Investing out of the crisis

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The Global Crisis Implications for Developing
Countries AN OECD DEVELOPMENT CENTRES
PERSPECTIVE

Guillaume Grosso Chief Operating Officer Policy
Counsellor OECD Development Centre
World Civic Forum 7 May 2009, Seoul
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The Global Crisis Implications for Developing
Countries
Outline

• The crisis contagion
• Real economic activities and employment
• Net capital flows
• Why are low income countries particularly
  vulnerable?
• Heavy dependence on external capital flows
• Difficulties in sustaining external debt
• Shifting wealth, a capacity for resilience?
• Trade portfolio diversification
• South-South linkages
• Recommendations

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The crisis contagion

• Contracting demand in OECD countries will impact
  real economic activities and employment
• Emerging economies
• Singapores economy shrunk at an annualised rate
  of 17 in 2008
• Chinese Taipeis economy may contract by 11 in
  2009
• India reported a year-on-year trade decline of
  15 for October 2008
• (Source The Economist, 2009)
• Low income countries
• Ethiopia is vulnerable to a slowdown in
  international air-traffic (Ethiopian Airlines
  being one of the countrys main earners of
  foreign exchange)
• Cambodias textile industry reportedly orders
  are down 60
• Mozambique could be adversely affected by the
  decline of the automobile industry (Alumina being
  its leading export)

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The crisis contagion

• Net capital flows to emerging economies are
  estimated to be USD165 billion in 2009

82 decrease
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Why are LICs particularly vulnerable?

• High dependence on external financing
• Aid budget averages around 9 per cent of
  Africas GDP

Aid as an average percentage of net capital flows
2000-06
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Why are LICs particularly vulnerable?

• Remittances are now larger than commodities as a
  foreign exchange earner in 28 developing
  countries. e.g. Sub-Saharan Africa USD 19
  billion for 2008 (Source WB)

Strong reliance on remittances as a source of
foreign exchange reserve
Net Capital Flows to Developing Countries,
1980-2006
Source Authors, based on World Bank and OECD
data
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Why are LICs particularly vulnerable?

High share of banking sector in foreign ownership
Share of banking assets held by foreign banks
with majority ownership, 2006
Modified from World Bank, Global Development
Finance (2008)?
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Why are LICs particularly vulnerable?
Dependence on FDI as a major form of capital flow
Net flows (in USD billions) to Sub-Saharan
Africa,1999-2007

• Global FDI inflows fell by about 21 per cent in
  2008 and likely to fall further in 2009.
• Resource seeking FDI projects could suffer from
  the decline in world demand and in prices.
• In times of crisis, due to profit remittances,
  FDI can be an expensive form of financing.
• FDI investors may easily pull out financial
  resources.
• (Source UNCTAD)

Source World Bank, Global Development Finance,
2008
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Why are LICs particularly vulnerable?

Increasing difficulties in servicing debt

• ?Due to a combination of
• 1) Endogenous debt dynamics
• USD appreciation
• Drop in export revenues
• Need to increase social spending
• 2) Debt relief process slow down
• 3) Closing down of new channels of financing
  Sovereign bond issues

Debt service to GDP ratio ()
Source World Bank Global Development Finance
(2008)
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Shifting wealth, a capacity for resilience ?
High degree of openness to international trade
risk affecting the current account in times of
crisis but portfolio have been diversified

Destination of exports in Least Developed
Countries, 2006
Source UNCTAD Least Developed Countries Report,
p. 158
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Shifting wealth, a capacity for resilience ?
Can South-South linkages compensate for the
economic slowdown in the North?
Sub-Saharan Africa Real GDP Growth Correlations
1980-2007

• Correlation of growth rates in SSA with growth
  rates in Latin America and Asia is just as high
  as the correlation with its traditional trading
  partners in Europe
• Correlation of growth rates in SSA with growth
  rates in the US amounts to only 0.01

(1) Excluding Sub-Saharan Africa Source IMF,
Regional Economic Outlook Sub-Saharan Africa
April 2008
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Recommendations

• OECD countries must provide effective and
  coordinated response.
• OECD countries must
• deliver on pledges of aid efficiency we should
  not add an 'aid crisis to the financial crisis
• The financial crisis should give a new impetus to
  governments efforts to improve aid
  effectiveness, as set out in the Paris
  Declaration and the Accra Agenda for Action and
  allocate aid budgets in a way that is pro-poor.
• reject trade and investment protectionism
• preserve innovation as an engine for growth
• not use the crisis as an excuse to weaken
  efforts to achieve long term green economic
  growth and promote clean alternatives
• The IMF and the World Bank have put in place
  facilities to help LICs deal with exogenous
  shocks. Coordinated and rapid response is
  needed. Conditionality could potentially still be
  a problem.
• Donor community must prioritize pro-poor public
  expenditures, social protection and safety nets.

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Recommendations

• Developing countries must focus on domestic
  resource mobilisation.
• They must prioritize aid budgets towards
  pro-poor public expenditures, social protection
  and safety nets for the most vulnerable people.
• They should diversity their trade portfolio to
  create more South-South linkages.

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Thank you