The document discusses the impacts of the global economic crisis following the financial crisis of 2008. It notes that many developing countries were innocent victims despite not being involved in subprime lending. The crisis led to a collapse in asset prices, economic recession, and declining growth rates around the world. Commodity prices and capital flows also reversed, straining the finances of developing nations. The document advocates for improved international cooperation and policy responses to mitigate the crisis impacts.

1. Financing for Development
Following The
Global Economic Crisis
Commonwealth Secretariat, London
6 July 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: growth, stability?
• Most developing countries innocent victims
• Policy responses: inadequate; double standards
• International cooperation: G7, G20, UN

3. Globalization: finance>trade
180 350
As percent of GDP, indices 1980=100
160
300
140
250
US$ Trillions
120
100 200
80 150
60
100
40
50
20
0 0
1980 1990 1995 2000 2006
Global financial assets
Global merchandise trade
(Global financial assets as a percentage of GDP (right axis 3
(Global merchandise trade as a percentage of GDP (right axis

4. Finance-investment nexus?
0.30
0.25
Gross Fixed Capital Formation
0.20
0.15
Gross Financial Investment Abroad
0.10
0.05
0.00
4
70
74
76
80
82
84
86
88
90
92
94
98
00
04
06
72
78
96
02
19
19
20
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20

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 7
 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. 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
9
collapse; fiscal space also disappearing

10. Globalization: Parallel fates
8
Developing
6 countries
World
4
2
Developed countries
0
-2
Preliminary,
revised forecast
-4 10
2003 2004 2005 2006 2007 2008 2009 (P)

11. Synchronous growth: The US,
transition & developing economies
9
7.9
8
7.6 7.5
7.2 7.1
7 6.9
6.6 6.5
6 5.7 5.7
5.4
5.1
5
4.5
3.8 3.7 3.9 3.9
4 3.5
3.2 3.3
3 2.8
2.5
2 1.6
1 0.8
0
1999 2000 2001 2002 2003 2004 2005 2006b
11
US Ec. in Transition Developing Ec.

12. World economy in recession,
recovery uncertain
5
4.0 3.9
4 3.9
3.5
3
Optimistic
2.7 2.1
2
1.6
1
0 Pessimistic
2003 2004 2005 2006 2007 2008 2009 2010
-1
-2
-2.6
-3

13. Recession in most
developed economies
6
4.0
4
2 1.5 1.5
GDP growth rate, %
1.1 1.0
0.4 0.7
0.0 -0.1
0
-0.6 -0.4
-1.1
-2 -1.7
-4 -3.5 -3.7
-6
-7.1
-8
USA Japan EU15 NewEU
13
2008 2009 2010 Baseline 2010 Pessimistic scenario

14. Transition economies too
8
6 5.4
4.2
4
GDP growth rate, %
2 1.0
1.5
0
-0.3 -0.6
-2
-1.9
-4
-6 -5.4
South-eastern Europe CIS
14
2008 2009 2010 Baseline 2010 Pessimistic scenario

15. Growth slowed in all
developing countries
8
6.8
7
6.1
6 5.4 5.6 5.4
4.9
5 4.5
GDP growth rate, %
4.3 4.1 4.0
4.0 3.9
4
3.0 3.1 2.9
3
2
1.7 1.7
2 1.4
0.9
1
0
-1 -0.7 -0.7
-1.1
-2 -1.8
-3
Developing Africa East Asia South Asia Western Latin
countries Asia America
15
2008 2009 2010 Baseline 2010 Pessimistic scenario

16. Growth by main
country groups
P r c p GDP
e a ita C ng in
ha e
g w ra
ro th te g w ra
ro th te
2004 2009/ 2009/
-07 2008 2009 2008 2004-7
W rld
o 2.6 0.9 -3.4 -4.3 -6.0
De lo e
ve p d
eo m s
c no ie 2.1 0.3 -4.1 -4.4 -6.1
Ec no ie in
o ms
tra itio
ns n 7.7 5.5 -2.6 -8.1 -10.2
De lo ing
ve p
eo m s
c no ie 5.7 4.0 0.1 -3.9 -5.6
LDCs 5.2 3.6 0.3 -3.3 -4.9

