Thursday, 21 May 2009

Empowering the IMF to do Business as Usual

By Xavier Cirera
In his entry on 18 May, John Humphrey clearly framed the implications of the current financial crisis for development and development studies into two sets of issues: i) what elements of the crisis will not return to where they were previously; and ii) what elements we would not like to return to the way they were beforehand. The crisis forces us to think about what went wrong. But at the same time, the crisis has opened up the space to discuss and reform previous policies, perhaps unrelated to the crisis, but that were, in our judgement, inadequate.

A clear example of this dual implication of the crisis for development is the current proposal to reform the IMF. The Fund is at the centre of the G-20’s proposed solution for the crisis. More money is being injected into the Fund in order to allow the IMF to help countries in crisis. Reform has been proposed, giving more power to emerging markets. The main idea, empowering the IMF to do business as usual.

But one question remains, do we want the IMF to do business as usual? More importantly, do we want the IMF? A year ago it was not clear what the role of the IMF was anymore. Not only that, countries such as Argentina or Venezuela were buying their ‘freedom’ out of the Fund by repaying in advance existing loans. Critiques have mounted over the years about the narrow-minded approach of the Fund to crisis and development in general. For example, could this massive counter-cyclical fiscal policy started by Britain and the US be tolerated by the IMF outside the OECD? Moreover, what is considered reckless domestic policy that justifies tight fiscal deficits? The Fund has very often ignored countries binding constraints to growth by focusing exclusively on an extremely tight fiscal policy. And more importantly, in the new G-20 proposal the Fund has no capacity to supervise the financial system; this task will be performed by the Financial Stability Board.

So why then reform the IMF? Why not provide the World Bank with financial capacity to rescue countries in case of crisis? Conditionality, then, would be linked to more general growth and poverty reduction policies rather than a narrow focus on fiscal policy. This seems to me a more coherent and effective approach to crisis support.

Monday, 18 May 2009

Reasons to be cheerful: Part one

By John Humphrey

The economies that have gained most from globalisation are now the ones that are suffering most – but this also implies that the countries that we want to see grow because they have not benefited so much from globalisation are not bearing the brunt of this crisis. What is the implication for development and development studies?

Reasons for pessimism
It is quite possible to be pessimistic about the current state of the world economy and the financial crisis. For the pessimists among us, last Friday's Financial Times web page provides an extensive buffet of bad news. Forget 'green shoots', things are still getting worse, and the only forecasts that are being revised upwards are those relating to toxic assets. The news is not good but there are reasons to be cheerful.

World Bank Forecast isn't bad news for everyone
Take the World Bank's 30 March Forecast Update for the 2009 Global Economic Prospects. Overall, the situation looks bad. From the November 2008 forecast, to the March 2009 forecast, real world GDP growth has been reduced by 2.6 per cent. The world economy is now expected to shrink by 1.7 per cent in 2009. Some countries have seen catastrophic (if the predictions are accurate) reversals in their prospects.

But, within these figures, there are important variations. The regions of the developing world where growth is expected to decline are Europe and Central Asia, where the forecast has been revised from +2.7 per cent to -2.0 per cent, and Latin America and the Caribbean (forecast revised from +4.0 per cent to -0.6 per cent). Elsewhere, things may be better. The prediction for growth in China is still 6.5 per cent for 2009 and 7.5 per cent for 2010. Indonesia is predicted to grow by 3.4 per cent in 2009 and 5.4 per cent in 2010. In addition to expected growth in East Asia and the Pacific, the World Bank is still forecasting positive real GDP growth in the Middle East and North Africa (+3.3 per cent), South Asia (+3.7 per cent – not confined to India, the projection for Bangladesh is +4.5 per cent), and sub-Saharan Africa, +2.4 per cent.

Obviously, these growth projections are lower than had been forecast in November 2008, but they are still positive. For Africa, they are positive in spite of sharp falls in commodity prices. As is well-known, prices of fuel and raw materials, in particular, fell sharply in the second half of 2008. Part of accelerated growth in sub-Saharan Africa in the past few years has been rising commodity prices. The good news is that subsequent falls in these prices have not done too much damage. In fact, there are (I should think) many more countries that are net importers of fuel and commodities than are net exporters, so the collapse of the commodity price bubble is not all bad news.

Current losers were recent winners
I also find a reason to be cheerful in the analysis of the impact of the financial crisis in East Asia. A recent presentation by Takatoshi Kato from the IMF emphasises just how much the financial crisis is beginning to impact on East Asia. Two things, in particular, attracted my attention. The first was that the recent downward revision of growth forecasts in East Asia was substantially greater than would have been predicted on the basis of the concurrent downward revision of growth forecasts in Europe and North America. This implies the crisis is starting to become "home-grown". This is not a reason to be cheerful. But across the world there is a strong correlation between the rate of contraction of GDP in the fourth quarter of 2008 and the share of advanced manufacturing in GDP.

Why does this make me cheerful, schadenfreude aside? Well, the economies that are suffering most badly in the short-term are the ones that have done pretty well in recent years. The big fallers are Taiwan, Singapore, Korea, Japan, Germany etc. Mexico is in there, and this is probably the result of the value chain issue in industry classification – "advanced manufacturing" based on products categories is compatible with "not very advanced processing". Overall, though, the export-oriented and increasingly high-tech economies that have gained most so far from globalisation are the ones that are suffering most. Not surprising, given the nature of this global crisis. But surely, this also implies that the countries that we want to see grow because they have not benefited so much globalisation are not bearing the brunt of this crisis? This is good.

What this means for development
So, this makes me cheerful. It also makes me want to think very carefully about what the implication of the current financial crisis is for development and development studies. Let's suppose that (i) the world economy does pull out of recession some time late in 2010, and (ii) the poorest countries do not bear the brunt of the crisis. Could we go back to business as usual? Or, to put the question more helpfully, which parts of business do we not want to see go back to "usual", and which parts of business will be incapable of getting back to usual? If the crisis is focused on the most globalised economies, we might see some more fundamental shifts emerging out of the crisis.