Speakers:

Dirk Willem te Velde - Research Fellow and Programme Leader, International Economic Development Group, ODI

Discussants:

Ann Grant - Vice Chair, Standard Chartered Bank

Claire Melamed - Head of policy coordination, ActionAid UK

Chair:

Lord Adair Turner - Chair of the Financial Services Authority and the ODI board

Alison Evans, Director of ODI

Introduction

It is now 2 years after the collapse of Northern Rock, 18 months after Bear Sterns and 12 months since Lehman Brothers. The panic in developed countries now seems to be over, but has happened in developing countries? How optimistic or pessimistic can we be about their speed of recovery? The crisis has been unprecedented both in terms of its scale and the speed at which it has been transmitted from the financial to the real economy. Now is the time to take stock of what has happened; review recent data and investigate why some countries have experienced more resilient growth than others. It is also the time to take action in relation to the crisis response agenda and to ensure that we build back, better. Growth without resilience cannot shield a vulnerable economy. So how do we build in the notions of resilience into the growth agenda? I would like to welcome you all and to this afternoon’s event and thank our speakers and discussants; to commence, Dirk Willem te Velde is going to talk in more detail about taking stock and taking action.   

Dirk Willem te Velde, Research Fellow and Programme Leader, International Economic Development Group

The presentation will outline firstly where we are now in terms of the global recovery and examine how Low Income Countries (LICs) are faring. It will review policy responses in both developed and developing countries. It will then proceed to suggest a new set of actions that are intended to get us out of the crisis, prevent new crises and assist those living with crises.

1.       Where are we?

Recent projections from the IMF suggest a ‘V-shaped’ recovery. Most developed countries are coming out of recession this quarter. Though there still remains some uncertainty, the current crisis has been deeper than that experienced in the past, but it is probably not going to be comparable in terms of duration. However, there are concerns that we could experience an L-shaped recovery or a double-dip recession; this could be a result of high oil prices choking off any recovery, reduced levels of consumption and a period of higher inventories or taking away monetary easing and fiscal stimuli next year.

BRICs appear to be emerging out of the worst, industrial production levels are increasing. Some commodity prices have also rebounded. But how have LICs fared? We are currently undertaking Phase Two of monitoring the effects of the financial crisis. Further to a recent workshop held with researchers from selected country case-studies it was clear that:

• Private capital flows do not yet show signs of returning to their previous levels;

• Declines in export revenues because of falls in commodity prices have been huge for some countries;

• Large declines in remittance flows are apparent for some countries (Bolivia and Kenya) though not as pronounced for others (Bangladesh);

• There is no effect on aid yet;

• For some countries the impact on growth has been severe. Growth projections have been revised by up to 7% for 2009 compared to what might have been in the ‘business as usual’ scenario for some countries (Cambodia and the DRC), with more moderate (though still severe in terms of within country effects) declines apparent for others of around 3-4% (as projected for Kenya)  to no growth effects in Bangladesh.

• Immediate poverty effects have been severe for some countries such as Cambodia (around 63,000 jobs have been lost in the garment industry to date, almost one fifth of the labour force) and Zambia (around a quarter of mining jobs have been lost). But there are likely to be further lagged effects.

Poverty elasticities with respect to growth in suggest that poverty rates will increase because of declines in growth. There is no evidence yet to suggest recovery is on the way yet [in the countries included as part of the monitoring work]. Although regional trade for some countries is holding up well and to some extent compensating from reductions in North-South trade. For some countries however, structural issues are apparent. Chinese FDI has been withdrawn from the garment industry in Cambodia: will it come back?

2.       Policy responses  

Developed countries have been quick and bold in their response, which has been coordinated, although there is some increase in protectionism. Most donors are sticking to their existing pledges (although there are some exceptions). But Gross National Income (GNI) is expected to decline which will affect the proportion allocated to Overseas Development Assistance (ODA).   

The IMF has initiated a response in the DRC and Zambia which suggests that its role is changing. The resources made available to the IMF and World Bank have tripled. But in general, responses from developing country policy makers have been limited, with most taking small monetary and fiscal steps.

3.       Taking action: How to ensure a rainbow recovery for all, prevent extreme volatility and crisis-resilient growth?

