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The global financial crisis: Possible effects on the RBEC region. Ben Slay RBEC senior economist 15 December 2008. Presentation topics. Regional economic growth trends Poverty reduction implications Global financial crisis: How will it affect our region? What risks? For whom?

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the global financial crisis possible effects on the rbec region

The global financial crisis: Possible effects on the RBEC region

Ben Slay

RBEC senior economist

15 December 2008

presentation topics
Presentation topics
  • Regional economic growth trends
    • Poverty reduction implications
  • Global financial crisis:
    • How will it affect our region?
    • What risks? For whom?
  • Effects on development environment
    • UN system, UNDP
    • Bretton Woods institutions
regional growth trends drama in three acts
Regional growth trends: Drama in three acts

Unweighted average annual GDP growth rates, national data

drivers of growth
Drivers of growth
  • “Recovery growth”—bouncing off the bottom
    • End of armed conflicts of early 1990s
    • Benefits of macro stabilisation, market reforms
    • Unemployed resources being put to work
  • Favourable global trends:
    • Growth in world trade
    • Higher export prices, especially for CIS countries
    • “Emerging market” conditions very positive
  • Favourable regional trends:
    • “Convergence growth” (vis-à-vis EU)
    • Special role of Russia
growth good for poverty reduction
World Bank data show that, between 1998-99 and 2005-06:

Those living in poverty fell by 50 million

Those vulnerable to falling into income poverty fell by 48 million

Only one person in eight living in absolute poverty

Growth: Good for poverty reduction

Source: Alam, Sulla, Yemtsov, “Income Poverty in ECA: An Update”, World Bank, 4 April 2008

poverty rose during after 1997 1998 financial crises
Poverty rose during, after 1997-1998 financial crises

Absolute income poverty, measured against $PPP2.15/day threshold. World Bank data.

growth poverty and human development
Growth, poverty, and human development
  • Reductions in income poverty are good—especially as a proxy for human development
    • Non-income dimensions of poverty
      • Health
      • Education
      • Equality
    • Development: Choices, freedoms, opportunities
  • UNDP’s human development index measures:
    • Per-capita GDP (in PPP terms)
    • Education attainment
    • Life expectancy
global crisis arrives emerging markets tank
Global crisis arrives: Emerging markets tank . . .

Year-to-date change in stock market indices, through mid-October. Source: JPMorgan

imf sees recessions growth slowdowns
. . . IMF sees recessions, growth slowdowns

Annual GDP growth, IMF data, forecasts. Sources: IMF World Economic Outlook, October 2008; other IMF publications

contagion four key transmission mechanisms
Contagion: Four key transmission mechanisms
  • Trade shocks:
    • Prices (terms of trade effects)
    • Quantities (falling export demand)
  • Financing gaps will be harder to fill
  • Inter- , intra-bank inflows may reverse
  • Falling remittances
terms of trade shock exports prices collapsing
Terms of trade shock: Exports prices collapsing

World oil prices have dropped by two thirds since mid-2008

Lower food, oil prices will help SEE, NMS, but not most CIS countries

share of exports going to eu 27
Share of exports going to EU-27

UNDP estimates, based on IMF data

financing gap needs that can t be met by borrowing
Financing gap: Needs that can’t be met by borrowing
  • Two key forms:
    • Large current account deficits
    • Large external repayments
    • Or both
  • Big problem now, when capital markets are closed to most developing, transition economies
current account balances
Current account balances

Significant refinancing issues could be present. Much depends on FDI, concessional finance (IMF)

No refinancing issues

Significant refinancing issues are present

Shares of 2007 GDP, EIU data.

external debt repayment without refinancing
External debt: Repayment without refinancing??

In billions. Sources: JPMorgan, EIU

remittances who s most at risk
Remittances: Who’s most at risk?

Remittances as % of GDP. Source: World Bank

special economic role of russia
Special economic role of Russia
  • Trade flows:
    • Russian imports from other CIS countries more than tripled during 2000-2007
    • Subsidised energy imports, manufacturing exports
  • Russian assets in other CIS countries: $33 billion (end-2007)
  • Annual service exports (transport, finance, tourism): $8 billion in 2007
  • Remittances (wages, transfers) from Russia to other CIS countries: $14 billion in 2007

Source: Central Bank of Russia

financial crisis is russia in serious trouble
Financial crisis: Is Russia in serious trouble?
  • Central Bank reserves are melting
  • Markets in free fall
  • Big declines in export prices
  • Growing signs of distress in oil, metals, mining sectors
    • Lay-offs
    • Electricity arrears
  • Smaller banks going under, being merged
  • S&P ratings downgrades:
    • 23 October
    • 8 December

In billions. CBR data

on the other hand
On the other hand . . .
  • $80 billion in off-shore national wealth, reserve funds untouched
  • Bailouts offered:
    • €4 billion to Iceland
    • $2 billion to Belarus
  • No sign of slowing growth in GDP, remittances during first half of 2008
  • Kazakhstan example: Russia can survive poor external refinancing prospects for some time
  • Opportunity to further strengthen state ownership?
    • Government has put $200 billion to support Russian economy at disposal of 3 largest state-owned banks
good news remittances from russia still growing
Good news: Remittances from Russia still growing . . .

