Global Finance. European Mezzogiorno and Mediterranean countries in a time of transition. Scenarios and new balances. Marco Zupi

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1 Global Finance European Mezzogiorno and Mediterranean countries in a time of transition. Scenarios and new balances Marco Zupi Scientific Director, CeSPI

2 The End At The Beginning.Challenge: more of the same? Estimated financing needs still represent a relatively small portion of global savings of around $17 trillion in Costs of funds not lower; volatility and instability still there. US got ½ of international capital inflows (not from rich to poor countries). The value of (non banking) shadow banking assets has risen from an estimated $26 trillion in 2002 to around $67 trillion, or 24 per cent of total assets in the global financial system. In the meantime, what about hot issues? Climate change related funds: EU Emissions Trading System (ETS) for adaptation projects (Germany plans: US$ 3.2 bn by 2015); Carbon Tax (expected 250 bn per year).

3 Financial deepening is not an engine for development The total notional value, or face value, of the global derivatives 9% market when the housing bubble popped in 2007 stood at around $500 trillion Broad Money 1) 01 (2 da ra m 11% of total un Securitized Debt 122% of world GDP Source: (2013) 78% of total 10% of total ur ce :J.S 138% of world GDP Derivatives So 964% of world GDP The Over-The-Counter 1% derivatives market alone had grown to a notional value of at least $648 trillion as of the end of 2011 the market is likely worth closer to $707 trillion and perhaps more Narrow Money

4 The End At The Beginning.Challenge: more of the same? September 2013, New York UN General Assembly: the UN launched Process of convergence between two parallel processes: post-mdg FfD and post-rio+20 FfSD. October 2013, 7-8, New York: Sixth High-Level Dialogue on FfD November 2013, 10-15, Beijing: Sustainable Finance Conference UNEP, December 2013, Abidjan: Leading Group of 65 Countries on innnovative FfD XIII Plenary Session on Innovative financing for agriculture, food security and nutrition (idea of African Fertilizer Financing Mechanism, AMCommitment on agriculture, new Catalytic Facility, ) Despite such specific aims, there is a systemic Need of developmental (I+tech), inclusive (SME), systemic reform of

5 A fragmented/additional Global Climate Finance Architecture Source: Alice Caravani, Neil Bird, Liane Schalatek (2011)

6 But when the "New Normal" - Enabling the financial sector to work for sustainable development JPMorgan has $72 trillion in notional amount on its books almost five times the size of the U.S. economy!! Source: UNEP-FI (2012)

7 Challenge: a new wave of globalization? We are in the mid of a fourth wave of Globalization: the new trend is to go to BRICs and middle income countries to produce for local markets (and not to re-export). World-wide productive networks from North-South vectors to S-N & S-S. By 2030 India will account for 23% of the projected $ 55.7 trillion in global middle class consumption spending, China for 18% and the rest of Asia for other 14%. For the first time ever, FDI to LDCs > rich economies in 2012 (52% of around US$ 1,350 bn) and outflows=426 bn (31%) Source: UNCTAD, 2013 Look at outward FDI: China had just an annual outflow of US$ 0.9 billions in 2000, 52 billions in 2008, almost 85 in 2012 (the geographical distribution may be far from truth as a very large part channeled through tax havens as Cayman and Virgin Islands or Hong Kong) new actors but the same old story

8 China Outward FDI Source: Ministry of Commerce (2013), Word Investment Report 2013

9 China Outward FDI into Med (US$ Bn) Country Algeria Libya Egypt Saudi Arabia Israel Syria Turkey Greece Italy France Spain Portugal (prel.) Source: The Heritage Foundation (2013), China Global Investment Tracker Interactive Map

10 Challenge: a new wave of globalization? New trends, but the new global middle class, about 400 million people, earned more and consumed more in the 20year span before the global financial crisis hit in 2008 than after. The inflation-adjusted real income for the group around the global median rose 80 percent between 1988 and Their incomes, however, were still around $3 to $5 pc per day. Not surprisingly, the top 1 percent of the world s earners were big winners (old story). Their real income went up by more than 60 % during the 20-year period. In absolute terms, they saw their incomes increase by nearly $23,000 per capita per year, compared with some $400 for those around the median. By contrast, incomes were almost stagnant among the world s poorest 5 percent (B. Milanovic, 2013).

11 Challenge: a new wave of globalization? Despite the talk of the global middle class, ten African countries, with a combined population of 150 million, currently have per capita GDPs lower than at the time of independence. Between 1980 and 2000, Africa s average per capita growth rate was zero. Thus, today the gap between rich countries like the United States and poor countries like Madagascar is 50 to 1. That is up from a ratio of 10 to 1 in The poorest 1% of the Danish population has an income higher than 95% of the people living in Mali, Madagascar or Tanzania (B. Milanovic, 2013). For exactly the same job of bus driver, the real hourly wage rate (adjusted for the cost of living) is $20 in Amsterdam and

12 Despite shift wealth... 3/5 of the poorest live in 2 emerging & middle income countries

13 Challenge: a new wave of globalization? But 85 percent of international banking and bond issuance takes place in the Euromarkets, a stateless offshore zone. Technically legal offshore system (and secrecy jurisdiction) has not been dismantled: transfer pricing (or mispricing) is common across TNCs. Tax revenue is drained out of a poor country and into a tax haven (Luxembourg). The U.S. Government Accountability Office reported in 2008 that two-thirds of US and foreign companies doing business in the US avoided income tax obligations to the federal government in the years , despite corporate sales totaling $2.5 trillion. The very top, rent seekers, free riders and unequal free market depend a lot on active government and policy-making: look at the worldwide dismantling of progressive tax systems.

