Maximo Torero (IFPRI) 30th April 2009, International food Policy Research Institute, Washington D.C.

1. Implications of the
Financial Crisis for
Developing Countries
David Laborde
d.laborde@cgiar.org
d laborde@cgiar org
and
Maximo Torero
m.torero@cgiar.org
t @ i
IFPRI
Washington 30th of April 2009

2. Origins of crises or sources of dynamism
• Developed economies
• Expansionary US monetary policy and very low interest
rates in the wake of IT bubble burst
• Expansionary US fiscal policy of tax cuts and defense/
security spending after September 11
• Emerging countries/oil producers have excess savings
• Risk assessment based on wrong assumptions or
g p
models…
• Lead to excess credit and leverage:
• I fl ti of housing market bubbles i US and other d
Inflation f h i k t b bbl in d th developedl d
economies=> consumption boom
• Subprime mortgages
• High levels of financial innovation in search of higher yields

3. Origins of crises or sources of dynamism
• Developing economies
• Improvements in macroeconomic p
p policies
• Increase in competitiveness
• Investment boom fueled by:
• Strong export demand and high commodity prices, thanks to
large US commercial account d fi it and strong growth i Chi
l i l t deficit d t th in China
and India
• Surge in FDI, as well as other private flows
• Strong remittances form workers abroad
• Investment surge increased demand for capital goods from
developed countries, fueling virtuous cycle of growth

4. We have Three Crises
• Food crisis forced 200 million people into extreme poverty,
half of them still there.
- Food crisis is not over: prices are still high
- Incentives for protectionist measures
• Fuel crises: rise and fall of price of oil (variability), impact
(variability)
of food for fuel, climate change,
• Financial crisis: Reduction in exports, commodity prices,
crisis:
remittances, tourism, FDI, and aid
- Hit public revenues in developing countries
- Second round effects can worsen the situation even
more
- Private capital flows fell more than $700 billion between
2007 and 2009
- Limited availability of domestic financing to businesses

9. Effects over developing countries
• Sharp decline in the sources of financing for
investment in developing countries
- Possible decline in world trade volumes in 2009,
combined with further fall in commodity prices
- Fall in inward FDI and portfolio investment (already
seen in 2008), together with higher interest rates
on capital
- Drop in remittances as developed-country labor
developed-
markets slacken
- Second-round effects that could exacerbate crisis
Second-
• Threat: not just slowdown, but crises of their own

10. GDP growth and Employment
• Average projected GDP growth in developing
countries is 1/4 of what was expected during
the first half of 2008.
- Still downside risks to this estimate
• Average growth in Eastern Europe, Central
Asia, and LAC is projected to be negative
• (Un)Employment
- ILO projects 30 million more people will be
unemployed in 2009 worldwide (23 million
in developing countries)
- Worse-case scenario: 50 million people
Worse-

11. 2005
Source: IMF http://www.imf.org/external/datamapper/index.php

12. 2007
Source: IMF http://www.imf.org/external/datamapper/index.php

13. 2009
Source: IMF http://www.imf.org/external/datamapper/index.php

14. Poverty and Hunger
• Poverty rates may not increase, but the
poverty count is likely to rise in SSA, East
Europe, Central Asia and LAC.
• The number of chronically hungry people in
the world is increasing (World Bank):
Bank):
- 2007 – 850 million
- 2008 – 960 million
- 2009 – more than 1 billion

15. Mechanisms on Trade
Financial crisis → C dit crunch
• Fi i l i i Credit h
- Less investments
- Restriction on trade finance, especially for developing
countries and small producers: direct impact on exports
• Financial crisis → Economic Crisis → Under-employment
Under-
of resources (Labor, Capital)
( , p )
- Low utilization rate of capital → Less investments
- Lower Income → Lower demand → Lower Trade
Elasticity of trade to GDP > 1: taste for diversity as a luxury
goods,
goods fixed trade costs foreign activities reduce in priority
costs,
• Deflation and specific tariffs in agriculture → mechanical
increase of the protection
- Difficulty to disentangle the price correction related to the end
of the bubble and medium term path
- A EUR93/ton tariff represents 40% if prices are at EUR332/ton
but 80% if price falls to EUR116/ton
• The end of the global imbalances?

16. Financial crisis, Economic slowdown and
Rising p
g protectionism
• Since September 2008, several observers have noticed the
implementation of new protectionist measures
• However, these measures are consistent with the natural
“cyclicity” of trade policies:
cyclicity” policies:
- Bouet and Laborde (2009) have computed t at in the
ouet a d abo de ( 009) a e co puted that t e
last 13 years, 4.5% of tariff lines have increased on two
subsequent years.
- If a protectionist wave in the current context is a threat,
threat,
it i not a f t yet. T iff increases do not explain trade
is t fact yet. Tariffs i
t d t l i t d
decline.
• The potential cost of rising protectionism (with and
without a successful Doha Round) has been investigated
in other IFPRI works (see Bouet and Laborde 2008, 2009)
- Up to -10% in world trade (volume) if tariffs increase to
their current WTO limits (bound level)

17. Why some exporters are more affected than
the others?
• Geographical specialization
- Does your main markets are more affected
than the others?
• Sectoral specialization
- Do your main products have a strong income
elasticities?
elasticities?
- Do you export capital goods?
• International division of labor
- Does your production chain highly
disaggregated? (= Strong exposition to rising
(
trade costs)
• Trade financing
- Can your financial system support your
exporters?

