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Sussex Development Lecture, 26 February 2009 - Claire Melamed, ActionAid UK
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Crisis – what crisis?
What do the financial and food crises mean for development?
The pre-crisis world…..
Globalisation is good
Globalisation ‘can lift millions out of deprivation and become the high road to a more just and inclusive global economy.
(2001)
And the controversy….- Huge debates about
the relationship between globalisation and poverty reduction
- Ravi Kanbur’s brilliant 2001 paper still sums it up best: aggregation, time horizon and market structure and power
Then a strange thing happened in 2008
The Economist:
‘decoupling is no myth. Indeed, it may yet save the world economy’
March 2008
2008 was the year that globalisation turned nasty
- Food crisis
- Financial crisis
Food crisis
- Crisis of trade – change in agricultural policy in EU and US fed through to other countries through prices in world markets
Trade, risk and consequences
- Costs and benefits of trade distributed very unevenly – how can a global system compensate for that?
- Global system means that all decisions are global – how do we manage that?
‘Financial crisis’ is really two crises:
The financial crisis and the Faustian pact
- Huge pressure on all developing countries to open up trade and finance
- But reality is that they did so in different ways. How they engage is a key factor in how financial crisis and recession affect them.
South Africa – open to trade and finance
By 2007:- Value of shares in SA stock
market held by foreign investors equivalent to 20% of GDP
- Foreign bank lending equivalent to 54% of GDP
As a result, South Africa hit very hard by the crisis
- External flows to South Africa fell 19% between 2007 – 2008 likely to be down by nearly 50% by 2009.
- Loss in flows because of crisis equivalent to 15% of pre-crisis GDP
- Loss in flows because of recession equivalent to 9% of pre-crisis GDP
China – export led growth but closed financial system
By 2007- Foreign bank lending
equivalent to 4% of GDP- Equities held by foreign
investors equivalent to 4% of GDP
Despite the headlines, China hit less hard by the crisis
- External flows to China rose by 5% between 2007-2008, predicted to fall by 22% by end 2009
- Fall in flows from financial crisis 2% of pre-crisis GDP
- Fall in export earnings from recession around 7% pre-crisis GDP
How countries integrate is key – it’s about policy choices
- Export led growth risky but brings some poverty benefits
- Financial liberalisation also risky, and less poverty benefits
- Also possibility that recovery from recession faster than recovery from financial crisis
Low-income countries
- Low rates of investment overall but high dependence on FDI
- Tiny financial markets – liberalisation brought some foreign involvement but sectors stay very small
- Fall in flows from recession and from financial crisis around 2-5% of pre-crisis GDP
Financial markets were already failing:
- Not getting finance where it was really needed- Finance not necessarily supporting
development- Huge risks involved in financial liberalisation –
volatility in flows even before crisis
What are the big lessons from 2008 for development?
- Risk matters
- Manner of integration is crucial
- Global institutions to manage costs as well as benefits of globalisation
And for the G20:
- Reduce risks in financial system to countries that have to go to the markets can do so with more confidence
- Do what they can to help with domestic resource mobilisation
- Agree way of helping the poorest that doesn’t rely on appeals after the event
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