Randy SpencePEP Forum on

The Impact of the Global Financial CrisisManila, Feb. 17 2009

For Discussion

ContentsInternational Transmission ChannelsDomestic TransmissionMicro ImpactsPoor and Disadvantaged PopulationsCoping MechanismsMitigation Measures

All in broad brush only – the next 2 days will fill in much more detail

International Transmission ChannelsPortfolio investment plummets bonds and stocks held, short term credit

provided from foreign to local banksalmost immediately after peak (October)

of financial crisisde-leveraging of Western/OECD banksoutflows of capital in most other countries large exchange rate fall

International Transmission ChannelsAnd as economies begin to contract:Exports decline

and imports, given exchange ratesnet change (X-M) could be + or – (likely -)

Foreign Direct Investment falls net flow may reverse as multinationals de-leverplant closure and job loss – quite quickly

Remittances fall where foreign workers lose jobs / returnwhere the foreign currency depreciates more

International Transmission ChannelsTourism declinesAID declines overall

ODA, other official flows, NGO/voluntary flows

Knowledge flows declineboth proprietary IP flow (in and outside FDI)and open knowledge investment / content

Reinforcement ; capital outflows continue as domestic economy declines

Domestic TransmissionWhat has been hit?

Credit and bank / financial system liquidityInvestment – initially mainly foreignRemittancesExportsTourism and AID

Large cumulative effect on exchange ratesLarge immediate welfare lossComplexities – which exchange rates, trade

partners..?

Domestic Transmission‘Panic’ & domestically originated de-

leveragingcredit and liquidity – banks de-lever and market

investors move to safer groundreal investment falls as firms shelve plansconsumption falls as consumers savegovernment spending – left to fill expenditure

gap, as well as rescue the financial systemDrop in consumption, equity investment, real

investment, sales, production, jobs and incomes

Domestic TransmissionRemembering that financial system impacts

continue, & reinforce real impacts in C, I, G, X-M

Keynesian termsIf expenditure C+I+G + (X-M) initially falls 4%, due

to falls in exports, tourism, remittances, FDI, AIDEnd-effect is 10% if multiplier is 2.5Indonesia in Indonesia crisis; 17% loss of GDP, back

to initial level in 3-4 yearsThis is my current best guess about present crisis

Micro ImpactsCan lower-level (micro) impacts be projected?

sector, region – production, employment, incomeshousehold – income, employment, health, security etc.

And is it essential to do this?compared to focus on monitoring and mitigating?put another way, if the situation of HH is monitored, how

much more is gained by knowing ‘why’ and ‘how’ as well as ‘what’ has happened to (poor) people?

My answer (below) has mostly to do with targeting

Micro ImpactsGE approach is tempting

but CGE models probably impossible to adapt to this wide a range of financial, quantity and price shocks

lack of CGE analysis of other financial crises (Asia Crisis) seems to support this view

Each country will be different in terms of sectors hit hardest because ofdifferent importance of sectors in the economydifferent exposure of sectors to international and

domestic transmission mechanisms

Micro ImpactsSome partial equilibrium analysis likely useful

projecting and tracking main immediate impacts (follow the money)

identifying where to look for the big micro impactsFor example

financial sector/workers, export industriesremittance-dependent populationsforeign-company workers, tourism sector/workerscommodity producers, luxury goods/services

suppliers

Micro ImpactsWhy is it useful to predict micro impacts, as

opposed to simply monitoring them?for selection of sites to monitor, given that (in

CBMS), full country coverage won’t be feasiblefor survey indicators and questions for choice and design of mitigation policies and

interventionsKnowing ‘what’ is more important than knowing

‘why,’ (my view) and there are real limits to knowing ‘why’ with so many transmission channels

Poorer PopulationsWhat about impacts on the poor and BoP?To what extent are poor population groups

‘decoupled’ from the market economy?From a HH view – what can decline or disappear?

markets/sales – agriculture, informal production, services (incl. tourism), jobs and intermittent work

public and social services; security, health, education..

prices – net effect of deflation on incomes & purchases

remittances, credit to survive, etc.

Poorer PopulationsGender impacts and impacts on children

(UNICEF)women are typically poorer across and within

HHcomplex reasons, but well studied in general

(non-crisis) conditionsCBMS in many countries is capable of gender

and age differentiated monitoring; this should be done

CBMS monitoring strategies to consider gender & children’s issues in their design (next 2 days)

Coping MechanismsThe range of mechanisms recently studied for

the food crisis provides a good reference point:Food and nutrition

reducing consumption, cheaper foods and sources etc.

Fuel, electricity and water cheaper fuels (wood, less cooking etc.

Educationchildren withdrawn from school, moved from

private to public schools etc.

Coping MechanismsHealth

reduction in seeking services, substitution of public and traditional for private, traditional and generic medicines for branded, etc.

Communications and transport – many formsSavings reduction, drawing on savingsSelling & pawning assets – productive and otherIncomes – multiple jobs, borrowing (if possible)

etc.Substitution of necessities for luxuries (travel,

entertainment recreation etc.)

Coping MechanismsOften a fine line between coping & simply being

poorer – reducing food intake when already malnourished

Poor HH have fewer coping mechanisms availableWomen typically have fewer coping options, or have

coping options which undermine their health & wellbeing moreagain the importance of gender differentiated

monitoringDependency ratios and relationships important

Mitigation MeasuresIn terms of the CBMS initiative, probably

we are looking mostly at safety netsbut an eye to generation of (local) economic

activity, & longer term economic development will be useful

crisis can be a good time to accomplish structural changes and reforms - carefully

Some dimensions of safety net targetinggeneral (cash transfers) and more purposeful

(health insurance, education incentives)

Mitigation Measuresgeneral (stimulus) and location-specific (hard

hit areas)shorter and longer term – e.g. children who

leave school tend not to go back; keeping kids in school is a long term investment, and very useful in a crisis

Monitoring should be over several years, and ideally for the same sitesthose who suffer are often NOT those who gain

during recoveryMitigation & assistance for long term victims

Mitigation MeasuresFinancing mitigation measures

Many in society do not lose, even gain (e.g. from secure jobs/incomes and lower prices)

Tax the secure and take care of the victims (Robin Hood model) – but tax increases are contractionary

So run deficits and take care of the victims – but typically limits to Govt. borrowing in crisis times

International financing mechanisms important - a trusted IMF with enough resources, W.B., regional development banks etc.

Mitigation MeasuresA good time for ‘Liberal’ economic policy

For small open economies, best survival paths are mainly matters of redistribution

Supporting efficient redistribution is not only (as always) the right thing to do;

It also may benefit you, as very few jobs and incomes are completely secure

A well designed CBMS initiative can be very helpful in achieving efficient redistribution and economic security