Guillaume Grosso Chief Operating Officer Policy Counsellor OECD Development Centre

1. 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

2. 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

3. 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)

4. The crisis contagion • Net capital flows to emerging economies are estimated to be USD165 billion in 2009 82% decrease 4

5. 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 Source: McCulloch (2008)

6. Why are LICs particularly vulnerable? • 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) Strong reliance on remittances as a source of foreign exchange reserve Net Capital Flows to Developing Countries, 1980-2006 Source: Authors, based on World Bank and OECD data

7. 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 Modified from World Bank, Global Development Finance (2008)‏

8. 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. • Resource seeking FDI projects could suffer from the decline in world demand and in prices. • In times of crisis, due to profit remittances, FDI can be an expensive form of financing. • FDI investors may easily pull out financial resources. • (Source: UNCTAD) Source: World Bank, Global Development Finance, 2008

9. Why are LICs particularly vulnerable? Increasing difficulties in servicing debt • Due to a combination of: • 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 Debt service to GDP ratio (%) Source: World Bank Global Development Finance (2008)

10. 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 Source: UNCTAD Least Developed Countries Report, p. 158

11. 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 • 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 (1) Excluding Sub-Saharan Africa Source: IMF, Regional Economic Outlook: Sub-Saharan Africa April 2008

12. 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. • rejecttrade 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.

13. 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.

14. Thank you