Crisis effects on ACP countries Challenges for decision-makers Alex Wilks, European Network on Debt and Development ACP EU Joint Parliamentary Assembly, 12 th February 2009 www.eurodad.org 1
Reduced inflows (1) 2
Reduced inflows (2) 3
Financial outflows: licit Debt service repayments from developing countries totalled US$ 540bn in 2006 In 2006, FDI outflows from the African region reached US$8bn. 4
Financial fallout Share of banking assets in SSA held by foreign banks with majority ownership, 2006 5
Financial outflows: illicit In 2006 developing countries lost an estimated $858.6 billion $1.06 trillion in illicit financial outflows. Europe ranks second in the share of overall illicit financial flows from developing countries, accounting for approximately 17 percent of the total ($15-18 billion per year, or 11-14 billion). 6
EU's importance for developing countries The EU is the main trading partner for developing countries. In 2007 a fifth of exports from developing countries went to the EU. The EU is also a major sourcing market with 28% of imports coming from African, Caribbean and Pacific (ACP) countries (incl. South Africa). The EU is a major source of remittances for developing countries. The EU27 accounted for 30% of all global remittance outflows in 2007. The EU is a major provider of foreign direct investment (FDI) to developing countries. Around 27% of total FDI were destined for developing countries in 2007, and 57% of FDI outflows are accounted for by the EU (2007). The EU is the world s largest provider of official development assistance (ODA). In 2007 the EU accounted for 53% of net ODA flows disbursed by Development Assistance Committee (DAC) donors. Total net ODA to the Least Developed Countries (LDCs) has nearly doubled in real terms over the last 10 years, reaching US$32.5 billion in 2007, representing one-third of total aid, more than half of which has been provided by the EU. 7
Summary of developing country situation Weak financial position the IMF has identified 26 vulnerable low income countries which have reserves which will cover no more than three months imports. Difficult to find replacement finance The IMF expects Africa s (average) current account deficit to widen by 5 per cent of GNI in 2009. In times of restricted credit it will be difficult to find sources to refinance these deficits. 8
EU government commitments MDG Eight: to develop an open, rule-based, predictable financial system. Monterrey Consensus on Financing for Development: Governments should attach priority to avoiding abrupt economic fluctuations that negatively affect income distribution and resource allocation, to encourage the orderly development of capital markets through sound banking systems and other institutional arrangements [including] transparent regulatory frameworks and effective supervisory mechanisms. 9
Long-term social effects of previous crises Previous financial crises have been very costly for developing countries in financial and human terms. In the 5 years following the start of the 1980s Latin American debt crisis real wages in Mexico and many other Latin American countries cumulatively fell by between 40 and 50 percent and in many instances did not recover until 10 or 15 years later". The incidence of extreme poverty in Mexico only fell below its 1984 level 22 years after the crisis started. 10
Growth and poverty Previous growth decelerations in Africa have been associated with increases in poverty, infant and child mortality and out-of-school children. Worst of all, just when economic reforms were beginning to take effect in Africa (growth had been sustained for ten years and accelerating over the last three), people are being asked to tighten their belts for a crisis that is not even remotely their fault. Shanta Devarajan, World Bank Chief Economist for Africa 11
Safety nets and fiscal stimulus Safety nets are absent or weak in most developing countries Governments cannot print or borrow money to invest in a fiscal stimulus. Interest rates are rising, not falling. Pro-cyclical response risks damaging the economy still more. 12
Pyschological/political effects Credibility has suffered. Of the: Free market model Rapid globalisation Advice of European governments and consultants, international financial institutions Political reactions may differ with public anger and instability in the EU and ACP 13
EU reactions so far Positive language, efforts to find new or improved proposals. Limited linkages between major EU financial reform processes (de Larosiere Group etc) and development. Danger of misleading announcements of EU contributions (including positive only private flows or of aid for exports not poverty reduction). 14
New rules: Responsible Financing Charter Clear ex ante and ex post rules of the game: only way to enforce (and reward) responsible lending and borrowing behaviour Internationally recognised standards for responsible lending and borrowing to apply to all loans issued to sovereign states or covered by a sovereign guarantee 15
Recommendations a) The EU can and must honour international commitments and produce a strong global element to its financial crisis response. b) This must assist developing countries maintain social spending and counter economic recession. Through maintaining inflows (aid) and plugging outflow gaps (debt cancellation, regulation against capital flight measures on tax havens, TNCs). c) The EU must also commit fully to rebalancing international economic governance mechanism, including the governance and roles of the World Bank, IMF and other institutions. 16
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