Transcript Investing out of the crisis

The Global Crisis:
Implications for Developing
Countries
AN OECD DEVELOPMENT CENTRE’S
PERSPECTIVE
Guillaume Grosso
Chief Operating Officer
Policy Counsellor
OECD Development Centre
World Civic Forum
7 May 2009, Seoul
The Global Crisis: Implications for Developing Countries
Outline
• The crisis contagion
 Real economic activities and employment
 Net capital flows
• Why are low income countries particularly vulnerable?
 Heavy dependence on external capital flows
 Difficulties in sustaining external debt
•
Shifting wealth, a capacity for resilience?
 Trade portfolio diversification
 South-South linkages
• Recommendations
The crisis contagion
Contracting demand in OECD countries will impact real economic activities and employment
Emerging economies
 Singapore’s economy shrunk at an annualised rate of 17% in 2008
 Chinese Taipei’s economy may contract by 11% in 2009
 India reported a year-on-year trade decline of 15% for October 2008
(Source: The Economist, 2009)
Low income countries
 Ethiopia is vulnerable to a slowdown in international air-traffic (Ethiopian Airlines
being one of the country’s main earners of foreign exchange)
 Cambodia’s textile industry reportedly orders are down 60%
 Mozambique could be adversely affected by the decline of the automobile industry
(Alumina being its leading export)
The crisis contagion
Net capital flows to emerging economies are estimated to be USD165 billion in 2009
Net capital flows to emerging economies
(in USD billion)
1000
900
800
700
600
500
400
82% decrease
300
200
100
0
2007
2008
2009
(Source: Insitute of International Finance)
4
Why are LICs particularly vulnerable?
High dependence on external financing
 Aid budget averages around 9 per cent of Africa’s GDP
Aid as an average percentage of net capital flows 2000-06
Developing countries
Sub-Saharan Africa
Private flows
84.9
38.4
Overseas development aid
19.5
65.4
Other official flows
-4.4
-3.9
Total
100.0
100.0
Source: McCulloch (2008)
Why are LICs particularly vulnerable?
Strong reliance on remittances as a source of foreign exchange reserve
 Remittances are now larger than commodities as a foreign exchange earner in 28
developing countries. e.g. Sub-Saharan Africa: USD 19 billion for 2008 (Source: WB)
Net Capital Flows to Developing Countries, 1980-2006
Source: Authors, based on World Bank and OECD data
Why are LICs particularly vulnerable?
High share of banking sector in foreign ownership
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)
Why are LICs particularly vulnerable?
Dependence on FDI as a major form of capital flow
Net flows (in USD billions) to Sub-Saharan Africa,1999-2007
• Global FDI inflows fell by
about 21 per cent in 2008 and
likely to fall further in 2009.
30
25
• Resource seeking FDI projects
could suffer from the decline in
world demand and in prices.
20
15
10
• In times of crisis, due to profit
remittances, FDI can be an
expensive form of financing.
5
0
1999
-5
2000
2001
2002
2003
2004
2005
2006
2007
Net FDI inflows
Net portfolio equity inflows
Net debt flows official creditors
Net debt flows private creditors
Source: World Bank, Global Development Finance, 2008
• FDI investors may easily pull
out financial resources.
(Source: UNCTAD)
Why are LICs particularly vulnerable?
Increasing difficulties in servicing debt
Due to a combination of:
Debt service to GDP ratio (%)
Madagascar
Rwanda
Eritrea
Mozambique
Uganda
Ethiopia
Togo
Niger
Nigeria
Sudan
Sierra Leone
Tanzania
Burkina Faso
Mali
Malawi
Chad
Congo, Rep.
Ghana
Benin
Zambia
Mongolia
Kenya
Senegal
Swaziland
Cote d'Ivoire
Cameroon
Guinea
Burundi
Mauritania
Central African R.
Sao Tome and P.
Gambia, The
Comoros
Lesotho
Congo, Dem. Rep.
Guinea-Bissau
10
9
8
7
6
5
4
3
2
1
0
Source: World Bank Global Development Finance (2008)
1) Endogenous debt
dynamics:
•USD appreciation
•Drop in export revenues
•Need to increase social
spending
2) Debt relief process slow
down
3) Closing down of new
channels of financing:
Sovereign bond issues
Shifting wealth, a capacity for resilience ?
High degree of openness to international trade risk affecting the current account in times of crisis
but portfolio have been diversified
Destination of exports in Least Developed Countries, 2006
India, 3%
China , 19%
others , 29%
USA & Canada,
24%
EU 25, 20%
Japan, 5%
Source: UNCTAD Least Developed Countries Report, p. 158
Shifting wealth, a capacity for resilience ?
Can South-South linkages compensate for the economic slowdown in the North?
Sub-Saharan Africa: Real GDP Growth
Correlations – 1980-2007
Rest of the World
European Union
United States
(1)
Developing Countries
Asia
Latin America
(1)
(1)
0.60
0.32
0.01
0.54
0.30
0.32
Excluding Sub-Saharan Africa
Source: IMF, Regional Economic Outlook: Sub-Saharan
Africa April 2008
• Correlation of growth rates in SSA
with growth rates in Latin America
and Asia is just as high as the
correlation with its traditional
trading partners in Europe
• Correlation of growth rates in SSA
with growth rates in the US amounts
to only 0.01
Recommendations
OECD countries must provide effective and coordinated response.
• OECD countries must:
 deliver on pledges of aid efficiency: we should not add an 'aid crisis‘ to the
financial crisis
The financial crisis should give a new impetus to governments’ efforts to improve aid
effectiveness, as set out in the Paris Declaration and the Accra Agenda for Action and
allocate aid budgets in a way that is pro-poor.
 reject trade and investment protectionism
 preserve innovation as an engine for growth
 not use the crisis as an excuse to weaken efforts to achieve long term green
economic growth and promote clean alternatives
• The IMF and the World Bank have put in place facilities to help LICs deal with exogenous
shocks. Coordinated and rapid response is needed. Conditionality could potentially still be
a problem.
• Donor community must prioritize pro-poor public expenditures, social protection and
safety nets.
Recommendations
Developing countries must focus on domestic resource mobilisation.
• They must prioritize aid budgets towards pro-poor public expenditures, social
protection and safety nets for the most vulnerable people.
• They should diversity their trade portfolio to create more South-South linkages.
Thank you