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World Economic Situationand Prospects

2009

asdfUnited Nations



World Economic Situationand Prospects 2009

asdfUnited Nations

New York, 2009



Acknowledgements

Te report is a joint product o the United Nations Department o Economic and Social Aairs (DESA), the United

Nations Conerence on rade and Development (UNCAD) and the ve United Nations regional commissions

(Economic Commission or Arica (ECA), Economic Commission or Europe (ECE), Economic Commission or

Latin America and the Caribbean (ECLAC), Economic and Social Commission or Asia and the Pacic (ESCAP) andEconomic and Social Commission or Western Asia (ESCWA)).

For the preparation o the global outlook, inputs were received rom the national centres o Project LINK

and rom the participants at the annual LINK meeting held in New York on 23 and 24 October 2008. Te cooperation

and support received through Project LINK are grateully acknowledged.

Rob Vos, Director o the Development Policy and Analysis Division (DPAD) o UN/DESA, was the lead

author and manager o the report. Pingan Hong led the team o DESA/DPAD, which comprised Grigor Agabekian,

Clive Altshuler, Marva Corley, Keiji Inoue, Alex Izurieta, Matthias Kemp, Malinka Koparanova, Hung-Yi Li, Ingo

Pitterle and Sergio Vieira. Te Financing or Development Ofce at UN/DESA contributed through inputs rom Man-

uel Montes, serenpuntsag Batbold, Sergei Gorbunov, Benu Schneider and Frank Schroeder. Te team at UNCAD

included Heiner Flassbeck, Alredo Calcagno, Olivier Combe, Pilar Fajarnes, Marco Fugazza, Masataka Fujita, Detle

Kotte, Alexandra Laurent, Anne Miroux, Victor Ognivtsev, Olle Ostensson, Astrid Sulstarova and Harmon Tomas.

Te team at ECA included Fabrizio Carmignani, Adam Elhiraika and Susanna Wol; at ECE: Rumen Dobrinsky, JoséPalacin and Robert Shelburne; at ECLAC: Osvaldo Kace, Jürgen Weller and Francisco Villareal; at ESCAP: iziana

Bonapace, Alberto Isgut, Muhammad Malik and Shigeru Mochida; and at ESCWA: Shaun Ferguson, Ali Kadri, Nabil

Sawat and Yasuhisa Yamamoto.

Helpul guidance was received rom Jomo Kwame Sundaram, Assistant Secretary-General or Economic

Development at UN/DESA. Comments and suggestions rom Richard Kozul-Wright are also grateully acknowledged.

For further information, please see http://www.un.org/esa/policy or contact:

DESA :

Mr. Sha Zukang, Under-Secretary-General, Department o Economic and Social Aairs, Room DC2-2320 United

Nations, New York, NY 10017, USA; phone: +1-212-9635958, e-mail: [email protected]:

Mr. Supachai Panitchpakdi, Secretary General, United Nations Conerence on rade and Development, Palais des

Nations, Room E-9050, CH - 1211 Geneva 10, Switzerland; phone: +41-22-9175806; e-mail: [email protected].

ECA :

Mr. Abdoulie Janneh, Executive Secretary, United Nations Economic Commission or Arica

P.O. Box 3005, Addis Ababa, Ethiopia, phone: +251-11-544 3336; e-mail: [email protected].

ECE:

Mr. Paolo Garonna (OiC) United Nations Economic Commission or Europe, Inormation Service Palais des Nations,

CH - 1211 Geneva 10, Switzerland; phone: +41-22-9171234; e-mail: [email protected].

ECLAC:

Ms. Alicia Bárcena, Executive Secretary, ECLAC, Av. Dag Hammarskjold 3477, Vitacura, Santiago, Chile; phone

+56-2-2102000; e-mail: [email protected]:

Ms. Noeleen Heyzer, Executive Secretary o the Economic and Social Commission or Asia and the Pacic, Te United

Nations Building, Rajadamnern Nok Avenue, Bangkok 10200 Tailand; phone: +66-2-2881234, ax +66-2-2881000,

e-mail: [email protected].

ESCWA :

Mr. Bader Al-Daa, Executive Secretary o the Economic and Social Commission or Western Asia, P.O. Box 11-8575,

Riad el-Solh Square, Beirut, Lebanon; phone: +961-1-981301; e-mail: http://www.escwa.un.org/main/contact.asp.



iii

Executive Summary

The global outlook The world economy is entering into a recession

Te world economy is mired in the worst nancial crisis since the Great Depression. Whatrst appeared as a sub-prime mortgage crack in the United States housing market duringthe summer o 2007 began widening during 2008 into deeper ssures across the globalnancial landscape and ended with the collapse o major banking institutions, precipitousalls on stock markets across the world and a credit reeze. Tese nancial shockwaveshave now triggered a ull-edged economic crisis, with most advanced countries already in recession and the outlook or emerging and other developing economies deterioratingrapidly, including those with a recent history o strong economic perormance.

In the baseline scenario o the United Nations orecast, world gross productis expected to slow to a meagre 1.0 per cent in 2009, a sharp deceleration rom the 2.5per cent growth estimated or 2008 and well below the more robust growth o previousyears. At the projected rate o global growth, world income per capita will all in 2009.Output in developed countries is expected to decline by 0.5 per cent in 2009. Growth inthe economies in transition is expected to slow to 4.8 per cent in 2009, down 6.9 per centin 2008, while output growth in the developing countries would slow rom 5.9 per cent in2008 to 4.6 per cent in 2009.

The world economy could fall into recession in 2009

-1

0

1

2

3

4

5

2003 2004 2005 2006 2007 2008a 2009b

Baseline

Optimistic

Pessimistic

Percentage

Source: UN/DESA.

a Partly estimated.

b Projections, based on

Project LINK.

Indicates confdenceinterval at two standard

deviations rom

historical orecast

errors



iv World Economic Situation and Prospects 20 09

Given the great uncerta inty prevailing today, however, a more pessimistic sce-nario is entirely possible. I the global credit squeeze is prolonged and condence in thenancial sector is not restored quickly, the developed countries would enter into a deeprecession in 2009, with their combined gross domestic product (GDP) alling by 1.5 percent; economic growth in developing countries would slow to 2.7 per cent, dangerously low in terms o their ability to sustain poverty reduction eorts and maintain social and

political stability. In this pessimistic scenario, the size o the global economy would actu-ally decline in 2009—an occurrence not witnessed since the 1930s.

o stave o the risk o a deep and global recession, World Economic Situa-tion and Prospects (WESP) 2009 recommends the implementation o massive, internation-ally coordinated scal stimulus packages that are coherent and mutually reinorcing andaligned with sustainable development goals. Tese should be eected in addition to theliquidity and recapitalization measures already undertaken by countries in response to theeconomic crisis. Under a more optimistic scenario—actoring in an eective scal stimuluso between 1.5 and 2 per cent o GDP by the major economies, as well as urther interest-rate cuts—WESP orecasts that, in 2009, the developed economies could post a 0.2 per centrate o growth, and growth in the developing world would be slightly over 5 per cent.

Origins o the global fnancial crisis

The story o a crisis oretold

Te intensication o the global nancial turmoil in September-October 2008 revealedthe systemic nature o the crisis and heightened ears o a complete global nancial melt-down. Although the problems originated in the major developed countries, the mounting

Synchronized global slowdown, led by a recession in developed countries

Percentage

-2

0

2

4

6

8

10

2003 2004 2005 2006 2007 2008a

2009b

Economies in transition

Developing economies

Developed economies

Optimistic scenario

Pessimistic scenario

Source: UN/DESA.

a Partly estimated.

b Forecast.



vExecutive Summary

nancial ragility was closely tied to an unsustainable global growth pattern that hadbeen emerging as ar back as the early 2000s, a risk orewarned early on in previousissues o WESP. As part o this pattern, growth was driven to an important extent by strong consumer demand in the United States o America, stimulated by easy credit andunderpinned by booming house prices as well as very high rates o investment demand

and strong export growth in some developing countries, notably China. Growing UnitedStates decits in this period were nanced by increasing trade surpluses in China, Japanand other countries that had accumulated large oreign-exchange reserves and were will-ing to buy dollar-denominated assets.

At the same time, increasing nancial deregulation, along with a urry o new nancial instruments and risk-management techniques (mortgage-backed securities,collateralized debt obligations, credit deault swaps, and so orth), encouraged a massiveaccumulation o nancial assets supported by growing levels o debt in the household,corporate and public sectors. In some countries, both developed and developing, domesticnancial debt has risen our- or veold as a share o national income since the early 1980s.Tis rapid explosion in debt was made possible by the shit rom a traditional “buy-and-hold” banking model to a “dynamic-originate-to-sell” trading model (or “securitization”).

Te leverage ratios o some institutions went up to as high as 30, well above the ceil ing o 10 generally imposed on deposit banks. Te deleveraging o this nancial house o cardsnow under way has brought down established nancial institutions and has led to therapid evaporation o global liquidity, together threatening the normal operations o thereal economy.

Until recently, all parties seemed to benet rom the boom, particularly themajor nancial players in the rich economies, while the risks were conveniently ignored,despite repeated warnings, such as those highlighted in WESP , that mounting household,public sector and nancial sector indebtedness in the United States and elsewhere wouldnot be sustainable over time. As strains in the United States mortgage market were trans-mitted to the wider nancial sector, ears o a meltdown escalated and have now spreadaround the world.

Policymakers worldwide have takenunprecedented measures to deal with the crisis …

Policymakers initially responded in piecemeal ashion, ailing to see the systemic risk orto consider the global ramications o the turmoil in their entirety. Te approach in-cluded massive liquidity injections into the nancial system and the bailout o some ma-

jor nancial institutions, while accepting the ailure o others. As the crisis intensiedin September 2008, policymakers shited to a more comprehensive and internationally improved coordinated orm o crisis management. Te measures taken have reshaped thepreviously deregulated nancial landscape. Massive public unding has been made avail-able to recapitalize banks, taking partial or ull ownership o ailed nancial institutions

and providing blanket government guarantees on bank deposits and other nancial assets.Governments in both developed and developing countries have started to put together s-cal and monetary stimulus packages in attempts to prevent the global nancial crisis romturning into a worldwide human disaster.



vi World Economic Situation and Prospects 20 09

… but it will take a long time or the

policies to take eect on the real economy

Tese policy measures are aimed at restoring condence and unreezing credit and money markets by recapitalizing banks with public unds, guaranteeing bank lending and insur-ing bank deposits. During the ourth quarter o 2008, interbank lending rates retreated

somewhat ollowing the start o the large-scale bailout. However, by December 2008,congestion and dysunction remained in important segments o the credit markets. In any event, it will take time or most o these policy measures to take eect; the restoring o condence among nancial market agents and normalization o credit supplies will takemonths, i not years, i past crises can be taken as a guide. Furthermore, it typically takessome time beore problems in nancial markets are elt in the real economy. Consequently,it seems inevitable that the major economies will see signicant economic contraction inthe immediate outlook and that recovery may not materialize any time soon, even i thebailout and stimulus packages were to succeed. Moreover, the immediate sca l costs o theemergency measures will be huge, and it is uncertain how much o these can eventually be recovered rom market agents or through economic recovery. Tis poses an additionalmacroeconomic challenge.

Implications or world trade and fnance

Commodity prices have become increasingly volatile …

Te crisis has already had a severe impact on global commodity markets with ar-reachingimplications or the prospects o the developing world at large. Commodity prices havebeen highly volatile during 2008. Most prices surged in the rst hal o 2008, continu-ing a trend that had begun in 2003. rends in world market prices reversed sharply rommid-2008, however. Oil prices have plummeted by more than 60 per cent rom their peak levels o July to November. Te prices o other commodities, including basic grains, also

declined signicantly. In the outlook, most o these prices are expected to even out urtheralong with the moderation in global demand.

… and prospects or world trade are bleak

Growth o world trade decelerated to 4.3 per cent in early 2008, down rom 6.4 per centin 2007, owing mainly to a decline in imports by the United States. United States imports,

which account or about 15 per cent o the world total, have registered a decline in every quarter since the ourth quarter o 2007 and dropped as steeply as 7 per cent in the secondquarter o 2008. Growth in the volume o world trade had dropped to about 3 per centby September 2008, to about one third o the rate o growth a year earlier. In the outlook,global trade is expected to weaken urther in 2009.

The risk o a pullback o lending to developing countries has heightened

Owing to their limited exposure to the mortgage market derivatives that brought downmajor banks in the United States and Europe, nancial systems in most developing coun-tries initially seemed shielded rom any direct impact rom the international nancial cri-sis. Growing risks have emerged through other channels, however, as investors have startedto pull back resources rom emerging market economies and other developing countries



viiExecutive Summary

as part o the deleveraging process o nancial institutions in the developed countries. Ex-ternal nancing costs or emerging market economies surged along with the tightening o the global credit market, as measured by the spreads o the Emerging Markets Bond Index.Unlike in recent years when the spread varied signicantly across regions and countriesto indicate investor discrimination among country-specic risks, the latest surge has beenuniorm, suggesting that contagion and aversion to investing in emerging markets has

taken hold among investors. Spreads are expected to remain high in 2009, as the strainsin global credit markets linger and also as capital ows to emerging market economies areprojected to drop urther.

Exchange-rate volatility has increased and the

risk o a hard landing o the dollar in 2009 remains

Volatility in foreign-exchange markets has also increased substantially with the deepeningo the global nancial crisis. Te United States dollar depreciated substantially vis-à-visother major currencies, particularly the euro, in the rst hal o 2008, but has since re-versed direction even more sharply. For many currencies in developing countries, the ear-lier trend o appreciation vis-à-vis the dollar has either reversed or slowed. Currencies in

a number o developing countries, particularly those that are commodity exporters, havedepreciated against the dollar substantial ly since mid-2008. Te heightened risk aversionamong international investors has led to a “ight to saety”, as indicated by the lowering o the yield o the short-term United States reasury bill to almost zero.

However, it is expected that the recent strength o the dollar will be temporary and the risk o a hard landing o the dollar in 2009 or beyond remains. Even though theglobal imbalances have narrowed somewhat in 2008 and are expected to narrow urther in

The rise and fall of commodity prices in 2007 and 2008

Percentage

J a n - 0 7

A p r - 0 7

J u - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u - 0 8

O c t - 0 8

Agricultural raw materials

Food commodities

Minerals, ores and metals

Crude petroleuma

100

150

200

250

300

350

400

450

500

Source: UNCTAD Commodity

Price Statistics database.

a Average of Brent/Dubai/

Texas, equally weighted

(dollars per barrel).



viii World Economic Situation and Prospects 20 09

2009 with the recession in developed countries, the United States external decit remainssignicant and its net international liability position continues to increase. Te large cur-rent-account decit and perceptions that the United States debt position is approachingunsustainable levels are important actors underlying the trend depreciation o the UnitedStates dollar since 2002. Te ight to saety into the United States dollar in the wake o the global nancial crisis is pushing the external indebtedness o the United States to new

heights; this is likely to precipitate a renewed slide o the dollar once the process o delever-aging has ended. Policymakers should recognize the risk o a possible hard landing o thedollar as a potential source o renewed turmoil in nancial markets in 2009.

Impact on developing countries

Developed economies are leading the global downturn, but the weakness has rapidly spread to developing countries and the economies in transition, causing a synchronizedglobal downturn in the outlook or 2009.

Among the economies in transition, growth o the Commonwealth of Indepen-dent States (CIS) region is on course or a marked slowdown in 2009, dragged largely by

the impact o a global recession and alling commodity prices on the largest economies,such as Kazakhstan, the Russian Federation and Ukraine. A slowdown in business invest-ment, and, to a lesser degree, in household consumption will be elt throughout the region.In South-eastern Europe , a urther moderation o economic growth is expected.

Among developing countries, growth in Africa is expected to decelerate in2009, as the contagion eects o the global economic slowdown spread throughout theregion, leading to weakened export demand, lower commodity prices and a decline in in-

The global imbalances have narrowed, but still pose a risk for further financial trouble

Billions of dollars

-1 000

-800

-600

-400

-200

0

200

400

600

2003 2004 2005 2006 2007 2008a 2009b

Sources: IMF, World Economic

Outlook database, October

2008; UN/DESA.

a Partly estimated.

b Forecast.

United States

Japan

European Union

Developing countriesand economies in

transition, excludingChina

China



ixExecutive Summary

vestment ows to the region. Growth in East Asia is expected to decline notably in 2009,as exports see signicant deceleration. Some economies in the region will also experiencesizeable nancial losses as a result o their relatively high exposure to global nancialmarkets. South Asia is experiencing an overall slowdown in economic growth rom theindustrial sector to the service sector. Growth in Western Asia is anticipated to slow down

signicantly in 2009 as export earnings rom oil all sharply, and investment spendingacross the region is expected to decline. Growth in Latin America and the Caribbean is alsoexpected to slow markedly, dragged largely by the all in commodity prices and globalcredit constraints.

The crisis will present a setback or the fght against poverty

Coming on the heels o the ood and energy security crises, the global nancial crisis willmost likely substantially set back progress towards poverty reduction and the MillenniumDevelopment Goals. Te tightening o access to credit and weaker growth will cut intopublic revenues and limit the ability o developing country Governments to make thenecessary investments to meet education, health and other human development goals.Unless adequate social saety nets are in place, the poor will no doubt be hit the hardest.

An estimated 125 million people in developing countries were already driven into extremepoverty because o the surge in global ood prices since 2006. Lessons rom earlier majornancial crises point to the importance o saeguarding (public) investment in inrastruc-ture and social development so as to avoid major setbacks in human development andallow a recovery towards high-quality economic growth in the medium term.

Immediate policy challenges

Policymakers initially underestimated the crisis

Policymakers worldwide initially underestimated the depth and breadth o the current -nancial crisis. As a result, policy actions by and large ell behind the curve and, in the early stages, policy stances were grossly inadequate or handling the scale and nature o the crisis.

Signifcant downturn in all developing regions in 2009

Annual percentage change

2003 2004 2005 2006 2007 2008a

2009b

Baseline

scenario

Pessimistic

scenario

Optimistic

scenario

Economies in transition 7.4 7.7 6.5 7.8 8.3 6.9 4.8 2.7 6.1

Developing economies 5.2 7.1 6.8 7.1 7.2 5.9 4.6 2.7 5.1

Africa 4.9 5.9 5.7 5.7 6.0 5.1 4.1 0.1 4.7

East Asia 6.9 8.0 7.7 8.6 9.0 6.9 5.9 4.6 6.4

South Asia 6.9 6.7 9.5 6.9 7.9 7.0 6.4 4.0 6.6

Western Asia 4.9 8.2 6.8 5.9 4.7 4.9 2.7 1.6 3.3

Latin America and theCaribbean 1.8 5.9 4.6 5.5 5.5 4.3 2.3 -0.2 2.7

Source: UN/DESA.

a Partly estimated.

b Forecasts, based on Project LINK.



x World Economic Situation and Prospects 20 09

Only ater the systemic risks or the global nancial system became maniestin September 2008 did six major central banks decide to move in a more coordinatedashion by agreeing to cut their respective ofcial target rates simultaneously and scale updirect liquidity injections into nancial markets.

Further monetary easing is expected in the world economy in the outlook or2009. However, with consumer and business condence seriously depressed and banks re-

luctant to lend, urther lowering o interest rates by central banks will do little to stimulatecredit supplies to the non-nancial sector or to encourage private spending. Indeed, it may end up merely expanding the money base within the banking system.

Massive fscal stimulus is needed

Restoring condence in nancial markets in order to normalize credit ows remains o primary importance. However, as long as ears or a deep recession prevail, consumers andinvestors will likely remain severely risk averse. Hence, counter-cyclical macroeconomicpolicies are needed to complement the eorts to rescue the nancial sector rom wide-spread systemic ailure.

With limited space or monetary stimulus, scal policy options will need to be

examined as ways o reactivating the global economy. Te severity o the nancial crisiscalls or policy actions that are commensurate with the scale o the problem and that shouldthus go well beyond any normal range o budgetary considerations. Te United States ad-opted a scal stimulus package in early 2008, totalling some $168 billion, or about 1.1 percent o annual GDP, mainly in the orm o a tax rebate or households. While some analystsbelieve the package had worked well to keep the economy buoyant or at least one quarter,others doubted the permanency o its eects. It is now clear that the size o the scal pack-

Monetary easing moving to a liquidity trap?

Percentage

0

1

2

3

4

5

6

7

8

J u l - 0 7

O c t - 0 7

J u l - 0 8

O c t - 0 8

J a n - 0 8

A p r - 0 8

Source: National central

bank websites.

China: One-yearloan rate

Japan: Discount rate

United States: Federalfunds rate (target)

Euro zone: Marginallending facility rate



xiExecutive Summary

age was too small in comparison with the seriousness o the situation and ailed to sustainthe economy. At the end o 2008, a second, more substantial, scal stimulus package wasunder discussion in the United States. Similarly, European countries were easing monetary policies and preparing or signicant scal expansion in 2009.

Counter-cyclical fscal policies are also needed in developing countries A large number o developing countries and the economies in transition have been reluc-tant to ease monetary policy over concerns o inationary pressures and currency depre-ciation. Inationary pressures should taper o during 2009, however, as world ood andenergy prices are now retreating and global demand is weakening. Tis should providesome space or monetary easing, as well as or scal stimulus, at least in those countriesthat still possess ample oreign-exchange reserves.

Te scope or counter-cyclical policies will vary greatly across developing coun-tries, mainly or two reasons. First, many countries have a history o pro-cyclical macroeco-nomic policy adjustment, partly driven by policy rules (such as ination targeting). Providinggreater monetary and scal stimuli in such cases will thus require a departure rom existingpolicy practice and policy rules. Second, not all countries have equally sufcient oreign-

exchange reserves and some are likely to suer stronger balance-o-payments shocks.Tere are countries with ample policy space or acting more aggressively to

stave o a recession. Te Chinese Government has already started to use its policy space,or instance, and has designed a large-scale plan o scal stimulus amounting to 15 percent o its GDP to be spent during 2009 and 2010, which should contribute to reinvigorat-ing global demand. Te Republic o Korea has also announced a scal stimulus packageequivalent to 1 per cent o its GDP.

For many o the middle- and low-income countries, the scope or providingsuch stimuli will be even more limited, as they may see their oreign-exchange reservesevaporate quickly, with either continued capital reversals taking place or strong reductionsin the demand or their export products, or both. In order to enhance their scope or coun-tercyclical responses in the short run, urther enhancement o compensatory nancing andadditional and reliable oreign aid ows will be needed to cope with the drops in exportearnings and reduced access to private capital ows caused by the global nancial crisis.

As they fght fres today, policymakers worldwide must look to tomorrow

Looking to the long run, however, a broadening o the development policy ramework is needed to conduct active investment and technology policies so as to diversiy thesecountries’ economies and reduce their dependence on a ew commodity exports, thereby allowing them to meet key development goals, including reaching greater ood security,addressing climate change and meeting the Millennium Development Goals. Tis willrequire massive resources or public investment in inrastructure, ood production, educa-tion and health, and renewable energy sources. Te crisis also presents various opportuni-

ties to al ign scal stimulus packages with long-term goals or sustainable development.

The fscal stimulus needs to be coordinated internationally

o ensure sufcient stimulus at the global level, it will be desirable to coordinate scalstimulus packages internationally. In a strongly integrated world economy, scal stimulusimplemented by only one country tends to be less eective because o high import leakage



xii World Economic Situation and Prospects 20 09

eects. By coordinating scal stimulus internationally, the positive multiplier eects canbe amplied through international economic linkages by 30 per cent or more, thereby providing greater stimulus to both the global economy and the economies o individualcountries. As in the case o a coordinated monetary easing, internationally coordinatedscal stimuli can also limit unnecessary uctuation in cross-country interest rate dieren-

tials and in exchange rates among major currencies. Compared with coordinated interestrate policies, scal policy coordination tends to be more difcult to attain, both techni-cally and politically, and hence may be difcult to achieve through ad hoc agreements,requiring instead a more institutionalized platorm or coordination.

Without adequate coordination, global economic reactivation may be delayed,and it may take longer beore market condence is restored. Tis may prolong the creditcrunch and keep borrowing costs high or developing country Governments and privaterms, thereby undermining their eorts to counteract the crisis.

Internationally coordinated policy action among decit and surplus countriesis also critical or achieving a benign adjustment o the global imbalances and avoidinga disruptive hard landing o the dollar. Now that the nancial crisis has already turneda disorderly adjustment into a synchronized global downturn, the need or international

policy coordination and cooperation is more pressing than ever.

Reorm o the international fnancial system

Even in the most optimistic scenario, however, it will take time beore condence is re-stored in nancial markets and recovery can take place. As immediate solutions are being

worked out, it is important to address the systemic causes that led to the present crisis.

Global economic governance mechanisms are inadequate

Te depression o the 1930s had been aggravated by “beggar-thy-neighbour” policies, dis-integration o the global economy and resurgent protectionism. Under the promise “never

again”, it led to the design o the Bretton Woods institutions, including the creation o theInternational Monetary Fund (IMF) and the World Bank, to saeguard the stability o theglobal economy and promote growth and development. But over time, the ability o theIMF to saeguard the stability o the global economy has been hampered by limited re-sources, and it has been increasingly undermined by the vastly greater (and more volatile)resources o private actors with global reach. More exclusive and ad hoc country groups,such as the Group o Seven (G7) or the Group o Eight (G8), have become the platorms

where international policy coordination has taken place in practice.Te apparent irrelevance o the Bretton Woods institutions in today’s crisis

also stems rom their skewed voting structures and governance, which do not adequately reect the importance o developing countries in today’s world economy. Te lack o acredible mechanism with broad representation or international policy coordination is anurgently elt lacuna which is limiting swi t and eective responses to the present crisis.

Regulatory rameworks are defcient

Te nancial crisis has revealed major deciencies in the regulatory and supervisory rameworks o nancial markets. First, the new approach to the regulation o nance, includingthat under the New Basel Accord (Basel II) rules, places the burden o regulation on the



xiiiExecutive Summary

nancial institutions themselves. Second, the more complex the trade in securities andother nancial instruments has become, the greater the reliance on rating agencies whoproved inadequate to the task at hand, in part because o conicts o interest over theirown sources o earnings, which are proportional to the trade volume o the instrumentsthey rate. Consequently, risk assessments by rating agencies tend to be highly pro-cyclical

as they react to the materialization o risks rather than to their build-up. Tird, existingapproaches to nancial regulation tend to act pro-cyclically, hence exacerbating a creditcrunch during a crisis. At times o boom, when asset prices and collateral values are ris-ing, loan delinquency alls and results in inadequate provisioning and overexpansion o credit. When the downturn comes, loan delinquency rises rapidly and standard rules onprovisions can lead to a credit crunch. Fourth, the spread o nancial networks across the

world, and the character o securitization itsel, has made practically all nancial opera-tions hinge on the “condence” that each institution in isolation is capable o backing upits operations. But as insolvencies emerge, such condence is weakened and may quickly vanish, generating a generalized credit reeze. Te risk models applied by regulatory agen-cies typical ly disregard such “contagion” eects and ail to account or the vulnerabilitieso the nancial system as a whole, at home and abroad.

Te basic objectives o the reorm o prudential regulation and supervision o nancial sectors should thus be to introduce strong, internationally concerted counter-cyclical rules supported by counter-cyclical macroeconomic policies.

The risk o a hard landing o the dollar is intrinsic

to the nature o the international reserve system

Te risk o a hard landing o the United States dollar is intrinsic to the very nature o theglobal reserve system, which uses the national currency o the United States as the mainreserve currency and instrument or international payments. Under this system, the only

way or the rest o the world to accumulate dollar assets and reserves is or the UnitedStates to run an external decit. However, as the net liability position o the United States

continues to increase, investors will start anticipating a readjustment and condence inthe dollar will erode.

The world lacks an international lender o last resort

Over the past decade, many developing countries have accumulated vast amounts o or-eign-currency reserves, providing some “sel-insurance” against external shocks. However,both the carry cost o holding such reserves and the opportunity costs o not using themor long-term investment purposes are high. Te tendency to accumulate a large amounto reserves in developing countries has its roots in more undamental deciencies o theinternational monetary and reserve system. Improved macroprudential capital-accountregulation can help reduce the need or the cost o sel-insurance via reserve accumulation.Te need or sel-insurance can be reduced urther with more eective mechanisms or

liquidity provisioning and reserve management at the international level, both regionally and multilaterally.

More generally, all IMF acilities should be signicantly simplied and in-clude more automatic and quicker disbursements proportionate to the scale o the externalshock. Recent action has been undertaken in this direction with the reorm o the IMFExogenous Shocks Facility. But total resources remain limited and much more is neededto provide collective saeguards or large-scale crises.



xiv World Economic Situation and Prospects 20 09

The way orward

Given the existing systemic aws, it seems paramount that deliberations on a new interna-tional nancial architectures should address at least our core areas o reorm:

(a) Te establishment o a credible and eective mechanism or international policy coordination. o guide a more inclusive process, the participation not only o major developing countries but also o more representative institutions o global governance is required; hence, a undamental revision o the governancestructure and unctions o the IMF and the World Bank is needed.

(b) Fundamental reorms o existing systems o nancial regulation and supervi-sion to prevent the re-emergence o excesses.

(c) Reorm o the present international reserve system, away rom the almost ex-clusive reliance on the United States dollar and towards a multilaterally backedmulti-currency system which, perhaps, over time could evolve into a single,

world currency-backed system.(d) Reorms o liquidity provisioning and compensatory nancing mechanisms

backed through, among other things, better multilateral and regional pooling

o national oreign-exchange reserves and avoiding the onerous policy condi-tionality attached to existing mechanisms.

The crisis is global; hence, global solutions are needed

World leaders have acknowledged these needs or reorm. At the Follow-up International Conference on Financing for Development to Review the Implementation of the Monterrey Consensus , held in Doha, Qatar, rom 29 November to 2 December 2008, Governmentsagreed to address systemic problems and undamentally reorm the global nancialsystem.

At the Conerence, donors also promised to honour all commitments to bridgeexisting deciencies in ofcial development assistance to developing countries and empha-

sized that the nancial crisis should not stand in the way o achieving this.Te global nancial crisis could motivate countries to recur to greater tradeprotection. At the Doha conerence on nancing or development, Governments pledgedto resist such temptation, but also stressed the need to break the impasse in the negotia-tions to complete the Doha Round o multilateral trade negotiations and saeguard its de-velopment dimensions, in particular the principle o special and dierential treatment.

It will not be easy to nd consensus among all stakeholders on the precise shapeo a new system o global economic governance, but the risk o endangering global peaceand prosperity by ailing to address the systemic problems underlying the present crisisare simply too high. Tis awareness should be the common ground or seeking commonsolutions.



xv

Contents

Executive Summary ............................................................................................................................................................. iii

Contents ................................................................................................................................................................................. xv

Explanatory Notes ............................................................................................................................................................... xix

I Global outlook .................................................................................................................................................. 1

The nancial crisis and the prospects or the world economy ................................................................................. 1

The story o a crisis oretold .............................................................................................................................................. 5

The deteriorating international economic environment or developing countries ............................................ 12

Tightening and more costly external nancing ......................................................................................... 12

Increased exchange-rate volatility and the risk o a dollar collapse ..................................................... 14

Weakening world trade and commodity prices ......................................................................................... 17

A synchronized global downturn .................................................................................................................................... 18Developed economies ...................................................................................................................................... 20

Economies in transition .................................................................................................................................... 20

Developing countries ........................................................................................................................................ 21

Macroeconomic policies to stimulate the global economy ...................................................................................... 22

The need or reorm o the international nancial system ........................................................................................ 27

Systemic ailures ................................................................................................................................................. 27

The way orward ................................................................................................................................................. 32

II International trade ........................................................................................................................................... 35

Trade ows ............................................................................................................................................................................ 35

Merchandise trade: growth deceleration and potential revenue alls.................................................. 35Trade in services: growth to slow with global downturn ......................................................................... 41

World primary commodities and prices ......................................................................................................................... 44

Non-oil commodities: dramatic price swings ............................................................................................. 44

Crude oil: the turnaround that was to be expected in a global slowdown ......................................... 51

Terms o trade or developing countries and economies in transition .................................................................. 54

Trade policy developments: dealing with multilateral

negotiations in the midst o nancial and ood crises ............................................................................................... 57

III Financing for development ............................................................................................................................. 61

Net resource ows rom poor to rich countries ............................................................................................................ 61

Private capital ows to developing countries ............................................................................................. 62

Foreign direct investment ................................................................................................................................ 68

International nancial cooperation ............................................................................................................... 71

Rehabilitating the global nancial system .................................................................................................. 78

Governance reorm at the Bretton Woods institutions ............................................................................. 81



xvi World Economic Situation and Prospects 20 09

IV Regional developments and outlook ............................................................................................................ 89

Developed market economies ......................................................................................................................................... 89

North America: How severe will the recession in the United States be? .............................................. 89

Western Europe: Sharp deceleration with many countries now in recession ..................................... 92

The new European Union member States: A divergent

growth pattern in 2008, a slowdown in 2009 ............................................................................................. 96

Developed Asia and the Pacic : Japan’s economy

enters recession and will contract urther in 2009 .................................................................................... 99

Economies in transition ...................................................................................................................................................... 101

South-eastern Europe: Another year o good

perormance, though with activity likely to weaken ................................................................................ 102

The Commonwealth o Independent States:

Despite some deceleration, growth remains impressive ......................................................................... 103

Developing economies....................................................................................................................................................... 108

Arica: The end o the commodity boom ..................................................................................................... 109

East Asia: A continuation o deceleration .................................................................................................... 114

South Asia: Expectations o a slowdown in robust growth ..................................................................... 116

Western Asia: Resilience amidst deteriorating external conditions ...................................................... 118

Latin America and the Caribbean: Signicant slowdown in 2009 ......................................................... 123

Statistical annex

Annex tables ......................................................................................................................................................................... 127

Boxes

I. 1 Key assumptions or the baseline orecast and the pessimistic and optimistic scenarios ................................ 3

I. 2 Prospects or least developed countries ........................................................................................................................ 7

I. 3 Don’t orget the ood crisis ................................................................................................................................................ 26

II. 1 The making o the ood crisis ............................................................................................................................................ 47

IV. 1 The impact o the global nancial turmoil on the banking

sector o the Commonwealth o Independent States ................................................................................................ 104

IV. 2 Arica’s response to the ood crisis ................................................................................................................................... 111

IV. 3 The creation o a Gul Cooperation Council monetary union ................................................................................... 120



xviiContents

Figures

I. 1 World economic growth, 2003-2009 .............................................................................................................................. 4

I. 2 Real per capita GDP growth in developed and developing countries, 2003-2009 ............................................. 5

I. 3 Divergence in economic perormance across developing countries in 2008 ....................................................... 8

I. 4 Daily spread between three-month LIBOR and three-monthUnited States Treasury bill interest rate, January 2006-November 2008 ............................................................... 10

I. 5 Daily yield spreads on emerging market bonds, January 2007-November 2008 ................................................ 13

I. 6 Foreign reserves o selected countries, January 2007-October 2008 ..................................................................... 14

I. 7 Exchange-rate indices or the United States, 2002-2008 ........................................................................................... 15

I. 8 Current-account balances, 2003-2009............................................................................................................................ 15

I. 9 Growth o world trade volume, January 2005-September 2008 ............................................................................. 18

I. 10 Ination versus growth in selected developed and developing countries, 2008 and 2009 ............................. 19

I. 11 Policy interest rates o major economies, January 2004-November 2008 ............................................................ 23

II. 1 Growth o global trade, 2002-2009 ................................................................................................................................. 36

II. 2 Monthly averages o ree-market price indices o non-oil

commodities, January 1997-September 2008 ............................................................................................................. 45II. 3 Surplus or decit o global production over usage or lead and zinc, 1996-2007 ............................................... 49

II. 4 Inventories and prices o lead and zinc, ourth quarter o 2003-second quarter o 2008 ................................. 50

II. 5 Nominal and real Brent crude oil prices, 1980-2008 ................................................................................................... 52

II. 6 Terms o trade by trade structure, 2000-2008 .............................................................................................................. 55

II. 7 Terms o trade by region, 2000-2008 .............................................................................................................................. 56

III. 1 Net nancial transers to developing countries and economies in transition, 1997-2008................................ 61

III. 2 Portolio investment inows to selected countries, 2007-2008............................................................................... 65

III. 3 Inows o oreign direct investment, global and by groups o economies, 1980-2008..................................... 69

III. 4 DAC members’ net ODA, 1990-2007, and DAC secretariat simulations to 2010 .................................................. 72

III. 5 Debt-service payments as a proportion o export revenues, 1990-2006 .............................................................. 77

IV. 1 Quarterly growth o personal consumption expenditure in the United States, 1991-2008 ............................. 90IV. 2 Economic activity in the euro zone, 1990-2008 ........................................................................................................... 93

IV. 3 Pattern o economic growth in the new EU member States, 2004-2009............................................................... 97

IV. 4 General government gross nancial liabilities, 1991-2007 ....................................................................................... 100

IV. 5 Growth o domestic credit in South-eastern Europe, 2005-2008 ............................................................................ 102

IV. 6 Consumer price index ination in selected CIS economies, 2007 and 2008 ......................................................... 107

IV. 7 Growth in Arica, oil versus non-oil economies, 2006-2008 ...................................................................................... 110

IV. 8 Year-on-year headline consumer price index ination rates, 2007-September 2008 ........................................ 115

IV. 9 Oil prices and combined current-account surplus in

Western Asian oil-exporting countries, 2003-2009 ..................................................................................................... 123

IV. 10 Real currency depreciations in Latin America, December 2006-October 2008 ................................................... 124



xviii World Economic Situation and Prospects 20 09

Tables

I. 1 Growth o world output, 2003-2009 ............................................................................................................................... 2

I. 2 Frequency o high and low growth o per capita output, 2006-2009 .................................................................... 6

II. 1 Value growth o exports and imports, 2002-2009 ....................................................................................................... 37

II. 2 Volume change o exports and imports, 2002-2009 .................................................................................................. 38II. 3 Exports o services: share in total trade in goods and services, 2003-2007 .......................................................... 42

II. 4 Exports o services among developing economies, 1990, 2000 and 2007 ........................................................... 43

II. 5 Commodity price indices in nominal terms, 2008 ....................................................................................................... 44

II. 6 Commodity price indices in real dollar terms, 1974-2008 ......................................................................................... 45

III. 1 Net transer o nancial resources to developing economies and economies in transition, 1996-2008 ....... 62

III. 2 Net nancial ows to developing countries and economies in transition, 1995-2009 ...................................... 63

III. 3 Credit deault swap spreads and annual probabilities o deault in

selected emerging market countries, 31 December 2007 and 23 October 2008 ................................................ 65

III. 4 Inows o oreign direct investment and cross-border mergers and acquisitions,

by region and major economy, 2007-2008 ................................................................................................................... 70



xix

Explanatory Notes

The following symbols have been used in the tables throughout the report:

.. Two dots indicate that data are not available or are not separately reported.– A dash indicates that the amount is nil or negligible.

- A hyphen (-) indicates that the item is not applicable.

- A minus sign (-) indicates decit or decrease, except as indicated.

. A full stop (.) is used to indicate decimals.

/ A slash (/) between years indicates a crop year or nancial year, or example, 2007/08.

- Use of a hyphen (-) between years, or example, 2007-2008, signies the ull period involved, including the

beginning and end years.

Reference to “dollars” ($) indicates United States dollars, unless otherwise stated.

Reference to “billions” indicates one thousand million.

Reference to “tons” indicates metric tons, unless otherwise stated.

Annual rates o growth or change, unless otherwise stated, reer to annual compound rates.

Details and percentages in tables do not necessarily add to totals, because o rounding.Project LINK is an international collaborative research group or econometric modelling, coordinated jointly by the

Development Policy and Analysis Division o the United Nations Secretariat and the University o Toronto.

The following abbreviations have been used:

AAA Accra Agenda or Action

ABCP asset-backed commercial paper

AIG American International Group, Inc.

Basel II New Basel Capital Accord

bps basis points

CAADP Comprehensive Arica Agriculture Development Programme

CDS credit deault swapCFA Common Framework o Action (o the United Nations High-Level Task Force on the Global Food Security Crisis)

CIS Commonwealth o Independent States

CPI consumer price index

DAC Development Assistance Committee (OECD)

ECA Economic Commission or Arica

ECB European Central Bank

ECE Economic Commission or Europe

ECLAC Economic Commission or Latin America and the Caribbean

ECU European Currency Unit

EESA Emergency Economic Stabilization Act

EMBI Emerging Markets Bond Index

ESCAP Economic and Social Commission or Asia and the PacicESCWA Economic and Social Commission or Western Asia

ESF Exogenous Shock Facility

EU European Union

FAO Food and Agriculture Organization o the United Nations

FDI oreign direct investment

Fed United States Federal Reserve



xx World Economic Situation and Prospects 20 09

FHFA Federal Housing Finance Agency

FSAP Financial Sector Assessment Program

FSIs Financial Soundness Indicators

FSF Financial Stability Forum

GATS General Agreement on Trade in Services

GCC Gul Cooperation CouncilGDP gross domestic product

GHG greenhouse gas

GNI gross national income

GSEs government-sponsored enterprises

HIPCs heavily indebted poor countries

ICT inormation and communication technologies

IFIs international nancial institutions

IFPRI International Food Policy Research Institute

IIF Institute o International Finance

IMF International Monetary Fund

IMFC International Monetary and Financial Committee (IMF)

IT inormation technologyIWG International Working Group o Sovereign Wealth Funds (IMF)

LDCs least developed countries

LME London Metal Exchange

M&As mergers and acquisitions

mbd millions o barrels per day

MDGs Millennium Development Goals

MDRI Multilateral Debt Relie Initiative

NAMA non-agricultural market access

NEER nominal eective exchange rate

NEPAD New Partnership or Arica’s Development

NGLs natural gas liquids

NPV net present value

ODA ofcial development assistance

OECD Organization or Economic Cooperation and Development

OPEC Organization o the Petroleum Exporting Countries

pb per barrel

PPP purchasing power parity

PRGF Poverty Reduction and Growth Facility

R&D research and development

REER real eective exchange rate

ROSCs Reports on the Observance o Standards and Codes

SLF Short-term Liquidity Facility

SSM special saeguard mechanism

SWFs sovereign wealth unds

TNCs transnational corporations

TSR Triennial Surveillance Review

UNCTAD United Nations Conerence on Trade and Development

UN/DESA United Nations Department o Economic and Social Aairs

WGP world gross product

WTO World Trade Organization



xxiExplanatory Notes

The designations employed and the presentation o the material in thispublication do not imply the expression o any opinion whatsoever onthe part o the United Nations Secretariat concerning the legal status o any country, territory, city or area or o its authorities, or concerning thedelimitation o its rontiers or boundaries.

The term “country” as used in the text o this report also reers, as appropriate,to territories or areas.

Data presented in this publication incorporate information available asof 30 November 2008.

For analytical purposes, the following country groupings andsubgroupings have been used:a

Developed economies (developed market economies):Australia, Canada, European Union, Iceland, Japan, New Zealand, Norway,Switzerland, United States o America.

Major developed economies (the Group o Seven):Canada, France, Germany, Italy, Japan, United Kingdom o Great Britain andNorthern Ireland, United States o America.

European Union:Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia,Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia,Slovenia, Spain, Sweden, United Kingdom o Great Britain and Northern

Ireland.EU-15:

Austria, Belgium, Denmark, Finland, France, Greece, Germany, Ireland, Italy,Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom o Great Britain and Northern Ireland.

New EU member States:Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta,Poland, Romania, Slovakia, Slovenia.

Economies in transition:

South-eastern Europe:Albania, Bosnia and Herzegovina, Croatia, Montenegro, Serbia, the ormerYugoslav Republic o Macedonia.

Commonwealth o Independent States (CIS):Armenia, Azerbaijan, Belarus, Georgia,b Kazakhstan, Kyrgyzstan, Republic o Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

Net fuel exporters:Azerbaijan, Kazakhstan, Russian Federation, Turkmenistan, Uzbekistan.

Net fuel importers:All other CIS countries.

Developing economies:Arica, Asia and the Pacic (excluding Australia, Japan, New Zealand and themember States o CIS in Asia), Latin America and the Caribbean.

Subgroupings o Arica:

North Africa:Algeria, Egypt, Libyan Arab Jamahiriya, Morocco, Tunisia.

Sub-Saharan Africa, excluding Nigeria and South Africa (commonly contracted to “sub-Saharan Africa”):

All other Arican countries except Nigeria and South Arica.

Southern Africa:Angola, Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia,South Arica, Swaziland, Zambia and Zimbabwe.

East Africa:Burundi, Comoros, Democratic Republic o the Congo, Djibouti, Eritrea,Ethiopia, Kenya, Madagascar, Rwanda, Seychelles, Somalia, Sudan,Uganda and United Republic o Tanzania.

West Africa:

Burkina Faso, Benin, Cape Verde, Côte d’Ivoire, Gambia, Ghana, Guinea,

Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra

Leone and Togo.

Central Africa:

Cameroon, Chad, Congo, Gabon, Equatorial Guinea, Central Arican

Republic and Sao Tome and Principe.

Subgroupings o Asia and the Pacifc:

Western Asia:

Bahrain, Iraq, Israel, Jordan, Kuwait, Lebanon, Occupied Palestinian

Territory, Oman, Qatar, Saudi Arabia, Syrian Arab Republic, Turkey, United

Arab Emirates, Yemen.

East and South Asia:

All other developing economies in Asia and the Pacic (including China,

unless stated otherwise). This group is urther subdivided into:

South Asia:

Bangladesh, Bhutan, India, Iran (Islamic Republic o), Maldives, Nepal,

Pakistan, Sri Lanka.

East Asia:

All other developing economies in Asia and the Pacic.

Subgroupings o Latin America and the Caribbean:South America:

Argentina, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay,

Venezuela (Bolivarian Republic o ).

Mexico and Central America:

Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Mexico.

Caribbean:

Barbados, Cuba, Dominican Republic, Guyana, Haiti, Jamaica, Trinidad

and Tobago.

For particular analyses, developing countries have been subdivided into

the following groups:

Oil-exporting countries:

Algeria, Angola, Bahrain, Bolivia, Brunei Darussalam, Cameroon, Colombia,

Congo, Ecuador, Egypt, Gabon, Iran (Islamic Republic o ), Iraq, Kuwait, Libyan

Arab Jamahiriya, Mexico, Nigeria, Oman, Qatar, Saudi Arabia, Syrian ArabRepublic, Trinidad and Tobago, United Arab Emirates, Venezuela (Bolivarian

Republic o), Viet Nam.

Oil-importing countries:

All other developing countries.

Least developed countries:

Aghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi,

Cambodia, Central Arican Republic, Chad, Comoros, Democratic Republic

o the Congo, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea,

Guinea-Bissau, Haiti, Kiribati, Lao People’s Democratic Republic, Lesotho,

Liberia, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique,

Myanmar, Nepal, Niger, Rwanda, Samoa, Sao Tome and Principe, Senegal,

Sierra Leone, Solomon Islands, Somalia, Sudan, Timor-Leste, Togo, Tuvalu,

Uganda, United Republic o Tanzania, Vanuatu, Yemen, Zambia.

Landlocked developing countries:Aghanistan, Armenia, Azerbaijan, Bhutan, Bolivia, Botswana, Burkina Faso,

Burundi, Central Arican Republic, Chad, Ethiopia, Kazakhstan, Kyrgyzstan,

Lao’s People’s Democratic Republic, Lesotho, Malawi, Mali, Republic o

Moldova, Mongolia, Nepal, Niger, Paraguay, Rwanda, Swaziland, Tajikistan, the

ormer Yugoslav Republic o Macedonia, Turkmenistan, Uganda, Uzbekistan,

Zambia, Zimbabwe.

a For denitions o country groupings and methodology, see World Economic and Social Survey 2004 (United Nations publication, Sales No. E.04.II.C.1, annex,

introductory text).

b In September 2008, the Georgian Parliament carried a motion to leave the Commonwealth o Independent States; this decision is due to enter into orce in

mid-2009.



xxii World Economic Situation and Prospects 20 09

Small island developing States:American Samoa, Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados,Belize, British Virgin Islands, Cape Verde, Commonwealth o NorthernMarianas, Comoros, Cook Islands, Cuba, Dominica, Dominican Republic, Fiji,French Polynesia, Grenada, Guam, Guinea-Bissau, Guyana, Haiti, Jamaica,Kiribati, Maldives, Marshall Islands, Mauritius, Micronesia (Federated Stateso), Montserrat, Nauru, Netherlands Antilles, New Caledonia, Niue, Palau,Papua New Guinea, Puerto Rico, Samoa, Sao Tome and Principe, Seychelles,

Singapore, Solomon Islands, St. Kitts and Nevis, St. Lucia, St. Vincent and theGrenadines, Suriname, Timor-Leste, Tonga, Trinidad and Tobago, Tuvalu, U.S.Virgin Islands, Vanuatu.

Heavily Indebted Poor Countries (countries that have reached their CompletionPoints or Decision Points):Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Chad, Democratic Republico the Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana,Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua,Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Uganda, UnitedRepublic o Tanzania, Zambia.

The designation o country groups in the text and the tables is intendedsolely or statistical or analytical convenience and does not necessarilyexpress a judgement about the stage reached by a particular country or areain the development process.



1

Chapter I

Global outlook

The nancial crisis and theprospects or the world economy

It was never meant to happen again, but the world economy is now mired in the mostsevere nancial crisis since the Great Depression. In little over a year, the mid-2007 sub-prime mortgage debacle in the United States o America has developed into a global nan-cial crisis and started to move the global economy into a recession. Aggressive monetary policy action in the United States and massive liquidity injections by the central bankso the major developed countries were unable to avert this crisis. Several major nancialinstitutions in the United States and Europe have ailed, and stock market and commod-ity prices have collapsed and become highly volatile. Interbank lending in most developed

countries has come to a virtual standstill, and the spread between the interest rate on inter-bank loans and treasury bills has surged to the highest level in decades. Retail businessesand industrial rms, both large and small, are nding it increasingly dicult to obtaincredit as banks have become reluctant to lend, even to long-time customers. In October2008, the nancial crisis escalated urther with sharp alls on stock markets in both de-veloped and emerging economies. Many countries experienced their worst ever weekly sello in equity markets.

Since early October, policymakers in the developed countries have come up with a number o more credible and internationally concerted emergency plans. Com-pared with the earlier piecemeal approach, which had ailed to prevent the crisis romspreading, the latest plans are more comprehensive and better coordinated. Te measureshave reshaped the previously deregulated nancial landscape; massive public unding was

made available to recapitalize banks, with the Government taking partial or ull owner-ship o ailed nancial institutions and providing blanket guarantees on bank depositsand other nancial assets in order to restore condence in nancial markets and staveo complete systemic ailure. Governments in both developed and developing countrieshave started to put together scal and monetary stimulus packages in order to prevent theglobal nancial crisis rom turning into another Great Depression.

Will this work? It is hard to predict, but doing nothing would almost certainly have urther aggravated the downside risks and more likely than not pushed the worldeconomy into a deeper crisis. It should be appreciated, however, that it will take time ormost o these policy measures to take eect; the restoring o condence among nancialmarket agents and normalization o credit supplies will take months, i not years, i pastcrises can be seen as a guide. Furthermore, it typically takes some time beore problems

in nancial markets are elt in the real economy. Consequently, it seems inevitable thatthe major economies will see signicant economic contraction in the immediate periodahead and that recovery may not materialize any time soon, even i the bailout and stimu-lus packages succeed. Moreover, the immediate scal costs o the emergency measures

will be huge, and it is uncertain how much o these can eventually be recovered rommarket agents or through economic recovery. Tis poses an additional macroeconomicchallenge.

The world economy is

mired in the most severe

nancial crisis since the

Great Depression

Early responses ailed to

prevent the crisis rom

spreading

New, better coordinated

measures, i eective, will

take time to show results



2 World Economic Situation and Prospects 20 09

Most developed economies entered into recession during the second hal o 2008, and the economic slowdown has spread to developing countries and the econo-mies in transition. According to the United Nations baseline orecast, world gross product(WGP) is expected to slow to a meagre 1.0 per cent in 2009, a sharp deceleration rom the2.5 per cent growth estimated or 2008 and well below the more robust growth in previ-

ous years (table I.1). Te baseline orecast assumes that it will take six to nine months ornancial markets in developed countries to return to normalcy, assuming central banks inthe United States, Europe and Japan provide urther monetary stimulus rom the end o 2008 and on into 2009 (see box I.1).

Uncertainties surrounding this orecast are high, as shown by the condenceinterval around the baseline orecast (gure I.1). In a more pessimistic scenario, both there sale o nancial assets and the credit crunch would last longer, while monetary st imu-lus would prove ineective in the short run and scal stimulus would turn out to be toolittle, too late. Tis would then lead to worldwide recession in 2009, with global outputalling by 0.4 per cent, and postpone recovery to, at best, the ollowing year. In a more op-timistic scenario, a large-scale scal stimulus coordinated among major economies wouldstave o the worst o the crisis, yet—or the reasons indicated—it would not prevent a sig-

nicant slowdown o the global economy in 2009. Both o these scenarios are also shownin table I.1 and gure I.1 and discussed urther below.

Developed countries have

entered into recession and

are dragging the world

economy down

Table I.1

Growth o world output, 2003-2009


2003 2004 2005 2006 2007 2008a

2009b

Baseline

scenario

Pessimistic

scenario

Optimistic

scenario

World outputc 2.7 4.0 3.5 4.0 3.8 2.5 1.0 -0.4 1.6

of which:

Developed economies 1.8 3.0 2.4 2.9 2.5 1.2 -0.5 -1.5 0.2

United States 2.5 3.6 2.9 2.8 2.0 1.2 -1.0 -1.9 -0.5

Euro zone 0.8 2.1 1.7 2.8 2.6 1.1 -0.7 -1.5 0.3

Japan 1.4 2.7 1.9 2.4 2.1 0.4 -0.3 -0.6 0.5



China 10.0 10.1 10.4 11.6 11.9 9.1 8.4 7.0 8.9

India 7.3 7.1 11.5 7.3 8.9 7.5 7.0 4.7 7.5

Brazil 1.1 5.7 3.2 3.8 5.4 5.1 2.9 0.5 3.0

Mexico 1.4 4.0 3.1 4.9 3.2 2.0 0.7 -1.2 1.5

of which:

Least developed countries 5.2 7.2 7.9 7.7 7.8 6.4 5.1 2.0 6.1

Memorandum items:

World trade 5.6 11.2 8.0 8.8 6.3 4.4 2.1 -3.1 3.1

World output growthwith PPP-based weights 3.6 4.9 4.5 4.9 4.9 3.7 2.3 1.3 3.0

Source: UN/DESA.

a Partly estimated.b Forecasts, based in part on Project LINK.c Calculated as a weighted average o individual country growth rates o gross domestic product (GDP), where weights are based on GDP in 2005

prices and exchange rates.



3Global outlook

Key assumptions for the baseline forecastand the pessimistic and optimistic scenarios

The baseline forecast

The baseline orecast assumes that it will take six to nine months or nancial markets in developed

countries to return to normalcy while central banks in the United States, Europe and Japan provide

urther monetary stimulus rom the end o 2008 and on into 2009.

The Federal Reserve (Fed) is assumed to maintain its main policy interest rate, the ed-

eral unds rate, at its current level o 1 per cent throughout 2009. In addition, the Fed (as well as other

major central banks) is expected to continue using direct injections o liquidity into the nancial

system through some special acilities, including the Term Securities Lending Facility, and the exten-

sion o non-recourse loans at the primary credit rate to depository institutions and bank holding

companies to nance their purchases o high-quality asset-backed commercial paper (ABCP) rom

money market mutual unds.

The European Central Bank (ECB) is assumed to cut its main policy interest rate, the

minimum bid rate,a urther during the ourth quarter o 2008 rom its current level o 3.25 per cent to

2.75 per cent by the end o the year. In 2009, it is expected to cut an additional 50 basis points (bps),

bringing its policy rate to 2.25 per cent and then to maintain this stance or the rest o the year. The Bank o Japan is assumed to hold its policy rate, the target Uncollateralized Over-

night Call Rate, at its current 0.3 per cent until the end o 2009.

The euro peaked against the United States dollar during the second quarter o 2008, at

$1.60, and has depreciated signicantly since then. It is assumed to remain close to the current levels

o around $1.28 in the ourth quarter o 2008 and to depreciate urther in 2009, reaching $1.20 as

interest-rate dierentials against the United States narrow urther.

The Japanese yen is expected to stay close to current levels o Y99 to the United States

dollar or the ourth quarter o 2008 and then to appreciate and average Y91 in the ourth quarter o

2009.

Brent oil prices are expected to average $64 per barrel in 2009, compared with an esti-

mated average o $101 per barrel in 2008.

A pessimistic scenario

Given the great uncertainties with regard to how deep this nancial crisis could become and howeective the policy measures in place would be, risks or the world economy to perorm even worse

than in the already gloomy baseline outlook remain high. The key ac tor in a more pessimistic scenario

o this kind would be a much sharper-than-anticipated decline in net lending to households and

businesses in major developed countries, not unlike the experience o the United Kingdom o Great

Britain and Northern Ireland, Japan and the Scandinavian countries during their respective nancial

crises in the early 1990s. The lack o condence and trust in the nancial sector would be prolonged,

especially i, or instance, large “o balance-sheet” positions o nancial institutions continued to

disguise risks at much larger nancial losses.

As a result, the re sale in equity markets and drops in asset prices will also be pro-

longed, along with deteriorating indicators o the real economy, including alling business prots

and rising unemployment. As nancial institutions continue to deleverage and investors become

even more risk averse, the pessimistic scenario assumes an extended vicious circle o asset price de-

ation and perceptions o rising nancial risk. House prices in the United States, which have declined

by about 20 per cent since the housing bubble burst, are assumed to all by another 15-20 per centduring 2009. The wealth losses rom a urther sell-o in assets worldwide could completely dwar

the attempts at recapitalization o nancial institutions and corporate businesses put in place by the

Governments o major developed countries, and make the nancial rescue look seemingly impos-

sible. This will erode market condence urther. Developing economies would be hurt more through

a deeper recession in the developed economies, a steeper all in commodity prices and a sharper

reversal o capital inows. Aid budgets could come under greater pressure and aect low-income

countries relying on ofcial development assistance not only or their long-term development but

also as a cushion against external shocks.

Box I.1

a In order to supply urtherliquidity to the markets, the

ECB has now changed itsmain renancing operationsrom a variable rate to axed-rate tender, and issupplying unlimited liquidityat the stated xed rate.




In the baseline scenario, income per capita or the world as whole is expectedto decline in 2009 (gure I.2). Tis will be the case not only in the developed economies

but also in many developing countries, where per capita income growth will be negative or well below what is needed to address poverty reduction.1

Te vast majority o countries are experiencing a sharp reversal in the robustgrowth registered during the period 2002-2007. For example, among the 160 economies in

1 As a rule o thumb, 3 per cent per capita income growth is sometimes seen as the minimum

required growth rate or achieving signicant reductions in poverty, even in the absence o

income redistribution.

