Facing multiple crises

What is to be done?

IDEAs, New Delhi29 January 2010

2

Global imbalances ballooned

United States

Oil exporters

Euro Area

Japan

China

Other Asia

Other industrialised

Central and Eastern

Europe

Latin America

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

USD bn

.

3

Then narrow with deflation

-800

-600

-400

-200

0

200

400

600

2004 2005 2006 2007 2008 2009

Bil

lion

US$

United States

Japan

European Union

Developingcountries (exclChina) and EiT

China

4

Net Capital Importers

Capital Importers

U. K.9%

I tal y3%

Turkey 3%

Greece3%Others

20%

U. S.50%

Spai n9%

Aust ral i a3%

5

ST Real Interest Rates

Short-term real interest rates of major economies (%)

- 2

- 1

0

1

2

3

4

2000

M1

2000

M7

2001

M1

2001

M7

2002

M1

2002

M7

2003

M1

2003

M7

2004

M1

2004

M7

2005

M1

2005

M7

2006

M1

2006

M7

2007

M1

2007

M7

2008

M1

2008

M7

Japan U. S. Euro

Area

Negative

Rates

6

US Fed Longterm Rates

Yields of U.S. T-Bonds and Corporate Bonds 1978 2007％（ － ）

02468

101214161820

1/ 31/ 1978 6/ 30/ 1982 11/ 30/ 1986 4/ 30/ 1991 9/ 30/ 1995 2/ 29/ 2000 7/ 31/ 2004

BAA corporate bond AAA corproate bond 10- year T- bond

persistenly falling long-term rates

7

Financial deepening fragility

World Stock Markets: Now vs GD

World Output: Now vs GD

World Trade: Now vs GD

Unemployment still rising

Economic recovery uncertain

Most developed economies slowly out of recession

-2.5

-5.6

-4.2-3.7

2.1

0.90.5

1.2

-6

-4

-2

0

2

4

6

USA Japan EU15 New EU

2008 2009 2010

Uncertain weak recovery in transition economies 4.5

5.6

-3.7

-6.7

0.71.7

-8

-6

-4

-2

0

2

4

6

South-eastern Europe CIS

2008 2009 2010

Sub-potential recovery in developing countries

1.91.6

4.14.7

-1.0

-2.1

5.3

4.3

6.7

5.5

3.6 3.4

-3

-2

-1

0

1

2

3

4

5

6

7

Developingcountries

Africa East Asia South Asia WesternAsia

LatinAmerica

2008 2009 2010

60 developing countries with declining incomes in 2009

12

33

18

1

14

2

13

60

22

0

10

20

30

40

50

60

70

2008 2009 2010

Developed countries

Economies in transition

Developing countries

Growth by main country groups

Per capita GDP growth rate

Change in growth rate

2004-07 2008 2009

2009/

2008

2009/ 2004-

7World 2.6 0.9 -3.4 -4.3 -6.0Developed

economies 2.1 0.3 -4.1 -4.4 -6.1

Economies in transition 7.7 5.5 -2.6 -8.1 -10.2

Developing economies 5.7 4.0 0.1 -3.9 -5.6

LDCs 5.2 3.6 0.3 -3.3 -4.9

Food prices remain higher

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Wheat Maize Rice

Stimulus lags delay recovery

0 2 4 6 8

3 month delay

Immediate andsustainedstimulus

efforts

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2009 2010 2011

Global recovery with coordinated vs uncoordinated stimuli, 2010-2015

Double-diprecession

with• Premature

stimulus withdrawal

• Widening imbalances + deep US$devaluation

can beavoidedthroughsustainablerebalancing

Early withdrawal stimulus

“Business as usual”

Coordinated, sustainable recovery

Need coordinated sustainable recovery

Double-diprecession

with• Premature

stimulus withdrawal

• Widening imbalances + deep US$ devaluation

can beavoidedthroughsustainablerebalancing

Coordinated sustainable recovery for all

Early withdrawal stimulus

“Business as usual”