17. Growth by main
regional groups P r c p GDP g w ra
e a ita ro th te C ng in g w ra
ha e ro th te
2009/ 2009/
2004-07 2008 2009 2008 2004-7
World 2.6 0.9 -3.4 -4.3 -6.0
Developed economies 2.1 0.3 -4.1 -4.4 -6.1
USA 1.6 0.1 -4.4 -4.6 -6.0
Jp n
aa 2 .1 -0.6 -5.9 -5.3 -8.0
Eu p a Unio
ro e n n 2 .4 0.7 -3.4 -4.1 -5.8
Economies in transition 7.7 5.5 -2.6 -8.1 -10.2
Developing economies 5.7 4.0 0.1 -3.9 -5.6
Africa 3 .4 2.5 -1.0 -3.5 -4.4
No Afric
rth a 3 .6 3.6 1.4 -2.3 -2.2
S -S ha n Afric
ub a ra a 3 .6 2.2 -1.9 -4.1 -5.5
Ea t a S uth As
s nd o ia 7 .3 5.0 1.8 -3.2 -5.5
Ea t As
s ia 7 .8 5.3 1.8 -3.5 -6.0
S u As
o th ia 6 .5 4.9 2.6 -2.4 -3.9
W s As
e t ia 3 .7 2.6 -1.2 -3.8 -5.0
La Am ric + C rib e n
tin e a a ba 4 .0 2.7 -3.0 -5.8 -7.0
LDCs 5.2 3.6 0.3 -3.3 -4.9
LDCs excl. Bangladesh 5.4 3.4 -0.6 -3.9 -6.0

18. Regional GDP growth rates
in PPP terms, 2007-2010
 2007  2008  2009  2010
Advanced European Emerging Sub- Central & Middle East
World Economies Union & Saharan Eastern
Developing Africa Europe
Economies
Note: The IMF World Economic Outlook classification of the Middle East region includes Egypt, Iran, and Libya.
Source: IMF, World Economic Outlook Update, January, 2009.

19. Recent African growth over

20. 60 developing countries will see
declining incomes in 2009
70
60 Developed countries
60
Economies in transition
50 Developing countries
40
33
30
22
18
20 14
12 13
10
1 2
0
2008 2009 2010

21. Strong US demand lifted
developing country exports 400
350
300
250
200
[ Billion $ dollars base 2000 ]
150
100
50
0
-50
-100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Domestic demand in the US (1st difference)
Manufact. exports from the developing world (1st difference) 21
÷>

22. Manufacturing demand supported
high primary commodity prices
500 1.8
Price index relative to price of manufact.
450 1.6
[Billion $ dollars base 2000]
400 1.4
350
1.2
300
1.0
250
0.8
200
0.6
150
100 0.4
50 0.2
0 0.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
External balance primary exporters
Manufactured exports from the developing world (1st difference)
Price of energy (relative to manufactures). RHS 22
Price of raw materials & food (relative to manufactures). RHS

23. High commodity prices over
• Last 5 years: rare opportunity for many
developing countries – including LDCs
– to generate substantial financial
resources from higher primary
commodity exports for investments and
growth – largely over
• 2008 price spikes for energy and food due
to increased speculation following flight
from ‘Wall Street’ (finance) to ‘Chicago’
(commodity futures), other factors 23

24. Oil prices roller-coaster
160
Nominal price
140 Real price
120
100
$ per barrel
80
60
40
20
0 24
2002 2003 2004 2005 2006 2007 2008

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

26. Non-oil commodity prices
U.S. dollars
450
400
350
300
250
200
150
100
50
0
2001 2002 2003 2004 2005 2006 2007 2008
26

27. Index 2000 = 100
100
150
200
250
300
350
400
450
500
550
Jan-07
Mar-07
May-07 Wheat
Jul-07
Sep-07
Maize
Nov-07
Jan-08
World food prices
Rice
Mar-08
May-08
declining after spikes
Jul-08
Sep-08
27
Nov-08

28. Food prices will
remain higher
35 0
30 0
25 0
20 0
15 0
10 0
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Wheat Maize Rice

