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Developing world's opportunities in recession

By Khalid Malik and Khalil Hamdani (China Daily)
Updated: 2008-11-06 07:43

The financial crisis is pushing the world into recession. The US is in the midst of it, and Europe, Japan and other advanced economies are slowing to a standstill. But with the crisis come some important opportunities, particularly through trade and investment between and among developing countries.

After all, at least one third of the world economy - the developing world - continues to grow in spite of the financial turmoil and economic slowdown in the developed economies.

South-South trade, that is trade between developing countries, has been expanding faster than North-South trade for more than a decade. Today, developing countries export about as much to each other as they do to developed countries. South-South foreign direct investment (FDI) tripled in the past decade. Today, one out of every four transnational corporations worldwide is based in the developing world.

Trade flows among Asian countries are remarkably dynamic, growing twice as rapidly as their trade with developed countries. But, equally, inter-regional flows have grown rapidly, particularly between Asia and Africa, and Asia and Latin America. South-South FDI is a particularly important source of capital for the smaller and weaker economies. These flows have helped insulate the emerging market economies from the financial crisis.

According to the International Monetary Fund, growth in 2009 will come mostly from emerging market economies. However, developing countries are vulnerable to the slowdown of world trade and the cut in trade credit. It is imperative that their growth momentum should not dissipate.

How can trade and investment between and among developing countries be protected?

Establish Stabilization Funds. Strong reserve positions of countries like China and India make it possible to consider large regional stabilization and growth funds that can help banks and exporters deal with the credit crisis. Recent proposals to set up an $80 billion fund on ASEAN-plus-3 basis (involving the 10 Southeast Asian nations and China, Japan and South Korea) are encouraging.

Similar potential exists in the other regions as well, where Nigeria, Brazil and Venezuela have strong reserve positions. Chinese state banks and African banks have developed a $6 billion joint fund to invest in Africa. In Latin America, Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay and Venezuela agreed last year to create a Bank of the South with up to $7 billion in initial capital. This initiative has fresh urgency.

Diversify portfolios. Sovereign wealth funds - most of which are based in developing countries but have considerable assets exposed to the financial turmoil in developed countries - have begun to diversify their portfolios and are increasingly investing in the developing world at attractive returns. There is tremendous potential to expand such investments in the developing world, and diversify risks at the same time.

Create trade opportunities. Tariffs among developing countries are relatively high; however, where these tariffs have been reduced, trade among the countries has expanded rapidly. UNCTAD reports that trade among the 43 developing countries in the Generalized System of Trade Preferences expanded by 50 percent in 2000-2005, more than 10 percent faster than the growth of their trade with the rest of the world. The trade scheme needs to be broadened and enlarged, perhaps including new members such as China and South Africa.

Reform institutions. The lessons from the 1997 Asian crisis need to be integrated into reform of the Bretton Woods Institutions. Policy prescriptions for managing financial crisis should safeguard growth and development. It is noteworthy that the IMF now recognizes the need for rapid disbursement of its lending with streamlined conditionality, as well as regulation of short-term capital movements. Arrangements for currency swaps, even common currencies, and the nature of regional policy coordination institutions should be re-evaluated. It is time for a re-think of a new financial architecture, with rules and institutions relevant to our diverse, globalized world.

Boom and bust cycles are inherent to financial markets. As is becoming increasingly clear, the swings of these cycles are directly influenced by how well regulated and transparent markets are. Developing countries have an urgent task to buttress their financial defense systems. This requires not only revisiting their own financial rules and institutions but also seeking regional and global alliances so that there is adequate liquidity on tap to mitigate the impact of the crisis on their economies.

Above all, it is essential to keep the long view. In the midst of the financial meltdown, no country, rich or poor, North or South, should take its eye off the pursuit of the Millennium Development Goals, those eight targets for slashing poverty, hunger and disease by 2015.

Despite the urgency of the moment, it is imperative that every country act in a spirit of global solidarity. We cannot allow today's financial crisis to become tomorrow's prolonged human crisis. For their part, developing countries, representing one-third of the world's output, can play their part in diversifying risk and contributing to global stability and prosperity.

Khalid Malik is United Nations Resident Coordinator in China, and Khalil Hamdani Special Advisor at the South Center, a Geneva-based inter-governmental organization

(China Daily 11/06/2008 page11)