Overcoming the Great Recession — An Address to the Japan National Press Club, Remarks by John Lipsky, First Deputy Managing Director of the International Monetary Fund, Tokyo, May 18, 2009
IMF News, May 18, 2009
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- Published: May 18, 2009
Why Asia was hit so severely
- Global GDP fell by an unprecedented 6 percent at an annualized rate in the fourth quarter of last year, and it likely declined at a similar pace in the first quarter of this year.
- GDP fell by an astonishing 15 percent on a seasonally adjusted annual basis in the fourth quarter in Emerging Asia, excluding China and India, and by almost as much in Japan.
- Specific sector and trade impacts:
- Japanese auto exports dropped by nearly 70 percent since September 2008.
- Asia exports of DRAM chips and other semiconductors have fallen by similar magnitudes.
- Strong correlation between fourth quarter output decline across Asian economies and advanced manufacturing’s share in their GDP (automobiles, electronics, machinery).
- Business fixed investment in Japan and the Newly Industrialized Economies (including Korea, Hong Kong SAR, Singapore and Taiwan Province of China) fell by 15 percent year-on-year in the fourth quarter of 2008—close to the peak decline during the Asian crisis.
- Financial integration and sudden stop dynamics:
- International bank flows to emerging and industrial Asia declined by a massive $295 billion in the fourth quarter of 2008.
- Regional equity markets experienced net outflows of $90 billion over the two most recent quarters.
- External corporate bond financing dried up almost completely.
- Policy frameworks and initial responses:
- Progress over the last decade allowed forceful responses: easing macroeconomic policies, steps to preserve financial stability, scope to reduce interest rates where inflation is under control, maintaining foreign exchange liquidity (reserves or bilateral swaps).
- Asia implemented proactive fiscal stimulus for 2009; additional efforts could be needed next year.
- Need to consider further strengthening bank capital, preemptive measures to shore up capital (drawing on Japan’s experience), and ensuring legal frameworks for orderly corporate debt workouts.
Outlook and recovery scenarios
- Signs of stabilization:
- Credit market dislocations have receded and financial market sentiment has improved.
- In some countries, business and consumer confidence appear to be bottoming out; excess inventories being run off; exports and production starting to stabilize.
- IMF World Economic Outlook projections and regional outlook:
- Global expansion expected to return by next year (2010).
- Recovery likely to be more gradual than in past recessions.
- Economies of Emerging Asia, excluding China and India, projected to contract by nearly 3 percent this year before returning to modest growth of about 1½ percent in 2010.
- China and India: growth set to slow significantly, though from faster paces.
- China: massive public investment expected to help maintain overall growth at around 6½ percent; resilient domestic demand’s direct help to the region limited due to low import content of public investment.
- Broad dependency: Asia’s recovery depends on the speed of the global economic turnaround.
Global lessons and IMF’s near-term policy messages
- Crisis underscores deep interdependence and need for cooperative, multilateral policy efforts.
- Three essential IMF messages for the near-term:
- Restore financial sector functionality in advanced economies: restructuring impaired institutions and thawing frozen markets.
- Sustain fiscal effort:
- Discretionary fiscal stimulus being applied in 2009 totals about 2 percent of GDP for the advanced G-20 economies, approximately the same degree of fiscal stimulus that is being applied in Asia.
- IMF analysis indicates fully one-third of the expansionary impact of the fiscal stimulus reflects spillover effects from stimulus-driven trading partner demand.
- When automatic stabilizers are included, G-20 fiscal effort anticipated in 2010 will remain similar to 2009; fiscal authorities should retain flexibility and embed stimulus in a medium-term fiscal framework to assure sustainability.
- Immediate action to cushion emerging market and developing economies from the double blow of drops in international capital flows and external demand.
Updating the IMF’s toolkit and financing facilities
- Need for larger, appropriately structured IMF financing in a world of fast-moving, securitized capital flows.
- Changes already implemented or proposed:
- Streamlined conditionality to focus programs on elements essential for stabilization and growth; encouraging countercyclical policies where appropriate (relaxing fiscal targets in program countries when prudent).
- Creation of precautionary insurance facilities:
- Flexible Credit Line (FCL) established in March: rapid upfront financing in large amounts—with no ex post conditions—for countries with strong policies and track records. Early users: Mexico, Poland, and Colombia.
- High Access Precautionary Arrangement (HAPA) for countries needing policy adjustment but benefiting from large precautionary arrangements.
- Modifications to concessional lending facilities:
- Doubled access limits on existing concessional lending facilities.
- IMF intends to provide $6 billion in concessional resources to low-income countries over the next two years.
- Global resource pledges:
- World leaders pledged to triple the IMF’s lending capacity to an unprecedented $750 billion.
- Leaders also approved an allocation of $ 250 billion of Special Drawing Rights.
- At least doubling the Fund’s capacity for concessional lending to low-income countries.
- Regional and bilateral contributions and initiatives:
- Japan has provided $100 billion in additional loanable resources to the Fund.
- Expansion of the Chiang Mai Initiative raises the available amounts to $120 billion and supports issuance of local-currency denominated bonds in the region.
- IMF welcomes expanded toolkit and looks forward to collaboration on new avenues.
Strengthening surveillance, governance, and legitimacy
- Surveillance improvements:
- Recognition that IMF warnings prior to the crisis were insufficiently effective; stronger bilateral and multilateral surveillance program under development.
- Bolstered resources for macro-financial linkages analysis; expanded analysis of country vulnerabilities to include advanced economies.
- Collaboration with the newly-enlarged Financial Stability Board (FSB) on an early warning exercise covering both advanced and emerging market countries.
- Continued use of the World Economic Outlook, Global Financial Stability Report, and Financial Sector Assessment Program (FSAPs) as benchmark references and implementation tools.
- Regulatory and standards role:
- FSB to lead regulatory reform roadmap; IMF contributes analysis, FSAPs, and technical assistance but is not a regulator.
- Governance and legitimacy:
- Speeding up governance reform, with endorsement to accelerate quota reform to early 2011 to better reflect members’ relative economic weight.
- Dynamic emerging markets gaining voice in policy debates inside the Fund and in global fora.
- Legitimacy and evenhandedness crucial to ensure countries approach the Fund early and heed its policy advice and early warnings.
Concluding assessment
- The Great Recession has produced severe risks and hardships but also spurred unprecedented anti-crisis policy measures and potential structural reforms in global markets and institutions.
- The IMF is rapidly adapting: enhancing financing tools, expanding concessional resources, strengthening surveillance, and reforming governance.
- Despite reasons for cautious optimism, serious challenges remain and require continued decisive policy action and international cooperation.
Remarks by John Lipsky, First Deputy Managing Director of the International Monetary Fund, at the Japan National Press Club, Tokyo, May 18, 2009.