Ever since the London Summit, there’s been much back-slapping between leaders about how they’ve successfuly headed off the risk of a 1930s-style lapse into tit-for-tat protectionism.
However, as the World Bank will today underline, while that may be true in the strict sense – of tariffs, quotas and so on – it’s certainly not the case once you take finance into account too. The Bank’s Global Development Finance report, due to be published later today but already briefed to the FT,
expects private capital flows to developing countries to fall almost three-quarters this year to $363bn (€260bn, £220bn) from a $1,200bn peak in 2007.
This is in line with figures published by the Institute of International Finance earlier this month (pdf), which found that,
With almost half the year over, it is clear that net private capital flows to emerging economies in 2009 will be down substantially from 2008. Net flows are now projected to be about $141 billion for the year as a whole, less than half of the $392 billion estimated for 2008, and far below the record level of $890 billion in 2007. Our new estimate for 2009 is down somewhat from the last one in January, which was for $165 billion.
These are precipitous declines – and the reason that they constitute protectionism is because developed country policymakers have been putting pressure on their banks to curtail to poorer countries, which are seen as riskier investments. As Hans Timmer at the Bank notes, though,
It is a very, very short-sighted policy. There is self-interest in protecting emerging and developing markets.
And that’s not because of some vague sense in which stability in fragile states depends on shared economic prosperity; it’s because (as the FT’s Chris Giles puts it), “the drop in credit flows will undermine investment in emerging and developing economies … with a consequent hit on rich country exports of capital-intensive goods”.
In all, the Bank estimates that the collapse in private sector lending will, together with current account deficits and the need to refinance maturing debt, leave developing and emerging countries in need of up to $635 billion – which will either have to come from official aid (which was less than a sixth of that level last year, and that was before the credit crunch hit public sector budgets), or countries with large foreign exchange reserves.
As with the 1930s, the underlying issue is whether policymakers and publics can manage to think in terms of a larger ‘us’ – not for reasons of altruism, but because of a more sophisticated appreciation of self-interest. So far, the jury’s still out on this – as indeed on prospects for whether this becomes another lost decade for development.
