Financial Crisis, Recession, and the Development Agenda

1. Financial Crisis, Recession, and the Development Agenda Richard Newfarmer Special Representative to UN and WTO World Bank ECOSOC Geneva July 9, 2009

2. Financial panic plunges GDP in high income countries into severe recession… Q3 2008 Q4 2008 Q1 2009 Source: World Bank.

3. Contracting consumption in rich countries transmits recession to poor countries – as world trade collapses Annual growth of global trade volumes Percentage change Source: World Bank, Global Economic Prospects, 2009

4. … and costs of borrowing have skyrocketed… and capital flows have dried up Spread over US Treas., basis points Private capital flows to dev’ing countries US$ b. Forecast 2008-09 Corporate CEMBI composite $1,158 billion in 2007 East Asia Crisis Sovereign EMBIG composite

5. …leading to global recession…. for the first time in the last 70 years Percent Growth of real GDP Developing World High Income Source: World Bank, DEC Prospects Group, Consensus Forecast, May 2009.

6. Crisis effects growth regions differently in 2009GDP growth, percent Source: World Bank.

7. Outlook? Recovery could begin late this year or next …but strength and duration is uncertain GDP annual growth rates (%) Forecast % change Developing countries High-income countries ? Source: World Bank, Global Development Finance, 2009

8. Green shoots? Tentative signs that recession is bottoming out …led by developing countries industrial production, percentage change (saar) Developing (excluding China) World (excluding China)** High-income OECD ** China is excluded due to vagaries in recent data tied to the Lunar New Year. Source: World Bank through Thomson/Datastream.

9. Low-income countries are at particular risk… • Especially those that: • export only a few commodities • have large % in poverty • have weak fiscal positions • have low reserves/ high debt • “fragile states” • Implications of slowdown… • 200 million likely to be trapped in poverty • Unemployment will certainly rise thru 2010 • Infant mortality and child mortality rises – 200,000- 400,000 infants annually • Health services cutback Source: IMF, 2009

10. Risks… Inattention to the long term development agenda • For example, climate change • Countries in brown and yellow likely to experience: • More droughts • More severe storms • Rising water scarcity • Rising sea levels • Countries vulnerable to climate change are the same as those to recession • Both forces could produce unprecedented: • Declines in food production • Pressures on migration

11. Split on Recession Cure, Leaders Try 3 Approaches The crisis requires a multilateral response… and the G20 leaders strive to coordinate actions… G20 Summit April 2 Agreed: • Accelerated restructuring of banks and increased regulation • Pledge to avoid protection • Fiscal stimulus and expansive monetary policy • Mobilization of more capital for developing countries • IMF – $700- b. New arrangement to borrow (NAB) • World Bank MDBs – Capital increase for ADB • Reform of the IMF and World Bank – Increased capital , new voting, merit selection of leaders

12. Improving the multilateral response requires… • Fulfilling pledges for development assistance, and augmenting these with a “vulnerability fund” • Need for social safety nets, labor –intensive infrastructure, SMEs, “aid for trade” • Financing gaps may be between $200-700 billion • Problem: 2010 when fiscal pressures in rich countries become more acute • Resisting pressures for trade protection will require vigilance and determination – and renewing a commitment to the Doha Development agenda • Improving regulation of financial markets will require careful balancing of national regulatory authorities with international cooperation

13. Financial Crisis, Recession, and the Development Agenda Richard Newfarmer Special Representative to UN and WTO World Bank ECOSOC Geneva July 9, 2009