The impacts of the international crises The impacts of the international crises on the economies of the LDCson the economies of the LDCs

GIOVANNI VALENSISI

UNCTAD - Division for Africa, Least Developed Countries and Special Programmes

Short courses for delegates, Geneva, 6 July 2012

Presentation structure

• LDCs before the storm: the so-called boom

• The triple crisis: food, fuel and finance

• Channels of transmission and factors of resilience

• Key policy lessons

Presentation structure

• LDCs before the storm: the so-called boom

• The triple crisis: food, fuel and finance

• Channels of transmission and factors of resilience

• Key policy lessons

LDCs witnessed a significant growth acceleration during the early and mid 2000s.

Though in general oil & mineral exporters benefited disproportionately, growth resumption was relatively broad-based.

Number of LDCs with negative real GDP growth in each year

0

2

4

6

8

10

12

14

16

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Growth rate of real GDP per capita (const 2005 USD)

-6

-4

-2

0

2

4

6

8

Developed economies Developing economies excluding LDCs LDCs

Nonetheless, in spite of rapid and relatively stable growth in the 2000s, still LONG-TERM INCOME DIVERGENCE.

Real GDP per capita in LDCs relative to other country groups (const. 2005 USD)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Developed economies Developing economies excl. LDCs (right scale)

Even during the boom, LDCs continued to play a marginal role in the world economy.

In 2009• 12% of world

population;• 0.9% of world GDP• 1% of world

merchandise exports (0.6% excl. oil)

• 2.5% of world FDI

During the boom period (2000-2008) 13 LDCs, as well as the LDCs as a group achieved the BPOA target of 7% GDP growth.

Bhutan Lesotho

Chad Mauritania

Equatorial Guinea Sao Tome & Principe

Guinea Timor-Leste

Kiribati Tuvalu

Laos

Further, 11 LDCs achieved the BPOA target of 25% investment-to-GDP ratio.

Afghanistan Laos

Angola Mozambique

Bhutan Myanmar

Cambodia Rwanda

Chad Sierra Leone

Equatorial Guinea Sudan

Ethiopia

LDCs' economic boom in the 2000s was largely underpinned by external factors, above all the expansion

of international trade and high commodities prices.Terms of trade (2000=100)

0

20

40

60

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

LDCs: Africa and Haiti LDCs: Asia LDCs: Islands

Volume indices of exports (2000=100)

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

LDCs: Africa and Haiti LDCs: Asia LDCs: Islands

The pace of export boom has been paralleled and even surpassed by the rise in imports volumes.

The boom was also underpinned by a significant, though unevenly distributed, surge in external financing

(including inter alia debt relief).

ODA remains the main source of external finance for LDCs.

Capital flows to LDCs (million current USD)

0

10'000

20'000

30'000

40'000

50'000

60'000

70'000

80'000

90'000

100'000

Remittances inflows ODA net disbursements (excl. Debt relief) FDI inflows

CAPITAL ACCUMULATION

• Investment rose slightly to 21% of GDP, but is still significantly lower than in other developing countries (26% of GDP);

• Except in oil exporters, capital accumulation was increasingly dependent on external resources.

All LDCs

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Domestic savings as % of GDP

Gross fixed capital formation as % of GDP

LDCs excluding oil exporters

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Gross domestic savings as % of GDP

Gross fixed capital formation as % of GDP

• Agricultural stagnation (esp. in African LDCs);

• De-industrialization in 27 LDCs;

• Inability to generate productive employment outside agriculture.

Composition of output (% share of GDP, period average)

0

10

20

30

40

50

60

70

2000-2002 2006-2008 2000-2002 2006-2008 2000-2002 2006-2008 2000-2002 2006-2008

Agriculture Manufacturing Industry, excl.Manufacturing

Services

LDCs total LDCs: Africa and Haiti LDCs: Asia LDCs: Islands

0

25'000

50'000

75'000

100'000

125'000

150'000

175'000

200'000

225'000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Food and agricultural raw material (SITC 0 + 1 + 2 + 4, less 27 and 28) Ores, metals and precious stones (SITC 27 + 28 + 667 + 68 + 971)

Fuels (SITC 3) Manufactured goods (SITC 5 to 8 less 667 and 68)

Other goods not elsewhere specified Services

Double-digit growth rates for all products, though fuels eroded the

weight of all other categories and stand now at ≈ 50% of the total. Fuels & minerals pulled the exports boom in many fast-growing LDCs. Manufactures played subdued role except in Bangladesh, Cambodia, and

some small ec. (Bhutan, Gambia, Lesotho).

