Transcript Understanding the Crisis: Layer upon Layer

Understanding the Crisis: Layer upon Layer
(Balázs Horváth; joint work with Ben Slay)
Outline
A Crisis of Many Components
 Formulating an Appropriate Policy Response
 Examples
 Donor coordination and UNDP’s role

In a globalized, interdependent world, we face a
confluence of shocks that all require policy action now:
Short-term/high frequency

Cyclical downturn triggered by massive global imbalances;

Financial crisis and associated liquidity and credit crunch;

An unprecedented roller-coaster of commodity prices.
Long-term/low frequency—impact later, but effect of
policies also slow to materialize  action needed now


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Extreme income inequality;
Seismic demographic shifts; and
Global climate change.
What can be done? Remedies
available for each problem…
For short-term shocks:

–
–
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Coordinated Keynesian policies to address cyclical downturn
Keep financial system afloat; regulate widely but sparingly
Address market failures but otherwise let markets set prices
For longer-term threats:
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–
–
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Fiscal redistribution, enhancing inclusive markets and legal
empowerment to alleviate extreme inequality
Pension, health, immigration reforms to address demographics
Properly pricing energy, subsidizing low-carbon technologies,
building global political consensus for action on climate change
Aim for the Overlap in Policy Packages;
Keep balance between urgent & important; ST & LT

Combine key elements of remedies for each
challenge.

Also deliver on other roles of the government:
–
–
–
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enhance regulation of monopolies & of financial system,
improve governance and transparency of govt actions,
avoid self-defeating protectionist trade policies,
legal empowerment of poor  enforceable property
rights, access to law—addresses a key aspect of
entrenched inequality
Examples of building blocks of
policy response
1. Widen the tax base
– This is a key test of governance
– Stark issue: more equitable burden-sharing or vital public
services go unfunded.
– Support regional and global efforts to minimize tax evasion
2. Structure the fiscal stimulus right
– Bolster demand, create green jobs, support low-carbon
technologies.
– Improve targeting of social transfers
– Pension, health, & immigration reforms (demographic
changes).
Examples, continued
3. Focus political efforts and fiscal stimulus on ending
regional conflicts
– If successful, by far “biggest bang for the buck”
4. Coordinated action to alleviate climate change
Key: if pricing does not internalize costs of energy use imposed on others,

final users’ incentives remain grossly misaligned,

chances of slowing global warming are slim.
The way out:

Increase taxes on greenhouse gas emission to end mispricing of energy

Use fiscal room opened up to
– eliminate distortive taxes (notably on employment), strengthen
(targeted) social transfers and subsidize low-carbon technologies; and
– in due course, return to path of fiscal sustainability.
Crisis is an opportunity for reforms

Vested interests that slowed reforms are weakened;
Society’s desire for decisive action grows;

Realization: policy inaction implies higher costs.

– Growing poverty associated w/ HK loss, rising crime/conflicts
– Tidal wave of economic migration may occur from poor regions
Donors to coordinate closely, focusing on
areas of their comparative advantage.

more efficient use of scarce development dollars,
reduces the strain on thinly-stretched governments,

UNDP’s role:

– Coordinator of the various specialized UN agencies
– Social policy, governance, environmental, and other policy
advice at central and local government level
– Proven track record in project implementation in remote
regions and working with disadvantaged groups
– Can critically contribute to ensuring micro-level traction for
policies advocated by IFIs focusing on central government,
macroeconomic & sectoral issues.
Thank you for your attention