World income per

capita will all in 2009

In this scenario, scal and monetary stimulus is likely to be less eective. First, it could

push the United States and parts o Europe into a “liquidity trap”—akin to that o Japan during the

1990s—where monetary easing would ail to stimulate private consumption and investment. Sec-

ond, the deep risk aversion and lack o condence orce banks to use any liquidity injections to shore

up their balance sheets without enhancing the credit supply to households and businesses . Third, s-cal stimulus also ails to restore condence among market agents as they ear that Governments lack

sufcient means to nance ever-larger bailouts o the nancial system or that exorbitant increases in

public debt will be a threat to economic stability in the uture.

An optimistic scenario

In contrast, in a more optimistic scenario, it is assumed that nancial market condence is restored as

quickly as assumed in the baseline. In addition, it is assumed that during the rst hal o 2009, scal

stimulus packages o between 1.5 and 2 per cent o gross domestic product (GDP) are introduced in

coordinated ashion. Also, compared with the baseline, greater monetary easing is assumed through

urther interest-rate cuts.

Box I.1 (cont’d)

Figure I.1

World economic growth, 2003-2009

-1

0

1

2

3

4

5

2003 2004 2005 2006 2007 2008a 2009b

Baseline

Optimistic

Pessimistic

Percentage

Source: UN/DESA.

a Partly estimated.b Projections, based

on Project LINK.

Indicates condence

interval at two standard

deviations rom

historical orecast errors



5Global outlook

the world or which data are available, the number o economies that had an annual growthin gross domestic product (GDP) per capita o 3 per cent or higher is estimated to havedropped rom 106 in 2007 to 83 in 2008, and this is expected to decline urther, to 52, in2009 (see table I.2). Among the 107 developing countries, this number is estimated to havedropped rom 70 in 2007 to 57 in 2008, and to decline signicantly urther in 2009 to 29.Tis trend suggests a signicant setback in the progress made in poverty reduction in many

developing countries over the past ew years. Te prospects or the least developed countries(LDCs), which generally did so well on average over the past several years, are also dete-riorating rapidly (see box I.2). Meanwhile, divergences in economic perormance amongthe low-income countries remain greater than among the mainly middle-income countriesin Asia or Latin America (gure I.3), although with the synchronized global downturn,growth divergences have narrowed somewhat rom preceding years.

The story o a crisis oretold

Te crisis should have taken no one by surprise. Tat analysts and policymakers are now expressing bewilderment at the extent o the crisis suggests not only a gross underesti-

mation o the undamental causes underlying the crisis but also unounded aith in thesel-regulatory capacity o unettered nancial markets. Past issues o the World Economic Situation and Prospects have repeatedly pointed out that the apparent robust growth pat-tern that had emerged rom the early 2000s came with high risks. Growth was driven toa signicant extent by strong consumer demand in the United States, stimulated by easy credit and underpinned by booming house prices, and by very high rates o investmentdemand and strong export growth in some developing countries, notably China. Growing

Policymakers have grossly

underestimated the global

consequences o thenancial crisis in the

United States

Figure I.2Real per capita GDP growth in developed and developing countries, 2003-2009

Percentage

-1

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008a 2009b

Developing countries

WorldDeveloped countries

Source: UN/DESA.

a Partly estimated.b Projections, based onProject LINK.




Table I.2

Frequency o high and low growth o per capita output, 2006-2009

Number o countries

monitored

Decline in GDP per capita

Growth o GDP per capita

exceeding 3 per cent

2006 2007 2008a 2009b 2006 2007 2008a 2009b

Number o countries

World 160 10 15 14 36 97 106 83 52

of which:

Developed economies 35 0 0 7 21 18 18 7 6

Economies in transition 18 0 0 0 0 16 18 18 17

Developing countries 107 10 15 7 15 63 70 57 29

of which:

Arica 51 9 14 6 9 25 29 24 16

East Asia 13 0 1 1 2 11 12 8 1

South Asia 6 0 0 0 0 5 5 5 4

Western Asia 13 1 0 0 1 8 7 7 2Latin America 24 0 0 0 3 14 17 13 6

Memorandum items:

Least developed countries 39 6 11 5 10 17 20 16 10

Sub-Saharan Aricac 44 9 14 6 9 20 23 19 13

Landlocked developing countries 25 2 5 2 3 12 15 15 13

Small island developing States 17 2 2 1 4 9 12 9 5

Shared Percentage o world population

Developed economies 15.8 0.0 0.0 1.7 13.7 2.5 2.5 1.5 1.4


Developing countries 79.1 0.9 1.6 0.7 3.3 67.2 72.2 65.9 49.4

of which:Arica 13.5 0.9 1.6 0.7 1.0 7.0 10.2 8.4 6.4

East Asia 30.5 0.0 0.0 0.0 0.1 30.4 30.5 28.3 20.9

South Asia 23.7 0.0 0.0 0.0 0.0 25.7 26.1 26.5 24.1

Western Asia 2.8 0.1 0.0 0.0 0.3 1.8 2.0 0.6 0.4

Latin America 8.5 0.0 0.0 0.0 2.0 4.7 6.3 5.2 0.7

Memorandum items:

Least developed countries 10.5 0.4 1.1 0.5 1.2 6.6 7.6 6.4 5.0

Sub-Saharan Aricac 8.4 0.9 1.6 0.7 1.0 4.5 5.5 4.6 3.1

Landlocked developing countries 4.9 0.3 0.8 0.3 0.5 2.7 2.9 2.9 2.7

Small island developing States 0.8 0.0 0.0 0.0 0.2 0.5 0.6 0.5 0.2

Source: UN/DESA, including population estimates and projections rom World Population Prospects: The 2006 Revision.

a Partly estimated.b Forecast, based in part on Project LINK.c Excluding Nigeria and South Arica.d Percentage o world population or 2000.



7Global outlook

Prospects for least developed countries

Growth in the least developed country (LDC) group decelerated rom 7.8 per cent in 2007 to 6.4 per

cent in 2008, breaking a our-year trend o growth over 7 per cent. In 2009, growth is expected to

slow urther to 5.3 per cent. These gures, however, obscure a signicant variation across countries.Cape Verde recently graduated rom LDC status. O the remaining 38 countries with data coverage,

only ve had growth over 7 per cent in 2008—the minimum rate o growth needed to achieve the

Millennium Development Goals (MDGs). Growth was between 3 and 7 per cent in 25 countries, while

the remaining 8 countries, most o which were mired in conicts or political instability, had growth

o less than 3 per cent (see table).

The majority o countries with growth above 7 per cent in 2008—or example, Angola,

the Democratic Republic o the Congo and Equatorial Guinea—were oil- and mineral-exporting

economies, thus underscoring the importance o the recent commodity boom or the export and

growth perormance o the group and also highlighting that their growth remains susceptible to

volatility in the international commodity markets. Although the value o merchandise exports rose

by 43 per cent in the LDCs between 2007 and 2008, quadrupling since 2003, this was largely due to

the rising prices o oil and mineral exports. The LDCs remain marginalized in terms o their share in

world trade, accounting or only 1 per cent o global exports.

In addition, about hal o the LDCs, many o which are high-growth perormers, expe-

rienced a de-industrialization o their economies in the past decade. This suggests the lack o struc-

tural transormation and economic dynamism necessary or reducing commodity dependence and

bringing about long-term sustainable growth.

Most LDCs are net ood importers and have thereore been strongly aected by the rise

in commodity ood prices, deteriorating terms o trade and widening current-account decits. Ater

experiencing a declining trend since 2001, ination in the LDCs increased to 13.5 per cent in 2008,

up rom 9.5 per cent in 2007, triggered mainly by rising world market prices o ood and uel. In the

oil-exporting countries, this was compounded by strong domestic demand growth. O the 38 LDCs

monitored, hal had ination rates over 10 per cent in 2008, up rom 13 countries in 2007.

Food import bills o LDCs climbed by 37 per cent in 2008, rom $17.9 million in 2007 to

$24.6 million in 2008 and ater having risen by 30 per cent in 2006, owing to surging prices o rice,

Box I.2

Table

Growth in least developed countries, 2008

Less than 3 per cent Between 3 and 7 per cent Greater than 7 per cent

Chad

ComorosEritrea

Guinea

Somalia

Togo

Myanmar

Haiti

Bangladesh

BeninBurkina Faso

Burundi

Central Arican Republic

Djibouti

Gambia

Guinea-Bissau

Lesotho

Madagascar

Malawi

Mali

Mauritania

Mozambique

NigerNepal

Rwanda

Sudan

Sao Tome and Principe

Senegal

Sierra Leone

United Republic o Tanzania

Uganda

Yemen

Zambia

Angola

Democratic Republic o the Congo

Equatorial Guinea

Ethiopia

Liberia




United States decits in this period were nanced by increasing trade surpluses in China, Japan and other countries accumulating large oreign-exchange reserves and willing tobuy dollar-denominated assets. At the same time, increasing nancial deregulation, along

with a urry o new nancial instruments and risk-management techniques (mortgage-backed securities, collateralized debt obligations, credit deault swaps, and so on), encour-aged a massive accumulation o nancial assets supported by growing levels o debt in thehousehold, corporate and public sectors. In some countries, both developed and develop-ing, domestic nancial debt has risen our- or veold as a share o national income sincethe early 1980s. Tis rapid explosion in debt was made possible by the shi t rom a tradi-tional “buy-and-hold” banking model to a dynamic “originate-to-sell” trading model (or

Figure I.3Divergence in economic performance across developing countries in 2008

0

2

4

6

8

10

AfricaDeveloping

AsiaLatin America and

the CaribbeanLeast developed

countries

Source: UN/DESA and ProjectLINK.

Note: For each region, thered bar within the box

corresponds to the regionalmean value o growth rates.

The ve blue horizontalbars, rom bottom to top,

correspond to the smallestobservation, the rst quartile,the median, the third quartile

and the largest observation,respectively. The outliers

are excluded rom thedetermination o the smallestand the largest observations.

wheat and vegetable oils. By the end o 2008, the annual ood import basket in LDCs cost more than

three times that o 2000, not because o the increased volume o ood imports, but as the result o

rising ood prices. The moderation in commodity prices which began in 2008 is expected to improve

the terms o trade o oil-importing and net ood-importing LDCs in the near term, yet much o the

damage has already been done, as the surge in ood prices has led to double-digit levels o ination,sparked ood riots in at least eight LDCs (Burkina Faso, Guinea, Haiti, Mauritania, Mozambique, Sen-

egal, Somalia and Yemen) and slowed progress towards the MDGs.

The global economic downturn will aect the LDCs through lower commodity prices,

weaker investment and trade ows, and higher exchange-rate vulnerability. Aid ows, which are im-

portant or unding improved social service delivery, large-scale inrastructure projects and industrial

development, may recede i traditional donors mired in the nancial crisis renege on their aid com-

mitments, thus urther hampering progress towards achieving the MDGs.

Box I.2 (cont’d)



9Global outlook

“securitization”). Leverage ratios o some institutions went up to as high as 30, well abovethe ceiling o 10 generally imposed on deposit banks. Te deleveraging now under way hasbrought down established nancial inst itutions and led to the rapid evaporation o globalliquidity that together threaten the normal operations o the real economy.

All parties seemed to benet rom the boom, particularly the major nancial

players in the rich economies, while the risks were conveniently ignored, despite repeated warnings that mounting household, public sector and nancial sector indebtedness in theUnited States and elsewhere would not be sustainable over time.2 As strains in the UnitedStates mortgage market were transmitted to the wider nancial sector, ears o a meltdownescalated and spread around the world.

Severe problems in United States mortgage markets and increasing volatility ininterest-rate spreads in the markets or interbank and emerging market lending suraced in

August 2007 as early signs o emerging global nancial turmoil. Despite massive liquidity injections and an increasingly loose monetary policy stance in the United States, Japanand parts o Europe, the turmoil continued into 2008. Major warning signs came withthe collapse o Bear Stearns, the th-largest investment bank in the United States, whichhad to be rescued by joint action o the United States Federal Reserve (Fed) and JPMorgan

Chase. In September 2008, the nancial turmoil intensied once again, this time turninginto a global nancial tsunami characterized by a severe credit reeze, a precipitous sell-o in stock markets worldwide and the collapse or near collapse o major nancial institu-tions in the United States and Europe. Several developed countries, including Iceland andHungary, needed massive emergency loans rom the International Monetary Fund (IMF)to cope with their nancial problems.

Te continued housing slump in the United States triggered the collapse o this nancial house o cards. House prices continued to decline in 2008 at an annualrate o about 17 per cent. Mortgage delinquency rates surged, part icularly or sub-primeloans. No less than 40 per cent o the sub-prime mortgage loans originated in 2006 weredelinquent by the second hal o 2008. As a result, the value o mortgage-related assetsdeteriorated signicantly. By the third quarter o 2008, nancial institutions worldwide

had written down a total value o about $700 billion worth o asset-backed securities,o which more than $500 billion related to the commercial banking sector. Many more

write-downs are orthcoming as the prices o these securities continue to drop, leading toan accelerated erosion o the capital base o nancial institutions and severely constrainingtheir ability to lend.

Moreover, the complex way in which those asset-backed securities were con-structed made it dicult to assess their value. Having been cavalier about risk during theboom years, investors have become extremely risk averse along with the plummeting marketcondence, resulting in urther declines in asset prices and a urther drying up o liquidity in a number o unding markets. Banks have become extremely reluctant to lend to eachother, losing condence in the creditworthiness o counterparties. Te credit market stress

was reected in the surge o the spread between the interest rate on interbank lending and

the interest rate on reasury bills. In late September and early October, this spread reachedits highest level in decades. It had soared to nearly 400 basis points, whereas under normalmarket conditions, the spread would be about 20 to 30 basis points (gure I.4).

2 For example, as early as 2006, the World Economic Situation and Prospects 2006 (United Nations

publication, Sales No. E.07.II.C.2) warned o the “vulnerability o the global economy derived rom

the possible burst o the house price bubble in some countries” (p. 23) and cautioned that the

related widening o the global imbalances posed a threat to the stability o the nancial system.

The nancial turmoil o

August 2007 was an early

sign o larger problems

ahead

Deregulation and nancial

innovations led to excessive

risk-taking by nancial

instititutions




Te credit crunch has become widespread, and even some large, nancially sound non-nancial corporations were unable to roll over their commercial paper in themoney market to und working capital needs.

Prices o nancial companies’ stocks were under tremendous pressure evenbeore September, but a urther erosion o investor condence, combined with a signi-

cant downgrading o the outlook or the real economic sector, triggered another round o asset sell-os worldwide in late September and October. Equity markets remained highly volatile thereater. In the rst ten days o October alone, equity markets worldwide plum-meted by about 20 per cent on average, losing roughly $10 trillion worth o equity. Many markets, including those o the United States and some Asian countries, experienced the

worst sell-o recorded in a single week. For the year, global equity markets have declinedby about 40 per cent on average. In several emerging markets, the decline has been evensteeper, with stock exchanges dropping by more than 60 per cent in China and the Rus-sian Federation, or example.

A number o large nancial institutions came under severe nancial stress and were cut o rom access to long-term capital and short-term unding markets. In theUnited States, these included the two government-sponsored enterprises (GSEs), Fannie

Mae and Freddie Mac, as well as Lehman Brothers, American International Group (AIG),Inc. and Washington Mutual. Fannie Mae and Freddie Mac hold about $5 trillion wortho mortgage loans, about hal o all the mortgage loans in the United States. Tey arealso the issuers o multi-trillion-dollar bonds bought by many other nancial institutions

worldwide, including the central banks o many countries, as well as pension unds. Teailure o these two companies would inevitably have caused unacceptably large dislo-cations in the global nancial system. Tereore, the Federal Housing Finance Agency

A re sale in asset markets

ollowed the collapse o

major nancial institutions

in the United Statesand Europe

Figure I.4Daily spread between three-month LIBOR and three-monthUnited States Treasury bill interest rate, January 2006-November 2008

J a n - 0 6

M a r - 0 6

M a y - 0 6

J u l - 0 6

S e p - 0 6

N o v - 0 6

J a n - 0 7

M a r - 0 7

M a y - 0 7

J u l - 0 7

S e p - 0 7

N o v - 0 7

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

Percentage

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Sources: British Bankers’Association and the United

States Federal Reserve Bank.



11Global outlook

(FHFA) put Fannie and Freddie under conservatorship o the United States Government,and the reasury provided nancial support.

AIG is one o the largest insurance companies in the world. It has more thanone trillion dollars in assets and operates in more than 100 countries. AIG plays a centralrole in a number o markets by insuring risks or many other companies. For example, it

holds a swap portolio valued at about $500 billion or the insurance o the debts o many other major nancial institutions. Given the size and composition o its obligations, aailure o AIG would also severely threaten global nancial stability. o salvage AIG, theUnited States reasury provided an emergency credit line o $85 billion in exchange orabout 80 per cent equity ownership in AIG, ater which urther support was given, raisingthe bailout to $150 billion in November o 2008.

wo more large nancial institutions ailed: Lehman Brothers and Washing-ton Mutual had to le or bankruptcy, the ormer being the largest rm to do so in UnitedStates history, while the latter is the largest bank ever to ail.

September 2008 marked a sea change in the international nancial landscape,including the end o independent investment banking in the United States and an end toprevious aith in the virtues o unettered nancial markets. Investment banks either went

bankrupt, merged with other commercial banks, or converted themselves into commer-cial banks. Between September 2007 and October 2008, 16 banks in the United Statesled or bankruptcy, and more than 100 out o some 7,000 banks are on the Fed’s watchlist. While this proportion is still small compared with the Great Depression, when about700 out o a total o 9,000 banks ailed, its ramications in an integrated nancial worldare every bit as big. In November, the United States Government also had to come to therescue o Citigroup, backing about $306 billion in loans and securities and investing $20billion directly in the nancial institution considered “too big to ail”.

Te credit crisis quickly spread to Europe, with a number o large European -nancial institutions teetering on the edge o collapse, such as the Dutch-Belgian bank For-tis, the French-Belgian Dexia, the British mortgage lender Bradord & Bingley, Germany’sHypo Real Estate, as well as the Dutch bank and insurance company ING and the Dutch

insurance giant Aegon. In Iceland, three major banks collapsed, dragging the country tothe brink o bankruptcy as the total external liabilities o the three banks accounted orve times Iceland’s annual GDP. Te contagion eects o the crisis also spread rapidly toemerging economies. Hungary was among the rst o the emerging market countries tosuer. Both Iceland and Hungary had to recur to the IMF (and other sources) to al leviatethe immediate nancial market stress, becoming the rst two European countries to doso in over 30 years. Ukraine also ran into acute liquidity problems, as its access to interna-tional capital markets was curtailed sharply, its currency was sold o and the credit-ratingagencies downgraded the country’s debt. Ukraine also had to recur to the IMF or a $16.4billion loan. Belarus and Serbia also led requests or substantial emergency support romthe IMF. Pakistan also entered into acute balance-o-payments’ problems and led or IMFsupport, as its oreign reserve level dropped to less than a ew weeks worth o imports.

Te intensication o the global nancial crisis rom late September-October2008 onwards heightened the risk o a complete collapse o the global nancial system. Inresponse, policymakers worldwide, particularly those in major developed countries, drasti-cally scaled up their policy measures in October. Most importantly, they made two strate-gic changes in the way they deal with the crisis. First, as noted above, the initial piecemealapproach was abandoned and replaced with a more comprehensive one. Second, unilateralnational approaches have given way to more international cooperation and coordination.

The international nancial

landscape changed

dramatically ater

September 2008

The crisis quickly spread

around the globe

Fears o systemic ailure

have led to massive

nancial sector rescue

plans




otalling about $4 trillion, these policy measures aimed at unreezing creditand money markets by recapitalizing banks with public unds, guaranteeing bank lend-ing and insuring bank deposits. Interbank lending rates retreated somewhat ollowing thestart o the large-scale bai lout. However, congestion and dysunction remain in importantsegments o the credit markets. Meanwhile, great uncertainty remains in credit deriva-

tives, with $400 tril lion to $500 trillion in notional value o derivatives outstanding.Given the stark erosion o condence and massive destruction o nancialcapital over the past year, it will take months, i not years, beore beleaguered banks sig-nicantly revive lending and raught investors see condence restored. It will take evenlonger or these policy measures to show their eects in terms o a regaining o strengthin the real economy. Meanwhile, the crisis has already had a severe impact on global com-modity markets and has led to reversals in private capital ows to emerging markets, withar-reaching implications or the prospects o the developing world at large.

The deteriorating international economicenvironment or developing countries

Tere had been complacency about the impact o the global nancial crisis on developingcountries and the economies in transition. In act, the broader international economicenvironment or developing countries and the economies in transition has deterioratedsharply, and since October 2008 the nancial stresses have shited rapidly towards theseeconomies. Te cost o external borrowing has risen considerably and capital inows arereversing. Both currency and commodity markets have become extremely volatile, withthe exchange rate depreciating at an alarming pace in several countries and prices o pri-mary commodities tumbling. Export growth in these economies is decelerating and thecurrent-account balances o many countries have shi ted back into a rising decit. Teseeconomies are acing even bigger challenges in the outlook or 2009.

Tightening and more costly external nancing

In the second hal o 2007, external nancing costs or emerging market economies startedto edge up rom record lows, but remained within normal range until September 2008.Costs surged thereater with the tightening global credit market. Spreads, as measuredthrough the Emerging Markets Bond Index (EMBI), soared rom 250 to about 550 basispoints within the space o a ew weeks during the second hal o September (gure I.5).Unlike in recent years where the spread varied signicantly across regions and countries asan indication that investors were discriminating among country-specic risks, the latestsurge has been uniorm, suggesting that contagion and generalized aversion to investingin emerging markets has taken hold among investors. Spreads are expected to remain high

in 2009, as the strains in global credit markets linger, but some renewed dierentiationin the spreads across regions and countries may re-emerge once it becomes clearer whichindividual countries are better able to cope with the crisis.

Private capital inows to emerging market economies were relatively robustin the rst hal o 2008, ater peaking in 2007, but have dropped sharply since the thirdquarter o 2008. Declines in bank lending and portolio equity inows explain most o the drop. Te volume o bank loans to emerging markets declined by about 40 per centrom 2007 levels as a consequence o the reeze in interbank lending worldwide. Te de-cline urther reects an adjustment in the surge in lending seen in 2007, when the volume

The myth o a “decoupling”

o developing country

growth led to an

underestimation o the

global repercussions

Spreads on emerging

market bonds have

more than doubled



13Global outlook

o lending doubled the ows to the Russian Federation and the Republic o Korea, orinstance. Portolio equity inows ell on average by about 30 per cent rom the previousyear, also coinciding with the wave o sell-os in emerging equity markets. In some emerg-ing markets, equity prices dropped by as much as 60 per cent. By contrast, oreign directinvestment (FDI) inows to these countries remained relatively stable; a decline o about10 per cent is estimated or 2008 rom the record highs o 2007.

In the outlook or 2009, capital inows to emerging market economies areprojected to drop urther. A continued deleveraging in the large nancial institutionso developed countries and the eroded condence o international investors are likely tolimit portolio inows to emerging market economies, while the pro-cyclical nature o FDI ows will also imply a slowdown in FDI along with weakening growth prospects oremerging market economies. On the other hand, as emerging market economies are notat the epicentre o this nancial crisis and as growth in many o them remains strongerin relation to that o developed economies, capital ows to these countries may gradually regain impetus as global nancial markets start to stabilize.

Te outow o capital rom emerging to developed market economies continued tobe larger than the inow. On balance, emerging market economies continue to be net lendersto the rest o the world, nancing the external decits o the United States and other developed

economies. Sovereign wealth unds (SWFs) o emerging market economies continued to grow and totalled about $4 trillion at the end o 2008. During the early stage o the global nancialcrisis, many SWFs injected sizeable amounts o money into the beleaguered nancial institu-tions o developed countries, but became more prudent ater registering considerable losses.

Most o the net transer o nancial resources rom developing to developedcountries is achieved through the accumulation o international reserves. Te total valueo the ofcial oreign-exchange reserves o developing countries reached about $3.1 trillionin 2007, and that amount rose urther in the rst ha l o 2008. China’s oreign-exchange

Private capital ows todeveloping countries will

weaken in 2009

Foreign reserves o

developing countries

increased urther in 2008,

but may dwindle in 2009

Figure I.5Daily yield spreads on emerging market bonds, January 2007-November 2008

Africa

Asia

EuropeLatin America

J a n - 0 7

M a r - 0 7

M a y - 0 7

J u l - 0 7

S e p - 0 7

N o v - 0 7

J a n - 0 7

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

Percentage

0

2

4

6

8

10

Source: JPMorgan Chase.




reserves, or example, rose rom $1.5 trill ion at the end o 2007 to about $1.9 trillion in thethird quarter o 2008. Nevertheless, a signicant deceleration in the pace o reserve accu-mulation has been reported or many developing countries amid the intensication o theglobal nancial crisis (gure I.6). In the outlook, the oreign reserves o developing coun-tries are expected to stagnate, or even decline in some countries, as more o these countries

are expected to experience either weakening current or capital accounts, or both.

Increased exchange-rate volatilityand the risk o a dollar collapse

Volatility in oreign-exchange markets has also increased substantially with the deepeningo the global nancial crisis (gure I.7). Te United States dollar depreciated substantially vis-à-vis other major currencies, particularly the euro, in the rst hal o 2008, but has sincereversed direction even more sharply. Many currencies in developing countries have alsoeither reversed their earlier trend o appreciation vis-à-vis the dollar or slowed their appre-ciation. Currencies in a number o developing countries, particularly those that are com-modity exporters, have depreciated against the dollar substantially since mid-2008. Te

heightened risk aversion o international investors has led to a “ight to saety”, as indicatedby the lowering o the yield o the short-term United States reasury bill to almost zero.

However, it is expected that the recent strength o the dollar will be tempo-rary and the risk o a hard landing o the dollar in 2009 or beyond remains, as stressedin previous issues o the World Economic Situation and Prospects . As the global nancialcrisis intensies, the world economy is experiencing an abrupt adjustment o the globalimbalances. Te current-account imbalances across the globe narrowed somewhat in 2008and are expected to narrow urther in 2009 (gure I.8). Te decit o the United States is

The dollar has appreciated

during the crisis …

… but persisting global

imbalances could

precipitate a hard

landing in 2009

Figure I.6Foreign reserves of selected countries, January 2007-October 2008

50

100

150

200

250

300

350

0

10

20

30

40

50

60

J a n - 0 7

F e b - 0 7

M a r - 0 7

A p r - 0 7

M a y - 0 7

J u n - 0 7

J u l - 0 7

A u g - 0 7

S e p - 0 7

O c t - 0 7

N o v - 0 7

D e c - 0 7

J a n - 0 8

F e b - 0 8

M a r - 0 8

A p r - 0 8

M a y - 0 8

J u n - 0 8

J u l - 0 8

A u g - 0 8

S e p - 0 8

O c t - 0 8

Billions of dollars

Source: IMF and nationalcentral bank websites.

Argentina(right axis)

India(let axis)

Pakistan(right axis)

Brazil(let axis)

Republic o Korea(let axis)

Ukraine(right axis)



15Global outlook

Figure I.7Exchange-rate indices for the United States, 2002-2008a

Nominal broad dollar index

Nominal major currencies dollar index

Euro per US dollar

J a n - 0 2

J a n - 0 3

J a n - 0 4

J a n - 0 5

J a n - 0 6

J a n - 0 7

J a n - 0 8

2002 January = 100

50

60

70

80

90

100

110

Source: United States FederalReserve Board. Rebased byUN/DESA.

Note: The major currenciesindex contains currencies o most developed countries;

the broad index incorporatescurrencies o emergingeconomies into the otherindex. A decline in the indexrepresents a depreciation o the dollar.

a Until November 2008.

Figure I.8Current-account balances, 2003-2009

Billions of dollars

-1 000

-800

-600

-400

-200

0

200

400

600

2003 2004 2005 2006 2007 2008a 2009b

Sources: IMF, World Economic

Outlook database, October2008; UN/DESA.

a Partly estimated.b Forecast.

United States

Japan

European Union

Developing countriesand economies intransition, excludingChina

China




estimated to be about $690 billion in 2008, down only slightly rom the $732 billion gapo 2007. Developed economies as a whole still registered a decit o more than $600 bil-lion in 2008. Most developing regions continued running savings’ surpluses.

Te narrowing o the United States current-account decit during 2008 oc-curred in the wake o the nancial crisis, which led to a downward adjustment in private

sector spending through weakening household consumption and business investment. Inthe third quarter o 2008, household consumption expenditure dropped at an annualizedrate o more than 2 per cent, the largest decline in 28 years, as the large wealth lossesorced households to rebuild savings. Tis was only partially oset by rising governmentspending, which increased notably ollowing the emergency measures adopted in responseto the crisis. Declining import demand on the heels o urther retrenchment in domesticconsumption and investment wil l probably also dominate external adjustment in 2009.

Despite its narrowing current-account decit, the net international l iability po-sition o the United States has continued to increase. Over the past ew years, the increasein net external indebtedness has been smaller than the annual current-account decit,however, as a consequence o the dollar depreciation, which has acilitated an appreciationo the value o United States-owned assets abroad and a depreciation in the value o United

States liabilities owed to the rest o the world. Being the issuer o the international reservecurrency, the United States might thus try to “inate” its way out o its external indebted-ness. However, the avourable revaluation eects are not nearly large enough to outweighthe adverse trend associated with sustaining large current-account decits. As equity mar-kets worldwide plummeted during 2008, the value o both the United States-owned assetsabroad and the oreign-owned assets o the United States has dropped signicantly. Teocial estimate o the valuation adjustment or 2008 will be available in mid-2009, but arough estimate suggests a urther increase in the net debt position o the United States toabout $2.7 trillion by the end o 2008, up rom $2.5 trillion in 2007.

Te large current-account decit and perceptions that the United States debtposition is approaching unsustainable levels are important actors underlying the trend de-preciation o the United States dollar since 2002. During 2008, the dollar became highly

volatile, driven by a number o actors related to the global nancial crisis.In the rst hal o 2008, when investors seemed to believe that the nancial

problems were mainly conned to the United States, dollar depreciation accelerated, withthe dollar dropping rom $1.45 to the euro at the beginning o the year to $1.60 to theeuro by mid-2008. Since then, however, the dollar has appreciated signicantly vis-à-vismost other major currencies (except the Japanese yen) and moved to about $1.25 to theeuro in the last quarter o 2008.

Tis sharp rebound o the dollar was mainly driven by the eects o a ight tosaety as the global nancial crisis intensied in September-October and spread to Europeand the rest o world. Many European nancial institutions were suddenly ound to beon the verge o collapse, the growth prospects or emerging economies were downgradedsignicantly, the prices o oil and other primary commodities tumbled, and many nancial

institutions, including hedge unds and mutual unds, either started to deleverage or wereorced to redeem. All these actors, plus a heightened risk aversion in general, caused amassive move o nancial assets worldwide into United States reasury bills, driving their

The rebound o the

dollar was driven by

a ight to saety



17Global outlook

yields to almost zero and pushing the dollar sharply higher.3 At the same time, however, thesituation is pushing the external indebtedness o the United States to new heights, possibly precipitating a renewed slide o the dollar once the process o deleveraging has ended.

Consequently, the disorderly adjustment o the global imbalances and a hardlanding o the dollar remain major downside risks to the global economy, as an accelerated

all o the dollar could cause renewed turmoil in nancial markets. Investors might renew their ight to saety, though this time away rom dollar-denominated assets, thereby orc-ing the United States economy into a hard landing and pulling the global economy into adeeper recession.

Weakening world trade and commodity prices

Prices o oil and non-oil primary commodities have also shown strong uctuations during2008, largely driven by nancial actors, as well as shits in the balance between supply and demand. Te prices o most commodities rose sharply in the rst hal o 2008, con-tinuing a multi-year upward trend that began in 2003. Food prices, especially the price o rice, surged the most in early 2008, leading to a ood crisis in some 40 developing coun-

tries. Oil prices also soared by about 50 per cent in the rst ha l o the year. While somecommodity-specic actors on either the supply or demand side could explain part o thesurge in these prices, a common actor had been the relocation o unds by investors romother nancial assets towards commodity markets, along with the declining value o othernancial assets.

Tese trends reversed sharply in mid-2008, however (see chapter II or details).Oil prices plummeted by more than 60 per cent rom their peak levels o July to November.Te prices o other commodities, including basic grains, have also declined signicantly. Inthe outlook, most o these prices are expected to even out urther along with the modera-tion in the global demand, but a cut in the supply o oil, as already indicated by the Orga-nization o the Petroleum Exporting Countries (OPEC), may keep oil prices rom alling.

Growth o world trade decelerated to 4.4 per cent in early 2008, down rom

6.3 per cent in 2007, mainly owing to a decline in imports o the United States. UnitedStates imports, which account or about 15 per cent o the world total, have registered adecline in each quarter since the ourth quarter o 2007 and dropped as steeply as 7 percent in the second quarter o 2008. Growth in the volume o world trade dropped to about2 per cent by September 2008 to about one third o the rate o growth in the previous year(gure I.9). In the outlook, import demand in most economies is expected to diminishurther, leading to a urther weakening o growth in global trade in 2009 (see chapter IIor more details).

3 The strengthening o the Japanese yen vis-à-vis the dollar, as well as other major currencies

during the second hal o 2008, can be explained mainly by two actors: the exposure o Japanesenancial institutions was very limited, and the “carry trade” in oreign-exchange markets reversed.

Over the past ew years, traders in oreign-exchange markets had borrowed yen at very low

interest rates to invest in government bonds denominated in other currencies paying much higher

interest rates. Since mid-2008, however, as interest rates in other countries were also decreasing,

the traders reduced “carry-trade” positions and repaid the loans in yen they had borrowed earlier,

thus pushing up the exchange rate o the yen. Moreover, as the yen appreciated, the margin o

returns on the “carry trade” were squeezed, orcing more traders to liquidate their positions and

urther pushing up the yen in an unstable spiral.

Commodity prices have

starkly declined rom

mid-2008




A synchronized global downturn

Developed economies are leading the global downturn, the majority o them already ex-periencing a recession in the second hal o 2008. Meanwhile, through international tradeand nance channels, the weakness has spread rapidly to developing countries and the

economies in transition, causing a synchronized global downturn in the outlook or 2009.Such a globally synchronized slowdown may be the rst o its kind in the post-war era.

Te employment situation is expected to deteriorate in most regions during2009 and much o the employment gains could be lost because o the global economicslowdown. Employment began to change course in many economies in the second hal o 2008, with unemployment rising rapidly in some (the United States, or instance) as lowerconsumption, production and trade started to have an adverse impact on the demand orlabour. Te employment situation worldwide is expected to deteriorate more signicantly in 2009.

Global ination is expected to decelerate signicantly in the outlook or 2009, with the risk or deation increasing in some economies. Surging commodity prices, par-ticularly those or oil and ood, boosted global ination in 2008, leaving consumer price

ination at its highest level in a decade. Ination was markedly higher in developingeconomies and economies in transition than in the developed economies. In the secondhal o 2008, however, inationary pressures dissipated rapidly ollowing the steep all in

world commodity prices (despite the lag in the pass-through eect rom international todomestic prices) and weakening demand worldwide. Te projected economic downturn isexpected to weaken inationary pressures urther in 2009, and the concern o policymak-ers should ocus on staving o sharp downalls in economic growth (gure I.10).

The crisis is likely to undo

employment gains o

recent years

Inationary pressures

are giving way to ears o

deation worldwide

Figure I.9Growth of world trade volume, January 2005-September 2008


J a n - 0 5

M a r - 0 5

M a y - 0 5

J u l - 0 5

S e p - 0 5

N o v - 0 5

J a n - 0 6

M a r - 0 6

M a y - 0 6

J u l - 0 6

S e p - 0 6

N o v - 0 6

J a n - 0 7

M a r - 0 7

M a y - 0 7

J u l - 0 7

S e p - 0 7

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 7

0

2

4

6

8

10

12

Source: UN/DESA, basedon data rom the CPB

Netherlands Bureau orEconomic Policy Analysis

online database, availablerom http://www.cpb.nl/

eng/research/sector2/data/ trademonitor.html (accessed

on 21 November 2008).



19Global outlook

A. Selected developed countries

United Kingdom

Spain

Ireland

Germany

France

United States

Japan

United Kingdom

Spain

Ireland

Germany

France

United States

Japan1

1.5

2

2.5

3

3.5

4

4.5

-3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2

GDP growth (percentage)

I n f a t i o n (

p e r c e n t a g e )

B. Selected developing countries

South Africa Saudi Arabia

Mexico

India

China

Argentina

South Africa

Saudi Arabia

Mexico

India

China

Argentina

0

2

4

6

8

10

12

14

0 1 2 3 4 5 6 7 8 9 10

GDP growth (percentage)

I n f a t i o n (

p e r c e n t a g e )

2008

2009

Source: UN/DESA.

a Partly estimated.b Forecast.

Figure I.10

Infation versus growth in selected developed and developing countries, 2008a and 2009b




Developed economies

Among developed economies , the economy o the United States is expected to decline by 1 per cent in the baseline scenario or 2009. Te most severe credit crunch since the GreatDepression has turned a housing sector-led slowdown into a ull-scale retrenchment o households and businesses, aecting the economy at large. Even though eective imple-mentation o the Emergency Economic Stabilization Act (EESA), together with othermeasures, may eventually stabilize nancial markets, it came too late to prevent a reces-sion in the real economy. Te unemployment rate is expected to rise above 7 per cent as

job losses in almost all sectors o the economy increase sharply. Ination, by contrast, isexpected to abate notably. Should all the policy measures ail to unclog the credit marketssoon, the United States most probably will suer a much deeper and longer recession.

Japan’s economy is in a recession and is expected, at best, to stagnate in 2009. While the direct losses rom the global nancial crisis have been contained so ar, the indi-rect eects are becoming increasingly signicant, including those brought on by weaken-ing external demand as well as the appreciation o the yen.

Since September 2008, the global credit crunch has transormed a sharp slow-

down in Western Europe into a ull-edged recession, and the major European economieshave technically entered into recession. Having lost all growth momentum, GDP is ex-pected to contract urther in the rst hal o 2009, with little likelihood o recovery in thesecond hal, leaving a negative growth rate or the year as a whole. Ater a long period o improving labour market conditions, unemployment rates began to drit upwards rommid-2008 and are expected to move up urther by nearly a ull percentage point on aver-age or the region as a whole in 2009. With activity slowing, and commodity prices al ling

well below their peaks o mid-2008, ination is expected to decelerate signicantly romthe highs experienced during 2008. Risks continue to be slanted towards the downside,particularly as regards the eectiveness o current and anticipated policies in stabilizingnancial markets.

Following several years o buoyant economic expansion throughout the entire

region, the new EU member States exhibited divergent growth patterns in 2008. Domesticdemand is weakening in response to higher credit costs and accelerated ination, and ex-port growth is a lso likely to decline. Growth is expected to weaken and ination to moder-ate in 2009. While the new EU members are not directly exposed to the sub-prime loanso the United States, the region’s banking system is subject to the shocks generated by thetroubles among nancial institutions in the EU-15. Te high stock o short-term privatedebt in oreign currencies has already created a serious liquidity squeeze in Hungary. Terisks or the region include a protracted slowdown in the EU-15, as well as a sharp reversalo capital ows.

In other developed economies , growth in both Australia and New Zealand areslowing as consumer demand has weakened owing to tighter credit conditions, higherination and alling asset prices. Te Canadian economy will suer rom the economic

slowdown in the United States, especially in sectors such as the automotive industry.


Among the economies in transition, growth o the members o the Commonwealth o In-dependent States (CIS) is heading or a marked slowdown in 2009, largely dragged by theimpact o the global recession and alling commodity prices on the largest economies, such

The United States economy

is expected to

decline in 2009

Japan is in recession

and its economy will

stagnate in 2009

Major European countries

are in recession

Economies in transition will

suer a marked slow down



21Global outlook

as Kazakhstan, the Russian Federation and Ukraine. A slowdown in business investment,and, to a lesser degree, in household consumption will be elt throughout the region. Tesmaller CIS economies will likely be aected by declining worker remittances and FDIinows. Te adverse eects o a domestic credit squeeze and increased costs o externalnancing will be signicant on the real economy o the region, despite some recently ad-

opted osetting policy measures. Te unemployment rate will increase in some countries, while ination is set to moderate, although it could remain at elevated levels. Among thedownside risks, a worse-than-expected growth in the Russian Federation would have re-cessionary eects on other members.

In South-eastern Europe , growth in 2008 continued to be largely driven by do-mestic demand, underpinned by rising real wages and the last ing credit boom, as well asby strong FDI inows. With the global nancial crisis, these growth actors have startedto lose momentum. In view o the weak demand in their main export markets, it is alsounlikely that the region would be able to switch to a more export-oriented pattern o eco-nomic growth in the short run. Tereore, a urther moderation o economic growth isexpected in 2009.


Developing countries will be hurt by the crisis through international trade and nancechannels. Te drop in commodity prices will hurt primary exporters in particular, butlower demand in the developed countries will aect export growth throughout the devel-oping world. Some emerging market economies, such as Brazil, are a lready acing severecurtailments in access to trade credit, while the threat o a sudden reversal in private capi-tal ows has heightened. Te vast amounts o oreign reserves accumulated by developingcountries still provide a buer and allow some space or counter-cyclical measures, butthese reserves could well dwindle rapidly as the global crisis deepens urther. A growingnumber o developing countries have already witnessed a signicant deceleration in eco-nomic growth. Tis, no doubt, is diminishing the prospects o achieving the Mil lennium

Development Goals (MDGs).Growth in Arica is expected to decelerate to 4.1 per cent in 2009 rom 5.1 per

cent in 2008, as the contagion eects o the global economic slowdown spread through-out the region, while inationary pressures continue to dampen consumer demand. Arica

would be impacted through weakened export demand, lower commodity prices and a de-cline in investment ows to the region. Consequently, employment growth in Arica is an-ticipated to weaken, pushing unemployment rates higher and orcing more workers into thealready large inormal economy. Ination is expected to subside rom 2008 levels. Risks orgreater growth retardation exist i donor countries do not live up to their aid commitments,threatening not only the achievement o the MDGs, but also undermining past progress.

Growth in East Asia is expected to decline notably in 2009, as exports will de-

celerate signicantly. Some economies in the region will also experience sizeable nanciallosses as a result o their relatively high exposure to global nancial markets. An outow o capital rom this region will urther intensiy the diculties experienced by the localnancial inst itutions. Ination in the region is expected to moderate, and the employmentsituation will start to deteriorate. Further monetary easing is expected in the region, andmost countries have enough policy space to adopt more expansionary scal policy neces-sary or stimulating domestic demand. Some countries, such as China and the Republic o Korea, have already taken action in that direction.

The crisis will hit growth

prospects o developing

countries hard

Growth in Arica will suer

rom lower commodity

prices and weakening

export demand

Growth in East Asia is

aected by the weakening

o global demand and theglobal credit crunch




South Asia is experiencing an overall slowdown in economic growth rom theindustrial sector to the service sector as a result o the negative impact o higher costs andthe global nancial turmoil. Ination is orecast to moderate in view o the retreat in en-ergy and ood prices, resulting in lower pressure on government budgets related to pricesubsidies. During 2008, external balances suered rom higher import prices or uel oil,

ood and other commodities, although continued solid remittances exerted a certa in sta-bilizing eect in this regard. Te nancial sector in the region has had only very limiteddirect exposure to the global nancial crisis, but the tightening in liquidity emerged as amajor indirect impact. In parallel to this, waning investor condence has led to capitaloutows and shrinking oreign-exchange reserves. A number o downside risks includea more prolonged slowdown in global growth, unsustainable scal balances and currentaccounts, natural disasters and political instability. Pakistan is a case in point where all o these actors have already come to a head.

Growth in Western Asia is anticipated to slow down signicantly in 2009, tothe lowest rate in seven years. Te region will register a sharp decline in export revenuesas average annual oil prices are expected to drop. Lower oil revenues and deterioratingcredit conditions in the countries o the Gul Cooperation Council (GCC) are likely to

trigger a delay o large investment projects throughout the region. Facing large current-account decits, the economies o Jordan, Lebanon and, in particular, urkey appear tobe the most vulnerable to a drop in FDI inows and tighter nancing conditions. By contrast, strong scal and external positions will allow authorities in GCC countries tomaintain an expansionary scal policy stance in order to weather the economic downturn.

While labour markets have already started to deteriorate in a number o countries, mostpronouncedly in urkey, the high ination rates throughout the region are expected todecline moderately.

Economic growth in Latin America and the Caribbean is expected to slow markedly in 2009. Te key drag is the all in commodity prices. In addition, domesticcredit is expected to tighten in many economies. Inationary pressures, which surged dur-ing 2008 owing to the increasing costs o energy, transportation and ood, should deceler-

ate in 2009, but Governments o the region may not be able to ease monetary policy in theace o currency depreciation. Stimulus will have to come through counter-cyclical scalpolicies, or which most countries have some room to manoeuvre given improvements inexternal and scal positions in preceding years. However, the region remains very vulner-able to an intensication o the global credit crunch, particularly a sharper reversal o capital inows and a urther decline o external demand.

Macroeconomic policies tostimulate the global economy

In general, policymakers worldwide have underestimated the depth and breadth o this

nancial crisis. As a result, policy actions by and large ell behind the curve, and early onpolicy stances were grossly inadequate or handling the scale and the nature o the crisis.In Europe and the United States, policies initially ocused almost exclusively on providingadditional liquidity to nancial markets and were myopic to the greater underlying risk o insolvency o large nancial institutions. Later, in September 2008, when policy measuresmoved towards the bailout and recapitalization o those important nancial institutionsseen to pose systemic risks, the economies o most developed countries had already

Capital outows and

waning investor condence

dim growth prospects in

South Asia

Lower oil prices and the

global slowdown aect

growth prospects in

Western Asia

Latin American and

Caribbean economies will

slow markedly in 2009

Policy responses have allen

well behind the curve



23Global outlook

entered into recession. Policymakers in emerging economies were in turn complacentabout the resilience o their economies, believing they would be suciently insulated romthe nancial sector woes o the United States and Europe. Until the ourth quarter o 2008, containing ination was their main concern in setting macroeconomic policy, andthey were caught by surprise when the crisis rapidly spread to hit their economies also in

October 2008.In the rst hal o 2008, monetary policy in the United States was aggressively expansive in attempts to stave o a recession, while central banks in Europe maintaineda tightening stance over inationary concerns. Only ater the risk o a systemic ailurein global nancial markets became maniest, did six major central banks—the Fed, theECB, the Bank o England, the Bank o Canada, the Swiss National Bank and the SverigesRiksbank—decide to move in a more coordinated ashion and agree to cut their respec-tive ocial target rates simultaneously by 50 basis points (bps). At the same time, the Fedand other major central banks a lso scaled up their unorthodox measures to inject liquidity more directly into nancial markets, part icularly credit markets. Since then, more centralbanks have ollowed suit, some o them reducing interest rates drastically (gure I.11).Further monetary easing is expected in the world economy in the outlook or 2009.

During October 2008, some retreat in the spread between the interbank lend-ing rate and the return on reasury bills was observed in the United States. Yet, tighter-than-normal credit conditions continued to strain markets into the ourth quarter. Temacroeconomic situation now resembles the liquidity trap in which Japan ound itsel during the 1990s and into the 2000s, rendering monetary policy ineective as nominalinterest rates near zero. With consumer and business condence seriously depressed andbanks reluctant to lend, urther lowering o interest rates by central banks would do littleto stimulate credit supplies to the non-nancial sector or encourage private spending.

Monetary policies became

aggressively expansive …

… but a liquidity trapis now looming

Figure I.11Policy interest rates of major economies, January 2004-November 2008

Percentage

J a n - 0 4

A p r - 0 4

J u l - 0 4

O c t - 0 4

J a n - 0 5

A p r - 0 5

J u l - 0 5

O c t - 0 5

J a n - 0 6

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

0

1

2

3

4

5

6

7

8

Source: National central bank websites.

China: One-yearloan rate

Japan: Discount rate

United States: Federalunds rate (target)

Euro zone: Marginallending acility rate




Rather, it would end up expanding base money within the banking system. With limitedspace or monetary stimulus, scal policy options will need to be examined as ways toreactivate the global economy.

Many developed economies have a certain built-in counter-cyclical budgetary stance by virtue o so-ca lled “automatic stabilizers”. For instance, during a recession, tax

revenue tends to a ll while unemployment benets and welare transers increase, leadingto a more expansionary scal stance. Tese automatic stabilizers may well be too weak tocounteract the recessionary eects o the large-scale nancial crisis that is currently raging.

Additional discretionary scal measures wil l be needed. Te United States adopted a scalstimulus package in early 2008, totalling some $168 billion, or about 1.1 per cent o an-nual GDP, mainly in the orm o a tax rebate or households. While some analysts believedthe package had worked well to keep the economy buoyant or at least one quarter, oth-ers doubted its eects would be more permanent. It is now clear that the size o the scalpackage was too small in comparison with the seriousness o the situation, and it ailedto sustain its eects. A second scal stimulus package is under discussion in the UnitedStates, as well as in some European economies.

Governments are hesitant to move quickly on such stimulus packages, ear-

ing possible negative repercussions in the medium run rom a urther widening o scaldecits, which are already ballooning as a result o the emergency scal measures to re-capitalize the nancial institutions and the workings o automatic stabilizers. Tese are notnormal times, however. Te severity o the nancial crisis calls or policy actions that arecommensurate with the scale o the problem and should thus go well beyond any normalrange o budgetary considerations.

A large number o developing countries and the economies in transition havenot been easing monetary policy so ar over concerns o inationary pressures and cur-rency depreciation. Most Latin American economies and many economies in transition,as well as several Asian developing countries, have either urther increased policy interestrates or kept them constant in late 2008. Ination has remained high in these countries inpart because o the lags in the pass-through eect o the rise in energy and ood prices dur-

ing the rst hal o 2008. Ination also remained a concern during the third and ourthquarters o 2008 ollowing the strong depreciation o the countries’ currencies on the heelso a strengthening dollar, as discussed above. Inationary pressures should taper o during2009, however, as world ood and energy prices are retreating and global demand is weak-ening. Tis should provide some space or monetary easing, as well as or scal stimulus, atleast in those countries stil l possessing ample oreign-exchange reserves. Most developingcountries and the economies in transition have weak automatic stabilizers; hence, much o the stimulus would depend on discretionary scal measures.

Te scope or a counter-cyclical stance will vary greatly across developingcountries. First, many countries have a history o pro-cyclical macroeconomic policy ad-

justment, partly driven by policy rules (such as ination targeting). Providing greatermonetary and scal stimuli will thus require a departure rom existing policy practice

and policy rules in such cases. Second, not all countries possess equally sucient oreign-exchange reserves, and some are likely to suer stronger balance-o-payments shocks.Some countries still have ample policy space or acting more aggressively to stave o crisis.China has already begun to use its policy space and has designed a large-scale plan o scalstimulus which could potentially contribute to reinvigorating global demand. Te scalstimulus package o $586 billion (or 15 per cent o China’s GDP), to be implemented dur-ing 2009 and 2010, is aimed at strengthening domestic demand through investment in

Fiscal stabilizers in

developed countries are

too weak

Strong additional scal

stimulus is needed

Counter-cyclical scal

policy is also needed in




25Global outlook

public inrastructure and social transers, and would rebalance an economy that is acinga likely increase in excess capacity o manuacturing export production in the wake o adeclining external demand.4 Te Republic o Korea has also announced a scal stimuluspackage equivalent to 1 per cent o its GDP.

For many middle- and low-income countries, the scope or conducting such

policies will be even more limited as they may see their oreign-exchange reserves evaporatequickly, to the extent that they are hurt by either sharp capital reversals or strong reductionsin the demand or their exports, or both. In order to enhance their scope or counter-cyclicalresponses in the short run, urther enhancement o compensatory nancing and additionaland reliable oreign aid ows will be needed to cope with the drops in export earnings andreduced access to private capital ows as a result o the global nancial crisis.

Over the longer run, however, a broadening o the development policy ramework is needed to conduct active investment and technology policies so as to diversiy these countries’ economies and reduce their dependence on a ew commodity exports andthereby help them to meet key development goals, including reaching greater ood security,addressing climate change and meeting the MDGs. Tis will require massive resources orpublic investments in inrastructure, ood production, education and health, and renewable

energy sources. Box I.3 exemplies this challenge as it relates to the investment require-ments or dealing with the global ood crisis. In the case o energy and climate change, itshould be expected that with the global downturn, demand or oil (and energy in general)

will all in the short run, likely leading to a drop in greenhouse gas (GHG) emissions (seeappendix table A.22). Since this would simply be the result o a cyclica l downturn, however,it should not provide a deterrent to making the necessary long-term investments to reducethe energy intensity o production worldwide and shit radically away rom the use o ossiluels towards sustainable energy sources. Te crisis presents a unique opportunity to alignscal stimulus packages with long-term goals in avour o sustainable development.

Furthermore, to ensure sucient stimulus at the global level, it will be desir-able to coordinate the scal stimulus packages internationally. In a strongly integrated

world economy, scal stimulus in one country tends to be less eective because o high

import leakage eects. By coordinating scal stimulus internationally, the positive multi-plier eects can be amplied through international economic linkages, thereby providinggreater stimuli to both the global economy and the economies o individual countries. 5

As in the case o coordinated monetary easing, internationally coordinated scal stimulican also limit unnecessary uctuation in cross-country interest-rate dierentials and inexchange rates among major currencies. Compared with coordinated interest-rate policies,scal policy coordination tends to be more dicult to achieve, both technically and politi-cally, and hence may be dicult to settle through ad hoc agreements, requiring instead amore institutionalized platorm (see below). As a consequence, the baseline orecast doesnot oresee the emergence o ully coordinated scal stimuli any time soon. Should thiscome about more quickly, however, as in the more optimistic scenario (see box I.1), the

4 Policy directions o that nature were also suggested or China in World Economic Situation and Prospects 2007 (United Nations publication, Sales No. E.07.II.C.2) and World Economic Situation

and Prospects 2008 (United Nations publication, Sales No. E.08.II.C.2). For a more detailed

discussion o scal stimulus in China to redress the global imbalances, see Pingan Hong, Rob

Vos and Keping Yao, “How China could contribute to a benign global rebalancing”, China and the

World Economy , vol. 16, No. 5, September-October 2008, pp. 35-50.

5 For an example o the output eects o coordinated scal policies, see National Institute Economic

Review , vol. 206, No. 1, October 2008, which suggests that coordinated policies could increase the

multiplier eects o scal stimulus by at least 30 per cent.

Fiscal stimulus in response

to the crisis should be

aligned with long-term

development goals

Internationally coordinated

scal stimulus will be more

eective




Don’t forget the food crisis

In spite o alling international commodity prices, the ood crisis still exists and high price levels will

remain, at least in the short term. In addition, the global nancial crisis threatens to worsen the situa-

tion. The present ood crisis, which started in early 2008, was triggered by rapidly rising internationalprices o grains, propelled by a series o short-term actors orming a “perect storm”; more impor-

tantly, however, many underlying longer-term actors had been brewing in the market or some time,

making the crisis inevitable (see chapter II).

According to the Food and Agriculture Organization o the United Nations (FAO), there

are currently still 36 countries in critical situations owing to exceptional supply shortalls, general

lack o access or severe localized ood insecurity o displaced populations requiring immediate ood

assistance.a Most o these countries have not seen their situation improve, and in some cases the

situation has worsened because o persistent high prices, as ood prices have been sticky on the

downside and the dollar appreciation has oset some o the price eects o alling commodity pric-

es. Adverse weather conditions, political strie and worsening economic conditions in the ace o

a global economic slowdown are also prevalent. Between 109 million and 126 million people may

have allen below the $1 per day poverty line since 2006 owing to the increase in ood prices, with

the vulnerable populations located in South Asia and sub-Saharan Arica.b All else being equal, the

incidence o extreme poverty in sub-Saharan Arica may have risen by almost 8 percentage points,implying that the recent ood price increases have more than oset the poverty reduction achieved

between 1990 and 2004.

On the macroeconomic side, about 50 low- and middle-income countries are experi-

encing a weakening o their balance o payments and are expected to remain vulnerable through

2009.

Inationary pressures, which had been present prior to the ood price surge because o

higher oil and non-ood commodity prices, as well as rising domestic demand in the oil-exporting

economies, were exacerbated by the rising ood prices. The surge in world market prices or grains

had immediate pass-through eects on domestic ood prices. Given the large weight o ood in the

consumer price index (CPI) in most developing economies, this sent headline ination soaring. The

International Monetary Fund (IMF) has noted that annual ood price ination or 120 low-income and

emerging market economies had risen by 12 per cent at the end o March 2008, up rom 10 per cent

three months earlier.c

Net ood importers were the most aected by the rising prices, causing deterioration

in their terms-o-trade and current-account balances. Arica saw its net ood imports increase to 1.6

per cent o gross domestic product (GDP) in 2007. Countries in sub-Saharan Arica (excluding South

Arica) imported 1.9 per cent o GDP worth o net ood imports. Latin America and the Caribbean

as a whole had net ood exports owing to South American exporters, but ood imports o Central

America and Mexico accounted or 0.6 per cent o GDP, while the Caribbean imported 3.7 per cent o

its GDP in ood. Relatively, Western Asia’s net ood imports were the highest in the Asian region.

Prices o grains started to decrease starkly rom mid-year 2008. The emerging nancial

crisis has been one actor in this regard, as speculators started to retreat rom commodity markets

to salvage asset positions in the nancial system. The related dollar appreciation (see main text) and

the alling price o oil have compounded the drop in international grain prices. Shits in the supply

and demand or grains have also pushed prices downwards. These could continue to decline now

that the production o cereals has recovered, caused in part by better weather conditions and also

since the global demand or grains is weakening with the worldwide economic slowdown. The sharp

decrease in the price o oil may weaken incentives to urther increase biouel production, which had

been an important actor in pushing up the demand or grains in recent years. However, the average

price levels o rice, corn and wheat, the three most-consumed grains, will still be substantially higher

in 2008 compared to 2007, but are expected to decline in 2009. The observed high price volatility,

however, may be detrimental to long-term investment in the production o grains and could sustain

conditions o ood insecurity or some time to come, unless counteractive measures are taken.

Box I.3

a Food and AgricultureOrganization o the

United Nations, Crop

Prospects and Food

Situation, No. 4, October2008.

b Based on UN/DESA

estimates.

c International Monetary

Fund, “Food andFuel Prices—Recent

Developments,Macroeconomic Impact,

and Policy Responses”,report prepared by

the Fiscal Aairs, PolicyDevelopment and

Review and ResearchDepartments, 30 June

2008.



27Global outlook

recessionary eects o the nancial crisis could be contained to a considerable degree dur-ing 2009 (see table I.1 and gure I.1).