• Increasing concentration of exports and primary commodity dependence;

• Widening import bill for sensitive products (→ food and fuel crisis in 2008).

Economic growth has been accompanied by some improvements in LDCs macroeconomic fundamentals

(esp. lower inflation, better business environment).

In most cases, however, growth contributed only weakly to the development of LDCs’ productive capacities.

LDCs’ economic performance during the 2000s is “best understood in terms of boom-bust cycle which have been typical of their development experience over the long term”. (LDCR 2010)

Presentation structure

• LDCs before the storm: the so-called boom

• The triple crisis: food, fuel and finance

• Channels of transmission and factors of resilience

• Key policy lessons

Growth did not reverse AGRICULTURAL STAGNATION!

Yet, the agricultural sector employs 60% of L force in the LDCs, and is crucial for poverty

Agriculture value added per worker (constant 2000 US$)

0

100

200

300

400

500

600

700

800

900

0

5'000

10'000

15'000

20'000

25'000

30'000

LDCs (left scale) Middle-income countries (left scale)

High-income countries (right scale)

1990

40 30 20 10 0 10 20 30 40

0-9

10-19

20-29

30-39

40-49

50-59

+60

Women Men

2000

40 30 20 10 0 10 20 30 40

0-9

10-19

20-29

30-39

40-49

50-59

+60

Women Men

2008

40 30 20 10 0 10 20 30 40

0-9

10-19

20-29

30-39

40-49

50-59

+60

Women Men

2015 (forecast)

40 30 20 10 0 10 20 30 40

0-9

10-19

20-29

30-39

40-49

50-59

+60

Women Men

LDC population doubled since 1980 and is forecasted to double once more by 2050.

Young population structure and the youth bulge is expected to persist over the medium-term (by 2015 in 27 LDCs >40% of pop. will be below 15).

Youth are also increasingly educated (primary enrolment ↑ to 80%, and secondary enrolment to 31% in 2009).

Growing pressure on the L market, and natural resources.

The pattern of growth and structural change had only weak effects for poverty reduction.

In 2007 53% of the population was living on less than 1.25 $ a day (59% in 2000).

The number of extreme poor increased even during the boom.

In spite of the “new bottom billion” narrative, given current trends over time LDCs will become the major

locus of extreme poverty in the world.

No evidence of declining volatilityOn the long term, greater correlation across commodities

Some evidence of asymmetric pass-through

Monthly price indexes for various commodities (2000=100)

0

50

100

150

200

250

300

350

400

450

500

Jan2

000

Jul20

00

Jan2

001

Jul20

01

Jan2

002

Jul20

02

Jan2

003

Jul20

03

Jan2

004

Jul20

04

Jan2

005

Jul20

05

Jan2

006

Jul20

06

Jan2

007

Jul20

07

Jan2

008

Jul20

08

Jan2

009

Jul20

09

Jan2

010

Food and tropical beverages Vegetable oilseeds and oil Agricultural raw materials

Minerals, ores and metals Crude petroleum

Absent a meaningful supply response, the rise in prices has led to a mounting import bill (four-fold increase)

New elements: commodity financializatioin, bio-fuels.

LDC import bill for food and fuels

0

10'000

20'000

30'000

40'000

50'000

60'000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

US

D m

illi

on

All food items Fuels

THE GREAT RECESSION OF 2009

LDCs severely affected by the 2008 food & fuel crisis, but far from the epicenter of the financial crisis (→

shallow financial integration)

In general, LDCs suffered sharp growth slowdown due to the fallout of the global recession (in 2009 GDP growth ≈

3% lower than in 2000-2007)

Heterogeneous impact according to structural conditions (in over 1/3 of the 49 LDCs the slowdown was > 6%, while there was no slowdown in other 15 of them);

Oil exporters and most Island LDCs were the worst hit.

LDCs faced a growth slowdown of 3%, less than ODC, but also had a weaker

recovery.

31 LDCs suffered growth slowdown, of

which 4 had open recession.

