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Finance

Background

Report launch: Post-crisis growth in developing countries

Growth Commission, Istanbul, 4 October

4 October 2009

Speakers:

Michael Spence, Standford

Danny Leipziger, ex-WB

Trevor Manuel, Minister for planning South Africa

Mahmoud Mohieldin, Egypt minister for investment

Hiroshi Watanabe, JBIC CEO

Danuta Hubner, Member of European Parliament

Sir Dwight Venner, Governor of Eastern Caribbean Central Bank

Presentations

Michael Spence – introduction on impact of financial crisis

  • check if we wrote anything wrong; what new changes do we need to make
  • what kind of financial system do we want? What gives resilience
  • must think about inclusiveness of the system, domestically and internationally

 

Sir Dwight Venner

  • intl fin system in its function affects all, so stability is an intl public good – needs to be inconclusive
  • credit crunch denied access to credit in our countries; reserves fell in value; needed to rescue domestic institutions
  • IMF was very important and helpful, ESF and doubling of access was a big contribution to maintaining stability
  • A new BW? Not in entirety, but some things need to be looked at again, ie regulation, need for prior scrutiny
  • Must build in checks and balances and fall-back positions, market system in and of itself is not the issue – it is the regulatory capacity

Trevor Manuel

  • difference between mature economies and EMEs – ie Solow is only relevant to rich countries
  • macro and regulatory policy is sovereign, but effects are extensively cross-border, even with FSB – questions still linger, but don’t micro meddle in inst
  • real economy effects are more severe than financial economy effects
  • worried about the idea that the state must recede automatically, state role will be different

Danuta Hubner

  • need to think twice on policies, crises can cause loss of decades of progress
  • can not disconnect exit strategies from development goals
  • what matters now is the how to get out of the crisis with growth
  • countries will slip through the cracks of global solutions – need tailor-made approaches
  • risk aversion matters, fiscal systems and taxes are important – need smart governance

Hiroshi Watanabe

  • biggest shocks hit developing countries (in relevant terms), need more focus on developing countries and the poor
  • financial patriotism is happening in the West – protecting their own banks, but forcing domestic operations/loans – negative impact on emerging markets
  • need countercyclical operation of the private and public sector
  • “seemless” investment is important – including across borders, and in small countries
  • Inequality of income distribution is a problem and we need efforts
  • More money for infrastructure, trade finance, SMEs – but FDI is volatile, so predictability is key

Mahmoud Mohieldin

  • policy makers need this kind of advice, about actions – not theories and models
  • 5 characteristics still there – globalisation, knowledge transfer, tech transfer
  • Responses to crisis could be worse for developing countries than original impacts – protectionism, capital controls, crowding out in sovereign borrowing
  • Emphasis on investment with savings – mobilise domestic savings, not just FDI
  • Strong state – pragmatic and ensure rights – but it is complex
  • Returning to pre-crisis levels is not really possible, any way pre-crisis was not that good for most poor people
  • Need more access to finance for SMEs
  • We have a lot of financial innovation to do – but mostly plain vanilla kind of instruments; stability is not the only goal – development role is also there; must mobilise savings for investment and growth

Danny Leipziger

  • we must worry about both short-term and medium-term impacts on developing countries
  • cost of capital will rise, capital inflows unreliable, receptivity to imports will be low
  • leads to a rethink of development paradigms, this is not all bad
    • domestic savings – it is about keeping savings that might be going abroad
    • tax – can be more fair and close loopholes, this is good
    • lets be careful about new role of public banks – ie how to get public banks to recede in importance
    • government role – I question whether industrial policy is more important
  • role of EMEs – in G20 or elsewhere? Will they invest in multilateral system? Ie trade of China
  • must deal with distribution, and burden of increased debt

 

Discussion

Questioner – receptivity to advice on not opening financial sector

Michael Spence – you do want securitisation and advanced fin services

  • national priorities always take over, so must have something in your own countries; an example of the limits of globalisation – based on a national governance structure
  • You can overdo this though and must be careful

Dwight Venner – we ended up needing local bankers to help with failing institution, foreign banks refused to help

  • foreign banks don’t export their useful instruments, need a local bank institution to innovate with relevant instruments
  • foreign banks participated in an anti-developmental system (ie barriers to value added)
  • local banks will help

Mahmoud – will be some time for dramatic changes – need right balance

  • need proper mix of foreign and local banks with competition, treating them the same
  • need right incentives and governance, want banks to go back to basics

Michael Spence – short run, high speed capital flows were really amazing in the crisis

  • China held the peg – no depreciation – this helped

Questioner – what about going forward on CAL and reserves? Trade off between resilience and opportunity? Will there be contention over the ‘right’ balance? What role for intl inst to negotiate this?

Michael Spence – no right answer, involves judgement; there will be a learning process with experimentation and development of new ideas

Danita Hubner – we will suffer from risk aversion, esp in Europe, we will have to live with this

  • end of cheap borrowing will happen, financial development will need to help with this

Hiroshi Watanabe – there is a tradeoff, but we need to deal with oversize and leverage financial institutions

Michael Spence – systemic risk regulators will have a big challenge, models and data are both incomplete

  • risks were missed, self-regulatory mechanisms failed; why? Did we miss evolving network complexities?
  • Other thought – we will never be able to do it – inherently unstable

Mahmoud – definition of systemic risk will vary depending on situation – might encourage further moral hazard, adds complexity

Questioner – how to tame and control bubbles?

Michael Spence – you can control turbo charging bubbles with debt; mitigate correlations

  • at least we have a debate now about identifying bubbles
  • public will not put up with no focus on bubbles