Financial Development

After the conclusion of the Growth Commission workshop on the financial crisis, I wrote the following piece in the Financial Express on how India used its reserves in the financial crisis. I examine whether or not using reserves as a tool to provide insurance is effective. I look forward to your comments.  

Read a recent piece in the Financial Express that I coauthored with Ila Patnaik about how India's economy is dealing with the financial crisis, the need for sustained private sector investment and the need for the incoming government to pursue broad economic reforms. I look forward to your feedback!

Viral Acharya, Matthew Richardson and Nouriel Roubini comment on the financial crisis, and offer recommendations to regulators on how to fix the system. Access the piece in the Financial Times here.

The financial system in the USA and much of Europe had a heart attack in September 2008.  As in the case of a real heart attack, the highest priority has gone to the emergency response and to stabilizing the patient.  Once that is done and the crisis is abating and even to some extent as it is going on, it will be important (economically and politically) for some to focus on two related issues:  What created the rising risk of an attack?  And what combination of actions post-crisis will reduce the risk of a repeat in the future. 

Michael Spence details the necessary steps needed for the Geithner plan to be implemented, and addresses the current criticisms of the plan. Follow the debate over the Geithner plan and comment on Spence's analysis here.

Aggressive and innovative monetary and financial sector policy actions in developed economies have pulled the global financial system back from the brink of an abyss. But impaired assets are not yet properly valued and neutralized. And new negative feedback loops may be forming between the financial and real sectors. In any case, even after banking circuits are eventually unclogged, confidence restored, and risk appetite revived, the financial euphoria of the recent past is unlikely to revive any time soon. The changed financial landscape has several implications for the developing economies.

Growth Commission Chair Michael Spence was a guest on CNBC's Squawk Box this past week, where he discussed the Fed's recent announcement that it will purchase $300 bn in long term U.S. Treasury Bills, adding to the $750 billion worth of agency backed mortgages it plans to purchase this year. Spence lauded this move by the Fed, and stressed that the key to recovery is to unfreeze the credit markets. Additionally, Spence emphasized the attention that must be paid to making sure that developing countries recover from this crisis.  Inevitably, he said, the western countries will recover, but due to an increased propensity to save, they will not likely drive the same levels of aggregate demand that existed before the crisis. This shortfall will only be made up if recovery in the developing world keeps pace with the industrial countries. To watch the interview, please click here.

In a sobering editorial in Tuesday’s Financial Times, Trevor Manuel, the Finance Minister in South Africa, and member of the Growth Commission, presents the very real dichotomy facing a world searching for a way out of the current financial crisis.  On the one hand, world leaders can band together and “find appropriate instruments of governance through which the propulsive power or modern finance can be harnessed to serve a development agenda”. On the other hand, a failure to do so will result in “growth and social progress” continuing to be the “bonded servants of finance capital”.

The impact of the current financial crisis on the developing countries and the slide of the major industrial countries into recession pose several interesting questions for the international community and the growth commission which released its report in 2008.

Two of these questions/issues will be singled out for attention in this brief note.  Firstly, the Commission predicated its findings on an open and expanding global economy in which developing countries could import ideas, technology and know how from the rest of the world, and, secondly, the importance of leadership, effective government and experimental policy making to facilitate poor countries in achieving high and sustainable growth rates over an extended period of time.