Internationally coordinated policy action among both the decit and the sur-

plus countries is also critical or achieving a benign adjustment o the global imbalancesand avoiding a disruptive hard landing o the dollar (see above). Now that the nancialcrisis has already triggered a disorderly adjustment in a synchronized global downturn, theneed or international policy coordination and cooperation is more pressing than ever.

The need or reorm o theinternational nancial system

Systemic ailures

Even in the most optimistic scenario, it will take time beore condence is restored innancial markets and recovery can take place. As immediate solutions are being workedout, it remains important to understand the systemic causes o the present crisis, which—in a nutshell—relate to weaknesses in global economic governance, excessive nancialderegulation, the problem o global (current- and capital-account) imbalances and relatedsystemic shortcomings in the international reserve system and the lack o an internationallender o last resort. Understanding these deeper causes makes it clear that much more

The massive underinvestment suered by the agricultural sector over the past two de-

cades must be compensated or. In order to return to the levels o three decades ago, government

spending in agriculture would need to double or triple in most developing countries. The United Na-

tions, through its High-Level Task Force on the Global Food Security Crisis, has proposed a Common

Framework o Action (CFA)d as a comprehensive strategy or tackling the crisis. The CFA estimatesthat an additional $25 billion to $40 billion will have to be invested every year, nanced through

domestic resource mobilization and ofcial development assistance, or ood and nutrition security,

social protection, agricultural development and a better unctioning o ood markets. According to

CFA estimates, approximately one third o the resources would be needed or immediate ood as-

sistance and short-term budgetary and balance-o-payments support, and the rest or investments

in rural inrastructure, education, clean water and agricultural research. The largest sums need to be

invested in South Asia, ollowed by Latin America, although on a per capita basis, Arica will require

the greatest investment push.

The present commitments by the international community still all short o bridging

the gap identied in the CFA. In order to regain lost ground in reducing rural poverty, initial support

and reorm programmes should be targeted at small producers o ood, especially those in sub-

Saharan Arica, since they are the most vulnerable and least-productive group. It has been estimated,

or instance, that i all Asian countries could manage to lit agricultural productivity to the present

yield levels o Thailand, one third o the region’s mostly rural poor—or about 220 million people—could be lited out o poverty.e

In view o the present global nancial crisis, it is more important than ever to strengthen

the development nance architecture, not only to limit the negative eects o such crises and to en-

able countries to respond eectively, but also to ensure that the internationally agreed development

goals can be met without diverting either external or domestic resources away rom ensuring ood

security. The key challenge is to secure adequate resources or the necessary long-term investments

in agriculture and rural development through better coordinated support rom the international

community which can be sustained over an extended period o time.

Box I.3 (cont’d)

d See http://www.un.org/

issues/ood/taskorce/ Documentation/CFA%20Web.pd.

e United Nations Economicand Social Commissionor Asia and the Pacic,Economic and SocialSurvey o Asia and thePacic 2008: SustainingGrowth and SharingProsperity (UnitedNations publication,Sales No. E.08.II.F.7).




undamental change is needed to reorm the international nancial system in order toprovide better saeguards or preventing a recurrence o the present crisis and to create aramework or global economic governance in l ine with twenty-rst century realities.

World leaders have acknowledged this need or reorm. Proposals or reorm-ing the economic governance architecture should be addressed, through, among other

things, the appropriate organs o the United Nations system, including the Bretton Woodsinstitutions. Te reorm discussion on new rules or governing the global economy needsto be embedded in the wider United Nations system so as to ensure that a more inclusiveand open exchange o ideas, in line with democratic governance principles, inorms the de-bate and that any reorms adopted are owned by the ull membership o the internationalcommunity. Te same kind o visionary multilateral spirit that inormed the discussion inBretton Woods in 1944 and San Francisco in 1945 is needed today, one which recognizesthat peace, stability and prosperity are indivisible and that delivering these goals requiresundamental reorms o the international nancial architecture.

Lack o credible mechanisms or international policy coordination

Te immediate priority in today’s context is to prevent the global nancial crisis romturning into a 1930s-style Great Depression. As discussed in the previous section, and asrecognized by most parties, this requires internationally concerted policy actions. Te rsto these major systemic ailures is the lack o an institutionalized and credible mechanismor such policy coordination. Te depression o the 1930s had been aggravated by “beggar-thy-neighbour” policies, disintegration o the global economy and resurgent protection-ism. More than a decade later, under the promise “never again”, it led to the design o theBretton Woods system, including the creation o the IMF and the World Bank as institu-tions to saeguard the stability o the global economy and to promote growth, employmentand development. But over time, the ability o the IMF to saeguard the stability o theglobal economy has been hampered by, among other things, limited resources and increas-ingly undermined by the vastly greater (and more volatile) resources o private actors with

global reach. More exclusive and ad hoc country groups, such as the Group o Seven (G7)and the Group o Eight (G8), have become the platorms where international policy coor-dination has taken place in practice.

As a consequence, the IMF has, by and large, been sidelined in handling thepresent crisis. Te apparent irrelevance o the Bretton Woods institutions in today’s crisisalso stems rom their skewed voting structures and governance, which are more reec-tive o the distribution o economic power in the world that prevailed in 1944 than o the present day, where developing countries carry much larger weight. Also, developingcountries as a group are net creditors to the rest o the world, and their savings will quitelikely provide, directly or indirectly, a major source o unding to cover the costs o themulti-trillion-dollar bailouts o nancial institutions in the United States and Europe.Quite apart rom this, they clearly have an abiding interest in taking an active part in any

concerted solution. Te lack o a credible mechanism with broad representation or inter-national policy coordination reects an urgently elt lacuna which is limiting swit andeective responses to the present crisis.

The need or systemic

reorms is now widely

recognized

“Beggar-thy-neighbour”

policies in the 1930s

aggravated the depression

o the 1930s

The lack o a credible

mechanism or policy

coordination is limiting

adequate responses

to the crisis



29Global outlook

Inadequate fnancial regulation

Second, this crisis is systemic in nature both because it has aected al l nancial institutionsand markets simultaneously and because it has spread to the real economy. o a signicantdegree, this has been a result o the dismantling o rewalls within and across nancialsectors over the past two decades. Tis was part o a relentless drive to promote ecient

and innovative nancial markets which were expected to better manage risk (“securitiza-tion”); instead—as it has turned out—the deregulation added to global nancial ragility.Particularly critical has been the pace and reach o new nancial instruments which wereencouraged despite the glaring absence o international surveillance and regulations.

It is generally the case that international regulation lags behind domestic regu-lation because o the inherent diculties in designing standardized “rules o the game”across a large number o countries. But the problem has been amplied or our mainreasons:

a) Te new approach to the regulation o nance, including under the New BaselCapital Accord (Basel II) rules, places the burden o regulation on the nan-cial institutions themselves. Tis has generalized the problem o moral hazard,

caused by a belie that as long as nancial institutions are expanding theirinternational operations they would be deemed too big to ail by (national)central banks, and has encouraged the prolieration o irresponsible behaviouracross a range o nancial institutions. Te hypertrophying o Iceland’s nan-cial system to ten t imes the size o its national GDP is an extreme example o this trend.

b) Te more complex the trade in securities and other nancial instruments, thegreater the reliance on rating agencies who proved inadequate or the task athand, in part because o conicts o interest over their own sources o earnings,

which are proportional to the trade volume o the instruments they rate. In con-sequence, risk assessments by rating agencies tend to be highly pro-cyclical asthey react to the materialization o risks rather than to their build-up. Te lack

o supervision and regulation o the quality o rating agencies, as much as o the operations o most non-bank nancial institutions and o the transactionsthrough oshore nancial centres, has urther encouraged reckless risk-taking.

c) Existing approaches to nancial regulation tend to act pro-cyclically, henceexacerbating a credit crunch during a crisis. Tis also applies to the interna-tional standards set by Basel I and Basel II rules and is most clearly the caseor loan-loss provisions based on current rates o loan delinquency. At timeso boom, when asset prices and collateral values are rising, loan delinquency alls and results in inadequate provisioning and overexpansion o credit. Whenthe downturn comes, loan delinquency rises rapidly and standard rules onprovisions can lead to a credit crunch. Similar diculties also apply to capitalcharges. Banks typically lose equity when an economy is hit by a massive exito capital, hikes in interest rates and declines in the currency. Enorcing capitalcharges under such conditions would only serve to deepen the credit crunchand a recession. Tis was the case in Asia during the 1997-1998 nancial crisis,as a result o extensive eorts to strengthen regulatory regimes as part o theIMF packages o nancial support.

Deregulation has induced

greater global nancial

ragility

Four key areas o

deciencies in the

international nancial

regulatory ramework

need to be addressed




d) Te spread o nancial networks across the world, and the character o securi-tization itsel, has made practically all nancial operations hinge on the “con-dence” that each inst itution in isolation is capable o backing up its operations.But as insolvencies emerge, such condence is weakened and may quickly van-ish, generating a credit reeze that spreads to the business sector, which in turn

makes that sector increasingly vulnerable. Te risk models applied by regula-tory agencies typically disregard such “contagion” eects and, consequently,may ail to oresee the systemic risks posed by the ailure o one or the othernancial institution. Te growing interaction among markets implies, in act,that correlation o market swings has increased, limiting the room or eectiverisk diversication.

Te regulatory decit has made all these problems more severe. Te basic impli-cation or prudential regulation, which has been largely ignored in the past, is simple: sincethe basic problem o nancial markets lies in strong cyclica l swings, the basic objective o prudential regulation and supervision should be to introduce strong counter-cyclical rulesto complement and ortiy counter-cyclical macroeconomic policies.

The dollar as the reserve currency

Te third systemic ailure is the world’s reliance on one single national currency—theUnited States dollar—as the major reserve currency. Te Bretton Woods system originally gave the dollar this central role as part o a system o xed exchange rates. Te new system

was put to a major test in the late 1960s when the United States was running large budgetand current-account decits, caused to a signicant extent by the escalating costs o theVietnam War and an increasingly overvalued dollar. Te decits were nanced by thelarge current-account surpluses leading to high dollar reserve accumulation in Germany and most o the rest o Europe, and Japan. Te ensuing monetary growth led to a rise inination and a rise in commodity prices worldwide, making the holding o low-yieldingdollar assets less attractive and making the “dollar standard” o xed exchange rates un-

tenable. In 1971, the growing imbalances led to the collapse o the Bretton Woods “dollarstandard” regime and a shit to exible exchange rates or major currencies, ollowed by almost a decade o stagation and a weakening dollar.

Te dollar remained as the de acto world reserve currency and, as indicated,a similar pattern has been building up over the past decade: the United States has run uprising budget and external decits stimulated by ar-reaching nancial deregulation, andthese decits were conveniently covered through loose monetary policy and mountingreserve accumulation in surplus countries, this time not just in Europe and Japan, butmost importantly also in China and other parts o developing Asia as well as in major oil-exporting countries, many o which have in practice managed exchange-rate regimes withtheir currencies pegged to the dollar.6 Strong export-led economic growth, especially in

Asia, has ed renewed commodity price ination and loose monetary policy in the UnitedStates and has elsewhere cheapened the cost o borrowing, leading to accelerated creditgrowth and eeding an asset price bubble worldwide. Te risks o this global growth pat-

6 This is ofcially the case in China and with most o the oil exporters in the Middle East. Many

Asian countries ormally moved to a exible exchange-rate regime ater the 1997-1998 nancial

crisis. In practice, however, in attempts to avoid a strong appreciation o those currencies that had

collapsed during the crisis as part o export-led growth strategies, most countries have managed

their currencies.

Improved nancial

regulation needs to

be complemented

with counter-cyclical

macroeconomic policies

The use o the dollar as the

global reserve currency

is an intrinsic source o

instability



31Global outlook

tern were conveniently ignored. Moving orward, the same problems will persist i notadequately addressed. Also, as argued above, the risk o a hard landing o the dollar willremain high even ater condence in nancial markets has been restored, as the problemo the global imbalances will not automatically disappear as a result.

Inadequate liquidity provisioningTe tendency o accumulating vast amounts o oreign currency reserves in developingcountries has its roots in more undamental deciencies o the international monetary andreserve system. Improved prudential capital-account regulation can help reduce the needor and the cost o sel-insurance via reserve accumulation. Te need or sel-insurance canbe urther reduced with more eective mechanisms or liquidity provisioning and reservemanagement at the international level, both regionally and multilaterally (see below).

Current mechanisms are limited in coverage, too narrowly dened, or subjectto unduly strict conditionality.7 Te establishment in 1997 o the Supplemental ReserveFacility provided some collective insurance to countries hit by capital-account crises, butthe Facility did not provide enough protection in the case o a typical sudden reversal in

capital ows; when it was rst used in the Republic o Korea, it did not prevent an economicimplosion there, possibly because it was accompanied by pro-cyclical policy conditionality.Te Contingent Credit Line (established in 1999) remained unused and expired in 2003,and little has been done to revitalize the Compensatory Financing Facility (established in1963), which provided liquidity to developing countries to manage terms-o-trade shocks.

In October, the IMF proposed establishing a Reserve Augmentation Line aspart o the Supplemental Reserve Facility to provide emergency liquidity to members whohave strong macroeconomic policies, a sustainable debt situation and proven credibility inpolicy implementation, but who are still aced with shocks through the capital account. oovercome the potential stigma associated with the Facility, there is a need to enhance thereliability o access to nancial resources and reinorce positive signalling to markets. A signicant number o emerging market members should qualiy based on the inormation

available rom past IMF Article IV consultation reports. Allowing automatic ront-loadeddrawing o up to 500 per cent o quota or eligible members, based on simple and transpar-ent guidelines, would send a clear signal to private markets that the line is an insuranceacility. I such a mechanism could emulate the lender-o-last-resort unctions o centralbanks, it could reduce the demand or high reserve build-up in developing countries. Tisin turn could create more policy space in developing countries by ofoading pressurestowards exchange-rate appreciation.

More generally, all IMF acilities should be signicantly simplied and includemore automatic and quicker disbursements proportionate to the scale o the external shocks,

without onerous policy conditionality attached to them. Recent action has been undertakenin this direction with the reorm o the IMF Exogenous Shocks Facility. But total resourcesremain limited and more is needed to provide collective saeguards or large-scale crises.

7 See, or example, Stephany Grifth-Jones and José Antonio Ocampo, “Compensatory nancing

or shocks: what changes are needed?”, background paper prepared or the tenth session o the

Committee and Development Policy, March 2008, available rom http://www0.gsb.columbia.edu/

ipd/pub/CompensatoryFinancing_24apr_sgj_topost.pd; and World Economic and Social Survey

2008: Overcoming Economic Insecurity (United Nations publication, Sales No. E.08.II.C.1), chapter II.

Existing mechanisms or

liquidity provisioning are

inadequate




The way orward

In today’s world o increased economic and political interdependence, achieving a broad-based, rapid and sustained growth in incomes and employment involves even more com-plex policy challenges than in the past. Certainly, the external environment o devel-oping countries has undergone a number o undamental changes that are unlikely tobe reversed in the oreseeable uture. Te multilateral arrangements designed at Bretton

Woods in 1944 did not include a global regime or capital movements, given that capitalmobility was expected to be limited. However, no such regime has emerged even ater thebreakdown o these arrangements, and despite the surge in private capital ows. In theatermath o the Asian crisis, various codes and standards were established through inter-national institutions, not just with respect to the nancial sector, but also with regard toauditing and accounting, data collection and so on. While these could have benets overthe longer term, they will not necessarily contribute to nancial stability, and in many cases they wil l involve substantial costs.

Another major outstanding challenge or the international nancial institu-tions is to help developing countries mitigate the damaging eects o volatile capital ows

and commodity prices and provide counter-cyclical nancing mechanisms to compensateor the inherently pro-cyclical movement o private capital ows. A number o options areavailable to dampen the pro-cyclicality o capital ows through better macroprudentialregulation and the provisioning o counter-cyclical multilateral nancing, and thereby help create a better environment or sustainable growth and poverty reduction.

Te ailure to create a tru ly inclusive system o global economic governance—or adequate counter-cyclical policies in the short term and appropriate regulatory reormin the medium term—has rustrated a coordinated, comprehensive and inclusive interna-tional response to the current crisis. Tese aws were also recognized during the nancialcrises in emerging markets in the 1990s, but relevant proposals or reorm did not lead tomuch change in actual practice.8 Te ailure o the international community to draw les-sons rom the nancial crises o the 1990s is now proving to be highly costly.

Tere is no legitimate orum, other than the United Nations itsel, in which theinterests o all countries can be articulated, considered and reconsidered to ensure moreinclusive and equitable—and thus credible and eective—global economic governance. A decade ater the collapse o the inter-war international nancial system, the 1944 Bretton

Woods Conerence, which created the IMF and the World Bank, ormed part o the new post-war system o inclusive multilateralism, led by the United Nations.

Tis is not the place to provide a blueprint but given the existing systemicaws, it seems paramount that deliberations on a new international nancial architectureshould address at least our core areas o reorm:

a) Te establishment o a credible and eective mechanism or international pol-icy coordination.9 o guide a more inclusive process, adequate participation

and representation o developing countries in the process o policy coordina-8 For one o many elaborate reorm proposals, see, or instance, José de Gregorio, Barry Eichengreen,

Takatoshi Ito and Charles Wyplosz, An Independent and Accountable IMF , Geneva Report on

the World Economy No. 1 (Geneva: International Center or Monetary and Banking Studies, and

London: Centre or Economic Policy Research, September 1999).

9 This could be carried out along the lines suggested in World Economic Situation and Prospects

2007 (United Nations publication, Sales No. E.07.II.C.2), pp. 24-34.

An inclusive, multilateral

system o global economic

governance is needed

Systemic reorms need to

ocus on our core areas



33Global outlook

tion and in the institutions o global governance is required, implying the needor a undamental revision o the governance structure and unctions o theIMF and the World Bank;

b) Fundamental reorms o existing systems o nancial regulation and supervi-sion leading to a new internationally coordinated ramework that can avoid

the excesses o the past;c) Reorm o the present international reserve system, away rom the almost ex-clusive reliance on the United States dollar and towards a multilaterally backedmulti-currency system which, perhaps, over time could evolve into a single,

world currency-backed system;d) Reorms o liquidity provisioning and compensatory nancing mechanisms—

backed through, among other things, better multilateral and regional poolingo national oreign-exchange reserves—which avoid the onerous policy condi-tionality attached to existing mechanisms.

Such reorms will not easily nd consensus among all stakeholders, but the risk o endangering global peace and prosperity by ailing to address the systemic problemsunderlying the present crisis are simply too high. Tis awareness should be the common

ground or seeking common solutions.



35

Chapter II

International trade

Trade ows

Merchandise trade: growthdeceleration and potential revenue alls

World trade has started to decelerate sharply, weakening its role as a major engine o globaleconomic growth in recent years. Growth in the volume o trade is estimated to haveslowed to 4.4 per cent in 2008, nearly hal o the average annual growth o 8.6 per centduring the period 2004-2007. Tis trend is expected to continue in 2009, with the volumeo world exports anticipated to slow urther to about 2 per cent on the heels o the globaleconomic recession. In a more pessimistic scenario o a deeper and prolonged nancial cri-

sis, however, the recession will be more proound, causing world trade activity actually todecline by 3 per cent (see the pessimistic scenario outlined in chapter I), something whichhas not happened since the Second World War. During 2008, the signs o signicantly

weakening world trade were already visible in the Baltic Dry Index, a leading indicator o global trade activity measuring the demand or shipping capacity to transport commodi-ties versus the supply o dry bulk carriers. In the six months between May and November2008, the Index experienced an unprecedented continuous decline o 85 per cent. Becausedry bulk primarily consists o materials that unction as raw-material inputs into the pro-duction o intermediate or nished goods, such as concrete, electricity, steel and ood, theIndex can a lso be seen as an ecient indicator o uture economic growth and productionand is hence not signalling a promising outlook.

Meanwhile, the value o trade ows has increased signicantly over 2008, but

unlike a similar rise in 2004 which took place because o robust volume growth, this in-crease is largely due to extraordinary rises in the prices o oil and most commodities duringthe rst hal o the year. As noted in gure II.1, the declining trend o volume and thedramatic gyration o the prices o most commodities in the second hal o 2008 wil l leadto a all in the value o global trade in the baseline estimate or 2009.

Te costs o alling trade and commodity prices tend to be distributed un-evenly across countries. In 2008, the clear winners were those who beneted rom thesharp rise in oil and commodity prices. At an aggregate level, oil producers in North A-rica, the Commonwealth o Independent States (CIS) and Western Asia doubled their rateo nominal export revenue growth in 2008, to 53 per cent, 48 per cent and 38 per cent,respectively. In addition, countries in sub-Saharan Arica (excluding Nigeria and South

Arica) and the least developed countries (LDCs) as a group achieved remarkable rates o

growth o export revenue ollowing the primary commodity boom, averaging about 42 percent in 2008. Latin America, which has a somewhat more diversied trade structure, saw the doubling o its rate o export revenue growth being ofset by a more rapidly increasingimport bill. Manuactured goods’ exporters in East and South Asia were afected by therise in commodity prices. In 2008, their import bills increased at a lmost twice the pace o 2007. In Europe, although import growth was less dramatic, it outpaced export growth(see tables II.1 and II.2).

World trade volume is

growing at only hal the

pace o recent years

The value o trade has

increased mainly on

account o dramatic price

increases




Figure II.1Growth of global trade, 2002-2009

-5

0

5

10

15

20

2002 2003 2004 2005 2006 2007 2008a 2009b

P e r c e n t a g e

0

2

4

6

8

10

12

14

16

18

T r i l l i o n s o f d o l l a r s

Source: UN/DESA and

Project LINK.

a Partly estimated.

b Projections, based

on Project LINK.

Value o world exports(right axis)

Growth o trade value(let axis)

Growth o trade volume(let axis)

Fortunes reversed ollowing the dramatic all in the prices o oil and primary commodities in the second hal o 2008, a trend which is likely to continue in 2009 asthe global economy enters into recession. Countries in North Arica, the CIS and West-ern Asia that had gained rom high commodity prices are expected to experience allingexport revenues at rates ranging rom between 4 and 19 per cent in 2009. Most alarmingare the losses in export earnings in sub-Saharan Arican countries and among the LDCs,

which are expected to all by about 22 per cent on average on account o declining com-modity prices. At the same time, these economies will see modest increases in their importbills in 2009, to the extent that their trade decits are expected to widen.

Te turnaround in the prospects or world trade will have an impact on theglobal imbalances. As emphasized in previous issues o the World Economic Situation and Prospects , the United States o America has, or the past decade, played a critical role asthe world consumer o last resort. With the recession and the drop in consumer con-dence in the United States, this is now changing and the trade decit o the world’s majoreconomy has narrowed, mainly because o weakening domestic demand. As the UnitedStates accounts or about 12 per cent o other developed country exports on average, tradesurpluses in Europe and Japan will be trimmed, and export growth in China and other

developing countries will also be directly and indirectly afected by the recession in theUnited States. Income growth in the United States started to slow in 2007 (showing anegative growth rate in the ourth quarter) which, together with the cumulative dollardepreciation over recent years, resulted in shrinking import demand. Except or a smallpositive rate o growth in imports in the second quarter o 2007, weakening demand inthe United States has been a main cause in the deceleration o global trade in 2007-2008.Consequently, export volume growth in developed Asia and Oceania ell rom 7.6 percent in 2006 to an average o 2.7 per cent during 2007-2008. Similarly, in Europe, export

Collapsing commodity

prices have led to severe

trade shocks in many

parts o the world

The global imbalances have

narrowed as a result o the

recession in the developed

countries



37International trade

Table II.1

Value growth o exports and imports, 2002-2009


Flow 2002 2003 2004 2005 2006 2007 2008a 2009b

World Exports 4.8 16.4 21.5 13.8 14.9 15.6 18.9 -4.4

Developed economiesExports 3.6 15.1 18.5 8.3 11.9 14.4 13.9 -7.3

Imports 3.0 16.0 19.3 11.8 13.2 13.6 14.7 -10.4

North AmericaExports -4.2 5.0 15.1 10.8 11.3 9.7 12.8 2.0

Imports 1.5 7.9 16.4 13.9 10.5 5.9 11.4 -7.1

Asia and OceaniaExports 3.1 13.1 20.2 7.0 9.3 11.2 15.4 4.3

Imports -0.3 15.6 19.8 15.9 11.2 11.0 24.7 -1.6

EuropeExports 6.7 19.0 19.3 7.7 12.5 16.3 13.9 -11.7

Imports 4.3 20.4 20.6 10.2 14.8 17.5 14.7 -12.9


South-eastern EuropeExports 6.5 20.6 30.8 24.4 17.5 27.4 26.1 0.8

Imports 20.2 19.1 21.9 17.4 15.2 30.7 24.5 3.5

Commonwealth o Independent States

Exports 6.3 26.8 36.7 36.9 28.1 25.0 47.9 -4.2

Imports 10.3 27.1 30.0 28.0 32.4 40.4 38.2 13.4

Developing countriesExports 7.2 18.2 26.1 21.9 18.4 16.3 23.2 -0.5

Imports 5.0 16.4 27.9 17.4 16.9 17.5 25.3 5.7

AfricaExports 3.4 23.4 29.3 37.1 18.6 20.1 38.3 -7.1

Imports 3.4 20.3 26.3 22.5 19.5 25.5 29.1 6.6

North AricaExports 0.1 29.6 23.5 37.2 33.1 19.4 52.7 -5.4

Imports 11.4 6.8 22.4 24.6 20.8 33.7 50.8 15.2

Sub-Saharan Arica (excludingNigeria and South Arica)

Exports 15.1 14.9 28.0 36.8 20.7 21.2 42.1 -22.5

Imports 4.6 19.6 26.7 19.3 12.0 18.7 18.2 2.8

East and South AsiaExports 9.9 19.4 25.6 18.1 18.3 16.4 18.2 6.0

Imports 8.7 19.5 28.1 16.9 16.5 14.4 24.8 8.1

East AsiaExports 9.7 19.4 25.5 17.2 18.3 16.3 18.0 6.5

Imports 8.8 19.2 27.4 15.5 15.8 14.8 24.1 7.5

South AsiaExports 12.2 18.9 26.3 29.2 17.9 17.6 20.2 0.0

Imports 7.5 22.6 35.3 30.6 22.3 10.8 31.0 13.6

Western AsiaExports 5.0 22.5 31.0 33.1 19.1 17.3 37.7 -18.7

Imports 7.2 17.4 36.5 15.2 14.7 28.1 23.2 -0.1

Latin America and the CaribbeanExports 1.0 8.5 23.0 20.8 18.2 12.5 21.3 -2.5

Imports -7.0 3.4 22.0 18.7 19.4 19.0 26.8 0.2

Memorandum item:

Least developed countries

Exports 9.5 16.0 35.8 35.6 23.2 25.6 42.8 -22.6

Imports 3.5 18.8 25.5 14.7 14.9 18.2 22.3 6.4

Source: UN/DESA and Project LINK.

a Partly estimated.

b Forecasts, based in part on Project LINK.

volume growth slowed rom 8.2 per cent in 2006 to 3.8 per cent per year on average in2007-2008. Tis, in turn, suggests that the typical ly robust intraregional European tradeis also experiencing negative eedbacks rom export revenue to income, and rom there toimports rom other countries in the region. In the outlook, export growth o developed

Asia and Oceania is likely to be negative and that o Europe to be at, at best.




Table II.2

Volume change o exports and imports, 2002-2009


Flow 2002 2003 2004 2005 2006 2007 2008a 2009b

World Exports 4.4 5.6 11.2 8.0 8.8 6.3 4.4 2.1

Developed economiesExports 2.2 2.5 8.9 5.6 7.5 4.5 3.1 0.0

Imports 2.5 4.6 9.5 6.5 7.0 3.9 1.1 -1.1

North AmericaExports -2.4 0.5 9.0 6.3 5.5 4.8 4.6 1.3

Imports 3.2 4.7 10.8 6.8 5.0 1.4 -4.1 -4.1

Asia and OceaniaExports 6.6 8.1 12.1 5.5 7.6 6.8 -1.4 -4.0

Imports 3.1 7.1 8.2 5.7 5.5 3.7 5.8 -5.5

EuropeExports 3.1 2.1 8.2 5.4 8.2 3.9 3.6 0.4

Imports 2.0 4.1 9.0 6.5 8.3 5.2 3.2 1.2


South-eastern EuropeExports 5.2 7.5 17.6 18.1 8.9 13.7 9.2 6.6

Imports 17.0 3.6 9.6 12.2 9.8 17.0 12.1 8.0


Exports 8.0 13.6 15.4 -0.2 6.4 8.6 4.7 4.4Imports 10.7 19.1 21.2 8.2 20.1 26.3 18.3 16.7

Developing countriesExports 8.6 10.8 15.0 12.5 10.9 8.8 6.2 4.8

Imports 7.4 10.3 16.3 11.7 12.0 9.8 9.8 6.3

AfricaExports 4.7 10.0 9.0 17.9 0.2 10.1 10.6 3.6

Imports 5.0 10.5 10.7 17.5 11.6 17.6 15.2 10.5

North AricaExports 1.2 16.0 1.1 12.0 16.5 10.4 14.3 6.6

Imports 11.8 5.7 8.7 18.1 16.0 24.9 24.3 17.9

Sub-Saharan Arica (excludingNigeria and South Arica)

Exports 11.0 2.7 10.5 13.8 4.7 8.1 6.1 4.9

Imports 3.9 6.7 14.5 13.9 5.9 9.8 6.7 7.6

East and South AsiaExports 12.0 13.0 17.8 14.0 13.6 10.5 7.4 5.2

Imports 11.4 11.9 18.0 12.0 12.1 8.3 9.4 6.0

East Asia Exports 12.0 13.5 18.5 14.2 13.8 10.7 7.4 5.3Imports 11.8 11.9 17.6 11.0 11.8 8.8 8.7 4.4

South AsiaExports 11.8 6.0 9.2 11.5 10.7 7.8 7.1 3.9

Imports 7.5 11.2 22.1 22.4 15.7 2.9 16.6 21.3

Western AsiaExports 4.5 8.9 8.0 6.0 5.6 6.2 5.8 3.9

Imports 7.3 7.7 23.5 8.8 9.8 15.6 9.8 8.5

Latin America and the CaribbeanExports 1.7 4.4 11.3 8.9 7.3 1.9 -2.0 4.1

Imports -4.1 6.2 7.5 10.4 13.0 9.1 8.6 3.6

Memorandum item:


Exports 9.7 2.5 14.1 10.7 7.7 12.5 5.8 8.1

Imports 3.1 7.3 13.9 8.9 9.1 9.7 9.9 10.5

Source: UN/DESA and Project LINK.

a Partly estimated.b

Forecasts, based in part on Project LINK.

While the widening o the global imbalances during the past decade has beenposing an increasing threat to global nancial stability, the present trend o a recessionary unwinding could afect development prospects in the medium run. As noted in chapter I,the outlook o a global recession and alling commodity prices will have an adverse impacton growth and domestic resource mobilization in most developing countries. Net oodand energy importers already sufered serious setbacks in early 2008 owing to the extraor-

Weaker global trade will

severely aect developing

countries




dinary surges in prices o oil and ood. Te reversal in commodity prices in the second hal o 2008 may be o little comort to these countries, as the global recession wil l signicantly

weaken demand or their exports. Financing ensuing trade decits will be increasingly dicult and costly in the context o great uncertainty in nancial markets. In contrast,countries that had beneted rom the commodity boom but did not invest in diversiying

their economy in a timely ashion will be doubly hit as they will see both the prices andthe volume o their exports decline.

Regional trends in trade

As mentioned above, import demand in the United States has been weakening since 2007and has al len urther in every quarter o 2008. Demand or imports o automobiles andcar parts has been particularly afected. High oil prices and the slowdown in activity ledto a drop in the volume o imports o ossil uels. Export growth, in contrast, has strength-ened over the past two years, driven by increased global demand or cheaper United States-made goods (in particular industrial inputs, computer-related commodities and consumergoods) ater a prolonged period o dollar depreciation. Weakening demand worldwide and

the rebound o the United States dollar (see chapter I) have reversed this trend, and UnitedStates exports have been alling since August 2008.rade growth in Western Europe has been afected by the United States slow-

down. Growth o the total European export volume slowed rom 3.9 to 3.6 per cent inthe course o 2008. Export perormance in the United Kingdom o Great Britain andNorthern Ireland deviated rom this trend, showing a recovery rom the contraction intrade observed in 2007. European exports are expected to grow by a meagre 0.4 per cent in2009, reecting the global slowdown as well as the appreciation o the euro and the poundsterling against other major currencies rom mid-2008. Te weakening o global demanddominates prospects or import demand in Europe, which slowed rom 5.2 per cent in2007 to 3.2 per cent in 2008 and is expected to slow urther, to 1.2 per cent in 2009.

Te sotening o import demand in the United States and elsewhere is also

slowing export growth in developed Asia (Japan and Australia in particular). Falling oilprices are reversing the trend in preceding years o a rising import bill in Japan and havehelped preserve the country’s trade surplus, despite the poorer export perormance. Aus-tralia managed to reduce its trade decit, thanks to sharp increases in the negotiated priceor its iron ore and coal exports, underpinning an increase in the country’s total exportrevenues by more than 20 per cent in 2008. Canada’s external sector is sufering rom the

weak United States economy, especially in the automobile industry, and, rom mid-2008,also rom the drop in oil prices and the appreciation o the Canadian dollar.

Among the new European Union (EU) member States, Estonia and Latvia haveseen their imports decline in real terms as a consequence o the bursting housing and creditbubbles and their impact on private consumption and investment. In other new EU membercountries, most notably Bulgaria and Romania, strong private consumption, continued or-

eign direct investment (FDI) inows and continuing strong domestic investment have beendriving import growth at a pace o about 12 per cent. Export perormance o the new EUmembers has not been immediately hurt by the sluggishness in demand rom major tradingpartners, possibly because many export contracts were component-based. Te export con-tracts, on average, stretch over three quarters o the year, causing export growth to respondto slower oreign demand with a similar time lag. A signicant deceleration o exports isthereore likely to be elt during the rst hal o 2009. During 2008, though, exports by thenew EU members continued to expand at an annualized rate o 11 per cent in real terms.

Both imports and exports

o the United States are

declining

The rest o the developed

world sees its income

directly aected by

sluggish United States

trade growth

Export growth in new

EU member States was

strong in 2008, but it will

be aected by the global

slowdown with a time lag




Increases in production capacity o automotive plants in the Czech Republic and Slovakia inoperation this year have helped to sustain a rapid growth o exports in 2008 despite decliningsales o transport equipment in the EU, but prospects or 2009 will be less glowing.

In the economies o South-eastern Europe, buoyant private consumption, con-tinuing FDI and, in some cases, heavy inrastructure spending resulted in strong import

growth o about 8 per cent in 2008, amplied in nominal terms by higher ood and en-ergy prices. Exports o the region kept growing at a pace o about 9 per cent in 2008. Itis expected, however, that the slower growth in the EU-15 may hold back urther exportexpansion in the subregion.

Growth o export revenues o the countries o the CIS was strong in 2008and outpaced import value growth. Te surge in oil and gas prices in the rst hal o 2008 helped boost trade surpluses in Azerbaijan, Kazakhstan and the Russian Federation,despite the rise in import demand based on growth in domestic consumption and invest-ment. Growth in the volume o exports rom the Russian Federation remained weak, andcould decline signicantly in the outlook. Imports o the Russian Federation increased by more than 20 per cent in 2008, but owing to the strong rise in hydrocarbon prices in therst six months o 2008, the economy was nonetheless able to increase its trade surplus.

In some other parts o the CIS, however, import growth outpaced export growth in valueterms, and trade decits widened, especially in the smaller economies such as Armenia,Kyrgyzstan, the Republic o Moldova and ajikistan. Ukraine sufered most rom therising costs o imported ood, oil and gas. Its trade decit surged during 2008 as importdemand was urther uelled by strong domestic demand.

rends in trade difer strongly between the oil and the non-oil exporters in Western Asia. In 2008, despite strong import growth, trade surpluses in the major oil-exporting countries o the Gul Cooperation Council (GCC) and Iraq increased sub-stantially rom their already high levels o 2007. Saudi Arabia’s trade surplus reached anestimated 65 per cent o gross domestic product (GDP) and that o Kuwait was no lessthan 72 per cent o GDP. In non-oil economies o the region such as Jordan, Lebanon andurkey, in contrast, rising import costs outpaced increased export revenues, resulting in a

urther widening o trade and current-account decits.Until recently, import demand rom oil exporters in Western Asia and rom

the ast-growing economies o East Asia had provided a bufer in Western Europe to theallout in demand rom the United States. Tis cushion is now deating. East Asian econ-omies are increasingly eeling the impact o the slowdown o developed economies interms o a substantial deceleration in the demand or their exports. Export volume growthor the region as a whole is estimated to have weakened rom an annual average o 13.7per cent during 2001-2007 to about 8 per cent in 2008, and is likely to experience much

weaker growth in the outlook or 2009. Nonetheless, China’s trade balance has continuedto widen in dollar terms during 2008, despite the appreciation o the renminbi that hastaken place over the past three years. Te Republic o Korea, the second largest exporterin the region, managed to sustain high rates o export growth until the third quarter o

2008. Te economy’s trade balance moved into decit in 2008, however, as a consequenceo strongly increasing import costs or energy and materials. Singapore and aiwan Prov-ince o China sufered rom considerably lower demand or inormation technology (I)products, consistent with the weak demand in industrial countries.

Te developing countries most vulnerable to a global economic downturn andvolatile commodity prices are primarily ound in Arica and Latin America. Te goodperormance o commodity exporters in Arica, owing to the rise in commodity pricesin the rst part o the year, is expected to give way to a much less avourable outcome, as

The trade boom in South-

eastern Europe may not last

Trade prospects in the CIS

remain closely linked to oil

and commodity prices

The all in exports in

Western Asia may cause

worsening trade

prospects in Europe


remain highly vulnerable

to trade shocks




the demand and prices o their exports will decline urther. A similar reversal o trends will also afect those Arican countries heavily reliant on agricultural exports and tourism.Oil exporters in the region will see signicantly lower current-account surpluses in 2008compared with previous years. Oil importers, in contrast, are expected to experience wid-ening current-account decits over 2008. South Arica is an exception to this trend, as its

current-account decit narrowed substantially in 2008 ollowing the country’s recovery rom the electricity crisis that had stalled mining exports the year beore. Te outlook or2009 will be much bleaker or both groups o economies, however, as export revenues areexpected to collapse.

Meanwhile, the aggregate current-account balance o Latin America and theCaribbean is estimated to move into a small decit in 2008, ater registering a surplus o about 0.5 per cent o aggregate GDP in 2007. Te declining trend is caused by a combina-tion o the economic slowdown in the industrialized world, the drastic drop in commodity prices in the second hal o 2008, which afected primary commodity exporters, and theerosion o competitiveness caused by strong currency appreciation in the region over thepast ew years (even though this trend has reversed in the second part o 2008). Goingorward, the gains in competitive edge rom the recent currency depreciation are likely

to be more than ofset by lower demand or exports because o the global slowdown andcontinued tight trade-credit constraints. Limited access to trade credit has already afectedexports and production in Brazil. Te recession in the United States will be elt most im-mediately in Mexico and Central America, which rely on United States markets or thelion’s share o their exports. Countries in South America rely on a more diverse group o trading partners and will eel the consequences once demand or their exports slows inEurope and in Asia’s emerging market economies.

Trade in services: growth to slow with global downturn

World trade in services has expanded dramatically in recent decades. In 2007, it reacheda total value o $3.1 trillion, more than triple the size o 1990. Tis trend has been con-

sistent with the worldwide trend o an increasing share o services in total output. During1990-2007, the share increased rom 65 to 72 per cent in developed countries and rom 45to 52 per cent in developing countries. Services today account or over 70 per cent o em-ployment in developed countries and about 35 per cent in developing countries. In recentyears, however, the astest growth has taken place in merchandise trade, and it seems thatthis was a actor in the sustained growth o trade in services. Since the growth o mer-chandise trade has been particularly robust in the developing world, the share o servicesin total trade has decreased (see table II.3).

Business services, including inormation and communication technologies(IC), as well as nancial and insurance services, are on the rise, and in 2007 made upabout one third o the services trade o developing countries. However, a prolonged nan-

cial crisis is likely to afect the trade and production o such services. rade in nancial ser-vices will be afected directly, but the efects will probably spill over into merchandise tradethrough tightening access to trade credit. Experts at a high-level World rade Organization(WO) meeting have suggested that the shortage o liquidity or nancing trade credit

worldwide amounts to $25 billion as o November 2008.1 Tis, on top o the contraction o demand, will constrain export opportunities, especially in developing countries.

1 See “Experts discuss problems o trade nance”, World Trade Organization, WTO: 2008 News

Items, 12 November 2008, available rom http://www.wto.org/english/news_e/news08_e/trade_

nance_12nov08_e.htm (accessed on 15 November 2008).

Trade in nancial and

transportation services,

which has become

increasingly important

in developing countries,is likely to weaken as the

nancial crisis unolds




Most o the services trade o developing countries takes place in a limited num-ber o countries, and its concentration has increased urther over the past decade. Some 25countries accounted or 86 per cent o total developing country services trade in 2007. Fiveo these alone accounted or 50 per cent o the total volume, up rom 43 per cent in 2000(table II.4). In less than two decades, China and India have become the largest developingcountry exporters o services, leaving behind other Asian countries that had dominatedthe services trade in the 1990s.

For developing countries in general, trade in services is particularly importantin the areas o movement o natural persons supplying services (Mode 4 o the General

Agreement on rade in Services (GAS)) and outsourcing (included in Mode 1), but is

also important in commercial presence (Mode 3), and is mostly carried out through FDI. Worldwide, the services sector accounts or the largest share o global FDI stocks andows, while the share o manuacturing has continued to decline.2 Te services sector ac-counted or 62 per cent o estimated world inward FDI stock in 2006, up rom 49 per centin 1990. Te share in the world total o FDI inows to the services sectors in developingcountries climbed rom 35 per cent in 1990 to more than 50 per cent in 2007.

While trade, nancial services and business activities continue to account orthe lion’s share o FDI in the sector, other services, including inrastructure, have begunto attract FDI since the 1990s. For example, the value o cross-border mergers and acquisi-tions (M&As) worldwide in electricity, gas and water rose rom $63 billion (about 6 percent o total sales) in 2006 to $130 billion (nearly 8 per cent o the total) in 2007.

In Arica, Western Asia, East and South Asia, and Latin America and theCaribbean, FDI inows grew to nearly record levels in 2007, the nance sector beingthe largest FDI recipient, while activity in inrastructure services such as electricity, tele-communications and water was on the rise. In view o the current turmoil in nancialmarkets, and considering the mixed results o privatized public services in the developing

2 See United Nations Conerence on Trade and Development, World Investment Report 2008:

Transnational Corporations and the Inrastructure Challenge (United Nations publication, Sales No.

E.08.II.D.23).

FDI is a major vehicle or

the expansion o trade

in services in developing

countries

FDI ows may weaken as

the economic slowdowntakes hold in developing

countries

Table II.3

Exports o services: share in total trade in goods and services, 2003-2007

Percentage

2003 2004 2005 2006 2007

World 20.1 19.9 19.5 18.9 19.4

Developed economies 22.5 22.7 22.7 22.2 22.8

Economies in transition 15.9 14.9 13.8 13.3 14.5

Developing economies 15.0 14.7 14.1 13.7 14.0

Arica 20.3 19.0 16.9 16.4 17.5

Latin America and the Caribbean 14.3 13.4 13.2 12.4 12.5

Asia 14.5 14.5 14.0 13.7 13.9

Oceania 35.4 34.2 33.7 30.4 28.5

Memorandum items:

Least developed countries 15.9 14.7 12.4 12.5 11.6

Landlocked developing countries 17.3 15.9 14.6 13.0 13.4

Small island developing States 45.4 44.3 39.7 34.7 38.2

Source: UNCTAD GlobStat.




world, these trends seem worrisome. Governments have oten ound themselves absorbingthe costs o ailures or shiting strategies o transnational corporations (NCs) in basicservices. Bailouts o large oreign nancial corporations may give rise to an even heavierburden. Some countries in Latin America and the Caribbean adopted a number o policy measures related to FDI that range rom reducing incentives to restricting or prohibitingsuch investment. As several actors have been inuencing recent trends, the precise impacto the nancial crisis on FDI ows is dicult to measure.3

Ofshore services represent only a relatively small component o the world’soutsourcing market. Ofshore service activities mainly comprise I services and I-

3 See United Nations Conerence on Trade and Development, World Investment Prospects Survey

2008-2010 (New York and Geneva: United Nations, September 2008).

Table II.4

Exports o services among developing economies, 1990, 2000 and 2007

Values in billions of dollars, share in per cent

1990 2000 2007

Value of

exports Share Rank

Value of

exports Share Rank

Value of

exports Share Rank

Developing economies 150.2 100.0 348.1 100.0 848.1 100.0

China, excluding Hong KongSARa, Macao SARa and TaiwanProvince o China 5.9 4.0 9 30.4 9.0 3 117.2 14.0 1

India 4.6 3.0 10 16.7 5.0 7 84.8 10.0 2

Hong Kong SARa 18.1 12.0 1 40.4 12.0 1 82.7 10.0 3

Singapore 12.8 9.0 2 28.2 8.0 4 69.7 8.0 4

Korea, Republic o 9.6 6.0 3 30.5 9.0 2 63.2 7.0 5

Taiwan Province o China 7.0 5.0 6 20.0 6.0 5 30.6 4.0 6

Thailand 6.4 4.0 7 13.9 4.0 9 30.0 4.0 7

Turkey 8.0 5.0 5 19.5 6.0 6 28.7 3.0 8

Malaysia 3.9 3.0 11 13.9 4.0 8 27.6 3.0 9

Brazil 3.8 3.0 12 9.5 3.0 12 23.8 3.0 10

Egypt 6.0 4.0 8 9.8 3.0 11 20.0 2.0 11

Mexico 8.1 5.0 4 13.8 4.0 10 17.3 2.0 12

South Arica 3.4 2.0 13 5.0 1.0 14 13.5 2.0 13

Morocco 2.0 1.0 18 3.0 1.0 22 13.4 2.0 14

Macao SARa 1.5 1.0 23 3.6 1.0 18 12.3 1.0 15

Indonesia 2.5 2.0 16 5.2 1.0 13 12.1 1.0 16

Lebanon 0.1 1.0 76 1.2 1.0 40 11.4 1.0 17

United Arab Emirates 1.1 2.0 32 2.2 1.0 25 10.7 1.0 18

Argentina 2.4 0.0 17 4.9 0.0 15 9.8 1.0 19

Iran, Islamic Republic o 0.4 1.0 48 1.4 1.0 37 9.3 1.0 20

Chile 1.8 1.0 19 4.1 1.0 17 8.8 1.0 21

Kuwait 1.3 2.0 26 1.8 1.0 32 8.6 1.0 22

Philippines 3.2 2.0 14 3.4 1.0 19 8.4 1.0 23

Saudi Arabia 3.0 0.0 15 4.8 1.0 16 7.7 1.0 24

Cuba 0.5 0.0 42 3.1 1.0 21 6.6 1.0 25

Source: UNCTAD GlobStat.

a Special Administrative Region o China.




enabled business services, as well as pharmaceutical and research and development (R&D)services. Developing countries have captured a sizeable and growing share o this market.Te potential impact o the current nancial and economic crisis on this incipient marketremains uncertain, since ofshore activity may either increase in pursuit o cost-savingstrategies or all as global demand recedes.

World primary commodities and prices

Non-oil commodities: dramatic price swings

During 2008, the upward trend in commodity prices, which had put its stamp on com-modity markets since the early 2000s, reached its peak and was ollowed by a dramatic all.Long- and short-term actors had combined in an unprecedented manner to create a broadrise in commodity prices with characteristics unlike those o previous commodity pricebooms, such as the one in the early 1950s or those ollowing the two oil-price shocks o the 1970s. Tese earlier booms resulted rom supply bottlenecks and were broken by a rise

in global ination ollowed by monetary tightening. Te most recent boom was diferent,however. Rather than experiencing a shock, supply was rising consistently in response toprice increases, but apparently not as ast as the rise o demand uelled by speculation in theutures markets. Te expectations and exchange-rate volatility which triggered speculation,driving stocks down, also contributed to the surge in prices. Hence, rather than balancingsupply and demand, rising prices ed speculation and urther price increases. Te tide wasturned by a change o sentiment among nancial investors in commodity markets.

From June 2008, commodity prices have generally been decreasing, as shownby the United Nations Conerence on rade and Development (UNCAD) commodity price index, which lost 11.5 per cent in dollar terms between June and September 2008.Tis trend holds or all commodity groups, though specic commodities or commodity groups have been more afected than others (see table II.5). Te change in trends can be

partially explained by high price incentives and avourable weather conditions that arecontributing to increased planting and harvesting o cereals, which may hit a new recordin 2008. World production o wheat, maize and rice is expected to exceed demand andcontribute to a partial replenishment o stocks. In addition, the recent appreciation o theUnited States dollar may also explain part o the price decline in nominal terms. Whilethe replenishment o stocks and lower prices is a welcome turn o events or consumers, thesharp rise in price volatility during 2008 has hurt both consumers and producers.

Commodity price

uctuations in 2008 were

caused by new actors

Growing supply in some

commodity markets is

acing ading demand

Table II.5

Commodity price indices in nominal terms, 2008

Base year 2000 = 100

Jan-08 Jun-08 Sep-08

All non-oil commodities 239.4 289.8 256.4

Food 200.0 262.6 232.3

Tropical beverages 167.1 192.8 186.7

Vegetable oilseeds and oils 318.8 370.5 266.9

Agricultural raw materials 196.6 228.6 212.7

Minerals, ores and metals 329.1 371.3 334.7

Source: UNCTAD Commodity Price Statistics.




Figure II.2Monthly averages of free-market price indices of non-oil commodities,January 1997-September 2008


0

50

100

150

250

200

300

350

400

450

J a n - 9 7

J u l - 9 7

J a n - 9 8

J u l - 9 8

J a n - 9 9

J u l - 9 9

J a n - 0 0

J u l - 0 0

J a n - 0 1

J u l - 0 1

J a n - 0 2

J u l - 0 2

J a n - 0 3

J u l - 0 3

J a n - 0 4

J u l - 0 4

J a n - 0 5

J u l - 0 5

J a n - 0 6

J u l - 0 6

J a n - 0 7

J u l - 0 7

J a n - 0 8

J u l - 0 8

Price Index – All groups (current dollar terms)

Tropical beverages

Vegetable oilseeds and oilsFood

Agricultural raw materials

Minerals, ores and metals

Source: UNCTAD Commodity

Price Statistics.

Between 1997 and 2002, commodity prices ollowed a downward trend inboth nominal and real dollar terms. Te commodity price boom, which resulted in recordprices in nominal dollar terms or several commodities, also allowed real prices to recoveror some commodity groups. Nonetheless, most commodity prices, corrected or dollarination, remained well below previous peaks (see gure II.2 and table II.6).

Exceptional conditions caused the rise and all o prices in world markets orbasic grains, ood and minerals. One o the unique eatures o the 2008 boom was the longand steady growth in commodity market trading, during which unused capacity was putinto operation. Capacity utilization peaked in the production o most commodities belong-ing to the categories o basic grains, ood and minerals, as new investments to increase sup-

Despite sharp rises, real

prices o most commodities

have remained below

previous peaks

Table II. 6

Commodity price indices in real dollar terms, 1974-2008


1st half 1974 1st half 1997 1st half 20081997-2008 change

(percentage)1974-2008 change

(percentage)

All non-oil commodities 317.8 121.9 197.3 61.9 -37.9

Food 386.7 126.2 175.8 39.2 -54.5 Tropical beveragesa 617.7 161.9 129.8 -19.8 -79.0

Vegetable oilseeds and oils 433.9 144.3 248.6 72.3 -42.7

Agricultural raw materials 203.1 115.0 151.3 31.5 -25.5

Minerals, ores and metals 239.7 103.8 262.0 152.5 9.3

Source: UNCTAD, Commodity Price Statistics and Inocomm.

a The highest prices or tropical beverages were recorded in 1977, which or this group o commodities is used as the year o reerence instead o

1974.




ply ell short o what was needed to match the increase in demand, and inventories becamedepleted. At that point, the nancial crisis had arrived, rendering the question o how longthe demand momentum could be maintained irrelevant. For other commodities such asagricultural raw materials, the supply response had been suciently large early on.

It is also likely that the depreciation o the dollar since 2002 uelled expecta-

tions o urther price increases as investors tried to preserve international purchasing powerby raising prices in dollar terms. Although dicult to ascertain with precision, the inu-ence o speculation by nancial investors has been considerable. Speculation in the actual,physical exchange o commodities certainly inuenced prices as speculators bought andstored commodities, betting on price increases. Such positions have temporarily reducedthe supply o goods and have no doubt afected price movements directly. Te impact o speculation in utures markets (that is to say, where speculators do not physically tradeany commodities) on price trends is much more dicult to determine, however. Futurestrades are bets on buying or selling goods entitlements which are continuously rolled over.It is thereore not clear whether such trading does more to commodity prices other thanincrease their volatility. It could, however, be argued that increased global liquidity andnancial innovation has also led to increased speculation in commodity markets. Con-

versely, the nancial crisis contributed to the slide in commodity prices rom mid-2008 asnancial investors withdrew rom commodity markets and, in addition, the United Statesdollar appreciated as part o the process o the deleveraging o nancial institutions in themajor economies (see chapter I).

As explained in Box II.1, the turmoil experienced in stock markets owing tothe global nancial crisis initially shited speculative investments towards markets or basicgrains, or example. But as the nancial vulnerability o large investors suraced later in theyear, the need or liquidity to renance bad debts and recapitalize ailing nancial institutionsseems to have abruptly stopped nancial investments in commodity and utures markets.Te credit crunch is also expected to have a negative impact on international commodity trade by raising import nancing costs. Tis will reduce import demand and contribute tourther declines in commodity prices. As economic actors expect a urther downturn o the

global economy, this may already have been translated into lower utures market prices.4

rends in commodity stocks have signalled impending shortages. Productionconditions o many commodities were characterized by excess capacity in the 1990s. Teresulting excess supply suppressed prices and provided little incentive to new investment. Asdemand gradually rose, spare capacity declined. Similarly, inventories, which in many caseshad been built up to very high levels, started alling. Eventually, supply responded, but inmany cases only ater prices had reached unprecedented levels. Figure II.3 shows the surpluso supply over demand or lead and zinc, which in many ways are typical o the mineralsand metals industry. A surplus o both metals in the early years o the twenty-rst century turned into a widening decit around 2004, and the industry did not return to surplus until2008. Figure II.4 shows London Metal Exchange (LME) stocks or the same two metals.

4 See, or example, United Nations Conerence on Trade and Development, Trade and Development Report 2008: Commodity prices, capital ows and the fnancing o investment (United Nations

publications, Sales No. E.08.II.D.21), chapter 2, p. 24; Institute or Agriculture and Trade Policy,

“Commodities market speculation: The risk to ood security and agriculture”, IATP Report, November

2008; W. Meyers and S. Meyer, “Causes and implications o a ood price surge”, background

paper or the present report, available rom http://www.un.org/esa/policy/publications/wesp_

background_papers.htm; and Organization or Economic Cooperation and Development, Trade

and Agriculture Directorate, Committee or Agriculture, “The relative impact on world commodity

prices o temporal and longer term structural changes in agricultural markets: A note on the role

o investment capital in the US agricultural utures markets and the possible eect on cash prices”,

Document No. TAD/CA/APM/CFS/MD(2008)6, 28 February 2008.

Exchange-rate uctuations

and speculative activity,

among other actors, haveincreased commodity

price volatility

Trends in commodity stocks

provided an early signal

o price gyrations




The making of the food crisis

In the years leading up to the ood crisis o early 2008, demand or basic grains (rice, wheat, barley,

maize and soybeans) exceeded production. As a result, stocks ell to 40 per cent o their levels in

1998/99, and the stocks-to-use ratio reached record lows or total grains and multi-year lows ormaize and vegetable oils. Given such tight conditions, the market could not absorb the events that

occurred on the demand and supply side, culminating in a “perect storm”, and leading to soaring

prices and rampant ood shortages in many developing economies.

There are dierences in how prices evolved among ood commodities, as well as in the

triggers that sparked the price surges. Some grain prices began an upsurge as early as the end o

2006; nevertheless, by September o 2007, all international grains prices had doubled rom their 2003

price levels (see gure A below). The apparent common actor that aected all price dynamics was

the comovement o the depreciation o the United States dollar and the rise in crude oil prices.

The United States dollar began to depreciate more steeply in 2006, and crude oil prices

rose simultaneously. This not only increased production and transport costs or commodities but

also stimulated an increase in biouel production, increasing the demand or, and the price o, maize

and vegetable oils. It has also been argued that biouel production has increased the demand or ag-

ricultural inputs, energy and labour, thereby having the impact o increasing ood prices in general.

Increasing maize prices induced crop substitution towards more protable maize production and ledto the substitution on the demand side or eed and ood, thereby increasing prices o other crops.

Subsequently, higher crude prices raised the production costs o all crops, livestock and dairy, and

these eects permeated throughout the agricultural sector raising the arm-to-retail margins and

increasing the cost o ood.

Shortalls in grain production also emerged because o bad harvests, most notably in

Australia and Europe. While these events would normally not have been such large market movers,

in this case the eect on prices was dramatic given the record-low level o cereal stocks and the

continuing strong global demand.

Box II.1

Figure APatterns of price developments among food commodities, 2003-July 2008

Ratio to January 2003 prices

0.00

1.00

2.00

3.00

4.00

5.00

6.00

J a n - 0 3

A p r - 0 3

J u l - 0 3

O c t - 0 3

J a n - 0 4

A p r - 0 4

J u l - 0 4

O c t - 0 4

J a n - 0 5

A p r - 0 5

J u l - 0 5

O c t - 0 5

J a n - 0 6

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

Barley

Wheat

Rice

Soybeans

Maize

Palm oil

Source: W. Meyers and

S. Meyer, “ Causes and

implications o a ood price

surge”, background paper or

the present report, available

rom http://www.un.org/esa/

policy/publications/wesp_

background_papers.htm.




The reaction to rising international ood prices at the domestic level only served to

exacerbate an already tenuous situation. Numerous exporting countries either banned, taxed or

otherwise limited exports o grains and oilseeds, while importing countries reduced import taris,

subsidized consumers or increased imports as precautionary measures. The most dramatic impact

was on the price o rice, but wheat was also aected. Rice exports were banned in Cambodia, Egypt,India (except basmati), Indonesia and Viet Nam, and China introduced a 5 per cent export tax. Since

the international market or rice is very thin (amassing no more than between 6 and 7.5 per cent o

rice consumption), the trade restrictions generated market panic resulting in private hoarding and

the delay o emergency ood deliveries.

