Helping Low-income Countries Confront the Worst Economic Crisis in 60 Years


By Hugh Bredenkamp

One of the great tragedies of the present crisis is that it nipped in the bud the longest and most broadly based economic expansion that low-income countries have seen in modern history. These countries were finally reaping the rewards of difficult reforms that go back to the 1980s and 1990s, helped by debt relief and other support. The results were plain to see. During 2000-07, low-income country growth was twice as high as in the previous decade, and inflation fell to single digits. As a result, these countries were finally starting to make inroads in raising living standards and reducing endemic poverty. There was great cause for optimism.

And then came the crisis. Or crises, I should say. For in fact, the low-income countries were besieged by two crises in rapid succession, as the global financial tsunami came hard on the heels of the food and fuel price shock of 2007-08. All of the hard-won gains were suddenly in jeopardy. And the stakes in this part of the world are particularly high, given the potential for human suffering on a wide scale. The effects of lower export volumes, remittances, investment flows, and prices for key export commodities could push hundreds of millions of desperately poor people back (or further) into poverty.

Victims of the crisis

We should remember also that the low-income countries were innocent victims of the crisis. They didn’t make the mistakes of some of the advanced countries, the mistakes that triggered this crisis. Instead, they did many of the right things on the policy front—fiscal positions were strengthened, debt burdens reduced, and comfortable reserve cushions built up in many countries. This makes it all the more important now for the world community to do whatever it can to help.

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Looking Beyond the Crisis


By John Lipsky in Jackson Hole

In my first two Jackson Hole blogs, I addressed some of the key challenges to restoring growth. Yet whatever shape the recovery takes once the Great Recession ends, several significant long-term problems will have to be faced if a solid expansion is to be sustained.

In particular, the principal sources of growth in many economies will shift, structural hurdles to growth will have to be overcome, the legacy of anti-crisis fiscal policies will have to be dealt with, and the governance of global economic policy will have to adjust to new realities. In other words, the agenda will be packed for many Jackson Hole Symposiums well into the future.

At present, growth in the principal economies is being restarted with the help of massive fiscal and monetary stimulus. As has been noted widely, a sustained expansion will require a shift back to private demand. Yet the U.S. recession has been marked by a significant increase in U.S. household saving out of current income that has been associated with the substantial losses in household net worth suffered during the past two years.

MARKETS STABLE DESPITE TERRORIST THREATS

The stimulus has provided a fillip to markets.

An immediate result has been weak consumption spending, and a significant decline in the U.S. current account surplus. Not only did these shifts appear to be inevitable even before the current crisis, but they almost certainly are going to be long-lasting.

In other words, it was the case prior to the crisis that sustaining a global expansion will require strengthened demand growth outside the United States, an aspect that the current crisis has served to make clear to all. This premise already underpinned the IMF-sponsored Multilateral Consultations on Global Imbalances that took place in 2006/07. The aim of that exercise was to develop mutually consistent policies that would support sustained growth while reducing global imbalances by facilitating an appropriate shift internationally in  the sources of growth, especially in economies that have relied on export-led growth. Whether the current crisis might have been moderated if the agreed policy programs had been fully implemented is moot, but the Consultation’s broad policy goals will remain relevant in the post-crisis period.

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Fixing the Financial System


By John Lipsky in Jackson Hole

Despite tentative signs that the global recession is ending, it’s clear that a full recovery will remain inhibited until financial markets are restored to health. While financial market conditions have improved—reflecting among other things massive public sector support—key credit channels remain strained, creating a drag on growth.

One of the keys to strengthening financial markets will be to put securitization markets on a sounder footing, an issue I discuss below.

Rebuilding active and innovative financial systems will be critical for sustaining a new global expansion. After being propped up by government intervention, a recovering economy increasingly will need to rely on private capital.  As confidence and trust are restored, government guarantees will be rolled back gradually, and the crisis-driven expansion in central bank balance sheets will be unwound.

The latest financial market developments have provided positive signals. Most markets have strengthened in recent months, and some asset prices are higher today than prior to last September’s severe turmoil. Equity prices have risen notably, while investment grade corporate and sovereign emerging market debt spreads have narrowed, mainly in response to reduced risk perceptions, but in the case of corporate debt also reflecting better-than-expected economic data.

Jackson Hole conference: A Grand Teton Perspective. . .


By John Lipsky

Every year at this time, senior Federal Reserve officials and central bank heads from around the world gather in Jackson Hole, Wyoming—together with leading economists from universities and the private sector—to hear presentations on key policy topics and to discuss the challenges facing the global economy. The spectacularly beautiful setting at the foot of the Grand Teton mountains provides calm and perspective.

Last year’s gathering took place on the eve of historic financial turmoil and subsequent economic downturn. One year later, it is clear that progress is being made to overcome the crisis, but also that many fundamental changes will flow from the past year’s challenges, even though the exact nature and course of these changes remain far from certain. The mountains’ grandeur remains unaltered, of course, providing inspiration while insinuating an appropriate sense of humility.

The story of the past year is well known: Faced with the very real possibility of a global financial meltdown, and the reality of the sharpest global economic downturn of the post-World War II period, policymakers around the world responded with a series of unprecedented actions—including massive monetary and fiscal stimulus, plus new governance initiatives. One year later, the signs are clear—if still tentative—of renewed growth, although opinions are divided regarding how effective specific policy actions have been, or about how soon the global economy will regain the pre-crisis level of output, or reestablish pre-crisis trend growth rates.

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The Global Crisis and Emerging Europe: Why the Script Differs from the Asian Crisis


By Ajai Chopra

When the global financial crisis spread to emerging Europe in the last quarter of 2008, memories of the Asian crisis of the late 1990s sprang back to life. Would emerging Europe face the same chaotic currency depreciations, mass defaults of banks and companies, double-digit output losses and social unrest that beset several Asian countries back then?

Nine months into the crisis, it is clear that emerging Europe as a whole is not following Asia’s script. But it is also clear that the crisis is evolving differently across countries.

The Baltic countries (Estonia, Latvia and Lithuania) are suffering output declines that already exceed those of the Asian crisis (see chart below).

Chopra4Chart1

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Regionally Coordinated Solutions to Foster Financial Stability in Emerging Europe


By Ajai Chopra

Europe’s economic and financial integration has been a tremendous success, but the region is now under great stress. As the global economic crisis has shown, the flipside of Europe’s successful integration has been a synchronized economic downturn and complex financial spillovers between countries.

For those of us involved in providing financing and policy advice to emerging Europe, it quickly became apparent that the official sector would be more effective if it managed to secure the cooperation of private western banks operating in emerging market countries in central, eastern, and southern Europe (CESE).

During the past decade, western banks played an important role in developing the financial sector in emerging Europe, through ownership of banks and through direct cross-border lending to financial institutions and firms. But over time, CESE countries accumulated high levels of debt to western banks. Although these banks have a declared long-term interest in the region, they came under intense pressure to deleverage when the global financial crisis struck because of the weak financial conditions in both home and host countries and the diminishing appetite for risk at the global level. Uncertainty about other banks’ strategies further exacerbated the pressure on individual banks to scale back lending to the region.

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Potential Output: Worrying About What Cannot Be Observed


By Ajai Chopra

Potential output seems to be on everybody’s mind these days, at least if you talk to economists. What would be merely a curiosity during better times—after all, potential output is a largely abstract concept measuring the level of output an economy can produce without undue strain on resources—has become a particular worry in the context of the global economic crisis.

So what is all the fuss about? In a nutshell, policymakers across Europe are concerned that the deep and long recession will affect supply capacity and weigh down the prospects for recovery.

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