1. Effects of global financial crisis on developing countries [ presented @ ATN12, Accra, August09 ] Michael Herrmann Economic Affairs Officer Macroeconomics and Development Policies UNCTAD, Geneva, Switzerland

2. This presentation

• Financial effects

• Economic effects

• • Economic slowdown

• • Commodity price decline

• • Possible aid effects

• Political effects

• Concluding thoughts

• • The make-up of crisis

• • Policies to discourage future crisis

• • Policies to address unraveling crisis

3. Financial effects

4. Economic effects: Economic slowdown

5. Economic effects: Economic slowdown

• Economic slowdown

• discourages exports of all countries, but especially of countries with high exports to developed countries.

• encourages fall commodity prices, which affects many of the poorest developing countries.

• discourages investment in all countries, but especially in poorer developing countries which are perceived to be riskier.

• encourages increased profit remittances from developing countries to developed.

• discourages workers remittances from developed countries to developing countries.

6. Economic Effects: Commodity price decline

7. Political effect: Possible aid effect

8. Political effect: Possible aid effect

9. Concluding thoughts

• The make-up of financial and economic crisis

10. Concluding thoughts

• Policies to discourage future crisis:

• Strengthen micro-prudential regulations

• • Focus: Stability of individual financial institutions Risk management (capital adequacy ratio, i.e. capital/ risk, where risk is assets), corporate governance, accountability, transparency, long-term horizon of management

• • Agency: Financial supervisory agencies

• Strengthen macro-prudential regulations

• • Focus: Stability of financial system Risk management (counter-cyclical regulations, incl. capital adequacy requirements, reserve requirements), moral hazard, buy-in of financial institutions

• • Key agencies: financial supervisory agencies and central banks

11. Concluding thoughts

• Policies to discourage future crisis (contd.):

• Consider prudential controls on capital inflows

• • Tobin-type taxes: Reduce reliance on short-term, volatile capital inflows; exposure to maturity and currency mismatches; volatility of exchange rates; upward pressure on currencies.

• Encourage timely alignments of exchange rates

• • International macroeconomic coordination to encourage prevent large and prolonged exchange rate misalignments and build-up of large and sustained external imbalances; companies can go out of business, countries cannot.

12. Concluding thoughts

• Policies to address unraveling crisis:

• Controls on capital outflows

• Blank guarantees for deposits

• Rescue of systemically relevant financial institutions

• Pursuit of counter-cyclical macroeconomic policies

• Leakages in open economies

• Risk of protectionism

• Risk of other bagger-thy-neighbor policies

• Importance of intl. policy coordination

• Importance of social protection

13. Concluding thoughts

• Financial markets have for some time had an independent capacity to destabilize developing countries; there are now increasing indications of the vulnerability of all countries to financial crisis.[] Overall, there appears to be a need for more collective control and guidance over international finance.

• The Trade and Development Report 1990.