VoxEU generated a hugely stimulating debate in the run-up to the London Summit, proposing, analysing, or refining many of the issues that figure in the final outcome – as well as many that do not. This note offers some personal reflections on the outcome of the Summit and the VoxEU debate.
One of many casualties of the financial crisis has been the theory of decoupling. Developing countries, many with sound policies and economic structures, have seen their apparently strong economic prospects trashed, at least for a couple of years. The crisis was not of developing countries’ making but it will certainly impact them heavily. The leaders recognised this asymmetry at the Summit, acknowledging that prosperity is indivisible (para 1) and that we have a collective responsibility to mitigate the social impact of the crisis (para. 25).
The challenge for developing counties is huge. World Bank projections from January 2008 expected developing countries to grow by 7% in 2009. The most recent forecast is about 2%. And within this, there are big differences between countries. Several emerging markets have suffered financial meltdowns as over-extended banks have collapsed and external funds dried up. All developing countries have suffered declines in export demand, especially commodity exporters, and most have seen remittances slow or contract and foreign private investment flows fall away. And as these real economy effects take hold, financial stresses will overcome some countries’ financial sectors, re-doubling the damage.
The full extent and timing of the shock is not evident in most countries yet, but we do now have plenty of examples of major disruption. For example, in India business confidence is at a seven-year low, export orders are reportedly running 50% lower in many sectors, and industrial production growth is slowing from double digits to low single digit. In Latin America, it is estimated that 40% of financial wealth was wiped out in the first 11 months of 2008 through falls in stocks and other assets markets and currency depreciation. In Zambia, 8100 mining jobs have been lost (27% of the total) and in Cambodia 15 garment exporters have closed and 15% of jobs lost.
Rising to the challenge: Global initiatives
The crisis is a crisis of economic growth. The remarkable expansion and poverty reduction that we saw over the period 2002-2007 were probably never sustainable, but now they are expected to fall well below trend. The Summit cannot restore them just by policy intervention, but it has taken decisions to make a bad situation better. Many of them were presaged in the VoxEU debate.
World demand is a major driver of prosperity in developing countries. The IMF estimates, for example, that every 1% of GDP growth in OECD generates about 0.5% growth in Sub-Saharan Africa. Hence the fiscal stimuli and monetary expansions reviewed at the Summit, which might add an extra 2% to world growth, will help to maintain growth among developing countries. This will be particularly important for commodity exporters. Likewise, the Summit’s strong commitment to resist trade-reducing measures and reject protectionism applies not just to international trade among rich and middle-income countries but also to imports from low income-countries, which will help to maintain growth momentum in their nascent manufacturing sectors. The steps announced to expand trade credit will further stimulate demand and trade to the great advantage of all developing country exporters. With only one exception, VoxEU contributors discussing trade policy advocated these outcomes.
Developing countries will also be at the sharp end of the contraction in international lending, as lenders eschew risk and contract their balance sheets. This is potentially true of all forms of capital flows, from FDI, for which plans are already being shelved, to bank lending, which is being contracting as banks draw capital back to their home countries. Given the financial sector’s previous exuberance, some contraction is inevitable, but the leaders’ commitment to resist financial protectionism will minimise the diversion of funds.
The increase in global liquidity generated by a large issue of special drawing rights (SDRs) relaxes financing constraints on all countries. This will both help to maintain global demand and allow developing countries to pursue more expansionary policies through the downturn because they now have the means to finance the resulting increases in imports. Of the $250 billion, about $19 billion will accrue directly to low-income countries.
No one, least of all developing countries, wishes to see future crises of this magnitude. Hence the commitment to stronger economic and financial monitoring, including of the world’s largest economies, promises greater stability and supports developing countries as they seek grow into prosperity. Likewise, financial sector re-regulation to prevent future irresponsible lending is a major gain. As the details are worked out, however, the bodies designing the new standards will need to recognise the particular needs of low-income countries in creating stable banking systems and in maintaining access to international finance on reasonable terms.
Rising to the challenge: The development focus
The Summit focused considerable attention on the immediate needs of developing countries. As VoxEU contributers noted, for the world’s poorest even a tiny decline in income can have catastrophic consequences. There are important differences between developing countries, but the package of measures agreed at the Summit succours everyone in one form or another. And again most of the outcomes figured somewhere in the VoxEU debate.
There will be a major expansion in access to official financing. The doubling of the resources available to the IMF will provide support to many emerging and middle-income countries to help to address balance of payments and financial sector stresses; it is key to avoiding the "sudden stops" associated with previous economic/financial crises. Similarly the authorisation of extra lending by the MDBs will provide longer-term resources with which to maintain local demand and investments in future growth at the same time as providing social protection for the worst-hit members of society. Moreover, the quicker and easier access to these funds agreed (e.g. via the IMF’s Flexible Credit Line) will help to ensure that they are available counter-cyclically and in sufficient amounts to be significant.
Added to their share of the new SDR issue, some of the proceeds of IMF gold sales will now be allocated to increase IMF support for low-income countries. This initiative, which originated from developing country representatives at the Summit Meeting, will further relax their financing constraints and encourage new spending and investment. The resulting doubling of low-income countries’ access to IMF resources, with more flexibility, provides developing countries with more scope to finance the absorption of the current shock. More importantly, however, as a continuing commitment, it also offers them greater "insurance cover" to allow them to pursue more adventurous growth strategies in future.
The Summit announced specific funds for social protection to help the poorest and hardest hit, including commitments for the Rapid Social Response Fund which will provide resources to mitigate the impact of the crisis at household level for poor and vulnerable households. It also announced a commitment to establish an effective mechanism, led by the UN, to monitor the impact of the crisis on the poorest and most vulnerable.
In total, the decisions taken at the Summit add up, in form or another, to about $50 billion to support social protection, boost trade, and safeguard development in low income-countries. This represents a considerable injection of crisis support for these and other developing countries and emerging markets.
Recognising the role of some emerging markets in the provision of additional resources to the IMF and World Bank and understanding that reasonable access to resources is a key backstop to countries’ development policies, leaders committed to thorough-going reforms of the international financial institutions on specific and tight deadlines. These will raise developing countries’ voice and quotas in the international financial institutions and increase the legitimacy and accountability of their managements; they will thus greatly increase the positive role that these institutions can play in fostering growth and development around the globe.
Finally, in what are undoubtedly fiscally hard times in all G20 nations, leaders reaffirmed their commitment to the Millennium Development Goals and to maintaining their official development assistance targets, including honouring their Gleneagles commitments, especially to Sub-Saharan Africa.
If ever we required proof that development is taken seriously at the highest levels of government, the London Summit provides it. Despite the manifest demands of their domestic constituencies, leaders have made a clear statement and a binding commitment that development and developing countries lie at the heart of their vision for the twenty-first century.