Implications of the Financial Crisis for Developing Countries

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Implications of the Implications of the Financial Crisis for Financial Crisis for Financial Crisis for Financial Crisis for Developing Countries Developing Countries David Laborde David Laborde d laborde@cgiar org d laborde@cgiar org d.laborde@cgiar.org d.laborde@cgiar.org and and Maximo Torero Maximo Torero t @ i t @ i m.torero@cgiar.org m.torero@cgiar.org IFPRI IFPRI Washington 30 Washington 30 th th of April 2009 of April 2009
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Maximo Torero (IFPRI) 30th April 2009, International food Policy Research Institute, Washington D.C.

Transcript of Implications of the Financial Crisis for Developing Countries

Page 1: Implications of the Financial Crisis for Developing Countries

Implications of the Implications of the Financial Crisis forFinancial Crisis forFinancial Crisis for Financial Crisis for

Developing CountriesDeveloping CountriesDavid LabordeDavid Laborde

d laborde@cgiar orgd laborde@cgiar [email protected]@cgiar.organd and

Maximo ToreroMaximo Torerot @ it @ [email protected]@cgiar.org

IFPRIIFPRI

Washington 30Washington 30thth of April 2009of April 2009

Page 2: Implications of the Financial Crisis for Developing Countries

Origins of crises or sources of dynamismOrigins of crises or sources of dynamism

•• Developed economiesDeveloped economies• Expansionary US monetary policy and very low interest

rates in the wake of IT bubble burst• Expansionary US fiscal policy of tax cuts and defense/

security spending after September 11security spending after September 11• Emerging countries/oil producers have excess savings• Risk assessment based on wrong assumptions or g p

models…• Lead to excess credit and leverage:

I fl ti f h i k t b bbl i US d th d l d• Inflation of housing market bubbles in US and other developed economies=> consumption boom

• Subprime mortgages• High levels of financial innovation in search of higher yields• High levels of financial innovation in search of higher yields

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Origins of crises or sources of dynamismOrigins of crises or sources of dynamism

•• Developing economiesDeveloping economies• Improvements in macroeconomic policiesp p

• Increase in competitiveness

• Investment boom fueled by:• Strong export demand and high commodity prices, thanks to

l US i l t d fi it d t th i Chilarge US commercial account deficit and strong growth in China and India

• Surge in FDI, as well as other private flows• Strong remittances form workers abroad• Investment surge increased demand for capital goods from

developed countries, fueling virtuous cycle of growth

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We have Three CrisesWe have Three Crises•• Food crisisFood crisis forced 200 million people into extreme poverty, forced 200 million people into extreme poverty,

half of them still there. half of them still there. -- Food crisis is not over: prices are still highFood crisis is not over: prices are still highFood crisis is not over: prices are still highFood crisis is not over: prices are still high-- Incentives for protectionist measuresIncentives for protectionist measures

•• Fuel crises:Fuel crises: rise and fall of price of oil (variability) impactrise and fall of price of oil (variability) impact•• Fuel crises: Fuel crises: rise and fall of price of oil (variability), impact rise and fall of price of oil (variability), impact of food for fuel, climate change, of food for fuel, climate change,

•• Financial crisisFinancial crisis: Reduction in exports, commodity prices,: Reduction in exports, commodity prices,Financial crisisFinancial crisis: Reduction in exports, commodity prices, : Reduction in exports, commodity prices, remittances, tourism, FDI, and aid remittances, tourism, FDI, and aid -- Hit public revenues in developing countries Hit public revenues in developing countries -- Second round effects can worsen the situation even Second round effects can worsen the situation even

moremore-- Private capital flows fell more than $700 billion between Private capital flows fell more than $700 billion between

2007 and 20092007 and 2009-- Limited availability of domestic financing to businessesLimited availability of domestic financing to businesses

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Page 6: Implications of the Financial Crisis for Developing Countries
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Page 9: Implications of the Financial Crisis for Developing Countries

Effects over developing countriesEffects over developing countries

•• Sharp decline in the sources of financing for Sharp decline in the sources of financing for investment in developing countriesinvestment in developing countriesinvestment in developing countriesinvestment in developing countries-- Possible decline in world trade volumes Possible decline in world trade volumes in 2009, in 2009,

combined with further fall in commodity pricescombined with further fall in commodity prices-- Fall in inward FDI Fall in inward FDI and portfolio investment (already and portfolio investment (already

seen in 2008), together with higher interest rates seen in 2008), together with higher interest rates on capitalon capitalon capitalon capital

-- Drop in remittances Drop in remittances as developedas developed--country labor country labor markets slackenmarkets slacken

-- SecondSecond--round effects round effects that could exacerbate crisisthat could exacerbate crisis

