Worldwide Lessons from Financial Crises


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This is a presentation on Worldwide Financial Crisis made by Vinod Thomas, Director-General & Senior Vice President at the Independent Evaluation Group, World Bank. In the presentation, Mr. Thomas describes the reasons for the recent financial crisis, highlights the extent of damages, and discusses policy responses to the crisis.

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Worldwide Lessons from Financial Crises

  1. 1. Worldwide Lessons from Financial Crises 金融危机的国际经验及现实思考 Vinod Thomas, Director-General & Senior Vice President Independent Evaluation Group, World Bank China Center for Economic Research Peking University February 19, 2009
  2. 2. Table of Contents <ul><li>The Crisis </li></ul><ul><li>Policy Responses </li></ul><ul><li>Outlook </li></ul>
  3. 3. I. The Crisis <ul><li>The sub-prime mortgage bubble in the US was the detonator of the current crisis </li></ul><ul><li>The extensive use of derivatives made the exposure to the mortgage crisis explosive </li></ul><ul><li>The chain reaction was globalized because of: </li></ul><ul><ul><li>The links among the financial sectors in OECD and emerging countries </li></ul></ul><ul><ul><li>The high dependence of international trade on US demand </li></ul></ul>
  4. 4. The extent of damage so far <ul><li>Deepening recession since mid-2008 with multiple downwards revisions of growth </li></ul><ul><li>Contagion from the developed to emerging and less developed economies </li></ul><ul><li>Downward cycle through </li></ul><ul><ul><li>Trade and weakening demand </li></ul></ul><ul><ul><li>Capital flow </li></ul></ul><ul><ul><li>Remittance </li></ul></ul><ul><ul><li>Commodity price </li></ul></ul><ul><li>Reinforcing expectation for global depression and deflation </li></ul>
  5. 5. The sharpest global decline since 1970 GDP Growth
  6. 6. Both OECD and emerging markets fall – no decoupling Source: World Development Indicators 2008 and IMF World Economic Outlook Update, January 28, 2009
  7. 7. Dramatic fall in Asia ’ s rapid growth <ul><li>China: </li></ul><ul><ul><li>Growth practically ground to a halt in 2008 Q4--Annual growth rate in 2009 expected to fall to 6.7% from 9.0% in 2008 </li></ul></ul><ul><ul><li>Exports plunged 17.5% year-on-year in January 2009 — the largest drop in almost 13 years </li></ul></ul><ul><ul><li>Imports down 43% year-on-year, partly explained by adjustment in inventory. </li></ul></ul><ul><li>Singapore’s GDP fell at an annualized rate of 17% and South Korea’s at 21% in Q4 2008 </li></ul><ul><li>Industrial production in the 12 months to December, 2008 is down 21% in Japan, 14% in Singapore, 19% in South Korea </li></ul><ul><li>Source: IMF World Economic Outlook Update, January 28, 2009 </li></ul>
  8. 8. Exports and capital flows crumble China Jordan Mexico India Source: National Agencies through Thomson/Datastream. Source: Institute for International Finance: “Capital Flows To Emerging Market Economies.” 01/27/09. Exports (Volumes, Change % 3 mma y/y) Private Net Capital Flows to Emerging Economies
  9. 9. High trade shares with sharp declines in GDP growth … (current episode) Source: World Development Indicators 2008 and IMF World Economic Outlook Update, January 28, 2009
  10. 10. … Also high trade shares with strong recovery of GDP growth (past episodes) Source: World Development Indicators 2008 Note: Crisis events are Argentina (1999-2002); Indonesia, Korea, Russia, Thailand, and Brazil (1997-1998); Mexico (1994) and Turkey (2000-2001)
  11. 11. II. Policy Responses A framework for assessment Policy response Short-term Long-term Country level <ul><li>Similar responses across countries—Fiscal and monetary policies to stimulate aggregate demand </li></ul><ul><li>Diverse responses depending on the initial conditions—saving rates, current account balance </li></ul><ul><li>Sustainable growth—poverty, environment, education </li></ul>Global response <ul><li>Coordinated responses—banking sector, financial system, liquidity, interest rates, open trade regime </li></ul><ul><li>International policy coordination mechanisms—surveillance, environment, climate change </li></ul>