Increased consumption, most notably in China and India, is requently seen as another

actor in the price surges. While part o a longer-term trend, counteractual evidence suggests that in-

creased ood demand in these emerging markets only played a role coming as it did on top o already

emerging supply shortages. In general, growth in the demand or corn or ood and eed has not been

above trend over the past 10 years. It was the steep rise in the demand or maize or ethanol produc-

tion in the United States (which, in turn, was driven by subsidies and the surge in ossil uel prices)

which—along with emerging supply shortages in China—contributed to the surge in the world price

o corn in late 2006. This spilled over into other markets. The price o soybeans increased steeply ol-

lowing the shit o 5.5 million hectares o arable land rom soybean to maize production in the United

States in response to the rising maize prices. This urther led to a decline in world oilseed production.As demand or oilseeds remained strong, especially in China, prices o other oilseeds surged as well.

Increased activity in utures markets by nancial investors also had an impact on short-

term price movements, as explained in the main text. This increased price volatility pushed up com-

modity prices in utures contracts well beyond what they would otherwise have been during the

boom. Similarly, the withdrawal o nancial investors at the emergence o the nancial crisis exac-

erbated their decline. While clearly aecting price volatility, it is less evident whether speculation in

utures markets is also having any lasting eect on seasonal average prices or long-term conditions

aecting demand and supply.a

Next to this storm o short-term actors pushing up ood prices were longstanding

policy ailures that weakened the agricultural sector in many developing countries, making it harder

or them to cope with market shocks and avoid a major-scale crisis. Thanks to the Green Revolution

and development policies that spanned rom the sixties through the eighties, world ood prices

decreased persistently rom the late 1980s until 2002, providing sel-suciency to many developing

countries and helping to reduce poverty. However, the policy shit towards more condence in pricesignals to stimulate production and less attention to government support or inrastructure invest-

ment and research and development or agricultural technology, together with lower ocial devel-

opment assistance (ODA), has been most detrimental to agricultural productivity growth. In particu-

lar, sub-Saharan Arica has suered the most rom the present ood crisis because o poorer social

and physical inrastructure, making it harder to assimilate new technologies triggered by the Green

Revolution. In 2003, Arican Governments committed themselves to raising their share o spending

on agriculture to 10 per cent by 2008 in support o the Comprehensive Arica Agriculture Develop-

ment Programme (the Maputo Declaration goal). In reality, however, such spending has dropped

dramatically in recent decades and the target is ar rom being met (see gure B).

Donors have also neglected agriculture. The share o total ODA or agriculture declined

rom 13 per cent in the early 1980s to 2.9 per cent in 2005-2006. In addition, ODA allocated to

other productive activities and economic inrastructure, which can have positive externalities or

agriculture, also suered rom a signicant drop in international support during the same period.

The downside o weakening investment and agricultural support measures in develop-ing countries is that productivity growth or major ood crops has stalled, and there has been no

signicant increase in the use o cultivated land. Thus, production has allen woeully short o growth

in ood demand. Unless the problem o underinvestment in agriculture is addressed, beyond the

short-term swings, ood prices may remain on a longer-term upward trend.

Box II.1 (cont’d)

a See, or example,

Commodity Futures Trading

Commission, Written

testimony o Jerey Harris,

Chie Economist beore

the Senate Committee

on Homeland Security

and Governmental Aairs,

United States Senate, 20

May 2008, available rom

http://www.ctc.gov/ stellent/groups/public/@

newsroom/documents/

speechandtestimony/

eajeharristestimony052008.

pd (accessed on 10

November 2008); Scott H.

Irwin, Philip Garcia, Darrel

L. Good and Eugene L.

Kunda, “Recent convergence

perormance o CBOT corn,

soybean and wheat utures

contracts”, Choices, vol. 23,No.2, 2nd quarter 2008, pp.

16-21, available rom http://

www.choicesmagazine.org/

magazine/pd/issue_4.pd (accessed on 11

November 2008).




Box II.1 (cont’d)

Figure BPublic agricultural expenditures in developing countries, 1980-2005

Percentage

14.9

12.3

6.4 6.5

11.2

7.9

5.3 5.5

6.4

5.4

4.65.3

8.1

2.12.5 2.6

0

2

4

6

8

10

12

14

16

1980 1990 2000 2005

Maputo Declaration

Asia

Africa


Latin America and the Caribbean

Source: International Lead

and Zinc Study Group,

available rom www.ilzsg.org/

static/statistic.aspx?rom=1

(accessed on 15

November 2008).

Source: Based on data

rom Shenggen Fan and

Anuja Saurkar, “Tracking

agricultural spending or

agricultural growth andpoverty reduction in Arica”,

Regional Strategic Analysis

and Knowledge Support

System, Issue Brie No. 5,

available rom http://www.

resakss.org/publications/

Expenditure% 20trends%20

brie.pd.

Figure II.3Surplus or deficit of global production over usage for lead and zinc, 1996-2007

Percentage

-5

-4

-3

-2

-1

0

1

2

3

4

5

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Lead

Zinc




Since LME inventories are stocks o last resort, a severe decline in these stocks is possibly thebest indicator o an acute physical shortage. Other metals have ollowed similar paths, com-monly with a price peak around the time when inventories were at their lowest, ollowed by declines in prices as production caught up and inventories started to accumulate.

Developments regarding agricultural products have been roughly similar, al-

though, ater speculative orces, the explanation o price uctuations lies in large part insupply-side actors. Among these are weather conditions—in the short term—and policy neglect, lack o long-term inrastructure and capacity investment, and insucient techno-logical innovation, in the longer term. An apparently relevant actor afecting both the de-mand and supply o agricultural products was the continuous rise o the dollar price o oil,

which raised costs o production and transportation, on the one hand, and inuenced sub-stitution or biouels on the other. It is not coincidental that some countries have resortedto export controls or bans to ensure adequate ood supplies or their own populations, andthis may have exacerbated price pressures. Such export restrictions were a response to theongoing surge in prices rather than the initial cause.

According to data rom the International Grains Council,5 ater two years o production decits and a year o relative balance between supply and demand in 2007/08,

global grains stocks should remain unchanged in 2008/09, at 281 million tons, owingmainly to good harvests. At the same time, world trade in grains is expected to al l as theglobal economy slows. It is likely, thereore, that the decline in prices observed in the sec-ond hal o 2008 will continue in the near uture.

5 International Grains Council, Grain Market Report , GMR No. 383, 30 October 2008; and, GMR

No. 380, 31 July 2008.

The decline in the prices o

most grains, beverages and

vegetable oils will continue asthe global economy slows

Figure II.4Inventories and prices of lead and zinc,a fourth quarter of 2003-second quarter of 2008

0

50

100

150

200

250

300

350

400

450

500

Lead stocks

Zinc stocks

Zinc prices

Lead prices

F o u r t h q

u a r t e r

2 0 0 3

S e c o n d q

u a r t e r

2 0 0 4

F o u r t h q

u a r t e r

2 0 0 4

S e c o n d q

u a r t e r

2 0 0 5

F o u r t h q

u a r t e r

2 0 0 5

S e c o n d q

u a r t e r

2 0 0 6

F o u r t h q

u a r t e r

2 0 0 6

S e c o n d q

u a r t e r

2 0 0 7

F o u r t h q

u a r t e r

2 0 0 7

S e c o n d q

u a r t e r

2 0 0 8

Source: London Metal

Exchange.a Average quarterly cash

prices (percentage o ourth

quarter 2003 prices) and end

o quarter inventories o lead

and zinc (per cent o end

2003 inventories).




Te tropical beverage price index, which had increased steadily until mid-2008,declined thereater (gure II. 2). In real terms, present price levels will remain well below the pre-crisis level in the immediate outlook. Tis wil l have severe implications or cofeegrowers, or example, prompting calls or the putting in place o compensatory mecha-nisms in Colombia and Brazil, which will perhaps be ollowed elsewhere.

Te vegetable oils and oilseeds price index rose by almost 174 per cent between January 2006 and June 2008, part ly owing to the indirect efect o increased productiono biouels which competed or agricultural inputs and capital utilization. However, pricesell by 30 per cent between June and September 2008, along with alling prices o ossiluels and most basic grains.

Developments in agricultural raw material prices were dominated by price in-creases or cotton. With a price average o $75.8 per pound over the rst six months o 2008, the Cotlook ‘A’ index increased by 30 per cent compared with its level in Janu-ary 2006. Nominal prices surged to levels not recorded since 1997. Between June andSeptember 2008, however, cotton prices ell by 4.5 per cent, ollowing the trend in othercommodity prices, albeit less dramatically. World production contracted by 5 per cent in2008 compared with the preceding year, in particular on account o a sharp decline (o

25 per cent) in production in the United States. Global demand or cotton increased by 1per cent, leading to a tightening o the market. Te price o natural rubber rose by 73 percent rom January 2006 to June 2008, mainly inuenced by rising petroleum prices whichdrive the price o synthetic rubber . Declining oil prices pushed down the prices o naturaland synthetic rubber by 10 per cent between June and September.

Te prices o most minerals, ores and metals increased during the commodity price boom, although they peaked at diferent times. Te prospect o a worldwide recessiondepressed prices in the second hal o 2008 as projections or demand ell well short o cur-rent capacity. Tis does not take into account the capacity that is scheduled to enter opera-tion in response to recent high prices. Te outlook or next year or most minerals is thatsupply will exceed demand, allowing a build-up o inventories rom present low levels andcontributing to a all in prices. Te situation with regard to gold may perhaps be diferent.

Prices in 2008 remained at historically very high levels, about $800 per ounce, owing in partto its use as a sae storage o wealth in times o economic and currency turmoil. A declinein the course o the second semester o 2008 may be mainly explained by a contraction inconsumption demand, especially in the jewellery market, where demand ell by 24 per centyear over year in the second quarter o 2008. In addition, China became the largest gold-producing country in 2007 with a total production o 276 tons, outstripping South Arica’s272 tons. Te extent to which the decline in the price o gold was also triggered by “margincalls” is uncertain, however, and thus it remains unclear whether, in the near uture, gold

will regain its privileged character o wealth storage as the nancial crisis deepens.

Crude oil: the turnaround that was

to be expected in a global slowdownOil prices were on a roller coaster ride throughout 2008 until the global commodity boomcame to an abrupt end in the summer. Te price o Brent crude, which stood at about $100per barrel (pb) in early January, rose to an all-time high o $145 pb in July beore droppingsharply to $60 pb in November (see gure II.5). As was the case with other commodities,the surge in oil prices during the rst ha l o 2008 reected both a tight balance betweensupply and demand and increased speculation and herding behaviour.

Cheaper derivatives o

petroleum will win over

natural bres

Prices o most metals

peaked between 2007

and mid-2008




Fundamental conditions included ast-growing oil demand in transition anddeveloping countries, weak supply rom oil-producing countries that are not members o the Organization o the Petroleum Exporting Countries (OPEC), and geopolitical con-cerns. Te upward price movement was reinorced by speculative activities, mostly in u-ture markets, as investors built positions in anticipation o urther price increases. In addi-tion, speculative buyers used oil and other commodities as a hedge against ination and a

weakening United States dollar, pushing prices urther in a sel-propelling upward spiral.Tis process went into reverse around the middle o July 2008 when concerns

about slowing demand rom developed countries coincided with rising supply in a largernumber o oil-producing countries (more than ofsetting declines in some others) andthe depreciation o the dollar ended abruptly, or the reasons explained in chapter I. Asthe nancial crisis in the United States deepened in September 2008 and increasingly spread across the globe, the oil-price decline accelerated, while daily prices became increas-ingly volatile. In October, international crude oil prices registered their biggest monthly drop ever as expectations mounted that a severe global economic downturn would sharply reduce demand or oil in 2009. Prices continued to slide even when OPEC decided tolower production considerably in late October and announced urther cuts in subsequentmonths. Despite the steep decline in the second hal o 2008, the price o Brent crude av-eraged $101 pb or the year as a whole, almost 40 per cent above the average annual priceo $72.5 pb in 2007.

Te high average price o oil and the signicant slowdown in global economicgrowth kept world oil demand at in 2008, averaging 86.1 million barrels per day (mbd).Robust growth in demand by developing and transition economies ofset a substantialcontraction in the developed countries, particularly in the United States, where yearly oildemand saw its biggest al l since 1982.

Demand conditions explain

to a great extent the

uctuations in the

price o oil price

World demand or oil

stagnated in 2008, caused

by osetting trends: alling

demand in developed

countries and rising demand

in developing countries

Figure II.5Nominal and real Brent crude oil prices, 1980-2008

Dollars per barrel

0

20

40

60

80

100

120

140

160

1 9 8 0

1 9 8 1

1 9 8 2

1 9 8 3

1 9 8 4

1 9 8 5

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8 a

Real price

Nominal price

Source: UN/DESA, based on

IMF International Financial

Statistics CD-ROM,

November 2008.

Note: United States consumer

price index was used as

the defator or the nominal

price o Brent oil.

a Partly estimated.




Oil demand in the developed countries ell by approximately 3 per cent in2008 as consumers aced sharply higher energy bills in the rst hal o the year and a severeeconomic downturn in the second. Te United States, which currently accounts or 22 percent o total world demand, registered the largest decline among developed economies,

with demand or crude oil dropping by about 5 per cent as gasoline prices rose, increasing

by 35 per cent between January and July. Oil demand in Europe continued its downwardtrend in 2008, mostly owing to shrinking demand or transportation uels in the largeeconomies o the EU. Demand or gasoline dropped sharply during the summer monthsin Germany, France, Italy, Spain and the United Kingdom, as very high retail prices andslowing economic growth reinorced the structural decline. Oil demand in the Pacicregion decreased in 2008 or the third consecutive year as a result o weak gasoline anddiesel demand in Japan.

However, in developing and transition economies, oil demand continued toexpand signicantly in 2008, growing on average by 3.8 per cent. All regions registeredincreasing demand owing to continuing robust, albeit slowing, economic growth. As inprevious years, demand or transportation uels rose sharply in China, India and West-ern Asia. otal oil demand increased by about 6 per cent in China and Western Asia,

by almost 5 per cent in India, and by approximately 4.5 per cent in Latin America andthe Caribbean. Soaring international uel prices had only a limited efect on demand asprice controls and subsidies in many developing countries continued to shield consumerspartially rom the cost increases. However, a number o South and East Asian countries,including China, Indonesia, Malaysia and aiwan Province o China, cut uel subsidiesduring 2008 to reduce the burden on the scal budget.

Global oil supply averaged 86.4 mbd in 2008, representing an increase o 0.9per cent over average supply in 2007. Tis increase was entirely due to higher productionby OPEC member countries during the rst three quarters o the year (and despite morerecent supply reductions). Non-OPEC supply, by contrast, remained virtually unchangedin 2008 as declining output in Mexico and Europe was compensated by higher production(which included liquid gas and biouels as well as crude oil) in Brazil, China and the United

States.6 Overall, weakness in non-OPEC supply could have been a key actor behind thesurge in prices during the rst hal o 2008. Given rapidly growing demand in develop-ing countries and constrained non-OPEC production, OPEC increasingly gained controlover marginal supply. Tis sparked ears among market participants that uture supply shortalls would lead to urther price hikes. However, as the nancial crisis hit developedeconomies, these ears gave way to more short-term concerns o altering demand.

Ater increasing quotas in the last quarter o 2007, OPEC let them unchangedduring the period in which oil prices surged between January and July 2008, despitemounting pressure rom major oil-importing countries to increase them. New members,

Angola and Ecuador, which joined OPEC in 2006 and 2007, respectively, had ormal quo-tas assigned to them rom January 2008 onwards, whereas Iraq continued to be exemptedrom the quota system.7 Actual production—including all three o these countries—uc-

tuated somewhat during the rst part o the year, primarily as a result o production out-ages in Iraq and Nigeria. From May onwards, as oil prices spiralled upwards, the largestproducer in OPEC, Saudi Arabia, raised its output steadily. In July 2008, Saudi Arabianproduction increased by 0.6 mbd since April to 9.7 mbd, its highest level since 1981, and

6 In assessing the supply and demand or oil to illustrate price uctuations, the convention o the

International Energy Association is to include both natural gas liquids and biouels.

7 Ecuador had previously been an OPEC member, having become an oil exporter in the early 1970s,

but it let the cartel in 1985 and rejoined in 2007.

Increases o supply by

OPEC countries in 2008

compensated shortalls by

non-OPEC oil exporters




about 8 per cent above its quota. As a result, total OPEC production reached a high o 37.7 mbd in July, when oil prices peaked. As the global economic outlook increasingly de-teriorated and oil prices ell rapidly, OPEC members decided in September 2008 to returnto the agreed quotas, mainly putting pressure on Saudi Arabia to lower output. However,prices continued to decline sharply in October, orcing OPEC to reduce quotas and cut

production by a total o 1.5 mbd as o November 2007.Te oil market outlook or 2009 essentially depends on how deep and long theeconomic slowdown in major oil-consuming countries will be. Te developed economies inparticular, which account or the lion’s share o global demand or energy, will be acing re-cession. Net oil-importers among emerging economies will experience a marked slowdown.In the baseline scenario, total oil demand in developed economies is expected to decline by about 3 per cent in 2009, similar to the rate in 2008. Since Japan, the United States andall large European economies have entered into recession, oil demand will remain subduedeven though consumers ace signicantly lower prices or retail gasoline, diesel and heatingoil. Meanwhile, oil demand growth in developing and transition countries is anticipated toslow down to about 3 per cent owing to decelerating economic growth in all regions.

With global demand slowing and oil prices continuing to all despite lower pro-

duction, OPEC is likely to reduce supply urther in 2009. Average OPEC output in 2009,including natural gas liquids (NGLs), is orecast at 36.1 mbd, almost 3 per cent below the av-erage in 2008. Tis compares to expectations o slightly increased production in non-OPECcountries, where several new project start-ups are expected to bring total average output to50.2 mbd. Based on experience in previous years, downward risks to production remain in anumber o OPEC and non-OPEC countries. Actual output may all short o target levels ow-ing to accidents, technical problems, political unrest, security challenges or weather-relatedoutages. It is plausible that increasingly low international oil prices may come close to orbelow marginal costs o production or many new projects, thus placing supply in jeopardy in the medium term. Output rom existing elds is declining at a rapid pace; hence, globaloil supply will depend undamentally on exploration and production rom new elds. Tis

will require massive investments by private and public oil companies over the coming years

and is likely to lead to upward pressure on prices in the medium- and long-run.Given these expected shits in demand and supply, during 2009 the price o

oil is expected to all back to levels seen in 2006. In the baseline scenario, oil demand isanticipated to decline slightly to 85.8 mbd and the average price o Brent crude is ore-cast at $64 pb on average or the year 2009. I a more pessimistic global growth scenarioplays out, prices could all well below that level. On the other hand, i the world economy bounces back in the second hal o 2009, oil prices will likely start rising again. Muchuncertainty surrounds these prospects and, consequently, the price o oil is expected toremain highly volatile in the outlook.

Terms o trade or developingcountries and economies in transition

As discussed above, during 2008, most commodity prices experienced sharp changes, withabrupt rises in the rst part o the year ollowed by alls in the second hal. By the end o 2008, world market prices o most primary products had dropped below levels posted atthe beginning o the year. In the case o oil and most mining and ood products, however,average prices or 2008 remained above those o 2007. Because o the importance o these

The upward price spiral has

ended with the nancial

crisis and may be on a

urther downward path

with the global slowdown

Price alls and deensive

supply cuts will act as

disincentives to long-term

investments

Main energy and primary

exporters beneted rom net

terms-o-trade gains in 2008




commodities in their trade, many primary exporters experienced, on balance, terms-o-trade gains in 2008, with signicant gains or net oil exporters in particular (gure II.6).

Regions with a large weight o oil in total exports recorded sizeable gains intheir terms o trade in 2008, as was the case in Western Asia, the economies in transitionand Arica (gure II.7). Exporters o agricultural products also saw their terms o trade

improve as the skyrocketing ood prices in the rst hal o the year were not ully ofsetby the subsequent all. Most exporters o mineral and mining products, in contrast, saw their terms o trade decline somewhat on average or the year as a consequence o the sharpreversal in the prices o metals and minerals and because many o these economies are alsonet importers o oil and ood.

Developing countries relying on exports o manuactures, particularly those inEast and South Asia, registered a urther deterioration in their terms o trade, as they wereafected by higher prices o oil, ood and some industrial raw materials o which they arenet importers. Te low-income countries that are net importers o ood and do not exportoil or mining products also experienced a signicant deterioration in their terms o tradein 2008. Te terms o trade o the developed countries, in contrast, are not greatly afectedby the sharp swings in commodity prices and have undergone only very small changes in

recent years. Tis is mainly due to the act that the bulk o both their imports and exportscomprise manuactured goods.

Most o these trends in the terms o trade are likely to be reversed in 2009, asthe sharp correction in commodity prices resulting rom the global nancial crisis and theeconomic slowdown become ully reected in annual data. Price declines or oil and min-erals and metals should lead to a reduction in the terms o trade o developing countries

which export these products, while ood- and uel-importing countries should nd somerelie rom the sotening in agricultural and energy prices.

Exporters o manuactures

in East and South Asia

aced urther deteriorating

terms o trade

Figure II.6Terms of trade by trade structure, 2000-2008

Index 2000 = 100

60

80

100

120

140

160

180

200

220

240

2000 2001 2002 2003 2004 2005 2006 2007 2008a

Petroleum exportersb

Exporters of minerals and mining productsb

Exporters of agricultural productsb

Manufactured goods’ exportersb

Low-income food-decit countriesb, c

Source: UNCTAD, Trade and

Development Report 2008 andUNCTAD Commodity Price

Statistics.

a Partly estimated.

b Selection o developing

and transition economies

(see UNCTAD, Trade and

Development Report 2008,

chapter 2, section 2).

c Excluding uel, minerals

and mining exporters.




Trade policy developments: dealing withmultilateral negotiations in the midst o fnancial and ood crises

Ater nine days o intense negotiations at the ministerial level, the Doha Round broke

down once again at the end o July. Some measure o convergence had been achieved with respect to both the agricultural and the non-agricultural market access (NAMA)components o the negotiations, but the remaining diferences proved unbridgeable. Inthe crucial area o agriculture, o a “to-do list” o 20 issues, 18 had seen some narrowingo positions. On one issue, the special saeguard mechanism (SSM)—which would allow developing countries to raise tarifs on agricultural products temporarily in order to deal

with import surges and price alls—there was a clear divergence between developed coun-tries (led by the United States) and others (led by India) on the so-called “trigger” (the sizeo the import surge needed to trigger the tarif increase). Developing countries expected alow trigger (above the base import volume) in order to saeguard their domestic producers,

while developed countries wanted the trigger to be as high as possible to avoid abuse o

the saeguard.Te diculty in dealing with the special saeguard scheme was, however,not the sole reason negotiations collapsed;9 rather, the breakdown appears to have re-ected more deep-seated policy concerns among developing countries about the direc-tion the Doha Round had taken, as well as resh worries related to the state o the worldeconomy.

Te structural weaknesses, evident in the stop-and-start history o the DohaRound since its inception in 2001, reer to persistent concerns among developing countriesrelated to their not being allowed to dene the Round’s development content, as originally envisaged in the Doha Ministerial Declaration and subsequently agreed ministerial texts.Tis revived memories o the Uruguay Round negotiations which, despite the promises atthe time, nally came to be viewed as a lopsided bargain. Such unease suraced relatively

early on in the process, particularly in academic and civil society circles, leading to politi-cal controversy over the treatment o such issues as cotton subsidies as well as over the per-ceived neglect o a series o development-related issues which were either let outstandingat the end o the Uruguay Round or became apparent during its implementation.10 Morerecently, in July 2007, the Secretary-General o UNCAD proposed ve key objectives

9 This was the conclusion o Ambassador Craword Falconer, Chairman o the Agricultural Committee

o the WTO, in his assessment o the breakdown o the WTO Trade Negotiating Committee. In

particular, he noted that in any subsequent eort to revisit the SSM, “we must recognize that it

was not, or any o the participants involved (and those participants include Members that were

not in the G7, it should be added), a purely technical breakdown. It was a political divide. In act

there was progress made on it politically, and technically, during that week. But it was simply

not sufcient to bridge a political divide that had been enduring since at least Hong Kong. So,

illusion number one to guard against is that it can be resolved essentially technically”. See “Report

to the Trade Negotiations Committee by the Chairman o the Special Session o the Committee

on Agriculture, Ambassador Craword Falconer”, WTO Committee on Agriculture Special Session,

JOB(08)/95, 11 August 2008.

10 For example, at the 2004 Annual Bank Conerence on Development Economics o the World Bank,

Proessor Gerry Helleiner argued that “it is more important or the WTO and other rules systems

to be broadly air and acceptable, however long it may take to get them right, than to rush to

urther liberalization as interpreted by major economic powers. I the current round o WTO

negotiations ails it will not necessarily be, as some suggest, a disaster or development”, as cited

in C. R aghavan, “Even patched-up, procedural deal in Hong Kong will be worse than ailure”, South-

North Development Monitor , No. 5935, 13 December 2005.

The ailure to complete

the Doha Round reectsdeep-seated dierences in

policy concerns between

developing and developed

countries

Key concerns are to

preserve the intended

development content o

the Doha Round




that needed to be attained or the Doha Round to realize its development promise. As re-ported in World Economic Situation and Prospects 2008 , these objectives embraced criticalissues such as real market access or developing countries’ exports o goods and services;improvements in multilateral trade rules to address existing asymmetries between devel-oped and developing countries; adequate policy space or developing countries to align

trade agreements with national development strategies and to al low a more efective specialand diferential treatment o developing countries; “development solidarity” in meetingthe implementation costs implied in the adjustments that developing countries would berequired to undertake; and coherence between regional and multilateral trade agreements.Failure to make real headway on these counts would appear to go a long way in explaining

why the negotiations could not reach a successul and balanced conclusion.11

In addition, the critical situation o the world economy at the time o the July 2008 ministeria l meetings may also have acted as a urther constraint. Tere were already clear signs, particularly in the United States, that nancial markets had become ragile,

with potentially catastrophic consequences or all countries i a crisis were to break andspread to the real economy. Te July ministerial meetings also coincided with growingconcerns in many developing countries about their ood and energy security. In address-

ing them, some net importers o grains were overwhelmed by the skyrocketing costs o ood subsidies, while many ood producers introduced new export restr ictions to enhancenational ood security. It hardly seems surprising, thereore, that one o the stumblingblocks leading to the halt o negotiations related to provisions allowing developing coun-tries to temporarily increase tarifs on agricultural products in times o economic andsocial diculty.12 It is also not surprising, thereore, that the WO ministerial meetingscheduled or December 2008 was cancelled, as positions had not changed and no prog-ress in the negotiations was to be expected.

Now, the overriding issue or trade negotiators is the nancial crisis that hasalready caused economic problems in advanced countries and is rapidly spreading to de-veloping countries. Tere is growing recognition that global nancial conditions weighheavily in shaping trade patterns. Tereore, the nancial architecture should not be set

aside rom trade negotiations. In particular, it has become evident, as discussed earlier,that unregulated nance in a global setting has also expressed itsel through commodity and currency speculation, leaving countries totally unprotected in a largely liberalizedtrading system.

Hence, the present circumstances call not only or meaningul reorms o theinstitutional arrangements that emerged rom Bretton Woods to address new threats toglobal economic stability but also or a more integrated perspective on the reorm agenda

which would move beyond the alse dichotomy between trade and nance issues. Regu-lating trade and nance should be considered jointly. Moreover, a proper, air and well-regulated system o global nance and currency exchanges has to be in place or develop-

11 Again, the remarks o Ambassador Craword Falconer are telling: “But our task does not begin and

end with SSM. I need only mention Cotton—one o the other three or our potential deal-breakers,which was not at all seriously addressed beore things broke down with SSM. There is tari quota

creation. There is tari simplication. Yes, one might well take the view that these can all into

place. But we also have to actually make that happen. And, while one might well rightly have held

the view that key elements elsewhere were essentially on the brink o resolution, not all o those

aected were in the room, and that would have needed urther eort to ensure nalisation.” See

WTO Committee on Agriculture Special Session, op. cit.

12 For a detailed review o the WTO negotiations, see, or example, International Centre or Trade and

Sustainable Development, Bridges Weekly Trade News Digest , vol. 12, No. 27, 7 August 2008.

The ood crisis and the

global nancial crisis have

increased concerns about

appropriate trade policy

strategies or developing

countries

The current context calls or

a more integrated approach

to regulating both trade

and nance




ment concerns truly to become the centre o multilateral trade negotiations. Tis was wellunderstood by the original architects o the Bretton Woods system. John Maynard Keynesexplicitly argued or such a comprehensive approach: “Whilst other schemes are not es-sential as prior proposals to the monetary scheme, it may well be argued, I think, that amonetary scheme gives a rm oundation on which the others can be built. It is very di-

cult while you have monetary chaos to have order o any kind in other directions… [I] we are less successul than we hope or in other directions, monetary proposals instead o being less necessary will be all the more necessary. I there is going to be great diculty in planning trade owing to tarif obstacles, that makes it all the more important that thereshould be an agreed orderly procedure or altering exchanges… [S]o ar rom monetary proposals depending on the rest o the programme, they should be the more necessary i that programme is less successul than we all hope it is going to be”.13

At this critical juncture, as policymakers seek a stable and ecient system orglobal nance, it is important that it not be separated rom the goal o a air and inclusivesystem or international trade which allows or the ull participation o developing coun-tries in line with their development objectives and potential. Devising a coherent, rule-based and authentically multilateral international system requires an integrated approach.

Given the open channels between the international trade, nancial and banking systems, atruly global, cooperative and non-partisan approach to tackling the most important issues,such as commodity and currency speculation, must be ound. But developing countrieshave only a limited voice in international nancial institutions. Te global institutionthat possesses the most credibility or implementing such an approach is thereore, morethan ever, the United Nations. Te Member States o the United Nations recognized theneed or a more integrated approach o that nature and or better coordination among theinstitutions on global economic governance at the Follow-up International Conerence onFinancing or Development to Review the Implementation o the Monterrey Consensus,held in Doha rom 28 November to 2 December 2008. Te outcome document calls ora “review o the international nancial and monetary architecture and global economicgovernance structures in order to ensure a more efective and coordinated management

o global issues. Such a debate should associate the United Nations, the World Bank,IMF and the World rade Organization, should involve regional nancial institutionsand other relevant bodies and should take place in the context o the current initiativesaimed at improving the inclusiveness, legitimacy and efectiveness o the global economicgovernance structures”.

13 J. M. Keynes, “Letter to Lord Addison, May 1944” in The Collected Writings o John Maynard Keynes,

Volume XXVI: Activities 1941-1946, Shaping the Post-War World, Bretton Woods and Reparations,

ed. Donald Moggridge (London: The MacMillan Press. Ltd., 1980), pp. 5-6.

The United Nations is

in a privileged position

to support an inclusive

process or revisiting the

state o global trade and

nance issues



61

Chapter III

Financing for development

Net resource ows rom poor to rich countries Amidst the unolding global nancial crisis, developing countries continued to make increas-ing substantial net outward transers o nancial resources to developed countries, reachingan all-time high o $933 billion in 2008 (see gure III.1 and table III.1). Ater a moderationin the rate o increase in 2007, outward transers increased more rapidly again in 2008. Netnancial transers are dened as net nancial inows less net actor and investment incomepayments to abroad which have become increasingly negative, implying resource ow out o developing economies. Tis trend has been continuing or over a decade.

Much o the increase in the outow during 2008 was concentrated in Western Asia and Arica, as the economies in these regions generated increasing trade surpluses,largely owing to the surge in oil and commodity prices in the rst hal o the year. As capitalinows also remained relatively strong up until the third quarter o the year, these regions

were able to urther increase international reserve positions in the aggregate. Net transersrom countries with economies in transition also increased, rom $101 billion in 2007 to$171 billion in 2008, owing mainly to the strong increase in the trade surplus o the Rus-sian Federation. In contrast, in Latin America and the Caribbean and East and South Asia,net outward transers declined in 2008 as a consequence o the nancial turmoil, leading toa signicant reduction in private capital ows rom the third quarter o the year onwards.

Net resource outows rom

poor to rich developing

countries reached an all-

time high in 2008

Figure III.1Net financial transfers to developing countriesand economies in transition, 1997-2008

Billions of dollars

-1 000

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

100

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008a



Source: Table III.1.

Note: Net nancial transers

are dened as net capital

inows less net interest and

other investment income

payments abroad.

a Partly estimated.




Te eects o the nancial turmoil are expected to be elt even more strongly and more widely in 2009, not only through withdrawals o capital rom emerging markets,but also through a signicant slowing o export prospects as the global economy deceler-ates. Countries will ace lower external surpluses in some cases or wider external decitsin others and will increasingly draw on international reserves. Te emerging markets will

be hit most directly through nancial channels, propelled by declining investor senti-ment, which has a lready led to an unwinding o carry trades. Te sell-o in high-yieldingcurrencies and emerging market equities is evidence not only o a broad-based risk aver-sion among investors but also o weakening growth prospects in the emerging economies.Low-income countries will eel the consequences o the crisis more signicantly throughtrade channels. How strongly this will inuence the pattern o net nancial transers willdepend on the prospects or private capital ows, ofcial development assistance (ODA)and debt relie, as discussed in the ollowing sections.

Private capital ows to developing countries

Developing countries have been attracting high and growing levels o private capital ows

(see table III.2) since 2002, and this trend continued until the end o the second quartero 2008. With the exception o net portolio investments, al l components registered sig-nicant gains.

Given the signicant change in nancial conditions acing developing coun-tries since the beginning o the third quarter o 2008, the ability o a number o them toraise capital has become severely compromised. Te current nancial turmoil is unlikeany other in over three decades. In dist inct contrast to the Latin American debt crises o the 1980s and the East Asian nancial crises in the late 1990s, nancial distress has been

The unwinding o

imbalances will aect net

ows o nancial resources


continued to attract privatecapital ows until the

second quarter o 2008

Table III.1

Net transer o fnancial resources to developing economies and economies in transition, 1996-2008

Billions of dollars

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008a

Developing economies 20.6 -4.1 -37.6 -118.9 -185.4 -154.5 -200.3 -295.8 -365.4 -545.4 -720.8 -773.3 -933.4

Arica -8.4 -7.0 13.0 2.5 -31.4 -16.6 -5.1 -19.6 -36.4 -64.7 -78.8 -67.0 -125.9

Sub-Saharan Arica(excluding Nigeriaand South Arica) 5.2 7.0 11.9 9.1 3.0 7.2 4.5 5.8 2.5 0.3 -8.4 -6.0 -28.6

East and South Asia 18.9 -31.1 -128.0 -137.2 -119.8 -116.5 -145.0 -170.4 -177.7 -254.7 -375.2 -485.9 -431.9

Western Asia 10.6 11.5 34.2 6.7 -31.4 -24.4 -19.7 -44.0 -70.7 -136.7 -158.0 -144.9 -315.6

Latin Americaand the Caribbean -0.5 22.4 43.1 9.1 -2.8 3.0 -30.4 -61.8 -80.6 -89.4 -108.8 -75.5 -60.0

Economies in transition -8.7 1.6 0.7 -25.1 -51.5 -33.2 -28.6 -39.2 -63.3 -100.7 -124.6 -101.1 -171.2

Memorandum item:

Heavily indebted poor

countries (HIPCs) 6.7 7.1 8.5 10.5 8.2 8.9 12.4 10.1 12.8 14.4 12.8 21.6 26.1Least developed countries 11.5 10.1 13.5 11.5 6.6 9.7 9.6 8.9 8.1 3.3 -5.4 -4.3 -22.3

Sources: UN/DESA, based on IMF, World Economic Outlook Database, October 2008; and IMF, Balance o Payments Statistics.

Note: The developing countries’ category does not include economies in transition; hence, data in this table may dier rom those reported or country

groupings reported in the IMF sources.

a Partly estimated.



63Financing or development

Table III.2

Net fnancial ows to developing countries and economies in transition, 1995-2009

Billions of dollars

Average annual ow

2005 2006 2007 2008a 2009b1995-1998 1999-2004

Developing Countries

Net private capital ows 148.3 79.6 141.7 86.0 379.1 391.1 135.3

Net direct investment 113.0 145.8 207.6 179.7 298.4 350.6 312.7

Net portolio investmentc 51.5 -20.3 -23.6 -122.6 47.4 -11.9 -100.7

Other net investmentd -16.1 -45.9 -42.2 29.1 33.5 52.6 -76.4

Net ofcial ows 10.7 -15.4 -87.4 -125.1 -133.5 -149.1 -129.5

Total net ows 159.0 64.1 54.3 -39.1 245.7 242.0 5.7

Change in reservese -70.4 -206.0 -490.6 -609.1 -1054.3 -1123.7 -809.4

Arica



Net portolio investmentc 4.7 0.0 4.6 18.6 15.0 5.1 9.5

Other net investmentd -2.3 -11.3 -4.5 -10.9 -16.1 1.6 13.5

Net ofcial ows 2.3 0.6 -6.1 -17.8 -2.1 5.0 2.6

Total net ows 9.8 6.1 23.2 19.0 40.5 57.4 72.6


East and South Asia



Net portolio investmentc 17.8 -2.3 -9.3 -110.7 13.9 -25.3 -108.4

Other net investmentd -19.1 -16.3 -4.9 58.3 -18.1 79.1 -63.5

Net ofcial ows 1.5 -6.7 -20.9 -21.8 -37.4 -10.2 -19.4

Total net ows 55.9 38.8 69.8 22.0 118.1 267.4 -10.8


Western Asia

Net private capital ows 18.4 -3.4 -16.4 -4.1 83.6 -32.0 -24.2


Net portolio investmentc 2.2 -10.3 -24.1 -17.1 -14.0 -14.7 -20.4

Other net investmentd 10.1 -0.8 -13.5 -13.9 82.3 -24.4 -17.9

Net ofcial ows -0.8 -16.0 -29.5 -66.9 -94.0 -146.3 -114.9

Total net ows 17.6 -19.4 -45.9 -71.0 -10.4 -178.3 -139.1





Net portolio investmentc 26.8 -7.8 5.1 -13.4 32.6 23.1 18.6

Other net investmentd -4.9 -17.6 -19.3 -4.4 -14.6 -3.6 -8.6

Net ofcial ows 7.8 6.6 -30.8 -18.6 0.0 2.3 2.2

Total net ows 75.6 38.7 7.2 -9.1 97.4 95.5 83.0





As can be seen rom table III.3, at the end o October 2008, the bankruptcy risk o emerging market Governments had increased substantially, compared with very low deault probabilities or most o 2007. In our sample, Ukraine has the highest CDSpremium (16.3 per cent), ollowed by the Bolivarian Republic o Venezuela (15.5 per cent)and the Russian Federation (10.1 per cent). Tese premiums compare with Iceland, orinstance, whose Government was the rst victim o nancial market turmoil in 2008 and

Higher bankruptcy risk in

emerging markets …

Figure III.2Portfolio investment inflows to selected countries, 2007-2008

Billions of dollars

-20

-15

-10

-5

0

5

10

15

20

F i r s t q u a r t e r

2 0 0 7

S e c o n d q

u a r t e r

2 0 0 7

T h i r d q

u a r t e r

2 0 0 7

F o u r t h q

u a r t e r

2 0 0 7

F i r s t q u a r t e r

2 0 0 8

S e c o n d q

u a r t e r

2 0 0 8

T h i r d q

u a r t e r

2 0 0 8

Financial turmoil

2007

Global nancial

crisis 2008

India

Republic of Korea

Taiwan Province of China

Sources: Balance-o-payment

data rom national central

bank websites.

Table III.3

Credit deault swap spreads and annual probabilities o deault in

selected emerging market countries, 31 December 2007 and 23 October 2008a

Credit deault swap(annual probabilities o deault)

31 December 2007 23 October 2008

Brazil 103 (1.3) 571 (6.3)

Hungary 57 (0.7) 574 (6.4)

Korea, Republic o 47 (0.6) 620 (6.8)

Mexico 70 (0.9) 580 (6.4)

Russian Federation 86 (1.1) 1 056 (10.1)

Turkey 168 (2.1) 777 (8.1)

Ukraine 238 (2.9) 2 535 (16.3)

Venezuela, Bolivarian Republic o 455 (5.2) 2 224 (15.5)

Sources: Deutsche Bank Research, available rom http://www.dbresearch.com or 2007 data and Bloomberg or

2008 data.

a Credit deault swap spreads in basis points and annual probabilities o deault in percentage.




is rumored to be on the verge o insolvency, with a deault probability trading at 25 percent in October 2008.

As a result, capital outows rom developing countries have intensied, leadingto tighter international and, in some cases, domestic liquidity conditions. Te pronouncedreduction in investors’ appetite or risk has resulted in a retrenchment in short-term capital

ows to emerging markets, exerting pressure on local markets, and sharply raising costs o credit.2 ogether with slowing global growth, this results in a very challenging environmentor several developing countries. Te Institute o International Finance (IIF) estimates thator a group o 30 emerging markets, net short-term lending (by both banks and non-banks)

was $253 billion in 2007 and $141 billion in 2008, compared to average annual net inowso just $25 billion or the period 1997-2006.3 Tis is a clear indication that this leaves someemerging markets more vulnerable to a reversal o short-term ows than at any time since1996. Te reversal o short-term interbank ows to both the Republic o Korea and the Rus-sian Federation has been a key source o stress in these two economies.

Another group o countries is acing solvency risks, as they are not only relyingheavily on short-term oreign nancing to meet large current-account decits but are alsocompromised in their policy options, owing to low international reserves and a substantial

stock o external debt. At the time o writing, Belarus, Hungary, Pakistan and Ukrainehave recurred to the International Monetary Fund (IMF) or emergency loans as they areacing increased debt-servicing problems.

Te unwinding o carry trades, which has led to a massive reversal o currency positions out o high-yielding assets in emerging markets back into currencies o devel-oped countries, in particular the Japanese yen, is another indicator that enormous liqui-dations by international investors have had a widespread impact in the developing world.

An enduring credit crunch and a declining global economy have clearly aected severalemerging market currencies, even those that are running a large aggregate current-accountsurplus. A broader group o currencies is suering as investors have withdrawn money rom their markets. Moreover, plunging raw-material prices are weighing on currenciesin commodity-producing nations rom Latin America and the Caribbean to sub-Saharan

Arica to the Russian Federation. Amidst the current turmoil, any orecast o net private ows in 2009 will in-

volve a delicate balancing act, as it will not only be necessary to consider the current stopand reversal in net private ows, but also to make assumptions about a possible recovery in ows that might be expected as the year progresses. Te act that key economic indica-tors in several developing countries (economic growth, prospective returns and nominalinterest-rate spreads) continue to appear more attractive than in mature markets suggestsa rebound o the current trend in private ows during 2009. At present, the correctionin world markets is characterized by a general ight rom risk rather than by economicundamentals, with equity markets and interbank ows experiencing some o the biggestdeclines. Farther down the road, the ocus o international investors on economic growthdierentials between developed and developing countries may reverse this trend, although

this will depend on how developing countries are able to stimulate domestic demand tooset weakening oreign demand. In this regard, those developing countries that havelarge current-account decits and are nanced by short-term nancial ows will be the

2 International Monetary Fund, Global Financial Stability Report—Financial Stress and Deleveraging:

Macronancial Implications and Policy (Washington D.C.: IMF, October 2008).

3 Institute o International Finance, report on “Capital ows to emerging market economies”, 12

October 2008.

… has led to additional

capital outows

A number o countries ace

multiple solvency risks

Emerging market

currencies have come

under pressure rom a

number o sources

Capital ow reversals make

net private capital ows

difcult to orecast




most vulnerable, and investors will dierentiate among emerging markets by paying moreattention to economic undamentals.

From a regional perspective, the impact o the global nancial turmoil on A-rica has thus ar been limited, as the risks o the majority o nancial markets in the regionare not correlated with those in mature economies. However, during the course o 2008,

portolio inows have come under some pressure as global liquidity has tightened (seetable III.2). According to the IMF, issuances o oreign currency-denominated bonds by Arican countries ceased in the rst hal o 2008, ater doubling yearly rom $1.5 billionin 2005 to $6.5 billion in 2007.4 An additional concern in Arica is the indirect eect o volatile and alling commodity prices, particularly that o crude oil, on export revenue andthe inow o capital into the region. In the short term, countries such as South Arica arenancing a very large current-account decit, about 8 per cent o gross domestic product(GDP),5 with private capital ows. I the capital ows dry up, South Arica will have tocontract this decit.

In East and South Asia, Governments are more adversely aected by the globalnancial crisis. Te dramatic reversal in portolio equity ows (see table III.2) reects thenet selling o equities by oreign investors. Tis selling pressure has been both a cause and

an eect o sustained weakness in emerging equity markets through 2008. Te equity sales have been particularly pronounced in the Republic o Korea, where investors have

withdrawn a massive net $45 billion in 2008.6 Despite the enormous accumulation o oreign-currency reserves in all major East and South Asian countries over the past ew years, the widespread wave o currency weakness experienced in the region and the rise indollar-unding pressures or banks show that vulnerabilities remain. Tese developmentsare also an important indicator o the high degree o interconnectedness within the globalnancial system. While the recent all in oil and ood prices has reduced the upward pres-sure on ination in many Asian countries, ood prices remain at a very high level relativeto last year’s record.

Te largest expansion o credit ows to Western Asian borrowers on record in20077 was sharply reversed in 2008 (see table III.2). Along with the global credit crunch,

Kuwait, Saudi Arabia and the United Arab Emirates, in particular, have experienced asevere contraction o interbank liquidity and rising spreads on corporate debt. While or-eign-asset growth o oil-exporting countries in the rst hal o 2008 was well above 2007levels, oil prices are no longer rising aster than domestic spending and investment, thuslowering the accumulation o international reserves. However, as both the Governmentsand the central banks remain in strong nancial positions, tighter credit conditions arelikely to have only a limited eect on investment activities in the region. Governmentshave started to st imulate domestic credit ows and investment.

While economic growth prospects remain positive or Latin America and theCaribbean, the economic and nancial crisis in the United States has clearly heighteneduncertainties in the region. Te region has witnessed a slowdown in portolio ows (see

4

International Monetary Fund, World Economic and Financial Surveys—Regional Economic Outlook:Sub-Saharan Arica (Washington D.C.: IMF, October 2008).

5 See “South Arica releases the 2008 International Monetary Fund’s Article IV Report and

Financial System Stability Assessment Report”, National Treasury o the Republic o South

Arica, press release, 22 October 2008, available rom http://www.nance.gov.za/comm_media/

press/2008/2008102201.pd.

6 Institute o International Finance, op. cit.

7 Bank or International Settlements, “International banking and nancial market developments”,

BIS Quarterly Review , June 2008.

Arica’s exposure to the

crisis has thus ar been

limited …

… while East and South

Asia have experienced

more direct eects

Strong nancial positions

help Western Asian

economies weatherthe storm

Latin America is acing

an increasing number

o downside risks




table III.2), large declines in stock price indices and signicant currency adjustments. While nancial conditions have not deteriorated more than in other regions in the currentglobal economy, Latin America and the Caribbean’s surplus is waning and will most likely turn into a modest decit in 2009.8 Te stagnation in economic growth o mature econo-mies will aect Latin America and the Caribbean through several channels: a decline in

the world’s demand or the region’s exports, alling remittances, weakening commodity prices, higher borrowing costs and the impact o tight monetary policies that the regionhas been pursuing to tame ination. Tus, the cyclical downturn in Latin America and theCaribbean is now envisaged to be more pronounced and subject to a widening o downsiderisks in comparison to other regions.9 In Mexico, or example, remittances ell by 6.9 percent year on year in July.10 O urther concern are oil prices, as oil exporters such as Ec-uador, Mexico and the Bolivarian Republic o Venezuela are exposed to the eect o any urther retreat o crude prices on scal balances.

Falling oil prices, selling pressure in equity markets and a major pullback innet bank lending (see table III.2) provide a combination o actors aecting economiesin transition. As a result, economic growth is set to slow in these countries, in particularin the Russian Federation. Most signicantly, the sharp reversal o short-term interbank

ows to the Russian Federation has been a key source o stress, and they are predicted tostay at low levels in 2009.

In summary, the ow o oreign capital in recent years has become the maindriver o the business cycle in quite a number o emerging market and other developingeconomies. Tat the process is driven primarily by variations in the availability o oreigncapital rather than by developments in the host countries is strongly indicated by the sig-nicant size o variations in the overall ow o capital. When oreign investors develop anappetite or risk, there is a boom in capital ows; the bust is marked by a “ight to qual-ity” (or risk aversion). Despite the act that key economic indicators in several developingcountries continue to appear more attractive than in mature markets, the sharp reversalin capital ows is now putting an end to a period o strong global economic growth andample availability o liquidity in these countries. Tis development is a lready posing severe

credit restraints, in particular in developing economies that are running current-accountdecits. While the development o local-currency debt markets has led to progress inthe reduction o currency mismatches in many developing countries, these markets arenevertheless characterized by short-term biases and have not solved problems o marketliquidity. Most developing countries sti ll lack sufciently developed markets or corporateand government bonds, which urther limits their scope or conducting counter-cyclicalmarcoeconomic policies.

Foreign direct investment

Foreign direct investment (FDI) has historically been the more stable component o cross-

border private capital ows over the past ew years, buoyed by strong economic growthand improvements in the investment climate in a number o countries. While many devel-

8 Institute o International Finance, op. cit.

9 See Chapter IV o the present report, as well as World Bank, “Latin America and the Global Crisis”,

report prepared by the Ofce o the Chie Economist or the Latin America and the Caribbean

region, 8 October 2008, available rom http://siteresources.worldbank.org/LACEXT/Resources/

GlobalEconomy.pd.

10 Data rom Banco de México, the central bank o Mexico.

The Russian Federation has

seen a sharp reversal in

short-term interbank ows

The sharp reversal in capital

ows is putting an end to a

phase o strong growth

More cautious business

sentiment is leading to

slowing FDI ows …




oping countries have attracted FDI through privatizations and mergers and acquisitions(M&As), unding or these activities will become harder to obtain in the coming months.Te United Nations Conerence on rade and Development (UNCAD) World Invest-ment Report 2007 predicts that FDI ows to emerging markets in 2008 will decline by 10 per cent.11 Since global business sentiment will become ar more cautious in the com-

ing months, FDI ows may slow even urther in 2009. Te Organization or EconomicCooperation and Development (OECD) has estimated that outows o FDI rom OECDcountries in 2008 could all by about $680 billion, or 37 per cent, rom their 2007 levels.12 Based on the historical relationship between developing country inows and changes inOECD outows, the OECD estimates that this could result in a decline in 2008 o about40 per cent or developing country inows rom 2007 levels.

Worldwide, FDI inows reached an estimated $1.6 trillion in 2008 (gureIII.3). In the three major groups o economies (developed countries, developing countriesand economies in transition), the global economic slowdown and intensiying nancialturmoil have had dierent impacts on FDI inows. While the decline is more distinct indeveloped countries, several developing markets are sti ll continuing to experience increas-ing FDI inows (table III.4). Net FDI inows are orecast to accelerate slightly to emerg-

ing European markets, the Middle East and Arica in the coming quarters. An increasingproportion o these ows takes the orm o reinvested earnings.13 Up until the rst hal

11 United Nations Conerence on Trade and Development,World Investment Report 2007: Transnational

Corporations, Extractive Industries and Development (United Nations publication, Sales No. E.07.

II.D.9).

12 Organization or Economic Cooperation and Development, Investment News: Results o the work o

the OECD Investment Committee, issue 7, June 2008.

13 Institute o International Finance, loc. cit.

… but the eects vary

by region

Figure III.3Inflows of foreign direct investment,global and by groups of economies, 1980-2008

Billions of dollars

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2 000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

World

Developingeconomies

Economiesin transition

Developedeconomies

Source: UNCTAD FDI/TNC

database and UNCTAD

estimates or 2008.




o 2008, FDI was bolstered by buoyant prots o transnational corporations (NCs) and

high commodity prices. Now that commodity prices have started to decline, commodity-related sectors will be somewhat less attractive. Tis could hurt Latin America and theCaribbean and Arica in particular in the months ahead.

Private equity rms, which account or one th o global cross-border M&As,are highly dependent on bank loans and will be severely limited in their nancing op-tions in the months to come. While the global outlook or the international expansiono NCs still looks positive, particularly given the higher prospective economic growthrates in developing countries, a lower level o investor condence and more prudence may inuence investment plans in orthcoming quarters. As in previous nancial crises, al lingasset prices and the tightening o credit conditions will lead to insolvency problems orcorporations and thereby to urther asset deation.

East, South and South-East Asia remain the most preerred regions or or-eign investment, ollowed by the European Union (EU), North America and emergingEuropean markets. China is the most preerred investment location, according to a recentUNCAD survey.14 Although, the overall environment or FDI remains positive, the Chi-nese Government has become more selective with respect to approving oreign involve-

14 United Nations Conerence on Trade and Development,World Investment Report 2008: Transnational

Corporations and the Inrastructure Challenge (United Nations publication, Sales No. E.08.II.D.23).

Investors are acing limited

nancing options

East, South and South-East

Asia remain the preerred

regions or FDI

Table III.4

Inows o oreign direct investment and cross-border mergers and acquisitions,

by region and major economy, 2007-2008

Billions of dollars

Region/Economy

Foreign direct investment inows Cross-border m ergers and acquisitions

2007 2008a

Growth rate

(percentage) 2007 2008

Growth rate

(percentage)

First

10 months Full year

First

10 months

First 10

months only

World 1 833.3 1 594.4 - 13.0 1 297.2 1 637.1 1 081.1 - 16.7

Developed economies 1 247.6 959.8 - 23.1 1 147.4 1 454.1 896.2 - 21.9

Europe 848.5 693.0 - 18.3 633.3 825.0 475.6 - 24.9

United States 232.8 175.6 - 24.6 313.7 379.4 328.4 4.7

Japan 22.5 15.0 - 33.6 20.9 21.4 14.9 - 28.6

Developing economies 499.7 540.9 8.2 124.2 152.9 161.4 29.9

Arica 53.0 62.3 17.5 7.9 10.2 25.8 226.6

Latin Americaand the Caribbean 126.3 147.5 16.8 25.9 30.7 26.0 0.6

Asia and Oceania 320.5 331.1 3.3 90.4 112.0 109.5 21.1

Western Asia 71.5 57.6 - 19.5 23.7 30.3 30.6 28.8

South, East andSouth-East Asia 247.8 272.5 9.9 66.7 81.5 78.6 17.9

Economies in transition 85.9 93.7 9.0 25.7 30.1 23.6 - 8.1

Source: UNCTAD.

Note: World FDI inows are projected on the basis o 103 economies or which data are available or part o 2008, as o 10 November 2008. Data are

estimated by annualizing their available data, in most cases the rst two quarters o 2008.

a Preliminary estimates.




ment in investment projects.15Te Chinese authorities are giving priority to projects in theinterior o the country and those that promise a high degree o technology transer.

While the services sector still accounts or the largest share o global FDIows, there has been a signicant increase in FDI ows to the primary sector, mainly inthe extractive industries. Te share o manuacturing in global FDI ows has continued

to decline. Te share o NC investments in extractive industries has more than doubledsince the 1990s. Tese industries account or a signicant share o total FDI inows insome economies, and or the bulk o inward FDI in a number o low-income mineral-rich countries. One o the challenges acing commodity-exporting countries, in particularthose in Arica, is how to channel revenues obtained rom commodity exports towards theareas o education, human resource development and inrastructure development, whichare essential or productivity improvements and or industrialization in general, as well asor attracting FDI to the manuacturing sector.16Te current reversal in commodity prices

will magniy these challenges.

International nancial cooperation

Ocial development assistance

Tere has been a signicant turnaround since the United Nations International Coner-ence on Financing or Development held in Monterrey, Mexico, rom 18-22 March 2002,

when total net ODA was $57.3 billion, or $54 billion excluding debt-relie grants. Te im-pulse or a revival in assistance rom OECD countries provided by the Monterrey Consen-sus has weakened signicantly in recent years. Net ODA has in act declined in absoluteterms rom $107.1 billion in 2005, to $104.4 billion in 2006, and urther to $103.7 billionin 2007, representing a all o 8.4 per cent in real terms. Excluding debt-relie grants, ODA to developing countries totalled $95 billion in 2007, compared with $82 billion in 2005(gure III.4).

As a share o gross national income (GNI) o the member countries o the De-velopment Assistance Committee (DAC) o the OECD, ODA remained unchanged com-pared with 2006, at 0.25 per cent; this share is only slightly higher than the pre-Monterrey share o 0.23 per cent, but is well below the 0.33 per cent level o the early 1990s, and wellshort o the intermediate target o 0.35 per cent set or 2010, to which DAC members havecommitted themselves.17

Only ve countries—Denmark, Luxembourg, the Netherlands, Norway andSweden—have met the United Nations target o 0.7 per cent o GNI, reafrmed throughthe Monterrey Consensus. ODA provided by the Group o Seven (G7) countries, in con-trast, averages no more than 0.23 per cent o their combined GNI, with the United Statesand Japan (despite being the largest donors in absolute amounts) providing the least ODA in relative terms (0.16 per cent and 0.17 per cent o GNI, respectively).

Japan’s share in global ODA had declined rom 14 per cent in 2002 to just 8per cent by 2007, and the United States share is projected to all rom the current 23.5 per

15 World Bank, Global Development Finance 2008: The Role o International Banking (Washington, D.C.:

The World Bank, June 2008).

16 United Nations Conerence on Trade and Development, World Investment Directory, Volume X:

Arica 2008 (United Nations publication, Sales No. E.08.II.D.3).

17 See United Nations, MDG Gap Task Force Report 2008, Delivering on the Global Partnership or

Achieving the Millennium Development Goals (United Nations publication, Sales No. E.08.I.17).

Manuacturing represents

a declining share in

global FDI ows

Net ODA has declined in

absolute terms since 2005

Only ve countries have

met the United Nationstarget or ODA




cent to below 19 per cent by 2010, compared with a orecast increase o the EU share to64 per cent, up rom 55.6 per cent in 2007. ODA by the EU-15 countries, which accountsor 60 per cent o the total, currently amounts to 0.40 per cent o their GNI, with a com-mitment to reach the 0.7 per cent target by 2015.

Landlocked and small island developing countries, whose special needs wererecognized in the Monterrey Consensus, received about $2.5 billion and $12 billion o ODA

in 2007, respectively. Te 49 least developed countries (LDCs) continue to receive about onethird o all aid. Although their share o ODA, excluding debt relie, had increased rom a low o 15 per cent in 1998 to 38.5 per cent by 2006, the total DAC aid o $29.4 billion to thesecountries constitutes only 0.09 per cent o their GNI, ar short o the target o 0.15-0.20 percent o GNI to be achieved by 2010 in accordance with the Brussels Programme o Actionor the Least Developed Countries or the Decade 2001-2010. By 2006, only 8 countries hadmet this target: Belgium, Denmark, Ireland, Luxembourg, the Netherlands, Norway, Swe-den and the United Kingdom o Great Britain and Northern Ireland. Achieving the target o 0.16 per cent o GNI, on average, or DAC donors would require increasing the aid volumeto LDCs to about $62 billion per annum, that is to say, double the current level.

