## 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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## Bibliographic details
- Published: May 18, 2009

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### 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.*

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## References

- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp051809_