29. World trade collapsing
12 10.9
9.2
7.7
8 6.6
4.1
4
2.4
Annual percentage change
0.5
0
2004 2005 2006 2007 2008 2009 2010
-4
-8
-12 29
-11.1

30. Trade collapse consensus
10.0
6.0
5.0
2.2
0.0
% change
-5.0
-10.0 -9.0
-13.2
-15.0
WTO OECD
2007 2008 2009 Forecasts

31. South exports fall more
(volume index, 1998 = 100)
280
Develop ing and other non-OECD
260
country exports
240
220
200 W orld trade
180
160
OECD country exports
140
120
100
2 0 11
20 11
20 11
2 0 M9
20 M9
20 7
1
20 1
20 5
20 1
20 5
20 1
20 3
20 3
20 7
20 7
20 3
20 5
20 M9
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
S urc : C B
o e P
06
06
06
07
08
07
08
06
07
07
08
08
09
06
07
08
06
07
08
20

32. African export growth over

33. Agricultural prices rose +
fell
Source: THE-Ambrosetti based on IMF data; January 2000 = 100; f = forecast

34. Oil, metal prices more

35. Global imbalances narrow
with deflation
600 United States
400
Japan
200
Billion US$
0
European Union
-200
-400
Developing
countries (excl
-600 China) and EiT
-800 China
35
2004 2005 2006 2007 2008 2009

36. 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
36

37. 90
105
120
135
Jan 04
Apr 04
Jul 04
Oct 04
Jan 05
Apr 05
Jul 05
Yen/US$
Oct 05
Jan 06
Apr 06
Jul 06
Euro/US$
Oct 06
Jan 07
Apr 07
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
Dollar volatility continues
Oct 08
Jan 09
Apr 09
0.60
0.70
0.80
0.90

38. Capital inflows contract
750
$ Billions
500
250
0
2005 2006 2007 2008 2009*

39. Share of global FDI

40. Credit crunch continues
Percentage of lenders tightening standards, by size of enterprise seeking loans
Panel A: United States Panel B: European Union
100 80
Large and M edi um Smal l
80 Small & Medium Large
60
60
40
40
20
20
0
-20
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2006 2007 2008
2006 2007 2008

41. Borrowing costs
10
remain high
Africa
Asia
8 Latin America
Europe
6
4
2
0

42. Aid flows unreliable
8%
LDCs
7%
6%
5%
4%
Sub-Saharan Africa
3%
2%
Other LICs
1%
0%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

43. Net Aid Transfer?
• Net ODA is net of principal payments,
but not of interest received on such loans
• Net Aid Transfer (NAT) is net of both
• 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, DRC received $5.4bn in ODA in 2003,
but only $400m. in NAT

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

45. Remittances to developing
countries, 2008-2010
300
2008 260
250 239 238
2009
(billions of US dollar s)
200 2010
150
100
45 41 42
50
0
Low-income countrie s Middle-income countries

46. Domestic demand
• Need to stimulate to offset weakened foreign
demand for exports
[Problem: domestic productive capacities and
capabilities lost with economic liberalization]
• Most countries’ fiscal space limited
 need more policy space to cope
• Need domestic -- not external -- financing
• Build + improve infrastructure
• Strengthen social services, protection 46

47. Policy priorities
• Contain spread of financial crisis
- Across borders (contagion)
- To real economy (ensuring liquidity)
• Reflate economy
- Fiscal measures (fiscal space needed)
- Monetary measures (monetary space)
• Appropriate regulatory reform
- National
- International 47

48. Finance priorities
• Prudential risk management,
including capital controls
• Counter-cyclical: limit pro-cyclicality
• Finance growth (output, employment)
• Development finance, e.g. crucial for
investment + technology policies
• Inclusive finance
48

49. Why stimulus?
• Need to stimulate to offset weakened foreign
demand for exports
[Problem: domestic productive capacities and
capabilities lost with economic liberalization]
• Most countries’ fiscal space limited
 need more policy space to cope
• Need domestic -- not external -- financing
• Build + improve infrastructure
• Strengthen social services, protection 49

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

52. Social impacts
• ILO: >200 m. more working poor
• ILO: Unemployment to rise by 51m
• ILO projections based on IMF 0811
• MDGs, IADGs, social spending at risk
• Rising social unrest
• US intelligence report:
crisis -- greatest security risk

