimulus
  needs new finance
• Developing countries require sources of
    finance to participate in global stimulus
     to make it more effective and not
     offset it
• Developed countries to allocate 1% of their
     own stimulus for direct expenditure support
     in developing countries
  • additional to existing ODA commitments
  • avoid unsustainable debt burdens
• Conclusion: New Financing Facility Required
Major institutional
recommendations 1
Global Economic Coordination Council
   democratically representative G-20/L27
   include UN system chief executives and
      Heads of Government
   coordinate international adjustment of
      imbalances
International Expert Panel
   •Patterned after Intergovernmental Panel on
      Climate Change
   •Provide independent advice on international
      policy issues
Major institutional
recommendations 2
New Financing Facility
     within or outside IFIs
     new, more representative governance
          structure
     – Voice and Representation Reform
          in IFIs
New International Reserve Currency
  reserve accumulation offsets stimulus
  to provide symmetrical adjustment to
  international imbalances
Other Proposed Institutions
• International Debt Restructuring Tribunal
  • Independent of IMF (unlike DRM proposal)
  • Replace World Bank’s ICSID
• Foreign Debt Commission
• Intergovernmental Commission on Tax
     Cooperation
  • Multilateral Regulations
  • International Tax Compact
• Global Financial Authority
• New Policy Surveillance Mechanism
  – Independent of IMF
  – Support national capital account management
Thank you
Please visit UN-DESA www.un.org
 and
 G24 www.g24.org websites
•Research papers
•Policy briefs
•Other documents

Acknowledgements: UN-DESA, ILO    41

				
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