Worldwide Lessons from Financial Worldwide Lessons from Financial CrisesCrises

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

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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

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The sharpest global decline since 1970

GDP GrowthGDP Growth

-4

-2

0

2

4

6

8

10

Pe

rce

nt

ch

an

ge

Advanced economies Emerging and developing economies World

6

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

, 200

9 (%

)

India

China

Indonesia

South Africa

Brazil

Saudi Arabia Argentina

RussiaTurkey

Korea

JapanUSA

UKGermany

Mexico

SpainItaly

FranceCanada

Australia

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

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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

Source: IMF World Economic Outlook Update, January 28, 2009

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Exports and capital flows crumblecrumble

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

-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.

Source: Institute for International Finance: “Capital Flows To Emerging Market Economies.” 01/27/09.

Exports (Volumes, Change % 3 mma y/y)

Exports (Volumes, Change % 3 mma y/y)

Private Net Capital Flows to Emerging Economies

Private Net 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

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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

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

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

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… Also high trade shares with strong recovery of GDP growth

(past episodes)

Source: World Development Indicators 2008Source: World Development Indicators 2008

0

20

40

60

80

100

120

0 2 4 6 8 10

Post-crisis GDP growth (%)

Ave

rge

trad

e pr

e- a

nd p

ost-

cris

is (

% G

DP

) Brazil

Korea

Mexico Russia

Turkey

Thailand

Indonesia

Argentina

0

20

40

60

80

100

120

-2 0 2 4 6 8

Average pre-crisis GDP growth (%)

Ave

rge

trad

e, p

re-

and

post

-cris

is (

% G

DP

)

Mexico

Korea

Argentina

Brazil

TurkeyRussia

Thailand

Indonesia

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

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

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II. Policy Responses

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 A framework for assessment

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Five Areas for Action

FiscalFiscal

Trade Trade

Poverty Poverty

EnvironmentEnvironment

ConsumptionInvestments

ConsumptionInvestments

Liquidity Financial system

Market confidence

Liquidity Financial system

Market confidence

Sustainable growth

Sustainable growth

Social stability harmony

Social stability harmony

Terms of tradeValue chain

Terms of tradeValue chain

CRISISCRISIS

FinancialFinancial

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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*

* How to Solve the Global Economic Crisis—Justin Yifu Lin, Senior Vice President and Chief Economist, World Bank

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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

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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 危机 – – Danger and OpportunityDanger 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 *David Dollar, Sustaining growth: China’s need for a new growth model,

November 19, 2008

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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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谢谢 !Thank you!

Improving Development Results Through Excellence in Evaluation

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