Poor countries, especially those in Sub-Saharan Africa, are facing an unprecedented crisis.

From Africa Can... End poverty:

"Responsible aid in a time of crisis

Submitted by Shanta on Thu, 01/29/2009 - 00:05.

My friend, former colleague and one-time co-author Bill Easterly, in his inaugural blog post, takes issue with Bob Zoellick’s Op-Eds in the New York Times and the Financial Times on the need for more aid to poor countries in the wake of the global financial and economic crisis. Bill’s argument is that Bob is calling for more aid without specifying what results that additional aid will achieve, so that the World Bank is not being held accountable for anything.

I agree with Bill that, in normal times, aid and, more generally, public spending is insufficiently linked to outcomes. When people are not accountable for outcomes, much of the aid or spending is wasted. We have made this point separately (see here and here) and jointly.

But these are not normal times we are living in. Poor countries, especially those in Sub-Saharan Africa, are facing an unprecedented crisis. Private capital flows, which had been rising faster in Africa than any other region, are drying up or reversing. Remittances, estimated at $20 billion a year to the continent, are also slowing because, for the first time, the crisis started in the sending countries (77 percent of remittances to Africa come from the U.S. and Western Europe). And the fall in commodity prices is sending many commodity exporters into a recession. Previous growth decelerations in Africa have been associated with increases in poverty, infant and child mortality and out-of-school children. Worst of all, just when economic reforms were beginning to take effect in Africa (growth had been sustained for ten years and accelerating over the last three), people are being asked to tighten their belts—for a crisis that is not even remotely their fault.

In these circumstances, the role of foreign aid is different from its usual role. It is to substitute for the private capital and transfers that had been flowing into the continent, but are slowing because of the financial crisis in the U.S. and Europe. It is analogous to President Obama’s fiscal stimulus in the U.S., which will use public spending to replace the shortfall in private consumption and investment to keep output from falling too fast. The purpose of aid is to reduce the size of the growth deceleration that African countries will experience. This is the result we are seeking to achieve with additional aid. Such results are hard to measure precisely—we would need to know the size of the growth deceleration in the absence of additional aid—which is why Bob Zoellick suggested possible activities that the money could be spent on. Of course, each country will have to tailor its spending according to its particular needs and circumstances. When they do, we will, as we increasingly do now, develop monitorable indicators of performance to hold them and us accountable."

Me:

"Funding for your proposal

Submitted by Don the libertarian Democrat (not verified) on Thu, 01/29/2009 - 21:06.

"The purpose of aid is to reduce the size of the growth deceleration that African countries will experience. This is the result we are seeking to achieve with additional aid. Such results are hard to measure precisely—we would need to know the size of the growth deceleration in the absence of additional aid—which is why Bob Zoellick suggested possible activities that the money could be spent on. Of course, each country will have to tailor its spending according to its particular needs and circumstances. When they do, we will, as we increasingly do now, develop monitorable indicators of performance to hold them and us accountable."This seems like a sensible proposal. Where do you expect the money to come from? Simply the World Bank? Other ideas?"

China will tolerate an increase in bad debt this year as it eases rules governing bank lending to prop up an economy that’s slowing faster than expect

From Bloomberg. Can we be far behind?

"By Philip Lagerkranser

Jan. 12 (Bloomberg) -- China will tolerate an increase in bad debt( INCLUDING OURS ) this year as it eases rules governing bank lending to prop up an economy that’s slowing faster than expected, the nation’s banking regulator said.

The China Banking Regulatory Commission will drop its target of reducing the balance and ratio of bad loans after five years of declines, and instead aim to prevent a “massive and rapid rebound” in soured debts, Chairman Liu Mingkang said in Beijing today. A transcript of his speech was obtained by Bloomberg News.

Looser requirements may fuel concerns about a surge in bad loans, four years after China finished a cleanup of its banking system that cost more than $500 billion. Lenders will likely face weakening asset quality, rising defaults and “significant” constraints on profits in 2009, Standard & Poor’s said Jan. 7.

“What we’re concerned about is whether banks will, under government interference, boost lending without properly recognizing the risks,” said Liao Qiang, the rating company’s Beijing-based analyst, in an interview. “Governments tend to relax prudential regulatory requirements in difficult times. The key is how banks” react.

Measures to boost credit include allowing banks to lend to businesses afflicted by “temporary” financial woes due to the global recession but with sound fundamentals, Liu said. Lenders can also “restructure” loans and “scientifically” adjust the types and maturities of debt, and the regulator will support the sale and securitization of loans, he said without elaborating.