•• Threat: not just slowdown, but crises of their ownThreat: not just slowdown, but crises of their own

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GDP growth and EmploymentGDP growth and Employment

•• Average projected GDP growth in developing Average projected GDP growth in developing countries is 1/4 countries is 1/4 of what was expected during of what was expected during the first half of 2008.the first half of 2008.-- Still downside risks to this estimateStill downside risks to this estimate

•• Average growth in Eastern Europe, Central Average growth in Eastern Europe, Central Asia, and LAC is projected to be negativeAsia, and LAC is projected to be negative

•• (Un)Employment(Un)Employment•• (Un)Employment(Un)Employment-- ILO projects 30 million more people will be ILO projects 30 million more people will be

unemployed in 2009 worldwide (23 millionunemployed in 2009 worldwide (23 millionunemployed in 2009 worldwide (23 million unemployed in 2009 worldwide (23 million in developing countries)in developing countries)

-- WorseWorse--case scenario: 50 million peoplecase scenario: 50 million people

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20052005

Source: IMF http://www.imf.org/external/datamapper/index.php

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20072007

Source: IMF http://www.imf.org/external/datamapper/index.php

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20092009

Source: IMF http://www.imf.org/external/datamapper/index.php

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Poverty and HungerPoverty and Hunger

•• Poverty rates may not increase, but the Poverty rates may not increase, but the poverty count is likely to rise in SSA, Eastpoverty count is likely to rise in SSA, Eastpoverty count is likely to rise in SSA, East poverty count is likely to rise in SSA, East Europe, Central Asia and LAC.Europe, Central Asia and LAC.

•• The The number of chronically hungry people in number of chronically hungry people in the world is increasing (World Bank)the world is increasing (World Bank): : -- 2007 2007 –– 850 million850 million-- 2008 2008 –– 960 million960 million-- 2009 2009 –– more than 1 billionmore than 1 billion

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Mechanisms on TradeMechanisms on TradeFi i l i iFi i l i i C dit hC dit h•• Financial crisis Financial crisis → → Credit crunchCredit crunch-- Less investmentsLess investments-- Restriction on trade finance, especially for developing Restriction on trade finance, especially for developing

countries and small producers: direct impact on exportscountries and small producers: direct impact on exportscountries and small producers: direct impact on exportscountries and small producers: direct impact on exports

•• Financial crisis Financial crisis → → Economic Crisis → UnderEconomic Crisis → Under--employment employment of resources (Labor, Capital)of resources (Labor, Capital)( , p )( , p )-- Low utilization rate of capital Low utilization rate of capital → → Less investmentsLess investments-- Lower Income Lower Income → Lower demand → Lower Trade→ Lower demand → Lower Trade

Elasticity of trade to GDP > 1: taste for diversity as a luxury Elasticity of trade to GDP > 1: taste for diversity as a luxury goods fixed trade costs foreign activities reduce in prioritygoods fixed trade costs foreign activities reduce in prioritygoods, fixed trade costs, foreign activities reduce in prioritygoods, fixed trade costs, foreign activities reduce in priority

•• Deflation and specific tariffs in agriculture Deflation and specific tariffs in agriculture → → mechanical mechanical increase of the protectionincrease of the protectionincrease of the protectionincrease of the protection-- Difficulty to disentangle the price correction related to the end Difficulty to disentangle the price correction related to the end

of the bubble and medium term pathof the bubble and medium term path-- A EUR93/ton tariff represents 40% if prices are at EUR332/ton A EUR93/ton tariff represents 40% if prices are at EUR332/ton

but 80% if price falls to EUR116/tonbut 80% if price falls to EUR116/tonbut 80% if price falls to EUR116/tonbut 80% if price falls to EUR116/ton

•• The end of the global imbalances? The end of the global imbalances?

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Financial crisis, Economic slowdown and Financial crisis, Economic slowdown and Rising protectionismRising protectionismg pg p

•• Since September 2008, several observers have noticed the Since September 2008, several observers have noticed the implementation of new protectionist measuresimplementation of new protectionist measures

•• However, However, these measures are consistent with the natural these measures are consistent with the natural ““cyclicitycyclicity” of trade policies” of trade policies::-- Bouet and Laborde (2009) have computed that in the Bouet and Laborde (2009) have computed that in the ouet a d abo de ( 009) a e co puted t at t eouet a d abo de ( 009) a e co puted t at t e

last 13 years, 4.5% of tariff lines have increased on two last 13 years, 4.5% of tariff lines have increased on two subsequent years.subsequent years.

-- If a protectionist wave in the If a protectionist wave in the current context is a current context is a threatthreat, , it i tit i t f tf t tt T iff i d t l i t dT iff i d t l i t dit is not a it is not a fact fact yetyet. Tariffs increases do not explain trade . Tariffs increases do not explain trade decline.decline.

