Transcript Addressing the South`s Challenges in the Global Economy in Crisis

Addressing the South’s Challenges in
the Global Economy in Crisis
Martin Khor
South Centre
November 2011
Good Performance of BIC and Other Dev
Countries in 2000s
• Developing economies did well in 2000s until the
2007-9 global crisis
• Per capita GDP grew from 1990 to 2009 for Brazil
($3464 to 8220), India (378 to 1032) and China
(341 to 3735)
• Their share of world GDP grew for China (3.9 to
12.6%) and India (3.1 to 5.1%) but not for Brazil
(3.3 to 2.9%) (from 1990 to 2009).
• BRICS share of world exports grew in 2000 to
2009 from 7% to 13.8%
Reasons for Rise of South in 2000s
• Partly due to policy improvements, structural changes,
avoidance of debt and BOP crises of the 80s and 90s
• However BIC and other emerging economies differed
among one another, and some had their own
weaknesses which can become vulnerabilities.
• Major factor for rise of South is that North set up
favourable environment by providing (a) markets
(especially for Asian manufactures), (b) cheap finance
(low interest, capital flow), (c) relocated industries
2008-9 Crisis and Post Crisis
• The 2008-9 global crisis affected the South’s markets
(exports fell), external finance (capital flows reversed)
and GDP (from 2007-9, China GDP 13 to 8.7%; India
9.4 to 5.7%; Brazil 6.1 to -0.6%).
• Rapid recovery in 2009-2010 due to low-interest , easy
monetary policy, bail-outs, Northern fiscal stimulus,
and some South counties’ own reflation policies.
• South’s growth recovered due to as exports grew;
capital inflows resumed. China’s recovery helped
provide demand for commodity exports.
Changed Conditions – South’s Rise on
Same Basis Not Sustainable
• At present, North policies are to some extent still
accomodative (eg very low interest)
• But Europe has shifted from fiscal stimulus to austerity,
and mired in debt and deflation spiral. US has selfimposed policy limits to govt spending.
• Medium prospects -- North austerity, sluggish growth
or new recession.
• Effects of on South can be expected to be slowdown in
export markets, slowdown or reversal of capital flows,
also reduced FDI
• Thus, continued rise of BIC and South on same basis
(dependence on North markets and finance) not likely
Vulnerabilities in new crisis situation
• BIC and other South countries have weaknesses which
may make them more vulnerable in the new global
crisis situation. Thus each country has to address its
weakness and vulnerability.
• For example, China has very high savings rate (54% of
GNP) and high investment (45%) but low consumption
rate (36%). India’s saving is 30% and investment 34%.
Malaysia has high savings (38%) but low investment
(20-21%). (2007-8)
• Brazil has low savings (18-20%) and investment (1821%). SAfrica also has low savings (18-19%) and
investment (21-22%) (2007-8).
Vulnerability: Dependence on External Finance;
Volatility in Capital Flows
• BICS also have different current account situations: In
latest 12 month period, China has $303bil surplus, while
others are in deficit – India $36b; Brazil $48b, SAfrica $11b.
• Major emerging economies have similar vulnerability in
facing volatile and large capital flows, in boom-bust cycles.
The latest boom led to inflation pressures, asset and stock
market bubbles and currency appreciation (with import
surges and loss of export competitiveness in some
countries).
• Most vulnerable are countries with currency appreciation
and current account deficit at same time.
Capital Flows: Effects and Areas of Fragility
1. CA deficits and currency appreciations
– Appreciations during pre-Lehman boom; declines in 2008-09 quickly reversed.
– Almost all dev countries appreciated, but faster in deficit (India, Brazil,
Turkey, RSA) than surplus countries (China, Korea, SEA).
– Adverse effects on exports in some countries
