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Meltdown Miscellany: stats and soundbites on the development impact

October 17, 2008
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Here are a few of the things that have crossed my screen on the impact of the meltdown on developing countries. I would really appreciate suggestions for more sources on this – especially on the distributive impact within and between countries.

Bailouts
In little more than three weeks America’s government, all told, expanded its gross liabilities by more than $1 trillion—almost twice as much as the cost so far of the Iraq war…. America’s government has put some 7% of GDP on the line, a vast amount of money but well below the 16% of GDP that the average systemic banking crisis (if there is such a thing) ultimately costs the public purse. [The Economist]

Impact on Aid
During the 1972-3 global recession aid fell by 15% before bouncing back quickly. But in 1990-93 aid plummeted by nearly 25% in a five-year period, and did not return to 1992 levels until 2003. Humanitarian aid followed the same pattern. One hopes that the geopolitical context has changed enough to stop the same happening this time around – the early 1990s was post Cold War and ‘end of history’; today is global interdependence, climate change, security – the arguments for aid should resonate more in this downturn.

Impact on Trade
Letters of credit – the financial instrument that oils the wheels of international trade – are drying up due to the credit crunch. ‘“There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit,” said Bill Gary, president of Commodity Information Systems in Oklahoma City. “The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.” [Global Dashboard]

Growth Forecasts
The IMF expects emerging economies, led by China, to grow by 6.9% in 2008 and 6.1% in 2009. That will cushion the world economy but may not save it from recession. The average downturn after recent banking crises in rich countries lasted four years. [The Economist]

Coupling v Decoupling
Of Output: The correlation between African GDP and World GDP since 1980 is 0.5, but between 2000 and 2007, it was only 0.2. As there have been significant structural changes (and a move into services that were able to withstand competition much better) as well as the rise of China, African growth has temporarily decoupled from OECD GDP. [ODI]

Of Finance – coupled everywhere except Africa?: By 2007 almost 900 foreign banks had a presence in developing countries. On average they accounted for some 40% of bank lending, up from 20% a decade earlier. In some places, particularly in eastern Europe and Latin America, foreign banks dominate the domestic financial system. Even China and India, which have been slow to allow in foreign banks, have opened up more in the past decade.

In Africa, foreign ownership of banks is unusually limited (to less than 5% in Nigeria and South Africa). Now, however, this very de-linkage from the Western financial system has turned out to Africa’s advantage. Its banks have almost no exposure to the subprime market causing such havoc elsewhere in the world. Benedicte Christensen, deputy director of the IMF’s African Department, says confidently that there is “no systemic risk that we can see in any African country in terms of banking. [The Economist]

Silver Linings: Time for the Tobin Tax?
One of the unintended consequences of the crisis is that it has legitimised coordinated global intervention. There is the chance to make finance once again the servant of the public. One obvious reform is to introduce a tax on international currency transactions. This idea has been knocking around since US economist James Tobin first suggested it in the early 70s, but the lack of interest in Washington and London has meant it never gained traction.

Set at a lower level it would raise considerable sums of money. A levy of just two basis points (two hundreths of 1%) placed on all currency deals would raise an additional $150bn a year, (assuming no evasion and no impact on trading volumes), enough to ensure that all the UN development goals were met by 2015. [The Guardian]

Finally a great soundbite from the Guardian’s Larry Elliott
‘Strange things have happened during this crisis, not the least of which is that the IMF was last week praising in developed countries all the things it normally excoriates in developing nations. Structural adjustment plans for the poor have involved privatisation, liberalisation and deregulation. Structural adjustment plans for the west, it seems, comprise of nationalisation, subsidisation and re-regulation.’

3 comments

  1. Effect on commodity prices is another: the CRB index is down 40% on a year ago, its lowest since Sept 04.

    However,oil will rebound as soon as we’re through the downturn, as there’s no underlying shift in the supply and demand fundamentals, and that will hike input and transport costs, and renew the attractiveness of biofuels. Climate change, competition for land and water scarcity are all still growing problems; global population is still rising fast.

    So far all these reasons, the downturn is more likely to be a lull in the storm on food and fuel – not a long term resolution of them. Policymakers need to see the downturn as a window of opportunity on both – as well as on climate, as Leo Horn argues on Global Dashboard here http://tinyurl.com/6kaujw.

  2. You forget remittances, which are a significant part of poorer countries’ economies and can outstrip ODA. The slowdown in rich countries will likely mean a reduction in the flow of remittances back to poor countries–creating household-level shocks and ultimately slowing economic growth.

  3. 1. Investment (both FDI and portfolio). Developing countries most probably would feel the decline of foreign investment flow. Moreover, access to credits would be more complicated (higher interest rates and more complicated requirements).
    2. Positive (?). Countries exporters of oil/gaz (Russia, Kazakhstan) would have more insentives for diversification of their economy which has been heavily based on carbon industries.

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