Speaker:

Prof Alan Winters - Chief Economist, DFID

Discussant:

Julian Jessop - Chief International Economist, Capital Economics

Chair:

Lord Adair Turner - Head of the UK Financial Services Authority (FSA) and Chair of ODI Council

1. Alan Winters presented preliminary thoughts on the financial crisis, first reviewing IMF projections and then the possible consequences of the crisis on developing countries. Evidence suggests that developing countries will feel the tightening of credit as well as the real economy effects on exports, remittances and commodity prices more than emerging market economies.
   1. He presented a list of areas that make developing countries more vulnerable to the crisis, including reserves, capital flows, dependency on commodities, and trade openness. There is concern for those countries with low reserves and a high share of their exports dependent on commodities.
   2. DFID has been monitoring a group of 29 selected countries over the past few weeks to identify which are the most vulnerable to the financial crisis.

1. Alan Winters emphasized that the financial regulation policies used in the developed world do not necessarily apply to developing countries; financial markets must not automatically be tightened in developing countries. He also questioned who will represent developing countries in the global financial regulation process.
   1. He proposed mechanisms to limit the damage of the financial crisis to low income countries including financial sector support. He highlighted the importance of monetary and fiscal policy but also of safety nets, human investment  and concessional finance.
   2. He emphasised that protectionist measures will not help.

1. Julian Jessop covered the current status of the financial crisis, including the problems of house price corrections and inter-bank rates and focused on emerging Europe and Asia.
   1. Outlook for advanced economies: outright recession in the G7 countries next year, housing slumps undermining consumer spending and compounding losses in the banking sector. He expected zero growth in the world economy at market exchange rates in 2009r and less than 2% at PPP exchange rates.
   2. Impact on developing countries: small countries typically have higher export to GDP ratios and are more likely to drop off the radar screen for FDI, but low cost countries might gain market share as consumers in weakening advanced economies become even more price sensitive; countries with large current account deficits (notably Eastern Europe) especially vulnerable to financing problems due to global credit crunch.
   3. Negative wealth effects of falling stock markets are at least less in emerging markets; developing countries might take advantage of the prolonged period of low interest rates; currency weakness is less of a worry now in Asia than it was in 1997-98 because there is much less external debt and higher levels of reserves. The fall in commodity prices is also welcome for consumers and not necessarily so bad for producers, since it partly reflects lower costs (especially oil) and improved supply conditions (agriculturals).  
   4. With only 6 per cent of world GDP, China could not save the world.

1. Julian Jessop concluded that emerging Asia will not experience the same financial imbalances that emerging Europe will suffer. Latin America is now vulnerable, and the groups that will suffer the worse include the over indebted, (some) commodity producers and (as ever) the very poor.

1. Lord Turner commended the speakers for covering topics he planned to raise in the introduction. He stated that the current financial crisis was created within the financial system and caused by a self reinforcing process of optimism. Deleveraging within the financial system must be distinguished from deleveraging in the global economy. He concluded his remarks stating that although this is the worst financial crisis since the 1930s the effects will be nothing like the 1930s because the G7 recession will be simultaneous but not necessarily disastrous.

1. A question and answer period followed the presentations. The discussion topics included:
   1. How the developing countries will be affected through real channels – how deep and how long will the recession be. Julian Jessop expects that since the financial crisis and economic imbalances have taken years to develop, they are unlikely to be unwound in just a few quarters. A deep U or even L shaped recession seems more likely than a shallow V.
   2. Considering countries’ high vulnerabilities to debt levels and commodity exports reducing capital flows, taken with IMF forecasts, Alan Winters predicts that African countries could expect nasty shocks, and a difficult recovery because of the crisis.
   3. Alan Winters suggested that potential commodity price stabilisation schemes are predicated on the assumption that peaks and down turns in volatility can be recognised. He does not recommend this type of action because there has never been a successful scheme.
   4. Regarding a question of the convergence of the merging middle class in Africa with the global crisis, Alan Winters responded that the middle class management of the crisis has many dimensions. Migration will become more difficult and remittances will suffer, leading to likely shocks for middle class families in the political landscape.
   5. The G20 meeting rather than the G7 meeting to address the financial crisis is evidence that political opportunities that might not have been possible before are more attractive today.
   6. In the manufacturing industry, Alan Winters expects quantities to adjust rather than prices. Services are important for general employment and distributional aspects, tourism, etc will be vulnerable. There is no single prescription to prevent the export of the manufacturing industry from exporting unemployment, but countries’ capacities to manage shocks should be encouraged. This is easiest through the IMF, safety nets and investment in children must be preserved.
   7. In response to a question concerning whether or not the current crisis is obscuring the larger view on environmental change, Lord Turner suggested that China should move to domestic state supported health system, and create social welfare nets to encourage spending savings.
   8. It was suggested that the crisis will have an impact on developing countries’ advice for the ministry of finance. Although there is risk about managing uncertainty, public expenditure management must be prepared for. Should DFID cancel long term investment projects to protect vulnerable industries and create support safety nets. Alan Winters agreed that ideally if long run investments are cancelled, hopefully this will allow countries to move money to safety nets.
   9. Julian Jessop suggested that China has experienced capital rather than labour intensive growth which has not created many jobs and led to environmental concerns, and export led growth has been perceived as beneficial for the US rather than the domestic industries.
   10. Advice for finance ministries vulnerable to commodity price shocks includes that price support is a bad idea – unknown level to target, that intervention in the market that drives supply and demand will lead to subsidising too much and aversely effecting energy conservation. Income support for poorer people would help more.
   11. A question was raised concerning momentum building toward increased regional integration and questioning the rationale for safety nets versus diversification is questionable. Increased regional trade will occur in Asia. Alan Winters reiterated that countries do not need tariffs and that a multilateral system is much better because it allows for trade agreements. Commodities are not linked well back into the economy – a source of government revenue and demand.
   12. Alan Winters suggested that there is room for financial tools and mechanisms to help commodity price volatility. He also suggested that if the EU sorted out the CAP it would not remove volatility.
   13. Lord Turner, addressing a question concerning climate change adaptation versus mitigation policy, said the world is committed to climate change adaptation; adaptation is partnered with policy strategies.