DESA News Vol. 12, No. 11 November 2008


Developing countries take a hit Developing countries take a hit

Financial and trade linkages have led to plummeting equities, debt write-downs, and weak demand in Asia and beyond

The global financial crisis has markedly intensified. Equity prices have fallen sharply worldwide, a number of major financial institutions have collapsed, while liquidity has evaporated in financial markets. These financial strains are exerting tremendous downward pressure on economic activity worldwide. A large number of developed economies are already in recession, and growth in many developing countries is decelerating significantly.

The UN expects world gross product growth to decline to a recessionary pace below 2 percent for 2008, down from the 3.8 percent of 2007, implying zero growth in world per capita income and likely falls in income for a large proportion of the population, particularly the poor. The outlook for 2009 will be even worse, with the growth of world gross product expected to drop to about 1 percent.

The debate about decoupling from the United States economy may be finally laid to rest. The contagious credit freeze has spread through the European economies, as well as other developed economies, to a lesser degree. While economies of the Euro area and Japan are already in recession, the prospects for other developed economies have also deteriorated markedly.

In the United States, the financial catastrophe has begun to manifest its impact on the real economic sector, as both household consumption and business spending retrench. The Emergency Economic Stabilization Act, directed mainly at transferring bad assets from financial institutions, is unlikely to prevent a United States recession beginning in the last part of 2008.

No country is immune

The impact of the global financial crisis on developing economies and economies in transition has also been deepening markedly, through both financial and trade linkages. Amid the synchronized global sell-off, equity markets in a large number of emerging economies have plummeted much more than their counterparts in developed markets. An increasing number of financial institutions in developing countries and economies in transition, particularly in Asian economies, are bearing sizeable losses from holding troubled assets of United States financial institutions. The much larger impact, however, is expected to come from the significant weakening of demand in most developed economies. Growth in developing countries and economies in transition is expected to decelerate on average by about 2 percent in 2008, from the previous year, and by another one percent or so in 2009.

The broad international economic environment for developing countries and economies in transition has deteriorated considerably. At the same time that external financing costs are rising, a reversal of capital inflows is already evident in many countries, even though the degree of financial constriction for these countries is still not as pronounced as in the Asian and Latin American financial crises of the past. The heightened global financial turmoil has also led to considerable volatility in the prices of commodities. For a group of low-income developing countries, which suffered from steep rises in the prices of food and energy in early 2008, the current high level of these prices continues to threaten progress toward the Millennium Development Goals, particularly the primary goal of reducing poverty and hunger. For oil-exporting and commodity-exporting developing countries, increased volatility in commodity prices and a significantly dimmed outlook for global demand portends growing vulnerability in the prospects of these economies.

The potential severity of this crisis was underestimated by most policy makers worldwide, which has led to failure to contain the crisis in its early stage. Despite some unusual policy actions and a few coordinated attempts among the central banks of major developed countries to inject more liquidity into credit markets, most policy measures so far have been piecemeal, and not adequate or appropriate for dealing with a systemic global crisis.

The present crisis marks the end of a prolonged period in which the world economy boomed on the basis of strong consumer demand in the United States, stimulated by easy credit and booming house prices. Growing United States deficits were financed by increasing trade surpluses in China and other developing countries willing to use increasing reserves to buy dollar-denominated assets. Increasing financial deregulation made it easy to move capital around the world and contributed to keeping the cost of borrowing low, further fuelling a widening of the global imbalances led by United States consumer demand.

All parties seemed to benefit from the relaxation of credit standards and the progressive underpricing of risk, despite repeated warnings that mounting household and public indebtedness in the United States and elsewhere would not be sustainable.

