Crisis – what crisis?

What do the financial and food crises mean for development?

The pre-crisis world…..

Globalisation is good

Globalisation ‘can lift millions out of deprivation and become the high road to a more just and inclusive global economy.

(2001)

And the controversy….- Huge debates about

the relationship between globalisation and poverty reduction

- Ravi Kanbur’s brilliant 2001 paper still sums it up best: aggregation, time horizon and market structure and power

Then a strange thing happened in 2008

The Economist:

‘decoupling is no myth. Indeed, it may yet save the world economy’

March 2008

2008 was the year that globalisation turned nasty

- Food crisis

- Financial crisis

Food crisis

- Crisis of trade – change in agricultural policy in EU and US fed through to other countries through prices in world markets

Trade, risk and consequences

- Costs and benefits of trade distributed very unevenly – how can a global system compensate for that?

- Global system means that all decisions are global – how do we manage that?

‘Financial crisis’ is really two crises:

The financial crisis and the Faustian pact

- Huge pressure on all developing countries to open up trade and finance

- But reality is that they did so in different ways. How they engage is a key factor in how financial crisis and recession affect them.

South Africa – open to trade and finance

By 2007:- Value of shares in SA stock

market held by foreign investors equivalent to 20% of GDP

- Foreign bank lending equivalent to 54% of GDP

As a result, South Africa hit very hard by the crisis

- External flows to South Africa fell 19% between 2007 – 2008 likely to be down by nearly 50% by 2009.

- Loss in flows because of crisis equivalent to 15% of pre-crisis GDP

- Loss in flows because of recession equivalent to 9% of pre-crisis GDP

China – export led growth but closed financial system

By 2007- Foreign bank lending

equivalent to 4% of GDP- Equities held by foreign

investors equivalent to 4% of GDP

Despite the headlines, China hit less hard by the crisis

- External flows to China rose by 5% between 2007-2008, predicted to fall by 22% by end 2009

- Fall in flows from financial crisis 2% of pre-crisis GDP

- Fall in export earnings from recession around 7% pre-crisis GDP

How countries integrate is key – it’s about policy choices

- Export led growth risky but brings some poverty benefits

- Financial liberalisation also risky, and less poverty benefits

- Also possibility that recovery from recession faster than recovery from financial crisis

Low-income countries

- Low rates of investment overall but high dependence on FDI

- Tiny financial markets – liberalisation brought some foreign involvement but sectors stay very small

- Fall in flows from recession and from financial crisis around 2-5% of pre-crisis GDP

Financial markets were already failing:

- Not getting finance where it was really needed- Finance not necessarily supporting

development- Huge risks involved in financial liberalisation –

volatility in flows even before crisis

What are the big lessons from 2008 for development?

- Risk matters

- Manner of integration is crucial

- Global institutions to manage costs as well as benefits of globalisation

And for the G20:

- Reduce risks in financial system to countries that have to go to the markets can do so with more confidence

- Do what they can to help with domestic resource mobilisation

- Agree way of helping the poorest that doesn’t rely on appeals after the event