Financial Crisis, Recession, and the Financial Crisis, Recession, and the Development AgendaDevelopment Agenda

Richard NewfarmerRichard NewfarmerSpecial Representative to UN and WTOSpecial Representative to UN and WTO

World BankWorld Bank

ECOSOCECOSOCGenevaGeneva

July 9July 9, 2009, 2009

Financial panic plunges GDP in high income Financial panic plunges GDP in high income countries into severe recession…countries into severe recession…

Source: World Bank.

Q32008

Q42008

Q12009

Contracting consumption in rich countries transmits Contracting consumption in rich countries transmits recession to poor countries – as world recession to poor countries – as world tradetrade collapses collapses

Percentage changePercentage changeAnnual growth of global trade volumesAnnual growth of global trade volumes

Source: World Bank, Source: World Bank, Global Economic Prospects,Global Economic Prospects, 2009 2009

SovereignEMBIG composite

Corporate CEMBI composite

Spread over US Treas., basis points

… … and costs of borrowing have skyrocketed… and and costs of borrowing have skyrocketed… and capital flowscapital flows have dried up have dried up

ForecastForecast

2008-092008-09

East Asia CrisisEast Asia Crisis

$1,158 billion in 2007

US$ b. Private capital flows to dev’ing countries

……leading to global recession…. for the first time in leading to global recession…. for the first time in the last 70 yearsthe last 70 years

WorldWorld High IncomeHigh Income

DevelopingDeveloping

Growth of real GDPGrowth of real GDPPercent

Source: World Bank, DEC Prospects Group, Consensus Forecast, May 2009.

Crisis effects growth regions differently in 2009Crisis effects growth regions differently in 2009 GDP growth, percentGDP growth, percent

Source: World Bank.

Developing countries

High-income countries

GDP annual growth rates (%)GDP annual growth rates (%)Forecast

Outlook? Recovery could begin late this year or next …Outlook? Recovery could begin late this year or next …but strength and duration is uncertain but strength and duration is uncertain

% change

??

Source: World Bank, Source: World Bank, Global Development Finance,Global Development Finance, 2009 2009

Green shoots? Tentative signs that recession is Green shoots? Tentative signs that recession is bottoming out …led by developing countries bottoming out …led by developing countries industrial production, percentage change (saar) industrial production, percentage change (saar)

Source: World Bank through Thomson/Datastream.

World (excluding China)** High-income

OECD

Developing (excluding China)

** China is excluded due to vagaries in recent data tied to the Lunar New Year.

Low-income countries are at particular risk…Low-income countries are at particular risk…

Especially those that:

• export only a few commodities

• have large % in poverty

• have weak fiscal positions

• have low reserves/ high debt

• “fragile states”

Source: IMF, 2009

Implications of slowdown…Implications of slowdown…• 200 million likely to be trapped in poverty200 million likely to be trapped in poverty• Unemployment will certainly rise thru 2010Unemployment will certainly rise thru 2010• Infant mortality and child mortality rises – Infant mortality and child mortality rises – 200,000- 400,000 infants annually200,000- 400,000 infants annually• Health services cutbackHealth services cutback

Risks… Inattention to the long term development agendaRisks… Inattention to the long term development agenda

For example, For example, climate changeclimate change

Countries in brown and Countries in brown and yellow likely to experience:yellow likely to experience:• More droughtsMore droughts• More severe stormsMore severe storms• Rising water scarcityRising water scarcity• Rising sea levelsRising sea levels

Countries vulnerable to climate Countries vulnerable to climate change are the same as those to change are the same as those to recessionrecession

Both forces could produce Both forces could produce unprecedented:unprecedented:• Declines in Declines in foodfood production production• Pressures on Pressures on migrationmigration

Split on Recession Cure, Leaders Try 3 Approaches

                                                                                                                                                                                                          

• Accelerated restructuring of banks and increased regulationAccelerated restructuring of banks and increased regulation• Pledge to avoid protectionPledge to avoid protection• Fiscal stimulus and expansive monetary policyFiscal stimulus and expansive monetary policy• Mobilization of more capital for developing countriesMobilization of more capital for developing countries

• IMF – $700- b. New arrangement to borrow (NAB)IMF – $700- b. New arrangement to borrow (NAB)• World Bank MDBs – Capital increase for ADBWorld Bank MDBs – Capital increase for ADB

• Reform of the IMF and World Bank – Increased capital , new voting, merit selection of leaders Reform of the IMF and World Bank – Increased capital , new voting, merit selection of leaders

The crisis requires a multilateral response… and the The crisis requires a multilateral response… and the G20 leaders strive to coordinate actions…G20 leaders strive to coordinate actions…

G20 Summit G20 Summit April 2 April 2

Agreed:Agreed:

Improving the multilateral response requires…Improving the multilateral response requires…

Fulfilling pledges for development assistance, and augmenting these with a Fulfilling pledges for development assistance, and augmenting these with a “vulnerability fund”“vulnerability fund”

– Need for social safety nets, labor –intensive infrastructure, SMEs, “aid for Need for social safety nets, labor –intensive infrastructure, SMEs, “aid for trade”trade”

– Financing gaps may be between $200-700 billionFinancing gaps may be between $200-700 billion

– Problem: 2010 when fiscal pressures in rich countries become more acuteProblem: 2010 when fiscal pressures in rich countries become more acute

Resisting pressures for trade protection will require vigilance and determination Resisting pressures for trade protection will require vigilance and determination – and renewing a commitment to the Doha Development agenda– and renewing a commitment to the Doha Development agenda

Improving regulation of financial markets will require careful balancing of Improving regulation of financial markets will require careful balancing of national regulatory authorities with international cooperationnational regulatory authorities with international cooperation

Financial Crisis, Recession, and the Financial Crisis, Recession, and the Development AgendaDevelopment Agenda

Richard NewfarmerRichard NewfarmerSpecial Representative to UN and WTOSpecial Representative to UN and WTO

World BankWorld Bank

ECOSOCECOSOCGenevaGeneva

July 9July 9, 2009, 2009