The root cause of the global financial crisis is deeply embedded in policy deficiencies in the international financial system and in the unsustainable fundamentals of the world economy. As has been reiterated in UN publications over the last few years, the accumulation of global imbalances before the eruption of this financial crisis was an early warning signal of unsustainable global growth. The creation of the housing bubble in the United States was one consequence of the pattern and dynamics of recent growth. The UN has long advocated an internationally coordinated policy to adjust the global imbalances in an orderly manner, to avoid an abrupt slowdown in the world economy which would have serious consequences on an over-extended international financial system. With the heightened risk of widespread breakdown of the international financial system and of global recession, an internationally coordinated policy is even more badly needed.

International cooperation to restore growth and regulate finance

The prospect of a systemic world financial breakdown – and, consequently, a long lasting economic slowdown – is real. In recent weeks, individual country policies – both to do nothing and to undertake drastic measures to rescue their domestic financial sectors – have inflicted new vulnerabilities on other economies and have been attended by international political recriminations, reminiscent of the 1930s, when only ad hoc processes for coordinated action existed.

Since the 1980s, ad hoc international coordination has been coming back into vogue and this has coincided with the reduction in the capabilities and the narrowing of the policy agendas of global institutions set in place after the 20th century Great Depression. In the 1930s, a retreat by all countries from global commerce did not reduce competitive actions and counter-actions, but actually intensified them, to the detriment of all.

The disjointed policy initiatives undertaken by developed countries in response to the market failures that originate in their jurisdictions reflect the incapacity of national authorities to commit their public resources to rescue institutions in other industrial economies in the absence of a commonly recognized framework of regulatory oversight. Existing institutions, all dominated by developed countries, including the IMF, OECD and the Financial Stability Forum, have, so far, not provided a platform facilitating effective coordination in response to crises and their prevention.

Beyond the obvious failure of concerted action, ongoing developments indicate that the most significant policy initiatives undertaken so far have not addressed the fundamental basis of the crisis. While these interventions ostensibly aim to avoid damage to the real sector, they have focused on restoring the viability of financial companies instead of addressing the process of reconciling overvalued financial assets with long-term rates of return in the real sector.

The immediate future is highly uncertain. Even if the United States bailout package helps to restore market confidence, it will take time before economic activity will resume. There is now widespread recognition that the problems are global and systemic, requiring solutions that are global and systemic. The present system of global economic governance has proven to be inadequate to prevent the global financial (capital account) imbalances from ballooning into the current crisis. The reliance on a single national currency – the United States dollar – as the world’s reserve currency is one reason for the emergence of these imbalances. To address the global imbalances, the world community continues to rely almost exclusively on national policies. When there is a crisis, this leads to ad hoc fixes, instead of a transparent global system of policy coordination, reserve management and financial supervision and regulation.

The ability of the International Monetary Fund to safeguard the stability of the global economy has been undermined by the vastly greater resources and volatility of globally integrated private actors and uncoordinated national policy responses as well as the emergence of exclusive multilateral institutions such as the G7, OECD and European Union. In effect, the IMF has been effectively sidelined in handling the present crisis. The perceived irrelevance of the Bretton Woods institutions in today’s crisis also stems from their skewed voting structures and governance and the disconnect, at times, between their policies and the nature of the global economy.

Developing countries now represent a much larger proportion of world economic activity than they did in 1944. Developing countries – as a group – are now net creditors to the global economic system and have an abiding interest in a rules-based and impartial debt workout system. Given the large and persistent trade and fiscal deficits in the United States, the bulk of the financing for the $700 billion United States bailout will likely be funded, directly or indirectly, from savings generated by developing countries.

There is clearly an urgent need to reform the international monetary and financial system to ensure that it is more inclusive and equitable, and thus enable credible and effective global economic governance. Already some developed countries, such as the United Kingdom and France, and many developing countries, such as those in the Commonwealth, have called for an international conference to redesign the system of international economic governance into a new post-Bretton Woods system, designed to restore accountability and transparency in international economic policy-making and to overcome existing systemic weaknesses.

