Economists and policymakers are still debating the causes of the global crisis and the prospects for recovery in the world economy (see the excellent column by Berkmen et al. 2010 on this site). But one point of agreement is that emerging economies have so far have weathered the crisis much better than advanced countries.
Figure 1. GDP growth, 2006-2009 (quarter over same quarter of previous year)
Source: IMF, WEO Update, 2010
The financial sector has been at the centre of the crisis and therefore it is understandable that many observers wonder what type of financial sector will emerge from the crisis. But the crisis may also have had significant effects on other areas of the world economy, particularly the newly integrated developing countries.
At the 2010 meetings of the Royal Economic Society in Guilford three prominent economists, Alan Winters, Saul Estrin and Thorsten Beck, in the special session organised by Nauro Campos titled “The crisis and the developing countries”, discussed the possible impact of the global crisis on three fundamental aspects of the process of globalisation, namely migration, foreign direct investment and financial development in Africa. Although, it is too early to draw definite conclusions, the three contributions argue that the crisis may have long-lasting effects on the pattern of migration, foreign direct investment and financial development in Africa.
Migration and the crisis
Alan Winters provided a historical perspective, looking at the response of migration flows during episodes of sharp output falls in the past, from Ireland in 1791, to the UK and US after the Great Depression and oil crises of the 1970s, to the Asian crisis of the 1990s. From these historical episodes Winters concludes that periods of sharp fall in output lead to sharp fall in inflows. However, the bulk of migration flows respond to long-term factors and follow clear trends. De-trending migration flows usually reveals that the short-term fluctuations are reversed. Similarly, policies towards migration tend to respond mainly to long-term flows.
There are several implications for the current crisis. Alan Winters stressed five main points:
- Inflows fall during recessions;
- Migrant returns may increase somewhat, but less than changes in inflows;
- Migration flows will be affected by long-run factors and related migration policies.
- Migrants are affected more severely than natives;
- Immigration policies tend to tighten during crises.
Data on migration from Mexico to the US shows a sharp fall in migration flows from 369,000 in the second quarter of 2006 to 144,000 in second quarter of 2009. Similarly, flows from new EU member States to the UK and Ireland in 2009 fell by more than 50% with respect to 2008.
There is some evidence, especially in the US, that migrants were hit harder than native citizens, especially in terms of job losses. In general, the increase in unemployment in OECD countries has been larger for foreign-born people.
Regarding policy responses, there has been some tightening in immigration policies. But Alan Winters argues that the tightening has been modest, and instead many countries are continuing a policy of gradual tightening that began before the crisis.
But while the crisis had significant effects on migration flows and on the labour market conditions of migrants in the recipient countries, based on historical experience, such effects are likely to be reversed. And to date, no major political backlash has emerged from the crisis.
Financial development in Africa and the crisis
Thorsten Beck warned of a high risk that the global financial crisis will slow down the process of financial development in Africa that had previously been advancing. Indeed, despite the huge gap between financial sectors in Africa and advanced countries, the growth dynamics in the last decade have been impressive. One main concern is that the demand for regulation will translate to a larger state intervention in the financial sector.
The financial sector in sub-Saharan Africa remains shallow, and access to finance is still limited. However, a process of financial deepening and broadening has accompanied the pick- up in growth rates observed in Africa in recent years. International financial flows and foreign investments have also played an important role. As shown in Figure 2, sub-Saharan Africa has a very high share of foreign ownership in the banking sector, well above the share observed in the rest of developing countries.
Figure 2. Ownership of banks
Liberalisation of the capital account of the balance of payments and the role of foreign ownership in the banking sector are two key globalisation challenges facing Africa. Beck argues that a generalised opening-up of the capital account may be premature. Nevertheless, opening should take place through intra-regional capital. Indeed, in recent years a large share of foreign inflows have come both from China and more advanced African countries. Similarly, foreign ownership of banks is associated to an increasing extent to banks in more advanced African countries. These intra-regional and South-South flows may explain the milder impact of the world crisis on the financial sectors of sub-Saharan Africa.
Beck questioned whether the government support, or even nationalisation, of financial institutions in the core markets may imply a revival of government ownership of banks. For Africa this may represent the main risk from the current crisis. A return to a large-scale government presence in the ownership and management of banks, not simply in short-term operations of liquidity support, may be a body blow to financial development in the region.
Foreign direct investment and corporate governance
Saul Estrin discussed the potential impact of the crisis on ownership structures in emerging and developing countries, emphasising the role of foreign direct investment (FDI) for the performance of the enterprise sector. Indeed, one main element of globalisation has been the improved efficiency in many emerging economies brought about by foreign ownership. This view is backed by convincing evidence on one of the fundamental episodes of globalisation of last century, namely the integration in to the world economy of the previously centrally-planned economies.
Estrin argued that robust results from empirical studies suggest that foreign ownership in transition countries raised the level of efficiency, measured by total factor productivity. Therefore, through its effects on the magnitude and geographical distribution of FDI, the current crisis may have long lasting effects on developing countries. The direction of these effects is not clear. In fact, Estrin provided evidence on 2009 indicating that the crisis has induced a shift of FDI away from advanced economies. For the first time in recent history, flows from advanced going to emerging markets have surpassed the flows from advanced to advanced countries.
Figure 3a. Global FDI flows, ($ billion)
Figure 3b. Global FDI flows, (% of GDP)
Undoubtedly, such a phenomenon has taken place within a context of significant contraction of FDI, both in value and as a share of GDP. Nevertheless, the decline has been much larger in advanced than in emerging economies. As investments around the world declined more than GDP, it would be revealing to measure the share of FDI in total investment, as this indicator may signal an increased importance of foreign flows into total private investments.
Figure 4. Shares in world GDP (at PPP exchange rates)
Source : IMF, WEO database.
While Estrin noted that FDI remain highly concentrated to a few major transition and developing economies, such as China, Russia, Brazil and India, Estrin’s contribution raises a the question about the possible effect of the crisis on the re-distribution of FDI flows in favour of emerging markets.
It is still too early to conclude whether the resilience of emerging economies during the current crisis is a sign of less developed and sophisticated financial sectors or a sign of longer term rebalancing of world economic power towards emerging countries. Furthermore, the larger weight of emerging economies in world output may have also contributed to mute pressures for protectionism. So far we have not seen any significant reversal in the process of globalisation.
But the true tests may be yet to come. How might the world economy react in the event of a “double dip” recession, as in the 1930s, or to a prolonged low growth scenario? Furthermore, how are advanced economies and even international financial institutions prepared to tackle a world in which the balance of economic power shifts to emerging countries?
Editor’s note: This column arose from a debate at the meetings of the Royal Economic Society, Guilford, 30 March, 2010
Berkman, S Pelin, Gaston Gelos, Robert Rennbeck and James P Walsh (2010), “The global financial crisis: Why were some countries hit harder?”, VoxEU.org, 28 March.