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Impact of The Global Slowdown On Developing Countries

The global financial crisis has severely impacted developing countries through massive capital outflows, a sharp drop in foreign investment, declining remittances and trade financing, and deteriorating economic growth. This poses major challenges to poverty reduction efforts. The World Bank advisor recommends that developed countries maintain aid flows and export credits to support trade. Developing countries should pursue counter-cyclical fiscal policies if possible, support the poor through social programs, and invest in labor-intensive infrastructure to help mitigate the crisis impacts. Global cooperation is needed to address this serious threat to developing economies.

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68 views

Impact of The Global Slowdown On Developing Countries

The global financial crisis has severely impacted developing countries through massive capital outflows, a sharp drop in foreign investment, declining remittances and trade financing, and deteriorating economic growth. This poses major challenges to poverty reduction efforts. The World Bank advisor recommends that developed countries maintain aid flows and export credits to support trade. Developing countries should pursue counter-cyclical fiscal policies if possible, support the poor through social programs, and invest in labor-intensive infrastructure to help mitigate the crisis impacts. Global cooperation is needed to address this serious threat to developing economies.

Uploaded by

NANDUTHECHAMP
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Impact of the Global

Slowdown on Developing
Countries

Jeffrey Lewis
Senior Advisor, The World Bank

Presentation to the OECD Global Forum on Development


December 9, 2008
1 Current Status of the World Economy

2 Impact of the Financial Crisis on


Developing Countries

3 Policy Challenges and Responses


Current Status of the World Economy

The world economy entering a major downturn


OECD countries in recession, enormous financial
sector dislocation, unknown fiscal costs of
bailouts, severe real economy dislocations,
stagflation potential
Developing country growth rate ex China & India
down by half
Emerging markets witnessing international
reserves declining, volatile equity and foreign
exchange markets
Weakening global trade - world trade likely to
decrease in 2009 for the first time since the 1982
recession, remittances dropping
Financial stress sweeps through
global markets
MSCI equity price indexes, January 2005=100
250
Emerging markets

200

Euro Area
150

US
100 A

Oct-2007
50
1

9
M

5M

6M

6M

7M

8M

M
05

05

06

07

07

08
08
0

0
20

20

20

20

20

20
20

20

20

20

20

20
Source: World Bank, Global Economic Prospects,
Deteriorating growth conditions in
major markets will depress expansion in
developing countries
Real GDP, percentage change
Forecast
% change
8
Developing
countries
6

High-income countries
?
0
1980 1985 1990 1995 2000 2005 2010

Shape of the coming recession: V,


U or World
Source: L? Bank, Global Economic Prospects,
mpact of the Financial Crisis on Developing Countries

Massive capital outflows, drastic drop off from


previous record highs (from $1 trillion to nearly
$500b, from 7.6 to 3 percent of GDP)
Many hard hit developing countries already had:
– Fiscally precarious positions
– High levels of initial poverty and malnutrition
– Limited capacity to implement targeted policy
response
Crisis transmission channels
– Affect wages and employment as inflation passes
through (headline inflation up 5% in most, >10%
in more than half)
– Sharp drop in investment, which has been driver
Financial flows are likely to drop
precipitously
Net private capital flows to developing countries
Possible
$ billions 2008-09
1000 $998 billion in 2007

800

600

East Asia Crisis


400

200

P
20 P
20 e
91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

20 6
07

08

09
0
19

19

20

20

20
19

19

19

19

19

19

19

20

20

20

Source: World Bank staff estimates 20


Trade finance has dried up and is
dragging down exports
Banks are refusing to honor letters of
credits from other banks and holding back
guarantees commodity buyers and sellers
need to ship their commodities
For agriculture commodity traders, it is
reported that the price has risen to 4
percent of the value of the contract, up
from 1 percent before the collapse of
Lehman Brothers
As market confidence is eroding, there is a
growing risk of resurgence of barter trade
between countries
Source: World Bank, staff
Remittances are likely to slacken
Remittances have been one of the most
dependable sources of finance for
developing, especially poor ones
Often bigger than largest commodity
earnings, or larger than capital inflows
These have often gone to the poorest
segments of recipient countries, with strong
poverty reduction impact

But these may not be sustainable at the high


levels of 2007…
As labor markets weaken in rich countries,
unemployment adversely affects unskilled
workers, a principal source of remittances
Crackdowns on illegal border crossing are
already beginning to take effect in the US
Policy Challenges and Responses

The effect of the crisis on poverty alleviation


efforts and MDGs is still being felt – up to 100m
at risk of poverty from food and fuel, financial
crisis still working through

What should global community focus on?


 Aid flows from donors should not weaken: with
the current liquidity squeeze, capacity of countries to
obtain external finance already weak
 Trade financing should not dry up: developed
countries should maintain export credits to
developing countries and ensure that capacity is
sufficient to support international trade flows
 Create conditions for recovery: Need to help
Governments ensure that capital (physical and
Policy options for developing countries

Counter-cyclical policies: But only


open to countries with access to
noninflationary sources of finance
and a sound investment climate
Policies to support the poor: tariff
reductions on food imports,
conditional cash transfers, stay in
school programs, and possibly public
employment programs
Public investments: in labor-intensive
and trade-related infrastructure, such
as rural roads
Fiscal and debt sustainability has
become an even bigger issue in the
current context
The capacity for fiscal response (and
exploring fiscal space) is influenced by debt
management (including debt strategy)
Weak debt management capacity in many LICs
curtails debt management strategies based on
prudent cost-risk considerations
Challenges for debt management in the
current crisis include
– Widening fiscal deficits (higher expenditures;
lower revenues)
– Rollover risk in difficult global financial
environment
– Realization of contingent liabilities
While only borrowing LICs can ensure that
Policy responses where developed
countries can help

Multilateral efforts to stem financial crisis


and reignite growth in home markets –
including fiscal stimulus and coordinated
monetary policies as well as new consistent
regulation
New commitments for development
assistance to finance fiscal expansion in
poor countries in next two years
Maintain market access or open markets
further, particularly in textile, clothing, and
agricultural products
Conclude Doha Development Agenda
World Bank pursuing measures to triple
Impact of the Global
Slowdown on Developing
Countries

Jeffrey Lewis
Senior Advisor, The World Bank

Presentation to the OECD Global Forum on Development


December 9, 2008

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