Doha review conference: mounting expectations

In 2002, the Monterrey Consensus, reached after the Asian financial crisis and the “9/11” terrorist attacks in the United States, appeared to represent a revival of multilateralism, under the framework of financing for development as a shared responsibility of both developed and developing countries. Developing countries committed to improve their macroeconomic management while developed countries promised to increase aid, alleviate debt distress, and ensure a global economy supportive of investment and growth.

The current crisis throws a spotlight on the international community’s failure to adequately address systemic issues. The General Assembly is convening a follow-up conference on financing for development in Doha from 29 November to 2 December. Member countries of the UN have begun intensely negotiating an outcome document that seeks to address obstacles encountered in meeting their commitments and to respond to new and emerging issues.

The review conference on financing for development in Doha beginning in late November provides an opportunity to send a clear signal of the urgency of considering these matters while ensuring counter-cyclical and other measures to contain the consequences of the ongoing financial turmoil. Addressing the IMF International Financial and Monetary Committee on 11 October, Under-Secretary-General Sha urged the international community “to recall the spirit with which the institutions of global governance were established in 1944 – against the backdrop of a ruinous depression and millions of lives lost in a world war.” He went on to exhort countries “to reform global institutions and mechanisms based on rigorous and appropriate analysis, by taking the necessary decisions in the financing for development conference at Doha.”

In the light of the present crisis and the special difficulties and risks faced by developing countries, the Doha conference will need to address in particular more effective regulatory frameworks, particularly in financial markets; more effective, globally coordinated, counter-cyclical policies and institutions; improved risk monitoring and crisis avoidance as well as management better suited to the realities of contemporary global financial integration; more universal and equitable distribution of voice and representation in global decision-making bodies; and follow through, in an accountable manner, on all international commitments made in the areas of aid, trade, debt reduction, and access to technology and affordable medicines in support of developing country efforts to achieve the MDGs.

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The connected cityThe connected city

An advanced information infrastructure can improve quality of life and enhance business competitiveness

Information and communications technologies have become all pervasive in today’s world. The cost of voice transmission circuits has dropped dramatically over the last three decades. Computing power per dollar invested has risen dramatically during the same period. But the ICT revolution is far from complete, as electronic commerce continues to grow exponentially. City administrations across the world are realizing that they, too, need to ride the crest of the ICT wave to ensure that their cities become better places to live and work.

One of the most significant recent developments in Asia in particular has been the revolution in electronic communications. New cellular phone networks are leap-frogging over under-developed copper-wire networks and Internet services are expanding at an exponential rate. Improved information infrastructure provides opportunities in areas well beyond the ICT sector itself, with a potential productivity impact on businesses, large and small. Many studies, from the micro to the macro, have found that telecommunications infrastructure is closely related to firm productivity and economic growth. This effect can be particularly large in poorer countries.

Information infrastructure for competitiveness

The telecommunications revolution can have a significant impact on a city’s competitiveness. With cities as international gateways for goods and services, an advanced telecommunications infrastructure is one of the most important factors in determining where a transnational corporation will set up its regional headquarters.

“Without an advanced information infrastructure,” cautions Under-Secretary-General Sha Zukang of DESA, “cities are at a great disadvantage in attracting international investment and competing globally.” When it comes to establishing such an infrastructure, Asia’s heavily populated cities are well poised to take advantage of the lower fixed costs of entry, which are implied by a high density of users. These days, becoming a competitive city involves multiple factors: technology infrastructure, knowledge workers, appropriate e-government policies, e-commerce and e-communities. It also requires public policy that shapes an environment that is conducive to competitiveness.

Public policy must be re-engineered to reflect the new demands placed on local governments. Citizens need information from local governments about local service provision, from education, healthcare, water and sanitation to provision of permits, licenses and applications. Moreover, the demand for local digital infrastructure will drive a profound shift towards online provision of services, enabling a remarkable improvement in quality of life with a reduction in cost and effort. Citizens and private businesses also need to be able to conduct business with governments online. In addition, governments need to commit higher education resources to new technologies and to producing a workforce of knowledge workers, including through retraining.