Te rate o growth o ODA will have to increase markedly i the internationalcommunity is to meet the targets that they set or nancing the internationally agreeddevelopment goals, including the Millennium Development Goals (MDGs). I the com-mitments at the 2002 Monterrey Conerence and the 2005 Group o Eight (G8) Summit atGleneagles are taken as the benchmark, ODA (at constant prices) rom major donors wouldhave increased by more than 60 per cent over the six years rom 2004 to 2010. However,halway through this period, ODA rom OECD donors has risen by only 15 per cent.

In order to meet the overall target o $130 billion by 2010 conrmed at the2005 Gleneagles Summit, net ODA needs to increase by nearly $13 billion in constant

The least developed

countries receive about

one third o all aid

ODA needs to be stepped

up to meet agreed targets

Figure III.4DAC members’ net ODA, 1990-2007, and DAC secretariat simulations to 2010

Billions of dollars Percentage of donor GNI

0

15

30

45

60

75

90

105

120

135

150

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

ODA as percentage

of GNI (right scale)

Total ODA

(billions of dollars)

0.33

0.22

0.33

0.28

0.35Increase required to

meet current 2010 targets

Source: OECD/DAC databaseand United Nations, MDG Gap

Task Force Report 2008.

Note: Figures are in 2004

prices. Data or 2008-2010

are based on DAC Secretariat

simulations.




2004 dollars, or about $18 billion per year between 2008 and 2010 at July 2008 exchangerates.18 Aid to sub-Saharan Arica has increased at a aster rate, but still not ast enough todouble to the $50 billion in real terms by 2010 pledged at Gleneagles. Net ODA to Aricaneeds to increase by over $6 billion per year in 2005 prices to reach the targeted increaseo at least $25 billion a year by 2010. So ar, only about $4 billion o this has been pro-

grammed into donors’ spending plans.Some developing countries have become important sources o aid or other de-veloping countries in recent years. Development cooperation provided by such donors hasgrown strongly, even though the total volume is still small. Disbursements by non-DACdonors have reached an estimated $8.5 billion, or 7.5 per cent o total aid ows in 2006, o

which about $7.1 billion came rom other developing countries. Recent studies, however,put the latter’s disbursements between $9.2 billion and $11.8 billion, which means theirshare in total aid ows would have increased to between 7.6 and 9.6 per cent as o 2006.

Currently, the largest donors rom the South, each providing at least $1 billionper year, are China, India, Saudi Arabia and Venezuela (Bolivarian Republic o), and i recent large pledges materialize, the total ows might grow to about $15 billion by 2010.Saudi Arabia and the Bolivarian Republic o Venezuela have achieved the target o 0.7

per cent, and the average grant element o all loan commitments by China, Brazil andIndia was about the same as other countries, one third in 2005-2006. In addition, somenon-DAC countries have made substantial progress in 2007, although the increases havecome rom a relatively small base; or instance, Lithuania raised its aid by 74 per cent, theRepublic o Korea by 43 per cent, and Latvia by 23 per cent.

Overall, most donors are not on track to meet their commitments to scale upaid unless they make unprecedented increases in their aid budgets. Tis implies an averageannual growth rate o ODA o over 14 per cent in real terms over the remaining part o the decade, compared with the 4.6 per cent observed since the 2002 Monterrey Coner-ence. ODA to sub-Saharan Arica will have to increase by an average annual rate o 18per cent, compared with 9 per cent in 2002-2006, i donors are to honour their pledgesto Arica. Tese pledges were reconrmed at the Follow-up International Conerence on

Financing or Development to Review the Implementation o the Monterrey Consensus,held in Doha, Qatar, rom 29 November to 2 December 2008, where donors promised tohonour their commitments and emphasized that the nancial crisis should not stand inthe way o their doing so. A urther challenge or international development cooperationis the additional resources required to meet the costs o dealing with climate change andimproving energy and ood security (see box II.1 or estimated investment requirementsto deal with the ood crisis; or innovative sources o nancing, including those needed toaddress climate change, see below).

Aid efectiveness

Important steps towards improving the quality o aid were made by the Paris Declaration

on Aid Eectiveness in 2005 and the subsequent eorts aimed at its implementation. Te2003 Rome Declaration on Harmonization and the 2005 Paris Declaration reected acommitment by over 100 Governments and international organizations to improve thequality o aid as called or in the Monterrey Consensus. Te signatories recognized theprinciples o country ownership and acknowledged that development could not be im-posed rom above, and that aid thereore had to be aligned to national development strate-

18 Ibid.

Some developing countries

are becoming an important

source o ODA

Sharp increases in aid

budgets are needed

The Paris Declaration

marked an importantstep in improving aid

eectiveness




gies. Te Tird High Level Forum on Aid Eectiveness, which took place in Accra rom 2to 4 September 2008, adopted the Accra Agenda or Action (AAA), which made only tulprogress in realizing the Paris Declaration commitments.

A multitude o challenges exist in aligning aid to national development andensuring aid eectiveness. In the context o the conceptual acceptance o “national owner-

ship”, action on this principle would require a decoupling o development assistance romconditionality and giving countries the policy space to choose their own developmentpath. Te DAC Working Party on Aid Eectiveness and Donor Practices has set out indi-cators to monitor aid delivery and improve aid delivery mechanisms. As indicated by the2006 and 2008 surveys conducted by the DAC secretariat, progress in each o the areaso national ownership, harmonization, alignment, results and mutual accountability hasbeen slow and has allen short o expectations. In Arica, or example, the greatest progress

was made in the areas o donor coordination and the alignment o technical assistance with country programmes; planned programmable aid is expected to increase by 38 percent between 2005 and 2010. However, transaction costs associated with aid remain highand only 46 per cent o aid ows were disbursed according to schedule in 2007.

Te amount o resources reported as untied had reached 95 per cent o bilateral

aid by 2006, with some countries untying all o their a id, signalling considerable progresson the 2001 DAC agreement to untie aid to LDCs. However, a major issue is the transpar-ency o donors’ untied aid programmes. Currently, data do not cover important countries,such as the United States, or certain orms o aid, such as technical cooperation or theadministrative costs o delivering aid. Many countries striving to reach the MDG goalsdid not receive sufcient aid in spite o improved macromanagement, debt managementand increased capacity or aid ows.

Selectivity is still a dening eature o the present system o allocation o aidows, creating a situation where a ew countries have a very large share o total ows.

At the same time, donors have not been able to resolve the problems o predictability,volatility and herding. Aid surges in selected countries have led to a mistaken belie thatlow-income countries may not have the capacity to absorb aid eectively and may suer

rom Dutch disease. Tese issues would not have arisen i the aid ows had been betterdistributed among countries and i sudden surges were avoided by stretching out the in-ow over a longer time rame.

Even developing countries at more advanced stages o development have prob-lems managing a surge o ows within a short timespan. Short-term difculties should notbe interpreted as indicative o long-term absorptive capacity. Lessons can be drawn romcountries which have had aid surges involving budgetary support. Te conditions attachedto the aid inows did not al low countries to use the excess liquidity generated or produc-tive investments. Te ailure o the international nancial institutions (IFIs) to correctly gauge the implications o an expenditure ramework generating excess liquidity led tocostly sterilization policies and an ensuing build-up o domestic debt. Lack o exibility inallowing countries to al locate the inow based on their own priorities proved costly as it

reduced the scal space or development expenditure.In actual practice, the resources released or development have been smaller

than aid statistics have indicated. Te decomposition o aid-ow statistics gives a morerealistic estimate o the resources available or development. For instance, debt relie ac-counted or a substantial part o the increase in ODA in 2005-2006; this included the largedebt-relie packages or Iraq and Nigeria. otal net aid statistics also include emergency and technical assistance. In order to assess programmable resources, an emerging priority

Aligning aid to national

development goals remains

a challenge

Signicant progress has

been made on increasing

untied aid

The smoothing o aid

ows can help to avoid a

multitude o problems

Development resources are

only a part o overall aid




is the sett ing-up o an accounting ramework to correctly report the resources available ordevelopment. Te United Nations provides a platorm or working towards a multilaterally agreed concept. Te outcome document or the Doha conerence on nancing or develop-ment adopted on 2 December 2008 calls or a more universal and accountable ramework or aid accounting and requests the Secretary-General, in cooperation with OECD-DAC

and IFIs, to report on the matter to the Development Cooperation Forum o the UnitedNations Economic and Social Council.

Innovative sources o development nancing

and the new aid “architecture”

Tere has been considerable progress in implementing initiatives to nance developmentthrough innovative channels under the rubric o “innovative sources o nancing” in the2002 Monterrey Consensus. An important challenge will continue to be the building o consensus around pilot projects and, more generally, how to implement the reorm agendaor the aid architecture. Moreover, urther exploration o new sources o innovative nanc-ing is expected. Te Fourth Plenary Meeting o the Leading Group on Solidarity Levies

to Fund Development, held in Dakar on 22 and 23 April 2008, addressed the ollowingissues: the easibility o taxing currency transactions; the stemming o illicit nancial owsrom developing countries (a working group on which was established under the chair-manship o Norway); remittances; and innovative nancing mechanisms or environmen-tal protection. Senegal and the next rotating Presidency, Guinea, were given the mandateto prepare the Group’s contribution to the Doha ollow-up conerence to Monterrey. Atthe Fith Plenary Meeting o the Group, held in Conakry in October 2008, a Declarationon Innovative Financing or Development as a new mode o development aid was adoptedand presented to the Doha conerence.

In the context o the broader aid architecture, innovative sources o nancinghave thus ar raised only a relatively small amount o unds. Other potentially more signi-icant sources o innovative nancing need to be developed. For example, there is renewed

interest in a currency-transaction tax in the light o the act that such transactions can betracked in the same way that international transactions are monitored or anti-terrorismand anti-drug money-laundering purposes. Tere are other proposals or internationally coordinated taxes, such as on carbon emissions and arms purchases.

By providing resources in a stable and predictable manner, such taxationschemes would efciently complement ODA, which suers rom swings and uctuationsin its levels due to donors’ politically dependent budget considerations. Tey could alsohave the advantage o correcting certain negative externalities, in addition to providingsignicant sources o development nancing. For instance, a carbon tax could be justiedon environmental-efciency grounds. Some members o the Leading Group on Solidarity Levies to Fund Development have also expressed interest in expanding eorts to combattax evasion and capital ight under the rubric o innovative sources o nancing.

It is important to stress that innovative nancing should generate resourcescomplementary to traditional ofcial development aid, without prejudice to the manner in

which these resources are reported. It should also be part o eorts to improve the quality and efciency o existing ofcial development aid, especially with regard to predictability and stability o unding to address long-term needs, early mobilization o unds or urgentaction and tailoring aid to the repayment capacity o countries. In addition, the new und-ing sources should explicitly address market ailures, including through means o advancedmarket commitments, development investment unds and counter-cyclical acilities.

Exploring new sources o

innovative nancing or

development remains a

challenge

Complementarity is animportant characteristic o

innovative nancing




With the prolieration o new sources o money or aid, the landscape in de-velopment cooperation has changed. As mentioned above, non-DAC donors, includingthose rom the South, private oundations and philanthropic channels, are growing insignicance. It is est imated that these sources now constitute roughly one ourth o globalaid ows.

Tis recent prolieration o donors and alternative sources o development -nancing has created a new challenge or international development cooperation: to ensureadequate checks and balances or the provisioning and use o aid rom all sources. Te new arrangements have evolved without systematic coordination among donors, internationalnancial inst itutions and recipient countries. Te resultant number o donor missions ineach recipient country is burdensome, leaving little time, space or human resources orindependent policymaking. In view o these new actors and institutions, aid architecturehas become an even more complex, uncoordinated and ragmented system that lacks acentrally directed political or technical ramework.

Tere is a clear imbalance in development cooperation relations, as recipientshave very little power to inuence development cooperation guidelines. “Ownership” isclosely linked to “representation”, but recipients o aid have very little voice in the govern-

ance o aid. Te actual role o parliamentarians in the governance o aid is oten trumpedby that o civil society. Aid recipients have a limited voice in the IMF and the World Bank,both o which provide decisive access to aid. Te World Bank’s Country Policy and Insti-tutional Assessments, which have been ound to be unpredictable and subjective, play amajor role in a id allocation, while developing countries themselves have little voice in how they are being rated.

Bilateral ows dominate the composition o aid but oer no ormal mecha-nism or the voice o recipient countries to be heard, as bilateral donors are answerableonly to their legislative bodies. Te changing landscape makes reorm more urgent, andthe Doha conerence provided an ideal opportunity to review and rebalance internationaldevelopment cooperation.

External debt relie

Te Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relie Initiative (MDRI) have provided countries with an opportunity to reduce their externaldebt-service burden. Along with these major debt-relie initiatives, the shit rom bilateralODA loans to grants has signicantly reduced the debt burdens o many low-income coun-tries, particularly those that have reached the HIPC completion point and received addi-tional debt relie rom the MDRI. Te HIPC status report o March 2008 estimated thatdebt relie in all orms, including HIPC, MDRI, traditional debt relie and other “volun-tary” bilateral debt relie, would reduce debt stocks or the 33 post-decision-point countriesrom $105 billion to $9 billion, a reduction o more than 90 per cent. Te debt service-to-export ratio or all developing countries declined rom almost 12.5 per cent in 2000 to 6.6

per cent in 2006, and to about 3 per cent in 2007 (gure III.5).19 Te average debt-servicepayment relative to GDP has been halved as a result o the initiatives, alling rom 3.2 percent o GDP in 2001 to 1.5 per cent o GDP in 2007. For the HIPCs, the reduction in debtburdens has created a better environment or investment and uture growth.

Te total assistance al located to HIPCs so ar amounts to $117 billion in nomi-nal terms, including $49 billion under the MDRI, representing on average about 50 per

19 Ibid., pp. 28-29.

New sources o aid and

an increased number o

donors have emerged

without systematic

coordination

Recipients hold little power

in inuencing development

guidelines

Lower debt levels have led

to a reduction in debt-

service payments




cent o these countries’ 2007 GDP. Te total cost to creditors o HIPC Initiative debt relie or all eligible countries is estimated at $71 billion in end-2007 net present value (NPV)terms. Nearly hal o the cost represents irrevocable debt relie to the 23 post-completion-point countries. Tus ar, 33 out o 41 countries that have been ound eligible or poten-tially eligible or debt relie under the HIPC Initiative have received debt reduction.

Post-conict countries have been encouraged to make eorts to become eligi-

ble or HIPC. Tus, the Comoros, Côte d’Ivoire, Eritrea, Kyrgyzstan, Nepal, Somalia, theSudan and ogo are pre-decision-point countries, and some could receive debt relie. Teestimated cost o HIPC Initiative debt relie to these eight interim countries is estimated tobe $20 billion, most o which is attributable to three countries: Côte d ’Ivoire, Somalia andthe Sudan. Among the above-mentioned countries, the Comoros, Côte d’Ivoire and ogoare making progress towards the decision point. Tis year, Côte d’Ivoire and ogo clearedarrears to major creditors and could reach their decision points by the end o 2008.

Te principal aim o the HIPC Initiative was to release resources or develop-ment and thereby reduce poverty. Some low-income countries that received debt relie have demonstrated remarkable eorts in this regard, increasing their public expenditureson social sectors and poverty reduction programmes. In nominal terms, total poverty-reducing expenditures amounted to about $21 billion in 2007, which represents an in-crease o almost $15 billion since 2001. Poverty-reducing expenditures have increased insectors such as health, rural inrastructure and education. For the 33 post-decision-pointcountries, such expenditures have increased on average rom 6.7 per cent o GDP in 2001to 8.8 per cent o GDP in 2007.

Te success o the implementation o the HIPC Initiative requires sustainedeorts on behal o the international creditor community. Important challenges are stillto be met to ully implement the HIPC Initiative and enable the remaining 18 pre-

Some recipient countries

have shown remarkable

eorts in reducing poverty

Considerable challenges

remain in achieving the

implementation o the

HIPC Initiative

Figure III.5Debt-service payments as a proportion of export revenues, 1990-2006

Percentage

0

5

10

15

20

25

30

1990 1992 1994 1996 1998 2000 2002 2004 2006

Heavily indebted poor countries (HIPCs)



Sources: UN/DESA, based

on data rom MillenniumDevelopment Goals

Indicators, available rom

http://mdgs.un.org,

and World Bank Global

Development Finance

database.




completion-point countries to reach their completion points. Tese include ensuring ullparticipation by al l creditors and mobilizing additional resources to nance debt relie toall remaining HIPCs. Although most multilateral nancial institutions have provideddebt relie under the HIPC Initiative and the MDRI, some small multilateral institutionsstill need to be encouraged to part icipate in the HIPC Initiative.

While Paris Club members have made strong eorts in their debt-relie com-mitments, the participation o non-Paris Club ofcial creditors has been low, deliveringonly about 40 per cent o their expected share in debt-relie operations or HIPCs. So ar,only 8 non-Paris Club creditors have delivered ull relie and 22 creditors partia l relie, but21 creditors have not yet delivered at all on HIPC Initiative debt relie. Te participationo commercial creditors also remains low. Tey are estimated to have provided 33 per cento their commitments in 2008, which is better than only 5 per cent the preceding year.

Another issue related to the implementation o the HIPC Initiative concerns the litigationactions by commercial creditors against low-income countries. Even though the amountsinvolved are small in relation to total debt, the costs o litigation or resolution are signi-cant in relation to debtor countries’ export earnings and public budgets.

Reducing debt to a sustainable level remains an issue or many HIPCs. Tese

countries are ar rom achieving debt sustainability. Risks o debt distress remain highamong them, including those that have received ull debt relie. Only 10 out o the 23post-completion-point HIPCs could be classied as being at “low risk” o debt distress,highlighting the act that many countries continue to be vulnerable. Indeed, several mid-dle- and low-income countries are suering rom debt distress but are not eligible or theHIPC Initiative. Tese countries have no access to debt relie or to orderly sovereign debt

workouts, as granting debt relie is conditional and only countries with unsustainablelevels o debt are eligible.

Rehabilitating the global nancial system

As analysed in chapter I, policymakers in developed countries ell behind the curve in

dealing with the emerging global nancial crisis, having underestimated the depth andbreadth o the problems in nancial markets and their link to the global imbalances.During October 2008, piecemeal approaches were shed and policymakers in developedcountries moved to manage the crisis in a more coordinated ashion. However, the pathtowards swit and improved policy coordination is hampered by the lack o institutional-ized mechanisms to this end and by deciencies in global governance structures. During2008, urther discussions have taken place on how to improve the regulation and super-vision o a globalized nancial system; how to improve the governance structure o theinternational nancial institutions; how to strengthen the oundations o surveillance andpolicy cooperation on key systemic issues; and how to address the role o ofcial nancingo emerging market and developing countries. Tese issues remain ar rom being resolved,

but the current crisis has increased the urgency o making urther progress in this regard.

Regulating the global nancial system

While tackling the nancial allout is an immediate priority, measures to address theunderlying causes o the disarray need to be taken. Te nal report o the Financial Stabil-ity Forum (FSF) on this issue was presented in April 2008 and was endorsed by the G7

Risks o debt distress

remains high among HIPCs

A lack o institutionalized

mechanisms and decientglobal governance

structures hamper better

policy coordination

Addressing the crisis requires

more undamental changes to

the nancial system




Finance Ministers and the International Monetary and Financial Committee (IMFC).20

Te guiding objectives o the report are to recreate a nancial system that operates withless debt and more capital, that is more transparent, that is immune to the kind o mis-aligned incentives at the root o the current crisis, and that boasts stronger prudential andregulatory oversight. Tere are policy recommendations on key areas, including prudential

oversight o capital, liquidity and risk management; transparency, disclosure and valuationpolicies; the role and uses o credit ratings; and the authorities’ responsiveness to risks andtheir arrangements or dealing with stress in the nancial system.

Te G7 accepted a number o FSF recommendations that had been identied asimmediate priorities or implementation by the end o 2008. Tese include prompt and ro-bust risk disclosure; improvement o the accounting, disclosure and valuation standards oro-balance sheet entities; the strengthening o risk management practices, including liquid-ity risk management; and the revision o the code o conduct or credit-rating agencies.

Te FSF also called or additional measures relating to international interac-tion and consistency o national emergency arrangements and responses to address thecurrent nancial crisis; the scope o nancial regulation, with a special emphasis on un-regulated institutions, instruments and markets; and better integration o macroeconomic

oversight and prudential supervision.Te FSF-inspired measures to strengthen the global nancial system, which

are basically conned to improved disclosure, prudential controls and risk management,are now generally seen as not going ar enough to address the inherent pro-cyclicality o the nancial system, which tends to oster asset price bubbles. Regardless o the specicsource o disturbance, almost all episodes o systemic nancial distress have at their rootvery rapid credit growth, excessive risk-taking and overextension o balance sheets in goodtimes, all masked by the strength o the real economy and extraordinary increases in assetprices.

As also argued in chapter I, recent developments have highlighted the im-portance o expanding the macroprudential tools o current regulatory rameworks. Teapproach would be to encourage the build-up o sufciently high buers (capital require-

ments, or example) in good times, when the market price o risk alls and imbalancesmight develop, in order both to restrain expansion during upswings and to provide agreater cushion against losses when disruptions occur. While nancial leverage is a key ingredient o the private risk-taking necessary or investment and economic growth, it alsotends to ampliy both booms and downturns. By developing policy instruments to loweror raise capital requirements depending on the specic situation, authorities would be bet-ter equipped to utilize market incentives to reduce systemic risk.

Te FSF report did not address pro-cyclicality per se because o the urgency o making concrete recommendations in other areas. However, the Forum has alludedto some aspects o pro-cyclicality rom a longer-term perspective, including the capitalregime, loan-loss provisioning practices, compensation arrangements, and the interactions

20 See Financial Stability Forum, “Report o the Financial Stability Forum on Enhancing Market and

Institutional Resilience”, 7 April 2008, available rom http://www.sorum.org/publications/r_0804.

pd. Based on the original proposals, the Financial Stability Forum submitted a ollow-up report

on 10 October 2008 which reviews the implementation o the recommendations set orth by

the April report in ve areas: (a) strengthened prudential oversight o capital, liquidity and risk

management; (b) enhanced transparency and valuation; (c) changes in the role and uses o credit

ratings; (d) strengthened responsiveness o authorities to risks; and (e) robust arrangements or

dealing with stress in the nancial system.

The G7 accepted a number

o FSF recommendations

FSF proposals are not going

ar enough to deal with

the pro-cyclicality o the

nancial system

The build-up o buers in

good times can provide a

cushion in a downturn




between valuation and leverage.21 o this end, assessing the potential pro-cyclical impacto the New Basel Capital Accord (Basel II) is considered one o the most important priori-ties or supervisory authorities and central banks.

Te crisis has also highlighted the importance o greater international coop-eration in nancial sector monitoring and regulation, which are still basically national

in nature. Tere is growing tension between global nancial integration and decits ininternational governance inconsistent with current global realities. Tere is a need to movetowards an international macroprudential and regulatory architecture that is more inte-grated in its approach, has coordinated standards and structures, and that involves greaterclarity o respective responsibilities and objectives as well as closer and more eectivecross-border coordination and collaboration among supervisors, regulators, central banksand scal authorities. Tis global system o nancial regulation, based on credible interna-tional rules, may require an international body (or bodies, such as the colleges o supervi-sors or systemically important nancial institutions, as proposed by the FSF) that wouldhave an explicit mandate or nancial oversight and monitoring, as well as early-warningcapabilities and the orce and authority to ensure that those warnings are acted upon.

It is equally important to develop ex ante agreed and consistent principles

and practical guidelines or cross-border cooperation and contingency planning or crisismanagement. Indeed, much o the preparatory work to acilitate management o the inter-national nancial crisis has not yet been carried out. 22 Nevertheless, national authoritiesnow better understand the need to have pre-existing plans or dealing with strains involv-ing cross-border nancial institutions, including large unding needs. Another importantissue is clariying the arrangements or coordination o deposit insurance or cross-borderinstitutions.

Te idea o a series o global summits on the reorm o the international -nancial system—dealing with basic principles, regulations and institutions—has gainedcurrency. On 15 November 2008, the United States convened the rst such summit in

Washington, D.C. in the orm o the Group o wenty (G20), plus the United Nations,the IMF and the World Bank. At this summit, there was still conict, even among major

economic powers, over the extent to which international nancial regulation should bereormed, and the outgoing United States Administration could not accede in this re-gard. However, a work programme, which includes accounting standards, supervision andregulation and inormation exchange, was set out or consideration in a ollow-up meetingto be held in April beore the Spring 2009 meetings o the Bretton Woods institutions.

At the same time, the President o the United Nations General Assembly created a Com-mission o Experts on Reorms o the International Monetary and Financial System, ledby Proessor Joseph Stiglitz o Columbia University, to report on proposals to recong-ure mechanisms and inst itutions o global economic governance based on lessons learnedrom the nancial crisis. Te outcome document o the 2008 Doha conerence, whichenjoys the consensus o all Member States o the United Nations, also stresses the need ora strengthened and more eective intergovernmental structure that would carry out the

21 Statement by Mario Draghi on the “Report o the Financial Stability Forum on Enhancing Market

and Institutional Resilience: Follow-up on implementation”, at the eighteenth meeting o the

International Monetary and Financial Committee o the International Monetary Fund, 11 October

2008, available rom http://www.im.org/external/am/2008/imc/statement/eng/s.pd.

22 See, or example, “International governance or the prevention and management o nancial crises”,

speech by William R. White, Economic Adviser and Head o Monetary and Economic Department

o the Bank or International Settlements, at the Bank o France International Monetary Seminar,

Paris, 10 June 2008, available rom http://www.bis.org/speeches/sp080708.htm.

Global nancial integration

has been accompanied

by a lack o international

governance

Consistent principles or

international cooperation

in crisis management need

to be agreed in advance

International consultations

on the nancial crisis have

intensied




nancing or development ollow-up and would review progress in the implementationo commitments, identiy obstacles, challenges and emerging issues and propose concreterecommendations.

Te series o substantial equity contributions to troubled nancial institutions inindustrialized economies has led to the sudden visibility o sovereign wealth unds (SWFs)

rom emerging and developing countries and to numerous calls or the regulation o theiractivities. Te IMF International Working Group (IWG) o Sovereign Wealth Funds, com-prising 25 member countries, was established in May 2008. It was set up to produce prin-ciples that properly reect the governance and investment practices o SWFs.

In October 2008, the IWG published a set o 24 principles (the Santiago Prin-ciples) designed to ensure an open international investment environment. Te purpose o the Santiago Principles is to establish a transparent and sound governance structure; toensure compliance with applicable regulatory and disclosure requirements; to ensure thatSWFs invest on the basis o economic and nancial risk and return-related considerations;and to help maintain a stable global nancial system and ree ow o capital. Te OECDhas been undertaking parallel work in drawing up a similar set o guidelines or recipientcountries. It is important that the guidelines or SWFs are no more onerous than those or

other large institutional investors and that they do not introduce an element o bias andlack o evenhandedness in nancial surveillance.

Governance reorm at the Bretton Woods institutions

Voice and voting power

During 2008, only a disappointing amount o progress was made in reorming the gov-ernance structures o the IMF and the World Bank in line with twenty-rst century eco-nomic realities. On 28 April 2008, Governors rom 180 o the 185 member countries o the IMF did, however, cast their vote on the proposed resolution on the quota and voicereorm package. O these, 175 countries, representing 93 per cent o total voting power inthe Fund, voted in avour o the package. Tree countries voted against, two abstained,and ve did not participate in the vote.23

Te package includes a second round o ad hoc quota increases o close to 10per cent based on a new quota ormula, the tripling o basic votes and the appointment o asecond Alternate Director or constituencies consisting o at least 19 members. Te resolu-tion also requested the Executive Board to recommend urther realignments o members’quota shares in the context o uture general quota reviews, beginning with the FourteenthGeneral Review o Quotas, to ensure that members’ quota shares adequately reect theirrelative position in the world economy.

Te realignment o quota and voting shares will lead to a net increase o 2.7percentage points in the voting share o emerging markets and other developing countries

as a whole. Tis very modest increase was only made possible owing to the use o a com-pression actor; the application or several emerging market and developing countries o a weight to the purchasing power parity (PPP) GDP measure greater than that or othercountries; and, most importantly, the willingness o several advanced countries to orgopart o the quota increases to which they would have been eligible by a straight applicationo the proposed ormula.

23 See “IMF reorm secures backing by wide margin”, IMF Survey Magazine, 29 April 2008, available

rom http://www.im.org/external/pubs/t/survey/so/2008/POL042908A.htm.

Equity contributions have

increased the visibility o

sovereign wealth unds

Progress on reorming

governance o the IMF and

the World Bank has

been disappointing




Tese ad hoc adjustments suggest that the new ormula per se has not achievedthe stated goal o providing a simpler and more transparent means o reecting members’relative positions in the global economy. Indeed, without alterations, the voting shares o developing and emerging market countries would actually have declined by 1.6 percentagepoints. It is hardly rational to utilize, as an appropriate oundation or periodic reviews

over the longer run, a ormula that produces changes in shares that move arther away rom a closer alignment o the voting power with economic realities.Te reorm package recognizes the need or changes to the ormula. According

to the Executive Board, urther work is necessary on measuring trade openness; addressingthe treatment o intra-currency union ows; developing a method o capturing nancialopenness; and measuring variability to adequately capture members’ potential need orFund resources.24 Te agreed changes in members’ quota and voting shares are too modestto inuence the operation o the Fund.

Quotas and voting shares are only one aspect o IMF governance. Its legitima-cy and eectiveness depends importantly on the institutional ramework through whichmembers’ voting power is exercised. In this regard, there is a proposal to reduce the num-ber o chairs on the Executive Board rom 24 (o which 9 are currently being held by Eu-

ropeans) to 22 in 2010 and, urther, to 20 in 2012, while preserving the present number o developing country and emerging market country ones.25 A more balanced compositionand smaller-sized Board is considered important or transorming the Fund into a moreeective global institution. In September 2008, the Managing Director announced theappointment o a Committee o Eminent Persons to assess the adequacy o the Fund’s cur-rent ramework or decision-making.

Te IMF is currently running a decit as a result o the decline in demand orFund resources since the late 1990s. Tis jeopardizes its ability to play a credible role inthe international nancial architecture. Beore the ull scale o the global nancial crisisbecame generally recognized, agreement had been reached at the IMF on both expendi-ture and income measures, including an expenditure reduction in the order o 14 per cent($100 million) in real terms over the next three years. A new income model 26 that moves

away rom primarily lending-based income sources towards more predictable and sustain-able investment-based ones was part o the package. Te new income and expenditureramework is expected to cover the $400 million shortall projected in the medium term.

Te World Bank has launched its own process o voice and participation re-orm. Te rst phase o the exercise will include the creation o an additional seat orsub-Saharan Arica on the Bank’s Board o Executive Directors and the doubling o basicvotes. Te dilution o the voting power o larger developing and transition countries wil lbe mitigated through an exceptional allocation o unallocated shares. Further realignmento Bank shareholding will be taken up by the Board in a shareholder review, with the ul-timate goal o moving over time towards equitable voting power between developed anddeveloping members. At its 2008 Annual Meeting, the Development Committee asked

24 International Monetary Fund, “Report o the Managing Director to the International Monetary and

Financial Committee on Reorm o quota and voice in the International Monetary Fund”, 7 April

2008, p. 3, available rom http://www.im.org/external/np/pp/eng/2008/040708.pd.

25 Statement by Henry M. Paulson, Jr., Secretary o the Treasury o the United States o America, at the

eighteenth meeting o the International Monetary and Financial Committee o the International

Monetary Fund, 11 October 2008, available rom http://www.im.org/external/am/2008/imc/

statement/eng/usa.pd.

26 See “IMF Board o Governors approves key element o IMF’s new income model”, International

Monetary Fund press release No. 08/101, 6 May 2008, available rom http://ww w.im.org/external/

np/sec/pr/2008/pr08101.htm.

The agreed changes are

too modest to achieve

signicant change

The institutional ramework

determines the legitimacy

and eectiveness

o governance

The current IMF decit

prevents it rom playing

a credible role in the

international nancial

architecture

Institutional reorms at the

World Bank continue




the Board to develop proposals by the 2010 Spring Meeting, and no later than the 2010 Annual Meeting, with a view to reaching consensus on realignment at the subsequentmeeting in 2011.27

Multilateral surveillance

As regards its assigned responsibility or multilateral surveillance, there remains a strongperception that the Fund has been sidelined in the handling o the present crisis. Te IMFreacted to events as they occurred, endorsing the actions taken by major developed coun-tries. Since it is indisputable that the global nancial crisis requires global solutions, the

world economy now more than ever needs a credible IMF with a governance structure thatis more representative o developing country interests, and one which can exercise strongpolicy leadership.

Te major thrust o the ongoing reorm o IMF surveillance mechanisms, which has assumed greater urgency in the light o the crisis, is to strengthen the analysiso macronancial linkages, integrating multilateral perspectives in bilateral surveillance,and enhancing the work on nancial markets. It is recognized that the Fund will need to

develop new and better analytical instruments to enhance its ability to detect emergingrisks, including the extension o the vulnerability exercise to advanced countries, in orderto improve the understanding o transmission mechanisms both within global nancialmarkets and between nancial markets and the real economy.

Since the 1980s, the IMF has mainly been ocused on problems in emerg-ing markets and developing countries, devoting insufcient attention to major nancialcentres and vulnerabilities in global nancial markets. Te ongoing nancial crisis under-scores the need or the Fund to maintain a sharp ocus on risks in the major developedcountries, especially the reserve currency-issuing countries, and their potential spillovereects. Consequently, much work still needs to be done to improve surveillance over themature nancial markets and advanced economies. Tis will be essential or ensuring thata reormed IMF remains relevant and properly discharges its mandate in promoting global

economic and nancial stability.One o the most important areas o the Fund’s work is surveillance over the

exchange-rate policies o its members. In June 2007, the Executive Board approved anupdating o the 1977 surveillance decision.28 Te update puts exchange-rate assessment atthe centre o IMF bilateral surveillance, while external stability becomes the overarchingprinciple o the surveillance ramework.

Te 2007 decision aims at providing a coherent ramework within which ex-change-rate issues can be assessed in the overall context o external stability. However, anover-reliance on quantitative models may divert attention away rom a meaningul analysis o external and internal stability as well as rom consideration o economic policy as a whole.

Te assessment o a member’s external stability should not be restricted toexchange-rate developments. Te Fund’s analysis should remain comprehensive, taking

into account the overall macroeconomic situation, with emphasis on the consistency and

27 Communiqué o the Development Committee, the Joint Ministerial Committee o the Board o

Governors o the Bank and the Fund on the transer o real resources to developing countries,

Washington, D.C., 12 October 2008, available rom http://siteresources.worldbank.org/

DEVCOMMINT/NewsAndEvents/21937474/FinalCommunique101208.pd.

28 See, “IMF Executive board adopts new decision on bilateral surveillance over members’ policies”,

International Monetary Fund, Public Inormation Notice (PIN), No. 07/69, 21 June 2007, available

rom http://ww w.im.org/external/np/sec/pn/2007/pn0769.htm.

The IMF has been sidelined

in handling the present

crisis

New and better analytical

instruments are needed to

detect emerging risks

Surveillance o mature

nancial markets needs

to be improved

While exchange-rate

assessment lies at

the centre o bilateral

surveillance …

… there remains a need or

a comprehensive approach




sustainability o the overall policy mix. Te surveillance should be ocused on the relevantchallenges in individual countries and should avoid exchange-rate issues’ crowding out at-tention to other important elements which determine macroeconomic stability in speciccontexts. In this regard, it has been argued that more needs to be done in this eld toensure eective and evenhanded implementation o the decision.29

It is also considered important that surveillance over exchange-rate policiesstrike the right balance between candor and condentiality o advice. It is essential thatthe Fund remain cautious and nuanced in presenting its exchange-rate assessments in view o the large margin o error and market impact.

In addition to the new surveillance decision, the IMF Executive Board reachedagreement on a “Statement o Surveillance Priorities” in the context o the 2008 riennialSurveillance Review (SR). Te our key policy objectives identied in the Statement are:to resolve nancial-market distress; to strengthen the global nancial system; to adjust tosharp changes in commodity prices; and to promote the orderly reduction o global imbal-ances. Te undamental goal o this eort should be to strengthen the spirit o cooperationby reaching a consensus among all members on the role o surveillance in assisting govern-ments in dealing with the challenges o the integrated global economy.

Liquidity provisioning both during and or the prevention o crises

Amidst the current nancial market turmoil, the need or providing ofcial liquidity hasonce again become the primary ocus o Governments around the world. In its turn, theIMF has activated its emergency procedures—a mechanism to speed up lending in a cri-sis. As o mid-October 2008, several countries (Hungary, Iceland, Pakistan and Ukraine)had asked the IMF or nancial assistance. According to the Managing Director o theFund, the conditions o the loans will be ewer and they will be more targeted than in thepast.30 While the IMF has more than $200 billion worth o unds available or loans andcan raise more money, i necessary, by tapping agreements to borrow rom several membercountries, the expected volume o the rescue packages could exhaust IMF resources given

the current state o nancial markets.In addition to the nancial crisis, the international community has had to deal

with the ood crisis. At its Spring 2008 meeting, the Development Committee requestedthe Fund and the Bank to be ready to provide timely policy and nancial support to vul-nerable countries dealing with negative shocks, including those rom ood prices.31 As o October 2008, 11 countries had received about $200 million in additional assistance underexisting lending programmes supported by the Poverty Reduction and Growth Facility (PRGF). Five new PRGF arrangements or about $274 million to help in part with com-modity-price shocks were also approved. Te IMF Executive Board also approved changesto the Exogenous Shock Facility (ESF) to make it more useul to low-income members. Techanges are aimed at enabling the Fund to provide more rapid and eective assistance in

29 See, or instance, statement by Stean Ingves, Governor o Sveriges Riksbank, at the eighteenth

meeting o the International Monetary and Financial Committee o the International MonetaryFund, 11 October 2008, available rom http://www.im.org/external/am/2008/imc/statement/

eng/swe.pd.

30 “IMF in talks on loans to countries hit by nancial crisis”, IMF Survey Magazine, 22 October 2008,

available rom http://www.im.org/external/pubs/t/survey/so/2008/new102208a.htm.

31 Communiqué o the Development Committee, the Joint Ministerial Committee o the Boards o

Governors o the Bank and the Fund on the transer o real resources to developing countries,

Washington, D.C., 13 April 2008, available rom http://siteresources.worldbank.org/DEVCOMMINT/

NewsAndEvents/21728301/Apr_2008_DC_Communique_E.pd.

The provision o liquidity

has become a key aspect o

dealing with the crisis

Assistance is also needed to

address the ood crisis




the event o shocks, with aster disbursement based on up-ront policy commitments andstreamlined procedural requirements. However, urther revisions o the ESF are considerednecessary to increase the level o access and to streamline conditionality.32

Te World Bank announced in May 2008 that it would support internationaleorts to overcome the global ood crisis with a new $1.2 billion rapid nancing acility

to address immediate needs, including $200 million in grants targeted towards the vul-nerable in the world’s low-income countries. Te $1.2 billion unding ceiling should bereached by May 2009.33

Along with addressing immediate member needs, the Fund has launched areview o its lending role with a view to reaching decisions beore the 2009 annual meet-ings. Te priorities o the review include nalizing a new crisis-prevention instrument,re-examining lending acilities or low-income countries and reviewing access limits andnancing terms or using Fund resources.

At least in part, the review has been a response to recent low demand or IMFacilities. Te decline in demand or IMF credit over the last decade can be attributed tosome extent to a rather long period o positive international economic conditions. At thesame time, the Fund’s lending toolkit might have ailed to keep pace with the evolution

o the global economy.Te review o the IMF’s nancial acilities should lead to a more coherent, trans-

parent and predictable ramework that will allow the institution to ulll its mandate ade-quately. Te IMF needs to move beyond its traditional stance o oering rigid instruments,

with low access levels in comparison to countries’ needs and with burdensome condition-alities. Te reorm should also aim at simpliying and streamlining the lending ramework in order to provide clear signals to the markets, reduce its complexity and strengthen itseectiveness, while also enhancing the exibility and adequacy o IMF nancing.

Te onset o the ood crisis reignited interest in mechanisms to protect develop-ing countries, particularly low-income countries, rom external economic shocks. Existingcompensatory acilities have high levels o conditionality and do not provide sufcient re-sources relative to the shock, thus limiting their eectiveness or events beyond the control

o aected countries. Countries have responded to shocks either by non-concessionary bor-rowing or by tightening scal and monetary policy, thereby undermining their own reormprocesses in order to avoid the onerous conditionalities associated with existing acilities.

Over the past decade, developing and emerging economies have made sig-nicant progress in consolidating scal balances and improving macroeconomic policy rameworks. Many o them have also built buers against external shocks in the orm o signicant reserve accumulation. However, the recent nancial market developments havedemonstrated that no country is immune to crisis and, hence, there is a strong need ora lender o last resort. In the ace o an exogenous and sudden stop in external unding,emerging market and developing country domestic central banks are unable to inject suf-cient liquidity in the orm o domestic currency, since this will not only be inationary butcan a lso cause the domestic currency to depreciate, the domestic interest rates to rise con-

siderably, or both. Tere is also no guarantee that, during a major capital reversal or globalliquidity crunch, domestic central banks will have sufcient reserves to provide emergency

32 Communiqué o the Intergovernmental Group o Twenty-Four on international monetary aairs

and development, 10 October 2008, available rom http://www.g24.org/10-08ENG.pd.

33 “Update on key issues and World Bank Group activities”, statement on behal o the World Bank

Group, at the eighteenth meeting o the International Monetary and Financial Committee o the

International Monetary Fund, 11 October 2008, available rom http://www.im.org/External/

AM/2008/imc/statement/eng/wb.pd.

The IMF has launched a

review o its lending role

The ood crisis has led

to increased interest in

mechanisms to protect


rom external shocks

The recent crisis has

highlighted the need or

a lender o last resort




liquidity assistance in oreign exchange. Indeed, the current crisis has demonstrated how quickly a cushion in the orm o oreign-exchange reserves could evaporate.

For these countries, the IMF, along with regional reserve-pooling arrange-ments and swap agreements with developed country central banks, could potentially play the role o international lender o last resort. Since the late 1990s, due to unusually benign

global conditions, demand or IMF lending has almost evaporated, while many borrowershave made early repayments. However, it would be unrealistic to suggest that the need oran international lender will never resurace again. Te Fund should stand ready to helpits emerging market and developing country members cope with liquidity problems in anenvironment o large and volatile capital ows. o this end, both appropriate acilities andamounts o nancing relevant to members’ needs are required.

In this regard, there have been proposals to increase normal access limits sig-nicantly above the current 300 per cent o quotas. Over the past 10 years, access limits—either measured as a share o GDP, trade or capital ows—have declined or emergingmarket and developing countries. Tis has led to a more or less permanent need to provideexceptional access, at exceptional nancial and political costs, or countries experiencingcapital reversals. Despite the quota and voice reorm package, the limits or non-excep-

tional access will likely continue to shrink urther in comparison to members’ potentialneeds. Accordingly, there is a view that quotas are not an appropriate metric on which tobase access to the Fund’s resources and that alternative ways could be explored.

In addition to increased normal access, there have been suggestions or ex-amining the possibility o providing the IMF with mechanisms or the rapid granting o short-term or very short-term loans, probably with the participation o reserve currency-country central banks, to member countries aected by sudden international liquidity crunches. When systemic nancial crisis occurs, speed is critical or the restoration o condence in the nancial system. Te aster the access to unds, the smaller the amounto money needed. Te creation within the Fund o instruments or quick provisioning o liquidity, similar to those used by central banks o advanced economies to cope with thecurrent turbulence, may be worth studying. Tis, together with much higher normal ac-

cess, could be the best response to the current crisis.On 28 October 2008, the IMF Executive Board approved the Short-erm Li-

quidity Facility (SLF).34 Te new acility comes with no conditions once a loan has been ap-proved, and oers large upront nancing to help countries restore condence and combatnancial contagion. o be eligible, countries should have a good track record o sound poli-cies borne out by the most recent regular country assessment o the IMF. Disbursementso IMF resources can be as much as 500 per cent o quota, with a three-month maturity.Eligible countries are allowed to draw up to three times during a 12-month period.

As in the case o national central banks, an international lender must deal withthe problem o moral hazard. Tere is almost a consensus that the best way to limit moralhazard is to develop a well-unctioning prudential, regulatory and supervisory system.

At the international level, moral hazard concerns could be addressed through existing

mechanisms: the Financial Sector Assessment Program (FSAP); the preparation o Reportson the Observance o Standards and Codes (ROSCs); and the publication o FinancialSoundness Indicators (FSIs). Tis surveillance, i perormed diligently, should enhance theeectiveness o central bank-like emergency liquidity provisioning by the Fund.

34 See “IMF to launch new acility or emerging markets hit by nancial crisis”, IMF Survey Magazine, 29

October 2008, available rom http://www.im.org/external/pubs/t/survey/so/2008/POL102908A.

htm.

There have been proposals

to increase normal

access limits …

… but the design o

instruments or quick

liquidity provision also

needs to be considered

The IMF Executive Board

approved the Short-Term

Liquidity Facility

Well-unctioning regulatory

systems are the best way to

deal with moral hazard



89

Chapter IV

Regional developmentsand outlook

Developed market economies

Economic activity plummeted precipitously in the developed country region over thecourse o 2008, with many o the major economies now technically in recession.1 Con-cerns o policymakers over inationary pressures in the summer o 2008, resulting romthe surging commodity prices and possible second-round eects via increasing wage pres-sures, have shited quite dramatically to concerns over real activity and the heighteningrisks o a protracted recessionary period.

Slumping housing markets that led to downturns in consumer spending and,more importantly, that exposed dangerous weaknesses in banking systems causing severeproblems in credit markets have been a major drag on activity since autumn 2007. Butthe situation entered a more dangerous phase in September 2008, with risk aversion ris-ing dramatically in many nancial markets leading to a ull-scale nancial crisis. Invest-ment spending is now slowing sharply in most economies in the region, and with negativegrowth impulses spreading across the globe, developed market exports, part icularly thoseto ast-growing Asian and oil-producing countries, are now slowing dramatical ly.

North America: How severe will therecession in the United States be?

Te economy o the United States o America has allen into a recession. At issue are itsdepth and duration. Te economy has been ragile since 2007, but until mid-2008, the

major drag had been a slump in the housing sector, while strong external demand and asizeable scal stimulus package had kept the economy growing at a mild pace. Te situ-ation deteriorated signicantly in the second hal o 2008 as the credit crisis intensieddramatically. Te severe credit crunch has turned a sector-led slowdown into a ull-scaleretrenchment o households and businesses aecting the economy at large. In response tothe nancial meltdown, the Government has drastically strengthened its policy stance,including by passing the Emergency Economic Stabilization Act (EESA), which, amongother measures, allocated $700 billion to enable the Government to recapitalize banks. 2 Eective implementation o the EESA, along with urther monetary easing, might eventu-ally stabilize nancial markets, but the package came too late to prevent the real economy rom alling into recession. In the baseline outlook, gross domestic product (GDP) growthis orecast to be -1.0 per cent in 2009, compared with an estimated, still positive, growth o

1.2 per cent or 2008 (see table A.1). Risks or a much deeper and longer recession remainhigh should all the policy measures ail to thaw the credit markets soon.

1 A technical recession is dened as two consecutive quarters o negative, quarter-on-quarter

growth.

2 See chapter I or details o the rescue plan and other unorthodox policies in use to combat the

nancial crisis.




Te housing sector, which was the trigger or the nancial crisis, has been ina slump or two years. New home sales have dropped by 60 per cent rom their peak o 2006, and existing home sales have allen by about 40 per cent. Builders continue to re-duce supply, pushing housing starts to their lowest level in more than 15 years. Althoughinventories o unsold homes have started to drop, they are still at a high level. House

prices continued to all in 2008, by about 16 per cent as measured by the Standard andPoor’s S&P/Case-Shiller Home Price Index or twenty cities. In the outlook or 2009, thetightened credit conditions will make it difcult or the housing sector to recover, and a

weakening broad economy, particularly one with rising unemployment, will continue toexert strong downward pressure on the demand or houses.

Household consumption spending is expected to decline (see gure IV.1).Households are acing massive constraints: wage and salary income is decelerating as un-employment rises, negative wealth eects are rapidly accumulating rom the sharp de-preciation in the value o equities and houses, and credit is more difcult to obtain; thisat a time when consumer debt is historically high and the savings rate low (outstandinghousehold debt as a share o disposable income was 133 per cent in 2007, while the savingsrate was 0.6 per cent). Moreover, consumer condence has plunged to its lowest level in

more than two decades.Business capital spending is also expected to all notably. Spending by busi-

nesses on machinery and equipment has in act been alling since the beginning o 2008,although corporate spending on non-residential construction has been growing. Credittightening, alling equity prices and sotening corporate prots are al l constraining busi-ness investment. Te risk o the private sector’s cutting capital spending on construction isalso high: besides the tightened nancing or commercial real estate, the demand or retailand ofce space is also diminishing as consumer spending and employment decline.

The housing sector is

continuing to weaken

Household consumption

is declining or the rst

time since 1991

Figure IV.1Quarterly growth of personal consumptionexpenditure in the United States, 1991-2008

Percentage, seasonally adjusted annual rate

-4

-2

0

2

4

6

8

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: United StatesDepartment o Commerce,

Bureau o Economic Analysis,National Economic Accounts.



91Regional developments and outlook

Te rate o unemployment is expected to rise to above 7 per cent in 2009 (seetable A.7). During 2008, non-arm payrolls declined each and every month, and thatdecline has intensied since September. Job losses had been concentrated in constructionand manuacturing, but have now spread to almost a ll sectors, including services. Unem-ployment surged to a rate o more than 6 per cent in the second hal o 2008, up rom the

low o 4.5 per cent in 2007. Moreover, the number o discouraged workers, those who areunemployed but have given up searching or a job, has also increased dramatically. Ater peaking at an annual rate o 5.6 per cent in mid-2008, headline ination

has been moderating, along with a signicant correction in energy and ood prices. Coreination has remained well above 2 per cent, which is perceived as the upper bound o thecomort zone or the Federal Reserve (Fed). However, with the sharp slowing in economicactivity, with no urther increases in commodity prices envisaged and with ination ex-pectations dropping signicantly rom late 2008, the outlook or 2009 is or core inationto drop below 2 per cent, with headline ination even lower (see table A.4).

Exports o the United States have been growing at an exceptionally strong paceover the past two years. In volume terms, exports are est imated to have increased by almost10 per cent in 2008. In contrast, the volume o imports has dropped by about 2 per cent,

reecting weak domestic demand. In the outlook, the growth o exports is expected to de-celerate notably in 2009 as global demand slows. Meanwhile, imports are expected to a llurther, as both consumption and investment ace a retrenchment. Te current-accountdecit improved during 2008, standing at about $700 billion, and is expected to narrow urther in 2009, to $540 billion, reecting continued weak import demand, as well as alower oil import bill.

On the policy ront, both monetary and scal policies have almost exclusively ocused on battling the nancial crisis, and are expected to continue to do so in 2009.

Since the eruption o the nancial crisis in late 2007, the Fed has reduced theederal unds rate, as well as the discount rate, in a dramatic manner, the ormer to a level o 1.0 per cent in October 2008. Te Fed has also adopted a ull gamut o unorthodox mon-etary measures to inject liquidity into markets in an attempt to quell the credit crunch.

Te Government has a lso adopted various scal measures, in a broad sense, intackling the crisis. Te rst scal stimulus package, which mainly included a tax cut orhouseholds and businesses, managed to keep GDP growing at a moderate rate until mid-2008, but it was clearly too small to avert a recession in the ace o an unprecedented creditcrisis o mammoth proportions. Te Government also took a number o unorthodox scalmeasures. In the outlook, another scal stimulus package is expected in 2009.

Risks o the economy alling into a much deeper and longer recession than inthe baseline orecast remain high. A sel-reinorcing cycle between the nancial meltdownand the recession in the real economy could orm a tumultuous downward spiral: thecredit reeze could lead to an additional retrenchment o consumer and business spending,ollowed by more job losses, urther deterioration in the housing market, more losses inand ailures o nancial institutions, and, in turn, more severe credit tightening.

Te Canadian economy will see a pronounced slowdown in growth rom 2.7per cent in 2007 to 0.4 per cent in 2008, beore rebounding somewhat to 0.8 per cent in2009. On the domestic side, higher inventories will cut into growth, as will the adingpositive eect o tax cuts that took eect in the rst hal o 2008. Weaker investment ow-ing to more pessimistic sentiment will generally add to the more challenging picture; scalpolicy will have only limited space in which to provide growth impulse, in view o weakerrevenue growth and political reluctance to embark upon more elaborate decit spending.

Inationary pressures are

nally starting to ease

The Fed is easing policy

dramatically

Fiscal policy has also beenbrought to bear, with

expectations o more

to come

Canada’s growth will be

dragged down by the

slowdown in the

United States




On the external side, the weak United States economy will be a major drag on activity,especially through its negative eect on exporters o manuactured products in areas suchas the automotive industry. At the same time, lower oil and commodity prices will slow the economic boom in the western provinces.

Te nancial turmoil led monetary policymakers to reduce the policy interest

rate by 200 basis points rom 4.25 per cent at the end o 2007 to the current level o 2.25per cent. Moderating ination in view o lower oil and commodity prices, as well as theslowing growth perormance combined with rising unemployment, will create increasingroom or urther interest rate cuts in 2009.

Western Europe: Sharp decelerationwith many countries now in recession

Te euro area, along with most o Western Europe, started the year on a high note, with(quarter-on-quarter) growth o 0.7 per cent in the rst quarter o 2008, a signicant re-bound rom the ourth quarter o 2007. Activity decelerated sharply thereater, however,to the point where the region is now in a technical recession. O the major economies,

Germany, Italy and the United Kingdom o Great Britain and Northern Ireland are all inrecession; Spain experienced its rst quarter o negative growth since 1993 and has expe-rienced the sharpest absolute deceleration; and France has narrowly escaped a technicalrecession, but activity is very weak. Despite this, the strong carryover rom the rst quartero the year has led to an estimated GDP growth o 1.1 per cent or the year as a whole;however, with no carryover into 2009 and no signicant rebound expected in the secondhal o that year, GDP is expected to decline by 0.7 per cent in 2009. Tis would mark therst annual decline in GDP since 1993 (see table A.1).

Higher requency data reveal the sharp drop in activity and provide a useulcomparison to previous slowdowns (see gure IV.2). Industrial production remained ro-bust in the rst quarter o the year but ell sharply thereater. Survey results show a contin-ued worsening o growth prospects into the ourth quarter. Te European Commission’seconomic sentiment indicator or the euro area is now well below its long-term average,and is below the troughs o 2001 and 1996 and nearing those o 1992 and 1993, when,i a regional aggregate o what has now become the euro area is made, growth registered1.2 and -0.7, respectively.3 Country-specic surveys paint a similar picture. Germany’s Iooverall business climate index, or example, peaked at the beginning o 2007 but has sinceseen a very sharp decline. As o November 2008, it was just above the value registered in1993, the lowest point since German reunication, while the component reecting Ger-man business expectations is now at a record low within this same timespan.4

Consumption expenditure contracted in the euro area in the rst hal o 2008,a pattern shared by a number o countries in the region. Sharply higher ination thatchoked o any improvement in real disposable income and deteriorating condence, stem-

ming rom ears surrounding uture economic activity as well as the intensiying globalnancial crisis, were the major drivers. Retail sales gures have been drit ing downwardssince the ourth quarter o 2007, and as o September stood at 1.6 per cent below the previ-ous year. Lending conditions to households have tightened, with higher bank lending rates

3 See Organization or Economic Cooperation and Development, Economic Outlook , vol. 2008/1, No.

83, June 2008.

4 See Io Institute or Economic Research, Io Business Cl imate Germany, available rom http://www.

cesio-group.de/portal/page/portal/ioHome/a-wino.

Lower ination will create

room or urther easing o

monetary policy

High requency data are

revealing the speed and

depth o the decline

Consumption

expenditure is

slowing




and tighter credit standards, and loans to households are clearly decelerating.5 Household wealth has been hit by declining equity markets and housing values, the latter havingparticular signicance in countries where house prices have experienced a sharp run-up inthe past, such as in Denmark, Ireland, Spain, the United Kingdom and, to a lesser extent,France. Current labour-market conditions remain avourable, but expectations or theoutlook have deteriorated, with employment and wage prospects diminishing. Business

surveys are a lready indicating that rms are expecting to reduce hiring. Some impetus canbe anticipated rom decelerating ination, thus yielding moderate improvement in realcompensation, but consumption expenditure is expected to be o only minimum supportover the orecast period.

Ater a strong rst quarter, investment spending has also been hit sharply,slowing external demand being a major negative impulse.6 In the early stage o the presentglobal slowdown, the impact o the deterioration in the United States had been dampenedby continuing robust demand rom East Asia and oil-producing countries, particularly the Russian Federation, but these economies have now joined the general slowdown. Or-der books have deteriorated signicantly and orward-looking surveys have plummeted.Capacity utilization, while still relatively high, is on a declining path. Balance sheets o non-nancial corporations were still reasonably sound towards the end o 2008, stemmingrom high past protability, but corporate protability is severely deteriorating and stock markets have plummeted, which could lead to dangerously worsening balance sheets in

5 See European Central Bank’s “The Euro area bank lending survey”, October 2008, available rom

http://www.ecb.int/stats/pd/blssurvey_200810.pd; and the discussion on “The results o the

2008 bank lending survey or the euro area” in the European Central Bank’s Monthly Bulletin,

November 2008, pp. 19-25, available rom http://www.ecb.int/pub/pd/mobu/mb200811en.pd.

6 Some o the good perormance in the rst quarter can be attributed to mild weather, which

boosted construction expenditure, but that reversed in the second quarter.

Investment spending is

dropping sharply

Figure IV.2Economic activity in the euro zone, 1990-2008

Percentage change, quarter over quarter

GDP growth

Economic sentiment (right axis)

Industrial production (right axis)

-0.8

-0.4

0.0

0.4

0.8

1.2

1.6

70

80

90

100

110

120

130

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008Sources: OECD, Eurostat andEuropean Commission.




2009. Te cost o external nancing has increased signicantly: corporate bond spreadshave widened and banks are reporting rising margins or loans and higher credit stan-dards. Bank lending to non-nancial corporations remains strong but has been slowingcontinuously, registering a growth o 12.1 per cent in September o 2008 versus 14.6 percent in the rst quarter o the year. Going orward, it is probable that the deterioration in

credit markets will slow borrowing urther. Investment in the housing sector remains very weak and in some countries has plummeted, and there is no expectation o any signicantrebound over the orecast horizon.

