 We're talking about response to economic shocks here today and I'm I'm focusing upon one of the most egregious Economic shocks that has been experienced in modern times, which is the global financial crisis that started in the United States and spread in one way or another across several continents and And I'm interested in the question of how do best developed countries React to that what can you know? What is the impact? How do they react to that and Perhaps that enables us to draw some wider lessons. I'm going to take a particular focus the way that different Developing countries react differs the way that Developing country like China reacts is very different from the way that a poor country in sub-Saharan Africa reacts So I'm going to focus upon Sub-Saharan Africa The In talking about how how do countries respond to crisis? the first issue is do they do they necessarily get affected by the crisis and and In other words, you know, is it possible that they they actually avoided the immediate effects of the of the global financial crisis That sounds ludicrous, but I'll Come back to it in a moment because the answer is that no, they didn't avoid the immediate effects of the crisis What what's a little bit more interesting is what happened afterwards? Did they recover from the fight for them from the financial crisis and there the answer is Typical economists answer on the one hand. Yes on the other hand They did recover directly Their situation recovered and but Indirectly no their their growth rates certainly suffered Over the longer term and that's what I'm going to be focusing on here Did they did they suffer initially well the reason I pose that question is because there was a hypothesis at the time of the Financial crisis immediately at the time of the layman's crash Which which crystallized the beginnings of the crisis and There was a widespread view that well actually, you know, maybe countries like sell like those in sub-Saharan Africa And maybe elsewhere in the developing world Will avoid any effect from the crisis Because in other words, they become delinked Well to see just and around that time there were numerous studies Numerous papers published to see well to what extent were they delinked and to what extent are they linked? The main thing that Bright has concentrated upon was was the most obvious thing And to claim that they are delinked because Their banking systems were not Integrated with the global financial markets the global financial system that had Been at the center of the mechanisms through which the financial crisis occurred and was transmitted around developed countries You know the banks in in sub-Saharan Africa banks elsewhere, you know, we're not involved in you know big big trades or any trades in some cases in complex financial derivatives, which are the mechanism through which the prime prime mark prime mortgage, sorry sub-prime mortgage Collapse was transmitted through through markets. It was transmitted through the markets because That sub-prime mortgage collapse Led to a complete breakdown of all the financial market linkages between individual global banks and Effectively a shutdown in the market money markets that connect them But the argument was that will in sub-Saharan Africa or countries like that The banks are sheltered from that. They're not involved in that kind of trade and That's true. I do a particularly an interesting Example that actually comes from some Islamic banks in the Gulf and elsewhere where several studies showed that actually they the Islamic banks, you know were completely unaffected by the crisis and did really Outperformed all other banks during that period and simply because being following Islamic principles, they were not engaged in any kind of debt-based Let alone derivative-based Activities, okay, so yeah in that sense they were delinked What about private capital flows that was the other mechanism that people thought well, perhaps private capital flows will link them link in Sub-Saharan African countries into effects of the crisis Because a breakdown in the In the financial system in developed countries would lead to a reduction in private capital flows What about well in fact? The evidence on that is very mixed and But when you look at the data That there does not seem to have been overall a major impact on a reduction in private capital flows at that time Although there were some short-term flows, which I'll say more about in a moment. What about ODA development assistance? They thought that as developed countries and face financial problems They would cut back on that ODA their development assistance and that would hit the Sub-Saharan countries and a lot of us felt that at the time well looking at it ODA has held up pretty well actually until just just the most recent couple of years when ODA has started to decline The other potential link that could affect things is trade and people recognize that at the beginning There was immediately a fear that the breakdown the financial system would And bring an end to export financing And and that or to trade financing generally and that that would restrict trade in fact, that's not what happened and trade financing Actually held up in general though. There is some mixed evidence on that but nonetheless Trade did come to be a major transmission mechanism Whoops, I hope you have very good eyesight I'm sorry. I'm not going to be able to do a lot about this. I Don't think I'm going to be able to expand that unless anybody here can tell me how to But I'll tell