Transcript The Multilateral Response to the Global Crisis for Emerging

The Multilateral Response to the Global
Crisis for Emerging Economies:
Rationale, Modalities, and Feasibility
Eduardo Fernandez-Arias, Andrew Powell, and
Alessandro Rebucci
Inter American Development Bank
22 April 2009
The views expressed are those of the authors and not those of the IDB or its Executive Board.
Motivation
• EMs require significant multilateral assistance to
respond successfully to the on-going global
economic crisis
• Question is not whether multilaterals should
intervene, but how?
• Our aim is to stimulate discussion among
participants ….
Outline
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Why should multilaterals intervene?
How should multilaterals intervene?
What is the specific role of MDBs?
Is it feasible to gear up multilateral lending
substantially?
• Looking ahead …
Why should multilaterals intervene?
• Because the shock is exogenous and large, but there
remains reluctance to recognize it
• he optimal policy response is the same as in advanced
economies
• But being “emerging” means that it cannot be
implemented without multilateral support
– Government paper is risky
– Policy intervention must be conducted in advanced
countries’ currencies
• This imposes tight constraints on active policy response
– Fiscal Policy: Higher rates and shorter maturities; stimulus
affects liquidity ratios
– Monetary Policy: Risk de-anchoring expectations,
exchange rate instability
– LOLR: liquidity provision may fuel capital flight and
monetary instability
Additional benefits of multilateral intervention
• Fiscal stimulus packages are more efficient the
more countries partake
– While EM’s are generally small, marginal
propensities to consume are higher and leakages
larger helping IC’s
• Avoiding negative spillovers and protectionism in
particular may have big pay off
• Reward past good policies and hedge against
reform backslash
How should multilaterals intervene? Differently
in different countries
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We see four different modalities
– Countries with fiscal space and no liquidity
problems
– Countries with fiscal space and potential
liquidity problems
– Countries with no fiscal space and potential
liquidity problems
– Countries with more serious “solvency” issues
Countries in the first group:
Should they be reclassified as no longer EM’s?
Have they over-saved?
Countries in the fourth group pose very difficult
dilemmas
• Should they adjust or restructure their debt?
• Should multilaterals hold off till a debt
restructuring is in the cards or try to help to fend
off default?
• Should multilaterals lend without the IMF?
• Still no framework for such restructurings akin to
corporate “insolvency” regimes, putting
multilaterals in difficult position
Countries in the second group: red carpet
treatment (unconditional liquidity)
• Multilaterals should support fiscal stimulus by providing
liquidity (defined as reserves over liabilities coming due
in a year)
– IMF can help with reserves support and MDBs with budget
support (both allow safer and cheaper stimulus)
– Markets and IMF monitor budget envelope and MDBs help
ensure its composition is development effective (see more
below on MDBs)
– Insurance-type or precautionary arrangements, with very
limited (e.g., no trade protectionist measure in fiscal
stimulus) or no ex-post conditionality
Countries in the third group: the usual tough
love (conditional liquidity)
• Multilaterals should support financially external
adjustment and backstop liquidity as before
– But countries may need to adjust to ensure a sustainable
fiscal stance
– Ordinary multilateral stabilization programs with traditional
ex-post conditionality
– Envelope is constrained but development effectiveness is
even more important: MDB’s can help on both liquidity
(denominator) and protection of particular expenditures
(social protection, supporting growth enhancing projects)
What is the specific role of IDB and other MDBs?
• Contribute to backstopping liquidity with medium and
long-term lending
• Help countries to design development-effective
expenditure composition policies within envelope:
– Make sure transitory measure are credibly transitory
– Protect social programs thereby making prudent
policies more viable politically
– Support infrastructure investment
– …and help to reform fiscal institutions and enact
growth spurring policies that can expand sustainable
envelope!
What is the specific role of IDB and other MDBs?
• Beyond central budget, support fiscal policy at
sub-national levels of government and private
sector investment in activities of public interest
• In non-systemic cases, IDB could also support
the budget envelop and backstop liquidity by
itself, but should not facilitate avoidance of IMF
• Partner with bilateral donors on specific areas of
common interest, possibly channeling credit off
balance sheet
Is it feasible to gear up multilateral lending
substantially before recapitalization of the system?
• Historical average stabilization package is 5-10 percent
of GDP
– So it should be feasible to support fiscal stimulus (2
percent of GDP) and backstop liquidity (3-8) percent of
GDP.
• But financing will likely remain endogenous to the
severity of the crisis.
– So it is useful to think about other ways to expand demand
and contain supply of resources for multilateral
intervention regardless of the envelop size at any point in
time
Ways to contain cost of multilateral intervention
• Expand financing supply:
– Increase leverage of multilateral system
– Extend SWAP network to G3 or G5 central banks
– Recycling mechanism for CA surpluses and flight
to quality funds
Ways to contain cost of multilateral intervention
• Contain financing demand:
– Establish credible structural fiscal policy
frameworks
– Approach multilaterals earlier rather than later
– Differentiate across countries (distinguish
systemic important cases from others)
– Prioritize activities in any given country
Looking ahead
• Need to recapitalize the multilateral system as financial
integration has deepened permanently, despite short
term prospects for dileveraging to continue
• Its governance also appear inadequate (at least for the
purpose of liquidity provision, i.e., IMF governance need
reform)
• Crisis prevention: can multilaterals help private sector
offer country insurance products?
• Crisis resolution: CACs vs SDRM. Unfortunately we may
soon have to revisit this debate, set aside during the
bonanza
Thank you