53. Poverty reduction set back
Slowdown in poverty
reduction compared
with pre-crisis growth
Total 73 – 103 million
Africa 12 – 16 million
East and South Asia 56 – 80 million
Latin America and ~ 4 million
Caribbean

54. Extreme poverty worsens
C ng in e m p ve (< $ 5 a
ha e xtre e o rty 1.2 /d y)
No. of Poor Change in poverty
’ /‘ -’
0 0 0
9 4 7 ’ /‘
0 0
9 8 ’ /‘ -’
0 0 0
9 4 7 ’ /‘
0 0
9 8
Transition economies 0.6 0.6 0.3% 0.3%
Developing economies 111.1 73.5 1.8% 1.2%
Africa 5.9 4.2 1.2% 0 %
.9
No Afric
rth a 0.1 0.1 0.1% 0.1%
S -S ha n Afric
ub a ra a 5.8 4.1 1.6% 1.1%
Ea t a S uth As
s nd o ia 101.0 6 .6
5 2 %
.0 1.3%
Ea t As
s ia 16.2 27.5 0 %
.8 1.3%
S uth As
o ia 8 .2
4 37.8 3 %
.0 1.3%
W s As
e t ia 0.6 0.2 0 %
.5 0 %
.2
LAC 4.1 3.7 0.7% 0.7%

55. Social protection
counter-cyclical
• Employment crucial for incomes, esp. for
domestic demand, poverty reduction,
multiplier effects
• Fiscal stimulus, esp. for job creation
• Conditional cash/income transfers
• Universal vs targeted social protection
• Social protection  demand maintenance55

56. Output, jobs recovery
lags, 1991, 2001
Duration of output recovery and job market recovery after the 1991 and
2001 US recessions (in months)
60
1991 2001
50
40
30
20
10
0
Output Job market recovery

57. Lags delay recovery
Im m ediate and
s us tained
s tim ulus
efforts
3 m onth delay
Q2
0 Q3 Q4
2 Q1 Q2
4 Q3 Q4
6 Q1 Q2
8

58. Coordination failure
Table 7: Economic Stimulus in 2009
As a % of GDP As a % of World GDP
Total 1.7 1.4
Advanced Economies 1.3 -
Developing & Emerging Economies 2.7 -

59. Social protection
counter-cyclical
• Employment crucial for incomes, esp. for
domestic demand, poverty reduction,
multiplier effects
• Fiscal stimulus, esp. for job creation
• Conditional cash/income transfers
• Universal vs targeted social protection
• Social protection  demand maintenance59

60. Social spending
low priority (11%)
Tax Cuts, 21.5
Other Spending, 39.8
Transfers to Low
Income, 9.2
Employment Measures,
1.8
Infrastructure Spending,
27.8

61. Financing for Development
• FfD process Member State --
esp. MICs -- driven from outset
• Post-Asian (1997-98) crisis,
post-9/11 ‘special moment’ 
• Doha Round,
• Monterrey Consensus settled
early

62. Monterrey Consensus
• 6 chapters:
1. domestic resource mobilization,
2. K flows, 3. Trade, 4. ODA, 5. Debt,
6. Systemic issues
Recent developments, new knowledge
 new understanding
 update/revise Consensus
OR become irrelevant

63. Domestic resource mobilization
• Experience: Savings rate follows,
does not lead investment rate
• Governance indicators –
foreign perceptions (e.g. corruption)
• Experience: development improves
governance, not vice versa
• But need developmental (‘good enough’)
governance for development
• Enhance international tax cooperation
(‘beggar my neighbour’ tax competition)

64. Capital flows 1
• Financial globalization
 instability rises, growth slower
1 Net flows from South to North
2 Costs not lower
3 Instability increase
• When net inflows,
1 asset price bubbles
2 consumer binges
3 ‘over-investment’

65. Net transfer of financial
resources from South to North
200
0
-200
Billions of US dollars
-400
-600
-800
-1000
Developing economies Africa Eastern and Southern Asia Western Asia Latin America