Wages and transfers paid out to other CIS countries, in millions, first-half data. Source: Central Bank of Russia.

but not from kazakhstan
. . . But not from Kazakhstan

Wages and transfers paid out to other CIS countries, in millions, first-half data. Sources: National Bank of Kazakhstan, UNDP estimates.

regional inflation trends
Regional inflation trends
  • Accelerated during 2007-2008
    • Much worse in CIS than elsewhere
    • Driven by higher food, energy prices
  • Can increase poverty even without causing a recession:
    • Poorer households’ nominal wages, social benefits may not keep up with inflation
    • Governments may have to tighten fiscal, monetary policies
accelerating inflationary pressures
Accelerating inflationary pressures . . .

Consumer price inflation. 2008 data are for January-September. Sources: CIS Statistical Office, EIU.

aggravate food insecurity
. . . Aggravate food insecurity

Tajikistan: 2.2 million food insecure

34% of rural population

37% of urban population

800,000 severely food insecure, requiring immediate support

Kyrgyzstan: Nearly 1 million vulnerable


Tajikistan: WFP, FAO, UNICEF Joint Food Security Assessment (May, July 2008)

Kyrgyzstan: UN Winter Preparedness Response Plan (October 2008)

impact on the development environment
Impact on the development environment
  • ODA flows?
  • Donor landscape?
  • New development paradigms?
  • Role of:
    • Bretton Woods institutions
    • United Nations
whither oda flows
Whither ODA flows?
  • Bad news:
    • OECD-DAC ODA falling before global financial crisis hits
    • Further reductions in 2009-2010?
  • Good news:
    • 2005-2007 decline due to less debt relief
    • Decline partly offset by growing ODA flows from non-DAC donors

Annual OECD-DAC ODA flows, in billions. Source: OECD-DAC

possible changes in donor landscape
Possible changes in donor landscape
  • Role of OECD-DAC donors will decline
  • Role of new donors, “south-south” cooperation will increase
  • Whither the Paris Declaration?
    • “Conditionality” principles will weaken, role of national ownership strengthen
    • But:
      • “Donor space” will fragment further
      • Donor coordination will become more difficult
search for new development paradigms
Search for new development paradigms
  • Global financial crisis is discrediting “neo-liberalism”, “Washington consensus”
  • But what’s the alternative?
    • Especially for developing countries without large foreign exchange reserves?
  • “Globalisation” hasn’t gone away
  • Changes in state/market relations in OECD countries may not easily transfer
    • Bank nationalisation in US, Europe doesn’t change need for private sector investment in developing countries
what happens to bretton woods institutions
What happens to Bretton Woods institutions?
  • Two key, related questions:
    • Riding to the rescue . . . or to irrelevance?
    • Who will pay for an expanded role?
  • Especially important for IMF
bwis emerging institutional imbalances
BWIs: Emerging institutional imbalances
  • Demand side: Possible new global roles
    • Lender of last resort?
    • Overseer of financial reregulation?
  • Supply side: Business models under attack as MICs proliferate
    • Capital markets were making BWIs irrelevant
    • Will MIC capital market access weaken?
  • Who will provide capital infusions for BWIs?
  • Will China, Gulf states invest in:
    • Bretton Woods institutions (multilateralism) . . .
    • . . . Or sovereign wealth funds (bilateralism)?
opportunities for un dp can we link
Opportunities for UN(DP): Can we link:
  • Macro level policy dialogue (around PRSPs) . . .
    • . . . Especially capacity development for broader participation in macroeconomic policy discussions
  • With local development/ABD programming . . .
    • . . . Especially collection, analysis of poverty data disaggregated by vulnerability criteria (e.g., gender, location, age, ethnicity)
  • With broader socio-economic/environmental risk management . . .
  • . . . And with “economic governance” programming, reflecting the:
    • Need for more effective social policy?
    • Changing balance between the state and the market?
threats for un dp
Threats for UN(DP)
  • IMF, World Bank positions will strengthen
    • Effective cooperation, especially with the Bank?
    • In non-PRSP countries?
  • Climate change/carbon finance—Will the urgency weaken with:
    • Global recession
    • Low energy prices
    • Will “cap and trade” survive the “flight from derivatives”?
  • Will governments conclude that reform is the problem, not the solution?
  • Whither the EU anchor?