However GDP p.c. fell in 16 LDCs in 2009, &

in 10 LDCs in 2010.

Real GDP growth ( const. 2005 USD)

-6

-4

-2

0

2

4

6

8

10

2006 2007 2008 2009 2010

Developed economies Developing economies excluding LDCs LDCs

Equatorial Guinea

Afghanistan

Myanmar

AngolaSierra Leone

CambodiaChad

Rwanda

Ethiopia

UgandaBurkina Faso

Timor Leste

Mauritania

Samoa

Malawi

Madagascar

Gambia

Tuvalu

Liberia

Guinea

BurundiGuinea Bissau

-Kiribati

Togo

Central African Republic

-Haiti

Eritrea

-5

0

5

10

15

20

25

-5 0 5 10 15 20 25

Real GDP growth rate 2000-2008

Real

GD

P gr

owth

rate

200

9-20

10

Presentation structure

• LDCs before the storm: the so-called boom

• The triple crisis: food, fuel and finance

• Channels of transmission & factors of resilience

• Key policy lessons

CHANNELS OF TRANSMISSION TO LDCs

Direct financial contagion has been sometimes acute (esp. where foreign actors played a big role), but relatively circumscribed due to LDCs shallow financial mkt.

Main channel of transmission to LDCs has been the fallout of the global recession:

A. TRADE SHOCK (world AD ↓, terms of trade?)

B. FDI inflows ↓ & profit repatriation ↑, except in countries where developing partners invested heavily

C. REMITTANCES mostly ↓

D. PUBLIC REVENUES ↓

TRADE SHOCK (1)

LDCs’ export revenues plummeted by 26% in

2009.

Price movements hit hard commodities exporters,

esp. oil & minerals

AD conditions penalized the majority of LDCs, but export composition and trade partners mattered

-80% -60% -40% -20% 0% 20% 40%

AfghanistanAngola

BangladeshBenin

BhutanBurkina Faso

BurundiCambodia

Central African Rep.Chad

ComorosDem. Rep. of Congo

DjiboutiEquatorial Guinea

EritreaEthiopiaGambiaGuinea

Guinea-BissauHaiti

KiribatiLao People's Dem. Rep.

LesothoLiberia

MadagascarMalawi

MaldivesMali

MauritaniaMozambique

MyanmarNepalNiger

RwandaSamoa

Sao Tome and PrincipeSenegal

Sierra LeoneSolomon Islands

SomaliaSudanTogo

UgandaUnited Rep. of Tanzania

VanuatuYemenZambia

LDC medianLDC weighted average

2008-2009 export shock, volume and price effects

% change in export volumes % change in unit value of export

TRADE SHOCK (2)

South-South trade and the 2009 shock to LDCs exports

y = 0.2699x - 0.1739R2 = 0.1612

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Share of South-South merchandise exports in 2008

Vo

lum

e in

dic

es o

f ex

po

rts

(% c

han

ge

2008

-20

09)S-S trade proved

more resilient

Mineral commodity dependence and the 2009 shock to LDCs exports

y = -0.2941x + 0.0021R2 = 0.6153

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Share of fuels and minerals in total merchandise exports in 2008

Uni

t val

ue o

f exp

orts

(% c

hang

e 20

08-2

009)

Heightened commodity

dependence proved to be a risk factor

TRADE SHOCK (3)

Terms of trade movements penalized commodities

exporters, but “benefitted” net importers

Reduction in import volumes were avoided in

most LDCs, with oil exporters and Island LDCs

being the exception

-40% -20% 0% 20% 40% 60%

AfghanistanAngola

BangladeshBenin

BhutanBurkina Faso

BurundiCambodia

Central African Rep.Chad

ComorosDem. Rep. of Congo

DjiboutiEquatorial Guinea

EritreaEthiopiaGambiaGuinea

Guinea-BissauHaiti

KiribatiLao People's Dem. Rep.

LesothoLiberia

MadagascarMalawi

MaldivesMali

MauritaniaMozambique

MyanmarNepalNiger

RwandaSamoa

Sao Tome and PrincipeSenegal

Sierra LeoneSolomon Islands

SomaliaSudan

TogoUganda

United Rep. of TanzaniaVanuatu

YemenZambia

LDC medianLDC weighted average

Terms of trade and import compression 2008-2009

% change in import volumes % change in terms of trade

DECLINE IN FDI

FDI inflows fell from 32 bln. in 2008 to $28 bln. in 2009, &

have not yet recovered.

