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Tuesday, July 14, 2009

Moving on from a global crisis: business as usual or an inflection point?

Read below comments by the Director-General of the World Bank's Independent Evaluation Group, Dr Vinod Thomas on what the global crisis would mean for countries.

Dr Thomas does note that countries that are open were more vulnerable to the effect of the crisis. He also added that for the financial sector, deregulation (which had been the trend before the crisis) coupled with sensible regulatory policies that are targeted at containing excessive risk taking at the "expense of other people's money" would be advisable for countries.

The article follows.

"Speaking at the Institute of Policy Studies in Singapore on June 19, 2009, Dr. Vinod Thomas, Director-General and Senior Vice-President of the World Bank’s Independent Evaluation Group (IEG), described the current global economic turmoil as a triple crisis comprising the global economic downturn; rising poverty; and climate change. Thomas said that this crisis provides a moment to reflect on the past and actions for the future.

“One can think of this crisis as one that can be solved and we can then move on. We can also think of this as an inflection point where some deep uncertainties about how the ways in which countries have developed and been growing over the last 10-15 years are just not going to happen anymore and that it’s not sustainable.”

The end of globalization?

With those countries most connected to the global economy having been worst hit by the crisis, questions have arisen about whether high levels of globalization will spell doom moving forward. “This crisis adds a certain degree of empirical evidence to an observation that the more you are connected, the more a crisis such as this affects you.”

Thomas also notes that trade has been a mechanism for transmitting the recession to so many countries—Singapore included—demonstrating that there really has been no decoupling. “Asia cannot, as people had imagined, go a separate way from the rest of the world economy, even if the crisis was initiated by the OECD countries.”

Trade and openness remain the policy prescriptions, however; as past experience shows that it is these same globalised economies which have stronger recovery of GDP growth. “In a crisis such as this, those with greater trade shares are hit harder. That does not mean that being connected to the rest of the world is a bad idea, because as the recovery takes place and opportunities show up, those that are more connected to the global economy, with greater shares of trade and investment in their GDP, benefit much more.”

Warning against the trend of rising protectionism, Thomas said that “coming out of the crisis, if the recovery means greater restrictions on trade, then the future growth trajectory will definitely look different from the past. The past growth rates—the honeymoon really—lasted as long as it did because of the increasing openness of the global economy.”

Crisis response

In addition to trade, policy responses have also focused on financial reform, fiscal spending, poverty alleviation, and the environment.

Discussing reforms needed in the financial sector, Thomas noted that “if regulation had a bad name in the past, today it is clear that deregulation- much needed in many economies- needs to be coupled with sensible regulatory policies.”

Thomas also warned against abandoning new or highly innovative financial instruments because of the benefits that they provide: “You need to keep in mind that the intermediation, the leveraging, and the access to credit for large numbers of people can be augmented by many of these instruments… The lesson though is that those need to be matched by a regulatory framework that avoids extraordinary risk-taking at the expense of other people’s money.”

As countries worldwide put in place unprecedented fiscal expansion packages, Thomas noted that we should put a premium on quality over quantity. “You will see huge variations two years from now, with the same dollar producing widely different impacts in terms of the growth recovery, and that will differentiate those who come out of this recovery well, compared to those who don’t.”

The crisis of rising poverty- 150 million more people in poverty in 2008, and 50 million more set to fall below the poverty line in 2009- with its risk of social instability and loss of welfare, is closely linked to employment. The recovery in employment is expected to be slower than economic recovery as employers wait to see if the recovery is real; and as efficiency gains may result in a shift in employment patterns.

While the environment may have been an issue placed on the backburner in previous crises, Thomas said that that is no longer an option, and that climate change means that “the kind of growth that we have gotten used to isn’t feasible going forward. The numbers that are coming out on climate change are just absolutely frightening and if even a part of that is true, then investing in a different way would seem to be a high priority…In 20-30 years, with business as usual, we may be living in an ice-free world. If you think about it, that should be enough to spur action, but that does not spur action anywhere close to what you would like.”

This does not mean, however, that countries should be expected to reduce carbon emissions while they are still developing. “No country has developed rapidly without increasing their carbon footprint. So we have to be realistic. That is the only way development has taken place.”

There is, however, huge room for improvement in the carbon efficiency of development, said Thomas. “A sevenfold variation exists in how carbon intensive you need to be for any given income…so, yes, growth goes with a greater carbon footprint, but, no, it’s not automatic or preordained. There’s huge room for adjusting this as you go forward.”

Uncertainty is at an all time high, and Thomas said that there is a sense that the past is not going to be the best predictor of the future this time around; that the incremental changes that we are comfortable with may miss out on the big picture, especially in terms of risks and opportunities. In this context, Thomas emphasized the importance of flexibility in crisis responses.

“Action waits until there is a crisis”

This crisis does provide for an opportunity to make necessary changes. “We could be at an inflection point as opposed to returning to business as normal. This crisis could be turned into an opportunity to take action on three fronts: economic, social, and climate.”

Citing the examples of fiscal reform in Korea, Thailand, China and Brazil, Thomas said that all of these could be linked to a crisis; and that there are many fronts—human capital, greater competitiveness, social inclusion, infrastructure, public sector governance, new forms of green investment—on which this crisis can spur action."

To read more, click on this link.

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