The global financial crisis and

developing countries

synthesis of 10 country study

Dr Dirk Willem te Velde

Overseas Development Institute

ODI meeting:

The global financial crisis and developing Asia

14 July 2009, London

Outline

The global financial crisis has also hit developing

countries; regional effects

Transmission belts and examples from a 10 country case

study

Effects on development and policy responses

2

3

Revisions in GDP per capita

forecasts for 2009 (IMF)

Serious effects in all regions, but different effects in different countries.

Jul 2008

Jul 2008

Jul 2008

Oct 2008

Oct 2008

Oct 2008

Nov 2009

Nov 2009

Nov 2009

Jan 2009

Jan 2009

Jan 2009

-3

-2

-1

0

1

2

3

4

5

6

Developing countries Africa World

Jul 2008 Oct 2008 Nov 2009 Jan 2009 April 2009 July 2009

4

Revisions in GDP forecasts for

2009 (IMF) in Developing Asia

Note: India/China vs other Developing Asia in the most recent forecast

BRICs doing better than small/low income ?

-2

0

2

4

6

8

10

12

Asia China India ASEAN-5

Jul 2009

Oct 2009

Nov 2009

Jan 2009

April 2009

July 2009

5

The global financial crisis and 10

developing countries

6

ODI used its network of researchers

ODI contributors:

Dirk Willem te Velde, Massimiliano Calì , Jodie Keane, Jane Kennan,

Isabella Massa, Anna McCord, Mareike Meyn, Milo Vandemoortele

Country case study contributors:• Luis Carlo Jemio and Osvaldo Nina, Grupo Integral S.R.L, INESAD, Bolivia

• Olu Ajakaiye, African Economic Research Consortium, Oluwatayo Oni Fakiyesi, University of Lagos,

Nigeria

• Hossein Jalilian, Chan Sophal, Glenda Reyes, Saing Chan Hang, Phann Dalis and Pon Dorina, Cambodian

Development Policy Research Institute, Cambodia

• Mustafizur Rahman, Debapriya Bhattacharya, Md. Ashiq Iqbal, Towfiqul Islam Khan, Tapas Kumar Paul,

Centre for Policy Dialogue, Bangladesh

• Sarah Ssewanyana, Lawrence Bategeka, Evarist Twimukye, Winnie Nabiddo Economic Policy Research

Centre, Uganda

• Amoussouga Gero Fulbert, Professor, Université d'Abomey-Calavi, Benin

• Manenga Ndulo, Dale Mudenda, Lutangu Ingombe, and Lillian Muchimba, Department of Economics,

University of Zambia

• Francis Mwega, Department of Economics, University of Nairobi, Kenya

• Ira Setiati Titiheruw, Hadi Soesastro and Raymond Atje, Centre for Strategic and International Studies,

Indonesia

• Charles Ackah, Ernest Aryeetey, Ellen B-D. Aryeetey, Institute of Statistical, Social and Economic

Research (ISSER), University of Ghana

7

ODI’s monitoring methodology

Global shock

Unprecedented in decades

National shock

(Same transmission belts, different effects:

Private capital flows, trade, remittances, aid)

Macro – effects

(differs: growth, development and fiscal space )

Policy responses

(range from pro-active to “business as usual”)

Short-term (economic and social), long-run (economic)

8

What affects the vulnerability of

countries?

FINANCIAL Countries with sophisticated, weakly regulated banking sectors / stock markets;

Countries with a high share of foreign-owned banks and foreign assets;

Countries dependent on external private capital flows (e.g. FDI, portfolio);

REALCountries with a significant share of exports to crisis-hit advanced economies; Economies with concentrated exports in a few commodities

Countries exporting commodities whose prices have dropped or products and services with high income elasticity of demand (eg tourism);

Countries heavily dependent on remittances

Countries dependent on aid.

9

Who is likely to be less resilient?

“INSURANCE”

Countries with a high current account deficit with pressures on exchange

rates and inflation rates,

Countries with low reserves;

Countries with high government deficits and weak fiscal balances;

Countries with high external debts;

“COPING”

Countries with weak policy implementation capacity and weak institutions

(e.g. state business relations);

Countries lacking social protection nets.

10

Transmission belt (1)

Private financial flows

Stock market declines everywhere (30-50% since start GFC)

Portfolio investment flows badly affected in late 2008

FDI has been more resilient; but plans put on hold

Ghana, Benin and to some extent Zambia have experienced

decreases in both FDI and portfolio investment inflows.

