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Expert's View
Special> G20 London Summit> Expert's View
UPDATED: March 3, 2009 NO. 9 MAR. 5, 2009
CRISIS FOCUS: Lessons From the Crisis

The current worldwide economic recession is not the first of its kind and will not likely be the last. But what should we learn from it? Vinod Thomas, Director General of Independent Evaluation Group at the World Bank Group, discussed the lessons from the crisis during a speech at Peking University in Beijing on February 18. Edited excerpts follow.

Effective actions in five areas, including financial, fiscal, trade, poverty and the environment, must comprise the means by which the current crisis is confronted. Whether it will be confronted effectively or not will presumably entail how well these instruments are employed-not only the pace or the quantity, but also the quality. Quantity and quality will determine whether this set of measures works or not. Not only the amount of money, but also how it is used are extraordinarily important.

What have all the different countries done? The United States has just approved tax cuts and priority investments, and China would be the second largest in terms of a fiscal package. But we have to be careful, because just spending money does not necessarily generate growth. It depends on how countries use the money, and the quality of the projects on which the money is spent. Those countries with low or negative savings need more than a sustained fiscal stimulus to emerge from the crisis, and that the countries with high savings rates can combine their short-term fiscal stimulus with a longer-term expansionary policy.

Monetary and fiscal policies are short-term responses. The long-term response is to focus on social welfare, job creation and issues related to social security.

It is reported that a 1-percent reduction in GDP traps another 20 million people in poverty. One hundred million more will be trapped in poverty with the global recession, so the social and poverty impacts of the crisis should be anticipated. The issue of poverty was ignored at the beginning of economic crisis, so addressing the problem later will be much harder. More measures should be taken to address unemployment and maintain social security.

Meanwhile, coordination is extremely important given the high degree of globalization. The experience with the Great Depression or the previous recession clearly indicates that cooperation and revival depend very much on trade not being restricted. Those who are more open to trade have made more significant recoveries after a crisis. So protectionism is the biggest threat to the revival of the world economy, and protectionism will worsen the global contraction.

More to the point, sustaining economic growth will not be possible without attending to environment. For many countries, there is a danger of backtracking on environmental policies when dealing with the financial crisis.

When we have more and more instruments, it is like a black box: We don't know how they are being used. The sophistication of regulations needs to catch up with the sophistication of the instruments. Thereby, the bottom line is to capture all the risks involved in securitized mortgage loans and derivatives.

During the period of high economic growth, many problems such as not having enough liquidity went unnoticed, because high growth hides many problems. But the problems emerge sooner or later and affect everyone.

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