As reports of sluggish global job creation continue, some look to new firms as a source of net job creation (Haltiwanger, 2011). But the lead article of this month’s Economics Letters, citing panel data from 93 countries, shows that most countries experienced a sharp drop in new firm registration during the financial crisis. As discussed in an earlier blog, relatively larger contractions are seen in countries with more developed financial markets and where entrepreneurs depend more on banks for start-up capital.
One of the most hotly debated policy questions with respect to the 2008 global crisis is how to stimulate business recovery. Because the crisis started in and severely affected the financial sector, the conventional assumption is that the recovery of the financial sector is a precondition to recovery in the corporate sector. While this conjecture appears reasonable, some have challenged it, pointing to numerous crises across the world in recent years in which real sector recovery preceded that of the financial sector. Of particular interest are episodes characterized by Calvo et al. (2006) as Systemic Sudden Stops (3S episodes) where output declines are associated with sharp declines in the liquidity of a country’s financial sector. Subsequent credit-less recoveries—in which external credit collapses with output but fails to recover as output bounces back to full recovery—have been termed “Phoenix Miracles.”
Empirically, 3S episodes offer an unusual natural experiment since they provide an opportunity to observe how firms are affected in economies which have been subjected to a financial shock that precedes or is contemporaneous with a recession. To date there has been little evidence at the firm-level on how corporations respond to crises in general. In a recent paper, my co-authors Meghana Ayyagari, Vojislav Maksimovic and I use a database of listed firms in emerging markets to analyze the recovery process after a financing crisis. We try to see if recovery of the financial sector precedes or occurs at the same time as the recovery in output of the corporate sector. In other words, we ask: Do firms experience Phoenix Miracles where their sales recover without a recovery in external credit? We then compare and contrast the experience of emerging market firms to that of US firms during the 2008 US financial crisis and investigate if the recent US recovery process qualifies as a Phoenix Miracle.
Given the urgent need for policymakers in Europe and other advanced economies to tackle current debt challenges, there is a frantic scramble for suitable policy tools that will help resolve the Greek conundrum.
One policy tool – a form of debt restructuring known as ‘financial repression’ that focuses on establishing a tighter relationship between government and the financial industry by setting caps on interest rates and regulating cross-border money flows – has largely been overlooked. The Petersen Insitute’s Carmen Reinhart recently delivered a
Three interlinked global crises—food, economic, climate—were high on the agenda of this year’s Bank-IMF Spring Meetings. At a conference organized by the Independent Evaluation Group and World Bank Institute, a panel of experts—Kristalina Georgieva, European Commissioner; Hans Herren, President, Millennium Institute; Trevor Manuel, Minister, National Planning Commission, South Africa; Ngozi Okonjo-Iweala, Managing Director, World Bank; Robert Watson, Chief Scientific Advisor, Government of UK— discussed not only the impact of each crisis, but crucially the links among them in seeking joint solutions.
The 2007–08 financial crisis was one of historic dimensions—few would dispute that it was one of the broadest, deepest, and most complex crises since the Great Depression. Initially, however, the crisis seemed to be of rather limited scope, and many thought countries would be able to “decouple” from events in the United States. But after Lehman Brothers collapsed in September 2008, the crisis spread rapidly across institutions, markets, and borders. There were massive failures of financial institutions and a staggering collapse in asset values in developed and developing countries alike. Nonetheless, the reactions of stock markets varied widely around the globe, with some countries showing greater comovement with the US market than others (figure 1).
Together with Tatiana Didier, we empirically investigate the factors that determine comovement between stock market returns in the United States and those in 83 other countries in a recent paper. In particular, we evaluate the extent to which comovement with US stock market returns during this recent turbulent period was driven by real linkages, was driven by financial linkages, or was the consequence of “demonstration effects” (see Goldstein 1998 and Masson 1998), in which investors became aware of vulnerabilities present in the US context and reassessed the risks in other countries, reevaluating the value of their stockholdings.
Presidents Hu and Obama created buzz earlier this week in Washington when they met on pressing bilateral issues, including US-China business and investment regulation, trade, currency imbalances and security concerns. US-China clean energy cooperation is an important part of that bilateral dialogue (see transcript of my intervention at a January 18 US-China Strategic Forum hosted by Brookings).
Cooperation between the two countries can yield big economic benefits. The world is recovering from the worst economic crisis since the Great Depression. In this context, taking advantage of clean energy opportunities is crucial to fueling a sustained global recovery.
|Photo: © World Bank|
Two years after the crisis triggered by the collapse of Lehman Brothers, the world economy has entered a new phase of recovery. Most developing countries have recovered to pre-crisis (or close to pre-crisis) levels of activity and have transitioned from a bounce-back phase to more mature growth.
We estimate in our new online Global Economic Prospects 2011 report that the growth rate for the world economy was 3.9% in 2010 and is likely to be to 3.3% this year, then 3.6 % in 2012.
The GDP growth rate for developing countries was a robust 7 percent in 2010, up sharply from 2% growth in 2009. This year we project the developing world will record GDP growth of 6%, then edge to an estimated 6.1% in 2012. This far outstrips the high income countries, which grew by 2.8% in 2010 and are estimated to growth by 2.4% this year and 2.7% next year.
The book’s editor, Mustapha Nabli, estimates that the average potential growth rate for the ten countries before the financial crisis was about 6 percent. Unlike the overheated financial sector, pre-crisis trade and remittance levels were sustainable.
Once the crisis hit, however, less diversified countries really felt the heat. Their financial sectors eventually recovered, but trade remained low, thus adversely affecting their growth. 13.6 percent of Turkey’s 2009 GDP, for example, was shaved off during the financial crisis. Possibly this was due in part to fears left over from past financial crises.
The recent financial crisis demonstrated that existing capital regulations—in design, implementation, or some combination of the two—were completely inadequate to prevent a panic in the financial sector. Needless to say, policymakers and pundits have been making widespread calls to reform bank regulation and supervision. But how best to redesign capital standards? Before joining the calls for reform, it’s important to look at how financial institutions performed through the crisis to see if we’re learning the right lessons from the crisis. Is capital regulation justified? What type of capital should banks hold to ensure that they can better withstand periods of stress? Should a simple leverage ratio be introduced to reduce regulatory arbitrage and improve transparency? These are some of the questions addressed in a recent paper I wrote with Enrica Detragiache and Ouarda Merrouche.
Since the first Basel capital accord in 1988, the prevailing approach to bank regulation has put capital front and center: banks that hold more capital should be better able to absorb losses with their own resources, without becoming insolvent or necessitating a bailout with public funds. In addition, by forcing bank owners to have some “skin in the game,” minimum capital requirements help counterbalance incentives for excessive risk-taking created by limited liability and amplified by deposit insurance and bailout expectations. However, many of the banks that were rescued in the latest turmoil appeared to be in compliance with minimum capital requirements shortly before and even during the crisis. In the ensuing debate over how to strengthen regulation, capital continues to play an important role. A consensus is being forged around a new set of capital standards (Basel III), with the goal of making capital requirements more stringent.
Book working title: “Global Migration and Remittances during the Financial Crisis and Beyond”
To be published by the World Bank in Spring 2011
Edited by Ibrahim Sirkeci, Jeffrey H. Cohen, and Dilip Ratha