TACTICAL METHODS IN RECENT CRISIS

Presented BY H.H.M Sponsor By

BOSTON KOR SYSTEMSRESERCH CENTER

www.bksystems.usMA.USA

Table of Contents

I. The Crisis

II. Policy Responses

III. Outlook

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I. The Crisis

The sub-prime mortgage bubble in the US was the detonator of the current crisis

The extensive use of derivatives made the exposure to the mortgage crisis explosive

The chain reaction was globalized because of: The links among the financial sectors in OECD and

emerging countries

The high dependence of international trade on US demand

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The extent of damage so far

Deepening recession since mid-2008 with multiple downwards revisions of growth

Contagion from the developed to emerging and less developed economies

Downward cycle through Trade and weakening demand Capital flow Remittance Commodity price

Reinforcing expectation for global depression and deflation

4

The sharpest global decline since 1970

-4

-2

0

2

4

6

8

10

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Pe

rce

nt

ch

an

ge

Advanced economies Emerging and developing economies World

5

GDP Growth

Both OECD and emerging markets fall – no decoupling

-6

-4

-2

0

2

4

6

8

10

12

0 2 4 6 8 10 12

Average annual growth GDP, 2006-2007 (%)

An

nu

al g

row

th G

DP

, 20

09

(%

)

India

China

Indonesia

South Africa

Brazil

Saudi Arabia Argentina

RussiaTurkey

Korea

JapanUSA

UKGermany

Mexico

SpainItaly

FranceCanada

Australia

6

Source: World Development Indicators 2008 and IMF World Economic Outlook Update, January 28, 2009

Dramatic fall in Asia’s rapid growth

China: 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

Exports plunged 17.5% year-on-year in January 2009—the largest drop in almost 13 years

Imports down 43% year-on-year, partly explained by adjustment in inventory.

Singapore’s GDP fell at an annualized rate of 17% and South Korea’s at 21% in Q4 2008

Industrial production in the 12 months to December, 2008 is down 21% in Japan, 14% in Singapore, 19% in South Korea

BOSTON KOR SYSTEMS 2013

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Exports and capital flows crumble

Private capital flows to emerging economies

-200

0

200

400

600

800

1000

2006 2007 2008 2009

(US

$, b

illio

ns,

net

)

Equity investment Private Creditors

-200

0

200

400

600

800

1000

2006 2007 2008 2009

(US

$, b

illio

ns,

net

)

Equity investment Private Creditors

8

-15

-5

5

15

25

35

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

China

Jordan

MexicoIndia

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

High trade shares with sharp declines in GDP growth…

(current episode)

0

10

20

30

40

50

60

70

80

90

100

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0

Change in GDP Growth Rate [2009 projected-Avg. 2006-07] (%)

Ave

rag

e tr

ade,

% G

DP

200

6-20

07

Korea

Russia

Turkey

Argentina

Germany

Spain

USA Japan Brazil

India

Australia

IndonesiaFranceItaly

China

UKMexico South Africa

Canada

9

Source: World Development Indicators 2008 and IMF World Economic Outlook Update, January 28, 2009

… Also high trade shares with strong recovery of GDP growth

(past episodes)

0

20

40

60

80

100

120

-2 0 2 4 6 8

Average pre-crisis GDP growth (%)

Ave

rge

tra

de

, p

re-

an

d p

ost

-cri

sis

(% G

DP

)

Mexico

Korea

Argentina

Brazil

TurkeyRussia

Thailand

Indonesia

0

20

40

60

80

100

120

0 2 4 6 8 10

Post-crisis GDP growth (%)

Ave

rge

tra

de

pre

- a

nd

po

st-c

risi

s (%

GD

P)

Brazil

Korea

Mexico Russia

Turkey

Thailand

Indonesia

Argentina

10

Source: World Development Indicators 2008Note: Crisis events are Argentina (1999-2002); Indonesia, Korea, Russia, Thailand, and Brazil (1997-1998); Mexico (1994) and Turkey (2000-2001)

II. Policy Responses 11

Policy response

Short-term Long-term

Country level

►Similar responses across countries—Fiscal and monetary policies to stimulate aggregate demand

►Diverse responses depending on the initial conditions—saving rates, current account balance

►Sustainable growth—poverty, environment, education

Global response

►Coordinated responses—banking sector, financial system, liquidity, interest rates, open trade regime

►International policy coordination mechanisms—surveillance, environment, climate change

A framework for assessment

Five Areas for Action

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Fiscal

Trade

Poverty

Environment

ConsumptionInvestments

Liquidity Financial system

Market confidence

Sustainable growth

Social stability harmony

Terms of tradeValue chain

CRISIS

Financial

Financial sectorFire-fighting and beyond

Often receive early attention U.S. Housing market: 3 million foreclosures (2008)

U.S. Banking sector: $1-$2 trillion net cost of bailout

World stock markets: Almost 50% loss in the total capitalization in 2008--$30 trillion of wealth disappeared

Needed measures: Adequate prudential regulations with the increasing

sophistication and dynamism of global markets Capture the full risk implications of securitized

mortgage loans and derivatives

Sound development of the financial sector in developing countries

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Fiscal policy Effective economic stimulus

Stimulus packages – a stark difference from the 1990s US: Tax cuts and priority investments – around $800 bn Japan: Three packages -- $112 bn Germany: Two packages for infrastructure, tax cuts, clean

energy-- $106 bn United Kingdom: VAT reduction, capital spending-$27.8 bn China: Infrastructure, housing -- $586 bn India: Export incentives, guarantees, refinance facility-- $4.1

bn

Short-term vs. long-term choices: Countries with low or negative savings need more than

sustained fiscal stimulus to emerge from the crisis Countries with high savings rates can combine the short-

term fiscal stimulus with a longer-term expansionary policy

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Trade Policy Avoiding the danger of

closing in The multiplier effects of the slowdown through the trade

system China: Decreased export demand, 20 million migrant factory

workers without jobs

Momentum towards protectionism gains force in crises USA: “Buy American” requirements Russia: raised tariff on imported cars India: 5% duty on select steel and iron products Argentina and Brazil: approved tariffs on wine and textiles China: increased export-tax rebates on 3,700 goods

Protectionism will worsen the global contraction

Strong international commitment to resist closing in critical

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Poverty Not to be seen as an after-

thought Social and poverty impact of crises should be anticipated 1% reduction in GDP traps another 20 million people in poverty, 100 million more people in poverty with the global recession

Millions live very close to the poverty line, so even small GDP changes produce vast swings in poverty

Past responses to crises ignored poverty impact in the early stages

More attention needed to vulnerable groups—potential area for the World Bank Group to contribute

Impact on immigrant labor: Foreign and domestic migration, remittances

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EnvironmentThe “Cinderella” of the

crisis? Tensions between:

Short- and long term objectives—economic recovery, mitigation, adaptation

Domestic and global objectives—global public goods

These tensions increase in crisis periods 30-50% reduction in wind and solar installations in U.S.

Support for climate funds under threat in the EU and elsewhere

Danger of backtracking on environmental policies

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Five lessons from research Early, rapid and sizeable responses are key

Social safety-net and pro-poor policies need support from the outset

Policies need to account for behavior and the political economy

Immediate responses cannot ignore implications for development

Global crisis needs a global solution—target stimuli where the marginal impact will be the greatest*

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Seven lessons from evaluation

Emphasize not only volume, but also quality

Focus on poverty from the outset

Build in the environment and climate change

Seek selectivity and adaptability of response

Stress coordination among partners

Focus on monitoring and evaluation

Organize for early warning

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The World Bank Group and the crisis

The WBG has a key role through:

Financial support Policy advice and knowledge sharing Catalytic role in cross-country policy

coordination Helping to balance national and global goals Long term partnership with countries, even

when its share in rescue packages is modest

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IV: Outlook: Uncertainty at an all-time high

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“…all consequential events in human history have come from unexpected, rare occurrences”

Nassim Nicholas Taleb

Unusual Times

Triple danger Economic, social, environment

Global economic downturn Outlook highly uncertain The timing of the recovery depends critically on policy actions

Rising poverty worldwide The situation exacerbated by growing unemployment

Climate crisis Environmental devastation and global warming can derail all

progress

This could be an inflection point for our planet

A new development paradigm is needed

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When a crisis prompts action危机 – Danger and Opportunity

Brazil’s fiscal responsibility law; India’s 1991 reforms; Korea’s financial sector actions….

China revitalized after the Asian crisis Liberalization of the housing market Easing restrictions on privatization of medium SOEs Acceleration of the entry to WTO Investment in releasing bottlenecks -- highway, port facility,

telecommunication, high education

China today… Opportunities in human capital; private sector;

openness; infrastructure* New ways of green investments

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Looking to global opportunities

Opportunity of fiscal stimulus to improve investments Target high growth areas Improve efficiency and raise productivity Promote green investments

Opportunity of political support during crisis to reform the domestic

economy Financial and regulatory reform Address long term macro imbalances Maintain open trade policies Deepen social safety-net and inclusive growth Breakthrough in the environment and climate change

Opportunity for global actions International regulatory framework for trade, investment and finance Global action on climate, environment and biodiversity The role of G20, international architecture and Bretton Wood II

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Thank you!

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