you what it shows. Okay Basically Sub-Saharan terms of trade We're looking at the volume of exports and terms of trade and the Financial crisis broke in a big way in 2008 Terrific, thanks a lot. Yeah the financial crisis broke in a big way in in 2008 which is here and Which shows that in 2008 the Sub-Saharan exports Were lower than the previous year, but has held had held up And They were still growing Sorry, that the growth rate was lower than the previous year, but that held up. It was still growing at about 2% 2008 though we have the immediate hit on Sub-Saharan African exports a decline of 5% So and that was a major channel of transmission that did hit all of Sub-Saharan Africa And had effects right throughout their economies But what happened after that? immediately Exports started to grow again in 2010 A rise of Nearly 6% So it's in that sense that I say that you know, well South Africa Sorry, not South Africa. Sub-Saharan Africa was immediately hit by The global financial crisis, but did recover very quickly The same is true if you look at the terms of trade the percentage change in the terms of trade facing Sub-Saharan African countries in 2008 The the terms of trade Sorry, that's 2009 in 2009 the terms of trade Took a 12% fall But again, they recovered completely in the following year But a 13% a 13% improvement in the terms of trade facing Sub-Saharan Africa So in that sense we're saying that Sub-Saharan Africa was able to recover quite quickly But what happened there after there after we've had very slow rates of growth 2011 2% rates of growth of exports and A 10% improvement in the terms of trade followed by in 2012 2013 2014 2015 Continuing year-on-year decline in the terms of trade facing Sub-Saharan Africa Accompanied by very very slow rates of growth in in exports Okay, so you know in one sense In one sense then Again, I'm gonna have that back to me in a moment in one sense then there was a sharp hit on trade And that resulted that and sharp worsening of the terms of trade and That that resulted from directly from the global financial crisis. Why? Well, it resulted from global financial crisis for several reasons, but you know one particular reason was that the the developed countries had that the the sharp downturn was due to the developed countries finding that they that that every enterprise wanted cash There was a sharp move into cash because financial markets had collapsed and that meant they had to sell off inventories the sharp reduction In inventories Which hit trade? Completely particularly for products of Sub-Saharan Africa Which were which products that? We're measuring on this chart Here we're seeing Global trade global trade took 10 percent Fall in 2009 and recovered quickly in 2010 Face but if we look at what was happening to the products of Sub-Saharan Africa, we can see commodity price index Taking a fall from 172 to 120 in that period and then recovering very quickly to 152 and Particularly, so if we look at things like commodity metals prices Going from 169 to 136 and then the index recovering quickly to 202 and We see that pattern all the way through sharp decline in 2009 and followed by a sharp rise so What do we what kind of stylized facts can we? pick out of that Well the Trade played a key role in the transmission to sell the South the Sub-Saharan Africa of the global financial crisis And that took the form of a major shock One year after the crisis followed by a bounce immediately after the big bounce immediately afterwards but in the subsequent years we've seen slow growth and We've seen slow slow growth of trade slow growth of all types You know, however we measure growth in Sub-Saharan Africa Is that a new normal? Why does it arise? Well, I think you know It's easy for us to think of it as being simply just you know a long decline You know that we've had a big a big shock the global financial crisis and then Everything was was pretty bad thereafter It just couldn't start and start a growth process either in global trade or or in the specifics of Sub-Saharan Africa But that's not really the case because as we saw immediately after the big shock hit those countries There was a big upturn suddenly the next year a recovery. They had been overshooting So what what generates the overall Decline overall stagnation that Praveen Gordon referred to this morning in the subsequent years and The decade really since then Well, I think it's basically that there are very many New global imbalances and volatility which has restricted The the drivers of international trade, which are the big industrialized countries including major emerging countries like China and so on and has restricted their their growth rates and Has created a and the crisis itself created an awareness of volatility which has Diminished the ability of countries to invest and grow I can say more about that and the second thing to note though is that There is now a new fragility Because I haven't put up here any figures relating to external debt, but it is clear that Several countries particularly commodity producers which experienced a boom before 2008 Accumulated debt in that period They borrowed a lot. They got a lot of inward investment and also in the in the period immediately after 2011 When they were recovering again, there was an inflow of capital and That that accumulation of debt issued by Countries in sub-Saharan Africa and other developing countries Has put them in a position where they now have very high degree of leverage It was debt that came in because they were