ThE FINANcIAl AND EcONOmIc crISIS

1 UNITED NATIONSNew York and Geneva, December 2010 ThE FINANcIAl AND EcONOmIc crISISOF 2008-2009 AND DEvElOpINg cOUNTrIESE dited bySebastian DullienDetlef J. KotteAlejandro M rquezJan PrieweiiSymbols of United Nations documents are composed of capital letters combined with figures. Mention of such a symbol indicates a reference to a United Nations views expressed in this book are those of the authors and do not necessarily reflect the views of the UNCTAD secretariat. The designations employed and the presentation of the material in this publication do not imply the expression of any opinion what soever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or in this publication may be freely quoted; acknowl edgement, however, is requested (including reference to the document number).

2 It would be appreciated if a copy of the publication containing the quotation were sent to the Publications Assistant, Division on Globalization and Development Strategies, UNCTAD, Palais des Nations, CH-1211 Geneva United Nations, 2010 All rights reservedUNITeD NATIoNS PUblICATIoNSales No. 978-92-1-112818-5iiiTh e Fi n a n c i a l a n d ec o n o m i c cr i s i s o F 2008-2009 a n d de v e l o p i n g co u nT r i e sAbbreviations and acronyms ..xiAbout the authors ..xiiiIntroductionSebastian Dullien, Detlef J. Kotte, Alejandro M rquez and Jan Priewe ..1 The crISIS TransmIssIon, ImpacT and specIal feaTuresWhat Went Wrong? alternative Interpretations of the Global FINANcIAl crisisJan Priewe ..17 Introduction: What went wrong? ..18 I. Prevailing explanations of the causes of the crISIS ..21 A. Various explanations focusing on FINANcIAl markets.

3 21 b. Alan Greenspan s view ..25 C. beyond the proximate causes ..28 II. The role of global imbalances ..30 III. The new Triffin dilemma ..39 IV. Finance-led capitalism and unequal income distribution ..43 V. Conclusions ..46 Notes ..48 References ..50 The emerging-market economies in the face of the Global FINANcIAl crisisDaniela Magalh es Prates and Marcos Antonio Macedo Cintra ..53 Introduction ..54 I. Proposed agenda for improving the governance of the international FINANcIAl system ..55 II. The implications of the crISIS for emerging-market economies ..57 III. Conclusion ..70 Notes ..71 References ..71cONTENTSivThe financialization of commodity markets and commodity price VolatilityJ rg Mayer ..73 Introduction ..74 I. The increasing presence of FINANcIAl investors in commodity markets ..75 A. Primary commodities as an asset class.

4 75 b. FINANcIAl investment in commodity indexes ..77 II. The impact of financialization on commodity price developments ..82 III. Commodity price volatility ..85 A. The origin of commodity price volatility ..85 b. Recent developments in commodity price volatility ..85 C. FINANcIAl investment and commodity price volatility ..90 IV. Conclusions ..92 Notes ..95 References ..97risk factors in International FINANcIAl crises: early lessons from the 2008-2009 Turmoil Sebastian Dullien ..99 Introduction ..99 I. empirical analysis of the crISIS ..100 A. Descriptive statistics ..102 b. econometric estimates ..106 C. Summing up the empirical evidence ..110 II. Tentative explanations and conclusions ..111 Notes ..114 References ..115vThe crISIS counTry and regional sTudieschina s economy in the global EcONOmIc crISIS : impact and Policy responsesLaike Yang and Cornelius Huizenga.

5 119 Introduction ..120 I. Impacts of the global EcONOmIc crISIS on the Chinese economy ..121 A. Relatively small impact on Chinese FINANcIAl institutions ..121 B. Impact on EcONOmIc growth ..122 C. Impact on employment ..124 D. Impact on FDI inflows ..127 E. Inflation ..128 F. Impact on China s foreign trade ..128 II. Responses of the Chinese Government and their outcomes ..133 A. Responses of the Chinese Government to the global crISIS ..133 B. Outcomes of China s expansionary policies and stimulus package ..137 III. Concluding remarks and policy proposals ..140 Notes ..145 References ..146sustaining growth in a Period of global downturn: The case of indiaAbhijit Sen Gupta ..149 Introduction ..149 I. India s growth slowdown prior to the FINANcIAl and EcONOmIc crISIS ..151 II. Transmission and impact of the crISIS ..155 III. Policy response to the crISIS .

