Sunday, September 28, 2008

The impact of financial meltdown in the West on the developing nations

The ADB raises the alarm for South Asian bond market amidst the financial meltdown in the West.

…As global credit markets tighten in the wake of events on Wall Street, the need for Asia, and in particular South Asia, to develop and strengthen domestic bond markets as a source of long term, local capital, has never been more acute.

...Participants shared information on bond market development, and looked at obstacles to further progress. In the case of the five countries of South Asia - Bangladesh, India, Nepal, Pakistan and Sri Lanka - they sought to identify measures that could help them increase the availability of long term, local currency financing.
...While many initiatives have been taken in Asia in recent years to create deep, liquid bond markets, the depth and maturity of such markets varies greatly, with countries in South Asia lagging counterparts in East and Southeast Asia. Typically, governments in South Asia have relied on bank borrowings and external aid as their main sources of finance in the past.

“Financial market diversification supported by well capitalized and judiciously regulated institutions has been at the heart of the tremendous growth that we have witnessed in East Asia,” said Simon Bell, Sector Manager for the World Bank’s South Asia Finance and Private Sector Development group.

There is just a press release; no papers or anything to support or to explain the present status of South Asian bond market. I would love to see more on this front rather than just releasing a press release of ‘he-said-that-she-said that’ format! I would love to explore the development and current status of bond market in South Asia. Hopefully, the ADB will put up files and papers from the conference soon on its website. Or am I missing a whole lot due to ignorance?

Most of the papers available so far are focused on the impact of the financial meltdown on the emerging markets, which overshadows its impact on poor, developing nations.

Here is one paper which analyzes the implications of sub prime crisis in the emerging markets.

This paper discusses some of the key characteristics of the U.S. subprime mortgage boom and bust, contrasts them with characteristics of emerging mortgage markets, and makes recommendations for emerging market policy makers. The crisis has raised questions in the minds of many as to the wisdom of extending mortgage lending to low and moderate income households. It is important to note, however, that prior to the growth of subprime lending in the 1990s, U.S. mortgage markets already reached low and moderate-income households without taking large risks or suffering large losses. In contrast, in most emerging markets, mortgage finance is a luxury good, restricted to upper income households. As policy makers in emerging market seek to move lenders down market, they should adopt policies that include a variety of financing methods and should allow for rental or purchase as a function of the financial capacity of the household. Securitization remains a useful tool when developed in the context of well-aligned incentives and oversight. It is possible to extend mortgage lending down market without repeating the mistakes of the subprime boom and bust.

Here is a nice piece from the NYT about the impact of this crisis in the developing countries that depend on foreign capital and have American-style trade deficits.

…The crisis, by squeezing the flow of capital, threatens countries from the Baltic to Africa that depend on foreign money to finance their deficits.

…There are more than 20 countries with current-account deficits that exceed 5 percent of their economic output, Mr. Strauss-Kahn said, putting them in what the fund considers the endangered category. Mr. Strauss-Kahn declined to name names, but outside economists listed Bulgaria, Estonia, Romania and Turkey as among the red flags in Europe. In Africa, they said, South Africa and Nigeria were worrisome; and in Latin America, Venezuela and Ecuador.

Here is one interesting thought:

In a paper I had analysed this decoupling/recoupling issue. There are two channels via which shocks are transmitted- trade flow and financial flow. The trade channel usually impacts with a lag but the financial channel is immediate. This is worrisome as it is a possibility that the crisis has got nothing to do with the economic fundamentals of the economy.

Here is one more link from the Center for Global Development. The CGD has a series of thoughtful blog posts from a wide range of experts.

Here is Shanta Devarajan (did I mention that Shanta is now running a new blog, which focuses on Africa; earlier he used to run a blog focusing on South Asia) asserting that despite the US subprime mortgage crisis, South Asia will continue to grow.


Update: Here is an interesting perspective (a socialist twist and anti-capitalist agenda) about the impact of global financial crisis on the workers around the world.

…But this means that taxes from working people are once again being used to rescue capitalists, demonstrating the boundless parasitism of financial elites. Nouriel Roubini, a New York University economist, describes this as “socialism for the rich, the well-connected and Wall Street (i.e. where profits are privatized and losses are socialized).” Meanwhile, the biggest finance capitalists like JP Morgan are gobbling up these distressed capitals at firesale prices — further concentrating capital in the hands of a tiny finance oligarchy.

…An estimated 2.2 million or 1 in every 50 households in the US face foreclosure. Those who continue to own homes would be 20-30 percent poorer in terms of household wealth as home values drop as a result of the collapse in the housing bubble. According to one estimate, a collapse of 30 percent in US home prices from their over-inflated peak would wipe out $6 trillion of household wealth and leave 10 million households with negative equity in their homes — they owe more on their homes than they are worth — increasing the likelihood of a new round of foreclosures and credit losses.

  • The global credit crunch means reduced capital flows for third world countries who are chronically dependent on foreign capital inflows to pay for older debts, sustain imports from the advanced capitalist countries and paper over chronic deficits they incur as imperialist states plunder their economies.
  • Most un-industrialized countries who are dependent on exporting agricultural products, raw materials, minerals, low-value added manufactures and services (e.g. business process outsourcing) to the advanced capitalist countries will be faced with shrinking exports due to the combination of depressed consumption in the North.
  • Aside from being dependent on low-value commodity exports, un-industrialized countries are also dependent on the export of labor, particularly to the wealthy industrialized countries…his means higher unemployment in labor-exporting countries, reduced earnings for foreign remittance-dependent households, and lower consumption spending in the domestic economy.
  • As financial instruments and stock markets become less attractive to financial investors, speculative capital shifts more into commodities trading such as oil, minerals and agricultural commodities. This is contributing to the precipitous rise in food and energy prices beyond what conditions in the real economy warrant, thereby rapidly eroding the real incomes of the vast majority especially in the third world.