  12. 12. Five Areas for Action Fiscal Trade Poverty Environment Consumption Investments Liquidity Financial system Market confidence Sustainable growth Social stability harmony Terms of trade Value chain CRISIS Financial
  13. 13. Financial sector Fire-fighting and beyond <ul><li>Often receive early attention </li></ul><ul><ul><li>U.S. Housing market: 3 million foreclosures (2008) </li></ul></ul><ul><ul><li>U.S. Banking sector: $1-$2 trillion net cost of bailout </li></ul></ul><ul><ul><li>World stock markets: Almost 50% loss in the total capitalization in 2008--$30 trillion of wealth disappeared </li></ul></ul><ul><li>Needed measures: </li></ul><ul><ul><li>Adequate prudential regulations with the increasing sophistication and dynamism of global markets </li></ul></ul><ul><ul><ul><li>Capture the full risk implications of securitized mortgage loans and derivatives </li></ul></ul></ul><ul><ul><li>Sound development of the financial sector in developing countries </li></ul></ul>
  14. 14. Fiscal policy Effective economic stimulus <ul><li>Stimulus packages – a stark difference from the 1990s </li></ul><ul><ul><li>US: Tax cuts and priority investments – around $800 bn </li></ul></ul><ul><ul><li>Japan: Three packages -- $112 bn </li></ul></ul><ul><ul><li>Germany: Two packages for infrastructure, tax cuts, clean energy-- $106 bn </li></ul></ul><ul><ul><li>United Kingdom: VAT reduction, capital spending-$27.8 bn </li></ul></ul><ul><ul><li>China: Infrastructure, housing -- $586 bn </li></ul></ul><ul><ul><li>India: Export incentives, guarantees, refinance facility-- $4.1 bn </li></ul></ul><ul><li>Short-term vs. long-term choices: </li></ul><ul><ul><li>Countries with low or negative savings need more than sustained fiscal stimulus to emerge from the crisis </li></ul></ul><ul><ul><li>Countries with high savings rates can combine the short-term fiscal stimulus with a longer-term expansionary policy </li></ul></ul>
  15. 15. Trade Policy Avoiding the danger of closing in <ul><li>The multiplier effects of the slowdown through the trade system </li></ul><ul><ul><li>China: Decreased export demand, 20 million migrant factory workers without jobs </li></ul></ul><ul><li>Momentum towards protectionism gains force in crises </li></ul><ul><ul><li>USA: “ Buy American ” requirements </li></ul></ul><ul><ul><li>Russia: raised tariff on imported cars </li></ul></ul><ul><ul><li>India: 5% duty on select steel and iron products </li></ul></ul><ul><ul><li>Argentina and Brazil: approved tariffs on wine and textiles </li></ul></ul><ul><ul><li>China: increased export-tax rebates on 3,700 goods </li></ul></ul><ul><li>Protectionism will worsen the global contraction </li></ul><ul><li>Strong international commitment to resist closing in critical </li></ul>
  16. 16. Poverty Not to be seen as an after-thought <ul><li>Social and poverty impact of crises should be anticipated </li></ul><ul><ul><li>1% reduction in GDP traps another 20 million people in poverty, </li></ul></ul><ul><ul><li>100 million more people in poverty with the global recession </li></ul></ul><ul><li>Millions live very close to the poverty line, so even small GDP changes produce vast swings in poverty </li></ul><ul><li>Past responses to crises ignored poverty impact in the early stages </li></ul><ul><li>More attention needed to vulnerable groups—potential area for the World Bank Group to contribute </li></ul><ul><li>Impact on immigrant labor: Foreign and domestic migration, remittances </li></ul>
  17. 17. Environment The “ Cinderella ” of the crisis? <ul><li>Tensions between: </li></ul><ul><ul><li>Short- and long term objectives — economic recovery, mitigation, adaptation </li></ul></ul><ul><ul><li>Domestic and global objectives — global public goods </li></ul></ul><ul><li>These tensions increase in crisis periods </li></ul><ul><ul><li>30-50% reduction in wind and solar installations in U.S. </li></ul></ul><ul><ul><li>Support for climate funds under threat in the EU and elsewhere </li></ul></ul><ul><li>Danger of backtracking on environmental policies </li></ul>
