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The impacts of the international crises on the economies of the LDCs

The impacts of the international crises on the economies of the LDCs. GIOVANNI VALENSISI UNCTAD - Division for Africa, Least Developed Countries and Special Programmes Short courses for delegates, Geneva, 6 July 2012. Presentation structure. LDCs before the storm: the so-called boom

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The impacts of the international crises on the economies of the LDCs

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  1. The impacts of the international crises on the economies of the LDCs GIOVANNI VALENSISI UNCTAD - Division for Africa, Least Developed Countries and Special Programmes Short courses for delegates, Geneva, 6 July 2012

  2. Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission and factors of resilience • Key policy lessons

  3. Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission and factors of resilience • Key policy lessons

  4. LDCs witnessed a significant growth acceleration during the early and mid 2000s. Though in general oil & mineral exporters benefited disproportionately, growth resumption was relatively broad-based.

  5. Nonetheless, in spite of rapid and relatively stable growth in the 2000s, still LONG-TERM INCOME DIVERGENCE.

  6. Even during the boom, LDCs continued to play a marginal role in the world economy. In 2009 • 12% of world population; • 0.9% of world GDP • 1% of world merchandise exports (0.6% excl. oil) • 2.5% of world FDI

  7. During the boom period (2000-2008) 13 LDCs, as well as the LDCs as a group achieved the BPOA target of 7% GDP growth. Further, 11 LDCs achieved the BPOA target of 25% investment-to-GDP ratio.

  8. LDCs' economic boomin the 2000s was largely underpinned by external factors, above all the expansion of international trade and high commodities prices. The pace of export boom has been paralleled and even surpassed by the rise in imports volumes.

  9. The boomwas also underpinned bya significant, though unevenly distributed,surge in external financing (including inter alia debt relief). ODA remains the main source of external finance for LDCs.

  10. CAPITAL ACCUMULATION • Investment rose slightly to 21% of GDP, but is still significantly lower than in other developing countries (26% of GDP); • Except in oil exporters, capital accumulation was increasingly dependent on external resources.

  11. Agricultural stagnation (esp. in African LDCs); • De-industrialization in 27 LDCs; • Inability to generate productive employment outside agriculture.

  12. Double-digit growth rates for all products, though fuels eroded the weight of all other categories and stand now at ≈ 50% of the total. • Fuels & minerals pulled the exports boom in many fast-growing LDCs. • Manufactures played subdued role except in Bangladesh, Cambodia, and some small ec. (Bhutan, Gambia, Lesotho).

  13. Increasing concentration of exports and primary commodity dependence; • Widening import bill for sensitive products (→ food and fuel crisis in 2008).

  14. Economic growth has been accompanied by some improvements in LDCs macroeconomic fundamentals (esp. lower inflation, better business environment). In most cases, however,growth contributed only weakly to the development of LDCs’ productive capacities. LDCs’ economic performance during the 2000s is “best understood in terms of boom-bust cycle which have been typical of their development experience over the long term”. (LDCR 2010)

  15. Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission and factors of resilience • Key policy lessons

  16. Growth did not reverse AGRICULTURAL STAGNATION! Yet, the agricultural sector employs 60% of L force in the LDCs, and is crucial for poverty

  17. LDC population doubled since 1980 and is forecasted to double once more by 2050. • Young population structure and the youth bulge is expected to persist over the medium-term (by 2015 in 27 LDCs >40% of pop. will be below 15). • Youth are also increasingly educated (primary enrolment ↑ to 80%, and secondary enrolment to 31% in 2009). • Growing pressure on the L market, and natural resources.

  18. The pattern of growth and structural change had only weak effects for poverty reduction. In 2007 53% of the population was living on less than 1.25 $ a day(59% in 2000). The number of extreme poor increased even during the boom.

  19. In spite of the “new bottom billion” narrative, given current trends over time LDCs will become the major locus of extreme poverty in the world.

  20. No evidence of declining volatility On the long term, greater correlation across commodities Some evidence of asymmetric pass-through

  21. Absent a meaningful supply response, the rise in prices has led to a mounting import bill (four-fold increase) New elements: commodity financializatioin, bio-fuels.

  22. THE GREAT RECESSION OF 2009 LDCs severely affected by the 2008 food & fuel crisis, but far from the epicenter of the financial crisis (→ shallow financial integration) In general, LDCs suffered sharp growth slowdown due to the fallout of the global recession (in 2009 GDP growth ≈ 3% lower than in 2000-2007) Heterogeneous impact according to structural conditions (in over 1/3 of the 49 LDCs the slowdown was > 6%, while there was no slowdown in other 15 of them); Oil exporters and most Island LDCs were the worst hit.