Export volumes decelerated sharply in the second quarter o 2008. Tey areestimated to grow by only 3.8 per cent in 2008 in the EU-15 and are actually expected todecline in 2009 (see table A.16). Slowing global demand, coupled with continued strongregional currencies, provides powerul headwinds. Te retreat o the euro and other re-gional currencies rom their July peak, with urther depreciation expected, provides somerelie.7 For some countries, a avourable product mix and orientation towards ast-growing

Asian and oil-producing countries, as well as strong competitiveness, provide some cush-ion, but all countries are expected to see signicant slowing in exports, and the region asa whole is expected to continue to lose market share. Import volumes are also expected to

slow in line with declining domestic demand, albeit by less than exports thereby causingnet exports to detract rom GDP growth.

Headline ination surged to its highest level in twelve years during 2008,reaching a peak o 4.0 per cent in both June and July in the euro area, but has since re-treated to an estimated 3.2 per cent in October. Most o the acceleration can be attributedto the sharp rise in oil and ood prices. Te pass-through to general prices, a major concernor policymakers, was muted, with core ination hovering just below 2 per cent since thebeginning o 2007. Wage growth has been picking up and, with productivity slowing inthe early stages o the downturn, unit labour costs have risen. But in the current negativeenvironment, wage increases are expected to be limited. Over the past ew years, the in-creasing strength o the euro has put signicant downward pressure on prices and has, tosome extent, mitigated the ull impact o the rise in oil prices. While the depreciation o

the euro in the second hal o the year will eliminate this dampening eect, the sharp allin oil prices (as well as in ood and other commodity prices), coupled with GDP alling

well below potential, is expected to lead to a urther tapering o o ination and a slow reversion towards 2 per cent. Ination expectations,8 which were running signicantly above 2 per cent in mid-2008, have since allen back.

Te labour market has been a bright spot in Europe or the last ew years, withunemployment trending down to multi-year lows, but it is now expected to deterioratesignicantly as growth alls well below potential over the entire orecast horizon. Firms areincreasingly challenged by the weaker demand outlook and tighter nancing conditions.Labour costs have also risen, but are expected to remain contained going orward. Employ-ment data are published with a signicant time lag, but they show a clear deceleration ingrowth rom the rst quarter o 2007 through the second quarter o 2008. Unemployment

data are timelier and show a gradual upward trend since the low point o 7.2 per cent orthe euro area in the rst quarter o 2008, reaching 7.5 per cent in August and September

7 On a trade-weighted basis, the euro peaked at a 40 per cent appreciation in July compared to its

low in 2000. It has since allen by more than 7 per cent rom its peak, but still remains historically

high.

8 Ination expectations are measured here as the spread between French ination-indexed and

non-indexed bonds.

Exports are succumbing to

a slump in global demand

Ination has moderated

Unemployment rates

reached multi-year lows

but will deteriorate

urther in the outlook




o 2008. o put this in perspective, unemployment is still relatively low, being well underthe previous cyclical trough o 7.8 per cent in 2000. It would be necessary to go back tothe 1980s to nd unemployment rates as low as they are currently. So ar, the constructionsector has been the hardest hit, with Denmark, Ireland, Spain, and the United Kingdommost aected, but as the downturn continues, unemployment is expected to increase in a ll

countries in the region, rising by about 1 percentage point or the region as a whole.Fiscal positions are expected to deteriorate signicantly over the orecast hori-zon. On the revenue side, slowing growth and al ling asset prices are expected to dampentax revenues. On the expenditure side, automatic stabilizers in the guise o social benetsand transers will increase signicantly. Some discretionary scal stimulus is assumed inthe outlook, but it is increasingly likely that more may be necessary, at least in those coun-tries with budgetary space, and perhaps by an even larger group. Measures to combat theintensiying global nancial crisis may well dwar these traditional policy measures. So ar,the ormer have included capital injections into nancial institutions; State-backed guar-antees or bank loans; higher levels o minimum deposit insurance; and actual bai louts o nancial rms, including a wave o partial nationalizations o banks in late September andOctober. Tese types o measures are likely to continue to be deployed.

At the beginning o 2008, while most central banks in the region were us-ing traditional policy instruments to suppress increasing inationary pressures (headlineination rates being well above declared targets), they were, at the same time, combat-ing problems in credit markets using unorthodox measures. Te European Central Bank (ECB) raised its main policy interest rate, the minimum bid rate, by 25 basis points (bps),to 4.25 per cent in July, and during the year there was urther tightening elsewhere by 75bps in Sweden and 50 bps in Norway, while the Swiss National Bank maintained the tightpolicy stance it had in 2007. Te unorthodox measures ocused on the direct injection o liquidity into the money markets, with central banks acting as both a lender o last resortand a market maker. Te ECB, or example, accepted an increasingly wide range o col-lateral and counterparties in its discount and repurchase operations, and at an increasingrange o maturities.

As global economic conditions deteriorated urther, however, policy stancesshited. Te Bank o England was the rst to react, lowering rates in February and April.Later, on 9 October, ater the nancial crisis had begun to enter a more dangerous phase inSeptember and indicators o economic activity had begun to all to levels associated with arecession, central banks changed course and joined in a coordinated rate cut o 50 bps. TeECB,9 the Bank o England, the Sveriges Riksbank and the Swiss National Bank (25 bps)all joined in the action. Te Bank o Norway also cut its rate by 50 bps later in the month.Since then, the ECB has made another 50 bps cut, bringing its rate to 3.75 per cent, whilethe Bank o England made a staggering cut o 150 bps in November. Te other centralbanks also loosened policy urther. Te cumulative change in policy rates by the end o No-vember was 150 bps or the ECB, 200 bps or the Bank o England, 100 bps or the SverigesRiksbank, 175 bps or the Swiss National Bank, and 100 bps or the Norges Bank.

In the outlook, policy is expected to loosen urther. Te ECB is assumed to cutits main policy interest rate urther during the ourth quarter o 2008 rom its current levelo 3.25 per cent to 2.75 per cent by the end o the year, and in early 2009 another 50 bps

9 The ECB also changed its operating procedure so that its main renancing operations would be

carried out through a xed-rate tender procedure with ull allotment at the interest rate on the

main renancing operation. This replaced its policy o setting a minimum bid rate or variable rate

tenders and eectively provides sufcient liquidity to satisy demand at the xed rate.

Fiscal policies are likely

to be unorthodox

Monetary policy is shitingto rapid easing




cut is assumed, with no urther action or the rest o the year. Similar policy is assumedor the other regional central banks.

In the rst hal o the year, regional currencies continued their long period o appreciation against the United States dollar and the yen—to no small degree on accounto the large and persistent global imbalances—with the euro reaching a peak o $1.60 and

¥169. Superimposed on this long-run trend, are short- to medium-term dynamics in cur-rency markets that have been driven largely by relative outlooks or growth, interest ratesand risk assessments, the latter at times generating signicant ights to saety into and out o currencies. All o these actors, both long- and short term, avoured the euro in the rst hal o 2008: growth was holding up, monetary policy was still tight and potentially tightening,and the risks stemming rom the nancial crisis were concentrated mostly in the UnitedStates. But this shited dramatically in July as the outlook or the euro area deterioratedsignicantly and it also became clear that the ECB would have to cut rates in response tothe slowdown. Tis led to a sharp decline in the euro against both the United States dollarand the yen during the summer months. In mid-September risk assessments shited urtheragainst the United States as market participants reacted to the latest proposed bailout plan,

which raised the Government’s debt burden signicantly. Tis led to a rebound o the euro,

but it was short-lived, as the economic news in Europe had deteriorated urther and thenancial turmoil that had spread across the continent at the end o September produced aserious jolt to risk perceptions. Te euro resumed its downward path reaching lows o nearly €1.25 against the dollar, while against the yen it ell to lows o nearly ¥117, as these higherrisk perceptions led to a reversal o the carry trade and a repatriation o unds.

In the outlook, the euro is expected to remain close to current levels o about$1.28 in the ourth quarter o 2008 and to depreciate urther in 2009, reaching $1.20 asinterest rate dierentials with the United States narrow urther. Similarly, the euro is as-sumed to remain at ¥126 in the ourth quarter and to reach ¥109 in 2009.

Risks to the outlook are signicant and biased towards the downside. Tekey assumption in the present outlook is that problems in nancial markets will subsideand that real activity will begin to stabilize in the second hal o 2009. Tis might be

optimistic as problems have continued to intensiy towards the end o 2008. Te longerthese problems persist, the more severely private investment will be hit. Moreover, hous-ing markets could deteriorate urther and remain in a slump or a longer period o time,dragging down overall economic activity even more in some economies in the region. Inaddition, the economies in East Asia and oil-producing countries could be hit harder thancurrently expected, which in turn would urther reduce demand or European exports.

Another major risk could come rom a collapse o the dollar which would push regionalcurrencies back to and beyond the elevated levels o the summer o 2008, pricing many exporters out o key markets.

The new European Union member States:

A divergent growth pattern in 2008, a slowdown in 2009Following several years o buoyant economic expansion in the new European Union (EU)member States, aggregate GDP growth in 2008 is expected to slow to 4.9 per cent in2008 and to decline urther to 3.1 per cent in 2009 (see gure IV.3). While a number o economies, such as Bulgaria, Poland, Romania and Slovakia, managed to sustain or evenaccelerate their growth rates in or into the 5-8 per cent range, the three Baltic economies

witnessed a sharp slowdown. Growth in Estonia and Latvia turned negative in 2008, with

Regional exchange rates

were highly volatile

during 2008

Downside risks

are worrying




urther contraction expected in 2009. Growth in the remaining countries in the region was moderate in 2008 but is also expected to slow urther in 2009, as their main drivingorce, robust domestic demand, is weakening in response to higher credit costs and ac-celerated ination. In Hungary, urther scal tightening and harder borrowing conditions

will lead to negative growth in 2009. Export growth or these economies is also expectedto decline owing to the economic slowdown by their main trading partners.

Te generally strong growth in the region over the past several years was drivenby vibrant domestic demand, underpinned by increasing real wages and the expansion o domestic credit, but it was also accompanied by a number o dangerous trends: sizeablecurrent-account decits that were oten nanced by interbank borrowing; FDI ows intomuch o the region that were nanced by lending rom parent companies, increasing theindebtedness o the private sector; a large raction o investment that was channelled intoreal estate in a number o the economies, especially the Baltic countries and Bulgaria, pro-ducing domestic housing bubbles; and, nally, a sizeable percentage o loans in the regionthat were denominated in oreign currencies.

Te tightening o global nancial markets has begun to reduce the ability o the business and banking sectors to maintain their levels o oreign borrowing. As a result,domestic credit growth has declined and banks have tightened their lending policies. Tegenerally large current-account decits have made the region especially vulnerable to thedeterioration in global credit conditions. In Hungary, the high stock o short-term privatedebt, denominated in oreign currencies, created a serious liquidity squeeze. o avoid anancial crisis, the country had to seek assistance rom the ECB, the EU and the Interna-tional Monetary Fund (IMF), which was provided quickly and in sufciently large amountsto contain the crisis and the potential or regional contagion. Although the nancial sectorso the new EU members are not signicantly exposed to United States sub-prime debt, there

Economic expansion wasoten nanced by oreign

borrowing

The region is vulnerable to

the global credit squeeze

Figure IV.3Pattern of economic growth in the new EU member States, 2004-2009

Annual percentage change in real GDP

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2004 2005 2006 2007 2008a 2009b

The Baltic Statesd

EU-12

Central Europec

Sources: United NationsEconomic Commission orEurope; Eurostat.

a Partly estimated.

b Forecasts, based on ProjectLINK baseline scenario.c Consists o the CzechRepublic, Hungary, Poland,Slovakia and Slovenia.d Consists o Estonia, Latviaand Lithuania.




is an extremely high level o oreign ownership, largely by EU-15 banks, and should theseexperience serious difculties, the nancial stability o the region would be seriously im-pacted. I the cut-o in oreign borrowing is too sharp, a true credit crunch could develop.

In 2008, domestic inationary pressures caused by continuing wage growth,sometimes in excess o productivity gains, and increases in excise taxes and regulated pric-

es were amplied by the surge in global ood and energy prices. Te impact o rising worldmarket prices or ood and oil on overall domestic ination diered across the new EUmember States on account o dierences in weights or ood prices in consumer price in-dices; dierences in the degree o competition in services and in the retail sectors, explain-ing dierent cost mark-ups; and dierences in exchange-rate regimes. Ination reacheddouble-digit levels in the Baltic States and Bulgaria, whose xed exchange-rate regimesprevented nominal appreciation rom accommodating some o the inationary pressure.Currency appreciation dampened ination in the Czech Republic, Hungary and Polandin the rst hal o 2008. By mid-2008, headline ination had peaked and had started tosubside, reecting, among other things, the drop in world oil and commodity prices.

In response to accelerating ination in the rst part o 2008, and in the light o the shared key policy goal o a return to a disinationary path, interest rates were increased

in the Czech Republic (at the beginning o the year), Hungary, Poland and Romania. Inaddition, certain measures were undertaken to constrain domestic credit, such as the in-creased credit supervision in Slovenia. But with slowing economic growth and declining

world commodity prices, policy concerns are shit ing. Monetary easing has already takenplace in the Czech Republic and in Hungary, but concerns about currency depreciationmay limit the room or a urther loosening o monetary policy.

Conditions attached to accession to the European Monetary Union remain amain ocus or macroeconomic policies in the region. Slovakia will adopt the euro in Janu-ary 2009, but no urther accessions are anticipated or several years. Te Maastricht crite-ria, especially the ination target, are proving difcult to meet. Budget decits have beenreduced towards achieving the target, but not without creating a pro-cyclical impulse to aslowing economy. In the outlook, the slowdown will make it more difcult to meet scal

targets and reduce the decit urther. However, given the limitations o using monetary policy or macroeconomic stabilization, especially under a xed exchange-rate regime, ad-ditional scal stimulus will be needed to counteract the economic slowdown.

Te employment situation in the new EU member States continued to improvein 2008; in Poland, or example, unemployment reached 9.6 per cent in mid-2008 com-pared to 19.0 per cent as recently as 2004. Nevertheless, structural problems in labourmarkets continue as labour-orce participation rates remain low in a number o these econo-mies. Te sharp economic slowdown being orecast in the Baltic States in 2009 may lead toa 1 or 2 percentage point increase in their unemployment rates, which are currently in therange o 5 to 6 per cent. In other economies, the rate o job creation has a lso slowed, and thecontinuing return o migrants rom the EU-15 back to their home countries may exert ad-ditional pressure on the labour markets. Since 2004, almost one million workers migrated

to the United Kingdom alone; approximately two thirds o these came rom Poland.External decits declined signicantly in the Baltic States in 2008, reecting

an improvement in their trade balances as weakening domestic demand led to a contrac-tion in imports. In Central Europe, however, the improvement in current-account decits

was only marginal, and in some countries the decits increased, reecting a decline inexports. In 2009, current-account decits will continue to decline in the Baltic States, but

will remain at about the same level in Central Europe.

Ination surged in response

to higher energy and

commodity prices, but is

expected to subsidein the outlook

Monetary policy

tightened in 2008

Labour markets continued

to improve, but the

worsening economic

situation will reverse

this positive trend

Current accounts decits

declined in the Baltic

States, but remain the same

in the rest o the region




In the outlook, the most serious risk aced by the region is a protracted slow-down in the EU-15; or the countries with large external decits and a high dependence onoreign borrowing, it is the possibility o a sharp reversal o capital ows.

Developed Asia and the Pacic: Japan’s economy

enters recession and will contract urther in 2009

In Japan, economic activity contracted in the second and third quarters, bringing anothermajor economy into recession. Weaker export demand owing to lower growth in interna-tional markets and negative exchange-rate eects were the primary causes. Annual growthis expected to register only 0.4 per cent in 2008 and -0.3 per cent in 2009 (see table A.1).Te negative eect o the global nancial crisis through the external account has increas-ingly outweighed the country’s only limited exposure to sub-prime loans in the UnitedStates as well as its strong capital position due to the high level o domestic savings. In thebaseline, the economy is orecast to remain in recession into the rst hal o 2009 beoreseeing a return to positive growth rates in the third quarter o 2009.

On the domestic side, slower growth in private consumption will be a major

drag on overall growth perormance. Te weaker trading environment or exporters andrising input costs, notably in the energy sector, exert increasing pressure on corporateprots, which will translate into soter labour demand and wage growth. In parallel, thecontinued relatively high consumer-price ination due to higher commodity prices willcut into consumers’ purchasing power, urther eroding the potential impulse rom privateconsumption or overall growth.

Te room or scal stimulus seems limited in the light o the country’s level o public indebtedness. Japan’s public debt ratio has surged to become the highest in the indus-trialized world since the extensive scal support measures during the recession in the 1990s(see gure IV.4). Te Government’s looser scal policy stance in the orm o two recentstimulus packages to support economic growth will be only temporary. In the medium term,the outlook or public nances remains bleak, as the option o higher income and consump-tion taxes remains on the table, holding signicant downside risk or private consumption.

Business investment has shown a more moderate expansion, especially in view o the weaker external trading environment, but momentum will pick up in the secondhal o 2009 as rms will aim to ensure their competitiveness through technological up-grades in their production processes. Similarly, private residential investment wil l supportgrowth as the slowing eect o regulatory changes ade.

On the external side, exports are suering rom the slowdown in the UnitedStates, Japan’s biggest export market, as well as a stronger yen. Demand rom emergingmarkets, especially China, has so ar been a strong counterweight to slower export demandrom developed countries, but the negative impact o the global crisis on economic activity in emerging markets wil l put urther pressure on Japan’s export perormance.

Consumer prices are being pushed higher by the increase in energy and com-modity prices. However, ination will moderate along with the slowdown o the globaleconomy, lower commodity prices and the appreciation o the yen. In 2008, the inationrate is estimated at 1.6 per cent and is expected to decelerate to 1.1 per cent in 2009 (seetable A.4).

In view o the weakening growth picture, the Bank o Japan cut its policy in-terest rate rom 0.5 per cent to 0.3 per cent in October. Rates are assumed to stay at theircurrent levels through 2009.

Consumption will

be weak …

… while the potential or

scal stimulus remains

limited

Investment remains a

bright spot in the outlook

Weaker export demand will

drag down growth

Ination will moderate

Monetary policy remains

on hold




Ater depreciating against the dollar or much o 2008, the deterioration o conditions in global nancial markets has led to increased global demand or yen-denomi-nated liquid assets and a substantial appreciation o the yen. Tis trend is expected to con-tinue in view o economic weakness and uncertainty in the United States, looser monetary policy in other major economies and increased risk aversion in the wake o the turmoilin nancial markets. Te latter implies a urther reduction in carry-trade positions, with

traders buying back the yen to close out their long positions in higher-yielding currenciesthat were opened by borrowing in the lower-yielding yen.

Te outlook is subject to the signicant downside risk o a more pronouncedslowdown in Japan’s main export markets. A worst-case scenario would imply a synchro-nized shock in the orm o weaker-than-expected demand rom developed economies,especially the United States, and emerging markets such as China.

Economic growth in Australia slowed to 2.6 per cent in 2008, rom 4.4 percent in 2007, and is projected to decelerate urther to 1.1 per cent in 2009, with privateconsumption emerging as a major drag on overall activity. Real household incomes arebeing squeezed rom various sides, including high interest rates, tighter credit conditions,a weakening housing market and at real wages due to continued inationary pressures.Sharp increases in the negotiated price or iron ore and coal, in turn, will benet netexports and the external account into 2009, although lower commodity prices will putpressure on the trade balance thereater.

Ater an increase to more than 4 per cent in 2008, consumer price inationis expected to all towards the upper limit o monetary policymakers’ target corridor o 2-3 per cent in 2009 ollowing weaker domestic demand that will outweigh emerginginationary pressure rom a weakening Australian dollar. In view o the spreading global

Capital owing into yen-

denominated assets

will sustain the

appreciation trend

Weakening consumption

will reduce Australia’s

growth

Ination will all amid

urther monetary policy

loosening

Figure IV.4General government gross financial liabilities, 1991-2007

Percentage of GDP

0

20

40

60

80

100

120

140

160

180

200

1991 1993 1995 1997 1999 2001 2003 2005 2007

Canada France

ItalyGermany

Japan United KingdomUnited States

Source: OECD.




nancial crisis, policymakers have cut interest rates three times, rom 7.25 per cent in Sep-tember to 5.25 per cent in November, and there will probably be urther monetary policy loosening in 2009 in order to alleviate the nancial stra ins o households and to stimulateprivate consumption.

New Zealand’s economic growth is expected to reach a very modest 0.6 per

cent in 2008, but should rebound slightly to about 1.1 per cent in the baseline orecastor 2009. Te slowdown in 2008 has been airly broad-based, with private consumptionsuering rom higher ination, high debt levels and the drop in housing prices. Whilebusiness investment will remain under pressure rom a weakening New Zealand dollarand relatively high interest rates, government spending is expected to provide the neces-sary st imulus in 2009 to prevent the economy rom sliding into recession. Export growthis expected to recover in 2009 on the heels o currency depreciation and a stronger per-ormance in the agricultural sector, as drought conditions give way to more avourable

weather orecasts.Ination continues to exceed the central bank ’s target range o between 1 and

3 per cent, driven by higher ood and energy prices, high capacity utilization rates andtight conditions in the labour market. However, the upward pressure on prices is orecast

to recede owing to weaker domestic demand, the sotening housing market and atteningcommodity prices. Policymakers have begun cutting interest rates rom their recent highand are expected to maintain their loosening stance in 2009 in an attempt to counterslowing economic growth as well as higher nancing costs or businesses in the wake o tighter global credit conditions. Te resulting smaller interest-rate dierentials in avouro the New Zealand dollar, combined with increased risk aversion in nancial markets,

will put downward pressure on the currency, especially in the light o the closing-out o speculative positions driven by carry trades that borrow in lower-yielding currencies, suchas the Japanese yen, to buy the New Zealand dollar. However, any more pronounceddepreciation o the currency would create renewed inationary pressure and, thus, limitmonetary policymakers’ space or urther interest rate cuts.


In 2008, the economies in transition generally showed a surprising resilience to the impacto the global nancial crisis. Despite a certain deceleration rom the previous year, strongeconomic growth continued both in South-eastern Europe and in the Commonwealth o Independent States (CIS). Aggregate GDP in economies in transition grew by about 7 percent, reecting an increase o 7.1 per cent in the CIS and 5.2 per cent in South-eastern Eu-rope (see table A.2). wo main actors underpinned the continued robust perormance o these economies. First, direct nancial contagion rom the global crisis was initially rela-tively limited, not least due to underdeveloped nancial systems in the region and weak nancial integration with the rest o the world. Second, economic growth in most econo-

mies was mainly driven by domestic demand, while a slowdown in export demand only mildly aected domestic output during 2008. Te surge in world energy and ood pricesduring the rst part o the year pushed domestic ination sharply upwards, especially inthe CIS, but also in the economies in South-eastern Europe. In late 2008, inationary pressures started to subside ollowing the steep all in world commodity prices.

Despite the avourable outcomes in 2008, the outlook or the economies intransition has deteriorated considerably. With the deepening o the global nancial crisis

New Zealand’s slowdown

will be cushioned by scal

spending

Monetary policymakers’

accommodative stance

will be limited by the

inationary eect o

currency depreciation

Resilient growth amidst

the global turmoil, but

considerable deterioration

is expected in 2009




unemployment rates remain very high (about 16 per cent on average); only Croatia has asingle-digit rate o unemployment. Nevertheless, positive labour-market developments areexpected to continue in 2009 as a result o new investments in production capacity and theimplementation o inrastructure projects. In Croatia, though, the rate o unemploymentmay increase in response to weaker perormance o the tourism industry.

Te general government budgets in most South-eastern European economieshave become more balanced and were ortied by higher tax revenue ollowing strongeconomic growth in recent years. Tere was some scal loosening in a number o countriesin 2008, in part because o their electoral cycle. Fiscal decits are expected to widen as aresult o the economic slowdown and anticipated expected scal responses in 2009, butlarger decits do not pose an immediate threat to macroeconomic stability.

In contrast, there was a notable tightening o monetary policy in 2008, partly in response to rising inationary pressures. Central banks increased their policy rates in

Albania, Serbia (in stages) and the ormer Yugoslav Republic o Macedonia, while manda-tory reserve requirements were increased in Bosnia and Herzegovina and Croatia. Te do-mestic monetary tightening was coupled with deteriorating conditions o access to inter-national nancial markets. Te rising cost o credit is likely to urther dampen economic

activity in the region. Against the backdrop o strong domestic demand and weakening import de-

mand in the important European markets, imports by South-eastern European economiesgenerally outpaced their exports in 2008. As a result, both trade and current-account de-cits continued to widen in all countries and, in a number o cases, have reached alarmingproportions. Financing these decits up until the 2008 crisis did not pose a problem, butnancing conditions have been changing or the worse, orcing a downward adjustmentin domestic demand. In November 2008, Serbia reached an agreement with the IMF ona standby loan o $518 million dollars, although it is not clear i any unds wil l be drawn.Te restraining eect o unavourable nancing conditions is likely to increase urther in2009 and the decits may decline somewhat in the short run.

The Commonwealth o Independent States:Despite some deceleration, growth remains impressive

While the pace o economic activity in the CIS moderated somewhat, it remained robustin 2008: GDP in most countries grew at rates o 6 per cent or higher (see table A.2).During the latter hal o the year, growth in the Russian Federation slowed somewhat romits strong perormance earlier on, owing to stagnating oil production and deceleratinginvestment. Notably though, the Russian grain harvest in 2008 was the highest in the last15 years. In Azerbaijan, the rate o GDP growth dropped compared with previous yearsas the impact o newly introduced oil and gas acilities aded, but it remained the highestin the CIS. A signicant deceleration o economic activity was observed in Kazakhstan

as a result o an abrupt cutback in oreign borrowing amidst global nancial turmoil thatalso spilled over into neighbouring countries (see box IV.1). Te military conict in theCaucasus had only a limited eect on oil exports, but it did, nonetheless, aect growthperormance in Georgia.10 In 2009, less avourable external circumstances, includinglower commodity prices and increasing difculties in obtaining external nance, are likely

10 In September 2008, the Parliament o Georgia carried a motion to leave the Commonwealth o

Independent States (technically this decision is due to enter into orce in mid-2009). However,

Georgia’s perormance is discussed in the context o this group o countries or reasons o

geographic proximity and similarities in economic structure.

Fiscal decits are expected

to widen in 2009

Monetary policy has

tightened

Current-account decits

are high but a downward

adjustment may be

under way




The impact o the global fnancial turmoil on the bankingsector o the Commonwealth o Independent States

The nancial crisis, which originated in the United States sub-prime mortgage market, has also aected

some o the economies o the Commonwealth o Independent States (CIS). Increased nancial

integration, including access to external nance, has created new channels or the transmission

o shocks. The impact o global turbulence has varied across the countries o the CIS, reecting

dierences in the degree o nancial development and the extent to which banks and companies

have relied upon oreign nancing. The external debt o the banking system has increased in the

largest economies in recent years, albeit to signicantly dierent degrees (gure A).

The consequences o the crisis have been the most severe in Kazakhstan, where the

banking system has developed rapidly in recent years as a result o the strong growth o oreign

liabilities uelling ast domestic credit expansion. In recent years, these sources have covered about

hal o the unding needs o the sector. Good access to international markets was supported by a

perceived strong regulatory and supervisory ramework, improved investment grade ratings and

avourable economic prospects.

The growing dependence on oreign unding was, however, also a source o vulnerability.

While the authorities managed to reduce the share o short-term obligations, they did not succeed

in curbing overall oreign borrowing. Global credit turmoil led to a sharp deterioration in access toexternal unding. In addition, alling condence caused a temporary decline in household deposits

and increased pressures over the exchange rate that required interventions by large central banks.

Lending has allen sharply, depressing growth in the non-oil sector and sharply reducing real estate

prices, which, particularly in Almaty, had recently undergone rapid growth, uelled by the availability

o credit (gure B).

In the Russian Federation, the impact o the crisis was initially more muted, given the

lower reliance o the banking sector on international capital markets. However, credit growth slowed

Box IV.1

Figure ABanking sector: external debt, 2003-2007

Percentage of GDP

0

10

20

30

40

50

2003 2004 2005 2006 2007

Kazakhstan

Russian Federation

Ukraine

Sources: National Bank o Kazakhstan, Central Bank o the Russian Federation and

National Bank o Ukraine.




down, and some banks with more aggressive expansionary policies unded by external nancing

experienced difculties. Moreover, adverse market conditions led to the postponement o primary

equity placements, which had been playing a larger role in corporate nancing. The worsening o the

global nancial crisis in 2008 increased the severity o the problems conronting the Russian banking

system. The widespread use o shares in Russian companies as collateral exposed the sector to a

reversal in equity prices. A plummeting stock market led to margin calls, which reinorced downward

pressures. The burgeoning domestic bond market has been negatively aected by mountingination and the overall liquidity problems. As market participants have become more sensitive to

counterparty risk, interbank nancing has suered amidst declining trust.

Despite a current-account surplus and a solid reserve position, the private sector in the

Russian Federation remains exposed to external nancing conditions, including through the impact

o capital ows on domestic liquidity. Capital outows drained liquidity rom the system and have

orced banks to rely on short-term public unding. The Central Bank’s interventions to shore up the

rouble, which has been under pressure through the intensication o capital outows, have had a

contractionary impact.

Patterns o ownership in the banking sector have also acted as a channel or the regional

transmission o shocks. Kazakh banks, enjoying good access to external nance, expanded into other

countries in the CIS. In Kyrgyzstan, they accounted or almost hal o total lending. The troubles o

parent institutions have led to a temporary slowdown in credit growth in Kyrgyzstan as well. However,

the low level o nancial intermediation has limited the impact o this channel with regard to the

transmission o shocks. In Ukraine, the degree o oreign ownership o the banking system initially

proved to be a benign inuence, as Western parent banks provided access to external nancing in a

difcult global environment. The situation deteriorated in late 2008, as concerns over exchange-rate

stability, widening external imbalances and mounting political risks created renancing difculties.

The reaction o the monetary authorities to alleviate the impact o the credit crunch

has been similar throughout the region and initially involved providing liquidity through various

means, including widening the scope o repurchasing operations, easing reserve requirements or

Box IV.1 (cont’d)

Figure BKazakhstan: annual credit growth, February 2004-September 2008

Percentage

0

40

20

60

80

100

120

F e b - 0 4

J u n - 0 4

O c t - 0 4

F e b - 0 5

J u n - 0 5

O c t - 0 5

F e b - 0 6

J u n - 0 6

O c t - 0 6

F e b - 0 7

J u n - 0 7

O c t - 0 7

F e b - 0 8

J u n - 0 8

Source: National Bank o Kazakhstan.




to lead to a marked slowdown in the economic activity o the region, with aggregate GDPgrowth orecast at 4.9 per cent.

Robust domestic demand, especially private consumption, remained the maindriver o economic expansion in the region. Rapid income growth, reecting the contin-ued robust economic perormance and high inows o worker remittances in the poorestcountries, has underpinned strong consumer demand, despite the negative impact o surg-ing ination on purchasing power. Consumption growth compensated or the notabledeceleration in xed investment demand, including in the Russian Federation, reectinga slowdown o construction activity and tightening credit supplies to businesses amid de-teriorating condence in economic prospects. In Kazakhstan, both private consumptionand xed investment decelerated sharply as lending to business and households stagnatedbecause o the problems in the banking sector.

Te pace o job creation in the CIS generally remained relatively strong despitethe worsened perormance o the labour-intensive construction sector. Armenia and Azer-baijan displayed the largest improvement in labour-market indicators. Te Russian Fed-

eration has continued to attract signicant migratory inows rom other CIS countries,spurred by rapid wage growth and the large wage dierential vis-à-vis jobs in the homecountries. In Kazakhstan, in contrast, registered unemployment increased, largely owingto a signicant all o output growth. Labour-market indicators are expected to deterioratein 2009, however, as economic growth in the CIS is projected to slow down, the more soas construction activity enters into a slump.

Ination rates remained high throughout the region and rose urther in a numbero countries in 2008 (see gure IV.6). Food spending accounts or a signicant share o the

Domestic demand is

driving the CIS economies

Employment growth was

strong in 2008, but bleaker

prospects are ahead

Inationary pressures are

high, but are abating

using public institutions to inject resources into the banking system. Limits on deposit insurance

were increased to shore up condence. In addition, support programmes have addressed the

renancing needs o particular sectors, such as construction and small and medium enterprises in

Kazakhstan. As the crisis deepened, scal allocations were made to support lending and the stock

prices o State companies in the Russian Federation. Direct restrictions on new lending and depositwithdrawals were introduced in Ukraine. Government plans or the sector also include State-backed

recapitalization o nancial institutions through subordinated loans or direct equity stakes in the

Russian Federation, Kazakhstan and Ukraine.

The global nancial crisis has highlighted the dearth o domestic sources o long-

term nancing in the region, a common problem in the CIS, which had been temporarily overcome

through access to international capital markets. In the short-term, uture growth o banking assets

will depend on ability to expand the deposit base. A more balanced unding structure will require a

slowdown in lending, which will also be depressed by the need or increased provisioning. Ongoing

inationary pressures and exchange-rate volatility represent a challenging environment or raising

deposits. State-owned banks, with their extensive branch networks, enjoy the advantage o acquiring

deposits vis-à-vis other competitors, and may increase their market shares. These banks will be used

as an instrument to support lending by the authorities. Some degree o banking consolidation

appears unavoidable in most countries. Over the medium term, the development o domestic capital

markets, including the presence o institutional investors, such as pension unds, would be necessaryto provide alternative sources o nancing.

Financial turbulence and credit constraints are leading to a global slowdown. Worsened

economic prospects worldwide are also depressing the demand or commodities, which are critical

or economic perormance and investor sentiment in the CIS region. This has opened up a second

channel or the transmission o negative shocks, contributing to an increase in the difculties created

by the persistence o an adverse global environment. For the banking sector, slower growth will add

to concerns over the deterioration o asset quality.

Box IV.1 (cont’d)




consumer basket in the CIS countries; hence, rising ood prices have had a marked impacton headline ination. In Azerbaijan, Kazakhstan, Kyrgyzstan, ajikistan and Ukraine, theannualized rate o consumer price ination peaked above 20 per cent beore starting todecline in the nal months o the year. Tis reected both external actors, such as highood and energy prices, and domestic inuences, including broadly accommodative policies,

and, in some cases, an ongoing adjustment o prices in regulated services. Policymakers ina number o countries resorted to various interventions in an attempt to curb inationary pressures, such as tighter policies and exchange-rate appreciation in Armenia and exportrestrictions on ood in Uzbekistan. In late 2008, headline ination decelerated in most CISeconomies as the eect o commodity price rises abated. Further lowering o commodity prices and more moderate domestic demand should support a moderation in ination in2009, which nevertheless is expected to remain relatively high.

Monetary authorities have been conronted by two major challenges, namely,strong inationary tensions and the need to address the allout rom the global crisis,

which have resulted in capital outows and exchange-rate pressures during the secondhal o 2008. Monetary policies remained generally accommodative earlier in the year asthe authorities, particularly in the Russian Federation and Ukraine, tolerated the moneti-

zation o strong capital inows during this period. Reecting the relatively loose policy stance, real interest rates were negative in a number o countries. In Kazakhstan, theauthorities cut policy rates to oset the negative eects o the credit crunch on economicactivity. In the second hal o the year, the ocus o attention, particularly in the RussianFederation, shited to the supply o extra liquidity through a wide range o instruments tosupport the nancial system in the ace o intensied global turbulence. Currencies cameunder pressure, as capital ows reversed, and the authorities intervened in the markets toprop up exchange rates.

Monetary policy is driven

by liquidity considerations

Figure IV.6Consumer price index inflation in selected CIS economies, 2007 and 2008

Percentage

0 10 20 30 40

Tajikistan

Azerbaijan

Kyrgyzstan

Kazakhstan

Ukraine

Belarus

Armenia

RussianFederation

Republic of

Moldova

Jan-Sep 2008

Jan-Sep 2007

Source: UN/DESA, basedon data rom CIS InterstatStatistical Committee.




Solid growth, coupled with gradual improvements in tax administration, hasboosted scal revenues throughout the region. Better revenue perormance has generally been accompanied by strong increases in public expenditure, causing a weakening in thestructural scal balances in many CIS countries. In Ukraine, higher social benets andpensions have contributed to a signicant widening o the scal decit. In Azerbaijan,

plans to develop inrastructure and raise social protection generated rising claims on pub-lic spending. In some o the low-income countries, scal measures have been used to shel-ter households rom rising uel and ood costs. In the Russian Federation, ater an overtly expansive scal stance in 2007, there has been some downward adjustment in 2008.

Export growth remained well below the expansion o imports in most o thesmaller economies in the region, with Armenia, the Republic o Moldova and ajiki-stan showing a particularly large gap. In the Russian Federation, rapid export growth invalue terms resulted mainly rom increasing oil and gas prices, while physical volumesstagnated. In volume terms, the expansion o imports continued largely to outstrip theincrease o exports. By contrast, energy export volumes rose rapidly in Azerbaijan andurkmenistan. In Kazakhstan, the positive eect o growing energy exports and highprices was coupled with a deceleration o imports as the economy cooled down. As a result,

Kazakhstan’s signicant current-account decit in 2007 moved into a surplus. Te overallCIS current-account surplus widened due to the improved external position o energy-producing countries. In Ukraine, the external decit widened sharply owing to continuedacceleration in import growth and poor export perormance. Te country is expected tosuer a signicant deterioration in its terms o trade in 2009 as a result o alling steelprices and a hike in Russian gas prices. A better export perormance was observed in Be-larus, but anticipated increases in the price o gas imports will also have a negative impacton its external position.

Te difculties experienced in the global economy have considerably increasedthe downside risks or the economic growth o the CIS. A severe and protracted globalslowdown could urther depress commodity prices, which remain a major actor in theeconomic perormance o many countries in the region. Financial turbulence has exposed

the dependence o the largest economies on external sources o long-term nancing. Inturn, an eventual downturn in the Russian Federation could impair the economic pros-pects o the smaller economies in the region through lower trade, remittances and FDI in-ows. Most commodity-exporting countries have put in place scal arrangements, such asreserve unds, that give them the possibility o intervening in order to mitigate the eectso a possible downturn, including one related to external payments problems. By contrast,Ukraine, which built only modest reserves, has been orced to request IMF support toallay concerns about its ability to und its large external nancing gap. In any case, thereis a risk o inadequate policy action given the lack o experience o most CIS countries incoping with a rapidly deteriorating external environment.

Developing economies Although growth in the developing economies moderated to 5.9 per cent in 2008 rom7.1 per cent in 2007, the region was able to maintain its sixth consecutive year o growtho over 5 per cent. Growth was mainly supported by strong commodity-export revenuesin the rst hal o 2008, accompanied by robust domestic demand and government ex-penditures on inrastructure development. East and South Asia again led growth in theregion, as high commodity prices and industrial activity supported economic perormance

Fiscal policies have added

to demand pressures

The global slowdown will

aect growth in 2009




throughout most o the year. Arica’s growth, also above 5 per cent, was likewise drivenby the commodity sector, but saw strong support rom the recovery in agriculture andimproved domestic demand.

Growth in all countries o the region is expected to slow considerably in 2009,to 4.6 per cent. Te region, which initially seemed immune rom the nancial crisis, is

now aected by the precipitous decline in commodity prices and is experiencing sharp or-eign capital outows as investors seek “sae havens”, thus threatening the nancial stabil-ity o some economies. Additionally, this has led to depreciating currencies and t ightenedcredit conditions. As the impact o the global economic slowdown spreads throughoutthe region, it will have stronger adverse eects on export demand, commodity prices and,subsequently, investment and aid ows.

Arica: The end o the commodity boom

Amidst a deteriorating economic environment, growth in Arica slowed in 2008, but theregion managed to maintain its th consecutive year o growth o over 5 per cent. Hav-ing been propped up by increased revenue rom the continent’s commodity exports in the

rst hal o the year, as well as continued improvements in non-oil sectors, such as agri-culture and tourism, growth dropped to 5.1 per cent, rom 6.0 per cent in 2007 (see table

A.3). Tis gure masks considerable disparities across the region as household spendinghas been constrained in many cases by rapid ination growth, higher interest rates and,to a lesser extent, domestic disturbances. As the global economy and commodity prices

weaken urther, growth is expected to decelerate to 4.1 per cent in 2009. Arica’s lack o integration into the global nancial system kept it relatively im-

mune rom the direct eects o the global nancial crisis in 2008, but the region is already being aected indirectly through slower global growth and credit tightening, which ishaving an impact on investment ows, export demand, commodity prices and exchange-rate vulnerability. In South Arica, which had made considerable progress towards mac-roeconomic stability, the rand weakened by about 23 per cent against the United States

dollar between September and November 2008 as a “ight to saety” triggered a sell-o in equities and bonds. Te Government o Nigeria was orced to revise its 2009 budgetdownwards in response to lower oil prices, and there are growing ears about the stability o the country’s currency, despite its ample oreign reserves totalling $63 billion.

Although oil and other commodity prices have generally allen in the secondhal o 2008, they remained high on average or the year by historical standards. Oil-exporting Arican countries grew at 6.1 per cent in 2008 compared with a 4.3 per centgrowth rate in the net uel exporters (see gure IV.7). High energy and ood prices, andslowing aid and private capital inows were among the key actors that contributed to thegrowth slowdown in the oil-importing Arican economies.

Growth decelerated in all subregions in 2008, with the exception o Central

Arica, but remained generally strong owing to healthy commodity exports and a rebound inagricultural output in the rst hal o 2008. As the global downturn extends into 2009, weak-ened trade with Europe and the United States, along with dampened commodity exports toChina and the rest o the world, will curtail growth in most economies o the region.

North Arica recorded a 5.1 per cent growth rate in 2008, as high oil revenues,the construction boom and tourism receipts boosted both public and private consump-tion in most countries; in Central Arica, however, robust growth was mainly due to therebound in oil production in the Congo. In West Arica, growth in 2008 was supported by

Arica’s growth slowed

in 2008

The global nancial turmoil

will have indirect eects on

the region

Oil exporters beneted

rom strong revenues in

the rst hal o 2008

The slowdown will

accelerate in 2009

Subregional growth is

supported by tourism,

agriculture and recovery

in conict areas




conict recovery and improved stability in Côte d’Ivoire and Liberia, increased oil produc-tion and prices in Nigeria and the expansion in mining activity, construction and tourismin many countries o the subregion.

East Arica, led by Ethiopia, continued to maintain the highest growth in thecontinent, beneting rom improved agricultural perormance, healthy aid inows andstrong growth in tourism and investment in the rst hal o 2008. However, growth in

most o the countries o this subregion remains constrained by inrastructure bottlenecks,especially those related to energy and transportation. In addition, reduced aid and invest-ment ows in 2009 will signicantly curtail growth.

In Southern Arica, economic perormance moderated rom 6.2 per cent in2007 to 4.2 per cent in 2008, led by sharply lower growth in South Arica owing to atightening in consumer spending and the slowdown in mining and quarrying. Delaysin donor unding, power shortages and high interest rates weakened growth in the othercountries o the region.

Ination in Arica, excluding Zimbabwe, was 10.7 per cent in 2008, up rom6.4 per cent in 2007. Over 90 per cent o the 51 Arican countries with available data re-corded a 5 per cent or more rate o ination in 2008, up rom 60 per cent in 2007. Only three countries (the Central Arican Republic, Côte d’Ivoire and the Comoros) had ina-tion rates o less than 5 per cent in 2008, while Zimbabwe’s hyperination rate o over 11million per cent remains the highest in the continent. Most o Arica’s recent ination hasbeen imported through high energy and ood prices in world markets, but domestic ac-tors have also played a role, including widening government decits and strong domesticdemand growth, especially in the oil-exporting countries o the region. Poor harvests inBurundi, Eritrea, Ethiopia and Kenya placed additional domestic pressure on ood pric-es, leading to double-digit increases in ination in 2008 and widespread ood insecurity

South Arica experiences

a sharp slowdown

Ination is up in 2008, but

is expected to subside

in the outlook

Figure IV.7Growth in Africa,a oil versus non-oil economies, 2006-2008

Percentage

5.76.0

5.1

5.5

6.6

5.95.7

4.9

4.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2006 2007 2008

Arica

Oil producers

Non-oil economies

Source: UN/DESA.

a Excluding Seychellesand Swaziland owing

to lack o data.




throughout the region. Although improvements in ood supplies rom the all harvestsand lower international commodity prices should lower prices and lead to a decelerationo ination in 2009, the ood crisis still exists and remains a long-term challenge or theregion (see box IV.2).

Unemployment is expected to increase throughout Arica, as the expansion in the

services, construction and public works sectors, which helped to boost employment creationin urban areas, particularly in North Arica, is expected to weaken. Slower ormal sector jobcreation will also push a greater number o workers into the already large inormal economy.

Employment conditions

will deteriorate

Arica’s response to the ood crisis

Over the last our decades, Arica has witnessed requent ood shortages leading to heavy dependence

on ood imports and aid, making Arica particularly vulnerable to shocks in the international ood

market. One third o the population o sub-Saharan Arica suered rom chronic hunger in the period

1990-1992, a proportion that had declined by only 4 percentage points by 2003-2005, while the

absolute number o people suering rom hunger increased rom 169 million to 212 million over the

same period.a

The situation worsened dramatically ollowing the most recent global ood crisis,

especially or Arican net ood importers. It is estimated that an additional 24 million people in sub-

Saharan Arica were malnourished in 2007 owing to the increase in ood prices; ination also increased

rom 6.4 per cent in 2007 to 10.7 per cent in 2008, driven mainly by increases in prices or ood,

transport and energy.b Although ood and oil prices have come down in the second hal o 2008, the

problem persists, as the recurrent crises in Arica are largely the result o longer-term issues related to

the neglect o the agriculture sector and poor and inconsistent agricultural development policies.

As a short-term response to the ood crisis, the international community increased ood

aid to the worst aected countries; at the domestic level, policies ocused on stabiliz ing ood supplies,

controlling prices and increasing transers (see table below). These policies had mixed eects, some

o which contributed to urther price increases. For example, in Egypt, subsidized bread was diverted

to eed animals, thereby exaggerating the shortage in the market, while export restrictions may have

led to panic and hoarding o certain commodities (see chapter II, box II.1).

Most Arican countries have also started to introduce measures to increase supply. InSenegal, where prices or rice have doubled between July 2007 and 2008, ertilizer subsidies have

been expanded, leading to a substantial increase in areas devoted to the cultivation o ood crops.

Additionally, the orecast or total cereal production in Arica or 2008 has increased to 152.8 million

tons, up rom the 141.3 million tons estimated or 2007, and slightly higher than the 2006 harvest.

Although short-term supply increases may help to mitigate the crisis in the near term, in

the long run, solving Arica’s ood crisis requires strategies to urther enhance agricultural investment

and productivity. High ood prices have oered an incentive to increase private investment in

agriculture, but more still needs to be done by Governments to provide an enabling environment.

The Arican Union’s decision in July 2008 to ocus its long-term commitment on investments or

increased productivit y and risk mitigation, including enhanced institutional and human capacities or

agricultural development, is a step in this direction. These strategies build on the New Partnership or

Arica’s Development (NEPAD) Comprehensive Arica Agriculture Development Programme (CAADP)

ramework that was agreed in 2003. Some components o the strategy include:

a) Increased agricultural productivity

In addition to more investment in better technologies, increasing agricultural productivity

requires better access to credit and land, a revival o extension services and public investment

in related inrastructure such as transport, communication, storage and irrigation. Although

most Arican countries still have large areas o unused arable land with which to increase pro-

duction, there are limits owing to high population growth and competing demands or non-

Box IV.2

a Food and AgricultureOrganization o the UnitedNations, “Hunger on the rise:Soaring prices add 75million people to globalhunger rolls”, briengpaper, 17 September 2008,available rom http:// www.ao.org/newsroom/ common/ecg/1000923/en/ hungergs.pd.

b Ibid.




Box IV.2 (cont’d)

Table

African Government policy responses to the food crisis, January 2006-August 2008

Country

Tax reductions

on food staples Trade restrictionsTrade

liberalizationConsumer

subsidy Social

protection Supply increases

Algeria

Angola

Benin

Burkina Faso

Burundi

Cameroon

Comoros

Congo

Côte d’Ivoire

Egypt

Ethiopia

Gambia

Ghana

Guinea

Guinea-Bissau

Kenya

Liberia

Madagascar

Malawi

Mali

Morocco

Namibia

Niger

Nigeria

Rwanda

Senegal

Sierra Leone

Somalia

South Africa

Sudan

Togo

Tunisia

Uganda

United Republic of Tanzania

Zambia

Zimbabwe

Frequency 15 13 18 17 17 20

Sources: International Food Policy Research Institute (IFPRI), 2008 and World Bank, 2008.




In most Arican economies, monetary policy is taking either a tightening orneutral stance in order to keep ination under control. In Nigeria, the Central Bank increased the amount o oreign exchange sold to retail banks to oset the rise in govern-ment expenditures rom windall oil prots. As commodity prices al l and the dollar gains

strength, currency depreciation is also a concern or some commodity exporters. In Ghanaand Mozambique, the central banks switched to a tightening stance in 2008 to stabilizeexchange rates and control imported ination, the Bank o Ghana increasing its prime raterom 16 to 17 per cent in July in an attempt to combat inationary pressures. In South

Arica, however, the benchmark rate has held at 12 per cent since August, despite the con-tinued rise in ination and rand depreciation, owing to the weakness in the economy.

High energy and ood prices pushed the proportion o oil-importing countries with scal decits up rom 76 per cent in 2007 to 86 per cent in 2008. On average, thesecountries recorded a scal decit o -1.7 per cent o GDP, compared with a surplus o 7per cent or oil-exporting countries. o maintain scal stability, many countries resortedto additional measures to control public spending and nance their decits, such as reduc-ing expenditures on development projects and service delivery. With a rapidly deteriorat-ing external environment, these countries will likely be in need o urther debt relie. A scaling-up o aid may also be necessary in order to sustain the progress made in the pastew years in macroeconomic management and stability, as well as in achieving the Millen-nium Development Goals.

Relatively high energy and ood prices, particularly in the rst hal o 2008,led to a widening o current-account decits in oil-importing Arican countries, rom -6.3per cent o GDP in 2007 to -7.2 per cent as o September 2008. At the same time, the

Monetary policy remains

a challenge as growth

subsides

Fiscal decits are widening

Current-account balances

also worsened in 2008

ood production and industry. In many Arican countries, dual property systems also exist,

with State-regulated property rights and customary management overlapping. In such cases,

it is important to strengthen land tenure security, which can in turn acilitate access to credit.

b) Market access and regionally integrated value chains

Regionally integrated value chains are important or expanding input and output markets,

particularly or smallholder armers who are oten at a disadvantage regarding access to both

domestic and export markets. Such integration can create the scope to exploit economies o

scale and improve access to new technologies and complementary inrastructure and ser-

vices. To enable smallholders to participate, however, requires coordination at the regional

level in order to improve the quality and saety o products, harmonize standards and ensure

adequate ow o inormation to potential value chain participants.

c) Mobilizing resources for investment in agriculture

The commitment by Arican countries to spend at least 10 per cent o national budgets on

agriculture and rural development (see also chapter II, box II.1) will go a long way to making

more resources available. However, given the huge gaps in research, inormation and nancial

support or agriculture, this eort needs to be complemented by development partners. In

this regard, the proposal by the Conerence o Arican Ministers o Finance, Planning and Eco-nomic Development, held in Addis Ababa on 2 and 3 April 2007, to establish a unding mecha-

nism (in consultation with the Arican Development Bank and the International Fund or Agri-

cultural Development) to scale up agricultural investment in the continent should be pursued.

In addition, the Aid or Trade Initiative can play an important role in increasing investment and

productivity in Arican agriculture. It is crucial that the current nancial crisis not result in a

reduction o aid; rather, donors should honour their commitments to increase the volume and

quality o aid, including by ensuring better allocation in line with recipient priorities.

Box IV.2 (cont’d)




current-account surplus o oil-exporting countries increased rom 10.5 per cent to 17.7per cent. Tereore, the continent’s overall current-account position, which was showinga surplus o 7.4 per cent in September 2008, is a reection o the high revenues generatedby oil-exporting countries. Although the current moderation in commodity prices shouldimprove the terms o trade and lower the import bills o many net uel importers in 2009,

it comes at a time when export demand has weakened globally, thus potentially osettingthe overall eects. Similarly, while most Arican currencies or which data are availableappreciated against the United States dollar in the rst hal o 2008, the trend reversedrom the third quarter o 2008.

Te continent’s prospects or 2009 are subject to strong uncertainties stemmingmainly rom the recent global nancial crisis. However, risks remain tilted towards thedownside owing to the global slowdown. Although the decline in oil and ood prices willease the economic burden on the net uel and ood importers, there are adverse consequencesrom a sharp decline in commodity prices or the region as a whole. In general, a hard land-ing o commodity prices could set in motion a calamitous chain o events leading to capitalight, signicant depreciation o currency, increased ination and interest rates, and a ur-ther decline in growth. Also owing to the global nancial crisis and economic downturn,

lower aid and private capital ows, especially FDI and remittances would have a signicantimpact on growth in 2009. Moreover, despite some improvements in security, Arica remainsvulnerable to political conicts. An escalation o the conict in the Democratic Republic o the Congo could have repercussions or political stability in other parts o the region.

East Asia: A continuation o deceleration

As a consequence o the deepened international nancial crisis, the deceleration o eco-nomic activity in East Asia wil l continue during 2009, as GDP growth is expected to dropto 6.0 per cent, down rom 6.9 per cent in 2008 and 9.0 per cent in 2007 (see table A.3).Te baseline scenario or the growth outlook assumes that there will be economic recovery in the developed economies in the second hal o 2009. Should this not occur, however,

GDP growth in the region would slow to 3.7 per cent in 2009.Overall, East Asian countries initially seemed insulated at the onset o the

nancial turmoil emanating rom the United States and Europe. Banks were prudently leveraged and had limited exposure to sub-prime mortgage debt. Additionally, the $3trillion in oreign-exchange reserves, which is more than 10 times the usable resources o the IMF,11 gives economies some measure o condence to deend their currencies in theevent o a speculative attack. Nonetheless, there is growing evidence that the economiesin the region will be hit hard. As the nancial crisis and subsequent slowdown continuedto unold, some countries experienced sharp capital outows, threatening nancia l stabil-ity towards the end o 2008. For instance, in the Republic o Korea, the won dropped 21per cent in just two months, between August and October o 2008. Although a special

$30 billion swap line extended by the United States Fed helped stabilize the won, othercountries in the region remain vulnerable to the substantial decrease in oreign-exchangereserves and may require emergency nancial support.

Te eect o the global slowdown on export demand, and subsequently onGDP growth, in 2008 was pervasive across countries in the region. In China, the region’slocomotive, GDP growth dropped rom 11.9 per cent in 2007 to a lower, albeit still high,9.1 per cent in 2008. Te decline would have been greater had it not been or the contin-

11 November 2008 data.

Risks remain tilted

towards the downside

East Asian economic

growth is still decelerating

The nancial system is

prudent, but is still subject

to the impact rom the

global nancial turmoil

Commodity-exporting

countries suered

less rom the global

slowdown in 2008




ued strong growth in domestic nal demand. Cambodia, the Philippines and Singapore, with their heavy reliance on manuacturing exports to industrialized countries, have beenaected the most by the global slowdown, with GDP growth dropping by about 3 percent-age points in 2008 compared with 2007. In contrast, record high prices o export com-modities, including rice, palm oil and energy, in the rst hal o 2008 allowed countries

such as Tailand, Indonesia and, to a lesser extent, Malaysia, to sustain growth rates in2008 at levels similar to those in 2007.On average, the year-on-year consumer price index (CPI) headline ination

rate is expected to drop to 3.6 per cent in 2009, rom 6.4 per cent in 2008, as commodity and energy prices decline. During 2008, ination climbed most steeply in South-East Asia,reaching a peak in July (see gure IV.8). In Hong Kong Special Administrative Region(SAR) o China, the Republic o Korea and aiwan Province o China, the trend was lesssteep, but also peaked in July. In contrast, the ination rate in China peaked in February and then started to decline owing to the gradual recovery in the production o meats andresh vegetables; by October it had reached its lowest level in 16 months. As commodity prices continue to decline and export demand rom industrialized countries cools urther,all countries in the region are expected to experience a moderation o ination in 2009.

As economic growth slows, the employment situation in some economies hasalready started to show signs o deterioration. Recent statistics or Hong Kong SAR, Sin-gapore and aiwan Province o China show rising unemployment rates rom mid-2008.In some other economies, anecdotal evidence also points to a weakening o employmentgrowth. Given the decline o economic growth in East Asia, unemployment rates or many countries are expected to increase by about 1 percentage point in 2009 over 2008.

Te monetary policy response to the twin risks o rapidly rising commodity prices and the international nancial crisis varied across countries. In South-East Asia,

where ination increased most steeply in the rst hal o 2008, the central banks initially

Widespread ination has

peaked in East Asia

The employment outlook is not very bright

Monetary policy is

displaying a mixed stance

Figure IV.8Year-on-year headline consumer price index inflation rates, 2007-September 2008

Percentage

0

2

4

6

8

10

12

J a n - 0 7

M a r - 0 7

M a y - 0 7

J u l - 0 7

S e p - 0 7

N o v - 0 7

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

J a n - 0 8

South-East Asia

China

Hong Kong SAR,a Republic of Korea,

and Taiwan Province of China

Source: Various NationalStatistical Ofces.

a Special AdministrativeRegion o China.




reacted by increasing interest rates. Te Bangko Sentral ng Pilipinas (the central bank o the Philippines), the Bank o Tailand and the Bank o Indonesia all had multiple increas-es in their key policy rates in mid-2008. By early October, however, the People’s Bank o China and the Bank o Korea cut interest rates in concert with the loosening stance o thecentral banks in developed economies.

Fiscal policy was expansionary in East Asia during 2008. During the rst hal o the year, many countries implemented or expanded subsidy programmes to soten theimpact o rapidly rising uel and ood prices on vulnerable groups, thereby worsening s-cal balances. In Malaysia, the cost o uel and ood subsidies tripled in 2008 compared

with the previous year, increasing the scal decit rom 3.2 per cent o GDP in 2007 to4.8 per cent in 2008. In the Republic o Korea, whose scal surplus dropped rom 3.8 percent o GDP in 2007 to 1.1 per cent o GDP in 2008, the Government implemented aneconomic stimulus package amounting to $11 billion dollars (1.2 per cent o GDP); inChina, the Government has introduced a massive stimulus package, in an amount that isalmost equal to total government spending in 2006, to be implemented during 2009 and2010. Although the details o the package have not yet been released, back-o-the-envelopecalculations suggest that the package, while large ($586 billion, or 15 per cent o GDP, to

be spent over two years), would provide an additional stimulus o about 2 per cent o GDPper year, ater deducting recent trend growth o public expenditures. Te aim o China’spackage is to strengthen domestic demand through public investment in inrastructure.Te targeted areas include low-income housing, rural inrastructure, water, electricity,transportation, the environment, technological innovation and rebuilding rom severaldisasters, most notably the earthquake o 12 May. Tis package is also designed to boostthe income o the poor through measures including higher subsidies and an increasedgovernment purchase price or grains in 2009.

