The Global Economic Crisis

and Policy Responsesin West Asia

ESCWA,Damascus, Syria

5 May 2009

2

Crisis Unexpected?• A crisis foretold• Unsustainable global imbalances • International financial architecture• Ideology: deregulation, self-regulation,

capital account liberalization• Financial Globalization: growth, stability?• Most developing countries innocent

victims• Policy responses: inadequate; double

standards• International cooperation: G7, G20, UN

3

Globalization: finance>trade

0

20

40

60

80

100

120

140

160

180

1980 1990 1995 2000 2006

US

$ T

rillio

ns

0

50

100

150

200

250

300

350

As

pe

rce

nt

of

GD

P, in

dic

es

19

80

=1

00

Global financial assets

Global merchandise trade

) Global financial assets as a percentage of GDP(right axis

) Global merchandise trade as a percentage of GDP(right axis

4

Finance-investment nexus?

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Gross Fixed Capital Formation

Gross Financial Investment Abroad

Financial globalization

•Net capital flows from South to North (US largest borrower)

•Cost of funds not generally lower due to financial deepening (more intermediation, financial rents)

•Higher volatility•Lower growth, higher instability

Short-term capital inflows problematic•No real contribution to investment,

growth rates•Asset (shares, real estate) price +

related (e.g. construction) bubbles instead

•Cheaper finance for consumption binges•Over-investment excess capacity•All exacerbate instability, pro-cyclicality

7

Contagion: crisis spreadsFinancial sector contagion (incl. vicious circles):Sub-prime crisis financial crisis asset price deflation liquidity/credit crunch

Financial crisis Economic recession(including feedback loops)Real economy contagion (incl. vicious circles): Less investment, especially abroad (FDI) Less consumption

Reduced demand for imports, i.e. for exports of others Prices, output declines globally Growth, employment declines globally

Middle East market indices (Feb 2008-Feb 2009 change in per cent)

Abu Dhabi Securities

Market Amman Stock

Exchange Bahrain Stock

Exchange Beirut Stock

Exchange Doha Securities

Market Dubai Financial

Market Kuwait Stock

Market Muscat Securities

Market Palestine

Securities Exchange Saudi

Stock Market Composite*

-80 -70 -60 -50 -40 -30 -20 -10 0

Change in percent

Deflationary spiral•Asset (stock, property) markets

deflating negative wealth effect

more bank insolvency generalized credit squeeze

•Lower external demand, world trade excess capacity investment slowdown

•Depressed domestic demand lower prices, outputrices, output lower employment, incomes

10

Disorderly unwinding of global imbalances

-800

-600

-400

-200

0

200

400

600

2005 2006 2007 2008 2009

US Japan EU Developing, excl China China

Billions of dollars

11

Globalization: Parallel fates

-4

-2

0

2

4

6

8

2003 2004 2005 2006 2007 2008 2009 (P)

