Let us recall the cause of the current financial and economic crisis. It is the result of regulatory failure in developed countries and the systemic failure of the international financial architecture. Both failures gave rise to speculative bubbles and an unsustainable – indeed, dangerous – pattern of global growth.
Developing countries were not at the root of the crisis. Yet, they are on the receiving end of its impacts. And they will continue to be hard hit, as the crisis moves through the global economy via various transmission channels. These include tighter conditions for international financing, higher costs of borrowing, the sharp contraction in global trade, declining remittances and the likely drop in ODA.
A top priority in dealing with the crisis must be to develop a clear understanding of its precise impacts, especially in the developing countries. In fact, the reliability of the analytical dimension of the crisis response provides the basis for designing effective policy measures to solve the crisis and prevent future ones. This round table thus targets the primary task in successfully addressing the crisis and its impacts.
DESA is very much engaged in this analytical work, as well as supporting intergovernmental dialogue and capacity development efforts. I am delighted to join my UN system colleagues and other panellists in this afternoon’s round table discussion.
I would like to highlight some of the actual effects of the crisis on development, now and in the future.
First, economic growth has decelerated sharply, and unemployment and poverty are on the rise.
According to the latest United Nations forecast in our World Economic Situation and Prospects, global growth will decline by 2.6 per cent this year, a steep plunge from the 2.1 per cent growth estimated for 2008.
After several years of strong per capita income growth, of 4 to 5 per cent per year, the developing world will have zero per capita income growth in 2009. Average incomes will fall in at least 60 developing countries, with the worst contractions in sub-Saharan Africa, Western Asia and Latin America.
Unemployment will climb worldwide, with the higher levels of unemployment and underemployment initially unresponsive even following economic recovery.
The food and energy crises of 2007 pushed millions of people into poverty and swelled the ranks of the hungry, reversing hard-won progress toward the Millennium Development Goals. Owing to the global downturn, between 73 and 103 million more people are expected to fall below the extreme poverty line of $1.25 per day.
Second, the downturn and related shocks are directly affecting the fiscal capacity of governments to provide social protection, deliver social services and invest in infrastructure and other areas critical to long-term development objectives.
Declining government revenues and significantly reduced access to affordable development finance will cause social spending to drop. This will impede countries’ capacities to cope with the impacts of the crisis on the poor and most vulnerable, and cause further setbacks in progress toward the MDGs.
As in the past, infrastructure investment may also be severely affected, with long-term repercussions for growth and development.
Trade and finance influence the volatility in food and energy prices – which remains high – and the resources available to invest in food and energy security, as well as in climate change mitigation and adaptation. Moreover, economic downturns also tend to adversely affect land use and accelerate deforestation and depletion of other natural resources, especially in poor countries.
Finally, many more developing countries will face renewed external debt problems. Already, most HIPC countries and one third of the countries in sub-Saharan Africa are already at great risk of debt distress. Falling GDP growth and export earnings will make debt servicing more difficult. Some $3 trillion in sovereign and private debt will need to be rolled over by developing countries this year.
All this shows how closely interconnected the multiple crises are.
The only solution is to respond in a way that puts the world on a more sustainable growth path. Clearly, it must take an integrated and coherent approach to the multiple crises.
Let me mention some immediate actions that would help lead to recovery in the new direction I have described.
First, as analyzed in the WESP, we need more fiscal stimulus and closer international coordination of the stimulus packages. This is critical to help reduce any leakage effects of fiscal spending measures and to enable a more comprehensive and long-term approach to economic policy making.
Second, the fiscal stimulus should work for all. Eighty per cent of the current stimulus is concentrated in developed countries. More and more reliable development financing must be made available to developing countries to cope with the multiple crises and to contribute to the recovery of global demand. An extra $500 billion in development financing will be needed in 2009 and 2010 for this purpose.
Third, some of these resources should be made available by allowing for temporary moratoriums on the external debt obligations of those countries in severe financial distress.
Fourth, trade protectionism must be resisted and a truly developmental outcome ensured for the Doha Round of trade negotiations. Developing countries’ access to trade financing must be restored, Aid for Trade promises fulfilled, and commitments met on providing full market access to exports from the least developed countries.
Fifth, more limits on migration and further discrimination against migrant workers should be strongly discouraged – for humanitarian reasons and to allow a continued flow of remittances, which should help economic recovery in their home countries.
Ladies and gentlemen,
Many significant steps have been taken to address the crisis. We have seen massive financial sector bailout packages, and large fiscal and monetary stimulus measures are being implemented. Recently, some indicators hint at nascent recovery. Even if true, we should not become complacent in policy action.
We are far from out of the woods. The books of major financial institutions still need to be cleansed of vast sums of toxic assets. Unemployment is still on the rise. The risks are still very high that the recession will be with us for some time to come. To avoid this and to enable real recovery will require much more concerted international action and greater policy coherence across all the areas mentioned.
The challenges we face are real. They are serious, they are many, and they are interconnected. They will not be overcome easily or in a short span of time. But we can meet them if we work together effectively and continuously try to find a common ground.