The Global Financial Crisis: Implications for Developing Countries

Transcription

1 The Global Financial Crisis: Implications for Developing Countries Andrew Mold Senior Economist OECD Development Centre

2 The Backdrop Shifting Wealth To some of us, the financial market turmoil that started in the summer of 2007 reflects the secular transformation of the global leconomy. There are now economic and dfinancial i forces in play whose impacts are of great consequence but that cannot as yet be adequately sustained by the world s current policy and market infrastructures. Mohamed El-Erian (2008.4). 2

3 Setting the Scene 1. There is still a heavy dependence on financial inflows above all, aid, remittances and FDI (16 LDCs with negative savings rates; aid 9%av av. GDP in SSA, but lower in South Asia, etc.) of 78 LICs have < 3 months FOREX reserves for imports.

4 6 5 4 Emerging and developing economies Current account considerations Current Account Balances (as % of GDP) Sub-Saharan Africa

5 Current account considerations Source: Minella (2008) Source: Carrera (2008) 5

6 Current account considerations Source: UNCTAD LDC Report, p

7 Current account considerations Wholesale Maize prices in selected Eastern Africa markets Source: FAO, Crop Prospects and Food Situation, October

8 The importance of FDI... Net flows (billions US$) to Latin America, Net flows (billions US$) to SSA, Source: World Bank, Global Development Finance,

9 Is FDI Better? vulnerability to external financing difficulties when the CA deficit is financed by FDI inflows (GDF, 2008: 68) BUT - FDI moves pro-cyclically and can intensify instability M&A activity is about % of current flows Use of derivative products by MNEs (currency forwards and options) as investment hedge pressure on domestic currency (Stiglitz et. al, 2006:179). 9

10 Is FDI Better? (2) Equity component more stable during crisis, but intra-company loans and reinvested earnings not. In most sectors, TNCs have ample liquidity to finance their investments, as shown by the high corporate profits reported, at least until In the UNCTAD 2008 survey of large TNCs, about one third of respondents envisaged negative impacts on FDI flows in the short term, but about half of them suggested no impacts (WIR, 2008) Some opportunistic fire-sale FDI? Consolidation in banking sector. E.g. Brazil s banks - merger of Itaú and Unibanco creation of largest bank in South America. 10

11 FDI and Growth US Outward FDI and GDP growth 1 st Qtr nd Qtr 2008 (4-period moving average) Source: US Department of Commerce 11

12 FDI and growth (2) FDI to Low Income Countries and Profit Remittances Correlation between FDI outflows and GDP Growth for OECD countries, GDP growth FDI Fitted values Source: World Bank, Global Development Finance,

13 The Relative Importance of Aid flows Aid as an average Percentage of Net Capital Flows ( ) Developing Countries Sub-Saharan Africa Private flows Overseas development aid Other official flows Total

14 Development aid (1) OECD 'aid pledge' we should not add an 'aid crisis to the financial crisis. In real terms, ODA in % than the 2004 Gleneagles base year, but compared to the 60% by 2010 to meet the Gleneagles commitments (DCD/DAC, 2008). Like FDI (to some extent), aid is highly geographically concentrated. In 2006, Afghanistan, DRC and Sudan accounted for 1/4 of total net ODA disbursements going to the LDC (UNCTAD LDC Report, 2008:27). 14

15 Development aid (2) Will budgets be hit? In Finland during its banking crisis between , when GDP fell by nearly 11 per cent, development aid fell by 60 percent (Roodman, 2008). But is this experience generalisable? 15

16 Development aid (3) No unambiguous relationship between economic growth in donor countries and subsequent aid flows (e.g. Round and Odedokun, 2004) Under pressure to reduce expenditures, aid flows are one of the first areas to be affected by cuts? Aid flows tend to be quite resilient to mild recessions (e.g., Bertoli et al., 2008) Aid is a very small share of budgets, and vis-a-vis rescue packages of domestic financial sector, very small (US$ 3 trillion already?) 16

17 Development aid (4) Source: OECD (2008) and World Bank (2008) 17

18 Broad conclusions: The crisis will hit countries in unexpected ways 1. Earnings from exports not always from obvious sources, e.g. Ethiopia, Mozambique. 2. Great heterogeneity in remittance channels, e.g. Bolivia, India, West Africa. 3. Rule of Thumb?.Expect the unexpected, e.g. High share of banking sector in LICs in foreign ownership.

19 Share of banking assets held by foreign banks with majority ownership, 2006 Country 50% - 70% Country 70% - 100% Rwanda 70 Madagascar 100 Côte d'ivoire 66 Mozambique 100 Tanzania 66 Peru 95 Ghana 65 Mexico 82 Burkina Faso 65 Uganda 80 Niger 59 El Salvador 78 Mali 57 Botswana 77 Zimbabwe 51 Modified from World Bank, Global Development Finance (2008) 19

20 Sub-Saharan Africa: Real GDP Growth Correlations Rest of the World(1) 0.60 European Union 0.32 United States 0.01 Developing Countries(1) 0.54 Asia 0.30 Latin America 0.32 (1) Excluding Sub-Saharan Africa Source: IMF,

21 Don t count your chickens Western Hemisphere Growth Rates, Actual and Projected Source: IMF World Economic Outlook, various issues

22 Every cloud 1. The crisis provides a unique opportunity to deliver on pledges regarding aid efficiency. 2. Developing countries have the possibility of more policy space. 3. Opportunity for revisiting global governance issues in a way which takes better into account the Southern countries.

23 Thank You for more information The Development Centre ( ) Andrew.Mold@oecd.org