Policy Priorities
in the face of the
Global Economic Crisis
IDEAs conference on
Re-regulating Global Finance
in the light of the Global Crisis
Tsinghua University
Beijing
9 April 2009
Contagion: crisis spreads
Financial sector contagion (incl. vicious circles):
Sub-prime crisis  financial crisis
 asset price deflation  liquidity/credit crunch
Financial crisis  Economic recession
(including feedback loops)
Real economy contagion (incl. vicious circles):
 Less investment, especially abroad (FDI)
 Less consumption
 Reduced demand for imports, i.e. for exports of others
 Prices, output declines globally
 Growth, employment declines globally
2
Deflationary spiral
• Asset (stock, property) markets deflating
 negative wealth effect
 more bank insolvency
 generalized credit squeeze
• Lower external demand, world trade
 excess capacity
 investment slowdown
• Depressed domestic demand
 lower prices, output
 lower employment, incomes
Disorderly unwinding of
global imbalances
Billions of dollars
600
400
200
0
-200
-400
-600
-800
2005
US
Japan
2006
EU
2007
2008
Developing, excl China
2009
4
China
Globalization: Parallel fates
8
Developing
countries
6
World
4
2
Developed countries
0
-2
Preliminary,
revised forecast
-4
5
2003
2004
2005
2006
2007
2008
2009 (P)
7
Recession in most
developed economies
6.5
6.0
6
4.8
5
4.9
4
3
2.9 2.8
2.9
2.4
2.0
2
1.9
2.1
2.7
1.8
1.2
1.1
1
0.4
0.4
0
-1
-0.6
-2
-1.6
-1.9
United States
2005
Japan
2006
2007
EU-15
2008
New EU members
6
2009 orig. forecast
Slowing growth in all
developing countries
9
8
7
6
5
4
3
2
1
0
-1
8.5
7.2
6.9
6.0
5.9
5.5
5.1
4.74.9
4.5
4.3
2.7
1.6
0.1
Developing
Africa
East and Western Asia
South Asia
-0.2
Latin
America
7
2005
2006
2007
2008
2009 forecast
Annual percentage growth
World trade collapsing
15
11.2
9.3
10
7.4
4.4
5
5.6
6.4
2.0
0
-0.8
-5
-10
-15
Preliminary, revised
UN forecast
-10.0
15
2001 2002 2003 2004 2005 2006 2007 2008 2009
Trade impacts summary
• Exports decline 
all developing countries
• Terms of trade  primary exporters
• Trade surpluses,
reserves may run down quickly
• But lower energy, food prices help
net food and oil-importers
16
Export Implosion in E. Asia
Dec. 2008 exports y-o-y (%)
%
Japan
China
S Korea
Thailand
Singapore
Taiwan
Malaysia
-35.0
-2.8
-17.4
-15.7
-20.0
-41.9
-4.9 (Nov.)
China: Exports, Imports
Drop Sharply
US $ billions
160
140
120
EXPORTS (total, fob)
100
80
60
IMPORTS (total, cif)
40
20
0
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
China: Accumulation of
Forex Reserves
US$ billions, end-month
2500
2000
Other foreign exchange reserves
1500
US treasury securities
1000
500
0
Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 DecSources: State Administration of Foreign Exchange, China; United States Department of the Treasury / Federal Reserve Board
China: Industrial Output
Slows Down Rapidly
% change, year-on-year
25
Industrial Production
20
15
10
5
0
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09
China: Inflation declines
in 2008, after 2007
% change, year-on-year
10
9
8
Consumer Price Index
7
6
5
4
3
2
1
0
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09
Financial impacts on
developing countries
• Despite non-involvement in sub-prime debacle:
 Emerging stock markets collapse greater
 Reversal of capital flows, FDI also down
 Spreads rise, much higher borrowing costs
• But financial positions stronger than during
Asian + LA crises (more foreign reserves,
better fiscal balances)
But reserves rapidly evaporating with export
collapse; fiscal space also disappearing
22
Social, political impacts
• >200 m. more working poor
• ILO: Unemployment to rise by 51m
• Government social spending at risk
• Rising social unrest
• US intelligence report:
crisis -- greatest security risk
Responses to crisis
• UN, BIS forecasts more accurate than others;
IMF, WB upbeat till late 2008
• But IMF, WB also marginalized by G7, etc
• IMF discouraging strong fiscal stimulus by
developing countries without surplus
• G7  G20: more inclusive? legitimate? crisis-,
but not developmental or equitable
• PGA (Stiglitz) Commission of Experts
• Doha Declaration: June 09 summit on impact
of crisis on developing countries
Thank you
Please visit UN-DESA www.un.org ,
G24 www.g24.org and PGA
www.un.org/ga/president/63/ websites
• Research papers
• Policy briefs
• Other documents
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