A time of crisis, a time for change Ottawa 19 October 2009

1. A time of crisis,a time for changeOttawa19 October 2009

2. Crisis Unexpected? • A crisis foretold • Unsustainable global imbalances • International financial architecture • Ideology: deregulation, self-regulation, inadequate and inappropriate regulation capital account liberalization • Financial Globalization: No growth, stability • Developing countries innocent victims • Policy responses: inadequate; double standards • International cooperation: G7, G20, UN

3. Global imbalances ballooned USD bn 1000 Latin America Other industrialised 800 Other Asia China 600 Japan 400 Oil exporters 200 0 . -200 -400 United States -600 -800 Euro Area Central and Eastern -1000 Europe 90 91 92 93 9495 9697 98 99 00 01 02 03 0405 06 07 3

4. Net Capital Importers 4

5. US macro-financial policies • International monetary + financial ‘non-system’ • Prolonged loose macroeconomic policies • Lax financial regulation + policies • Low US savings rate • US over-consumption, E Asian surpluses • US, UK economic hubris

6. Broad Liquidity! 964％ of World GDP 78％ of Total 138％ of World GDP 11％ of Total 122％ of World GDP 10％ of Total 9％ of World GDP 1％ of Total Derivatives Securitized Debt Broad Money Power Money 6

7. Globalization: finance>trade 7

8. Finance-investment nexus? 8

9. 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

10. Net transfer of financial resources from South to North

11. 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

12. 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 12

13. Capital inflows contract

14. Credit crunch: US, EU

15. Borrowing costs for South remain high

16. 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 17

17. 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

18. Globalization: Parallel fates 20

19. Food prices remain higher

20. World trade collapse

21. Trade collapse consensus

22. South exports fall more Source: CPB

23. Oil, metal prices fell more

24. Trade impacts: summary Exports decline all developing countries Terms of trade primary exporters Trade surpluses, reserves run down quickly But lower energy, food prices helped net food and oil importers 30

25. World economy contracted, recovery uncertain

26. Growth by main country groups

27. 60 developing countries will see declining incomes in 2009

28. Livelihoods threatened Declining living standards Many livelihoods under threat, especially when social protection not well- developed Prolonged slowdown in world economy likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth

29. Social impacts ILO: >200 m. more working poor ILO: Unemployment to rise by 51m ILO projections based on IMF Nov 08 MDGs, IADGs, social spending at risk Rising social, political unrest US intelligence report, February 2009: crisis -- greatest security risk

30. Aid flows unreliable

31. ODA for Africa vs G20 recovery efforts

32. Net aid transfers? • Net ODA is net of principal payments, but not of interest received on such loans • Net Aid Transfer (NAT) is net ofboth • Japan recently received >$2bn/year in interest on ODA loans • NAT excludes cancellation of old non-ODA loan, e.g. a 2003 Paris Club agreement cancelled some $5bn in non-ODA official debt owed. • That cancellation is ODA, but generated little additional net transfers, ie. NAT • Hence, e.g. DRC received $5.4bn in ODA in 2003, but only $400m. in NAT

33. Remittances to developing countries declining • Historically, remittances to home countries in crisis rise • However, migrant workers in host countries now most adversely hit by job losses, lower incomes • Evidence uneven for different migrant workers by home country, host country, crisis impact

34. Stimulus lags delay recovery

35. Global recovery with coordinated vs uncoordinated stimuli, 2010-2015

37. Output, jobs recovery lags, 1991, 2001

38. Multilateral responses 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-management, but neither developmental nor equitable June 09 summit on crisis + impact on developing countries UN PGA (Stiglitz) Commission of Experts

39. New Bretton Woods moment? Bretton Woods, 1944: United Nations conference on monetary + financial affairs 15 years after 1929 Depression Middle of WW2 US initiative vs UK Treasury stance 44 countries (28 developing countries; 19 LA) UN system: IMF, IBRD, ITO Clear emphasis on sustaining growth, job creation, post-war reconstruction, post- colonial development, not just monetary and financial stability

40. Thank you Please visit UN-DESA www.un.organd G24 www.g24.orgwebsites Research papers Policy briefs Other documents Acknowledgements: UN-DESA, ILO 48