At World Bank conference, experts explore ways out of current crisis
East Asian economies like China, Korea know how to tackle obstacles to growth
Excess industrial capacity is a drag on global recovery
Fiscal stimulus efforts need to be ambitious and fast-acting
July 17, 2009—Lessons from the East Asian crisis come in many forms – whether an object lesson in the risks of overreliance on exports, knowing when incentives for industrial innovation work best, or in advocating for conservative monetary policies and a big build up in reserves to counter global instability.
These and other pressing issues such as big stimulus plans, shifting economic power, greening growth amidst the crisis, and an exit strategy from today’s worldwide meltdown were on the agenda at the 20th Annual Bank Conference on Development Economics (ABCDE) held in Seoul in late June.
ABCDE 2009, which had the theme, ‘Lessons from East Asia and the Financial Crisis,’ attracted international academics, East Asian policymakers, leading Korean thought-leaders and officials from the World Bank, the International Monetary Fund, the Asian Development Bank, the Bank for International Settlements, and other multilateral organizations.
“Tackling increasing poverty and inequality is essential to growth. Advanced nations must work together to increase support for developing countries if the world is to overcome this crisis and institute a viable post-crisis order,” said Jeung Hyun Yoon, Korea’s Minister of Strategy and Finance during the event’s opening session.
Minister Yoon cited the central role of the G20 in the crisis and Korea’s responsibilities as one of East Asia’s largest economies. He spoke of the country’s upcoming chairmanship of the G20 starting in 2010, announced the government’s intention to triple development assistance to poorer countries by 2015, and said the country is committed to green growth as a key way out of today’s crisis. An estimated 75% of Korea’s post-crisis stimulus plan is targeted at green growth.
East Asian lessons and options for recovery
According to World Bank Chief Economist Justin Lin, a key factor behind East Asia’s rise up the economic ladder between the 1970s and 2007 was the ability of many Asian countries to use their comparative advantage successfully. This was possible in part because governments in many instances (for example in the case of Korea) provided a foundation for industrial upgrading by providing information, coordination and necessary investments to facilitate the new industries.
“East Asian countries have important lessons to impart in terms of providing the foundation for industrial upgrading and in building soft and hard infrastructure that is targeted at releasing bottlenecks to growth, as in China after the 1997 crisis,” said Lin.
According to analysis by Lin and other top economists, the current economic recovery appears to be fragile due to massive underutilized capacity in the industrial sectors of many big advanced economies and emerging markets economies. Complicating this is the rapidly accumulating burden of public debts.
“Since this global problem has evolved from a financial sector crisis to a real economy crisis with excess capacity emerging as a huge drag on recovery, it is more important to focus on ensuring that fiscal stimulus efforts are ambitious and fast-acting enough to spur growth than it is to rush toward exit strategies from big spending plans,” noted Lin.
Anne Krueger, former WB chief economist as well former IMF First Deputy Managing Director, predicted an era of lower growth , a rise in the real cost of capital, and big fiscal challenges in the medium term.
“It is too early to say when an exit strategy from big fiscal stimulus efforts will be needed and we must hope that the aggregate demand effects from big stimulus packages in the US and China begin to take hold soon,” she cautioned.
Krueger also noted Korea’s strong role in advocating for free trade for developing countries and stressed that the country has an impressive track record in promoting technological innovation.
Simon Johnson, MIT professor and former IMF Chief Economist, warned that problems from "super-sized finance" have actually worsened since rescue efforts began. He thought the US financial system had fostered the rise of banking oligarchs that were ‘too big to fail’, which has undermined institutions around the world and created global vulnerability.
Noting that global rebalancing may be in the offing, current IMF Chief Economist Olivier Blanchard said that it is unclear who would replace US consumers as joblessness and a slump in investment ripples through America’s real economy and through Western Europe.
Blanchard asserted that, in the medium term, three shifts need to occur. First, as the crisis recedes, there should be less emphasis on public spending and more on private spending. Second, a shift is needed in the United States from domestic demand to foreign demand (and less private consumption and more saving). Third, in Asia, it would be useful to see a shift from foreign demand to domestic demand.
On the question of whether Asia can decouple itself from other regions and from the advanced countries, Blanchard was skeptical. He noted that the rebound in Emerging Asia’s exports, especially electronic exports due to restocking in the US and external demand from China, holds promise. But he cautioned that China alone cannot pull the entire Asia region.
From climate change to social capital
Other topics covered at the ABCDE conference included: climate change; a comparative approach between Asian economic transitions and Africa today; household and firm responses to shocks; ICT innovation in Africa; and the role of social capital and institutions in development.
During the session on climate change, Sunita Narain of the Centre for Science and Environment in India noted the need to “turn the discussion upside down” with a shift in focus from technical and physical challenges to social ones, with a strong focus on people and a local emphasis on adaptation.
Young winners of the World Bank’s 2009 essay competition on climate change —Sophie Bathurst (Australia), Guillermo Recio (Mexico) and Kwasi Gyeabour (Ghana)—will begin posting their ideas about how to tackle climate change through youth-led solutions on the Bank’s climate change blog, “Development in a Changing Climate” in August this year.
Looking ahead to ABCDE Stockholm
In 2010, the ABCDE conference will be in Stockholm, coinciding with Sweden’s EU Presidency. In accepting next year’s host role, Lars Vargo, Swedish Ambassador to Korea, spoke of the vital importance of development aid, knowledge sharing, and international cooperation in reducing poverty and promoting sustainable growth.
“The bar has been set very high by Korea, but Sweden promises to do its best to provide a platform for sharing ideas and policy innovations across many countries at next year’s event,” Vargo promised.
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