External balances came under pressure across East Asia in 2008 owing to thehigh cost o commodities and weakened export demand. Nevertheless, most countriescontinued to exhibit current-account surpluses. China, or instance, experienced a reduc-tion in its current-account surplus rom 11.5 per cent o GDP in 2007 to 8.5 per cent o

GDP in 2008, while in the Republic o Korea, a surplus o 0.6 per cent o GDP in 2007turned into a decit o 3.3 per cent o GDP in 2008 on account o the rising costs o com-modity imports and increased tourism spending abroad. Consistent with these shits incurrent-account positions, nominal exchange rates depreciated in most countries, with theexception o China, reversing previously appreciating trends.

Given the sombre outlook or the global economic environment, economicprospects in East Asia, too, ace serious downside risk. Te most compelling concern isthe potential or a complete meltdown o the nancial system in the developed economiesthat would directly undermine the nancial sector in East Asia. Tis would drag down theregional growth rate by at least 1-2 percentage points.

South Asia: Expectations o a slowdown in robust growthEconomic growth in South Asia remained robust in 2008 at 7.0 per cent, despite a slow-down in a number o countries in the region. Growth was upheld by high commodity export earnings in the rst hal o 2008 in Bangladesh, the Islamic Republic o Iran,Pakistan and Sri Lanka; there was also improved political stability in Nepal. However,the region’s GDP growth is expected to slow to 6.4 per cent in 2009 amidst the allout

China is leading scal

stimulus in the region

Current-account surpluses

ell and current-account

decits widened in 2008

The slowdown will spread

rom the industrial to the

service sector




rom the global nancial crisis. While the slowdown has thus ar mainly been limited tothe industrial sector, it is expected to spread to the service sector as the squeeze on costsbecomes more pervasive and demand slackens.

Although nancial institutions in South Asian countries had little direct ex-posure to the United States sub-prime mortgage market, the global nancial crisis has

had indirect eects on domestic nancial markets, with money markets experiencing anunusual tightening o liquidity. In addition, outows o oreign capital have posed seri-ous problems in both India and Pakistan. In India, during the rst two weeks o October2008, oreign-exchange reserves ell by more than $17 billion, partly due to oreign capitaloutows. In the case o Pakistan, oreign-exchange reserves, which had stood at $16.5 bil-lion in October 2007, decreased to about $7 billion a year later.

In India, economic activity, which had been growing at 9 per cent or more onaverage over the past three years, has been moderating in response to stepped-up mon-etary tightening, the hardening o commodity prices in international markets and globalnancial strains. Pakistan is orecast to see a a ll in its growth rate to 3.8 per cent owing tocontinued political uncertainty, problems o law and order and severe electricity shortages.Growth in the Islamic Republic o Iran, which is the only net oil exporter in the subre-

gion, will moderate rom 6.0 per cent in 2008 to 5.6 per cent in 2009, ater robust growthmomentum owing to high oil revenues as well as strong private consumption and invest-ment. Some deceleration in growth is also expected in Bangladesh, Nepal and Sri Lankabecause o weaker perormance in the commodity-producing sectors and a slowdown inthe service sector.

Ination rates have increased throughout the region, owing mainly to higherinternational commodity prices. In India, ination rose moderately rom 6.4 per cent in2007 to 8 per cent in 2008, but in Pakistan it increased by over 4 percentage points, to12 per cent in 2008, with ood ination reaching 17.6 per cent. In Bangladesh, ination

was about 10 per cent—despite the act that much o the increase in uel oil prices hadnot been passed on to consumers—while in the Islamic Republic o Iran and Sri Lanka,prices increased by more than 20 per cent. Te economic slowdown and lower energy and

commodity prices will reduce inationary pressures in 2009, although supply constraintsand an upward revision in administered prices o uel oil and electricity will oset part o these eects in some countries (Pakistan, or instance).

Most countries in the region, with the notable exception o the Islamic Republico Iran, pursued strict monetary policies to contain ination in 2008. In addition, someGovernments introduced new or strengthened existing short-term measures to curb ood-price increases. In Bangladesh, or example, these included the open-market sale o oodgrains at subsidized prices and a reduction in the interest rate on credits or ood imports.

While government revenues increased in a number o countries, the increasein expenditures was much larger, owing primarily to increased subsidies and increases inpublic sector wages. In Pakistan, the budget decit rose to 7.4 per cent o GDP in 2008,the highest level in the past 10 years, while in Sri Lanka, the budget decit is estimated to

remain at about 7 per cent o GDP. In India, increases in government salaries and subsi-dies on ood, ertilizers and certain uel oil products are expected to lead to a decit o 3.5per cent o GDP in 2008. In the outlook, however, as in a number o other countries in theregion, India’s scal decit is expected to increase, owing to slower growth in tax revenuesin the light o weaker economic growth as well as the likely need or urther scal stimulito overcome the negative impacts o the current global economic crisis.

The nancial crisis has led

to tighter liquidity and

shrinking currency reserves

Growth rates will be lower

across the region

High ination will remain

problematic

Monetary policies have

been in a tightening mode

Fiscal balances will

deteriorate urther …




Te surge in prices o uel oil, ood and other commodities wreaked havoc onexternal balances in the region, as higher import costs have led to both deteriorating tradebalances and urther pressure on oreign-currency reserves. In Pakistan, or example, thevalue o imports in dollar terms was roughly double the value o exports in 2008, and themerchandise trade decit o $20 billion was about 12 per cent o GDP. In 2009, trade bal-

ances in the region will remain under pressure, as weaker demand in overseas markets willlead to a stagnating export perormance.Employment in the region will suer in the light o the global economic crisis,

whose eects will be especially elt in labour-intensive export industries such as textiles.However, the large amount o workers’ remittances has so ar remained a stabilizing actoror aggregate household income in the region. In Bangladesh, remittances increased by 32per cent in 2008 and were close to $8 billion; remittances in Nepal increased by about 20per cent to roughly $1.7 billion; and Pakistan received a record $6.5 billion in terms o remittances in 2008. Since most o these remittances originate rom the oil-rich MiddleEastern countries, i oil prices all considerably over a sustained period, remittances willlikely decline, with large shares o the population losing an important source o livelihoodand aggravating the problem o poverty.

Risks to the outlook are mainly on the downside. Te external environment isparticularly uncertain at the present time because o the unolding global nancial crisisand the volatility o oil prices. Te global nancial crisis, i it worsens, will prolong theglobal slowdown, adversely aecting the economies o the subregion through export de-mand, investment ows and exchange-rate volatility. In addition, several countries in thesubregion ace political conicts that add to the uncerta inty.

Western Asia: Resilience amidstdeteriorating external conditions

Te Western Asia region went through a rapidly changing external environment in 2008,

showing considerable resilience to deteriorating global conditions. Driven by high aver-age oil prices and strong consumption and investment spending, economic activity inthe region expanded at a robust pace o 4.9 per cent in 2008, compared with 4.7 per centin 2007 (see table A.3). Against the background o the global nancial crisis, economicgrowth in the region is expected to slow down to 2.7 per cent in 2009.

Te region will experience a sharp decline in export revenues in the outlook as average oil prices are orecast to drop by 35 per cent in 2009 amidst slowing globaldemand. In addition, tighter credit conditions and deteriorating business and consumercondence are likely to weaken domestic demand throughout the region, possibly trig-gering delays in several large investment projects. Te global credit crisis has had a severeimpact on the banking sectors in Kuwait, Saudi Arabia and the United Arab Emiratesowing to their direct linkages to international money and capital markets. However, de-

cisive actions by central banks to ensure liquidity and guarantee bank deposits helped tostabilize the nancial sector in the region. While the main oil exporting countries in theregion are not immune to the crisis, their strong scal and external positions will cushionthem against the global economic downturn and sharply lower oil prices.

Surging international commodity prices in the rst hal o 2008 and higherproduction volumes led to strong growth in energy-related sectors, including crude oil, liq-ueed natural gas and petrochemicals. In the countries o the Gul Cooperation Council(GCC), robust growth in wealth in recent years, coupled with improved business and con-

… while weaker exports

will keep external balances

under pressure

The slowdown will

negatively aect

employment, although

remittances will remain a

stabilizing actor

Factors o uncertaintyinclude a prolonged

nancial crisis and internal

conicts

Economies remain resilient,

but growth is slowing

down markedly

Export revenues are

dropping sharply as global

demand weakens

Oil exporters beneted

rom high prices and

increased production

in 2008




sumer sentiment, negative real interest rates and large public sector salary hikes, boosteddomestic demand in 2008. Tis contributed to a broad-based expansion in non-petroleumsectors, in particular, business and transport services, communications, nance and con-struction. Average GDP growth in the GCC countries increased to an estimated 6.2 percent in 2008, but is orecast to drop to 3.2 per cent in 2009 as oil prices trend lower and

investment growth decelerates. Western Asian countries with more diversied economies continued to ben-et rom the buoyant conditions in the GCC countries through increased remittances,oreign direct investment ows, and tourism and export receipts. In Iraq and Lebanon,political progress and improved security conditions contributed to economic recoveries in2008. While the more diversied economies in the region, with the exception o urkey,have not experienced any signicant direct eects rom the nancial crisis, the sharp eco-nomic downturn in the developed and GCC countries will have a negative impact on theirgrowth in 2009.

Te urkish economy aces a severe slowdown as both external and domesticdemand weaken. GDP growth is expected to average only 2.8 per cent in 2008—the low-est rate since 2001. Te outlook or 2009 remains bleak as the economy is hit by the global

credit crunch and probable recessions in major export markets. Weak demand will severely aect the manuacturing sector, most notably the automotive, textile and electronics in-dustries. In spite o having stronger macroeconomic undamentals than in the past, theurkish economy remains vulnerable to deteriorating credit conditions and capital rever-sals owing to the size and composition o its current-account decit. Tis became clearin October 2008, when urkish bond spreads widened signicantly and the urkish liradropped sharply against the United States dollar. However, market conditions improvedin November 2008, and the country is expected to avoid recession in 2009.

Economic activity in Israel continued to expand at a robust pace throughoutthe rst hal o 2008, but slowed considerably later in the year. While the Israeli economy remains undamentally sound, weaker export demand and reduced availability o venturecapital and other nancing sources are likely to have an impact on economic activity in

the short run. GDP growth is orecast to decline rom 4.0 per cent in 2008 to 1.8 per centin 2009.

Despite the economic recovery in recent years, unemployment and underem-ployment rates, particularly among youth, remain staggeringly high in many Western

Asian countries, most notably in the non-oil exporting economies. In Jordan, where un-employment declined slightly rom 13.1 per cent in 2007 to 12.9 per cent during the rsteight months o 2008, about three quarters o the unemployed are concentrated in the15-29 year-old age group. In urkey, the unemployment rate had started to rise even beorethe nancial turmoil intensied, averaging 10.1 per cent during the rst seven months o 2008. Meanwhile, unemployment in Israel dropped to a two-decade low o 5.9 per cent inthe second quarter o 2008 as a result o the country’s broad-based economic expansion.

Western Asian countries experienced urther acceleration o consumer price in-

ation in the rst hal o 2008. Annual ination is expected to surpass 10 per cent in allcountries, except Bahrain and Israel, averaging 10 per cent or the region as a whole. Sharply higher ood prices and housing costs were the main drivers o ination. Tis resulted, in part,rom trends in global markets, especially the rise in commodity prices and the weakness o the United States dollar, to which most countries in the region peg their currencies. Yet,domestic actors and policies continued to add to inationary pressures as ample liquidity,the rapid expansion o consumer credit and increased subsidies uelled domestic demand. In

Global slowdown clouds

the outlook or diversied

economies

Turkey has been severely

hit by the nancial turmoil

and the recession in

developed countries

Growth in Israel is slowing

considerably despite sound

undamentals

Labour-market challenges

have increased with the

global crisis

Ination soared owing to

high commodity prices andbuoyant domestic demand




Box IV.3 (cont’d)

Figure ANominal effective exchange rates of theGulf Cooperation Council (GCC) countries, 2000-2008

2000 = 1.00

0.80

0.90

1.00

1.10

2000 2001 2002 2003 2004 2005 2006 2007 2008

Bahrain

Kuwait

Oman

Qatar

Saudi Arabia

United Arab Emirates

Source: United NationsEconomic and SocialCommission or Western Asia,sta estimates.

Note: The nominal eectiveexchange rate (NEER)measures the nominal valueo a national currency againsta basket o currencies o major trading partners (China,India, Japan, Republic o Korea, the euro zone, UnitedStates, United Kingdom andregional partners).

Figure BReal effective exchange rates of theGulf Cooperation Council (GCC) countries, 2000-2008

2000 = 1.00

Bahrain

Kuwait

Oman

Qatar

Saudi Arabia

United Arab Emirates

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: United NationsEconomic and SocialCommission or WesternAsia, sta estimates.

Note: The real eectiveexchange rate (REER)measures the value o a

national currency against abasket o currencies o majortrading partners (China,India, Japan, Republic o Korea, the euro zone, UnitedStates, United Kingdom andregional partners), adjustedby domestic and oreignprice levels.




Governments in most Western Asian countries pursued expansionary scalpolicies in 2008, including higher spending on health, education and inrastructure. De-spite strong expenditure growth, the GCC countries ran substantial scal surpluses in2008. In countries with a weaker revenue base such as Jordan, Lebanon, the Syrian ArabRepublic and Yemen, high international commodity prices became a serious scal burdenas subsidies on basic ood items and uel products increased sharply, prompting Jordan andthe Syrian Arab Republic to reduce uel subsidies in 2008.

rends in trade and current-account balances dier sharply between the oil-

exporting and importing economies. Higher average prices or oil and gas, along withincreased production, led to massive increases in export earnings in the GCC countriesand Iraq. Despite strong import growth, current-account surpluses in those countries, in2008, are expected to exceed the already high levels o 2007 (see gure IV.9). In 2009,trade and current-account surpluses o oil-exporting countries will drop substantially. In

Jordan, Lebanon, urkey and Yemen, rising import costs outpaced increased export rev-enues, resulting in widening current-account decits. However, these decits have been

well nanced by the inows o oreign capital and remittances as the countries recorded asteady increase in oreign reserves. While lower oil and ood prices are expected to reduceimport spending in 2009, nancing o the current-account decits is likely to becomemore difcult as FDI inows decline and access to credit tightens.

Tere are substantial downside risks to the economic outlook or the Western

Asia region, including, most importantly, a collapse o oil prices and a urther deteriora-tion o global nancing conditions that result in a sudden reversal o capital ows. A sharpand lasting decline in oil prices would not only impact private and public investment inoil-exporting countries, but would also have adverse spillover eects on the more diversi-ed economies in the region. Additionally, sharply higher borrowing costs and massivecapital outows are a serious threat or the economies in the region that ace large externalimbalances, especially urkey.

Increased subsidies strain

government budgets in the

more diversied economies

Current-account surpluses

in the GCC countries were

reaching record

levels in 2008

Downside risks include

the collapse o oil pricesand the sudden reversal

o capital ows

may converge downwards towards those o Saudi Arabia, the largest economy in the GCC. However,

this avourable scenario would most likely require highly integrated goods, capital and labour mar-

kets. Another possibility is that price levels will converge upwards in line with market expectations.

For example, the cash changeover to the euro in 2002 resulted in high perceived ination in the euro

area, as opposed to a rather stable actual ination.c Such high perceived ination, i it were to occur inthe GCC countries, could translate into higher actual ination through wage pressures. Considering

recent price dynamics, a short-term transitory acceleration o ination in several countries is thereore

likely i the planned introduction o the single currency includes an imminent cash changeoverd.

It should be emphasized that the monetary union is well placed to be a catalyst or ur-

ther economic integration and economic development o GCC member countries. The resulting inte-

gration o money and capital markets will have scale eects, thereby reducing the nancing costs in

member countries and encouraging economic diversication. However, several technical and legisla-

tive obstacles still remain, in particular the eective harmonization o national institutions, including

payment systems, nancing acilities o central banks and money markets, and the jurisdiction o nan-

cial transactions, as well as a harmonization o policy inrastructure. In addition, policymakers need to

decide upon the institutional and governance structure o a supranational central bank. That includes,

among other things, the amount o oreign currency reserves that the common central bank would

maintain. Given that, in 2007, all countries met the oreign reserves target (which requires that total

holdings cover at least our months worth o goods’ imports), this decision seems relatively uncontro-versial, with total oreign reserves o a common central bank expected to slightly exceed $100 billion.

Box IV.3 (cont’d)

cSee “Adopting theeuro: economic and

communication challenges”,European Economy News, No.

2, April 2006.

d It is still unclear whetherthe introduction o a single

currency will take place inone stage, including cash

changeover, or in multiplestages starting with the

introduction o a commoncurrency unit that is

equivalent to the EuropeanCurrency Unit (ECU).




Latin America and the Caribbean:Signicant slowdown in 2009

GDP growth in Latin America and the Caribbean is expected to decrease signicantly in2009. Following ve consecutive years o GDP growth over 4 per cent, economic growth

is expected to slow signicantly, to 2.3 per cent in 2009, down rom 4.3 in 2008 and 5.5per cent in 2007 (see table A.3), owing to a signicant drop in commodity prices, weakerexternal demand and a tightening o nancial conditions.

In the allout rom the global nancial crisis, nancial ows are expected toexhibit a reversal in the region, as investors cope with substantial market uncertainty. Ad-ditionally, the six-year-long appreciation trend or Latin American currencies has come toan end as regional currencies were down about 23 per cent against the United States dol-lar between end-June and October 2008. Tis depreciation o national currencies againstother major currencies, notably in Brazil, Chile, Colombia and Mexico (see gure IV.10)is another clear sign o the contagion eects o the global nancial crisis. Yet, the region isbetter equipped to deal with the crisis than it has been in the past, owing to lower externaldebt and the large accumulation o oreign reserves.

High commodity prices and buoyant internal demand, the main driving orceso economic growth in 2008, wil l be less avourable in 2009. In 2008, the average terms-o-trade index or the region as a whole was 45 per cent higher compared to that observedin the 1990s. erms o trade also improved on average or the year 2008, driving GDPgrowth along with strong consumer demand and increased demand or gross xed invest-ment. Tese actors compensated or the weaker external demand or other exports romthe region and explain the better-than-expected perormance during the rst hal o 2008.

The region is better

equipped to deal with

the crisis

High commodity prices andexpanding internal demand

drove economic growth

in 2008

Figure IV.9Oil prices and combined current-account surplus inWestern Asian oil-exporting countries, 2003-2009

B i l l i o n s o f d o l l a r s

D ol l a r s p e r b a r r e l

Current-account surplus (left axis)

Price of Brent oil (annual average, right axis)

56.553.1

204.8

188.2

90.3

266.8

162.8

0

50

100

150

200

250

300

2003 2004 2005 2006 2007 2008a 2009b

0

20

40

60

80

100

Source: UN/DESA, based onIMF International FinancialStatistics and nationalsources.

Note: Oil-exporting WesternAsian countries include:

Bahrain, Kuwait, Oman,Qatar, Saudi Arabia, SyrianArab Republic, United ArabEmirates and Yemen. Iraq isexcluded due to lack o data.

a Estimated.b Forecasts.




However, in 2009, external shocks are expected to worsen growth prospects, albeit tovarying degrees across countries.

In South American countries, where export revenues are mostly derived romoil, metal or mineral products, lower commodity prices will negatively aect the termso trade. In addition, domestic demand will slow because o t ighter nancing conditions,as has a lready become evident in Brazil during the last quarter o 2008. GDP growth or

South America is expected to a ll to 2.9 per cent in 2009, down rom 5.4 per cent in 2008.Growth in Central America and Mexico is expected to all to 0.9 per cent in 2009, rom2.2 per cent in 2008. Te subregion will be directly hit by the recession in the UnitedStates, which provides the market or most o its manuactured exports and jobs or itsmigrant workers. Te Caribbean countries are equally highly sensitive to the United Stateseconomic downturn but, being net importers o commodities, are expected to see somecompensation through an improvement in the terms o trade; scal stimulus throughpublic investment in inrastructure (or example, in rinidad and obago) is also likely tomitigate some o the growth deceleration caused by the global slowdown.

In most Latin American and Caribbean countries, ination surged during2008, owing mainly to the increased costs o energy, transportation and ood, but lowerination rates are expected in 2009. Central American and Caribbean countries wereparticularly hard hit, since they are commodity importers. In the Bolivarian Republico Venezuela, however, prices rose more than 30 per cent in 2008, because o the gapbetween strong domestic demand and shortages in the supply o consumer products. As,more recently, the global downturn has reduced commodity demand expectations, ina-tion pressures are expected to decelerate in 2009. For the region as a whole, the inationrate is expected to decline rom an average 8.1 per cent in 2008 to 7.3 per cent in 2009.

Mexico and Central

America will be the most

strongly aected by the

global economic slowdown

Lower ination rates are

expected in 2009

Figure IV.10Real currency depreciations in Latin America, December 2006-October 2008

Index 2000 = 100

D e c - 0 6

F e b - 0 7

A p r - 0 7

J u n - 0 7

A u g - 0 7

O c t - 0 7

D e c - 0 7

F e b - 0 8

A p r - 0 8

J u n - 0 8

A u g - 0 8

O c t - 0 8

80

100

120

140

160

180

200

Brazilian real

Chilean peso

Colombian pesoMexican peso

Source: JPMorgan Chase.




However, urther depreciation o national currencies in the short run amidst the globalnancial turmoil wil l become a major actor in keeping inationary pressures high, despitethe reduced inuence o world commodity prices.

As economic growth slows, unemployment rates are expected to rise above 8per cent in 2009, reversing the positive trend o ormal sector job growth during the past

ve years. Until the second hal o 2008, the steady expansion o economic activity hadbeen reected in improved labour-market indicators. Unemployment rates declined rom9.1 per cent in 2005 to an expected rate o 7.5 per cent in 2008, and job quality improved,as reected in an increase in the share o ormal wage employment.

Te region is expected to register a decit in the current account in 2009, aterseveral years o surpluses and a relatively small decit in 2008. Since the last quarter o 2007, imports have been growing at a aster pace than exports, owing to strong demandor oreign capital goods, increased energy prices, currency appreciation and lower ex-port expansion. In addition, remittances slowed, increasing by only 3.3 per cent in 2007,compared to 20.1 per cent in 2006, owing essentially to a deteriorating United Stateslabour market. In 2008, only a small number o countries, including Argentina, Ecuadorand Venezuela (Bolivarian Republic o), ran current-account surpluses, attributable to an

improvement in their terms o trade. In the outlook, the signicant economic downturnin the United States and the euro zone will aggravate the external balances o Mexico,Central America and the Caribbean. Although many o the net importers o uel andother commodities in this subregion will see their situation improve, the export sector willbe less dynamic and inows o remittances are expected to decrease. In South America,adverse terms o trade and lower global demand or commodity exports will lead to lowercurrent-account surpluses or widening decits.

Te scal position o the region as a whole will deteriorate as oil and non-oilcommodity exporters ace a sharp al l in commodity prices and export demand, aectinggovernment revenue. Te previously higher export revenues had a positive impact on publicrevenues and primary surpluses, while reducing public debt and allowing expansionary scalpolicies. However, structural budget positions (when expenditures and revenues are pro-

jected according to the trend values o their determinants) have weakened. Public revenuesare expected to all along with slowing economies and the all o commodity prices thatcommenced in mid-2008. In countries highly dependent on oil revenues, such as the Boli-varian Republic o Venezuela, the Government will not be able to continue to expand publicconsumption at the same pace as in recent years.

During 2009, central banks are expected to ease monetary policies in responseto emerging liquidity shortages stemming rom the ongoing global nancial crisis. Tis is aturnaround rom 2008, when interest rates were increased in attempts to control ination-ary pressures. At the same time, i export demand alls sharply and uncertainty induces acredit crunch, authorities will be orced to take counter-cyclical measures. Te scope or do-ing so, however, is limited in many countries o the region. As mentioned above, exchange-rate depreciation is exerting new inationary pressures limiting monetary expansion, while

high levels o public indebtedness will limit scal expansion. Te space or counter-cyclicalmeasures may be larger in those countries with eective scal stabilization unds already inplace, with structural budget rules or with ample oreign-exchange reserves.

Further downside risks mostly depend on the external situation. A deeper eco-nomic slowdown in the United States would aect Mexico, Central America and theCaribbean more directly, while South America will be more sensitive to lower economic

Unemployment rates are

expected to rise

Current-account decits

will increase in 2009

Fiscal positions will

deteriorate, as public

revenues are expected

to all

Interest rate cuts are

expected in response to

liquidity shortages

Downside risks are

mainly external




dynamism in Europe, China and other important Asian export markets. Additionally,increased risk aversion by oreign investors could reverse capital ows, cause exchange-ratevolatility and strong pressure on national currencies to depreciate, and severely tightendomestic credit supplies. As mentioned, scal sustainability remains a challenge or many countries in the region. In order to stimulate the economy and mitigate the social eects

o external shocks, countries will need to see their scal stimulus measures supported by internationally concerted policies to reactivate the global economy (as argued in chapter I) with a view to keeping the burden on uture incomes within manageable proportions.



Statistical annex



Annex

List of tables

A. 1 Developed economies: rates o growth o real GDP, 1999-2009...................................................................................... 129A. 2 Economies in transition: rates o growth o real GDP, 1999-2009 .................................................................................... 130

A. 3 Developing economies: rates o growth o real GDP, 1999-2009 .................................................................................... 131

A. 4 Developed economies: consumer price ination, 1999-2009........................................................................................... 133

A. 5 Economies in transition: consumer price ination, 1999-2009 ......................................................................................... 134

A. 6 Developing economies: consumer price ination, 1999-2009 ......................................................................................... 135

A. 7 Developed economies: unemployment rates, 1999-2009 .................................................................................................. 137

A. 8 Economies in transition and developing economies: unemployment rates, 1999-2008 ................................ 139

A. 9 Major developed economies: quarterly indicators o growth,

unemployment and ination, 2006-2008....................................................................................................................................... 141

A.10 Selected economies in transition: quarterly indicators o growth and ination, 2006-2008 ......................... 142

A.11 Major developing economies: quarterly indicators o growth,

unemployment and ination, 2006-2008....................................................................................................................................... 143

A.12 Major developed economies: nancial indicators, 1999-2008 .......................................................................................... 145A.13 Selected economies: real efective exchange rates, broad measurement, 1999-2008 ...................................... 146

A.14 Indices o prices o primary commodities, 1999-2008 ........................................................................................................... 148

A.15 World oil supply and demand, 2000-2009 ..................................................................................................................................... 149

A.16 World trade: changes in value and volume o

exports and imports, by major country group, 1999-2009 ................................................................................................. 150

A.17 Balance o payments on current accounts,

by country or country group, summary table, 1999-2007 ................................................................................................... 152

A.18 Balance o payments on current accounts, by country or country group, 1999-2007 ...................................... 153

A.19 Net ODA rom major sources, by type, 1987-2007 ................................................................................................................... 156

A.20 Total net ODA ows rom DAC countries, by type o ow, 1995-2007 ......................................................................... 157

A.21 Commitments and net ows o nancial resources,

by selected multilateral institutions, 1998-2007 ......................................................................................................................... 158

A.22 Greenhouse gas emissions o Annex 1 Parties to the

United Nations Framework Convention on Climate Change ............................................................................................ 159



129Statistical annex

Table A.1

Developed economies: rates o growth o real GDP, 1999-2009


1999-2007 a 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b 2009c

Developed economies 2.5 3.2 3.7 1.3 1.4 1.8 3.0 2.4 2.9 2.5 1.2 -0.5United States 2.7 4.4 3.7 0.8 1.6 2.5 3.6 2.9 2.8 2.0 1.2 -1.0

Canada 3.2 5.5 5.2 1.8 2.9 1.9 3.1 2.9 3.1 2.7 0.4 0.8

Japan 1.5 -0.1 2.9 0.2 0.3 1.4 2.7 1.9 2.4 2.1 0.4 -0.3

Australia 3.4 4.4 3.6 2.1 4.0 3.4 3.2 3.2 2.5 4.4 2.6 1.1

New Zealand 3.6 4.7 3.8 2.4 4.7 4.4 4.3 2.7 2.5 3.0 0.6 1.1

European Union 2.4 3.1 3.9 2.0 1.2 1.3 2.5 2.0 3.1 2.9 1.3 -0.5

EU-15 2.3 3.1 3.9 1.9 1.2 1.2 2.3 1.8 2.9 2.7 1.1 -0.7

Austria 2.4 3.3 3.7 0.5 1.6 0.8 2.5 2.9 3.4 3.1 1.9 0.1

Belgium 2.3 3.4 3.7 0.8 1.5 1.0 3.0 1.8 3.0 2.8 1.2 -0.2

Denmark 1.9 2.6 3.5 0.7 0.5 0.4 2.3 2.4 3.3 1.6 0.4 -0.7

Finland 3.4 3.9 5.0 2.6 1.6 1.8 3.7 2.8 4.9 4.5 2.1 0.2

France 2.2 3.3 3.9 1.8 1.0 1.1 2.5 1.9 2.2 2.2 0.8 -0.2

Germany 1.5 2.0 3.2 1.2 0.0 -0.2 1.2 0.8 3.0 2.5 1.6 -0.9Greece 4.2 3.4 4.5 4.2 3.4 5.6 4.9 2.9 4.5 4.0 3.0 1.8

Ireland 6.6 10.7 9.2 5.8 6.4 4.5 4.7 6.4 5.7 6.0 0.4 -2.2

Italy 1.4 1.5 3.7 1.8 0.5 0.0 1.5 0.6 1.8 1.5 -0.2 -1.0

Luxembourg 5.1 8.4 8.4 2.5 4.1 1.5 4.5 5.2 6.4 5.2 2.7 1.7

Netherlands 2.4 4.7 3.9 1.9 0.1 0.3 2.2 2.0 3.4 3.5 2.0 -0.1

Portugal 1.7 3.8 3.9 2.0 0.8 -0.8 1.5 0.9 1.4 1.9 0.6 -0.6

Spain 3.7 4.7 5.0 3.6 2.7 3.1 3.3 3.6 3.9 3.7 1.2 -1.8

Sweden 3.2 4.6 4.4 1.1 2.4 1.9 4.1 3.3 4.1 2.7 1.5 0.4

United Kingdom 2.8 3.5 3.9 2.5 2.1 2.8 2.8 2.1 2.8 3.0 1.0 -1.0

New EU member States 4.4 2.8 4.1 2.9 3.0 4.3 5.6 4.8 6.5 6.0 4.9 3.1

Bulgaria 5.0 2.3 5.4 4.1 4.9 5.0 6.6 6.2 6.3 6.2 6.5 5.0

Cyprus 3.8 4.8 5.0 4.0 2.1 1.9 4.2 3.9 4.1 4.4 3.6 2.6

Czech Republic 4.0 1.3 3.6 2.5 1.9 3.6 4.5 6.3 6.8 6.0 4.1 3.6Estonia 7.2 -0.1 9.6 7.7 7.8 7.1 7.5 9.2 10.4 6.3 -2.0 -2.0

Hungary 4.0 4.2 5.2 4.1 4.1 4.2 4.8 4.0 4.1 1.1 1.5 -1.0

Latvia 8.1 3.3 6.9 8.0 6.5 7.2 8.7 10.6 11.9 10.2 -0.6 -4.0

Lithuania 6.4 -1.5 4.2 6.7 6.9 10.2 7.4 7.8 7.8 8.9 4.5 1.5

Malta 2.5 4.1 6.3 -1.6 2.6 -0.3 1.1 3.5 3.1 3.7 2.9 2.3

Poland 4.1 4.5 4.3 1.2 1.4 3.9 5.3 3.6 6.2 6.6 5.5 4.0

Romania 4.8 -1.2 2.1 5.7 5.1 5.2 8.5 4.2 8.2 6.0 8.0 4.3

Slovakia 4.9 0.0 1.4 3.4 4.8 4.7 5.2 6.5 8.5 10.4 7.8 5.0

Slovenia 4.5 5.3 4.1 2.8 4.0 2.8 4.3 4.3 5.9 6.8 4.2 3.6

Other Europe 2.3 1.7 3.5 1.6 0.9 0.4 3.2 2.7 3.0 3.5 1.5 0.3

Iceland 4.2 4.1 4.3 3.9 0.1 2.4 7.7 7.5 4.4 3.8 -3.4 -8.3

Norway 2.5 2.0 3.3 2.0 1.5 1.0 3.9 2.7 2.5 3.7 1.6 0.9

Switzerland 2.0 1.3 3.6 1.2 0.4 -0.2 2.5 2.5 3.4 3.3 1.7 0.2

Memorandum items:

Major developed economies 2.3 3.0 3.6 1.1 1.2 1.7 2.9 2.2 2.7 2.2 0.9 -0.7

North America 2.7 4.5 3.8 0.9 1.7 2.4 3.6 2.9 2.8 2.1 1.1 -0.8

Western Europe 2.4 3.0 3.9 1.9 1.2 1.3 2.5 2.0 3.1 2.9 1.3 -0.5

Asia and Oceania 1.8 0.5 3.0 0.5 0.9 1.7 2.8 2.1 2.4 2.4 0.7 0.0

Sources: UN/DESA, based on OECD, Main Economic Indicators and individual national sources.

Note: Country groups are calculated as a weighted average o individual country growth rates o gross domestic product (GDP), where weights are

based on GDP in 2005 prices and exchange rates.

a Average percentage change.

b Partly estimated.

c Baseline scenario orecasts, based in part on Project LINK.



130 World Economic Situation and Prospects 2009

Table A.2

Economies in transition: rates o growth o real GDP, 1999-2009


1999-2007 a 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b 2009c

Economies in transitiond 6.9 4.8 8.8 5.7 5.1 7.4 7.7 6.5 7.8 8.3 6.9 4.8

South-eastern Europed 4.2 -1.3 4.1 4.2 4.5 4.3 5.7 4.9 5.4 6.2 5.2 4.5

Albania 6.8 13.5 6.7 7.9 4.2 5.8 5.7 5.8 5.5 6.0 5.8 5.2

Bosnia and Herzegovina 5.9 9.5 5.4 4.3 5.3 4.4 6.3 3.9 6.9 6.8 5.2 4.8

Croatia 4.0 -0.9 2.9 4.4 5.6 5.3 4.3 4.3 4.8 5.6 4.3 3.8

Montenegro 4.2 .. .. 1.1 1.9 2.5 4.4 4.2 8.5 7.0 7.0 5.0

Serbia 3.5 -10.2 4.5 5.4 3.6 2.8 8.2 6.0 5.6 7.1 6.3 5.0

The ormer YugoslavRepublic o Macedonia 2.8 4.3 4.5 -4.5 0.9 2.8 4.1 4.1 4.0 5.0 5.0 4.6

Commonwealth of

Independent States 7.2 5.5 9.3 5.9 5.1 7.7 7.9 6.7 8.1 8.5 7.1 4.9

Net fuel exporters 7.2 6.2 9.9 5.6 5.1 7.4 7.4 6.9 8.1 8.5 7.1 4.9Azerbaijan 15.9 7.4 11.1 9.9 10.6 11.2 10.2 26.4 34.5 25.0 16.0 14.0

Kazakhstan 9.3 2.7 9.8 13.5 9.8 9.3 9.6 9.7 10.7 8.9 4.5 4.0

Russian Federation 7.0 6.4 10.0 5.1 4.7 7.3 7.2 6.4 7.4 8.1 7.1 4.8

Turkmenistan 7.7 16.5 5.5 4.3 0.3 3.3 4.5 12.9 11.1 11.6 7.0 6.0

Uzbekistan 5.8 4.4 4.0 4.2 4.0 4.4 7.7 7.0 7.3 9.5 8.0 6.8

Net fuel importers 6.8 0.9 5.6 7.9 5.5 9.1 11.4 4.9 8.1 8.2 6.8 4.0

Armenia 11.0 3.3 5.9 9.6 15.0 14.0 10.5 13.9 13.3 13.8 10.0 8.0

Belarus 7.2 3.4 5.8 4.7 5.0 7.0 11.4 9.4 10.0 8.7 10.0 8.0

Georgia 7.0 2.9 1.8 4.8 5.5 11.1 5.9 9.6 9.4 12.4 4.0 4.5

Kyrgyzstan 4.3 3.7 5.4 5.3 0.0 7.0 7.0 -0.2 3.1 8.2 6.0 5.0

Republic o Moldova 4.6 -3.4 2.1 6.1 7.8 6.6 7.4 7.5 4.8 3.0 6.0 5.0

Tajikistan 8.3 3.7 8.3 9.6 10.8 11.1 10.3 6.7 6.7 7.8 6.0 7.0Ukraine 6.5 -0.2 5.9 9.2 5.2 9.6 12.1 2.7 7.3 7.6 5.7 2.1

Source: UN/DESA, based on data o the Economic Commission or Europe.




b Partly estimated.


d Excluding Montenegro beore 2000.




Table A.3 (cont’d)

1999-2007 a 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b 2009c

Iran, Islamic Republic o 5.2 4.2 2.8 4.0 6.7 7.1 5.1 4.7 5.8 6.2 6.0 5.6Israel 3.7 2.9 8.9 -0.4 -0.6 2.3 5.2 5.3 5.2 5.4 4.0 1.8

Korea, Republic o 5.6 9.5 8.5 3.8 7.0 3.1 4.7 4.2 5.1 5.0 4.1 3.0

Malaysia 5.6 6.1 8.9 0.5 5.4 5.8 6.8 5.3 5.8 6.3 5.4 4.3

Mexico 3.1 3.8 6.6 0.0 0.8 1.4 4.0 3.1 4.9 3.2 2.0 0.7

Nigeria 8.1 0.5 5.3 8.2 21.2 10.3 10.6 7.1 5.2 6.0 6.1 5.7

Pakistan 5.1 4.3 2.0 3.1 4.6 4.8 7.5 7.7 6.2 6.0 5.8 3.8

Peru 4.6 0.9 3.0 0.2 5.0 4.0 5.1 6.7 7.6 8.9 8.9 5.2

Philippines 4.9 3.4 6.0 1.8 4.4 4.9 6.4 5.0 5.4 7.2 4.4 3.3

Saudi Arabia 3.3 -0.7 4.9 0.5 0.1 7.7 5.3 5.6 3.1 3.4 5.3 2.8

Singapore 6.0 7.2 10.1 -2.4 4.2 3.5 9.0 7.3 8.2 7.7 2.8 0.2

South Arica 4.0 2.4 4.2 2.7 3.7 3.1 4.9 5.0 5.4 5.1 3.1 2.5

Taiwan Province o China 4.2 5.7 5.8 -2.2 4.6 3.5 6.2 4.2 4.8 5.7 3.6 2.7 Thailand 4.9 4.4 4.8 2.2 5.3 7.1 6.3 4.5 5.1 4.8 4.6 3.2

Turkey 4.1 -3.4 6.8 -5.7 6.2 5.3 9.4 8.4 6.9 4.6 2.8 1.8

Venezuela,Bolivarian Republic o 3.2 -6.0 3.7 3.4 -8.9 -7.8 18.3 10.3 10.3 8.4 5.9 1.9

Sources: UN/DESA, based on data o Statistics Division; IMF, International Financial Statistics.




b Partly estimated.


d Covering countries that account or 98 per cent o the population o all developing countries.

e Special Administrative Region o China.




Table A.4

Developed economies: consumer price ination, 1999-2009

Annual percentage changea

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b 2009c

Developed economies 1.6 2.5 2.3 1.6 1.8 2.0 2.3 2.4 2.1 3.5 1.8

United States 2.1 3.4 2.8 1.7 2.2 2.7 3.4 3.3 2.8 4.3 1.3

Canada 1.7 2.7 2.5 2.3 2.8 1.9 2.2 2.0 2.1 3.0 2.3

Japan -0.3 -0.7 -0.8 -0.9 -0.2 0.0 -0.3 0.2 0.1 1.6 1.1

Australia 1.5 4.5 4.4 3.0 2.8 2.3 2.7 3.5 2.3 4.7 3.5

New Zealand -0.1 2.6 2.6 2.7 1.8 2.3 3.0 3.4 2.4 4.1 3.3

European Union 1.8 2.6 2.7 2.3 2.1 2.1 2.2 2.2 2.2 3.4 2.2

EU-15 1.2 2.0 2.2 2.1 2.0 2.0 2.1 2.2 2.1 3.2 2.1

Austria 0.5 2.0 2.3 1.7 1.3 2.0 2.1 1.7 2.2 3.1 1.8

Belgium 1.1 2.7 2.4 1.6 1.5 1.9 2.5 2.3 1.8 4.3 3.1

Denmark 2.1 2.7 2.3 2.4 2.0 0.9 1.7 1.9 1.7 3.4 2.2

Finland 1.3 2.9 2.7 2.0 1.3 0.1 0.8 1.3 1.6 3.8 1.7

France 0.6 1.8 1.8 1.9 2.2 2.3 1.9 1.9 1.6 3.4 1.8Germany 0.6 1.4 1.9 1.4 1.0 1.8 1.9 1.8 2.3 2.5 1.8

Greece 2.1 2.9 3.7 3.9 3.4 3.0 3.5 3.3 3.0 4.4 2.6

Ireland 2.5 5.3 4.0 4.7 4.0 2.3 2.2 2.7 2.9 3.6 2.0

Italy 1.7 2.6 2.3 2.6 2.8 2.3 2.2 2.2 2.0 3.2 1.8

Luxembourg 1.0 3.8 2.4 2.1 2.5 3.2 3.8 3.0 2.7 3.7 2.5

Netherlands 2.0 2.3 5.1 3.9 2.2 1.4 1.5 1.7 1.6 2.5 2.8

Portugal 2.2 2.8 4.4 3.7 3.3 2.5 2.1 3.0 2.4 2.6 1.6

Spain 2.2 3.5 2.8 3.6 3.1 3.1 3.4 3.6 2.8 3.8 2.3

Sweden 0.5 1.3 2.7 1.9 2.3 1.0 0.8 1.5 1.7 3.5 2.0

United Kingdom 1.3 0.8 1.2 1.3 1.4 1.3 2.1 2.3 2.3 3.5 2.7

New EU member States 10.9 12.8 9.2 5.2 3.6 5.1 3.4 3.1 4.1 6.0 4.1

Bulgaria 2.6 10.3 7.4 5.8 2.3 6.1 6.0 7.4 7.6 12.0 5.2Cyprus 1.1 4.9 2.0 2.8 4.0 1.9 2.0 2.2 2.2 5.0 3.8

Czech Republic 1.8 3.9 4.5 1.4 -0.1 2.6 1.6 2.1 3.0 5.6 4.0

Estonia 3.1 3.9 5.6 3.6 1.4 3.0 4.1 4.4 6.7 11.0 6.0

Hungary 10.0 10.0 9.1 5.2 4.7 6.8 3.5 4.0 7.9 6.0 3.9

Latvia 2.1 2.6 2.5 2.0 2.9 6.2 6.9 6.6 10.1 15.0 6.5

Lithuania 1.5 1.1 1.6 0.3 -1.1 1.2 2.7 3.8 5.8 11.0 7.0

Malta 2.3 3.0 2.5 2.6 1.9 2.7 2.5 2.6 0.7 5.0 3.6

Poland 7.2 10.1 5.3 1.9 0.7 3.6 2.2 1.3 2.6 4.3 3.6

Romania 45.8 45.7 34.5 22.5 15.3 11.9 9.1 6.6 4.9 8.0 5.0

Slovakia 10.4 12.2 7.2 3.5 8.4 7.5 2.8 4.3 1.9 4.0 3.8

Slovenia 6.1 8.9 8.6 7.5 5.7 3.7 2.5 2.5 3.8 5.8 3.2

Other Europe 1.5 2.3 2.0 1.0 1.5 0.7 1.3 1.7 0.8 3.4 2.5

Iceland 2.1 4.4 6.6 5.3 1.4 2.3 1.4 4.6 3.6 15.2 18.5

Norway 2.3 3.1 3.0 1.3 2.5 0.5 1.5 2.3 0.7 4.0 3.1

Switzerland 0.8 1.6 1.0 0.6 0.6 0.8 1.2 1.1 0.7 2.4 1.3

Memorandum items:

Major developed economies 1.3 2.1 1.9 1.3 1.7 1.9 2.3 2.3 2.1 3.4 1.6

Euro zone 1.2 2.3 2.5 2.3 2.1 2.2 2.2 2.2 2.1 3.2 2.0

Sources: UN/DESA, based on OECD, Main Economic Indicators; Eurostat; and, individual national sources.

a Data or country groups are weighted averages, where weights or each year are based on GDP in 2005, in United States dollars.

b Partly estimated.





Table A.5

Economies in transition: consumer price ination, 1999-2009


1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b 2009c

Economies in transitiond 73.1 25.1 21.5 13.9 12.0 10.1 11.8 9.2 9.1 15.2 11.8

South-eastern Europed 14.0 25.3 31.1 7.6 3.8 3.9 6.4 6.2 3.9 7.7 4.9

Albania 0.4 0.1 3.1 7.8 0.5 2.3 2.4 2.4 2.9 4.2 3.2

Bosnia and Herzegovina -0.6 1.7 1.8 0.9 0.2 -0.3 3.0 6.0 2.0 8.0 4.5

Croatia 4.0 4.6 3.8 1.7 1.8 2.1 3.0 3.2 2.9 6.4 3.9

Montenegro .. .. 22.6 18.3 6.7 2.2 2.6 3.0 4.3 8.4 3.5

Serbia 42.4 77.5 98.4 19.3 9.6 9.8 16.1 12.7 6.5 10.3 7.0

The ormer YugoslavRepublic o Macedonia -1.3 6.6 5.2 2.4 1.1 -0.6 -0.7 3.3 2.8 8.0 5.0

Commonwealth of

Independent States 78.5 25.1 20.6 14.4 12.8 10.6 12.3 9.5 9.6 15.9 12.4

Net fuel exporters 77.7 20.0 20.3 15.0 13.1 10.6 12.4 9.6 9.3 14.9 11.6

Azerbaijan -8.6 1.8 1.6 2.8 2.1 6.7 9.6 8.3 16.6 22.5 20.0

Kazakhstan 8.3 13.2 8.4 5.8 6.4 6.9 7.6 8.6 10.8 19.7 12.0

Russian Federation 85.7 20.8 21.5 15.8 13.7 10.9 12.7 9.7 9.0 14.5 11.5

Turkmenistan 23.5 7.0 8.2 15.0 15.3 10.0 12.0 9.0 6.4 12.0 10.0

Uzbekistan 29.0 25.0 26.6 21.6 19.0 14.2 15.0 10.5 12.3 12.0 10.0

Net fuel importers 83.0 57.4 22.6 10.7 10.6 10.9 11.8 8.8 11.3 22.3 17.2

Armenia 0.7 -0.8 3.2 1.0 2.7 8.1 0.6 2.9 4.4 9.7 6.0

Belarus 293.7 168.9 61.4 42.8 28.5 18.3 10.4 7.0 8.4 15.5 10.2

Georgia 19.3 4.2 4.6 5.7 4.9 5.7 8.2 9.2 9.2 11.0 6.5

Kyrgyzstan 35.9 19.7 6.9 2.1 3.0 4.1 4.4 5.6 10.2 27.5 15.5

Republic o Moldova 45.9 31.3 9.8 5.3 11.8 12.5 12.0 12.8 12.4 15.0 9.5

Tajikistan 27.4 32.9 38.6 12.2 16.3 7.2 7.2 10.0 13.4 30.0 18.5

Ukraine 22.7 28.2 11.9 0.8 5.2 9.1 13.5 9.6 12.8 26.2 21.4

Source: UN/DESA, based on data o the Economic Commission or Europe.

a Data or country groups are weighted averages, where weights or each year are based on GDP in 2005, in United States dollars.

b Partly estimated.


d Excluding Montenegro beore 2001.




Table A.6

Developing economies: consumer price ination, 1999-2009


1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b 2009c

Developing countries by region: 7.4 7.0 6.3 5.9 5.8 5.0 4.6 4.5 5.2 8.1 5.9

Africa 14.5 18.6 13.1 9.3 8.8 6.6 6.7 6.1 6.4 10.7 7.5

North Arica 2.4 1.1 1.1 0.7 2.3 4.7 2.6 4.5 5.3 9.6 7.0

Sub-Saharan Arica(excluding Nigeriaand South Arica) 39.4 54.3 30.8 17.7 16.8 9.7 9.8 8.3 7.5 12.7 8.4

Net uel exporters 21.7 26.2 17.2 11.6 12.5 10.6 8.4 6.2 6.5 9.9 7.8

Net uel importers 9.1 12.8 10.0 7.5 6.0 3.5 5.4 6.0 6.3 11.2 7.3

East and South Asia 2.2 1.9 2.6 2.1 2.7 4.1 3.6 3.6 4.9 7.4 4.7

East Asia 0.9 0.9 2.0 1.0 1.8 3.5 2.9 2.7 4.0 6.4 3.6

South Asia 7.1 5.6 4.9 5.9 5.9 6.2 6.5 7.1 8.5 11.3 8.8



Western Asia 24.1 19.9 19.9 17.4 8.6 4.0 4.5 5.9 5.8 10.0 7.8

Net uel exporters -0.4 -0.4 -0.2 0.3 1.1 1.4 2.4 3.7 4.9 10.8 8.4


Latin America

and the Caribbean 10.0 8.9 6.6 8.8 10.8 6.9 6.3 5.2 5.3 8.1 7.3

South America 7.3 8.8 6.7 10.9 13.8 7.0 7.2 5.7 5.8 9.0 8.3

Mexico and Central America 15.4 9.2 6.4 5.1 4.6 4.9 4.4 3.9 4.3 6.1 5.1

Caribbean 5.6 6.9 7.9 5.3 18.0 30.4 7.2 8.2 7.1 13.1 9.5



Memorandum items:

Least developed countries 41.1 53.6 30.7 20.2 18.3 11.1 10.6 9.6 9.9 13.5 9.8East Asia (excluding China) 3.3 1.6 3.5 2.9 2.5 3.2 3.9 3.9 3.1 6.4 4.2

South Asia (excluding India) 12.0 8.9 7.4 8.8 9.9 11.0 10.9 9.8 12.8 17.9 13.5

Western Asia(excluding Israel and Turkey) -0.1 -0.2 0.2 0.7 1.5 1.8 2.8 4.3 5.1 11.1 8.6

Major developing economies

Argentina -1.2 -0.9 -1.1 25.9 13.4 4.4 9.6 10.9 8.8 9.0 7.9

Brazil 4.9 7.1 6.8 8.5 14.7 6.6 6.8 4.2 3.6 5.8 5.8

Chile 3.3 3.8 3.6 2.5 2.8 1.1 3.1 3.4 4.4 8.9 6.5

China -1.4 0.3 0.5 -0.8 1.2 3.9 1.8 1.5 4.8 6.3 3.1

Colombia 10.9 9.2 8.0 6.3 7.1 5.9 5.0 4.3 5.5 7.3 5.5

Egypt 3.1 2.7 2.3 2.7 4.5 11.3 4.9 7.6 9.3 17.1 9.7

Hong Kong SARd -4.0 -3.8 -1.6 -3.1 -2.5 -0.4 0.9 2.1 2.0 4.5 4.3

India 4.7 4.0 3.7 4.4 3.8 3.8 4.2 5.8 6.4 8.0 6.5

Indonesia 20.5 3.7 11.5 11.9 6.6 6.2 10.5 13.1 6.4 10.3 8.0

Iran, Islamic Republic o 20.1 14.5 11.3 14.3 16.5 14.8 13.4 11.9 17.2 24.0 18.5

Israel 5.2 1.1 1.1 5.7 0.7 -0.4 1.3 2.1 0.5 5.1 3.2

Korea, Republic o 0.8 2.3 4.1 2.8 3.5 3.6 2.8 2.2 2.5 4.8 3.3





1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b 2009c

Malaysia 2.7 1.5 1.4 1.8 1.0 1.5 3.0 3.6 2.0 5.8 3.4

Mexico 16.6 9.5 6.4 5.0 4.5 4.7 4.0 3.6 4.0 5.4 4.7

Nigeria 6.6 6.9 18.9 12.9 14.0 15.0 17.9 8.2 6.5 7.6 7.9

Pakistan 4.1 4.4 3.2 3.3 2.9 7.4 9.1 7.9 7.6 12.1 9.1

Peru 3.5 3.8 2.0 0.2 2.3 3.7 1.6 2.0 1.8 5.6 4.4

Philippines 5.9 4.0 6.8 3.0 3.5 6.0 7.6 6.2 2.8 8.8 7.0

Saudi Arabia -1.3 -1.1 -1.1 0.2 0.6 0.3 0.7 2.2 4.1 11.0 8.7

Singapore 0.0 1.4 1.0 -0.4 0.5 1.7 0.4 1.0 2.1 6.5 2.4

South Arica 5.2 5.4 5.7 9.2 5.8 1.4 3.5 4.6 6.5 11.2 7.0

Taiwan Province o China 0.2 1.3 0.0 -0.2 -0.3 1.6 2.3 0.6 1.8 3.7 1.7

Thailand 0.3 1.6 1.6 0.6 1.8 2.8 4.5 4.6 2.2 6.3 3.2

Turkey 64.9 54.9 54.4 45.0 21.6 8.6 8.2 9.6 8.8 10.2 8.5

Venezuela,

Bolivarian Republic o 23.6 16.2 12.5 22.4 31.1 21.8 16.0 13.7 18.7 31.2 31.3

Source: UN/DESA, based on IMF, International Financial Statistics.

a Data or country groups are weighted averages, where weights are based on GDP in 2005 prices and exchange rates.

b Partly estimated.


d Special Administrative Region o China.




Table A.7

Developed economies: unemployment rates,a,b 1999-2009

Percentage of labour force

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008c 2009d

Developed economies .. 6.5 6.7 7.3 7.3 7.1 6.8 6.3 5.7 6.1 7.0

United States 4.2 4.0 4.7 5.8 6.0 5.5 5.1 4.6 4.6 5.7 7.2

Canada 7.6 6.8 7.2 7.7 7.6 7.2 6.8 6.3 6.0 6.1 6.4

Japan 4.7 4.7 5.0 5.4 5.3 4.7 4.4 4.1 3.8 3.8 3.8

Australia 6.9 6.3 6.8 6.4 6.1 5.5 5.1 4.9 4.4 4.2 5.0

New Zealand 6.8 6.0 5.3 5.2 4.6 3.9 3.7 3.8 3.6 3.9 3.9

European Union .. 8.7 8.5 8.9 9.0 9.0 8.9 8.2 7.1 7.3 8.1

EU-15 8.6 7.7 7.2 7.6 7.9 8.1 8.1 7.7 7.0 7.2 8.2

Austria 3.9 3.7 3.6 4.2 4.3 4.8 5.2 4.8 4.4 4.1 4.9

Belgium 8.5 6.8 6.6 7.5 8.2 8.4 8.5 8.3 7.5 7.1 7.4

Denmark 5.1 4.3 4.5 4.6 5.4 5.5 4.8 3.9 3.8 3.1 3.7

Finland 10.3 9.6 9.1 9.1 9.1 8.8 8.4 7.7 6.9 6.4 6.8

France 10.4 9.0 8.3 8.6 9.0 9.3 9.3 9.2 8.3 8.0 8.8

Germany 8.3 7.5 7.6 8.4 9.3 9.8 10.6 9.8 8.4 7.3 7.6

Greece 12.0 11.3 10.7 10.3 9.7 10.5 9.9 8.9 8.3 7.9 8.1

Ireland 5.7 4.2 4.0 4.5 4.7 4.5 4.4 4.5 4.7 6.2 8.1

Italy 11.0 10.2 9.1 8.7 8.5 8.1 7.7 6.8 6.2 7.0 7.5

Luxembourg 2.4 2.3 1.9 2.6 3.8 4.9 4.6 4.6 4.6 5.0 5.5

Netherlands 3.2 2.8 2.3 2.8 3.7 4.6 4.7 3.9 3.2 2.8 3.3

Portugal 4.5 4.0 4.0 5.1 6.4 6.8 7.7 7.8 8.1 7.5 8.3

Spain 12.5 11.1 10.4 11.1 11.1 10.6 9.2 8.5 8.3 11.1 15.1

Sweden 6.7 5.6 4.9 5.0 5.6 6.3 7.3 7.0 6.2 6.0 6.7

United Kingdom 5.9 5.4 5.0 5.1 5.0 4.7 4.8 5.4 5.3 5.6 6.3

New EU member States .. 12.2 13.0 13.7 12.9 12.8 11.9 10.0 7.6 7.8 7.8

Bulgaria 16.0 16.4 19.5 18.1 13.7 12.0 10.1 9.0 6.9 6.5 6.6

Cyprus .. 4.9 3.8 3.6 4.1 4.7 5.3 4.6 4.0 4.0 4.0

Czech Republic 8.6 8.7 8.0 7.3 7.8 8.3 7.9 7.2 5.3 5.5 5.8

Estoniae 11.3 12.8 12.4 10.3 10.0 9.7 7.9 5.9 4.7 5.5 6.8

Hungary 6.9 6.4 5.7 5.8 5.9 6.1 7.2 7.5 7.4 8.0 8.6

Latviae 14.0 13.7 12.9 12.2 10.5 10.4 8.9 6.8 6.0 5.8 7.0

Lithuaniae 13.7 16.4 16.5 13.5 12.4 11.4 8.3 5.6 4.3 4.6 5.4

Malta .. 6.7 7.6 7.5 7.6 7.4 7.2 7.1 6.4 6.5 6.5

Poland 13.4 16.1 18.3 20.0 19.7 19.0 17.8 13.9 9.6 9.6 9.0

Romania 7.1 7.3 6.8 8.6 7.0 8.1 7.2 7.3 6.4 7.0 6.8

Slovakia 16.4 18.8 19.3 18.7 17.6 18.2 16.3 13.4 11.1 10.9 11.2

Sloveniae 7.3 6.7 6.2 6.3 6.7 6.3 6.5 6.0 4.9 5.0 5.2

Other Europe 3.0 2.8 2.9 3.4 4.3 4.4 4.4 3.8 3.2 3.2 3.4

Icelande 1.9 1.3 1.4 2.5 3.4 3.1 2.0 1.3 1.0 1.3 3.4

Norway 3.2 3.4 3.6 3.9 4.5 4.4 4.6 3.5 2.6 2.8 2.9

Switzerland 3.0 2.6 2.6 3.2 4.3 4.4 4.4 4.0 3.6 3.5 3.7




Table A7 (cont’d)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008c 2009d

Memorandum items:

Major developed economies 6.0 5.6 5.8 6.5 6.6 6.3 6.2 5.8 5.4 5.8 6.7

Euro zone 9.2 8.3 7.8 8.2 8.7 8.8 8.8 8.2 7.4 7.6 8.6

Source: UN/DESA, based on data o OECD and the Economic Commission or Europe.

a Unemployment data are standardized by OECD or comparability among countries and over time, in conormity with the denitions o the

International Labour Organization (see OECD, Standardized Unemployment Rates: Sources and Methods (Paris, 1985)).

b Data or country groups are weighted averages, where labour orce is used or weights.

c Partly estimated.

d Baseline scenario orecasts, based in part on Project LINK.

e Not standardized.