14 Challenge: a new wave of globalization? There are still 60 off-shore zones (also in Africa): CityGroup has 427 branches, Morgan Stanley 273. And more than 40% of FDI into India comes from Mauritius. And also the official distinction among types of financial flows may be misleading: the psychological interpretation of good and bad cholesterol depending on the type of flow (FDI vs portfolio investment) may be far from truth. Data captures different things from our interpretation. Basically, different types of flows are just alternative accounts for the same actors/firms (not true that different actors are correlated to different flows). The same firm can use FDI, portfolio investment, bank loans, government support (ECAs).

15 However, a new wave is in motion: Growth of GDP per capita by income groups Source: UNDESA (2012/13), World Economic Prospects

16 Global rebalancing % Share of world output (PPP) Source: UNDP (2013), HDR

17 Realignment of world trade % share of world merchandise trade Source: UNDP (2013), HDR

18 World trade by volume Source: UNCTAD (2013), Trade & Development Report

19 Global current-account imbalances (% of world GDP) Source: IMF(2012/13), World Economic Outlook

20 Also in real economy: Changes in employment Source: UNCTAD (2013), Trade & Development Report

21 Post-recession employment recovery in developed economies Source: UNDESA (2012/13), World Economic Prospects

22 Share of world labour income in world gross output (%) Source: UNCTAD (2013), Trade & Development Report

23 The vicious cycle of developed economies Source: UNDESA (2012/13), World Economic Prospects

24 The vicious cycle of developed economies Source: UNDESA (2012/13), World Economic Prospects

25 Monetary stability vs financial instability Five years after the outbreak of the financial, economic and social crisis, the prevalence of financial over real economy persists and worsens. At the national level, financial reforms have been partial and slow, at their best. In Europe, expansionary monetary policies has been ineffective for credit expansion and aggregate demand creation and fiscal austerity worsened unemployment. Contrary to the monetarist approach, policymakers should focus more on the volume of bank credit than on money creation for promoting financial stability (monetary/price stability coexists with considerable financial instability).

26 Savings vs Credit engine In the Euro-zone area, surplus countries (Germany) rely on export, without stimulating domestic demand, and disequilibrium worsens. The banking system as a whole can provide investment credit without the prior existence of a corresponding amount of financial savings. Beyond that, government intervention may facilitate access to credit, especially for sectors and firms engaged in activities. In providing credit, banks can play a key role in ensuring financial stability. They have to discriminate between good and bad projects when they create money (with loans, credit card). Need of regulations to encourage a financial system that ensure access to SME, long-term finance, sustainable/green investment (beyond Basel III, just on safe and sound financial system)

27 Banks create money: today over 99% of circualing money is electronic in UK Source: Positive Money UK (http://www.positivemoney.org)

28 Financial positions of public & private sectors (% of world GDP) Source: UNCTAD (2013), Trade & Development Report

29 Projected increase of G-20 Public expenditure due to ageing population Long-term care Unemployment Russia Brazil Korea Germany Spain UK Canada Japan USA Turkey Saudi Arabia France Italy Argentina Australia Mexico Soth Afrihca Cina Indonesia India % of GDP Pensions Health Source: Standard & Poor s (2012)

30 Volatility of net K flows to emerging markets Source: UNDESA (2012/13), World Economic Prospects

31 Daily yield spreads on emerging market bonds Source: JPMorgan Chase (2012/13)

32 Credit Default Swap rates for most regions (MENA in particular) remain high and stable Source: World Bank; Bloomberg (2013)

33 Foreign Investor Share of General Government Debt (%) Source: IMF(2013), Global Economic Prospects. Finance

34 Italy and Spain: Nonfinancial Firms Change in Bank Credit and Net Bond Issuance (Billions of euros) Source: IMF(2013), Global Economic Prospects. Finance

35 New correlation among prices of different kinds of assets Due to a weaker operation of fundamentals in price formation in each market Source: UNCTAD; Bloomberg (2013)

36 New wave, new institutions, new mechanisms Infrastructure development banks New institutions can facilitate regional integration and South-South relationships FDI generally follows, does not lead domestic investment (and not panacea: in Ldcs for resource mineral, extraction; limited positive externalities) Source: UNDP (2013), HDR

37 Rising net private capital flows to Developing countries Source: World Bank(2013), Global Economic Prospects. Finance

38 Rising net private capital flows to Developing countries Following a strong start to 2013, net capital flows to the developing world are expected to increase to $1.3 trillion, up from $1.2 trillion in Another record level of bond flows, rebounding bank lending, and robust FDI inflows. As a share of developing countries aggregate GDP, however, inflows appear set to ease slightly, from 4.9 percent to 4.7 percent. After reaching record highs in 2012 and 2013, bond flows are expected to fall gradually in 2014 and FDI inflows to developing countries are projected to increase through the forecast period, reaching $758 billion (2.4 percent of GDP) by Bank lending is expected to rise.

