Policy Priorities in the face of the Global Economic Crisis IDEAs conference on Re-regulating Global Finance in the light of the Global Crisis Tsinghua.

Policy Prioritiesin the face of theGlobal Economic

Crisis

IDEAs conference onRe-regulating Global Finance in the light of the Global Crisis

Tsinghua University Beijing

9 April 2009

2

Contagion: crisis spreadsFinancial sector contagion Financial sector contagion (incl. vicious circles):Sub-prime crisis Sub-prime crisis financial crisis financial crisis asset price deflation asset price deflation liquidity/credit crunch liquidity/credit crunch

Financial crisis Economic recession(including feedback loops)(including feedback loops)

Real economy contagion Real economy contagion (incl. vicious circles): Less investment, especially abroad (FDI)Less investment, especially abroad (FDI) Less consumptionLess consumption

Reduced demand for imports, i.e. for exports of othersReduced demand for imports, i.e. for exports of others Prices, output declines globallyPrices, output declines globally Growth, employment declines globallyGrowth, employment declines globally

Deflationary spiral•Asset (stock, property) markets

deflating negative wealth effect

more bank insolvency generalized credit squeeze

•Lower external demand, world trade excess capacity investment slowdown

•Depressed domestic demand lower prices, outputrices, output lower employment, incomes

4

Disorderly unwinding of global imbalances

-800

-600

-400

-200

0

200

400

600

2005 2006 2007 2008 2009

US Japan EU Developing, excl China China

Billions of dollars

5

Globalization: Parallel fates

-4

-2

0

2

4

6

8

2003 2004 2005 2006 2007 2008 2009 (P)

Developing countries

Developed countries

World

Preliminary, revised forecast

6

Recession in most developed

economies

2.9

1.9 1.8

4.8

2.82.4

2.9

6.5

2.0 2.1

2.7

6.0

1.2

0.4

1.1

4.9

-1.9

-0.6

-1.6

0.4

-2

-1

0

1

2

3

4

5

6

7

United States Japan EU-15 New EU members2005 2006 2007 2008 2009 orig. forecast

7

Slowing growth in all developing countries

7.2

6.0

8.5

4.75.5

5.1

6.9

4.94.3

5.9

-0.2

1.6

4.5

0.1

2.7

-10123456789

Developing Africa East andSouth Asia

Western Asia LatinAmerica

2005 2006 2007 2008 2009 forecast

15

World trade collapsing

-0.8

4.45.6 6.4

2.0

-10.0

11.2

9.37.4

-15

-10

-5

0

5

10

15

2001 2002 2003 2004 2005 2006 2007 2008 2009

Ann

ual p

erce

ntag

e gr

owth

Preliminary, revised UN forecast

16

Trade impacts summary•Exports decline all developing countries

•Terms of trade primary exporters

•Trade surpluses, reserves may run down quickly

•But lower energy, food prices help net food and oil-importers

Export Implosion in E. Asia

%

Japan -35.0China -2.8 S Korea -17.4 Thailand -15.7Singapore -20.0Taiwan -41.9Malaysia -4.9 (Nov.)

Dec. 2008 exports y-o-y (%)

China: Exports, Imports Drop Sharply

0

20

40

60

80

100

120

140

160

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

IMPORTS (total, cif)

EXPORTS (total, fob)

US $ billions

Sources: General Administration of Customs (China); Economic Intelligence Unit.

China: Accumulation of Forex Reserves

0

500

1000

1500

2000

2500

Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08

Other foreign exchange reserves

US treasury securities

US$ billions, end-month

Sources: State Administration of Foreign Exchange, China; United States Department of the Treasury / Federal Reserve Board

China: Industrial Output Slows Down Rapidly

0

5

10

15

20

25

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09

% change, year-on-year

Sources: National Bureau of Statistics of China; Economic Intelligence Unit.

Industrial Production

China: Inflation declines

in 2008, after 2007

0

1

2

3

4

5

6

7

8

9

10

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09

% change, year-on-year

Source: National Bureau of Statistics of China.

Consumer Price Index

22

Financial impacts on developing countries• Despite non-involvement in sub-prime

debacle: Emerging stock markets collapse greater Reversal of capital flows, FDI also down Spreads rise, much higher borrowing costs

• But financial positions stronger than during Asian + LA crises (more foreign reserves, better fiscal balances)But reserves rapidly evaporating with export collapse; fiscal space also disappearing

Social, political impacts

•>200 m. more working poor •ILO: Unemployment to rise by 51m

•Government social spending at risk

•Rising social unrest•US intelligence report:

crisis -- greatest security risk

Responses to crisis• UN, BIS forecasts more accurate than

others; IMF, WB upbeat till late 2008• But IMF, WB also marginalized by G7, etc• IMF discouraging strong fiscal stimulus by

developing countries without surplus• G7 G20: more inclusive? legitimate?

crisis-, but not developmental or equitable• PGA (Stiglitz) Commission of Experts• Doha Declaration: June 09 summit on

impact of crisis on developing countries

31

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