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This blog is maintained by the Growth and Crisis (GC ) Program of the World Bank Institute.

We bring you timely news, resources, tools, ideas and commentaries on issues related to the global economic crisis and growth.

Macroeconomic Management

The Financial Crisis and its Impact on Developing Countries

Submitted by Ignacio on Wed, 04/22/2009 - 14:46

A new working paper by Stephany Griffith-Jones and José Antonio Ocampo, published by UNDP's International Poverty Centre, looks at the impact that the financial crisis is having on developing countries. The paper identifies three mechanisms that play a key role in spreading the consequences of the financial crisis to the developing world: remittances, capital flows and trade.

A one-pager also available from the IPC: How Does the Financial Crisis Affect Developing Countries?

More information on this topic at the World Bank's blog Crisis Talk.

Global Dialogues as a Response to the Global Economic Crisis: New Webpage

Submitted by Ignacio on Tue, 02/24/2009 - 15:23

The video recordings of the third and fourth discussions in this series are now available.

We have also created a new webpage for the Global Dialogues series, where you can access all the specific discussions and more background information on the Global Economic Crisis. We will be adding new sessions to that webpage as they take place, more or less monthly.

Global Dialogues as a Response to the Global Economic Crisis (II)

Submitted by Ignacio on Tue, 02/17/2009 - 15:24

The second global dialogue of this series focused on the impact of the global crisis on the national macro economies and on the financial systems.

Experts from from Argentina, Uruguay, Turkey, Poland, Hungary, Russia, South Africa, Indonesia, Philippines, and South Korea participated in this event. Speakers included Professor Guillermo Calvo of Columbia University, and Dr. Gerard Caprio of Williams College.

Watch the discussion.

Global Dialogues as a Response to the Global Economic Crisis

Submitted by Ignacio on Wed, 02/11/2009 - 17:42

The World Bank Institute launched at the end of last year a global dialogue series geared towards policymakers, with the goal of facilitating real time cross-country discussion on the current global economic crisis.

The first videoconference focused on the impact of the financial crisis on state and local finance. Participants from Brazil, China, India and Russia contributed via satellite.

Watch the discussion.

The Gross Inequalities of Global Imbalances

Submitted by Ignacio on Tue, 03/13/2007 - 13:15

Terry McKinley and Alex Izurieta write about global economic imbalances in UNDP International Poverty Centre's February one pager.

 

According to this paper, the US is running a deficit about 3.5 times larger than the deficits of all other OECD countries combined. The average US current account deficit in recent years has been one third higher than the total GDP of sub-Saharan Africa.

 

global imbalances

Source: UNDP - International Poverty Centre

 

 

Current global imbalances not only pose huge dangers; they also cause a grossly inequitable distribution of global resources. Capital is ‘flowing uphill’ to rich countries—overwhelmingly to one rich country, the US.

…

The money that many middle-income countries are now investing in the US could make a major contribution to development if it were redirected to poorer countries, or even kept within these middle-income countries. Because more goods and services would become available domestically, the population in such countries would enjoy a higher standard of living.

…

Since the US is enjoying the fruits of this inequitable imbalance in resource flows, it has limited motivation to correct it. An impending US economic collapse is probably the main factor that could impel national policymakers into action. An alternative solution, mutually beneficial to all, could be a coordinated effort by both developed and developing countries to stimulate domestic demand in regions other than the US.

 

 

Why isn't financial deepening happening in the poor countries?

Submitted by Yan on Tue, 02/20/2007 - 16:30

While global financial integration has been progressing well, financial deepening is not.  Only a handful of emerging market economies are benefiting from large capital inflows in the form of FDI.   In countries like Kenya where the capital account is open and foreign bank entry has long been allowed, capital market remains shallow and real interest rate remains high, hindering the private sector development. 

 

Why is there a weak association between financial openness and financial deepening in the poor countries?  In a November conference, Professors Ju and Wei seemed to have provided an answer.  In their paper "A Solution to Two Paradoxes of International Capital Flows", they provide a framework to study the role of financial and property right institutions in determining patterns of capital flows.  Their two-sector model features differentiating returns to financial investment and physical investment, as financial investors have to share the return to capital with entrepreneurs.  The more developed a financial system is, the greater the slice that goes to the financial investors.  As an implication, a poor country with an inefficient financial sector may experience a large outflow of financial capital, but together with inward FDI, resulting in a small net inflow.  The model also incorporates property rights protection as another institution.  Countries with poor property rights protection may well experience an outflow of financial capital without a compensating inflow of FDI.

