February 24, 2009—Senior economic and central bank officials from emerging market countries who participated in a February 12th World Bank video conference on the global economic crisis said that despite falling trade volume and slowing GDP growth, their financial systems and international reserves remain strong, in contrast to the crises of the late 1990s.
Officials from Brazil, China and India, among others, responded to remarks by economics professors Guillermo Calvo, of Columbia University, and Patrick Honohan, of Ireland’s Trinity College. Calvo noted that while the U.S. is suffering “a double-whammy” of a drop in aggregate demand combined with a credit crunch, most emerging markets are faring better. The emerging markets’ bond index is doing “quite well” under the circumstances, he said, with spreads lower than those of the US corporate (junk) bond market index.
Calvo and Honohan spoke with policymakers and analysts at the third in a series of Global Dialogues as a Response to the Global Economic Crisis organized by the World Bank Institute (WBI), which delivers knowledge and learning services to developing countries. These dialogues provide an opportunity for policymakers dealing with the global crisis to share their experiences, and what they have learned from them.
While officials from China, India and Brazil confirmed a recovery in capital inflows and international currency reserves in recent months, they have also taken measures to stimulate their economies, while also delivering social programs to cushion the impact of job losses.
For example, Yang Jinlin, of China’s Asia-Pacific Finance and Development Center, noted that China’s GDP growth dropped from 10 to 6.8 percent in the fourth quarter of 2008, largely due to a 10-percent drop in exports during the same period. This has wiped out jobs for 23 million migrant workers in China, he said.
It has prompted the Chinese government to reduce interest rates five times, and to launch a stimulus package worth four trillion yuan over the next two years. These measures are aimed at preventing a hard landing for the Chinese economy, he said. He acknowledged that the shift from an export-driven to a domestic-demand-driven economic model will take a long time.
Guillermo Calvo expressed concern that financing requirements for the U.S. government’s stimulus package could “crowd out” capital currently drawn to emerging markets.
Officials acknowledged that risk, but remained bullish about the current state of their economies. Katherine Hennings, advisor to Brazil’s Deputy Governor for Economic Policy, said her country is pumping liquidity into its economy to enable banks to finance private sector activity, especially trade.
In this crisis, government is not the problem, she said, drawing a contrast with the 1990s. She said Brazil holds $208 billion in reserves, and that its financial system—with banks’ capital-to-equity ratio at 16 percent—is sound.
Alok Sheel, Joint Secretary of India’s Economic Affairs Department, was similarly upbeat, saying that India’s large domestic market was a bulwark against the drop in demand for India’s exports. The financial sector, meanwhile, is relatively robust, he said, with little exposure to toxic assets.
A marked consensus emerged from the two-hour exchange that while middle-income countries are being hit by the economic crisis in the rich countries, many of them—especially those who survived major crises in the 1990s—have shored up their defenses. In contrast to several more developed economies, they have established sound prudential bank regulation, trimmed deficits, and accumulated reserves that now enable them to roll out stimulus packages to soften the damage of the global turmoil. All good news, but all were also clearly aware of the risks that remain.
These Global Dialogues are being delivered through the Global Development Learning Network (GDLN), a partnership of more than 120 recognized global institutions, which collaborates in the design of customized learning solutions for individuals and organizations working in development.