Coordinated, sustainable recovery

Output, jobs recovery lags, 1991, 2001

Duration of output recovery and job market recovery after the 1991 and 2001 US recessions (in months)

0

10

20

30

40

50

60

Output Job market recovery

1991 2001

Financial globalization

•Net capital flows from South to North (US largest borrower)

•Cost of funds not generally lower due to financial deepening (more intermediation, financial rents)

•Higher volatility•Lower growth, higher instability

27

Globalization: finance>trade

0

20

40

60

80

100

120

140

160

180

1980 1990 1995 2000 2006

US

$ T

rillio

ns

0

50

100

150

200

250

300

350

As

pe

rce

nt

of

GD

P, in

dic

es

19

80

=1

00

Global financial assets

Global merchandise trade

) Global financial assets as a percentage of GDP(right axis

) Global merchandise trade as a percentage of GDP(right axis

28

Finance-investment nexus?

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Gross Fixed Capital Formation

Gross Financial Investment Abroad

Net transfer of financial resources from South to North

Source: UN World Economic Situation and Prospects 2008 )forthcoming(

-1000

-800

-600

-400

-200

0

200

Bill

ions

of U

S do

llars

Developing economies Africa Eastern and Southern Asia Western Asia Latin America

Short-term capital inflows

problematic•No real contribution to investment,

growth rates•Asset (shares, real estate) price +

related (e.g. construction) bubbles instead

•Cheaper finance for consumption binges•Over-investment excess capacity•All exacerbate instability, pro-cyclicality

31

Problems Crisis•International financial architecture: non-system

•Policy responses: inadequate; double standards

•Inadequate and inappropriate regulation

•International cooperation: G7 G20, IMF strengthened

33

G20 London Summit Commitments

$500bnIMF Funding

$0 New Commitments

$250bnTrade FinanceNew commitments

< $25bn

$100bnAid for the poorest

New Commitments< $100bn

$250bn SDR allocation

44% to G7 countries aloneOnly $80bn to DCs

$1,100bnTotal

G20 Pittsburgh commitments

•G20 takeover (G7)?•BWI governance shifts•Executive remuneration debate

•Financial regulation reform?•Capital requirements•Surveillance

Systemic reform agenda• Ensure macro-financial stability with counter-

cyclical macroeconomic policies + prudential risk management, including capital controls

• Finance growth (output, employment) with developmental financial system

• Ensure inclusive financial system -- NEW• Monterrey policy coherence: Align IMF, WB

with UN development agenda, IADGs • But who will lead comprehensive reform

process?

Bretton Woods moment lost?Bretton Woods, 1944: United Nations

conference on monetary + financial affairs• 15 years after 1929 Depression• Middle of WW2• US initiative vs UK Treasury stance• 44 countries (28 developing countries; 19 LA)• UN system: IMF, IBRD, ITO• Clear emphasis on sustaining growth, job

creation, post-war reconstruction, post-colonial development, not just financial stability

Stiglitz Commission Report

•Macroeconomic stabilization: broader view

•Regulating financial markets•Reforming global economic governance

•Systemic reform priorities: SDRs as reserve currency

4 crises, dilemmasClimate change vs developmentReduce climate change while

raising living standards for all

Need to reduce GHG emissions in rich countries and slow (+ eventually reduce) them in developing countries

Food prices lower after spikes, but higher than before while hunger rising since ‘95

4 crises: 1 solution?More renewable energy to mitigate sustainable development pathway

Investment (vs market)-led approach to address climate change, development, food, recovery goals

Cannot rely on markets alone More job creation from renewable energyCross-subsidization (e.g. global or

regional feed-in tariffs, scale economies) Big push: front-loading Scale + learning economies Need significant (fin. + technology)

transfers

Global Green New Deal

• New Deal for recovery, social protection, jobs, infrastructure, development

• Green: more job creation from renewable energy (compared to fossil fuel energy)

• Global: cross-subsidization (e.g. regional feed-in tariffs, scale economies

• Public investment to induce private invt• Cheap credit over-investment

under- utilized capacity private investment reluctance public invt in renewables

41

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