able to borrow very low interest rates and Which is attractive to them But more to the point it was very attractive for For portfolio owners and investors from developing come from developed countries because the interest rates Returns they could get in the United States Europe, etc. We're so low. They sought to be able to lend in Poor countries particularly commodity exporting countries Of course though that means that once interest rates start to go up There's a big danger that There's a very serious danger that those countries will be In the midst of a major debt crisis again and Now all that What we're interested in is how can countries themselves respond What's going to be the effect of a crisis? Can they can they respond to it? We'll be discussing that in many different facets this afternoon, but I'll just point to a few things basically The issue is whether there is hysteresis hysteresis means that what happens in the future is very much determined by what's happened Seems obvious that it should be the case, but how would that occur? How would hysteresis occur in my view? It sort of comes about through weakened institutions which limit and seriously Seriously Undermine the ability of countries in sub-Saharan Africa to respond one is simply what's called fiscal space that you know by several countries such as South Africa for example and did Use fiscal policy Increasing the size of the budget deficits in order to support their economy during the Initial phase of the downturn and so on But that means that now they've accumulated debt externally and internally which Limits the extent to which they can continue to Prime their economists through budget deficits That's one thing A second thing is which I I think is is Perhaps Most important is a breakdown in trust and inequality You know when there's a major hit even if it's only a fairly short-term hit such as in in 20 as Sub-Saharan African countries felt in 20 or 9 20 10 There's a breakdown in in what I think is the most important 2010 There's a breakdown in in whatever social contract there is between The elites and their governments on the one hand and civil society on the other hand and an increase in inequality It is the poor who feel burdens of any downturn And that is partly accompanied by you know civil society fragmentation Which we've seen in many ways In terms of sometimes internal conflict between different groups within countries and sometimes Other forms of civil society fragmentation And those those kinds of things to make it very difficult for any sort of political Leadership to be able to take a country forward and obviously encourages a kleptomaniac kind of action by by elites that have got access to rents Which in turn has led to major capital flight from south sub-Saharan Africa a Final element is simply that you know with that that cut in fiscal space that those fiscal restrictions on governments The inability of governments to expand their budget and because they had already expanded it is such that one of the sectors that gets really badly hit is investment in education and Even the extent that education occurs It's Severely hits the ability to facilitate the transition from education into work. Hence we get large ever-increasing Appears at the moment ever-increasing Bodies of unemployed youths perhaps a lost generation Those feed into migration about which I'll say nothing because Andres is the world one of the world's experts on migration and But migration clearly An immediate effect is This is Caused by these weakened institution is caused by this weakening of the possibilities of growth But at the same time it limits the ability of countries to have a new growth things new entrepreneurial activities and so on because Of the loss of Innovative people who migrate Okay, in other words the crisis simply weakens The ability of countries to respond to the crises What's rent by that? Yeah So can I go to minus one yeah Yeah, so basically the the You know there is they had in economics has been a widespread view that your crises are cathartic And they are the precon precursor to developing new growth and so on Ideas first put for both Marx and Schumpeter Could that happen in Sub-Saharan Africa? Well from what I've said the answer is no, I think no it's not going to happen How could it happen well in principle it could happen by it's a well-worked-out state-led policy for economic diversification But from what I've said about the crisis weakening the institutional structure and the social cohesion Of countries and that state-led policy for economic diversification is Seems to be way out of reach There's a body of work in in in economics of called finance for development and in in The finance and development work. There's a big view that you know the good studies, which I would like very much That seemed to show that well actually you have a strong financial if you have a well-developed financial system That enables you to recover from shocks because it enables people to be able to finance new enterprises and move from one industry to another And thereby generate a new kind of economic growth and so on In fact, that's that's Not happening That the financial systems in sub-Saharan Africa are not able to do that and I'm skeptical as to whether they ever can Okay, so I have to leave you with the pessimistic note that I've ever run my time Is it under is my pessimism unjustified? Is it simply pessimism of the intellect and optimism of something else? Well, I leave you to decide that. Thank you very much You