Transcript Monetary unions among developing and emerging markets

Thorvaldur Gylfason
 How
A
we got to where we are
brief history
 How
innocent bystanders are
affected by crisis
 Implications
 Where
 From
for Africa
to go from here
good governance to greater
helpworthiness through reform
 Financial
crises follow man like pandemics,
with persistent regularity


About every 20 years or so in United States at
least from 1792 until Great Depression 1929-39
Then, long-lasting stability, with intermittent
minor crises


A


Why? Confluence of two forces, to be described
And then, threat of another big one in 2008
following collapse of Lehman Brothers
big one now seems to have been averted
How?
Lessons from history
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 In
1970s, onslaught in academic circles
against active stabilization policies

Theoretical and practical grounds


Government intrusion into private markets
Not very influential in Finance Ministries and
Central Banks
 In
1980s, similarly motivated attack on
regulation, esp. financial regulation



Same forces that had condemned stabilization
This time, more influential in political arena
Significant reversal of 1930s financial regulation

Commercial vs. investment banks: Firewall torn down
 Appears
plausible to infer that deregulation
encouraged banks to take excessive risks

Subprime loans in US, housing bubble, etc.
 But
willingness to apply stabilization policies
was still in place



Concerted action by industrial countries seems to
have turned the tide
G20 agreed to inject $1.1 trillion into circulation
Some think that the action should have been
more ambitious
 Emerging

consensus on need for reregulation
How exactly remains to be worked out
Real GDP growth (%)
2007
2008
2009
2010
World economy
5.2
3.2
-1.3
1.9
Advanced economies
2.7
0.9
-3.8
0.0
Emerging and developing
8.3
6.1
1.6
4.0
Sub-Saharan Africa
6.9
5.5
1.7
3.8
Advanced economies
Strong output contraction, with negative growth in 2009
Emerging and developing economies
Much smaller per capita output contraction in 2009,
followed by return of brisk growth
Even so, deepest world recession since 1960
First time world output declines since then
 In
Africa, hard-won economic gains are at
stake despite relatively weak financial
linkages with advanced economies

Reduced demand for African exports



Fall in commodity prices (e.g., Angola)
Reduced FDI due to tighter credit, flight to quality


Also, smaller worker remittances
Also, reversed portfolio investment flows, putting
pressure on exchange rates, equity prices, and reserves
Reduced overseas development assistance
 These

external shocks cause severe slowdown
Especially in Angola, Botswana, South Africa
 Further


Substantial deterioration in fiscal and external
balances, especially in commodity exporting
countries
Financing is strained due to tight credit
worldwide
 Risks



challenges
are tilted to downside
If fiscal stimulus in advanced economies proves
too small, problems may persist, or worse
Domestic banking systems may weaken as slow
growth reduces credit quality and asset losses
Without well-functioning safety nets, crisis could
lead to significant increase in poverty in some
countries

Main challenges
Contain adverse impact of crisis on economic growth
and poverty
 Preserve hard-won gains of recent years
 Macroeconomic stability
 Debt sustainability


How?

Fiscal policy to cushion pernicious effects of crisis


There is fiscal space provided debts are low
Otherwise, rely on automatic stabilizers
Monetary stimulus may be feasible as long as inflation
remains under control
 Monitor financial institutions and their balance sheets

Real GDP growth (%)
2007
2008
2009
2010
Angola
20.3
14.8
-3.6
9.3
Botswana
4.4
2.9
-10.4
14.3
Kenya
7.0
2.0
3.0
4.0
Lesotho
5.1
3.5
0.6
3.0
Malawi
8.6
9.7
6.9
6.0
Mozambique
7.0
6.2
4.3
4.0
Namibia
4.1
2.9
-0.7
1.8
Rwanda
7.9
11.2
5.6
5.8
Swaziland
3.5
2.5
0.5
2.6
Tanzania
7.1
7.5
5.0
5.7
Uganda
8.6
9.5
6.2
5.5
Zambia
6.3
6.0
4.0
4.5
Zimbabwe
-6.1
-30
3.7
6.0
6000
5000
4000
3000
2000
1000
Angola
Botswana
Kenya
Lesotho
Malawi
Mozambique
Namibia
Rwanda
Swaziland
Tanzania
Uganda
Zambia
Zimbabwe
Total
0
-1000
-2000
Source: World Bank, World Development Indicators 2008
 Political
on FDI

risk has significant, negative impact
Inflation also has negative impact, but not robust
 GDP
growth rate, literacy, and openness have
significant, positive impact on total FDI

GDP per capita and infrastructure also have
positive impact, but not robust
 Conclusion



is obvious
Political risk and inflation need to be kept at bay
Growth, education, openness, and infrastructure
need to be promoted through public policy
What is good for FDI is almost always good in
itself, and is also good for growth
 FDI
encourages growth of host country by
augmenting domestic capital and enhancing
efficiency through transfer of new
technology, marketing and managerial skills,
innovation, and best practices
 Even so, literature suggests that FDI has both
benefits and costs depending on country
specific conditions and policies, including




Ability to diversify
Absorption capacity
Targeting of FDI
Opportunities for linkages between FDI and
domestic investment
10000
Angola
Botswana
8000
Kenya
Lesotho
Malawi
6000
Mozambique
Namibia
Rwanda
4000
Swaziland
Tanzania
Uganda
2000
Zambia
Zimbabwe
Total
0
-2000
Source: World Bank, World Development Indicators 2008
 One
major determinant: Political goodwill …
 … which, increasingly, depends on
helpworthiness as perceived by donors
 Helpworthiness can by built up by reforming
policies and institutions through





Freer trade to enhance efficiency
More and better education to promote better,
longer lives in smaller families
More FDI, without sacrificing resources or rights
Infrastructure, including energy grids to facilitate
– yes! – air conditioning
Monetary integration, as planned, to beat inflation
 Now,
as always, is the time to reform
 Marked,




but uneven progress in recent years
Botswana’s per capita GDP has grown by 5% a year since 1980
Secondary school enrolment is 75%, up from 48% in 1991
Births per woman have decreased from nearly 7 in 1960 to 3
Life expectancy is rising again after tragic drop due to Aids
 Important
economic and social gains are now
threatened by global crisis
 The right way to react to this threat is to
invigorate reforms of policies and institutions
 Now, as always, is the time to reform