The impact of the current financial and economic crisis on foreign direct investment and other private flows, external debt and international trade in emerging market economies Fourth High Level Dialogue on Financing for Development United Nations, New York, 23-24 March 2010. UN-ECLAC On behalf of the UN Regional Commissions
As a consequence of the crisis, global economic activity, international trade and financial markets experienced contractions in unprecedented magnitudes 2 Global economic activity declined 0.8% % 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0 6.0 4.8 4.1 3.8 2.3 1.4 4.8 2.9 1.7 GDP growth rate, 2000-2009 Percentage 6.2 3.6 1.9 7.5 4.9 3.2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 7.1 4.5 2.6 7.9 5.1 3.0 8.3 5.2 2.7 6.1 3.0 0.5 2.1-0.8-3.2 World Developed Eco. Developing Econ. Source: World Economic Outlook, IMF.
Global international trade declined by 13% 3 % Growth rate of the volume of international trade 20.0 10.0 0.0 13.9 12.6 16.4-1.1 0.3-0.6 8.9 3.7 0.8 12.6 6.3 2.6 16.2 10.7 7.2 8.3 4.8 13.4 11.9 9.0 6.8 11.8 7.1 3.4 2.4-0.7 5.9 10.0 20.0-10.7-13.2-15.4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 World trade Developed Economies Developing Economies Source: Development Studies Section on the basis of CPB Netherlands Bureau for Economic Policy Analysis (2010).
As well global financial flows fell by 82%, led by a contraction in cross border flows 4 Global Cross-border capital flows 2000-2008 (US$ Trillion). US$ Trillion 12 10 8 6 4 2 0-2 5.3 1.5 1 0.9 1.9 7.6 2.8 2.4 1.2 1.2 10.5 4.9 2.6 1.9 0.8 1.6 2.1 1.8-0.2-1.3 Capital flows fell by 82% -4 2000 2005 2007 2008 Source: McKinsey Global Institute (2009) FDI Equity Debt Lending and deposits
Financial flows fell also sharply in developing economies 5 Total financial flows to developing economies. (2002-2009) (US$ Billions) 700 627.1 US$ Billions 600 500 400 300 Capital flows fell by 96% 200 100 78.6 128.6 180.3 202.2 121.7 0 23.9 Net Outflows -100 2002 2003 2004 2005 2006 2007 2008 2009-2.1 Source: WEO 2009, IMF
The crisis had also caused important social consequences, as illustrate by the global rise in unemployment 6 25 Unemployment rate, 2000-2009 (percentage) 20 15 10 5 18.0 12.4 7.8 6.7 6.1 4.9 18.1 12.6 8.9 8.6 8.3 6.3 0 2005 2006 2007 2008 2009 Developed economies South eastern Europe Commonwealth of Independent States Africa Developing America Developing Asia Source: World Economic Situation and Prospects 2010, UN.
Even though this is a global crisis, not all developing economies regions and countries were affected with the same intensity and by the same factors
8 On average growth was lower in all developing economies, but Central and Eastern Europe and LAC experienced the most significant contraction % GDP Growth rates In percentage 12.0 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0 6.5 1.9-1.8-4.3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Developing economies Africa Central and Eastern Europe Developing Asia Middle East LAC Fuente: WEO, FMI. (2009) and ECLAC (2010)
At the regional level regions Commonwealth of Independent States and the Middle East experienced the largest drops in financial flows 9 Financial flows to developing economies. 1980-2009 15.0 (% of GDP) 10.0 % of GDP 5.0 0.0-5.0-10.0 1980s 1990 1996 1997 2002 2003 2006 2007 2008 2009 Developing Asia Africa CEE CIS and Mongolia Middle East Western Hemisphere All EMEs Source: International Financial Statistics IMF, Rakesh Mohan and Muneesh Kapur (2009) and Robert Shelburne, Financing Development in Europe s Emerging Markets, UNECE Annual Report, 2008 and ECLAC 2010.
Even though was the most stable component among the private flows, FDI inflows experienced a significant decline in most of the developing economies regions 10 Direct Investment flows to emerging market economies. (1990-2009) US$ Billions 700 600 500 400 300 200 (US$ Billions) Annual % Change 2008-09 Developing economies -34.7 Developing economies: Africa -36.2 Developing economies: LAC -40.8 Developing economies: Asia and Oceania -32.1 Transition economies -39.4 100 0 Developing economies Africa LAC Developing Asia and Oceania South-East Europe and CIS 1990-96 97-2002 2003-2006 2007 2008 2009 Source: WIR (2009) and Global and Regional FDI Trends in 2010, UNCTAD.
Given the negative effects on economic activity and employment, remittances also experienced a significant decline 11 180 Dynamics of remittances flows (US$ Billions) 160 159 157 US$ Billions 140 120 100 80 60 40 20 34 54 39 37 28 24 20 19 20 18 12 12 13 14 66 68 26 43 21 80 50 31 30 34 101 59 37 39 125 63 65 5150 58 56 58 49 53 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009e Asia Latin America and Caribbean Europe and Central Asia Middle East and Africa Source: Development Studies Sectiononthebasis odf World Development Indicators and Migration and Development Brief, Nº11, November, 2009.
In the Asia-Pacific region, the contraction of exports was the most immediate channel of transmission of the crisis, and the plunge in 2009 was much deeper than during other crises 12 Exports dynamic during some global crisis episodes % Change 25 20 15 10 5 Percentage 0-5 -10-15 -20-25 -30 Bangladesh China India Republic of Korea Taiwan Province of China Indonesia Malaysia Philippines Thailand 2008-2009 2001 dot.com 1997-1998 Source: ESCAP 2010
In Emerging Europe, non-fdi flows experienced a significant reversal as a consequence of the crisis 13 Capital Flows to Emerging Europe (% of GDP) Percent of GDP 10 9 8 7 6 5 4 3 2-1 01-2 -3-4 -5 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Private direct investment Other Inflows Official flows Source: Robert C. Shelburne, UNECE, March 2010.