6 162 IV. Medium-term policy challenges ..165 V. Conclusion ..168 Notes ..169 References ..169viBrazil and India in the Global EcONOmIc crISIS : Immediate Impacts and EcONOmIc policy responsesAndr Nassif ..171 Introduction ..172 I. business cycle fluctuations, depressions and appropriate EcONOmIc policies ..174 II. The macroeconomic environment in brazil and India before the global crISIS of 2008 ..178 III. Impacts of the global crISIS on brazil and India and their EcONOmIc policy responses ..183 A. lessons from EcONOmIc policy responses in brazil and India: Timeliness and intensity matter ..183 b. Impact on the real economy ..188 IV. brazil and India in the post-global crISIS : Main challenges for 2010 and beyond ..192 V. Conclusion ..195 Notes ..196 References ..199africa and the Global FINANcIAl and EcONOmIc crISIS : Impacts, responses and opportunitiesPatrick N.

7 Osakwe ..203 Introduction ..203 I. The crISIS in historical perspective ..206 II. Impacts of the crISIS on Africa ..209 A. exchange rates ..209 b. Stock markets and bank balance sheets ..210 C. Trade and commodity prices ..212 D. Capital flows ..214 e. Impact of the crISIS on poverty ..216vii III. African policy responses ..217 IV. Seizing opportunities created by the crISIS ..219 V. Concluding remarks ..221 Notes ..221 References ..222lookInG forWard polIcy aGendaThe report of the stiglitz commission: a summary and commentAlejandro M rquez ..225 Introduction ..225 I. Report s introduction ..227 II. Macroeconomic issues and perspectives ..230 III. Reforming global regulation to enhance global EcONOmIc stability ..236 IV. International institutions ..241 V. International FINANcIAl innovations ..245 VI. The report s concluding comments.

8 249 VII. Comment ..252 Notes ..253 References ..254reforming macroeconomic policies in emerging economies: from procyclical to countercyclical approachesRicardo Ffrench-Davis ..255 Introduction ..256 I. Real macroeconomic balances ..258 A. A two-pillar macroeconomic approach ..259 b. Toward real macroeconomic balances: Three pillars ..261 C. Instability, growth and equity ..262 II. external shocks and real macroeconomic balances ..267viii III. FINANcIAl development, financierism and productivism ..273 A. Financierism empowered by neoliberal reforms ..273 b. Rational pro-cyclicality of short-term FINANcIAl markets, and irrational policymakers following their advice ..275 IV. Concluding remarks ..279 Notes ..280 References ..282a possible new role for special drawing rights In and Beyond the Global monetary systemJ rgen Zattler.

9 287 Introduction ..288 I. A renewed interest in SDRs ..289 II. The Triffin-dilemma and the shortcomings of the current reserve system ..291 III. Potential role of SDRs for improving the efficiency of the global reserve system ..295 IV. Potential of SDRs to foster development and the provision of global public goods ..298 V. Concluding remarks ..301 Notes ..303 References ..304ixThe FINANcIAl and EcONOmIc crISIS and Global EcONOmIc GovernanceDetlef J. Kotte ..305 Introduction ..306 I. The world economy before the crISIS ..307 A. FINANcIAl fragility ..307 b. Macroeconomic management and the confidence game ..308 C. Macroeconomic imbalances ..309 II. Institutional shortcomings and the case for reform ..311 III. Monetary system reform for crISIS prevention ..313 A. A new reserve currency? ..313 b. Multilateral rules for exchange-rate management.

10 315 C. Complementary reforms ..317 IV. Summary and conclusion ..320 Notes ..322 References ..322xiAbbrEvIATIONS AND AcrONymSASeA African Securities exchanges AssociationASeAN Association of Southeast Asian NationsbIS bank for International SettlementsbNDeS brazil s Development bankCPI consumer price indexCRR cash reserve ratio eCb external commercial borrowingeMU european Monetary UnioneU european UnionFDI foreign direct investmentFIe foreign invested enterpriseFII foreign institutional investorFTA free trade agreementGDP gross domestic productIbGe brazilian Institute of Geography and StatisticsIMF International Monetary FundIPeA brazilian Institute for Applied EcONOmIc Research oeCD organisation for EcONOmIc Co-operation and DevelopmentoTC over the counterPSI Programme for Sustaining Investment (brazil)RbI reserve bank of IndiaRMb renminbiSDR Special Drawing RightSelIC Special Settlement and Custody System (brazil)