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A Primer on these Perilous Economic Times

Marcus Williams's picture

It was a close and muggy Washington morning as about 100 people gathered early this past Saturday for the yearly MIGA client breakfast, taking place during the 2011 World Bank Group/International Monetary Fund Annual Meetings. It was gratifying to see people from many fields in the audience, ranging from investors and fund managers to bankers and project lawyers as well as a not a few economists and development specialists. The rather overheated feeling in the air was probably only partly due to the warm weather outside, and as much to do with the prevailing sense of deep concern about where the world’s economic fortunes are headed. All in all, it promised to be a lively session.

Hans Timmer, the World Bank’s Director for Economic Prospects, gave concise but broad remarks about the current state of the global economy and different scenarios for what could materialize. Having started out by commenting how pleased he was to see the welcoming smiles in the audience, he warned that they may no longer be there once he got into the subject matter.

In a far-reaching talk, Hans focused much discussion around the sovereign debt crisis in Europe and the possible effects it might have for the rest of the world, and particularly for developing countries. The fear is that this time around developing countries may be far more vulnerable to negative spillovers than they were in the financial crisis three years ago. Indeed, financial markets have seen spreads for emerging market debt increase sharply over the past six weeks – up an average 80 basis points – something not seen in the 2008 crisis. This will in turn affect the ability of the developing countries to provide the growth that will be needed to pull the global economy back on track. He noted that in terms of growth projections, last year’s low case scenario has become this year’s base case. And the question for the world’s emerging markets will be, what happens if the new low case scenario becomes the reality?

During the question session, there was discussion about the many commentaries being voiced in the press about the absence of political leadership to pull governments and parliaments together to forge a decisive and shared plan of action. Hans noted that such observations tend to suggest the real problem is political rather than economic, and that if only the political will existed then implementing the economic solutions would be relatively simple. He cautioned against such a view, noting that notwithstanding the highly charged political environment, the economic answers are of course far from easy. One of the most vital prescriptions will be to do everything possible to ensure that contagion is limited and that in particular Europe’s sovereign debt crisis doesn’t spread to becoming a full-blown banking crisis. And the need for quick and decisive ring-fencing around failing organizations, and indeed sovereigns, is going to be paramount.

Concluding with an attempt to look for silver linings, Hans noted that the current crisis offers a chance for developing countries to take over the driver’s seat and take the lead in charting the path to get the world’s economy back into positive territory. In the meantime, the wise thing to do is to hope for the best but very definitely be prepared for the worst. As people stepped outside to head back to the Bank and the Fund, the day was properly underway and the temperature had undoubtedly increased.

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