39 Global finance flows to Ldcs: remittance flows are growing Source: WB(2013), World Development Indicators

40 Remittance Flows: Recent Trends and Outlook Remittance flows to developing countries are expected to reach $414 billion in 2013 (up 6.3 percent over 2012), and $540 billion by Worldwide, remittance flows may reach $550 billion in 2013 and over $700 billion by Remittance flows are expected to continue to increase in all regions and major recipient countries except Mexico, where flows may dip in Flows are expected to remain strong or even increase in several countries affected by weakening balance of payments, notably India, the top recipient of remittances in the world. The global average cost for sending remittances remains broadly unchanged at just under 9 percent (and some anecdotal reports that many banks are imposing additional fees on beneficiaries receiving remittances).

41 Remittance Flows: Top 10 recipients Source: WB(2013), World Development Indicators

42 Remittance flows in MENA Region Source: WB(2013), World Development Indicators

43 Trends in remittance flows to the five largest recipient countrie in MENA Region Source: WB(2013), World Development Indicators

44 Remittance Flows in MENA Region Remittances to the Middle East and North Africa are projected to reach almost US$49 billion in The growth in remittances is easing compared to the rapid expansions of the previous years. The price of making remittances from the countries of the Gulf Cooperation Council (GCC) to the region is falling, but remains high along corridors from Europe. UN Population Division data on migrant stocks: there are almost 19 million migrants from the MENA region. Migration within the region is growing, accounting for a growing share of migrants. The largest corridor is from Egypt to the GCC, where there are 2.4 million Egyptian migrants, including 1.3 million in Saudi Arabia alone. Source: WB(2013), Migration and Remittances Team

45 Potential for a development multiple-win strategy or in-betweenness conflicts? Governments, sending countries Governments, recipient countries - additional finance for development - war on terrorism (money laundering and dirtying, regulations, controls) - support to internationalisation - to facilitate immigrants integration Banks Money transfer agencies - to make profit - to attract new customers - support to internationalisation - to make profit - multinationals (WU, MG) - licensed national agency Senders - support to household - support to personal investment - help to organise return - support to local development Informal channels - personal - friend or family member - trader with a counterpart in the home country - unlicensed remittance agency Recipients - support to consumption - support to investment - support to local development

46 Remittance Flows in MENA Region Remittances to the Middle East and North Africa are projected to reach almost US$49 billion in The growth in remittances is easing compared to the rapid expansions of the previous years. The price of making remittances from the countries of the Gulf Cooperation Council (GCC) to the region is falling, but remains high along corridors from Europe. UN Population Division data on migrant stocks: there are almost 19 million migrants from the MENA region. Migration within the region is growing, accounting for a growing share of migrants. The largest corridor is from Egypt to the GCC, where there are 2.4 million Egyptian migrants, including 1.3 million in Saudi Arabia alone. Source: WB(2013), Migration and Remittances Team

47 Finance for Development in practice Sources of funding for firms ( ), shares % Small medium big n. countries n. firms Retained e banks Gov.t Commercial credit equities Family and friends other ,1 59,7 12,4 17,9 22,9 1,1 1,5 2,5 3 3,4 3,4 3,4 3,4 2,9 4,7 3,1 1,5 6,4 7,7 7,1 Source:: WB, 2008 Retained earnings, that is self-funding is the main financial source for each type of firm in every country. This is just what Pecking order theory says: There is a precise hierarchy according to a strategy of financial selfsufficiency. There is a need for systemic reform of finance: long-run investment in human capital, sustainable infrastructure and innovation Green Bank, Infrastructure Bank

48 European and International Institutional References LSE Growth Commission (2013), Investing for Prosperity: Skills, Infrastructure and Innovation, September. G-20/OECD (2013), G20/OECD High-level Principles of Longterm Investment Financing by Institutional Investors, September. UN (2013), International financial system and development. Report of the Secretary-General, July. EC (2013), Green Paper. Long-term Financing of the European Economy, March. G-30 (2013), Long-term Finance and Economic Growth, Washington DC, February.

49 Challenge: more of the same? Need for financing the real economy for meeting the new patterns of demand. Domestic financial systems need to channel credit towards productive investment in the real sector. Enhance international tax cooperation. Need of prudential risk management, including capital controls. Counter-cyclical financial macroeconomic policies for green employment and output. But Doha Round, Rio+20, COP19 in Warsaw come to something of a halt,

50 Thank you

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