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The Global Economic Crisis and Policy Responses in West Asia ESCWA, Damascus, Syria 5 May 2009

The Global Economic Crisis and Policy Responses in West Asia ESCWA, Damascus, Syria 5 May 2009. Crisis Unexpected?. A crisis foretold Unsustainable global imbalances International financial architecture Ideology : deregulation, self-regulation, capital account liberalization

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The Global Economic Crisis and Policy Responses in West Asia ESCWA, Damascus, Syria 5 May 2009

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  1. The Global Economic Crisisand Policy Responsesin West AsiaESCWA,Damascus, Syria5 May 2009

  2. Crisis Unexpected? • A crisis foretold • Unsustainable global imbalances • International financial architecture • Ideology: deregulation, self-regulation, capital account liberalization • Financial Globalization: growth, stability? • Most developing countries innocent victims • Policy responses: inadequate; double standards • International cooperation: G7, G20, UN

  3. Globalization: finance>trade

  4. Finance-investment nexus? 4

  5. Financial globalization • Net capital flows from South to North (US largest borrower) • Cost of funds not generally lower due to financial deepening (more intermediation, financial rents) • Higher volatility • Lower growth, higher instability

  6. Short-term capital inflows problematic • No real contribution to investment, growth rates • Asset (shares, real estate) price + related (e.g. construction) bubbles instead • Cheaper finance for consumption binges • Over-investment excess capacity • All exacerbate instability, pro-cyclicality

  7. Contagion: crisis spreads Financial sector contagion (incl. vicious circles): Sub-prime crisis  financial crisis  asset price deflation  liquidity/credit crunch Financial crisis  Economic recession (including feedback loops) Real economy contagion (incl. vicious circles): Less investment, especially abroad (FDI) Less consumption Reduced demand for imports, i.e. for exports of others Prices, output declines globally Growth, employment declines globally

  8. Deflationary spiral Asset (stock, property) markets deflating  negative wealth effect  more bank insolvency  generalized credit squeeze Lower external demand, world trade  excess capacity  investment slowdown Depressed domestic demand  lower prices, output  lower employment, incomes

  9. Disorderly unwinding of global imbalances 10

  10. Globalization: Parallel fates

  11. Recession in most developed economies 13

  12. Slower growth in all developing countries 14

  13. Growth by main country groups

  14. Growth by main country groups

  15. Real growth and consumer inflation, 2005-2009

  16. 2007 2008 2009  2010 Advanced Economies European Union Emerging & Developing Economies Sub- Saharan Africa Central & Eastern Europe Middle East World

  17. ▲Total ♦ Males  Females N 18 16 14 12 10 8 6 4 Unemployment rate in per cent

  18. Unemployment scenarios for 2009 Males Total Females Total Males Females Middle East World .

  19. WA: Limited impact so far • Most of region’s financial markets have declined significantly • So far, impact on real economy relatively limited due to: • mass surplus liquidity (GCC countries) from oil boom • relative insulation • low market capitalization

  20. But worse yet to come • But crisis going to hit more forcefully • Real GDP growth projected to drop to 4% in 2009 (6% in 2007) • Unemployment rates to climb from 9.4% to 10.8%

  21. Past growth problems • Regional economic growth spurred by: - oil revenue - real estate investment - housing - tourism - foreign assistance --- rather than productive activity • Surpluses not used to build up strong industry, infrastructure, skills

  22. Monthly Crude Oil Prices ($/barrel) Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09

  23. Food prices will remain higher

  24. World trade collapsing

  25. Collapsing world trade Source: CPB

  26. ME current account

  27. ME oil exporters too

  28. Volatile aid flows

  29. Iraq (2003) Jordan Lebanon Syria (2006) Yemen Egypt (2006) (2006) (2006) (2006) .

  30. Remittances to developing countries, 2008-2010

  31. Total remittances as % of national GDP Jordan (2007) Lebanon Oman (2006) Syria (2007) oPt (2007) Yemen (2007) (2007)

  32. Remittances from Saudi Arabia, 2005

  33. 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Percentage of GDP

  34. Impact of crisis on extreme poverty

  35. Livelihoods threatened • Declining living standards, increasing inequality of concern for some time • Many livelihoods under threat, especially when social protection not well-developed • Migrant workers > 60% in most GCC countries • Prolonged slowdown in world economy likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth

  36. Policy priorities • Promote growth of productive sector • Encourage pro-poor growth • Strengthen social protection • Oppose discrimination • Emphasize human development, decent work

  37. Trade impacts: summary Exports decline all developing countries Terms of trade primary exporters Trade surpluses, reserves may run down quickly But lower energy, food prices help net food and oil-importers 46

  38. Financial impacts on developing countries Despite non-involvement in sub-prime debacle:  Emerging stock markets collapse greater Reversal of capital flows, FDI also down Spreads rise, much higher borrowing costs But financial positions stronger than during Asian + LA crises (more foreign reserves, better fiscal balances) But reserves rapidly evaporating with export collapse; fiscal space also disappearing 47

  39. Social, political impacts • >200 m. more working poor • ILO: Unemployment to rise by 51m • Government social spending at risk • Rising social unrest • US intelligence report: crisis -- greatest security risk

  40. New Bretton Woods moment? Bretton Woods, 1944: United Nations conference on monetary and financial affairs 15 years after 1929 Depression Middle of WW2 US initiative vs UK Treasury stance 44 countries (28 developing countries; 19 LA) IMF, IBRD, ITO – UN system Clear emphasis on sustaining growth, employment creation, development, not just financial stability But BWIs very different governance arrangements

  41. Responses to crisis UN, BIS forecasts more accurate than others; IMF, WB upbeat till late 2008 IMF, WB also marginalized by G7, etc IMF discouraging strong fiscal stimulus by developing countries without surplus G7  G20: more inclusive? legitimate? crisis-, but not developmental or equitable PGA (Stiglitz) Commission of Experts Doha Declaration: June 09 summit on impact of crisis on developing countries

  42. UN role? Universal, legitimate lead reform process? Ensure comprehensive systemic reform Ensure developmental financial system Ensure inclusive financial system Develop capacity for offering 2nd opinion to interested member states Align IMF, WB with UNDA (including FfD), IADGs to ensure policy coherence

  43. Thank you Please visit UN-DESA www.un.org G24 www.g24.organdPGAwww.un.org/ga/president/63/websites Research papers Policy briefs Other documents Acknowledgements: UN-DESA, ILO, ESCWA 57

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