The global financial and economic crisis highlights the need for effective means of coordinating complementary national policy responses into workable international action. This seems to me to require in turn an international financial architecture that emphasizes the sustainability of national and cross-border financial institutions, instruments and regulations. The international financial architecture needs a major infusion of transparency and forward-looking regulatory practices. Neither will be simple to conceptualise or implement.  

Some may wonder how the observations of the Growth Report, dealing with sustainable high growth patterns over long periods, can be reconciled with policy choices currently facing government decision-makers.  Clearly the food and fuel price spikes earlier in 2008, followed by the financial meltdown affecting all markets, were dramatic challenges, especially for poorer developing economies, but also for emerging market economies generally. This will inevitably be followed by a global recession in 2009, a slow-down that has already started, even in China, the world’s dominant growth engine in recent years.

Kemal Dervis, head of the UN Development Program, and also a commissioner on the Commission for Growth and Development discussed the need for fairness in the availability of credit for emerging markets. In an op-ed in the Washington Post on Monday, November 3rd, Commissioner Dervis highlighted the dramatic effects the current deleveraging process will have on developing economies. He also points out that if the IMF and reserve-rich countries start implementing a selective lending facility, this will likely create new political tensions that will push vulnerable countries into crisis even faster.  

One of the villains of the current financial crisis is "securitization."  The alphabet soup of securities structures--CMOs, CDOs and SIVs--is roundly blamed for the financial world's current mess.

The irony is that it was not so long ago that emerging countries looked to securitization as a savior for the problems that they faced in developing capital markets.  Specifically, many countries (particularly in Latin America) looked to Fannie Mae/Freddie Mac Mortgage Backed Securities as models for instruments for providing housing finance, and others (such as India) looked at special purpose vechicles as a potential method for getting around the poor financial conditions of local government attempting to finance infrastructure.

So which is it: villain or savior?  Well, of course the answer is neither.  Securitization is just an instrument, and when applied appropriately under appropriate circumstances, is a useful instrument.  So let's begin by dispensing with the notion that securitization is itself a villain, and then talk about why it is not a savior either.

On October 10, 2008, Michael Spence, Mohamed El-Erian and Mahmoud Mohieldin discussed the current global imbalances, macro economic global governance, and the impact it will have on the developing world.  Please access the video of the discussion here.

In an opinion piece featured in the Financial Times' The Economists' Forum on October 27th, Michael Spence offers suggestions on how to avoid the deepening of an asset deflation overshoot which has already begun, and will likely get worse if not attended to by leaders in both industrial and developing economies. Key highlights include coordinated actions by the government and private sector to recapitalize banks, direct intervention in housing markets, IMF coordination of reserve surplus countries,  and private corporation stock buy-back programs. Please access the article here.

In an opinion piece that is being carried by various publications around the world, Growth Commission Chair Michael Spence discusses how the current credit crisis in the U.S. and other G-8 countries can influence growth in developing countries. In particular, Dr. Spence stresses the evolving nature of global interdependencies, and the need for proactive coordination in warding off future crises. Please read more and offer your thoughts by accessing the article here.

Debate among economists about the $700 billion Paulson plan reveals a deep divide between realists and fundamentalists. If economists and policy makers pay attention to how the tension between these two positions plays out in this particular debate, it will help us know how to deal with it in other areas, including development.

The formal, model-based approach of the fundamentalists has contributed much to progress in economic analysis. At key junctures, it has also made important contributions to policy. The challenge is to maintain an intellectual environment that leaves space for a conversation with realists as well. In complicated policy contexts where models don't yet capture key forces, the realists have much to offer both policy makers and fundamentalist modelers. By giving voice to observations that strike realists as obvious but that are not accepted in conversations dominated by fundamentalists, the report by the Commission on Growth and Development could encourage a richer, more open debate about the policy options for poor countries. 

We are launching the Commission on Growth and Development BLOG (The Growth Blog) today, while unprecedented changes in the financial markets are underway. These changes have the potential to reconfigure financial systems in a manner not seen since the 1930s. However important those are, we should not lose sight of the longer-term, of the real economy and of the performance of developing countries-on which the prospects of millions of people depend. The report of the commission, entitled, "The Growth Report: Strategies for High Growth and Sustainable Development" deals exactly which such issues. We will also want to discuss and debate what the shifting global landscape means for effective growth strategies and how they need to be adapted to account for climate change, heightened volatility and risk, including rapid shifts in relative prices, reduced growth in the developed economies for a period of time and other factors. I believe that a broad array of policies that could be under the heading risk mitigation and management will become a higher priority in setting growth and development strategies. Notwithstanding the secular and surprising cyclical shifts, the underlying dynamics of sustained high growth and their political and policy underpinnings are not likely to change dramatically. And there are major areas of supporting policy in which there is ongoing research, continued debate and something less than complete practical guidance in the offing.