66. Capital flows 2
• FDI, 1990s: brown-field M&As (>80%)
> green-field FDI (2000 WIR)
• Remember: FDI generally follows, does
not lead domestic investment
• In LDCs, mainly for resource, esp. mineral,
extraction; limited positive externalities
• Sovereign wealth funds:
– recent political scrutiny, discrimination;
– double standards

67. Trade
• Terms of trade:
1 Prebisch-Singer
2 Lewis
3 manufactures
• WTO: trade liberalization end in itself,
despite ‘development round’ rhetoric
• contrast ITO 1948 Havana Charter
(trade reform for growth, employment)

68. Aid for trade
1. compensation (lost revenue,
productive/X capacities)
2. new capacity + capability
development
(‘dynamic’ comparative
advantage not automatic)

69. ODA 1
• Aid: no +ve effect on devt?
Not if take out politically driven aid
• WB IEG on no conditionality
reduction due to ‘bunching’
• ODA system ‘incoherence’  national
ownership impossible; higher
transaction costs; burdensome
 formula for failure
 fatigue, disillusionment
• Additional: aid for trade, climate
change adaptation

70. ODA 2
• ODA: development aid or ‘welfare
colonialism’?
• Aid should focus on productive sectors
for growth, employment
• respect national ownership; eliminate
conditionalities (Accra AA silent)
• DCF: must independently complement
DAC processes and accommodate
creative tensions or risk irrelevance
by being DAC footnote;
• need to be forum/site for debates to
advance development

71. Debt sustainability
• Debt necessary for, but also
obstacle to development
• HIPC limited success –
acknowledge, but what next?
• ‘New donors’, ‘free rider’ issues
• SDRM: do not throw baby out
with [Krueger] bathwater

72. Systemic issues
• BWIs governance democratic deficit –
modest shift in IMF voting rights;
• WB – development bank -- governance
reform considerations should be
different
• ‘double majority’?
• International financial architecture?
No real movement since Asian crisis
except for Financial Stability Forum, G20

73. Systemic issues 2
• Significant interest in regional monetary
and financial cooperation, but modest
• Recent consensus on need for systemic reform
• Current crisis creates conditions for
reform (but G7/G20, OECD not leading)
• however, emphasis still crisis management,
recovery, macro coordination
• Reform: multilateral? regulation? inclusive?
• Regulatory reform not necessarily
developmental, e.g. Basel rules.

74. Emerging issues
• Innovative sources of financing: currency
transaction (Tobin) tax; airline tax
• Aid for trade
• Financing climate change mitigation and
adaptation:
* (historical and contemporary) equity issues
* efficacy of carbon trading
* new World Bank financing instruments
* deforestation mitigation compensation

75. • North/South asymmetry in international
development cooperation negotiations,
including FfD
• North development ministries’ ODA focus;
macro, trade policies by other ministries
• South govts’ planning/finance ministries
 different concerns, priorities
• Planning ministries: more holistic, all IADGs,
not just MDG welfare indicators
• Finance min: macro-financial focus, including
aid predictability, debt sustainability, etc

76. • 2005 Summit: Ecosoc reform (AMR, DCF)
• 2008: series of events building up to
Doha (DCF, Accra, MDGs, G20)
• Recent developments, new knowledge
 new understanding
 enhance Monterrey
• UN: FfD process needs to be augmented or
updated; if not, risk irrelevance
Need:
• greater international tax cooperation,
• more effective FfD follow-up mechanism
• new international financial architecture

77. Constraints on developing
country responses
• IMF fiscal requirement for stimulus
• IMF claims developing countries likely to fail
• Policy -- including fiscal -- space constrained
• Monetary policy less effective, worse with
independent central banks, fiscal authority
• Systemic, market, institutional pro-cyclicality
• Lost productive capacities due to openness 77

78. International 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-,
but not developmental or equitable
• PGA (Stiglitz) Commission of Experts
• Doha Declaration: June 09 summit on impact
of crisis on developing countries

79. 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

80. UN leadership?
• 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

81. Thank you
Please visit UN-DESA www.un.org
G24 www.g24.org and PGA
www.un.org/ga/president/63/ websites
• Research papers
• Policy briefs
• Other documents
Acknowledgements: UN-DESA, ILO, ESCWA 81