Crisis effects on ACP countries Challenges for decisionmakers

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Crisis effects on ACP countries Challenges for
decision-makers

• Alex Wilks,
• European Network on Debt and Development
• ACP EU Joint Parliamentary Assembly Economic
  Committee, European Parliament, 12th February
  2009
• www.eurodad.org

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Reduced inflows (1)
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Reduced inflows (2)
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Financial outflows licit

• Debt service repayments from developing countries
  totalled US 540bn in 2006
• In 2006, FDI outflows from the African region
  reached US8bn.

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Financial fallout

• Share of banking assets in SSA held by foreign
  banks with majority ownership, 2006 (Source ODI
  EC background paper, 2009)

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Financial outflows illicit

• In 2006 developing countries lost an estimated
  858.6 billion 1.06 trillion in illicit
  financial outflows.
• Europe ranks second in the share of overall
  illicit financial flows from developing
  countries, accounting for approximately 17
  percent of the total (150-180 billion per year,
  or 110-140 billion).

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Summary of developing country situation

• Weak financial position
• the IMF has identified 26 vulnerable low income
  countries which have reserves which will cover no
  more than three months imports.
• Difficult to find replacement finance
• The IMF expects Africas (average) current
  account deficit to widen by 5 per cent of GNI in
  2009. In times of restricted credit it will be
  difficult to find sources to refinance these
  deficits.

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EU's importance for developing countries

• The EU is the main trading partner for developing
  countries. In 2007 a fifth of exports from
  developing countries went to the EU. The EU is
  also a major sourcing market with 28 of imports
  coming from African, Caribbean and Pacific (ACP)
  countries (incl. South Africa).
• The EU is a major source of remittances for
  developing countries. The EU27 accounted for 30
  of all global remittance outflows in 2007.
• The EU is a major provider of foreign direct
  investment (FDI) to developing countries. Around
  27 of total FDI went to developing countries in
  2007.
• The EU is the worlds largest provider of
  official development assistance (ODA). In 2007
  the EU accounted for 53 of net ODA flows
  disbursed by Development Assistance Committee
  (DAC) donors.

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EU government commitments

• Millennium Development Goal 8 to develop an
  open, rule-based, predictable financial system.
  
• Monterrey Consensus on Financing for Development.
  Governments should
• attach priority to avoiding abrupt economic
  fluctuations that negatively affect income
  distribution and resource allocation,
• encourage the orderly development of capital
  markets through sound banking systems and other
  institutional arrangements including
  transparent regulatory frameworks and effective
  supervisory mechanisms.

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Growth and poverty

• Previous growth decelerations in Africa have been
  associated with increases in poverty, infant and
  child mortality and out-of-school children. Worst
  of all, just when economic reforms were beginning
  to take effect in Africa (growth had been
  sustained for ten years and accelerating over the
  last three), people are being asked to tighten
  their beltsfor a crisis that is not even
  remotely their fault.
• Shanta Devarajan, World Bank Chief Economist for
  Africa

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Long-term social effects of previous crises

• Previous financial crises have been very costly
  for developing countries in financial and human
  terms.
• In the 5 years following the start of the 1980s
  Latin American debt crisis real wages in Mexico
  and many other Latin American countries
  cumulatively fell by between 40 and 50 percent
  and in many instances did not recover until 10 or
  15 years later".
• The incidence of extreme poverty in Mexico only
  fell below its 1984 level 22 years after the
  crisis started.

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Safety nets and fiscal stimulus

• Safety nets are absent or weak in most developing
  countries
• Developing country governments cannot print or
  borrow money to invest in a fiscal stimulus.
  Interest rates are rising, not falling.
  Pro-cyclical response risks damaging the economy
  and society still more.

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Pyschological/political effects

• Credibility has suffered. Of the
• Free market model
• Rapid globalisation
• Advice of European governments and consultants,
  international financial institutions
• Political reactions may differ with public
  anger and instability in the EU and ACP

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EU reactions so far

• Positive language, efforts to find new or
  improved proposals.
• Limited linkages between major EU financial
  reform processes (de Larosiere Group etc) and
  development.
• Danger of misleading announcements of EU
  contributions (including positive only private
  flows or of aid for exports not poverty
  reduction).

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New rules Responsible Financing Charter

• Clear ex ante and ex post rules of the game only
  way to enforce (and reward) responsible lending
  and borrowing behaviour
• Internationally recognised standards for
  responsible lending and borrowing to apply to all
  loans issued to sovereign states or covered by a
  sovereign guarantee

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Recommendations

• The EU can and must honour international
  commitments and produce a strong global element
  to its financial crisis response.
• This must assist developing countries maintain
  social spending and counter economic recession.
  Through maintaining inflows (aid) and plugging
  outflow gaps (debt cancellation, regulation
  against capital flight measures on tax havens,
  TNCs).
• The EU must also commit fully to rebalancing
  international economic governance mechanism,
  including the governance and roles of the World
  Bank, IMF and other institutions.

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