What’s missing in response to the
global financial crisis?
Developing Country Perspectives
Amar Bhattacharya
G24 Secretariat
October 20th, 2009
Response to the Global Financial Crisis
What has been done?
 What remains to be done?
 What is missing on the agenda?

Response to the Global Financial Crisis
Policy Actions
 Institutional and Governance
Arrangements

Response to the Global Financial Crisis
Main Areas of Policy Action
 Curbing the spread and impact of the
crisis
 From crisis to sustained recovery
 Regulation of financial markets
Response to the Global Financial Crisis
Curbing the spread and impact of the crisis




Unprecedented stimulus and heterodox measures resulting in
“the largest and most coordinated fiscal stimulus ever
undertaken”
Varied responses to financial distress
Macroeconomic and heterodox measures in larger EMEs
Stepped up support from IFIs to developing countries—but
asymmetric in scale and scope
From Crisis to Recovery
“Recovery and repair remains incomplete”




Concern about high unemployment and a jobless
recovery
Sluggish private demand and downside risks
Tradeoffs on exit strategies
Compact on framework for strong, sustainable and
balanced growth with a process of mutual assessment
Regulation of Financial Markets


New and higher standards for prudential regulation
(more and better quality of capital, countercyclical
buffers, minimum quantitative standards for liquidity,
adoption of leverage ratios, reform and
harmonization of accounting standards, reform of
credit rating agencies)
Corporate Governance and Regulation (adoption of
FSB guidelines on compensation, Basel principles for
corporate governance of financial institutions,
revision of OECD corporate governance principles)
Regulation of Financial Markets



Perimeters of regulation (all systemically significant
financial institutions to be brought under the
regulatory net, tighter prudential regulations and bank
resolution plans for too-big-to-fail institutions,
strengthening the robustness of the OTC derivatives
market including through capital requirements and
standards for central counterparties)
More coherent and effective national and crossborder supervision and crisis management
Peer review process
Missing or Less Addressed Elements







Legacy of debt and lack of debt restructuring mechanism
Capital account liberalization and management
Adequate mechanisms for crisis prevention and crisis
response
Development finance beyond the crisis
Reform of global reserve system
Climate change and climate finance
Ensuring equity in a world of globalized finance
Governance and Institutional Reform




Global Steering Committee and challenge of
inclusion and legitimacy
 L20 vs. Global Economic Cooperation Council
 G20 vs. IMFC/DC
Reform of the IFIs
FSB and Standard Setting Bodies
Regional Institutions and Financial Arrangements
Role and Governance of the IMF









“Candid, evenhanded and effective surveillance”
Enhanced and more automatic support to LICs in the face of shocks
Broad based precautionary financing to counter excessive self insurance
and adequate financing to respond to systemic crises
Hence at least a doubling in IMF quota
A credible shift in voting power by January 2011 (but from whom to
whom and on the basis of what criteria)
Open, competitive and merit based selection of senior management
without nationality restrictions
Modification of decision rules (thresholds and double majority)
Composition and improved corporate governance of the Board
Greater Ministerial involvement and IMFC reform
Reinvigorating the Development
Mandate of the World Bank
Promoting Knowledge Sharing and
Institutional Development
 Coping with Volatility and Protecting the
Vulnerable
 Scaling-up long-term development finance
and countering the uphill flow of capital
 Meeting the challenge of global public
goods

Terms of Trade Volatility and Shock Frequency, 1975-2005
Volatility per Income Level
Volatility
0.18
0.14
0.16
0.12
0.14
0.1
0.12
0.08
0.1
0.08
0.06
0.06
0.04
0.04
0.02
0.02
0
0
Non-Insdutrial
Low Income
Industrial
Shock Frequency
Middle Income
High Income
Shock Frequency per Income Level
16
25
14
20
10
Percent
Percent
12
8
6
15
10
4
5
2
0
Non-Industrial
Industrial
Source: CGD Brief, “ The Age of Turbulence and Poor Countries”, October 2008
0
Low Income
Middle Income
High Income
12
Procyclicality of Capital Flows,
1990-2007
Net Private Capital Flows
750
GDP, Growth
20
2008 Financial Crisis 18
650
16
550
450
12
350
10
8
250
Asian/DotCom Crisis
6
150
4
50
2
Net Private Capital Flows (less FDI)
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
19
19
91
0
90
-50
Growth of Developing Countries
13
Source: International Monetary Fund, World Economic Outlook Database, April 2009
Percent (%)
US$ Billions
14
MDB Role in Responding to Financial Crises
While the IMF is the focal point for the response to the systemic liquidity threat,
the MDBs can play a critical complementary role in curtailing the spread and
impact of the crisis:
 Financing for counter-cyclical fiscal measures targeted towards maintenance
of jobs and protection of the poor
 Closing gaps and mitigating rollover risks in project financing including
infrastructure, directly and by crowding in private and other official financing
 Catalyzing trade financing
 Supporting financial systems and credit flows to private sector and SMEs
The MDBs have almost doubled their support through their non-concessional
windows on these various fronts in response to the crisis, yet global aggregate
analysis and case-by-case evidence suggests that the increase is far short of
what is needed
A Better Balance Between Public and Private
Sources of Development Financing





