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Helmut Reisen, Head of Research OECD Development Centre

Global Forum on Development. The consequences of the global economic and financial crisis: How much do we know?. Helmut Reisen, Head of Research OECD Development Centre. 9 December 2008. 1. Current crisis impact on development finance.

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Helmut Reisen, Head of Research OECD Development Centre

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  1. Global Forum on Development The consequences of the global economic and financial crisis: How much do we know? Helmut Reisen, Head of Research OECD Development Centre 9 December 2008

  2. 1. Current crisis impact on development finance • RBS estimate: outflows 2008 equal to 1/5 of 2003-07 inflows (1trn.$)‏ • Portfolio equity & bond outflows • Commercial bank credit • Trade credit • FDI, M&A • Systemic Sudden Stop • Calvo, Izquierda, Mejia, NBER Working Paper No. 14026 2

  3. 2. Lessons for the diagnosis of policy performance • From decoupling to contagion, from hyperbole to endogeneity/cyclicality • GDP growth rates • “Green” vs ‘black’ accounting • Low risk spreads • High commodity prices • FX reserve levels • Not huge forever • Currency defense • Bank recapitalisation cost • Public budgets • Deficits → FX rates, Y → debt ratios • Be smarter than ratings agencies and (b)analysts 3

  4. 3. Channels of crisis contagion • Through foreign trade (“monsoon effect”)‏ • Global demand, prices, remittances, tourism. China can’t compensate US. • Financial contagion • CA deficits, currency slumps, balance sheet mismatches. • “Pure” contagion • (October 2008) breakdown of money and banking markets • → generalised risk aversion → shedding of assets w/a public guarantees. • Expectations matter 4

  5. 4. Channels of crisis vulnerability • Systemic sudden stops • RER drop =f: • Size of trade sector, external gap, portfolio integration. • Partial insurance • Reserves, debt management, local-currency bank debt. • Strengthen your house even if you are innocent 5

  6. 5. Development finance in a deleveraged world • Impact of deleveraging • Mid term: push 2/3; pull 1/3 • With global growth down, flows down • “Hunger for yield’ satisfied • Time to rebuild bank capital → less bank credit • FDI picks up post-crises • Helped by SWFs (no debt leverage)? 6

  7. 5. Development finance in a deleveraged world • Multilateral ODA: • The Comeback Kids? • Aid to be curtailed? • Deep slumps vs cycles • IFIs will crowd back in… • …But will it be enough? • Can Asian FX reserves be leveraged through IFIs? • Stimulate private-flow insurance Source: OECD Development Centre, based on World Bank Global Development Finance, 2008. 7

  8. 6. Global Governance • Less reliance on international soft law (EITI, DSF)? • Less influence for Wall Street/City → more regulatory independence? • Less pro-cyclicality in bank capital regulation • Less relevance for rating agencies • More emphasis on guarantees and MDBs • More emphasis on G20, less on G8, HDP, etc. • Who represents Small Poor Countries? 8

  9. 7. Positive aspects of the global credit crisis? • Lower fuel & food prices • → More PP for poor, less government subsidies? • Lower rents → less resource curse? • Less chavismo? • Tax heavens closed? • More intergenerational justice as asset prices go down • More talent allocated to real economy, less to finance 9

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