18. Analytical tool
• Short term analysis
y
• Modified version of MIRAGE
- Computable General Equilibrium are not macro-econometrics model
macro-
for forecast
- But they are good to deal with trade and see how countries, based on
their trade specialization and comparative advantages, can react to a
shock
• What have we modified?
- Utilization of resources (labor and capital) based on IMF, OECD and
ILO estimates and forecasts
• Related to short term business cycle and institutional aspects: not the
comparative advantages of the CGE
• We ensure consistency of utilization rate of resources and GDP forecasts in
MIRAGE and in the IMF
- Changes in investment behavior (OECD and IMF sources)
g ( )
- Short term closure of current account: endogenous trade balance and
fixed real exchange rate
- Specific tariffs modeled as specific tariffs
- Trade finance as a trade cost
- New demand structure with better measurement of income and price
elasticities (from Gouel, 2009)
Gouel,

19. Simulations design (1)
• Core scenario
- Step 1: Impacts of the demand and investment
p 1: p
shocks
IMF, OECD and ILO estimates/forecasts
- Step 2: Impacts of the trade finance restriction
2:
IMF and ICC qualitative assessments (we assume 0%
costs in OECD, 1% costs in BRICs, and 2% for other
developing countries)
- Step 3: External constraint: introducing the
3:
current account constraint (change in the
( g
model closure)
- Step4: Reduction in the global imbalances:
Step4:
Cut by 1/3 in 5 years (from 6% to 4%, IMF estimates)
%

20. Simulations design (2)
• Two variants
- A deeper recession. Same schedule but
recession.
secessionist effects increased by 50%
- A delayed recovery. Recovery will start in
recovery.
2013.

21. Core Scenario - Exports (volume)
160
North ‐ Agro ‐ Baseline
North ‐ Agro ‐ Crisis
150
North ‐ Manu ‐ Baseline
North ‐ Manu ‐ Crisis
South ‐ Agro ‐ B li
S th A Baseline
140 South ‐ Agro ‐ Crisis
South ‐ Manu ‐ Baseline
South ‐ Manu ‐ Crisis
130
120
110
100
90
80
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: MIRAGE simulations, Laborde and Torero (2009)

22. Export volume
Focus on 2012 (compared to baseline)
( p )
Source: MIRAGE simulations, Laborde and Torero (2009)

23. Export volume - Asia
Focus on 2012 (compared to baseline)
( p )
Source: MIRAGE simulations, Laborde and Torero (2009)

24. Export volume – Sectoral results (world)
Focus on 2012 (compared to baseline)
( p )
Source: MIRAGE simulations, Laborde and Torero (2009)

25. Trade surplus/deficit
Focus on 2012 (compared to baseline) - % of GDP
( p )
Source: MIRAGE simulations, Laborde and Torero (2009)

26. Agricultural Real Value Added
(2012, volume, % changes)
Recession scenario – Selected countries
Source: MIRAGE simulations, Laborde and Torero (2009)

27. Long term effects – Total real income
2015 compared to baseline
p
Source: MIRAGE simulations, Laborde and Torero (2009)

28. Long term effect scenarios (2015)
Agricultural Export volume– Selected countries
volume–
Source: MIRAGE simulations, Laborde and Torero (2009)

29. Export volume
Alternative scenarios – Developing countries
p g
160
Agro ‐ Baseline Agro ‐ Core Scenario
150
Agro ‐ Deeper
Agro Deeper Recession Agro ‐ Delayed
Agro Delayed Recovery
Manu ‐ Baseline Manu ‐ Core Scenario
140
Manu ‐ Deeper Recession Manu ‐ Delayed Recovery
130
120
110
100
90
80
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: MIRAGE simulations, Laborde and Torero (2009)

30. Final remarks
On who is affected:
• Small producers -> Should be more affected by
credit crunch
• “High value crops” strategy: ambiguous effects
during economic crisis (high income elasticity)
• Role of trade finance-> Extremely importan
finance-
• Even if the recovery takes place, several years of
growth (and investment ) are lost-> Mill
th ( d i t t lost- Millennium
l t i
goals? Public policy to compensate

31. Final remarks
On what to do:
• Increase demand counter-cyclically to the
counter- y y
extent that is consistent with protecting
fundamentals
- Finance creation and upgrading of infrastructure –
useful to catch up, after period of rapid private-sector
growth
- Trade finance is essential
- Pro-poor spending, pro-poor tax cuts:
• Fund social safety nets and investments in education and
health – investment in future productivity of the economy
• Insure those who are uninsured or who face high costs of self
g
insurance