Even after the crisis has abated, the global financial environment is likely to be much
more difficult than the past eight years
The wave of financial crises and cycles in private market flows have highlighted the
high costs of borrowing from private markets for development financing (for
countries that relied on market financing, typical costs of 20-50 percent of GDP since
1995)
MDBs can play a critical role in mobilizing long-term market financing through its
direct borrowing and by catalyzing stable private sector financing, and reducing risks
arising from potential shocks
MDBs remain the most effective channel to provide concessional financing for low
income countries, and the combination of market financing and concessional arms
provide a powerful means for augmenting and leveraging financing for maximum
development impact across the range of EMEs and LICs
MDBs have not been able to play this role because of a lack of a collective vision and
will, lack of agreement on key operational policies and safeguards, and a governance
structure that is skewed against those that have the greatest stake in the institutions.
The Uphill Flow of Capital, 1998-2008
(US$ billions)
1500
1000
500
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-500
-1000
-1500
Net Private Capital (NPC)
Reserves
Source: International Monetary Fund, World Economic Outlook Database, April 2009
NPC Less Unrecorded Capital Outflows
Total Capital Outflows
16
EMBI Spreads (bps)
2,500
2,250
Bond Spreads (basis points)
2,000
1,750
1,500
1,250
1,000
750
500
Emerging market bond spread (EMBIG)
250
0
1994M1
1996M4
1998M7
2000M10
2003M1
2005M4
2007M7
2009M8
Source: JPMorgan
17
Net Private Capital Flows (excl. FDI) and
Net Multilateral Lending, 1990-2007
(Billions, US$)
600
60
Net private Capital Flows
(Left axis)
500
50
400
40
300
30
200
20
Net Multilateral Concessional
(Right axis)
100
10
0
0
Net Multilateral Non-Concessional
(Right axis)
-100
-10
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Net Private Capital Flows (excl. FDI)
Net Multilateral Non-Concessional
Net Multilateral Concessional
Multilateral Net Flows- Non-Concessional
Lending (2002-2007)
(Billions, US$)
6
4
2
0
2002
2003
2004
2005
2006
2007
-2
-4
-6
-8
-10
AFRICAN DEV. BANK
ASIAN DEV. BANK
IBRD
IDB
Other MultiNational
Total
19
Climate Change and the Global Goods
Agenda

The role of the World Bank and the other MDBs on the
climate change and the global public goods agenda needs to
be based on a broader review of the institutional architecture
and assignment of responsibilities for the global
development challenges of this era.

Of greatest urgency is an effective institutional mechanism
for responding to the looming challenge of climate change
that entail extreme global risks with disproportionate effects
on developing countries.

The UNFCC should be the primary framework for global
negotiation and accountability.
Climate Change and the Global Goods
Agenda

The World Bank and the RDBs, given their development
mandate and comparative advantage in financing and
country-based engagement, could play a critical role in
implementing a global compact.

In particular, the World Bank and the RDBs could be a
major source of external financing given their ability to
mobilize market financing and crowd-in private sector
financing to produce solutions on scale.
Three Implications for World Bank
Reform



A major expansion in the World Bank role is
warranted, which in turn will require a major boost to
its capital.
The Bank’s business model needs to be reformed to
reduce costs and enhance country ownership (EIB
Model)
The World Bank will only be able to fulfill this
potential role with a fundamental reform in its
governance structure
22
Reform of Voice and Governance in the
World Bank



Initial package of reforms adopted at the last Annual Meetings
(doubling of basic votes, partial offset for largest EMEs, and
third chair for sub-Saharan Africa) was more modest than the
IMF 2006-2008 package with respect to voice and vote reform
Discussions are now underway on a second phase of reform
for implementation by the 2010 Spring Meetings but with goals
that are less ambitious than the IMF (3 percent rather than 5
percent)
Need to encompass and distinguish between IBRD, IDA and
IFC
Total Votes for Developed and
Developing Countries in Shares
70
60
50
40
30
20
10
0
IMF
IBRD
Developed Countries
AsDB
IADB
Developing Countries
24
Shares of Developed and Developing
Countries in Total Votes
70
60
50
40
30
20
10
0
IBRD
IDA
Developed Countries
MIGA
IFC
Developing Countries
25
Summary of G24 Positions



Goals need to be more ambitious and criteria for
reform different from the IMF
Parity in voting shares should be a minimum goal
Reform needs to be based on the Bank’s
development mandate and address the democratic
deficit in the governance structure
Evolution in relative weights in the world economy based on
GDP PPP
 Reflect Bank’s development mission and primary focus on
developing countries