Bond issuances put on hold in Ghana, Kenya, Uganda

There is little evidence so far of a drop in banks‟ international

claims, but some countries are vulnerable

11

Transmission belt (1)Portfolio flows and stock markets

Indonesia:

Stock exchange index, 2007-2009

Source: Uganda Country Case Study

Indonesia:

FDI and portfolio investment, 2007 and

2008 (US$m)

Source: Indonesia Country Case Study

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08

In U

SD

millio

ns

Foreign Direct Investment Portfolio Investment

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

3000

1/2

/2007

3/2

/2007

5/2

/2007

7/2

/2007

9/2

/2007

11/2

/2007

1/2

/2008

3/2

/2008

5/2

/2008

7/2

/2008

9/2

/2008

11/2

/2008

1/2

/2009

3/2

/2009

IHS

G

Worsening US

Subprime M ortgage

Crisis, Aug 16 '07

Global Stock M arket

Crash, Oct 10 '08

Less so and later in Bangladesh (but more in Africa)

12

Transmission belt (2)

Trade – different shocks

Open countries (Cambodia, Ghana, Uganda, Zambia) and

more protected countries (Bangladesh, Nigeria).

Different types of export shocks

Commodity price shock affecting Nigeria, Bolivia, Benin,

Zambia, but also Uganda, Ghana, and Kenya

Manufacturing volume shock (e.g. garments), affecting

Cambodia, and to some extent, Bangladesh

Tourism receipt shock (Kenya, Cambodia, Zambia)

Multiple shocks of declining commodity prices and lower

demand for simple manufactured, affecting Indonesia.

Import shocks (lower oil prices in Bangladesh, Kenya)

13

Transmission belt (2)

Trade – export concentration

Country Products affected Combined share of total exports

(three latest years reported)

Bangladesh Garments 75.6%

Benin Cotton 68.6%

Bolivia Natural gas 48.0%

Cambodia Garments (HS61/62) 86.0%

Ghana Gold, cocoa 61.1%

Indonesia Crude oil, palm oil, natural rubber, aluminium,

woven female clothing, cocoa, coffee, copper

24.2%

Kenya Flowers, vegetables, coffee 20.3%

Nigeria Crude oil 93.0%

Uganda Coffee, gold, flowers, cotton 39.2%

Zambia Copper 67.6%

Source: Comtrade and ITC (for ) and country sources ()

14

Transmission belt (2): Trade ValueGarments in Cambodia vs Bangladesh

0

50

100

150

200

250

300

350

Jan

-06

Ap

r-06

Jul-

06

Oct-

06

Jan

-07

Ap

r-07

Jul-

07

Oct-

07

Jan

-08

Ap

r-08

Jul-

08

Oct-

08

Jan

-09

US

D m

Source: MOC March 6, 2009

0

100

200

300

400

500

600

700

800

900

1000

Jan-0

6

Feb-0

6

Mar-

06

Apr-

06

May-0

6

Jun-0

6

Jul-06

Aug-0

6

Sep-0

6

Oct-

06

Nov-0

6

Dec-0

6

Jan-0

7

Feb-0

7

Mar-

07

Apr-

07

May-0

7

Jun-0

7

Jul-07

Aug-0

7

Sep-0

7

Oct-

07

Nov-0

7

Dec-0

7

Jan-0

8

Feb-0

8

Mar-

08

Apr-

08

May-0

8

Jun-0

8

Jul-08

Aug-0

8

Sep-0

8

Oct-

08

Nov-0

8

Dec-0

8

mln

US

$China BangladeshLinear (Bangladesh) Linear (China)

Walmart effect: Bangladesh sells cheap products to US, Cambodia is

already in a slightly higher niche and hence more vulnerable

Cambodia garments exports mn USD US imports (mn USD)

15

Trade prices

Copper vs cocoa/gold prices

0

500

1000

1500

2000

2500

3000

3500

Ja

n-0

3

Ma

y-…

Se

p-0

3

Ja

n-0

4

Ma

y-…

Se

p-0

4

Ja

n-0

5

Ma

y-…

Se

p-0

5

Ja

n-0

6

Ma

y-…

Se

p-0

6

Ja

n-0

7

Ma

y-…

Se

p-0

7

Ja

n-0

8

Ma

y-…

Se

p-0

8

Ja

n-0

9

ICCO Cocoa prices in dollarsCopper prices LME in dollars

Zambia/DRC vs Ghana

• Export concentration matters

• Price changes matter

• Volume changes matter

It is different in Asia:

• manufacturing shutdown in MICs

16

Transmission belt (2)

