by Leo Horn Phathanothai | Oct 12, 2008 | Africa, Conflict and security, Economics and development, Global system
So far, many observers and experts point out, developing countries seem to be holding out quite well amidst the global financial turmoil. In reality the current global financial crisis poses multiple and profound risks to development, which I will briefly outline.
Finance ministers from 24 developing countries (the Group of 24, or ‘G-24’) meeting last Friday at the IMF, noted that:
“many emerging markets and developing economies are not immune to the spillovers of the ongoing global financial crisis”
and that:
“preventing macroeconomic volatility from financial spillovers and sustaining continuous growth were key priorities for developing countries”
See the G-24 public communiqué here.
There are several ways in which the global financial crisis can impact on development. Impacts will be highly country-specific. Key factors include:
- Cuts in international development aid – Jakaya Kikwete, President of Tanzania and Chairman of the African Union, expressed his ‘deep concern’ about the financial crisis dampening rich countries’ commitment to development aid (see news report here). And for good reason: development aid tends to be strongly pro-cyclical, in other words a nation’s generosity to other nations tends to be proportional to its own good fortunes.
- Reduced access to international financial capital markets – The impact will likely be bigger for middle-income countries and some emerging markets (excluding China, given it is a super high saver). Much of sub-Saharan Africa had limited access to international private capital to start with, and will therefore not be strongly affected by this.
- Possible reversals in capital inflows to developing countries – due to the global credit crunch and as investors’ appetite for risk abates.
- The spread of stock market turbulence to emerging markets – in one day last week, markets in Brazil, Mexico, South Africa and Turkey plunged 10%.
- Downturn in global demand for developing country exports.
- Postponement of large investment projects. There is emerging evidence that large investment plans (e.g. in India’s power sector) are being delayed or cancelled as turbulence in capital markets undermine prospects for raising funds.
- Remittances will be impacted by the economic downturn, as well as inflation and a weak dollar. See a recent news report on how remittances to the Caribbean are being hit.
It is of course unrealistic to expect that developing countries can be wholly insulated from the global financial crisis. However, the one very powerful instrument that rich countries do have at their disposal to help keep development on track is aid. A cutback in aid at this point can have severe impacts, as high food and oil prices justify increases in aid. Aid will be needed for countries with reduced sources of revenue and finance, as social expenditures are typically the first to get cut when fiscal resources tighten. Emergency support should be targeted to countries that are fiscally highly vulnerable (the IMF has identified 22 such countries).
by Richard Gowan | Oct 11, 2008 | Climate and resource scarcity, Conflict and security, Cooperation and coherence, Europe and Central Asia, Global system
The UN and NATO have signed a – not very radical – declaration about their cooperation in places like Afghanistan and Darfur, and the Russians are peeved:
Moscow on Thursday accused NATO and the United Nations of secretly forging an agreement that tightens their cooperation without informing Russia, a U.N. Security Council member whose relations with NATO are badly strained.
Foreign Minister Sergey Lavrov said Russia was aware an agreement was in the works and assumed it would be shown to member states for review. “This did not happen, and the agreement between the secretariats was signed in a secretive way,” Lavrov said.
Russia’s anger reflected its wariness that closer relations could give NATO more clout at the United Nations, where Moscow holds veto power as a permanent Security Council member. Russian Foreign Ministry spokesman Andrei Nesterenko suggested that top U.N. officials went back on their word. “We were assured at the highest level of the U.N. secretariat that no such document would be signed without informing us in advance,” he said.
It was silly of the UN to let this come out the same week that the Security Council agreed to extend the UN monitoring mission in Georgia. But this agreement has been in the works for ages. I recall seeing a draft in 2006, although this was covered in scribbled deletions from the French, who didn’t want it to overshadow cooperation between the UN and EU. For a time, it looked like the deal was dead, but there’s been a lot of interest in it at the very top of both NATO and the UN.
I don’t think the Russians should worry too much: this is a piece of paper that summarizes a vast amount of UN-NATO cooperation that is already happening.
But signing it was a mistake for the UN. As a report overseen by Lakhdar Brahimi implied earlier this year, UN staff are seen as legitimate targets for terrorists and malcontents worldwide because it is associated with U.S. and Western interests. The challenge in an Afghanistan is for the UN to maintain some political autonomy. Even a low-profile declaration like this makes it just a little harder to do that.
And this minor diplomatic incident points to a growing conceptual problem for fans of multilateral security cooperation. This is a naive belief that all international security institutions have, or could have, shared goals and that we simply need to link them up better to meet those goals. This is a hangover from the happy days of the 1990s, when the West still had a grip on pretty much every organization from the UN to Boy Scouts, but it’s not sustainable in a more competitive world.
NATO and the UN have fundamentally different roles: the first is still, in the final analysis, a framework for Western security while the latter is a place to do deals between disunited states. The two can cooperate case-by-case, but this deep political difference remains. And it should remain – our best hope for resolving threats in a competitive world is to keep our range of political options open.
I think the only really interesting question in security cooperation at present is how we maintain and nurture sufficient institutional pluralism in the international system. “Diverse institutional responses to diverse threats” is my new slogan.