Table A.8

Economies in transition and developing economies: unemployment rates,a 1999-2008

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b

South-eastern Europe

Albaniac 18.4 16.8 16.4 15.8 15.0 14.4 14.2 13.9 13.2 13.5

Bosnia and Herzegovinac 39.0 39.4 39.9 42.7 44.0 44.9 46.6 47.7 46.0 46.0

Croatia 13.6 16.1 15.8 14.8 14.3 13.8 12.7 11.1 9.6 9.0

Montenegro .. 37.4 36.6 36.5 33.4 31.2 27.4 22.3 18.0 15.3

Serbia .. 12.1 12.2 13.3 14.6 18.5 20.8 20.9 18.1 15.5

The ormer Yugoslav Republic o Macedonia 32.4 32.2 30.5 31.9 36.7 37.2 37.3 36.0 34.9 34.4


Net fuel exporters

Azerbaijanc 1.2 1.2 1.3 1.3 1.4 1.4 1.4 1.3 1.2 1.1

Kazakhstan .. 12.8 10.4 9.3 8.8 8.4 8.1 7.8 7.3 6.9

Russian Federation 12.6 10.5 9.0 8.0 8.6 8.2 7.6 7.2 6.1 5.8

Turkmenistanc .. 2.4 2.5 2.5 2.5 2.5 .. .. .. ..Uzbekistanc 0.4 0.4 0.4 0.4 0.3 0.4 0.3 0.3 0.2 0.2

Net fuel importers

Armeniac 11.5 10.9 9.8 10.5 10.2 9.4 7.6 7.2 6.6 6.3

Belarusc 2.1 2.1 2.3 3.0 3.1 1.9 1.5 1.2 1.0 1.0

Georgia 13.8 10.3 11.1 12.6 11.5 12.6 13.8 13.6 13.3 13.3

Kyrgyzstanc 3.0 3.1 3.2 3.1 2.9 2.9 3.3 3.2 3.2 3.1

Republic o Moldovac .. 8.5 7.3 6.8 7.9 8.1 7.3 7.4 5.1 5.0

Tajikistanc 3.0 2.7 2.3 2.6 2.3 2.0 2.1 2.3 2.5 2.5

Ukraine 11.6 11.6 10.9 9.6 9.1 8.6 7.2 6.8 6.4 6.4

Arica

Algeria .. .. 27.3 25.9 23.7 17.7 15.3 12.3 13.8 ..

Botswana .. 15.8 19.6 .. 23.8 .. .. 17.6 .. ..

Egypt 8.1 9.0 9.2 10.2 11.9 10.3 11.2 10.7 9.0 8.7

Mauritius .. 6.7 6.9 7.3 7.7 8.5 9.6 9.1 8.5 7.8

Morocco 13.9 13.6 12.5 11.6 11.9 10.8 11.0 9.7 9.5 ..

South Arica .. 26.0 27.9 30.0 29.8 27.0 26.6 25.5 24.3 23.2

Tunisia 16.0 15.7 15.1 15.3 14.5 14.2 14.2 14.3 14.1 ..

Developing America

Argentinad,e 14.3 15.1 17.4 19.7 17.3 13.6 11.6 10.2 8.5 8.2

Barbados 10.4 9.2 9.9 10.3 11.0 9.8 9.1 8.7 7.4 ..

Boliviad 7.2 7.5 8.5 8.7 9.2 6.2 8.1 8.0 7.7 ..

Brazil,g 7.6 7.1 6.2 11.7 12.3 11.5 9.8 10.0 9.3 8.5

Chile 10.1 9.7 9.9 9.8 9.5 10.0 9.2 7.7 7.1 8.0Colombiah 19.4 17.3 18.2 17.6 16.7 15.4 13.9 13.0 11.4 12.0

Costa Rica 6.2 5.3 5.8 6.8 6.7 6.7 6.9 6.0 4.8 5.0

Dominican Republic 13.8 13.9 15.6 16.1 16.7 18.4 18.0 16.2 15.6 ..

Ecuadori 15.1 14.1 10.4 8.6 9.8 9.7 8.5 8.1 7.4 8.2

El Salvador 6.9 6.5 7.0 6.2 6.2 6.5 7.3 5.7 .. ..

Guatemala .. .. .. 5.4 5.2 4.4 .. .. .. ..





1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b

Honduras 5.3 .. 5.9 6.1 7.6 8.0 6.5 4.9 4.0 ..

Jamaica 15.7 15.5 15.0 14.2 11.4 11.7 11.3 10.3 9.9 ..

Mexico 3.7 3.4 3.6 3.9 4.6 5.3 4.7 4.6 4.8 4.4

Nicaragua 10.7 7.8 11.3 11.6 10.2 9.3 7.0 7.0 6.9 ..

Panama 13.6 15.2 17.0 16.5 15.9 14.1 12.1 10.4 7.8 6.0

Paraguayd 9.4 10.0 10.8 14.7 11.2 10.0 7.6 8.9 7.2 ..

Perud,j 9.2 8.5 9.3 9.4 9.4 9.4 9.6 8.5 8.4 8.0

Trinidad and Tobago 13.2 12.2 10.8 10.4 10.5 8.4 8.0 6.2 5.9 ..

Uruguayd 11.3 13.6 15.3 17.0 16.9 13.1 12.2 11.4 9.6 8.2

Venezuela, Bolivarian Republic o 15.0 13.9 13.3 15.8 18.0 15.3 12.4 10.0 8.4 8.2

Developing Asia

China 3.1 3.1 3.6 4.0 4.3 4.2 4.2 4.1 4.0 4.0

Hong Kong SARk 6.2 4.9 5.1 7.3 7.9 6.8 5.6 4.8 4.0 3.6

India .. 4.3 .. .. .. 5.0 .. .. .. ..

Indonesia 6.4 6.1 8.1 9.1 9.5 9.9 11.2 10.3 .. ..

Iran, Islamic Republic o .. .. .. 12.8 .. 10.3 11.5 .. .. ..

Israel 8.9 8.8 9.4 10.3 10.7 10.4 9.0 8.4 7.3 6.1

Jordan .. 13.7 14.7 14.4 14.8 12.5 14.8 14.0 13.1 12.9

Korea, Republic o 6.3 4.4 4.0 3.3 3.6 3.7 3.7 3.5 3.2 3.2

Malaysia 3.5 3.1 3.5 3.5 3.6 3.6 3.6 3.3 3.2 3.5

Occupied Palestinian Territory 11.8 14.1 25.2 31.3 25.6 26.8 23.5 23.6 21.5 25.7

Pakistan 5.9 7.8 7.8 8.3 8.3 7.7 7.7 6.2 5.3 ..

Philippinesl,m 9.6 10.1 9.8 10.2 10.2 10.9 7.8 7.9 7.3 7.7

Saudi Arabia 4.3 4.6 4.6 5.3 5.6 5.8 6.1 6.3 5.6 ..

Singapore 2.8 2.7 2.7 3.6 4.0 3.4 3.1 2.7 2.3 2.1

Sri Lanka 9.1 8.0 7.7 8.7 9.2 8.5 7.2 6.5 6.0 5.4

Taiwan Province o China 2.9 3.0 4.6 5.2 5.0 4.4 4.1 3.9 3.9 4.0

Thailand 4.2 3.6 3.3 2.4 2.2 2.1 1.8 1.5 1.4 1.4

Turkey 7.7 6.5 8.4 10.3 10.5 10.3 10.3 9.9 9.9 10.0

Viet Namd 6.7 6.4 6.3 6.0 5.8 5.6 5.3 4.8 4.6 ..

Sources: UN/DESA, based on data o the Economic Commission or Europe (ECE); ILO LABORSTAT database and KILM 5th edition; Economic

Commission or Latin America and the Caribbean (ECLAC); national sources.

a As a percentage o labour orce.

b Partly estimated.

c End-o-period registered unemployment data (as a percentage o labour orce).

d Urban areas.

e Break in series: new methodology starting in 2003.

6 main cities.

g Break in series: new methodology starting in 2002.h 13 main cities.

i Covers Quito, Guayaquil and Cuenca rom 2000.

j Metropolitan Lima.

k Special Administrative Region o China.

l Philippines denition: this partly adopts the ILO denition, that is to say, it does not include one ILO criterion which is “currently available or work”.

m Break in series: new methodology starting in 2005.




Table A.10

Selected economies in transition: quarterly indicators o growth and ination, 2006-2008

Percentage

2006 quarters 2007 quarters 2008 quarters

I II III IV I II III IV I II III

Rates o growth o gross domestic producta

Armenia .. .. .. .. 11.5 11.6 13.5 13.8 9.1 10.3 10.4

Belarus 11.3 9.6 8.7 10.7 8.2 8.7 8.4 7.3 10.9 10.1 ..

Georgia 9.2 7.1 9.9 11.1 11.4 13.4 13.2 11.7 9.3 7.9 ..

Kazakhstan 7.5 9.3 10.5 10.7 10.6 10.4 9.6 8.9 6.1 5.4 ..

Kyrgyzstan 2.8 4.8 1.7 4.0 7.9 8.8 7.8 8.5 11.7 .. ..

Russian Federation 6.3 7.4 7.5 8.0 7.4 8.1 7.3 9.5 8.5 7.5 ..

Ukraine 4.7 7.5 8.3 10.4 8.9 8.7 7.7 7.6 6.5 6.5 6.9

Change in consumer pricesa

Armenia -2.0 1.7 6.7 5.8 4.9 4.3 2.1 6.3 7.8 10.1 11.3

Belarus 7.8 7.1 6.3 6.6 7.5 6.8 8.0 10.7 12.8 15.5 16.3

Croatia 3.5 3.8 3.3 2.3 1.6 2.1 2.8 4.9 5.8 6.5 7.5

Georgia 5.0 9.1 13.0 9.6 10.4 7.5 7.6 11.3 11.2 11.4 11.0

Kazakhstan 8.4 9.0 8.7 8.3 8.0 7.9 9.7 17.3 18.7 19.5 19.5

Kyrgyzstan 6.2 5.7 5.2 5.0 4.7 4.8 9.8 21.2 22.3 28.8 ..

Republic o Moldova 10.8 11.8 14.2 14.1 11.8 10.6 13.2 13.8 15.0 16.4 12.0

Russian Federation 10.9 9.4 9.4 9.1 7.7 8.0 8.9 11.5 12.9 14.8 14.9

Ukraine 9.7 7.1 8.0 11.4 10.2 11.4 14.1 15.5 22.5 30.1 25.8

Sources: UN/DESA, based on data o the Economic Commission or Europe and national sources.

a Percentage change rom the corresponding period o the preceding year.




Table A.11

Major developing economies: quarterly indicators o growth, unemployment and ination, 2006-2008

Percentage



Rates o growth o gross domestic producta

Argentina 8.8 7.9 8.8 8.6 8.0 8.4 8.8 9.1 8.3 7.5 ..

Brazil 3.9 1.2 4.4 5.0 4.0 4.8 5.1 5.3 5.5 5.7 ..

Chile 5.0 4.4 3.2 4.8 6.2 6.2 3.9 4.0 3.3 4.5 4.8

China 10.2 10.9 10.7 11.0 11.1 11.5 11.5 11.2 10.6 10.4 9.9

Colombia 6.2 5.9 7.8 7.2 8.5 8.0 6.5 8.0 4.5 3.7 ..

Ecuador 4.8 4.1 4.9 1.8 1.6 1.1 1.4 5.8 6.9 8.8 ..

Hong Kong SARb 9.0 6.2 6.4 6.6 5.5 6.2 6.8 6.9 7.3 4.2 1.7

India 10.2 9.6 10.1 9.3 9.7 9.2 9.3 8.8 8.8 7.9 7.6

Indonesia 5.0 5.0 5.9 6.1 6.1 6.4 6.5 6.3 6.3 6.4 6.1

Israel 5.3 6.9 4.8 3.8 5.5 4.2 4.9 6.8 5.2 4.9 5.1

Korea, Republic o 6.3 5.2 5.0 4.2 4.0 4.9 5.1 5.7 5.8 4.8 3.9Malaysia 5.9 6.0 5.9 5.3 5.5 5.7 6.7 7.3 7.1 6.7 4.7

Mexico 6.0 5.1 4.9 3.7 2.5 2.6 3.4 4.2 2.6 2.7 1.6

Philippines 5.7 5.6 5.2 5.5 7.0 8.3 7.1 6.4 4.7 4.4 4.6

Singapore 10.4 8.2 7.4 7.0 7.0 9.1 9.5 5.4 6.9 2.3 -0.6

South Arica 4.9 4.9 4.8 6.6 5.8 4.9 5.1 4.6 3.8 4.4 2.9

Taiwan Provinceo China 5.0 4.9 5.5 3.9 3.8 5.5 7.0 6.4 6.2 4.6 -1.0

Thailand 6.4 5.3 4.8 4.5 4.4 4.4 5.1 5.7 6.0 5.3 4.0

Turkey 5.9 9.7 6.3 5.7 8.1 4.1 3.3 3.6 6.7 1.9 ..

Venezuela,Bolivarian Republic o 10.3 9.4 10.2 11.4 8.8 7.6 8.6 8.5 4.9 7.2 4.6

Unemployment ratec

Argentina 11.4 10.4 10.2 8.7 9.8 8.5 8.1 7.5 8.4 8.0 7.8

Brazil 9.9 10.3 10.4 9.2 9.8 10.0 9.3 8.1 8.4 8.1 7.8

Chile 8.0 8.8 8.4 6.7 6.4 6.8 7.4 7.4 7.4 8.0 8.1

Colombia 9.4 8.5 9.7 8.9 9.8 11.2 10.9 9.8 12.1 11.1 11.4

Hong Kong SARb 4.9 4.9 5.1 4.4 4.1 4.3 4.4 3.6 3.2 3.3 3.5

Israel 8.4 8.4 8.8 8.1 7.3 7.4 7.6 7.0 5.9 5.7 6.4

Korea, Republic o 3.9 3.4 3.3 3.2 3.6 3.3 3.1 3.0 3.4 3.1 3.1

Malaysia 3.8 3.4 3.1 3.0 3.4 3.4 3.1 3.0 3.6 3.5 ..

Mexico 3.5 3.2 4.0 3.6 4.0 3.4 3.9 3.5 4.0 3.5 4.2

Philippines 8.1 8.2 8.0 7.3 7.8 7.4 7.8 6.3 7.4 8.0 7.4

Singapore 2.6 2.7 2.7 2.6 2.9 2.3 1.7 1.7 2.0 2.2 2.2

Taiwan Provinceo China 3.9 3.9 4.0 3.9 3.8 3.9 4.0 3.9 3.9 3.9 4.2

Thailand 1.9 1.7 1.2 1.3 1.6 1.6 1.2 1.1 1.7 1.4 1.2

Turkey 11.5 9.2 9.0 9.8 10.9 9.2 9.0 10.1 11.2 9.2 9.0

Uruguay 12.6 10.8 10.7 9.6 9.9 9.5 9.0 8.1 8.5 7.5 7.6








Change in consumer pricesa

Argentina 11.6 11.4 10.6 10.1 9.5 8.8 8.6 8.5 8.5 9.1 9.0Brazil 5.5 4.3 3.8 3.1 3.0 3.3 4.0 4.3 4.7 5.6 6.3

Chile 4.1 3.8 3.5 2.2 2.7 2.9 4.8 7.2 8.0 8.9 9.3

China 1.2 1.4 1.3 2.0 2.7 3.6 6.1 6.6 8.0 7.8 5.3

Colombia 4.3 4.0 4.5 4.3 5.2 5.7 5.3 5.4 6.1 6.9 7.7

Ecuador 3.9 3.4 2.8 2.0 2.1 1.7 2.5 2.8 5.3 9.1 9.9

Hong Kong SARb 1.6 2.1 2.3 2.2 1.7 1.3 1.7 3.5 4.6 5.7 4.6

India 4.5 5.9 6.2 6.5 7.0 6.3 6.7 5.5 6.3 7.8 9.0

Indonesia 16.9 15.5 14.9 6.1 6.3 6.1 6.5 6.7 7.6 10.2 11.9

Israel 3.1 3.6 2.0 -0.2 -0.6 -1.1 0.9 2.8 3.6 5.0 5.1

Korea, Republic o 2.1 2.2 2.5 2.1 2.0 2.4 2.3 3.4 3.8 4.8 5.5

Malaysia 3.8 4.1 3.6 3.0 2.6 1.5 1.8 2.2 2.6 4.8 8.4

Mexico 3.7 3.1 3.5 4.1 4.1 4.0 4.0 3.8 3.9 4.9 5.5Philippines 7.3 6.9 6.1 4.8 2.9 2.4 2.5 3.3 5.5 9.7 12.2

Singapore 1.4 1.2 0.7 0.6 0.5 1.0 2.8 4.1 6.6 7.5 6.5

South Arica 3.8 4.0 5.2 5.5 5.9 7.0 7.0 8.4 9.9 11.7 13.5

Taiwan Provinceo China 1.3 1.5 -0.3 -0.1 0.9 0.3 1.5 4.5 3.6 4.2 4.5

Thailand 5.7 6.0 3.6 3.3 2.5 1.9 1.6 2.9 5.0 7.5 7.2

Turkey 8.1 9.6 10.8 9.8 10.3 9.5 7.1 8.2 8.8 10.3 11.7


Source: IMF, International Financial Statistics, and national sources.

a Percentage change rom the corresponding quarter o the previous year.

b Special Administrative Region o China.

c Reects national denitions and coverage. Not comparable across economies.




Table A.12

Major developed economies: nancial indicators, 1999-2008

Percentage

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008a

Short-term interest ratesb

Canada 4.9 5.7 4.0 2.6 3.0 2.3 2.8 4.2 4.6 3.5

Francec 3.0 4.4 4.3 3.3 2.3 2.1 2.2 3.1 4.3 4.8

Germanyc 3.0 4.4 4.3 3.3 2.3 2.1 2.2 3.1 4.3 4.8

Italyc 3.0 4.4 4.3 3.3 2.3 2.1 2.2 3.1 4.3 4.8

Japan 0.2 0.2 0.1 0.1 0.0 0.0 0.0 0.2 0.7 0.7

United Kingdom 5.4 6.1 5.0 4.0 3.7 4.6 4.7 4.8 5.9 5.8

United States 5.3 6.5 3.7 1.7 1.2 1.6 3.5 5.2 5.3 3.0

Long-term interest ratesd

Canada 5.5 5.9 5.5 5.3 4.8 4.6 4.1 4.2 4.3 3.7

France 4.6 5.4 4.9 4.9 4.1 4.1 3.4 3.8 4.3 4.3

Germany 4.5 5.3 4.8 4.8 4.1 4.0 3.3 3.8 4.2 4.1

Italy 4.7 5.6 5.2 5.0 4.3 4.3 3.6 4.1 4.5 4.7Japan 1.7 1.7 1.3 1.3 1.0 1.5 1.4 1.7 1.7 1.5

United Kingdom 5.1 5.3 4.9 4.9 4.5 4.9 4.4 4.5 5.0 4.7

United States 5.6 6.0 5.0 4.6 4.0 4.3 4.3 4.8 4.6 3.8

General government nancial balancese

Canada 1.6 2.9 0.7 -0.1 -0.1 0.8 1.6 1.0 1.0 -0.2

France -1.8 -1.5 -1.6 -3.2 -4.1 -3.6 -2.9 -2.4 -2.7 -3.0

Germany -1.5 1.3 -2.8 -3.6 -4.0 -3.8 -3.3 -1.5 -0.2 0.0

Italy -1.8 -0.9 -3.1 -3.0 -3.5 -3.5 -4.3 -3.4 -1.6 -2.5

Japan -7.4 -7.6 -6.3 -8.0 -7.9 -6.2 -6.7 -1.4 -2.2 -2.0

United Kingdom 1.1 4.0 0.9 -1.7 -3.3 -3.4 -3.4 -2.7 -2.8 -4.2

United States 0.9 1.6 -0.4 -3.8 -4.8 -4.3 -3.1 -2.1 -2.8 -5.8

Sources: UN/DESA, based on IMF, International Financial Statistics; OECD Economic Outlook ; and Eurostat.

a Average or the rst nine months.

b Money market rates.

c From January 1999 onwards, represents the three-month Euro Interbank Ofered Rate (EURIBOR), which is an interbank deposit bid rate.

d Yield on long-term government bonds.

e Surplus (+) or decit (-) as a percentage o nominal GNP or GDP. Estimates or 2008.

Deerred tax payments on postal savings accounts are included in 2000 and 2001.




Table A.13

Selected economies: real eective exchange rates, broad measurement,a 1999-2008

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b

Developed economies

Australia 104.4 100.0 95.7 99.6 110.8 120.2 126.8 132.1 140.7 145.5

Bulgaria 92.5 100.0 107.9 112.1 120.5 125.1 127.5 135.3 142.9 148.2

Canada 101.2 100.0 96.5 94.6 102.4 104.5 108.0 111.7 112.5 106.0

Czech Republic 99.7 100.0 106.6 118.2 117.0 121.2 129.0 133.2 138.7 157.5

Denmark 106.3 100.0 102.5 106.5 113.6 114.2 111.6 109.6 109.5 109.8

Euro zone 108.9 100.0 101.6 105.3 117.3 121.2 120.1 121.2 126.0 133.3

Hungary 100.7 100.0 107.1 113.3 115.0 118.8 118.9 115.5 119.6 122.3

Japan 95.0 100.0 88.7 82.8 82.7 83.4 79.0 72.0 67.1 71.1

New Zealand 111.5 100.0 99.4 111.4 130.5 140.2 147.2 135.9 146.3 138.6

Norway 100.2 100.0 102.9 108.9 108.7 110.5 116.7 122.0 131.1 136.5

Poland 95.0 100.0 110.7 107.2 99.0 101.8 111.0 113.3 117.1 127.8

Romania 86.8 100.0 107.8 112.9 116.9 126.6 153.2 170.9 190.3 180.9

Slovakia 95.0 100.0 102.1 104.0 112.3 116.8 116.8 118.2 128.3 130.2

Sweden 105.0 100.0 91.5 93.9 97.7 97.1 94.1 95.0 98.6 93.9

Switzerland 107.1 100.0 103.1 109.3 111.0 108.9 104.7 100.2 95.3 96.6

United Kingdom 101.9 100.0 97.2 98.2 95.5 99.6 97.1 96.9 98.9 89.0

United States 99.2 100.0 106.0 106.1 98.0 91.8 89.2 86.8 82.6 77.7


Croatia 98.5 100.0 105.5 106.5 109.6 113.5 114.3 115.2 116.4 123.7

Russian Federation 88.5 100.0 120.8 126.6 130.9 140.5 154.4 170.3 180.1 191.7


Argentina 102.3 100.0 105.0 56.1 62.4 60.8 60.0 58.4 57.7 57.9

Brazil 84.1 100.0 90.2 89.7 98.5 105.8 129.6 140.7 155.5 180.2

Chile 95.4 100.0 94.7 93.0 91.9 100.0 111.7 117.9 117.2 122.4

China 97.7 100.0 105.5 102.9 97.9 95.9 98.2 101.1 103.3 111.7

Colombia 107.3 100.0 100.4 99.1 88.0 94.7 104.8 102.8 110.4 116.0

Ecuador 78.0 100.0 102.5 110.9 114.3 114.7 121.1 130.6 125.9 143.2

Egypt 98.0 100.0 91.1 81.6 65.4 66.1 71.9 74.1 76.3 87.9

Hong Kong SARc 106.4 100.0 101.9 101.5 95.0 89.9 86.4 84.1 79.9 72.3

India 98.2 100.0 102.6 99.1 98.4 99.1 102.3 99.2 106.5 101.4

Indonesia 103.8 100.0 96.3 116.5 123.2 113.5 113.8 142.0 149.3 165.8

Israel 93.7 100.0 99.7 89.7 87.5 85.4 86.3 86.8 87.9 97.8

Korea, Republic o 93.8 100.0 90.6 93.5 92.8 95.0 104.9 110.0 107.6 93.9

Kuwait 97.5 100.0 107.5 109.3 102.3 94.9 96.2 95.2 93.2 96.7

Malaysia 99.3 100.0 103.9 101.6 98.6 100.7 103.3 107.0 112.7 112.7

Mexico 90.0 100.0 107.9 109.5 100.0 98.2 103.1 106.0 106.0 108.8

Morocco 99.6 100.0 98.2 98.5 98.7 97.1 94.5 94.5 93.4 93.1

Nigeriad 98.8 100.0 111.1 111.0 104.9 107.8 124.2 133.1 130.6 136.0

Pakistan 99.6 100.0 95.5 100.1 100.9 100.4 102.2 105.8 105.6 106.0

Peru 100.0 100.0 104.2 104.0 100.0 99.5 99.3 99.4 99.6 105.9

Philippines 103.0 100.0 107.6 112.5 107.6 100.7 107.1 129.5 136.0 129.7





1999 2000 2001 2002 2003 2004 2005 2006 2007 2008b

Saudi Arabia 99.4 100.0 103.6 102.3 94.3 87.6 84.9 84.1 81.8 81.4

Singapore 99.4 100.0 97.8 95.9 95.4 102.2 106.7 112.1 119.5 125.3

South Arica 101.0 100.0 90.6 80.5 105.7 115.2 117.5 113.4 109.2 101.2

Taiwan Province o China 96.2 100.0 96.1 93.8 89.6 90.8 89.1 89.0 87.8 86.1

Thailand 102.5 100.0 97.0 101.2 100.3 100.0 102.7 111.6 124.8 124.2

Turkey 91.0 100.0 87.5 100.5 110.5 116.0 124.3 120.4 127.6 126.9

Venezuela, Bolivarian Republic o 96.4 100.0 109.4 92.6 93.5 98.8 99.2 107.9 119.7 132.2

Sources: JPMorgan Chase and IMF, International Financial Statistics.

a Indices based on a “broad” measure currency basket o 46 currencies (including the euro). The real efective exchange rate, which adjusts the

nominal index or relative price changes, gauges the efect on international price competitiveness o the country’s manuactures due to currency

changes and ination diferentials. A rise in the index implies a all in competitiveness and vice versa. The relative price changes are based on

indices most closely measuring the prices o domestically produced nished manuactured goods, excluding ood and energy, at the rst stage o

manuacturing. The weights or currency indices are derived rom 2000 bilateral trade patterns o the corresponding countries.

b Average or the rst ten months.

c Special Administrative Region o China.d Data is rom International Financial Statistics (IFS) only. Data or 2008 is until July.




Table A.14

Indices o prices o primary commodities, 1999-2008

Non-uel commodities Combined index

Manuac-

turedexportprices

Real

prices o

non-uelcommo-ditiesa

Memo-

randum

item:CrudepetroleumbFood

Tropical beverages

Vegetableoilseedsand oils

Agricul-tural raw materials

Mineralsand metals Dollar SDR

1999 98 118 125 97 89 98 95 105 94 63.3

2000 100 100 100 100 100 100 100 100 100 100.0

2001 103 79 94 96 89 96 100 98 98 83.8

2002 102 89 117 94 87 97 99 99 98 88.3

2003 104 94 137 112 98 105 99 108 97 101.8

2004 119 100 155 123 137 126 112 117 108 130.6

2005 127 126 141 132 173 141 126 120 118 183.5

2006 151 134 148 152 278 184 165 123 150 221.3

2007 164 148 226 169 313 207 179 133 156 250.4

2005 I 129 132 139 126 165 139 121 123 113 159.7

II 125 132 144 129 167 138 122 120 115 178.8

III 125 120 139 137 173 140 126 118 118 204.4

IV 130 120 139 138 188 147 135 117 125 191.1

2006 I 151 136 137 149 220 167 153 119 141 209.0

II 155 129 141 162 285 188 168 123 153 234.6

III 148 133 149 155 301 189 168 125 151 238.4

IV 151 139 164 143 304 190 169 127 150 203.1

2007 I 155 143 179 165 288 192 169 129 149 198.0

II 154 142 209 169 336 207 180 131 158 235.5

III 165 150 236 164 322 210 181 133 158 259.0

IV 183 157 278 179 307 220 185 138 159 308.1

2008 I 223 182 342 207 358 262 216 140 187 335.2

II 273 184 358 221 381 295 240 144 205 425.7

III 244 191 305 219 355 271 226 .. .. 411.3

Sources: UNCTAD, Monthly Commodity Price Bulletin; United Nations, Monthly Bulletin of Statistics; and Middle East Economic Survey , available rom

http://www.mees.com/Energy_Tables/basket.htm.

a Combined index o non-uel commodity prices in dollars deated by manuactured export price index.

b Efective 16 June 2005, OPEC basket i s composed o 13 crudes.




Table A.15

World oil supply and demand, 2000-2009

2000 2001 2002 2003 2004 2005 2006 2007 2008a 2009b

World oil supplyc,d

(millions o barrels per day) 76.9 77.1 76.9 79.8 83.3 84.3 85.0 85.6 86.4 86.3

Developed economies 18.5 18.3 18.3 17.8 17.4 16.5 16.3 16.4 16.2 16.4

Economies in transition 8.1 8.7 9.6 10.5 11.6 12.0 12.4 12.9 12.9 13.2

Developing economies 48.6 48.3 47.3 49.7 52.5 54.0 54.4 54.2 55.1 54.4

OPECe 30.8 30.4 28.8 30.8 33.1 34.2 34.3 35.9 37.1 36.1

Non-OPEC 17.8 17.9 18.5 18.9 19.4 19.8 20.1 18.4 18.0 18.3

Processing gains 1.7 1.7 1.8 1.8 1.9 1.9 1.9 2.1 2.2 2.3

World total demandg 76.2 77.3 77.7 79.3 82.5 83.8 85.1 86.1 86.1 85.8

Oil prices (dollars per barrel)

OPEC Basketh 27.6 23.1 24.4 28.1 36.1 50.6 61.1 69.1 96.9 60.2

Brent Oil 28.3 24.4 25.0 28.9 38.3 54.4 65.4 72.7 101.0 64.0

Sources: United Nations, World Bank, International Energy Agency, U.S. Energy Inormation Administration, and Middle East Economic Survey, availablerom http://www.mees.com/Energy_Tables/basket.htm (accessed on 13 November 2008).

a Partly estimated.

b Baseline scenario orecasts.

c Including crude oil, condensates, natural gas liquids (NGLs), oil rom non-conventional sources and other sources o supply.

d Totals may not add up due to rounding.

e Includes Angola and Ecuador as o January 2007 and December 2007, respectively.

Net volume gains and losses in rening process (excluding net gain/loss in the economies in transition and China) and marine transportation

losses.

g Including deliveries rom reneries/primary stocks and marine bunkers, and renery uel and non-conventional oils.

h New OPEC reerence basket introduced on 16 June 2005 is currently composed o 13 crudes.




Table A.16

World trade: changes in value and volume o exports and imports, by major country group, 1999-2009


1999 2000 2001 2002 2003 2004 2005 2006 2007 2008a 2009b

Dollar value o exports

World 3.6 13.4 -3.9 4.8 16.4 21.5 13.8 14.9 15.6 18.9 -4.4

Developed economies 1.8 7.3 -2.8 3.6 15.1 18.5 8.3 11.9 14.4 13.9 -7.3

North America 4.5 13.4 -6.6 -4.2 5.0 15.1 10.8 11.3 9.7 12.8 2.0

EU plus Other Europe -0.1 3.5 1.1 6.7 19.0 19.3 7.7 12.5 16.3 13.9 -11.7

Developed Asia 7.0 14.0 -13.6 3.1 13.3 20.2 7.0 9.3 11.2 15.4 4.3

Economies in transition -1.4 34.2 -0.7 6.3 26.4 36.3 36.2 27.6 25.1 46.2 -4.1

South-eastern Europe -6.5 16.6 3.1 6.5 20.6 30.8 24.4 17.5 27.4 26.1 0.8

Commonwealth o Independent States -0.4 37.7 -1.0 6.3 26.8 36.7 36.9 28.1 25.0 47.2 -4.3

Developing economies 8.7 27.3 -6.3 7.2 18.2 26.1 21.9 18.4 16.3 23.2 -0.5

Latin America and the Caribbean 5.8 19.7 -3.6 1.0 8.5 23.0 20.8 18.2 12.5 21.3 -2.5

Arica 12.6 26.1 -8.2 3.4 23.4 29.3 37.1 18.6 20.1 38.3 -7.1

Western Asia 24.8 81.4 -7.0 5.0 22.5 31.0 33.1 19.1 17.3 37.7 -18.7

East and South Asia 7.2 19.2 -6.7 9.9 19.4 25.6 18.1 18.3 16.4 18.2 6.0

China 6.1 27.9 6.8 22.4 34.6 35.4 27.7 26.5 25.1 20.8 14.8

Dollar value o imports

World 3.7 12.9 -3.5 3.7 16.3 22.0 13.8 14.8 15.6 18.9 -3.9


North America 11.5 17.6 -6.2 1.5 7.9 16.4 13.9 10.5 5.9 11.4 -7.1

EU plus Other Europe 1.1 5.3 -1.2 4.3 20.4 20.6 10.2 14.8 17.5 14.7 -12.9

Developed Asia 10.4 17.8 -8.3 -0.3 15.6 19.8 15.9 11.2 11.0 24.7 -1.6

Economies in transition -21.0 14.8 14.1 12.0 25.6 28.6 26.2 29.7 39.0 36.4 12.2


Commonwealth o Independent States -26.2 15.6 14.1 10.3 27.1 30.0 28.0 32.4 40.4 38.2 13.4

Developing economies 2.7 19.7 -4.4 5.0 16.4 27.9 17.4 16.9 17.5 25.3 5.7

Latin America and the Caribbean -2.4 15.8 -2.1 -7.0 3.4 22.0 18.7 19.4 19.0 26.8 0.2

Arica -6.6 1.0 0.2 3.4 20.3 26.3 22.5 19.5 25.5 29.1 6.6

Western Asia 2.1 21.7 0.0 7.2 17.4 36.5 15.2 14.7 28.1 23.2 -0.1


China 18.2 35.2 8.1 21.3 39.8 35.8 17.6 19.7 20.3 28.6 19.1

Volume o exports

World 4.3 13.2 -1.1 4.4 5.6 11.2 8.0 8.8 6.3 4.4 2.1

Developed economies 4.4 12.6 -0.9 2.2 2.5 8.9 5.6 7.5 4.5 3.1 0.0

North America 3.5 14.0 -5.5 -2.4 0.5 9.0 6.3 5.5 4.8 4.6 1.3

EU plus Other Europe 4.8 11.9 2.3 3.1 2.1 8.2 5.4 8.2 3.9 3.6 0.4Developed Asia 4.7 12.7 -6.6 6.6 8.1 12.1 5.5 7.6 6.8 -1.4 -4.0

Economies in transition 5.8 15.2 3.8 7.9 13.2 15.5 0.8 6.6 8.9 5.0 4.5


Commonwealth o Independent States 7.8 15.4 3.6 8.0 13.6 15.4 -0.2 6.4 8.6 4.7 4.4





1999 2000 2001 2002 2003 2004 2005 2006 2007 2008a 2009b


Latin America and the Caribbean 0.5 4.6 -0.1 1.7 4.4 11.3 8.9 7.3 1.9 -2.0 4.1

Arica 3.1 -9.2 -2.0 4.7 10.0 9.0 17.9 0.2 10.1 10.6 3.6

Western Asia 7.9 37.2 3.0 4.5 8.9 8.0 6.0 5.6 6.2 5.8 3.9


China 17.6 35.8 9.3 29.8 28.5 28.6 25.4 21.4 19.2 9.5 6.2

Volume o imports

World 6.1 13.8 -0.5 4.1 6.5 11.8 8.3 8.9 6.4 4.6 2.2


North America 11.1 12.3 -3.6 3.2 4.7 10.8 6.8 5.0 1.4 -4.1 -4.1

EU plus Other Europe 5.9 10.7 1.0 2.0 4.1 9.0 6.5 8.3 5.2 3.2 1.2

Developed Asia 6.6 9.0 0.3 3.1 7.1 8.2 5.7 5.5 3.7 5.8 -5.5

Economies in transition -18.4 21.8 14.0 11.8 16.2 19.3 8.8 18.4 25.0 17.5 15.5


Commonwealth o Independent States -22.9 23.9 13.8 10.7 19.1 21.2 8.2 20.1 26.3 18.3 16.7


Latin America and the Caribbean -0.9 17.5 -0.4 -4.1 6.2 7.5 10.4 13.0 9.1 8.6 3.6

Arica -1.3 1.8 6.3 5.0 10.5 10.7 17.5 11.6 17.6 15.2 10.5

Western Asia 4.0 22.9 2.4 7.3 7.7 23.5 8.8 9.8 15.6 9.8 8.5


China 25.2 38.4 10.7 28.0 27.5 23.1 13.9 16.2 12.8 7.0 10.6

Sources: UN/DESA Statistics Division, ECA, ECE, ECLAC, ESCAP, ESCWA and IMF.

a Partly estimated.

b Baseline scenario orecasts, based in part on Project LINK.




Table A.17

Balance o payments on current accounts, by country or country group, summary table, 1999-2007

Billions of dollars

1999 2000 2001 2002 2003 2004 2005 2006 2007

Developed economies -182.6 -322.8 -265.2 -287.7 -317.8 -330.7 -505.0 -597.7 -555.3

Japan 114.5 119.6 87.8 112.6 136.2 172.1 165.7 170.4 211.0

United States -299.8 -417.4 -382.4 -461.3 -523.4 -625.0 -729.0 -788.1 -731.2

Europea 25.8 -27.2 21.8 66.2 90.5 144.5 87.0 51.8 19.1

EU-15 11.3 -60.5 -6.8 38.6 48.9 107.6 25.6 -6.0 -28.9

New EU member States -23.2 -21.8 -18.6 -20.2 -27.4 -41.7 -35.7 -53.5 -79.9


South-eastern Europe -2.5 -1.3 -2.2 -5.0 -5.4 -7.0 -7.2 -8.0 -13.9

Commonwealth o Independent States 23.9 48.3 33.2 30.4 36.1 63.8 88.2 97.4 74.2


Net uel exporters -7.9 79.5 32.6 29.5 76.7 121.6 279.1 360.4 336.4

Net uel importers 47.7 22.9 45.5 97.9 147.9 152.9 205.9 324.7 439.6

Latin America and the Caribbean -55.8 -47.3 -52.5 -15.2 9.1 21.5 37.0 50.2 18.7

Net uel exporters -22.8 -14.1 -21.1 -0.6 11.0 12.6 26.6 35.3 21.0

Net uel importers -33.0 -33.2 -31.4 -14.6 -1.8 8.9 10.4 14.8 -2.3

Africa -11.4 18.4 5.2 -7.7 2.6 12.3 35.5 53.7 29.6

Net uel exporters -2.3 26.7 12.0 -2.4 11.4 27.7 56.4 81.7 66.5

Net uel importers -9.1 -8.3 -6.8 -5.3 -8.8 -15.4 -20.9 -27.9 -36.9

Western Asia 3.0 37.8 32.2 23.9 44.9 63.1 152.5 190.5 181.5

Net uel exporters 7.7 50.3 32.4 27.1 52.3 77.6 174.9 216.6 221.2

Net uel importers -4.7 -12.4 -0.2 -3.2 -7.3 -14.5 -22.4 -26.1 -39.7

East and South Asia 103.9 93.4 93.3 126.4 167.9 177.5 260.0 390.7 546.3

Net uel exporters 9.4 16.6 9.4 5.4 2.0 3.7 21.2 26.8 27.8

Net uel importers 94.5 76.8 83.9 121.0 165.9 173.9 238.8 363.8 518.5

World residualb -121.5 -173.5 -156.0 -134.9 -62.5 0.6 61.1 176.8 281.0

Sources: IMF, World Economic Outlook , October 2008; and IMF, Balance of Payments Statistics.

a Europe consists o EU-15, new EU member States plus Iceland, Norway and Switzerland.

b Statistical discrepancy.




Table A.18

Balance o payments on current accounts, by country or country group, 1999-2007

Billions of dollars

1999 2000 2001 2002 2003 2004 2005 2006 2007

Developed economies

Trade balance -157.9 -296.4 -260.2 -264.3 -314.9 -423.7 -639.9 -780.1 -759.6

Services, net 89.4 82.3 76.4 96.4 113.6 166.3 206.6 256.1 344.7

Income, net 17.4 27.6 41.7 18.9 48.3 125.3 153.8 161.2 142.9

Current transers, net -131.5 -136.3 -123.0 -138.7 -164.9 -198.6 -225.5 -234.9 -283.3

Current-account balance -182.6 -322.8 -265.2 -287.7 -317.8 -330.7 -505.0 -597.7 -555.3

Japan

Trade balance 121.3 114.9 69.2 92.5 104.0 128.5 93.8 81.1 105.1

Services, net -52.2 -45.9 -42.7 -40.7 -31.4 -34.3 -24.1 -18.2 -21.2

Income, net 57.4 60.4 69.2 65.8 71.2 85.7 103.5 118.2 138.6


Current-account balance 114.5 119.6 87.8 112.6 136.2 172.1 165.7 170.4 211.0

United States

Trade balance -346.0 -454.7 -427.2 -485.0 -550.9 -669.6 -787.2 -838.3 -819.4

Services, net 82.7 74.9 64.4 61.2 54.0 61.8 75.6 85.0 119.1

Income, net 13.9 21.1 31.7 27.4 45.3 67.2 72.4 57.2 81.8



Europea

Trade balance 48.7 2.5 48.8 96.8 107.1 86.1 18.2 -54.7 -71.2

Services, net 63.4 56.3 58.9 78.6 96.4 145.8 164.3 201.2 262.8

Income, net -16.4 -17.3 -20.8 -40.3 -27.7 18.2 31.4 36.5 -14.2


Current-account balance 25.8 -27.2 21.8 66.2 90.5 144.5 87.0 51.8 19.1

EU-15

Trade balance 67.2 8.0 51.9 95.2 105.6 81.9 3.6 -65.0 -65.6

Services, net 39.7 28.5 32.7 52.7 68.4 114.2 127.4 156.4 206.6

Income, net -27.6 -28.5 -26.9 -40.7 -38.4 18.6 19.3 36.1 -8.0


Current-account balance 11.3 -60.5 -6.8 38.6 48.9 107.6 25.6 -6.0 -28.9

New EU member States

Trade balance -28.7 -28.5 -26.1 -25.2 -28.5 -33.1 -33.1 -48.2 -66.8

Services, net 7.5 9.0 9.2 8.1 7.6 8.6 11.7 14.4 19.7

Income, net -6.9 -7.4 -7.9 -10.7 -16.3 -27.7 -26.8 -34.4 -49.3

Current transers, net 4.9 5.1 6.2 7.6 9.8 10.4 12.5 14.8 16.5



Trade balance 24.9 53.7 37.8 34.4 43.5 71.8 107.4 130.0 112.5

Services, net -1.9 -4.3 -7.2 -8.3 -7.1 -10.8 -12.6 -11.7 -17.8

Income, net -8.0 -9.6 -6.8 -8.9 -16.5 -17.0 -28.5 -44.9 -51.3







1999 2000 2001 2002 2003 2004 2005 2006 2007

South-eastern Europe

Trade balance -8.9 -9.0 -10.9 -14.1 -18.3 -22.1 -22.5 -24.4 -32.2

Services, net 1.9 2.6 3.5 3.5 6.0 6.3 6.8 7.8 9.1

Income, net 0.5 0.2 0.1 0.0 -0.4 -0.3 -0.9 -1.3 -1.6




Trade balance 33.8 62.7 48.7 48.5 61.8 93.9 129.9 154.4 144.7

Services, net -3.8 -6.9 -10.7 -11.8 -13.2 -17.1 -19.4 -19.5 -26.9

Income, net -8.4 -9.7 -6.9 -8.9 -16.0 -16.7 -27.5 -43.6 -49.6




Trade balance 138.6 211.7 181.5 223.4 299.3 355.8 552.8 736.8 813.9Services, net -45.6 -53.0 -58.3 -60.8 -57.8 -59.0 -85.1 -100.4 -122.1

Income, net -109.0 -116.7 -111.7 -113.8 -117.4 -140.0 -132.1 -120.5 -110.5



Net uel exporters

Trade balance 64.7 168.6 115.7 121.0 171.1 231.5 386.0 478.2 488.0

Services, net -45.9 -53.9 -51.4 -54.5 -58.4 -70.7 -83.4 -106.2 -134.5

Income, net -21.9 -30.0 -27.1 -35.0 -39.2 -48.8 -44.4 -29.5 -32.5

Current transers, net -4.8 -5.2 -4.6 -2.0 3.2 9.7 20.9 17.9 15.4

Current-account balance -7.9 79.5 32.6 29.5 76.7 121.6 279.1 360.4 336.4

Net uel importers

Trade balance 73.8 43.1 65.8 102.4 128.2 124.3 166.8 258.7 325.9

Services, net 0.3 1.0 -7.0 -6.3 0.6 11.8 -1.7 5.9 12.4

Income, net -87.1 -86.7 -84.6 -78.8 -78.2 -91.1 -87.7 -91.0 -78.0




Trade balance -9.3 1.6 -5.9 21.9 43.7 59.3 82.8 100.4 74.1

Services, net -13.6 -14.3 -16.4 -14.6 -11.8 -14.8 -35.4 -40.8 -48.8

Income, net -53.0 -56.0 -56.3 -52.1 -59.1 -66.0 -61.9 -70.6 -69.4


Current-account balance -55.8 -47.3 -52.5 -15.2 9.1 21.5 37.0 50.2 18.7

Arica

Trade balance -2.5 31.8 16.4 5.9 18.1 33.3 63.9 81.5 74.5

Services, net -7.0 -7.3 -7.9 -9.4 -9.3 -11.3 -15.6 -17.8 -22.4

Income, net -16.7 -22.0 -19.6 -22.0 -27.1 -35.0 -44.2 -44.6 -62.1


Current-account balance -11.4 18.4 5.2 -7.7 2.6 12.3 35.5 53.7 29.6





1999 2000 2001 2002 2003 2004 2005 2006 2007

Western Asia

Trade balance 27.1 67.8 64.8 64.2 86.4 112.3 188.2 237.9 248.3

Services, net -18.9 -20.2 -21.0 -23.8 -21.5 -28.2 -31.3 -51.8 -72.8

Income, net 1.8 -1.6 -1.7 -5.6 -8.6 -11.4 3.8 17.5 24.7



East Asia

Trade balance 135.4 119.7 117.6 139.2 166.4 180.7 255.2 367.7 484.1

Services, net -6.0 -11.9 -13.9 -13.9 -17.0 -11.2 -13.3 -7.4 -0.3

Income, net -34.9 -29.5 -27.5 -26.8 -14.8 -20.3 -19.8 -13.0 6.5



South Asia

Trade balance -12.1 -9.2 -11.3 -7.8 -15.3 -29.8 -37.3 -50.6 -67.2

Services, net -0.1 0.8 0.8 0.8 1.9 6.6 10.5 17.5 22.3

Income, net -6.2 -7.6 -6.6 -7.3 -7.9 -7.2 -10.0 -9.8 -10.1



World residualb

Trade balance 5.6 -31.1 -40.9 -6.6 27.9 3.9 20.4 86.7 166.7

Services, net 41.9 25.0 10.8 27.4 48.7 96.6 108.9 144.1 204.8

Income, net -99.6 -98.6 -76.8 -103.8 -85.6 -31.7 -6.7 -4.3 -18.9


Current-account balance -121.5 -173.5 -156.0 -134.9 -62.5 0.6 61.1 176.8 281.0

Sources: IMF, World Economic Outlook , October 2008; and, IMF, Balance of Payments Statistics.

a Europe consists o EU-15, new EU member States plus Iceland, Norway and Switzerland.

b Statistical discrepancy.




Table A.19

Net ODA rom major sources, by type, 1987-2007

Donor groupor country

Growth rate o ODAa

(2006 prices and

exchange rates)

ODA as a

percentage

o GNI

Total ODA(millions

o dollars)

Percentage distribution o ODA by type, 2007

Bilateral Multilateral

1987- 1996 1997- 2006 2007 2007 Total GrantsbTechnical

cooperation Loans Total United

Nations Other

Total DAC

countries 0.22 4.02 0.28 103 655 69.1 71.4 13.5 -2.3 30.9 6.6 24.2

Total EU 1.17 3.56 0.40 62 095 60.2 62.8 16.0 -2.6 39.8 7.4 32.3

Austria 1.30 8.94 0.49 1 798 72.9 74.5 9.5 -1.5 27.1 2.6 24.5

Belgium -1.80 5.97 0.43 1 953 63.7 65.2 38.2 -1.5 36.3 3.1 33.2

Denmark 3.80 0.82 0.81 2 563 64.4 67.2 2.5 -2.8 35.6 13.6 22.0

Finland -2.85 6.87 0.40 973 58.4 56.9 10.5 1.6 41.6 11.5 30.1

Francec 1.87 0.38 0.39 9 940 63.4 67.8 25.6 -4.4 36.6 1.5 35.2

Germany 0.45 2.10 0.37 12 267 65.8 67.6 29.8 -1.8 34.2 1.9 32.4

Greece .. 5.11 0.16 501 49.8 49.8 27.6 .. 50.2 3.0 47.3

Ireland 6.96 13.61 0.54 1 190 69.3 69.3 1.9 .. 30.7 13.0 17.7

Italy -3.56 2.03 0.19 3 929 31.2 30.3 2.2 0.9 68.8 11.3 57.5

Luxembourg 13.95 12.23 0.90 365 69.5 69.5 2.2 .. 30.5 11.1 19.4

Netherlands 0.76 2.87 0.81 6 216 75.1 77.8 6.4 -2.7 24.9 8.5 16.4

Portugal 20.34 5.63 0.19 403 50.4 45.9 24.1 4.5 49.6 3.1 46.5

Spain 14.77 5.59 0.41 5 744 46.7 42.5 9.2 4.2 53.3 20.8 32.5

Sweden 0.71 5.02 0.93 4 334 68.2 68.0 4.2 0.2 31.8 12.1 19.7

United Kingdom 1.48 7.87 0.36 9 921 52.3 62.2 12.2 -9.8 47.7 7.8 39.9

Australia 0.11 1.84 0.30 2 471 85.5 83.7 44.7 1.8 14.5 2.8 11.7

Canada -0.88 1.70 0.28 3 922 78.4 79.3 14.3 -0.9 21.6 5.7 15.9

Japan 1.67 0.90 0.17 7 691 75.8 78.5 24.3 -2.7 24.2 7.2 17.0

New Zealand -0.50 5.22 0.27 315 77.3 77.3 14.7 .. 22.7 11.2 11.6

Norway 1.32 3.27 0.95 3 727 76.4 69.5 12.2 6.9 23.6 16.0 7.6

Switzerland 3.11 4.14 0.37 1 680 75.4 74.4 .. 1.0 24.6 7.6 17.0

United States -3.34 8.06 0.16 21 753 86.9 90.6 .. -3.7 13.1 3.0 10.2

Source: UN/DESA, based on OECD, T he DAC Journal Development Co-operation Report 2007 .

a Average annual rates o growth, calculated rom average levels in 1985-1987,1994-1996 and 2004-2006.

b Including technical cooperation.

c Excluding ows rom France to the Overseas Departments, namely Guadeloupe, French Guiana, Martinique and Réunion.




Table A.20

Total net ODA ows rom DAC countries, by type o ow, 1995-2007

1995-1996average 2002 2003 2004 2005 2006 2007

Net disbursements at current prices and exchange rates (millions of dollars)

Ofcial Development Assistance 57 186 58 297 69 065 79 432 107 099 104 421 103 655

Bilateral grants and grant-like ows 36 380 39 818 50 888 57 246 83 453 79 450 74 009

of which:

Technical co-operation 14 220 15 452 18 352 18 672 20 753 22 252 13 989

Humanitarian aid 2 152 2 779 4 360 5 193 7 110 6 751 6 282

Debt orgiveness 3 561 4 538 8 317 7 134 24 999 18 600 ..

Bilateral loans 3 404 939 -1 153 -2 942 -1 008 -2 490 -2 342

Contributions to multilateral institutionsa 17 401 17 540 19 330 25 127 24 653 27 461 31 988

Share o total net ows

(percentage)

Ofcial Development Assistance 32 80 55 50 35 34 ..

Bilateral grants and grant-like ows 20 55 41 36 28 26 ..

of which:

Technical co-operation 8 21 15 12 7 7 ..

Humanitarian aid 1 4 3 3 2 2 ..

Debt orgiveness 2 6 7 4 8 6 ..

Bilateral loans 2 1 -1 -2 0 -1 ..

Contributions to multilateral institutionsa 10 24 15 16 8 9 ..

Source: UN/DESA, based on OECD, The DAC Journal of Development Co-operation Report 2007 and DAC online database, available rom

http://www.oecd.org/dac/stats/idsonline (accessed on 14 November 2008).

a Grants and capital subscriptions. Does not include concessional lending to multilateral agencies.




Table A.22

Greenhouse gas emissionsa o Annex 1 Parties to the United Nations Framework Convention on Climate Change

Teragram CO2 equivalent

1990 2000 2002 2003 2004 2005 2006 2007 2008b 2009c

Annual

growth rate1990-2009

Cumulativechange

between 1990and 2009

Australia 416 495 510 518 524 530 536 550 554 553 1.5 32.8

Austria 79 81 87 93 92 93 91 93 93 92 0.8 16.1

Belarus 127 70 68 70 74 76 81 84 83 82 -2.3 -35.4

Belgium 145 146 143 146 146 142 137 136 133 128 -0.6 -11.2

Bulgaria 117 69 66 71 71 71 71 65 60 54 -4.0 -53.6

Canada 592 718 717 741 743 734 721 716 708 695 0.8 17.4

Croatia 33 26 28 30 30 31 31 32 33 34 0.2 3.0

CzechRepublic 194 147 145 146 147 146 148 158 163 165 -0.8 -14.9

Denmark 70 69 70 75 69 65 72 66 63 59 -0.9 -15.8

Estonia 42 18 18 20 20 19 19 17 14 11 -7.0 -74.6

Finland 71 70 77 85 81 69 80 86 82 80 0.6 12.4

France 566 560 553 557 557 560 547 540 533 517 -0.5 -8.8

Germany 1 228 1 019 1 017 1 030 1 028 1 005 1 005 979 958 910 -1.6 -25.9

Greece 105 128 129 134 134 134 133 134 135 135 1.3 28.7

Hungary 98 78 77 81 79 80 79 76 73 70 -1.8 -28.7

Iceland 3 4 4 4 4 4 4 4 4 3 0.0 0.6

Ireland 56 69 69 69 69 70 70 71 66 59 0.4 6.9

Italy 517 552 559 574 578 578 568 575 572 562 0.4 8.8

Japan 1 272 1 348 1 356 1 361 1 355 1 358 1 340 1 361 1 358 1 338 0.3 5.2

Latvia 26 10 11 11 11 11 12 11 10 9 -5.8 -67.6

Liechtenstein — — — — — — — — — — 1.1 21.2

Lithuania 49 19 21 21 22 23 23 23 22 21 -4.4 -57.9

Luxembourg 13 10 11 12 13 13 13 13 13 12 -0.6 -10.7

Monaco — — — — — — — — — — -1.1 -18.2

Netherlands 212 214 215 216 218 212 207 202 194 187 -0.7 -11.8

New Zealand 62 71 73 76 75 77 78 78 77 76 1.1 22.7

Norway 50 53 53 54 55 54 54 54 54 53 0.3 6.7

Poland 454 389 373 385 384 386 400 402 396 383 -0.9 -15.6

Portugal 59 82 88 83 85 87 83 85 88 88 2.1 49.2

Romania 248 139 150 157 159 152 157 158 160 158 -2.3 -36.1

RussianFederation 3 326 2 038 2 064 2 106 2 120 2 123 2 190 2 295 2 382 2 433 -1.6 -26.8

Slovakia 74 49 49 50 50 49 49 48 46 42 -2.9 -42.7

Slovenia 19 19 20 20 20 20 21 21 21 21 0.7 13.8

Spain 288 385 403 410 426 441 433 467 472 462 2.5 60.7

Sweden 72 68 70 71 70 67 66 65 63 60 -0.9 -16.2

Switzerland 53 52 52 53 53 54 53 54 56 58 0.5 9.6

Turkey 170 280 271 286 297 312 332 348 358 366 4.1 115.1




Table A22 (cont’d)

1990 2000 2002 2003 2004 2005 2006 2007 2008b 2009c

Annual growth rate1990-2009

Cumulativechange

between 1990and 2009

Ukraine 922 395 403 417 417 426 443 436 451 446 -3.7 -51.6UnitedKingdom 772 674 657 662 661 659 656 631 595 545 -1.8 -29.4

United States 6 135 7 003 6 953 6 978 7 061 7 107 7 017 6 975 6 859 6 610 0.4 7.7

All Annex 1Parties 18 734 17 616 17 628 17 871 17 995 18 039 18 019 18 110 18 000 17 577 -0.3 -6.2

Source: UN/DESA, based on data o the United Nations Framework Convention on Climate Change (UNFCCC) online database available rom

http://unccc.int/ghg_emissions_data/ghg_data_rom_unccc/time_series_annex_i/items/3814.php (accessed on 17 November 2008).

Note: Based on the historical data provided by the UNFCCC or the GHG emissions o the Annex 1 Parties up to 2006, DESA/DPAD extrapolated the

data to 2009. The extrapolation is based on the ollowing procedure:

First, GHG/GDP intensity or each country i s modelled using time-series regression techniques, to reect the historical trend o GHG/GDP. While the•

trend or each individual country would usually be a complex unction o such actors as change in st ructure o the economy, technology change,

emission mitigation measures, as well as other economic and environmental policies, the time-series modelling could be considered as a reduced

orm o a more complex structural modelling or these relations between economic output and GHG emissions.

Second, GHG/GDP intensity or each country is extrapolated or the out-o-sample period (i.e., 2007-2009), using parameters derived rom the•

time-series regression model.

Third, in some cases, the extrapolated GHG/GDP intensity or individual countries was adjusted to take account or announced emission control•

measures taken by Governments.

Finally, the projected GHG emissions were estimated using GDP estimates according to the• World Economic Situation and Prospects 2009 baseline

orecast and the extrapolated GHG/GDP intensity.

a Without land use, land-use change and orestry.

b Estimated.

c Baseline scenario orecasts.

world economic situation prospects 2009

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