•• The potential cost of rising protectionism (with andThe potential cost of rising protectionism (with and•• The potential cost of rising protectionism (with and The potential cost of rising protectionism (with and without a successful Doha Round) has been investigated without a successful Doha Round) has been investigated in other IFPRI works (see Bouet and Laborde 2008, 2009)in other IFPRI works (see Bouet and Laborde 2008, 2009)-- Up toUp to --10% in world trade (volume) if tariffs increase to10% in world trade (volume) if tariffs increase toUp to Up to 10% in world trade (volume) if tariffs increase to 10% in world trade (volume) if tariffs increase to

their current WTO limits (bound level)their current WTO limits (bound level)

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Why some exporters are more affected than Why some exporters are more affected than the others?the others?

•• Geographical specializationGeographical specialization-- Does your main markets are more affectedDoes your main markets are more affectedDoes your main markets are more affected Does your main markets are more affected

than the others?than the others?•• SectoralSectoral specializationspecialization

Do your main products have a strong incomeDo your main products have a strong income-- Do your main products have a strong income Do your main products have a strong income elasticitieselasticities??

-- Do you export capital goods?Do you export capital goods?•• International division of laborInternational division of labor

-- Does your production chain highly Does your production chain highly disaggregated? (= Strong exposition to risingdisaggregated? (= Strong exposition to risingdisaggregated? ( Strong exposition to rising disaggregated? ( Strong exposition to rising trade costs)trade costs)

•• Trade financingTrade financingCan your financial system support yourCan your financial system support your-- Can your financial system support your Can your financial system support your exporters?exporters?

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Analytical toolAnalytical tool•• Short term analysisShort term analysisyy

•• Modified version of MIRAGEModified version of MIRAGE-- Computable General Equilibrium are not macroComputable General Equilibrium are not macro--econometrics model econometrics model

for forecastfor forecastfor forecastfor forecast-- ButBut they are good to deal with trade and see how countries, based on they are good to deal with trade and see how countries, based on

their trade specialization and comparative advantages, can react to a their trade specialization and comparative advantages, can react to a shockshock

•• What have we modified?What have we modified?-- Utilization of resources (labor and capital) based on IMF, OECD and Utilization of resources (labor and capital) based on IMF, OECD and

ILO estimates and forecastsILO estimates and forecastsRelated to short term business cycle and institutional aspects: not theRelated to short term business cycle and institutional aspects: not the•• Related to short term business cycle and institutional aspects: not the Related to short term business cycle and institutional aspects: not the comparative advantages of the CGEcomparative advantages of the CGE

•• We ensure consistency of utilization rate of resources and GDP forecasts in We ensure consistency of utilization rate of resources and GDP forecasts in MIRAGE and in the IMFMIRAGE and in the IMF

-- Changes in investment behavior (OECD and IMF sources)Changes in investment behavior (OECD and IMF sources)g ( )g ( )-- Short term closure of current account: endogenous trade balance and Short term closure of current account: endogenous trade balance and

fixed real exchange ratefixed real exchange rate-- Specific tariffs modeled Specific tariffs modeled asas specific tariffsspecific tariffs-- Trade finance as a trade costTrade finance as a trade costTrade finance as a trade costTrade finance as a trade cost-- New demand structure with better measurement of New demand structure with better measurement of incomeincome and price and price

elasticitieselasticities (from (from GouelGouel, 2009), 2009)

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Simulations design (1)Simulations design (1)

•• Core scenarioCore scenario-- Step 1Step 1: Impacts of the demand and investment : Impacts of the demand and investment pp pp

shocksshocksIMF, OECD and ILO estimates/forecastsIMF, OECD and ILO estimates/forecasts

Step 2Step 2: Impacts of the trade finance restriction: Impacts of the trade finance restriction-- Step 2Step 2: Impacts of the trade finance restriction: Impacts of the trade finance restrictionIMF and ICC qualitative assessments (we assume 0% IMF and ICC qualitative assessments (we assume 0%

costs in OECD, costs in OECD, 11% costs in BRICs, and % costs in BRICs, and 22% for other % for other developing countries)developing countries)developing countries)developing countries)

-- Step 3Step 3: External constraint: introducing the : External constraint: introducing the current account constraint (change in the current account constraint (change in the ( g( gmodel closure)model closure)

-- Step4Step4: Reduction in the global imbalances:: Reduction in the global imbalances:Cut by 1/3 in 5 years (fromCut by 1/3 in 5 years (from 66% to% to 44% IMF estimates)% IMF estimates)Cut by 1/3 in 5 years (from Cut by 1/3 in 5 years (from 66% to % to 44%, IMF estimates)%, IMF estimates)

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Simulations design (2)Simulations design (2)

•• Two variantsTwo variants

-- A deeper recessionA deeper recession. Same schedule but . Same schedule but secessionist effects increased by 50%secessionist effects increased by 50%secessionist effects increased by 50%secessionist effects increased by 50%

A delayed recoveryA delayed recovery Recovery will start inRecovery will start in-- A delayed recoveryA delayed recovery. Recovery will start in . Recovery will start in 2013.2013.