  23. LDCs faced a growth slowdown of 3%, less than ODC, but also had a weaker recovery. 31 LDCs suffered growth slowdown, of which 4 had open recession. However GDP p.c. fell in 16 LDCs in 2009, & in 10 LDCs in 2010.

  24. Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission & factors of resilience • Key policy lessons

  25. CHANNELS OF TRANSMISSION TO LDCs Direct financial contagion has been sometimes acute (esp. where foreign actors played a big role), but relatively circumscribed due to LDCs shallow financial mkt. Main channel of transmission to LDCs has been the fallout of the global recession: TRADE SHOCK (world AD ↓, terms of trade?) FDI inflows ↓ & profit repatriation ↑, except in countries where developing partners invested heavily REMITTANCES mostly ↓ PUBLIC REVENUES ↓

  26. TRADE SHOCK (1) LDCs’ export revenues plummeted by 26% in 2009. Price movements hit hard commodities exporters, esp. oil & minerals AD conditions penalized the majority of LDCs, but export composition and trade partners mattered

  27. Heightened commodity dependence proved to be a risk factor TRADE SHOCK (2) S-S trade proved more resilient

  28. TRADE SHOCK (3) Terms of trade movements penalized commodities exporters, but “benefitted” net importers Reduction in import volumes were avoided in most LDCs, with oil exporters and Island LDCs being the exception

  29. DECLINE IN FDI FDI inflows fell from 32 bln. in 2008 to $28 bln. in 2009, & have not yet recovered. Significant decline, albeit lower than in other regions. Some mostly small countries saw rising FDI even in 2009 (China effect?). FDI mostly natural-resource-seeking, except in Island LDCs.

  30. Remittances proved somewhat more resilient, but still fell in the large majority of LDCs. Inflows to big Asian recipients grew even in 2009, though at a lower rate (destination matters).

  31. FISCAL IMPACT AND POLICY RESPONSES Gov. revenues fell (as % of GDP) in about half of African LDCs, esp. due to ↓ mineral-related revenues and duties. Expenditure rose on average by ≈2% of GDP, but fiscal policy contained procyclical elements in more than 1/3 of the countries considered. Several LDCs incurred additional debt to cope with the crisis; meanwhile debt vulnerabilities remain a serious concern (10 LDCs in debt distress & other 10 at high risk).

  32. INTERNATIONAL POLICY RESPONSES In both 2008 and 2009, the World Bank, IMF and regional development banks increased their lending significantly to the LDCs. Although the bulk of its intervention in the aftermath of the crisis benefited MIC, IMF financing to LDCs also increased from SDR 1,089 million in 2005–2007 to SDR 2,691 million in the period 2008–2010. Surveys of lending agreements concluded with the IMF during the global recession show that there has been very little fundamental change with respect to the use of procyclical conditionalities.

  33. Current deficits actually shrunk in most LDCs except oil exporters in 2009 • Macroeconomic factors attenuating the downturn • Price movements favoring net importers of food & fuel(i.e. most LDCs) at the trough of the crisis; • Timely involvement of multilateral lenders(ex. Zambia, Dem. Rep. Congo); • Pickup of commodityprices since Q2 of 2009

  34. Considerable downside risks remain • LDCs’ rebound ultimately depends on world recovery, which is still uneven and fragile (European periphery). • Debt vulnerabilities remain a serious concern for LDCs (10 LDCs in debt distress and other 10 at high risk), and several LDCs incurred additional debt to cope with the crisis. • Prospects for future ODA flows are uncertain/pessimistic as traditional donor strive to restore government balances. • The recent spikes in food prices put pressure on LDCs balance of payments, & threaten to trigger another food crisis.

  35. Presentation structure • LDCs before the storm: the so-called boom • The triple crisis: food, fuel and finance • Channels of transmission and factors of resilience • Key policy lessons

  36. KEY LESSONS FROM THE DOWNTURN • Sound fundamentals are necessary, but without development of productive capacities you remain prone to shocks. • Regional integration and export diversification were useful in containing the impact of the downturn on export sectors (ex. East Africa). • Timely policy responses were critical, but LDCs often lack resources to adopt countercyclical policies → domestic resource mobilization.

  37. KEY LESSONS FROM THE DOWNTURN • Agricultural modernization is essential to improve the food security outlook in LDCs, and alleviate the pressure on the BoP. • Proactive policies are crucial for LDCs to achieve economic diversification. • The social impact of the crises can be long-lasting, as many “survival strategies”poor households put in place affect their long-term well-being.

  38. Thank you for your attention! http://unctad.org/en/pages/ALDC/ALDC.aspx

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