  18. 18. Five lessons from research <ul><li>Early, rapid and sizeable responses are key </li></ul><ul><li>Social safety-net and pro-poor policies need support from the outset </li></ul><ul><li>Policies need to account for behavior and the political economy </li></ul><ul><li>Immediate responses cannot ignore implications for development </li></ul><ul><li>Global crisis needs a global solution—target stimuli where the marginal impact will be the greatest* </li></ul><ul><li>* How to Solve the Global Economic Crisis—Justin Yifu Lin, Senior Vice President and Chief Economist, World Bank </li></ul>
  19. 19. Seven lessons from evaluation <ul><li>Emphasize not only volume, but also quality </li></ul><ul><li>Focus on poverty from the outset </li></ul><ul><li>Build in the environment and climate change </li></ul><ul><li>Seek selectivity and adaptability of response </li></ul><ul><li>Stress coordination among partners </li></ul><ul><li>Focus on monitoring and evaluation </li></ul><ul><li>Organize for early warning </li></ul>
  20. 20. The World Bank Group and the crisis <ul><li>The WBG has a key role through: </li></ul><ul><li>Financial support </li></ul><ul><li>Policy advice and knowledge sharing </li></ul><ul><li>Catalytic role in cross-country policy coordination </li></ul><ul><li>Helping to balance national and global goals </li></ul><ul><li>Long term partnership with countries, even when its share in rescue packages is modest </li></ul>
  21. 21. IV: Outlook: Uncertainty at an all-time high
  22. 22. <ul><li>“… all consequential events in human history have come from unexpected, rare occurrences” </li></ul><ul><li>Nassim Nicholas Taleb </li></ul>Unusual Times
  23. 23. Triple danger Economic, social, environment <ul><li>Global economic downturn </li></ul><ul><ul><li>Outlook highly uncertain </li></ul></ul><ul><ul><li>The timing of the recovery depends critically on policy actions </li></ul></ul><ul><li>Rising poverty worldwide </li></ul><ul><ul><li>The situation exacerbated by growing unemployment </li></ul></ul><ul><li>Climate crisis </li></ul><ul><ul><li>Environmental devastation and global warming can derail all progress </li></ul></ul><ul><ul><li>This could be an inflection point for our planet </li></ul></ul><ul><li> A new development paradigm is needed </li></ul>
  24. 24. When a crisis prompts action 危机 – Danger and Opportunity <ul><li>Brazil’s fiscal responsibility law; India’s 1991 reforms; Korea’s financial sector actions…. </li></ul><ul><li>China revitalized after the Asian crisis </li></ul><ul><ul><li>Liberalization of the housing market </li></ul></ul><ul><ul><li>Easing restrictions on privatization of medium SOEs </li></ul></ul><ul><ul><li>Acceleration of the entry to WTO </li></ul></ul><ul><ul><li>Investment in releasing bottlenecks -- highway, port facility, telecommunication, high education </li></ul></ul><ul><li>China today… </li></ul><ul><ul><li>Opportunities in human capital; private sector; </li></ul></ul><ul><ul><li>openness; infrastructure* </li></ul></ul><ul><ul><li>New ways of green investments </li></ul></ul><ul><ul><li>*David Dollar, Sustaining growth: China ’ s need for a new growth model, November 19, 2008 </li></ul></ul>
  25. 25. Looking to global opportunities <ul><li>Opportunity of fiscal stimulus to improve investments </li></ul><ul><ul><li>Target high growth areas </li></ul></ul><ul><ul><li>Improve efficiency and raise productivity </li></ul></ul><ul><ul><li>Promote green investments </li></ul></ul><ul><li>Opportunity of political support during crisis to reform the domestic economy </li></ul><ul><ul><li>Financial and regulatory reform </li></ul></ul><ul><ul><li>Address long term macro imbalances </li></ul></ul><ul><ul><li>Maintain open trade policies </li></ul></ul><ul><ul><li>Deepen social safety-net and inclusive growth </li></ul></ul><ul><ul><li>Breakthrough in the environment and climate change </li></ul></ul><ul><li>Opportunity for global actions </li></ul><ul><ul><li>International regulatory framework for trade, investment and finance </li></ul></ul><ul><ul><li>Global action on climate, environment and biodiversity </li></ul></ul><ul><ul><li>The role of G20, international architecture and Bretton Wood II </li></ul></ul>
  26. 26. <ul><li>谢谢 ! </li></ul><ul><li>Thank you! </li></ul><ul><li>Improving Development Results Through Excellence in Evaluation </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul>