Globalization and Economic Crises in the Asia-Pacific ... · in the Asia-Pacific: Imperatives on Statistics Management ... foreign debt, foreign investment, ... Global Crisis: Causes

Globalization and Economic Crises in the Asia-Pacific:

Imperatives on Statistics Management

Fourth Regional Course/Workshop on Statistical Quality Management

UN SIAP 21-25 Sep 2009, Daejeon

By George Manzano

UN ESCAP

Why bother with understanding global crisis, transmission mechanisms, mitigation?

(Can’t afford not to…)

Elements of interdependence

Trade: goods, services, raw materials, energy

Finance: foreign debt, foreign investment, exchange rates

Business: multinational corporations, global production

Interdependence: Impact

Overall standard of living is higher Access to raw materials & energy not available at home… Access to goods & components made less expensively elsewhere…

Access to financing and investment not available at home… Access to big markets…

Interdependence: Costs

Overall volatility is higher…

Margin of error for policy mistakes smaller

Negative spillovers more pronounced

Distribution of gains leaves much to be desired

Higher risk of getting the ‘crisis flu’.

Not all crises are alike…

Role of theory… Cause and effect: understanding how a crisis develops

Essential elements: provides focus on key issues

Theory identifies the information needs:

indicators and the role of statistics

Policy prescription: mitigation and policy dilemmas

Monitoring of policy effectiveness: indicators

Crisis Types What is affected in the economy?

Currency Crisis: Massive Devaluation & Interest Rate Spike

Banking Crisis: Banks not meeting payments

Foreign Debt Crisis: Countries not paying international debts

Crisis Types

According to causes… Policy induced

Financial panic

Bubble burst

Moral Hazard

Disorderly workout

1997 CRISIS twin crisis

1st Generation: speculative attack on a fixed exchange rate given unsustainable fiscal policy

2 2nd Generation: panics and self fulfilling prophesies

3rd Generation: how currency crises leads to banking crises, currency mismatches, bank lending and moral hazard (bail outs)

BUILD UP OF VULNERABILITY…

AMIDST HEADY GROWTH

how did the level of vulnerability rise?

Asian Crisis Vulnerability

Panic and Illiquidity Approach

Trigger shift of market expectation panic creditor grab collapse of banking system

Challenge: How to manage market expectations

Solution: International lender of last resort?

Structural Defects and Moral Hazard

Wrong economic incentives (government guarantees, lack of corporate governance, industrial policies) overborrowing, overlending and overinvestment in risky projects asset bubble

Solution: greater financial transparency and more resolve to institute reforms

Implications on the demand for statistical services

Panics are caused by uncertainty, so task is to minimize uncertainty by providing timely information.

Moral hazard problems arise from cozy relationships between banks and companies that may fuel imprudent debt behavior.

Solution is transparency and improved corporate governance. Effective regulation with strict rule on transparency and disclosure. Better monitoring is shored up by accurate information.

The Present Global Crisis: Causes & Consequences on Asia-Pacific developing economies

Not just a crisis for banks, but an economic crisis… World Recession

Vulnerability: global imbalance: US overspending, the ROW (especially Asia) oversaving

Why the overspending?: the wealth effect created by the housing bubble in the US

Result: a very wide current account deficit in the US, financed by purchases by the ROW of US financial assets: sustainable? The Hard Landing Scare

sub-prime mortgage crack in US housing market

Trigger:

collapse of major banks, stock market crashes,

credit freeze

Result:

consumption slows

Implications:

no lending

no fresh capital

business halts

consumption slows

wealth effect evaporates

cannot pay debts

International Implications

Worst financial crisis

since the Great Depression

Transmission mechanism:

how crises can be ‘exported’

Financial channels: financial deregulation, massive debt build up,

banking crisis

Trade prospects: deflated import

demand

Trade and Finance: drying up of trade

finance

Capital flows: risk averse

portfolio finance

What to do

Get the banks and financial system to work again: lending function

Pump prime the economies:

bail out and stimulus (emergency)

Liquidity and Inflation: when to put the brakes?

Reform the

financial sector: excessive risk taking

Policy Challenges and the

Imperatives on Indicators/Statistics

1. Policymakers initially underestimated the severity of the crisis. • information of the holdings of toxic

assets • illiquidity and solvency

2. Need for fiscal stimulus: how much is enough?

3. Structural transformation: diversification, food security and climate change

4. International coordination of fiscal stimuli

The Present Crisis

and the developing

countries in the Asia Pacific

External origin but still affected through the following channels: Direct financial: not

much Indirect Trade:

significant • Demand: Low

import demand, high export dependence

• Supply: drying trade finance facilities

Indirect Capital Flows • Portfolio flows

POLICY CHALLENGES

? How to

spur demand from

domestic market

Spend more now, save less

Reorient productive

structure Promote intra

regional trade

pump prime the

ECONOMY

make sure that banks are lending

-3

0

3

6

9

12

Cambodia Indonesia Lao PDR Malaysia Philippines Viet Nam

GD

P gr

owth

rate

(per

cent

)

2007

2008

2009

Singapore

Thailand

Southeast Asian Economies Prospects

Source: ESCAP 2009

SURVEILLANCE AND MONITORING

Capital account liberalization (openness) and financial contagion

Public good aspects of economic stability

Asymmetries in size in financial resources between private capital markets and official financial sector,

role of speculation

Use of Indicators Provide objective basis

Choice of indicators is guided by theory

Technical level: selection and quality of indicators

Interpretation level: judgments of degrees of vulnerability; benchmarks

Qualities: Timeliness Low Noise

Indicator Korea Thailand Benchmark

Savings Rate (% GDP)

33 33 <24

Budget Deficit (% GDP)

0.1 (3) >3

Current Acct Deficit (% GDP)

4.8 7.9 >5

Foreign Debt (% GDP)

32.1 50.3 >30

Sample of Leading Indicators

Source: Salvatorre, 1999

Sample of Leading Indicators

Source: Salvatorre, 1999

Indicator Korea Thailand Benchmark

Short term debt (% GDP)

10.3 20.8 >10

CA Def – FDI (% GDP)

5.2 6.8 > 3

Debt Service (% of X) 7 11.5

Months of Import Cover

1.1 5.1

Macroeconomic • Fiscal deficit, inflation

External • Reserves, FDI, Exchange rate

Financial • Interest rates, credit growth, money supply

Institutional • Regulatory framework, independence of central bank

Lessons from Asian Crisis Informational

Needs

Need for

Detect stress earlier

Instill market discipline Uncertainty fuel

rumors and speculation

Need for TIMELINESS

Lead time for policy response

Formulating the right

policy response