Developing countries

Developed countries

World

Preliminary, revised forecast

13

Recession in most developed

economies

2.9

1.9 1.8

4.8

2.82.4

2.9

6.5

2.0 2.1

2.7

6.0

1.2

0.4

1.1

4.9

-1.9

-0.6

-1.6

0.4

-2

-1

0

1

2

3

4

5

6

7

United States Japan EU-15 New EU members2005 2006 2007 2008 2009 orig. forecast

14

Slower growth in all developing countries

7.2

6.0

8.5

4.75.5

5.1

6.9

4.94.3

5.9

-0.2

1.6

4.5

0.1

2.7

-10123456789

Developing Africa East andSouth Asia

Western Asia LatinAmerica

2005 2006 2007 2008 2009 forecast

Growth by main country groups

Per capita GDP growth rateChange in growth

rate

2004-07 2008 20092009/

20082009/

2004-7

World 2.6 0.9 -3.4 -4.3 -6.0

Developed economies 2.1 0.3 -4.1 -4.4 -6.1

USA 1.6 0.1 -4.4 -4.6 -6.0

Japan 2.1 -0.6 -5.9 -5.3 -8.0

European Union 2.4 0.7 -3.4 -4.1 -5.8

Economies in transition 7.7 5.5 -2.6 -8.1 -10.2

Developing economies 5.7 4.0 0.1 -3.9 -5.6

Africa 3.4 2.5 -1.0 -3.5 -4.4

North Africa 3.6 3.6 1.4 -2.3 -2.2

Sub-Saharan Africa 3.6 2.2 -1.9 -4.1 -5.5

East and South Asia 7.3 5.0 1.8 -3.2 -5.5

East Asia 7.8 5.3 1.8 -3.5 -6.0

South Asia 6.5 4.9 2.6 -2.4 -3.9

West Asia 3.7 2.6 -1.2 -3.8 -5.0 Latin America +

Caribbean 4.0 2.7 -3.0 -5.8 -7.0

LDCs 5.2 3.6 0.3 -3.3 -4.9

LDCs excl. Bangladesh 5.4 3.4 -0.6 -3.9 -6.0

Growth by main country groups

Per capita GDP growth rate

Change in growth rate

2004

-07200

8200

92009/

2008

2009/ 2004-

7World 2.6 0.9 -3.4 -4.3 -6.0Developed

economies 2.1 0.3 -4.1 -4.4 -6.1

Economies in transition 7.7 5.5 -2.6 -8.1 -10.2

Developing economies 5.7 4.0 0.1 -3.9 -5.6

West Asia 3.7 2.6 -1.2 -3.8 -5.0

LDCs 5.2 3.6 0.3 -3.3 -4.9

Real growth and consumer inflation, 2005-2009Real Growth Consumer inflation Country/Group 2008 2009 2008 2009Bahrain 6.3 2.0 3.5 3.5Kuwait 6.1 0.7 10.4 5.7Oman 6.0 1.5 12.4 6.0Qatar 16.0 7.0 15.0 11.2Saudi Arabia 4.2 0.7 9.9 4.5United Arab Emirates 7.4 0.5 18.6 5.2GCC countries 5.8 1.1 12.0 5.2Egypt 6.5 4.5 17.1 9.7Iraq 8.9 5.0 2.7 5.0Jordan 6.0 3.6 14.0 6.5Lebanon 5.5 3.0 11.7 5.7Occupied Palestine -1.7 -1.0 9.8 5.2Sudan 8.5 4.2 15.0 11.0Syrian Arab Republic 6.5 3.2 14.7 6.0Yemen 4.5 2.0 19.0 12.7More Diversified

Economies 6.6 4.0 13.9 8.2

ESCWA region 6.1 2.1 12.7 6.3

Regional GDP growth rates in PPP terms, 2007-2010

Note: The IMF World Economic Outlook classification of the Middle East region includes Egypt, Iran, and Libya. Source: IMF, World Economic Outlook Update, January, 2009.

WorldAdvanced Economies

EuropeanUnion

Emerging &

DevelopingEconomies

Sub-Saharan

Africa

Central &Eastern Europe

Middle East

2007 2008 2009 2010

Real GDP growth in Arab States, 2007-2010

N

18

16

14

12

10

8

6

4

Un

emp

loy

men

t ra

te i

n p

er

cen

tUnemployment rates in the

Middle East (% of labour force)

▲ Total ♦ Males Females

Unemployment scenarios for

2009

Middle East .World

To

tal

Mal

es

Fem

ales

To

tal

Mal

es

Fem

ales

WA: Limited impact so far•Most of region’s financial markets have declined significantly

•So far, impact on real economy relatively limited due to:

- mass surplus liquidity (GCC countries) from oil boom

- relative insulation - low market capitalization

But worse yet to come•But crisis going to hit more forcefully

•Real GDP growth projected to drop to 4% in 2009 (6% in 2007)

•Unemployment rates to climb from 9.4% to 10.8%

Past growth problems

•Regional economic growth spurred by: - oil revenue- real estate investment- housing- tourism- foreign assistance --- rather than productive activity

•Surpluses not used to build up strong industry, infrastructure, skills

Monthly Crude Oil Prices ($/barrel)

Jan

-08

Feb

-08

Mar

-08

Ap

r-08

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-0

8

Dec

-08

Jan

-09

Food prices will remain higher

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Wheat Maize Rice

33

World trade collapsing

-0.8

4.45.6 6.4

2.0

-10.0

11.2

9.37.4

-15

-10

-5

0

5

10

15

2001 2002 2003 2004 2005 2006 2007 2008 2009

Ann

ual p

erce

ntag

e gr

owth

Preliminary, revised UN forecast

Collapsing world trade

(volume index, 1998 = 100)

100

120

140

160

180

200

220

240

260

280

2006M

1

2006M

3

2006M

5

2006M

7

2006M

9

2006M

11

2007M

1

2007M

3

2007M

5

2007M

7

2007M

9

2007M

11

2008M

1

2008M

3

2008M

5

2008M

7

2008M

9

2008M

11

2009M

1

World trade

Developing and other non-OECD country exports

OECD country exports

Source: CPB

ME current accountMiddle East and North Africa

-2000

200400600800

100012001400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US $ billions

Exports

Current account balance

Source: Economic Intelligence Unit.

