Guillaume GrossoChief Operating Officer

Policy CounsellorOECD Development Centre

The Global Crisis: Implications for Developing

Countries

AN OECD DEVELOPMENT CENTRE’S PERSPECTIVE

World Civic Forum7 May 2009, Seoul

• 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

Outline

The Global Crisis: Implications for Developing Countries

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)

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Net capital flows to emerging economies are estimated to be USD165 billion in 2009

82% decrease

The crisis contagion

High dependence on external financing

Aid budget averages around 9 per cent of Africa’s GDP

Why are LICs particularly vulnerable?

Aid as an average percentage of net capital flows 2000-06

Developing countries Sub-Saharan Africa

Private flows 84.9 38.4

Overseas development aid 19.5 65.4

Other official flows -4.4 -3.9

Total 100.0 100.0

Source: McCulloch (2008)

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)

Why are LICs particularly vulnerable?Strong reliance on remittances as a source of foreign exchange reserve

Source: Authors, based on World Bank and OECD data

Net Capital Flows to Developing Countries, 1980-2006

Why are LICs particularly vulnerable?

Country 50-70% Country 70-100%

Rwanda 70 Madagascar 100

Côte d'Ivoire 66 Mozambique 100

Tanzania 66 Peru 95

Ghana 65 Mexico 82

Burkina Faso 65 Uganda 80

Niger 59 El Salvador 78

Mali 57 Botswana 77

Zimbabwe 51

Share of banking assets held by foreign banks with majority ownership, 2006

Modified from World Bank, Global Development Finance (2008)

High share of banking sector in foreign ownership

Net flows (in USD billions) to Sub-Saharan Africa,1999-2007

Source: World Bank, Global Development Finance, 2008

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Net FDI inflows Net portfolio equity inflows

Net debt flows official creditors Net debt flows private creditors

• 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)

Dependence on FDI as a major form of capital flow

Why are LICs particularly vulnerable?

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Source: World Bank Global Development Finance (2008)

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

High degree of openness to international trade risk affecting the current account in times of crisis but portfolio have been diversified

Source: UNCTAD Least Developed Countries Report, p. 158

others , 29%

EU 25, 20%

Japan, 5%

USA & Canada, 24%

China , 19%

India, 3%

Destination of exports in Least Developed Countries, 2006

Shifting wealth, a capacity for resilience ?

Sub-Saharan Africa: Real GDP Growth Correlations – 1980-2007

(1) Excluding Sub-Saharan Africa

Source: IMF, Regional Economic Outlook: Sub-Saharan Africa April 2008

Rest of the World (1) 0.60

European Union 0.32

United States 0.01

Developing Countries(1) 0.54

Asia 0.30

Latin America 0.32

Can South-South linkages compensate for the economic slowdown in the North?

• 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

Shifting wealth, a capacity for resilience ?

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. reject trade 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.

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.

Thank you