 Doubling of basic votes insufficient
26
Summary of Counter Positions





No basis for parity
IMF Quota Formula (actual or calculated)
should drive adjustments
Hence only small shift in voting power
warranted
Piece meal approach to a Bank specific
approach
No basis for non-dilution of DTCs
27
Distinct Mission and Functions of
the World Bank
IMF
World Bank
Mission
International
Financial Stability
Poverty reduction and
development
Functions
Multilateral and
bilateral surveillance
Lending
Technical Assistance
Global public goods related
to development
Market-based lending
Concessional financing
Policy advice and capacity
building
28
New IMF Quota Formula
CQS = (0.5*Y + 0.3*O + 0.15*V + 0.05*R) ↑k
Y = 0.4 MP GDP + 0.6 PPP GDP over a three year
period
O = annual average of current receipts and current
payments over five year period
V = variability of current receipts and net capital flows
measured as a standard deviation from the centered
three-year trend over a thirteen year period
R = twelve month average over a year of official
reserves
k = a compression factor of 0.95
29
IBRD shares / IMF Calculated Quotas
( number of countries)
Advanced Economies
US
Japan
EU-15
Other Advanced
IBRD shares / IMF Calculated New Quota Formula ( # of countries)
Overrepresented
Aligned
Underrepresented
Highly
Moderately
Broadly
Moderately
Highly
x>1.50
1.10<x<1.50
0.9<x<1.1
0.5<x<0.9
x<0.5
3
6
6
8
3
0
0
0
1
0
0
0
1
0
0
0
2
5
5
3
3
4
0
2
0
Developing and Transition Countries
Asia
MENA
SSA
LAC
ECA
99
18
7
40
19
15
20
1
3
5
8
3
9
2
0
0
1
6
18
3
6
2
1
6
13
7
3
0
3
0
Total
102
26
15
26
16
30
Criteria for a World Bank Specific Approach


Equity in representation based on the development
and poverty mandate of the World Bank
Recognition of the development cooperative nature
of the institution, i.e. taking into account the role of
those that enable the Bank to carry out its mission as
well as those that are important as clients in achieving
the Bank's objectives
Three Caveats on Current Discussions



Economic weight is important but not the sole factor in
determining representativeness or contribution/importance
to the Bank’s development mission
Similarly IDA contributions are important but not the
principal factor in enabling the Bank to carry out its mission
Role of clients and especially the poorest countries need to
be more explicitly recognized in voting power
Towards a World Bank Specific
Formula
I.
Representation Pillar
1.
2.
3.
II.
1$ = 1 Vote (GDP PPP and/or GDP MP)
1 Country = 1 Vote (Basic Votes)
1 Person = 1 Vote (Population or Square Root of Population)
Development Cooperative Pillar
1.
1.
2.
3.
2.
1.
2.
Contributions
IDA
ODA
Outstanding IBRD Loans
Importance as Clients
Incidence of Poverty
Income status weighted by population
33
Comparison Between Developed and Developing Countries
for Variables Used in World Bank Formula
120
100
80
60
40
20
Developed
e
co
m
oo
r
A
dj
.
fo
r
In
fP
Po
p.
Lo
RD
IB
st
.
O
ut
Pr
op
.o
an
s
A
O
D
A
ID
t
Ro
o
Sq
ua
re
la
t
Po
p.
Po
pu
Vo
c
as
i
B
io
n
te
s
I
G
N
PM
kt
G
D
G
D
P/
PP
P
0
DTC Countries
34
Existing IBRD Voting Shares Compared with Illustrative
Simulation Using World Bank Specific Criteria
70
60
50
40
30
20
10
0
IBRD% of Total Votes
Advanced Economies
IBRD Base Case Simulation
Developing and Transition Countries
35
Simulated Base Case / Total Votes
(number of countries)
x>1.5
1.10<x<1.50
.9<x<1.1
.5<x<.9
x<.5
1
0
1
20
4
US
0
0
0
1
0
Japan
0
0
0
1
0
EU-15
1
0
1
11
2
Other Advanced
0
0
0
7
2
83
32
19
19
6
Asia
17
9
4
0
1
MENA
8
2
2
4
3
SSA
36
6
3
2
0
LAC
13
6
7
4
2
ECA
9
9
3
9
0
84
32
20
39
10
Advanced Economies
Developing and Transition Countries
Total
36
Reform of Voice and Governance in the
World Bank

In addition to voting reform, agreement to change the
selection process for the Head and top management of the
institution to an open merit-based process without regard to
nationality, beginning with the next appointments, represents an
early win in reform of voice and governance.

Reform of composition of the Board and a review of
decision rules should be pursued in the medium-term.

A fundamental re-examination of the role of the Board and
the Development Committee should be contingent on
substantial progress on voice and vote reform.