 

Shan vs. the World Bank

Submitted by Ignacio on Wed, 11/22/2006 - 15:33

Weijian Shan recently ignited a debate over the profitability of Chinese companies with his essay in the Far Eastern Economic Review “The World Bank’s China Delusion”, which had a reply in World Bank economists Bert Hofman and Louis Kuijs’ “Profits Drive China's Boom."

 

 

FEER’s blog told the full story.

 

To vastly oversimplify the positions, the World Bankers believe that the corporate sector is making healthy returns on its investments, and this is fuelling the high savings rate and fast growth in investment. Therefore Beijing can afford to be sanguine about the investment level, although the central government could improve efficiency by forcing state-owned companies to pay dividends back into state coffers.

Mr. Shan argues that while profits may have been growing in recent years, they are not nearly as high as some official statistics would have one believe, and it is bank credit which is fuelling the investment boom. The implication is that a large proportion of savings is going into unproductive investments, which will eventually cause more problems in the already precarious banking system.

 

Thank you Yan Wang for the heads up.

Why doesn't capital flow from rich to poor countries?

Submitted by Yan on Mon, 11/13/2006 - 11:02

While global cross border capital flows have risen to reach nearly $6 trillion in 2004, only a small fraction (about 10%) flows to developing countries.  People cannot help but ask, Why doesn't capital flow from rich to poor countries?  In a recent conference, Prof Enrique G. Mendoza and his co-authors seemed to have provided an answer.  In their paper "Financial Integration, Financial Deepness and Global Imbalances", they argue that in the last decade, financial integration was a global phenomenon, but financial development was not.  Capital market liberalization may lead to global imbalances when countries are vastly different (heterogeneous) in their levels of financial development. 

 

Their model shows that first, countries with deeper financial markets have lower savings and accumulate net foreign liabilities.  Conversely, countries with shallow financial markets may have higher savings (due to the lack of insurance, for example) but higher capital outflows (out of desire to seek more secure  returns).  Second, financial market differences also affect the composition of the international portfolio.  Countries with deeper financial markets invest in high return assets. As a result, they may receive positive factor payments even if the net foreign asset (NFA) position is negative (e.g. the US).  The authors conclude that this has some welfare implications to developing countries:  Low income countries with low levels of financial development will be worse off in such an environment because their savings may bypass their domestic financial sector and flow to developed countries with highly sophisticated financial markets, at least in the short run.  (Considering learning by doing, the long run effect may be different, in my view ).

Banking Sector Openness and Economic Growth

Submitted by Ignacio on Mon, 11/06/2006 - 13:11

In a new working paper, our own Nihal Bayraktar and Yan Wang look at the links between banking sector openness and economic growth.

 

Banking sector openness may directly affect growth by improving the access to financial services and indirectly by improving the efficiency of financial intermediaries, both of which reduce the cost of financing, and in turn, stimulate capital accumulation and economic growth. The objective of the paper is to empirically reinvestigate these direct and indirect links, using a more advanced econometric technique (GMM dynamic panel estimators). An illustrative model is presented to link financial market development with investment. The empirical results confirm the presence of direct and indirect links, and thus provide support for countries planning to open their banking sector for international competition.

 

Read the full text.

Fridays Academy: Trade, Inequality, and the Poor

Submitted by Ignacio on Fri, 10/20/2006 - 09:11

Like every Friday, from Raj Nallari and Breda Griffith's teaching notes.

 

Open trade is good for overall economic growth and by extension poverty reduction, but what effect does it have on inequality? Trade liberalization tends to reduce monopoly rents and the value of personal connections with bureaucrats and politicians, thereby reining in the rich. In developing countries, it may be expected to increase the relative wage of low-skilled workers, who are likely to be scarcer in the world economy than at home. Multilateral liberalization of agricultural trade may increase rural incomes but expose urban dwellers to higher food prices. And, in many countries, trade openness may have adjustment costs with which the poor are ill-equipped to cope. At first glance, therefore, the relationship between trade and inequality is unclear.

 

Trade reform in developing countries took off from the late 1970s. Until then, developing countries had pursued inward-looking policies by promoting import-substituting industrialization strategies. The aim was to encourage domestic production and restrict foreign investment by multinational firms in order to support the growth of domestic firms. But not only do inward-looking policies create many distortions, as discussed above, they also tend to benefit relatively rich and powerful groups at the expense of the poor (Dollar 2004).

 

Since the late 1970s, developing countries have become more integrated with the world economy through foreign trade, foreign investment, and immigration. Integration has been driven by technological advances in transport and communication and by deliberate policy changes. China’s ratio of trade to national income has more than doubled since it opened to the world in the early 1980s, and countries such as Bangladesh, India, Mexico, and Thailand have seen large increases as well.