The monitoring work needs to continue. Fiscal stimulus packages need to be sustained, part of which should be allocated to developing countries. Extreme volatility in financial markets needs to be prevented. Economic rates of return should be rewarded, not just financial. Reducing global imbalances means solving market coordination failures but also leveraging savings from surplus countries to LICs. A new global compact that considers crisis resilient growth, global public goods - which also includes those related to the climate change crisis, is required.

Minouche Shafik, Permanent Secretary, DfID

Although there is a need to take stock, we must bear in mind that we are still in the thick of it. The impact of the crisis on growth in developing countries is severe, we project declines in GDP of -1.6% in 2009 for developing countries excluding China and India. If we include population growth, we are projecting -1.2% per capita declines in GDP in Africa. Although a recovery is projected this year for developed countries, it is likely to be sluggish, credit constrained, with high unemployment.

The crisis was systemic, but has real economy effects which may last much longer for different countries and regions. In terms of household impacts, the main transmission channels are likely to be through employment and the sale of assets. According to recent estimates by the ILO, global unemployment is projected to have increased by 39million between March 2007 and 2009. The World Bank estimates that remittances will fall by 7.3% this year, in part due to lagged real economy effects. As a result of the cumulative effects of the food and fuel price crises, it is expected that an extra 100million people have been put at risk of increased hunger. Anecdotal evidence received from DfID country offices suggests that as a result of food and fuel price increases, households are starting to cut back on school fees, withdraw children from school and sell assets such as livestock.

So what has the world done about this?

A trillion dollar package rescue package has been launched. The increase in Special Drawing Rights (SDRs) for LICs has resulted in an unprecedented increase of $19million - these are figures that have never been heard before. Initial G20 concerns were primarily about preventing the ‘mojito crisis’ and stopping banking sectors from failing. But the communiqué released clearly has developing country concerns included throughout. The main focus of DfID has been to take full account of developing country concerns and make sure the levers of the G8, G20 and UN also support this. All of DfIDs aid commitments will be met.

Has the big package launched translated into action on the ground?

The IMF has increased lending to LICs: SDR’s have been doubled providing more room for manoeuvre. Most finance ministers in sub-Saharan Africa (SSA) have spoken candidly about the IMF and consider it better than in the past because of limited conditionality and greater accommodation of fiscal space. Multilateral banks are well capitalised with enough headroom to increase spending. This to some extent confirms the usefulness of multilateral institutions: the world has been served well by their ability to mobilise capital quickly.      

DfIDs response has been to increase social protection expenditure. An additional £50million has been allocated to social protection and employment creation. This in addition to around £200million allocated by the World Bank to provide direct support to households and ensure they are kept above the poverty threshold: evidence suggests that small direct transfers can have a huge impact. Although countries like Malawi don’t like the culture of giving out handouts, and have concerns that they ‘can’t afford a welfare state’, DfID has made long-term commitments to support such programmes for the next ten years, until the domestic economy can.

Global imbalances are a key issue. Diagnosis of the problem needs to include LICs. Access to concessional crisis funds based on needs, as opposed to performance, is a key issue highlighted. The role of IFIs in crisis resolution cannot be effective until representation and voting rights are resolved. These are some of the longer-term implications highlighted by the crisis. Other long-term implications highlighted include global social protection as advocated by the ILO. Similar to the supervisory role the IMF plays, the UN is advocating a vulnerability index system.

Although climate finance is not part of the crisis, the climate crisis is potentially much more serious than the global financial crisis. Climate change was not addressed at the recent G20 meeting. But discussion of the international financial architecture needs to address the provision of climate finance. It is estimated that developing country needs for mitigation and adaptation to climate change could be around $100billion by 2012. Around $50billion of which is likely to come from carbon markets and another $50billion from other direct funding of mitigation and adaptation efforts, of which ODA will comprise 10%. The UK is the first developed country to put concrete climate finance proposals on the table, though questions do remain as to the regulation of carbon markets and other financing mechanisms.

There are clearly gaps in the global financial architecture; the development of institutions is an evolutionary rather than a revolutionary process. We can consider the current crisis as like the ‘ice age’ which results in massive fundamental changes. As this adaptation takes place the risk is to avoid fighting yesterday’s war and instead fight for the future and redesign institutions for this.