ME oil exporters too

Middle East and North Africa: Oil Exporters

0

200

400

600

800

1000

1200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US$ billions

Exports

Current account balance

Source: Economic Intelligence Unit.

Volatile aid flows

0%

1%

2%

3%

4%

5%

6%

7%

8%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Other LICs

Sub-Saharan Africa

LDCs

Official aid (USD$/capita)

Iraq )2003( Jordan Lebanon Syria )2006( Yemen Egypt )2006( )2006( )2006( )2006(.

Remittances to developing countries, 2008-2010

45

260

41

239

42

238

0

50

100

150

200

250

300

Low-income countries Middle-income countries

(bil

lion

s of

US

doll

ars)

2008

2009

2010

Jordan )2007( Lebanon Oman )2006( Syria )2007( oPt )2007( Yemen )2007( )2007(

Total remittances as % of national GDP

Remittances from Saudi Arabia,

2005

Remittances from Saudi Arabia

as % of GDP of receiving Arab country, 2005

Per

cen

tag

e o

f G

DP

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

Impact of crisis on extreme poverty

Change in extreme poverty (< $1.25/day)

No. of Poor Change in poverty’09/‘04-’0

7 ’09/‘08 ’09/‘04-’07 ’09/‘08

Transition economies 0.6 0.6 0.3% 0.3%

Developing economies 111.1 73.5 1.8% 1.2%

Africa 5.9 4.2 1.2% 0.9%North Africa 0.1 0.1 0.1% 0.1%Sub-Saharan Africa 5.8 4.1 1.6% 1.1%East and South

Asia 101.0 65.6 2.0% 1.3%East Asia 16.2 27.5 0.8% 1.3%South Asia 84.2 37.8 3.0% 1.3%West Asia 0.6 0.2 0.5% 0.2%LAC 4.1 3.7 0.7% 0.7%

Livelihoods threatened• Declining living standards, increasing

inequality of concern for some time • Many livelihoods under threat, especially

when social protection not well-developed

• Migrant workers > 60% in most GCC countries

• Prolonged slowdown in world economy likely to cause remittances, job creation, tourism and ODA to decline, unemployment to increase, particularly among youth

Policy priorities•Promote growth of productive sector

•Encourage pro-poor growth•Strengthen social protection •Oppose discrimination•Emphasize human development, decent work

46

Trade impacts: summary•Exports decline all developing countries

•Terms of trade primary exporters

•Trade surpluses, reserves may run down quickly

•But lower energy, food prices help net food and oil-importers

47

Financial impacts on developing countries• Despite non-involvement in sub-prime debacle:

Emerging stock markets collapse greater Reversal of capital flows, FDI also down Spreads rise, much higher borrowing costs

• But financial positions stronger than during Asian + LA crises (more foreign reserves, better fiscal balances)But reserves rapidly evaporating with export collapse; fiscal space also disappearing

Social, political impacts •>200 m. more working poor •ILO: Unemployment to rise by 51m

•Government social spending at risk

•Rising social unrest•US intelligence report:

crisis -- greatest security risk

New Bretton Woods moment?

Bretton Woods, 1944: United Nations conference on monetary and financial affairs

• 15 years after 1929 Depression• Middle of WW2• US initiative vs UK Treasury stance• 44 countries (28 developing countries; 19 LA)• IMF, IBRD, ITO – UN system• Clear emphasis on sustaining growth, employment

creation, development, not just financial stability

• But BWIs very different governance arrangements

Responses to crisis• UN, BIS forecasts more accurate than

others; IMF, WB upbeat till late 2008• IMF, WB also marginalized by G7, etc• IMF discouraging strong fiscal stimulus

by developing countries without surplus• G7 G20: more inclusive? legitimate?

crisis-, but not developmental or equitable

• PGA (Stiglitz) Commission of Experts• Doha Declaration: June 09 summit on

impact of crisis on developing countries

UN role?• Universal, legitimate lead reform

process?• Ensure comprehensive systemic reform• Ensure developmental financial system• Ensure inclusive financial system • Develop capacity for offering 2nd

opinion to interested member states

• Align IMF, WB with UNDA (including FfD), IADGs to ensure policy coherence

57

Thank youPlease visit UN-DESA Please visit UN-DESA www.un.orgwww.un.org

G24 G24 www.g24.orgwww.g24.org andand PGAPGA www.un.org/ga/president/63/ websites websites

• Research papersResearch papers• Policy briefsPolicy briefs• Other documentsOther documents

Acknowledgements: UN-DESA, ILO, Acknowledgements: UN-DESA, ILO, ESCWAESCWA