Significant decline, albeit lower than in other regions.

Some mostly small countries saw rising FDI even in 2009

(China effect?).

FDI mostly natural-resource-seeking, except in Island

LDCs.

-24%

-150% -100% -50% 0% 50% 100% 150%

MauritaniaYemenSamoaMalawi

Central African Rep.Guinea

DjiboutiMadagascarTimor-Leste

BeninCongo, Dem. Rep. of

MaliAfghanistanSierra Leone

CambodiaBangladesh

GambiaLaos

BurundiLDC totSenegalAngola

MaldivesVanuatuEthiopiaLesotho

TanzaniaUgandaZambia

São Tomé and PrincipeKiribati

MyanmarRwanda

SudanComoros

BhutanBurkina Faso

HaitiNiger

MozambiqueLiberia

ChadTogo

EritreaSolomon Islands

Guinea-BissauEquatorial Guinea

Nepal

Change in FDI inflows (2008-2009)

Remittances proved somewhat more resilient, but still fell in the large majority of LDCs.

Inflows to big Asian recipients grew even in 2009, though at a lower rate (destination matters).

FISCAL IMPACT AND POLICY RESPONSES

Gov. revenues fell (as % of GDP) in about half of African LDCs, esp. due to ↓ mineral-related revenues and duties.

Expenditure rose on average by ≈2% of GDP, but fiscal policy contained procyclical elements in more than 1/3 of

the countries considered.

Several LDCs incurred additional debt to cope with the crisis; meanwhile debt vulnerabilities remain a serious

concern (10 LDCs in debt distress & other 10 at high risk).

INTERNATIONAL POLICY RESPONSES

In both 2008 and 2009, the World Bank, IMF and regional development banks increased their lending

significantly to the LDCs.

Although the bulk of its intervention in the aftermath of the crisis benefited MIC, IMF financing to LDCs also

increased from SDR 1,089 million in 2005–2007 to SDR 2,691 million in the period 2008–2010.

Surveys of lending agreements concluded with the IMF during the global recession show that there has been very

little fundamental change with respect to the use of procyclical conditionalities.

Macroeconomic factors attenuating the downturn

Price movements favoring net importers of food & fuel (i.e. most LDCs) at the trough of the crisis;

Timely involvement of multilateral lenders (ex. Zambia, Dem. Rep. Congo);

Pickup of commodity prices since Q2 of 2009

0

50

100

150

200

250

300

350

400

450

500Mothly price indices for primary commodities (2000=100)

Food and tropical beverages Vegetable oilseeds and oilAgricultural raw materials Minerals, ores and metalsCrude petroleum

Current deficits actually shrunk in most LDCs except

oil exporters in 2009

LDCs’ rebound ultimately depends on world recovery, which is still uneven and fragile (European periphery).

Debt vulnerabilities remain a serious concern for LDCs (10 LDCs in debt distress and other 10 at high risk), and several LDCs incurred additional debt to cope with the crisis.

Prospects for future ODA flows are uncertain/pessimistic as traditional donor strive to restore government balances.

The recent spikes in food prices put pressure on LDCs balance of payments, & threaten to trigger another food crisis.

Considerable downside risks remain

Presentation structure

• LDCs before the storm: the so-called boom

• The triple crisis: food, fuel and finance

• Channels of transmission and factors of resilience

• Key policy lessons

Sound fundamentals are necessary, but without development of productive capacities you remain prone to shocks.

Regional integration and export diversification were useful in containing the impact of the downturn on export sectors (ex. East Africa).

Timely policy responses were critical, but LDCs often lack resources to adopt countercyclical policies → domestic resource mobilization.

KEY LESSONS FROM THE DOWNTURN

Agricultural modernization is essential to improve the food security outlook in LDCs, and alleviate the pressure on the BoP.

Proactive policies are crucial for LDCs to achieve economic diversification.

The social impact of the crises can be long-lasting, as many “survival strategies” poor households put in place affect their long-term well-being.

KEY LESSONS FROM THE DOWNTURN

Thank you for your attention!

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