Discussants

Ann Grant - Vice Chair, Standard Chartered Bank, member of the ODI Board

It is difficult to generalise on the impact of the crisis across countries, even more so when taking stock. There is a need for much detailed country by country research: sweeping statements are often made on the basis of poor quality statistics. This applies to those made in relation to poor people. However, in general the analysis previously presented supports the notion that SSA has been affected. The real economy has been affected by declines in mostly resource based FDI. Portfolio investment has declined, markets are less liquid markets. But there is room for a slightly more optimistic outlook, in part due to the likely recovery of the Chinese economy and therefore demand for commodities.

The appropriateness and importance of the G20 response is notable. We expect SSA economies to perform stronger in 2010, so there is some difference in opinion between our estimates and the ‘passivity’ of projections made by DfID and ODI. In terms of policy responses, we see most countries sticking with their reforms; there is little evidence of a ‘Chavez response’ in SSA, compared to some countries in Latin America. So in general SSA is better positioned for the recovery, but there are still many obstacles.

Chinese investments are strategic and long-term and include a growing provision of bank finance as well as the financing of infrastructure. It is important that SSA gets the best possible deal out of such agreements in development terms. But what the crisis also highlights is that:

• The new definitions of corporate social responsibility that relate to the triple bottom line - profits, people and planet - are totally vindicated. Companies that were not in it for the long run have pulled out.

• The need for government, civil society and academics to redouble their efforts to communicate with each other. As opposed to drafting single agenda’s it is more practical and effective to work collaboratively: the current challenges are not solvable by one sector.

Claire Melamed - Head of policy coordination, ActionAid UK

The crisis is far from over, with some regions faring worse than others. There are real dangers for families, risks of permanent effects from the sale of assets and the pulling out of children from school. These measures increase the longevity of the crisis on individuals and households.

Calls for global social protection have caught people’s imagination and started to gain currency. It is important to seize this mood, but be more imaginative. How could we pay for this? Would we make use of the Tobin Tax? The crisis is putting both new and old ideas on the table. We need to put the pieces of the jigsaw on the table and try to join together so as to work out the needs of institutions and their different forms.

The IMF is an institution that has proved its colours. The speed of response in terms of allocation of SDRs without conditions is exactly the type of response advocated. However, there are concerns about lending programmes next year. Will flexibility be maintained? Will it be back to business as usual in the next one to two years? Should we expect balanced budgets elsewhere when it is likely we will not have balanced budgets here within such a time period. Flexibility should be rolled over for as long as countries need it.

In relation to the discussion of tax havens and increased transparency, developing countries should be part of this debate. As opposed to talking about the recycling of surpluses into financing consumption in LICs, perhaps we should instead be drilling down to the growth strategies creating the surpluses. We should be advocating for balanced growth - export orientation coupled with increases in domestic demand. This would help to make growth strategies more resilient, but is likely to mean different things in different contexts.

The crisis has meant a steep learning curve for most people. We have not hit bottom yet; we need to keep these concerns on the G20 agenda. It is a grim picture, but there is some room for optimism in terms of the potential long-term reforms that may result from the crisis resolution.

Questions and Answers

In terms of the pattern of recovery, are you expecting growth rates to be lower? Might increased expenditure on social protection reduce the resources available in other sectors? Minouche Shafik responded in that expenditure for social protection was coming from new money. Dirk Willem te Velde suggested that it was important that it is important to understand who gains and who loses from shocks, and that while social protection was important, African finance minsters have also suggested that more support for the supply side is important.

How do we make supply chains more resilient and tackle unemployment? Ann Grant responded that one way is to increase the tax base which may increase the ability of governments to respond. 

If we had not experienced the collapse of the financial system [financial crisis] but instead consider the food and fuel price crises of 2008 – would we still be talking about the same kinds of responses?Claire Melamed responded that there are different layers of analysis of the current crises – which are all linked and came in waves – but vulnerability to risks and external shocks remain the same.

What does the panel think about the Tobin tax on financial transactions?Dirk Willem te Velde responded that while there is certainly more evidence of market and co-ordination failures in financial markets which need to be addressed, a currency tax is one possible option. But the Briefing Paper suggests a better way might be to reward economic rates of return of banking activities, as opposed to financial rates of return alone, so that projects can also have long-run development effects on developing countries.