A time of crisis,

a time for change

Ottawa 19 October 2009

2

Crisis Unexpected?• A crisis foretold• Unsustainable global imbalances • International financial architecture• Ideology: deregulation, self-regulation,

inadequate and inappropriate regulationcapital account liberalization

• Financial Globalization: No growth, stability• Developing countries innocent victims• Policy responses: inadequate; double

standards• International cooperation: G7, G20, UN

3

Global imbalances ballooned

United States

Oil exporters

Euro Area

Japan

China

Other Asia

Other industrialised

Central and Eastern

Europe

Latin America

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

USD bn

.

4

Net Capital Importers

Capital Importers

U. K.9%

I tal y3%

Turkey 3%

Greece3%Others

20%

U. S.50%

Spai n9%

Aust ral i a3%

US macro-financial policies•International monetary + financial ‘non-system’

•Prolonged loose macroeconomic policies

•Lax financial regulation + policies

•Low US savings rate•US over-consumption, E Asian

surpluses•US, UK economic hubris

6

Broad Liquidity!

964 ％ of World GDP

78 ％ of Total

10 ％ of Total

11 ％ of Total

138 ％ of World GDP

1 ％ of Total

122 ％ of World GDP

9 ％ of World GDP

Derivatives

Securitized Debt

Broad Money

Power Money

7

Globalization: finance>trade

0

20

40

60

80

100

120

140

160

180

1980 1990 1995 2000 2006

US

$ T

rillio

ns

0

50

100

150

200

250

300

350

As

pe

rce

nt

of

GD

P, in

dic

es

19

80

=1

00

Global financial assets

Global merchandise trade

) Global financial assets as a percentage of GDP(right axis

) Global merchandise trade as a percentage of GDP(right axis

8

Finance-investment nexus?

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Gross Fixed Capital Formation

Gross Financial Investment Abroad

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

Source: UN World Economic Situation and Prospects 2008 )forthcoming(

-1000

-800

-600

-400

-200

0

200

Bill

ions

of U

S do

llars

Developing economies Africa Eastern and Southern Asia Western Asia Latin America

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

12

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

Capital inflows contract

0

250

500

750

2005 2006 2007 2008 2009*

$ B

illio

ns

Source: IFF *Projection

Credit crunch: US, EUPercentage of lenders tightening standards, by size of enterprise seeking loans

Panel A: United States Panel B: European Union

-20

0

20

40

60

80

100

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2006 2007 2008

Large and Medium Small

0

20

40

60

80

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2006 2007 2008

Small & Medium Large

Borrowing costs for Southremain high

0

2

4

6

8

10

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09

Africa

Asia

Latin America

Europe

17

Contagion: crisis spreadsFinancial 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. for exports of others Prices, output declines globally Growth, employment declines globally

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, outputrices, output lower employment, incomes

20

Globalization: Parallel fates

-4

-2

0

2

4

6

8

2003 2004 2005 2006 2007 2008 2009 (P)

Developing countries

Developed countries

World

Preliminary, revised forecast

Food prices remain higher

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Wheat Maize Rice

26

World trade collapse

10.9

7.7

9.2

6.6

2.4

-11.1

4.1

-12

-8

-4

0

4

8

12

2004 2005 2006 2007 2008 2009 2010

Ann

ual p

erce

ntag

e ch

ange

0.5

Trade collapse consensus

6.0

2.2

-9.0

-13.2-15.0

-10.0

-5.0

0.0

5.0

10.0

WTO OECD

2007 2008 2009 Forecasts

% c

ha

ng

e

South exports fall more

(volume index, 1998 = 100)

100

120

140

160

180

200

220

240

260

280

2006M

1

2006M

3

2006M

5

2006M

7

2006M

9

2006M

11

2007M

1

2007M

3

2007M

5

2007M

7

2007M

9

2007M

11

2008M

1

2008M

3

2008M

5

2008M

7

2008M

9

2008M

11

2009M

1

World trade

Developing and other non-OECD country exports

OECD country exports

Source: CPB

Oil, metal prices fell more

30

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

World economy contracted, recovery uncertain

3.9

2.1

-2.6

1.6

3.9

3.5

2.7

4.0

-3

-2

-1

0

1

2

3

4

5

2003 2004 2005 2006 2007 2008 2009 2010

Optimistic

Pessimistic

Growth by main country groups

Per capita GDP growth rate

Change in growth rate

2004-07 2008 2009

2009/

2008

2009/ 2004-

7World 2.6 0.9 -3.4 -4.3 -6.0Developed

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

12

33

18

1

14

2

13

60

22

0

10

20

30

40

50

60

70

2008 2009 2010

Developed countries

Economies in transition

Developing countries

Livelihoods threatened•Declining living standards•Many livelihoods under threat,

especially when social protection not well- developed

•Prolonged slowdown in world economy likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth

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

Aid flows unreliable

0%

1%

2%

3%

4%

5%

6%

7%

8%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Other LICs

Sub-Saharan Africa

LDCs

19697

1591

260

5 0 0 0

1 0 0 0 0

1 5 0 0 0

2 0 0 0 0

G-2 0 to tal co mmitme nt G-2 0 fis cal s timulus , 2 0 0 9 O D A to A frica, 2 0 0 8

Bill

ion

US

Dol

lar

ODA for Africa vs G20 recovery efforts

• Net ODA is net of principal payments, but not of interest received on such

loans• Net Aid Transfer (NAT) is net of both• Japan recently received >$2bn/year in interest

on ODA loans• NAT excludes cancellation of old non-ODA loan,

e.g. a 2003 Paris Club agreement cancelled some $5bn in non-ODA official debt owed.

• That cancellation is ODA, but generated little additional net transfers, ie. NAT

• Hence, e.g. DRC received $5.4bn in ODA in 2003,

but only $400m. in NAT

Net aid transfers?

Remittances to developing

countries declining•Historically, remittances to home countries in crisis rise

•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

Stimulus lags delay recovery

0 2 4 6 8

3 month delay

Immediate andsustainedstimulus

efforts

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2009 2010 2011

Global recovery with coordinated vs uncoordinated stimuli, 2010-2015

Output, jobs recovery lags, 1991, 2001

Duration of output recovery and job market recovery after the 1991 and 2001 US recessions (in months)

0

10

20

30

40

50

60

Output Job market recovery

1991 2001

Multilateral 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•June 09 summit on crisis + impact on

developing countries •UN PGA (Stiglitz) Commission of

Experts

New Bretton Woods moment?Bretton Woods, 1944: United Nations

conference on monetary + financial affairs• 15 years after 1929 Depression• Middle of WW2• US initiative vs UK Treasury stance• 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 monetary and financial stability

48

Thank youPlease visit UN-DESA

www.un.org and G24 www.g24.org websites

•Research papers•Policy briefs•Other documents

Acknowledgements: UN-DESA, ILO