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Core Scenario Core Scenario -- Exports (volume) Exports (volume) 160

150

North ‐ Agro ‐ Baseline 

North ‐ Agro ‐ Crisis 

North ‐Manu ‐ Baseline 

North ‐Manu ‐ Crisis 

S th A B li

130

140South ‐ Agro ‐ Baseline 

South ‐ Agro ‐ Crisis 

South ‐Manu ‐ Baseline 

South ‐Manu ‐ Crisis 

120

100

110

90

Source: MIRAGE simulations, Laborde and Torero (2009)

80

2007 2008 2009 2010 2011 2012 2013 2014 2015

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Export volume Export volume Focus on 2012 (compared to baseline)Focus on 2012 (compared to baseline)( p )( p )

Source: MIRAGE simulations, Laborde and Torero (2009)

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Export volume Export volume -- AsiaAsiaFocus on 2012 (compared to baseline)Focus on 2012 (compared to baseline)( p )( p )

Source: MIRAGE simulations, Laborde and Torero (2009)

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Export volume Export volume –– SectoralSectoral results (world)results (world)Focus on 2012 (compared to baseline)Focus on 2012 (compared to baseline)( p )( p )

Source: MIRAGE simulations, Laborde and Torero (2009)

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Trade surplus/deficitTrade surplus/deficitFocus on 2012 (compared to baseline) Focus on 2012 (compared to baseline) -- % of GDP% of GDP( p )( p )

Source: MIRAGE simulations, Laborde and Torero (2009)

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Agricultural Real Value Added Agricultural Real Value Added (2012, volume, % changes)(2012, volume, % changes)

Recession scenarioRecession scenario –– Selected countriesSelected countriesRecession scenario Recession scenario Selected countriesSelected countries

Source: MIRAGE simulations, Laborde and Torero (2009)

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Long term effects Long term effects –– Total real income Total real income 2015 compared to baseline2015 compared to baselinepp

Source: MIRAGE simulations, Laborde and Torero (2009)

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Long term effect scenarios (2015) Long term effect scenarios (2015) Agricultural Export volumeAgricultural Export volume–– Selected countriesSelected countries

Source: MIRAGE simulations, Laborde and Torero (2009)

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Export volumeExport volumeAlternative scenarios Alternative scenarios –– Developing countriesDeveloping countriesp gp g

150

160

Agro ‐ Baseline  Agro ‐ Core Scenario

Agro Deeper Recession Agro Delayed Recovery

140

Agro ‐ Deeper Recession Agro ‐ Delayed Recovery

Manu ‐ Baseline  Manu ‐ Core Scenario

Manu ‐ Deeper Recession Manu ‐ Delayed Recovery

120

130

100

110

90

Source: MIRAGE simulations, Laborde and Torero (2009)

80

2007 2008 2009 2010 2011 2012 2013 2014 2015

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Final remarksFinal remarks

On who is affected:On who is affected:•• Small producersSmall producers --> Should be more affected by> Should be more affected bySmall producers Small producers Should be more affected by Should be more affected by

credit crunchcredit crunch•• “High value crops” “High value crops” strategy: ambiguous effects strategy: ambiguous effects

during economic crisis (high income elasticity)during economic crisis (high income elasticity)•• Role of trade financeRole of trade finance--> Extremely > Extremely importanimportan

•• Even if the recovery takes place, several years of Even if the recovery takes place, several years of th ( d i t t ) l tth ( d i t t ) l t > Mill i> Mill igrowth (and investment ) are lostgrowth (and investment ) are lost--> Millennium > Millennium

goals? Public policy to compensategoals? Public policy to compensate

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Final remarksFinal remarksOn what to do:On what to do:•• Increase demand counterIncrease demand counter--cyclically to the cyclically to the y yy y

extent that is consistent with protecting extent that is consistent with protecting fundamentalsfundamentals- Finance creation and upgrading of infrastructure –

useful to catch up, after period of rapid private-sector growthgrowth

- Trade finance is essential- Pro-poor spending, pro-poor tax cuts:

• Fund social safety nets and investments in education and health – investment in future productivity of the economy

• Insure those who are uninsured or who face high costs of self ginsurance