2. Build-up of short-term private debt in some – risk of corporate default if reversed.
3. Asset bubbles
– Increased correlation between capital flows and equity prices (increased
foreign presence in domestic equity and bond markets)
– Credit and asset bubbles , risk of hard landing.
NET PRIVATE CAPITAL FLOWS TO DEEs (% of GDP)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2010
2007
2004
2001
1998
9
1995
1992
1989
1986
1983
1980
1977
1974
1971
-0.5
Brazil
160
10
150
8
140
6
130
120
4
110
2
100
90
0
80
-2
70
60
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
-4
Dec-11
India
125
12
10
115
8
105
6
95
4
2
85
0
75
-2
65
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
-4
Dec-11
China
125
12
10
115
8
105
6
95
4
2
85
0
75
-2
65
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
-4
Dec-11
RECENT COMMODITY CYCLES
•
•
Commodity cycles overlapping with cycles in capital flows and dollar
–
Price rises started in 2003, accelerated in 2006 and continued initially in 2008, like
capital flows.
–
Started to fall in August 2008, about the same time as capital flows fell and dollar
rose as crisis deepened (Lehman); flight to safety, $ rising.
–
Started to rise again in Spring 2009 with QE and low interest rates, together with
the boom in capital flows and fall of the dollar.
Financialization of commodity markets: between 2003 and 2010 the number of
contracts in commodity derivatives (futures and options) rose from 13 million to 66
million and investment in index trading rose from $13 billion to $320 billion.
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PRIVATE CAPITAL FLOWS AND COMMODITY PRICES
180
700
150
500
120
400
300
90
200
60
100
0
30
1998
1999
2000
2001
2002
2003
2004
Net private financial flows
2005
2006
2007
2008
Right: Primary Commodity Prices
14
2009
2010
Indices (2005=100)
USD, Billions
600
END OF BOOMS IN CAPITAL FLOWS AND COMMODITY PRICES
•
Common factors affecting boom in capital flows, commodity prices and dollar:
 Monetary policy and lack of profitable investment and lending opportunities in
advanced ecnomies; search for yield in DEEs and commodity markets.
 Strong growth in developing economies attracting capital and raising commodity
demand
•
Scenarios: both booms can end with:
– An abrupt monetary tightening in US, as in early 1980s (debt crisis)
– Monetary tightening and slower growth in China.
– A BOP or financial crisis in a major emerging economy.
– Prolonged European crisis, leading to financial instability, recession
•
Most vulnerable are those developing countries enjoying dual benefits of global
liquidity expansion: boom in commodity prices and capital flows (Brazil, RSA).
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Vulnerability of Countries that are Dependent
on both Commodities and Capital Inflows
• They enjoyed dual benefits of global liquidity
expansion: boom in commodity prices and capital
flows.
• Their growth performance depends on two factors
that are largely beyond their control-- commodity
prices and capital flows.
• Usually these two are positively correlated. When
commodity markets flatten, they start running
deficits; at same time capital flows tend to dry up.
POLICY CONCLUSIONS ON CAPITAL FLOWS
•
•
Developing Countries:
–
Need determined action to control capital flows – inward and outward. Should
not allow currencies and CA to get out of hand. Commodity exporters should run
surplus at times of boom, keep them in (earned) reserves as self-insurance for
rainy days (Prebisch).
–
Developing countries as a group no longer depend on capital flows from North.
Need to introduce reliable and stable mechanisms for south-south recycling from
surplus to deficit countries without going through Wall Street or the City.
Reform of the international financial architecture to reduce systemic instability:

Reform of Reserves system

Surveillance of systemically important countries

Regulation of international capital flows, including in source countries.

Regulating of trading in commodity futures.
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Role of and Changes in China
• As North slows, can China replace it as growth engine of BIC and
South?
• China itself will face its own problems. Exports contribute about
50% of its recent (pre-crisis) growth. If its export growth slows from
24-30% (2002-6) to 10%, its GDP growth may reach only 7%.
• Domestic engine of growth: Needs to switch from investment to
consumption-led (consumption ratio fell from 55% late 1990s to
36% in 2008). Share of wages and household income (including
government transfers) in GNP has to rise. Greater public spending
on health, housing, etc. needed.
• A shift from export led to consumption led growth needs industrial
restructuring (may include phasing out of some low-paying labourintensive and high-polluting industries)
Changes in China will affect other
developing countries
• East Asian developing countries are even more export
dependent for growth, will be affected more than China.
• They supply components to China used for China’s exports
to North. Of $100 of China’s processing exports, $35-40 go
to East Asian dev countries and $20-25 to China.
• A $100 increase in Chinese consumption increases imports
only by less than $10.
• China’s slower growth will also affect demand for and
prices of commodities. This has effect on Brazil (which is a
major commodities exporter) and commodity-dependent
countries including in Africa.
New Directions Needed
• Especially with bleak prospects from global crisis in
medium term, BIC and other South countries need to plan
reforms
• China and Asean need to reduce dependence on Northern
markets, develop domestic engines of growth (China
through consumption-based growth, Malaysia etc through
productive investments), and expand regional and S-S trade
and production cooperation.
• Dev Countries with trade/CAccount deficits have to reduce
dependence on external financing and capital inflows.
• Both sets of countries require restructuring, strong
industrial policy, overall development policies and a
developmental state
Balanced, Equitable and
Sustainable Development
• Better balance also required in future
development, with regard to economic/social
development; reducing income and rural/urban
inequalities; and tackling environment concerns
• BICS have initiated climate-friendly development
with national programmes and national
targets/pledges that are rather ambitious
• Besides implementing national measures,
stronger collaboration within BICS and between
them and other South institutions and countries
is essential
Managing Strategic Challenges in BICS and South
• Managing strategic change: Big challenge to combine economic
growth with social equity and environmental goals, in midst of
global slowdown
• Thus, need for strategic thinking, research in BICS & South
governments, academics, think-tanks:
(1) National policy
(2) South-South cooperation in economic, social, environ areas:
(3) Managing N-S relations;
(4) Reviewing and reforming international institutions and order
• Need to strengthen or create institutions at national, BICS, Regional
and South levels (trade, financial and production cooperation)
New Challengs in N-S Relations
• Managing barriers thrown up by North: The North should
also manage its decline in context of positive international
cooperation. However it appears the mood for such
cooperation has darkened considerably.
• Non or little cooperation in providing financial resources,
tech-transfer, trade relations
• Desire of North to redefine the South – new categorisation
(advanced developing countries, etc) and only recognising
LDCs or SVEs for development treatment (WTO, UNFCCC, RioPlus-20, etc). All others to be treated similarly as North re
obligations
Potential Obstacles from North
• Emphasis on new IPR barriers and TRIPS Plus
enforcement, affecting technology development
• New trade protection measures, using climate change,
border adjustment taxes, airline emission charges,
carbon footprint standards
• Renewed attack on subsidies used by the South (US vs
China---solar panels, wind energy cases and review of
200 subsidies) even as North dragging its feet on
reducing its agricultural subsidies.
• Insistence on new unfair barriers to development,
especially climate emission reduction obligations
Trade and Investment Agreements
• WTO: Imbalanced Uruguay Round agreements but South has
organised itself better in Doha talks; thus impasse (possibly
permanent); but South must prepare itself for what comes
next. Dangers of recategorising developing countries and new
treaties on “new issues” even when “old issues” like
agriculture subsidies are not settled
• North-South FTAs can threaten financial stability and new
industrial and development policies. Includes US, EU
bilaterals, EU’s regional EPAs and US TPP.
• Bilateral investment treaties also constrain finance stability
policy measures and need to be reformed
• Can South-South agreements be better?
Moves for financialisation of
climate, forests, natural resources
• Possibly fastest growing area of new financial markets is in
climate change. Growth of carbon markets.
• Green Climate Fund with potential of $10bil a year now and
$100 bil by 2020. Design of Fund: North demands a private
sector facility with own governance and rules, including
“leveraging” private funds through loan guarantees etc. –
financial engineering that had contributed to current crisis.
Decision to be made in Durban Dec 2011 and after
• Moves to extend financial markets to other environmental
areas---like biodiversity and natural resources. Initiatives
include Green Economy (Rio Plus 20), REDD plus (forests),
payment for environmental services, etc.
Conclusions
• Challenges are enormous, and have to be faced
simultaneously: addressing global crisis’s effects,
addressing need for global financial system reform,
addressing weaknesses in national economy, changing
the basis of effective demand and developing new
markets and structures, and addressing social equity
and environmental issues.
• The moment for reflection for strategic and practical
measures has come. BICS and South require their own
strong policy institutions to reflect collectively and
nationally on future trends and strategic options.
Thank you
[email protected]
www.southcentre.org