Acute readers will note that this is rather different to what Alex and David have been saying about climate change, commodity prices, etc. – i.e. we need shared awareness and shared platforms to tackle new challenges – not to mention the swirling demands for an international response to the financial crisis.
I’ll freely admit that I’m skeptical about the idea of truly shared understanding in ANY political realm (isn’t it just an old Enlightenment fallacy back to disturb the system?) but I do share the analysis that on an issue like climate change, international convergence on a (probably rather minimal) shared awareness of the threats involved and mechanisms to respond is necessary and just possible. Maybe. Climate change now is probably in the same category as nuclear proliferation during the Cold War: everyone can be scared into signing a big deal to tackle it, which is how we got the NPT, a pretty amazing treaty in retrospect.
But even as Russia and the U.S. were moving towards the NPT, they were on alert in Europe and Asia. It is possible to converge on global problems while competing on diverse localized security issues. So I’ll leave the search for common platforms to my colleagues, and argue for uncommon platforms down below.
by Alex Evans | Oct 10, 2008 | Climate and resource scarcity, Conflict and security, Economics and development, Global system
Although there’s no consensus on whether we’re heading for a 2-3 year recession or a much longer period of deflation a la Japan in the 1990s (c.f. Nouriel Roubini on V, U and L shaped recessions), four implications for development are already clear.
First, donor countries are going to be facing a dramatically different situation in their public sector budgets from next year. With the US Treasury’s $700 billion bailout plan now approved by Congress, the incoming US Administration will face a budget deficit of up to a trillion dollars next year, rather than $300 bn as planned. Other donors will find their budgets constrained too – by falling growth, lower tax revenues and probably also higher public debt. In the UK, for example, public borrowing next year is likely to have to rise from an expected £43 bn to £100 bn or more.
All this means that governments will have less to spend – so we should start worrying now about what that means for development assistance. While it remains to be seen whether those governments that have committed to spending 0.7% of national income on aid will row back on those commitments, it now looks much likelier that for example climate adaptation costs will come out of aid budgets, rather than being additional to 0.7% – as they should be.
This shift will be compounded by the second implication of the credit crunch: change in public attitudes. So far, the full impacts of the financial crisis have yet to hit the real economy in developed countries. But when they do, they will accelerate a switch that we can already see, towards more priority on issues that are ‘close to home’, and less on global issues like development and climate change.
Third, the financial crisis will obviously hit growth in developing countries. Monday’s stock market falls hit developing country exchanges hardest: the benchmark MSCI emerging markets index, for example, fell 11% as investors fled for safety. Meanwhile, the debate about whether developing countries in Asia and Africa have ‘decoupled’ from developed countries seems to be ending, with the conclusion that developing country growth is not immune from a downturn in the wider global economy.
And fourth, a reduction in commodity prices for the duration of the global downturn (however long that may be) as demand for them falls. As I’ve mentioned, futures prices for grain crops are already falling; we can expect that trend to be supported by falling energy prices, which will reduce some of the pressure on food that’s come via fertiliser prices, transport costs and demand for crops as biofuels.
That said, let’s be clear: the fall in commodity prices due to a global downturn does not mean that we’re out of the woods for good on high food and fuel prices. As Javier Blas notes in the FT today, the downturn also means that necessary investment in increasing supply will be put off. As soon as we’re out of the dowturn and demand starts going up again, we’ll discover that there’s been no shift in the underlying supply fundamentals – and hence that the stagflation drivers we were all worrying about until the credit crunch really began in earnest are just waiting where we left them. Let’s hope policymakers use the current easing as a moment of opportunity to start getting long term policy frameworks in place to manage high commodity prices a bit better than we did over the last two years.
by David Steven | Oct 10, 2008 | Climate and resource scarcity, Conflict and security, Cooperation and coherence, Global system, Influence and networks
I’m just back from RUSI, where I spoke about the future of resilience. Full text is below the jump, or you can download the PDF.
The talk complements one from April, at RUSI’s Critical National Infrastructure conference. Alex and I also have a paper on the subject in a future edition of Renewal.
Brief pitch: in turbulent times, we need to build on the work done by emergency planners, and take a broader look at how to make global, national and local systems more resilient to risk. (more…)
by Alex Evans | Oct 8, 2008 | Global system
Krugman:
The coordinated rate cut was the right thing to do. But I don’t expect much from it — because the relationship between Fed funds rates and the rates most businesses actually pay is very weak right now, thanks to the messed-up state of the financial system.
A quick illustration: in early July 2007, before the crisis, the target Fed funds rate was 5.25% and the rate on 30-day A2/P2 commercial paper — that is, CP issued by less-than-sterling borrowers — was 5.4%. On Monday of this week, the target Fed funds rate was 2%, down 325 basis points from pre-crisis levels, but the CP rate was 5.61% — up from pre-crisis levels.
So will this latest rate cut make any difference to borrowers? Maybe — but only to a few of them. We’re way past the point at which conventional monetary policy has much traction.