The challenge of back office integration

E-government solutions are often described in terms of the relationship between governmental institutions and citizens – the ‘front office’ interface. However, a large part of investment in e-government relates to the integration of ‘back office’ functions, such as human resources, finance and ICT. Such integration can take place either vertically, between the tiers of public administration, or horizontally, across the agencies engaged in the delivery of services to citizens.

In this year’s e-government survey, which DESA, publishes biennially, the majority of the leading countries in e-government have implemented this ‘back office’ integration throughout their national and ministerial websites. European countries make up 70 percent of the top 35 countries, and Asian countries make up 20 percent. The North American and Oceania regions account for 5 percent. The European countries, as a group, have invested heavily in deploying broadband infrastructure, coupled with an increase in the implementation of e-government applications for the benefit of their citizens.

The key variables involved in the delivery of ‘back office’ integration are the people, process and technology required. Yet, the record suggests that success or failure is less a technological issue than a people issue. What is particularly important is the ability to change public service cultures and motivate public sector workers to engage energetically in new ways of working, while providing adequately skilled and competent management and leadership. In their journey to e-government, governments need to address two critical issues: supporting agility within their ‘back office’ processes; and facilitating the development of self-adaptive ‘front office’ processes.

To reduce time to market with regard to new decisions, regulations and law, it is necessary to equip public administration with tools that support an agile response to change. A change in one activity in a process, or in one part of an e-government system, may cause many problems in other parts of the same process or system. E-government, in particular, confronts a big challenge to achieving inter-operability and integration, taking into account differences in law, regulations, services, administrative process and different languages, within any one country and across regions and countries.

User perspectives

At the same time, there is a growing need for e-government services to be adaptive to the needs of citizens and businesses. For e-government initiatives to succeed, public services should be organized so as to serve every citizen individually. In order to increase the pay-off of using an e-government system, the delivery of services has to be very efficient, which means, for example, that an experienced individual user can perform a service without being bombarded with irrelevant information.

Experience shows that web users tend to be reluctant to provide feedback about their satisfaction and expectations by completing questionnaires or forms. In order to avoid asking users explicitly, means for understanding their preferences implicitly are required. Such information will also be very important for converting and customizing off-line services for on-line use.

Knowledge sharing

E-government places high demands on security, trust and privacy, and has to deal with many different stakeholders in the same process, such as citizens and municipalities, county councils and federal government. Governments must also commit resources to removing communication and information access barriers that restrict business and social interactions between citizens with and without disabilities. DESA has been working hard to address these various challenges that governments face through platforms such as the United Nations Public Administration Network, which provides a 24/7 knowledge-sharing platform.

One of the network’s main purposes is to assist in building knowledge on how central and local governments can use ICT tools to improve their governmental operations, customized to their citizens’ needs. One of DESA’s strongest partners in this network, the Regional Center on City Informatization, based in Shanghai, has received firm support from the Shanghai Municipal Government, which partnered with DESA in organizing the Forum 7th Annual Forum on City Informatization in the Asia-Pacific Region on the Smart Use of ICT for Better Cities in May 2008.

DESA has also built partnerships with the other international agencies, such as UNU, ITU, UNDP, the Chinese Academy of Sciences and the Ministry of Public Administration and Security of the Republic of Korea. And we are gathering partnerships within this Forum to discuss the Knowledge Repository for e/m-Government in Asia and the Pacific, which will become part of the Global Knowledge Repository for e/m Government.

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Finance: The stakes are too high for half-measures and quick fixes

Finance: The stakes are too high for half-measures and quick fixes

General Assembly President Miguel d’Escoto Brockmann told an interactive panel on the global financial crisis that the international community had the responsibility and the opportunity to identify longer-term measures beyond protecting banks, stabilizing credit markets and reassuring big investors. The stakes were too high for half-measures and quick fixes put together behind closed doors. “The world faces setbacks that are already causing untold suffering. For some, the consequences are fatal.”

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