Trade prices matter

US imports – by country US imports – by product

Source: BEA

2009 Q1/2008 Q1

Total, all countries (A-15) -30.5%Europe -27.2%

Canada/6/ -38.2%Latin America and Other Western

Hemisphere -29.8%Asia and Pacific -21.6%

Australia -9.3%China -10.9%

Hong Kong -47.9%India -21.8%

Indonesia -11.1%Japan -41.5%

Korea, Republic of -17.6%Malaysia -37.0%

Philippines -26.2%Singapore -25.4%

Taiwan -26.0%Thailand -23.9%

Other -7.2%Middle East -53.0%

Africa -56.7%

Members of OPEC -61.8%

2009m1-m4/ 2008m1-m4 %Platinum -77.5%Crude oil -55.1%Nickel -54.9%Copper -53.0%

Gem diamonds -52.2%Natural gas -50.6%Vehicles -50.5%

Liquefied propane and butane -49.9%

Petroleum preparations -49.6%Aluminum -34.7%

Metalworking machines -34.2%

Electrical machinery (4) -26.7%

Iron and steel mill products -20.7%

Textile yarn, fabric -20.2%Clothing -10.8%Toys, games, and sporting goods -9.9%Footwear -8.3%

Gold, nonmonetary -4.3%Rice 6.9%Sugar 20.3%Cigarettes 37.3%

17

Transmission belt (3&4)

Remittances and aid

Remittances likely to decline due to lower emigration flows or

stocks (Bangladesh, Cambodia). In Bangladesh, emigration

fell by 38.8% between February 2008 and February 2009.

Reduction of remittances in some countries. In Kenya,

remittances were down 27% in January 2009, compared to

January 2008, after a year of volatility.

Some countries are more aid dependent (e.g. Bangladesh)

than others (e.g. Kenya). Little evidence of a pull out by 09Q1

18

Transmission belt (3&4)

Remittances and aid

Remittances likely to decline due to lower emigration flows or

stocks (Bangladesh, Cambodia). In Bangladesh, emigration

fell by 38.8% between February 2008 and February 2009.

Reduction of remittances in some countries. In Kenya,

remittances were down 27% in January 2009, compared to

January 2008, after a year of volatility.

Some countries are more aid dependent (e.g. Bangladesh)

than others (e.g. Kenya). Little evidence of a pull out by 09Q1

19

Growth effects

Effects differ (e.g. vulnerability, openness, sectoral

distribution, growth constraints). Cambodia from 10% to 0%

Source: Cambodia case study

-0.5

4.9

4.84.7

610.210.8

13.3

10.38.5

6.6

1

-5

0

5

10

15

2002 2003 2004 2005 2006 2007 2008e 2009p

IMF (old proj.) IMF(new proj.) World Bank

ADB Government EIU

20

Development and poverty

Significant job losses. Cambodia lost 51,000 garments jobs

(around 15% of garment workers).15,000 lost in construction.

Zambia lost 8,100 (25%) of 30,000 mining jobs 2008.

Remittances play a key role, but declining in countries

Rural-urban shocks and gender challenges

Possible Increase in number of poor due to GFC

•300,000 in Bangladesh (0.2% of the population);

•110,000 in Cambodia (0.8% of the population);

•233,000 in Uganda (0.8% of the population);

•230,000 in Ghana (1% of the population); and

•650,000 in Indonesia (0.3% of the population).

Protests

21

Economic/social policy

responses differed

Economic policy responses vary widely, from „business as

usual‟ to more pro-active approaches:

Implementing / accelerating long term growth policies (e.g.

Cambodia); Implementing a fiscal stimulus (Indonesia, and now

Kenya); Small monetary policy steps, not much else (e.g. Uganda).

The institutional context (“resilience” differs). Some countries

(e.g. Kenya, Ghana, Bangladesh, Nigeria) have established a

global financial crisis task force.

Social policy responses range from

Reducing social sector allocations (Nigeria) to upgrading social

protection from low base (Cambodia), to expanding existing systems

to need (Indonesia)

22

Conclusions

Developing countries hit. The same transmission belts (trade, private

finance, aid, remittances) affected countries differently. Stresses visible.

Real channels affected more than financial channels. But don‟t downplay

financial flow issues either. And feedback loops!

Development prospect already affected significantly, but need to better

understand and monitor GFC effects and policy responses.

Policy responses differ

Developing countries (e.g. set up task forces to assess and scrutinise

responses; need for crisis-resilient growth strategies)

Developed countries (e.g. engage in rainbow fiscal stimulus abroad &

stay open)

Multilateral organisations (e.g. Counter cyclical role, reform).

23

Thank you

dw.tevelde@odi.org.uk

Monitoring the global financial crisis and policy implications in

developing and developed countries