The reduction on remittances was critical for many LAC in particular in Central America 14 Remittances inflows to Selected Countries in LAC % Change y-o-y 40% 30% 20% 10% 0% -10% Guatemala El Salvador México -20% Nicaragua Rep. Dominicana Ecuador Colombia Jamaica -30% 1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 Source: ECLAC
Heterogeneity is also present conditioning both the recovery process and how to face the postcrisis period.
Developing economies will growth faster than developed economies and it is expected that some developing economies will become the engine of global growth 16 GDP growth rate % 8.0 6.0 6.1 6.0 6.3 4.0 2.0 0.0 3.0 0.5 2.1 3.9 2.1 4.3 2.4-2.0-0.8-4.0-3.2 2008 2009 2010 2011 World Developed Econ. Developing Econ. Source: World Economic Outlook, IMF. (2010)
In general, it is expected an increase in the total financial flows to emerging market economies in 2010 and 2011 but without reaching 2007 and 2008 levels 17 30 Total Flows to Developing Economies US$ Billions 25 23.9 US$ Billions 20 15 2007 -> 627 Billions 14.1 10 5 0-5 -2.1 2008 2009 2010 Source: WEO, IMF 2009
But there are significant regional differences in expected destiny of total financial flows 18 Total Flows to Developing Economies US$ Billions 200 175.8 150 US$ Billions 100 50 0 23.9 70.5 35.4 34.5-2.1 52.3 48.0 36.6 40.9 14.1-3.6 62.2 0.0 61.9-50 -50.7-50.4-100 -150-123.2-77.7-107.6-200 -169.1 2008 2009 2010 Emerging and developing economies LAC Middle East Developing Asia Africa Commonwealth of Independent States Central and eastern Europe Source: WEO, IMF 2009
In addition, Net FDI flows will not recover the pre-crisis level 19 450 400 411 Foreign Direct Investment to Developing Economies 425 US$ Billions 350 300 279 269 US$ Billions 250 200 150 153 140 100 50 0 87 90 93 77 69 71 70 66 49 42 35 34 40 38 31 28 26 32 32 37 26 17 2007 2008 2009 2010 Emerging and developing economies LAC Middle East Developing Asia Africa Commonwealth of Independent States Central and eastern Europe Source: WEO, IMF 2009
It is also expected that remittances flows will recover, but the pace of recovery will be different among regions 20 70 Dynamic of remittances flows (US$ Billions) 166 65 65 165 164 US$ Billions 60 55 50 58 56 159 58 53 49 59 54 51 158 61 56 53 162 160 158 US$ Billions 45 157 156 2008 2009e 2010f 2011f Asia Latin America and Caribbean Europe and Central Asia Middle East and Africa Source: Development Studies Sectiononthebasis odf World Development Indicators and Migration and Development Brief, Nº11, November, 2009.
Once again, heterogeneity among developing countries must be taken into account 21 Not all developing economies will have the same recovery process both in economic and social terms. Not all developing economies have the financial and fiscal capacity to mitigate the economic and social effects of the crisis, and to stimulate aggregate demand. Not all developing economies will have the same access to international financial markets. Not all developing economies have the same capacity and production specialization to take advantage of the recovery in international trade.
Traditionally, international financial markets have acted in a pro-cyclical and rather volatile manner, dampening and propagating external shocks 22 The main challenge of this post-crisis era is to avoid the mistakes of the past, and efforts have to be made to avoid that international financial resources are concentrated in a small group of developing countries and a small group of productive sectors. This requires a deep reform of the International Financial Architecture to promote: A revision of the global development agenda to rebalance the relationship between stability and development. The adoption of counter-cyclical policies to avoid the erratic behavior of international financial markets. Higher coordination among global, regional and sub-regional instance to develop early warning system to avoid future crisis episodes, new regulation and supervision schemes, and to coordinate policies related to increase the level and the efficiency of ODA.
Additionally, International cooperation is needed to avoid that the social and economic effects of the crisis have a deep and protracted effects 23 Traditionally, the negative effects of crises on social variables such as employment, real wages, and income distribution tend to have longer duration than the negative effects on economic variables. The current crisis is not an exception, and it may significant reduce the possibility for many developing economies to achieve the objectives of the development agenda, i.e., the MDGs. In part due to shortage of international financing, loss of access to international trade and poor fiscal stance. In this context, the international cooperation system must coordinate efforts to help those countries in need, and enough ODA resources have to be assigned to avoid an increase in poverty, hunger and deeper deterioration of social conditions.
FDI flows must play an important role in the future 24 Developing countries have in the past years relied on FDI inflows as one of the most important external sources of development finance. The crisis led to a huge drop in global FDI inflows, which will have a severe impact on the development finance in developing countries. Therefore, international community, particularly developed countries need to take measures to reverse this situation and implement the recommendations of the Monterrey Consensus and ensure adequate inflows of FDI and other private flows to developing countries. Private flows, and in particular, FDI can promote new technologies in the host countries, increase employment opportunities and open new market access for their exports.
The impact of the current financial and economic crisis on foreign direct investment and other private flows, external debt and international trade in emerging market economies Fourth High Level Dialogue on Financing for Development United Nations, New York, 23-24 March 2010. UN-ECLAC On behalf of the UN Regional Commissions