‘Arduous Task’

Industrial & Commercial Bank of China Ltd., the world’s largest bank by market value, and competitors have said they’ll increase lending as part of the government’s $590 billion stimulus package, announced in November. China’s biggest banks are all state-controlled.

Chinese banks extended 740 billion yuan ($108 billion) of new loans in December, the most since January 2008, the Shanghai Securities News reported today, citing unidentified people.

The CBRC encourages lending to fund small and medium-sized businesses, mergers and acquisitions among large companies, as well as credit for automobile and home appliance purchases, according to the transcript.

“The downside risk to the Chinese economy is even worse than anticipated,” Liu, 62, said in the speech. “The 8 percent growth target is of great importance, but an exceptionally arduous task.” Liu last month said expansion of 7 percent or less could trigger social instability.( YIKES )

China’s economy will expand 7.5 percent this year, the slowest pace in almost two decades, as the global financial crisis worsens, the World Bank predicts. Exports probably fell the most in a decade in December even after the government increased rebates, pledged more export loans and stalled currency gains, according to economists surveyed by Bloomberg News.( THEY'RE TRYING TO REMAIN A SAVER/EXPORT COUNTRY. PERIOD. )

Funding Channels

The regulator will have “reasonable tolerance” for rising bad loans, Liu said. Shrinking corporate profits and interference by local governments have “seriously” reduced borrowers’ willingness to repay debts, he added( THIS IS ONE WAY TO STOP A CALLING RUN. ). Banks cut their average bad-loan ratio to 5.49 percent at the end of September, from 6.3 percent six months earlier.

Still, the CBRC will “strictly” ban companies from taking up new project loans to repay existing ones, and prohibit bundling of non-performing assets into securities, according to the transcript. Banks aren’t allowed lend to production projects before the investors get relevant approvals, Liu said.

The regulator will also broaden the channels for banks to boost capital and urge them to increase provisions, Liu said without being more specific.

The banking regulator on Jan. 10 said it would “allow qualified small and medium-sized banks to moderately exceed the loan-to-deposit requirement( WE COULD HAVE DONE THIS AS WELL ).” Chinese lenders are required to keep outstanding loans below 75 percent of their deposits.

To contact the reporter for this story: Philip Lagerkranser in Hong Kong at at lagerkranser@bloomberg.net"

These are interesting actions.

"The IMF should conduct vigorous and even-handed surveillance reviews of all countries": It Was All Like This

Via the NY Times, here's the G20 statement from the summit, all on one page.

Here's Paul Kedrosky's summary:

"I'm trying hard to read the entire G-20 communique -– what leaders propose to do so that global markets stop re-enacting Mothra vs. Godzilla, except with capitalism playing the part of a small island near Japan -- and it's taking years off my life while destroying my corneas. Insofar as I can tell, the shorter version is contained in these four bullet points:

• It's not you, it's me.
• If you change, I might love you more, but don't count on it.
• The IMF sucks.
• "Never" is open. How does that work for you?

And you knew this was coming, so here's the word cloud for the whole thing in its straight-outta-Brussels diplomatic-speak vagueness."

Now, since he's sussed it, why should I even bother to read it?( One note Paul, don't call it a communique. It makes it sound like something issued by subcomandante Marcos ). After all, I'm constantly amazed by Hilzoy, who feels called upon, out of decency or fairness I suppose, to slog through some of the most boring texts. I usually skim these atrocities at best. In fact, I've already scrolled through this text once, but I'm going to see if there's anything that I find interesting.

"Root Causes of the Current Crisis

3. During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

4. Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption."

Is there anything that they didn't mention? I don't see low interest rates and a giant sloshing pool of money. There's no point in going through this thing, it's going to mention everything in general terms.

"Help emerging and developing economies gain access to finance in current difficult financial conditions, including through liquidity facilities and program support. We stress the International Monetary Fund’s (IMF) important role in crisis response, welcome its new short-term liquidity facility, and urge the ongoing review of its instruments and facilities to ensure flexibility.

•

Encourage the World Bank and other multilateral development banks (MDBs) to use their full capacity in support of their development agenda, and we welcome the recent introduction of new facilities by the World Bank in the areas of infrastructure and trade finance.

•

Ensure that the IMF, World Bank and other MDBs have sufficient resources to continue playing their role in overcoming the crisis."

I guess that this is important.

"Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace. Financial institutions must also bear their responsibility for the turmoil and should do their part to overcome it including by recognizing losses, improving disclosure and strengthening their governance and risk management practices."

And also:

"Then peace will guide the planets
And love will steer the stars

This is the dawning of the age of Aquarius
The age of Aquarius
Aquarius!
Aquarius!

Harmony and understanding
Sympathy and trust abounding
No more falsehoods or derisions
Golden living dreams of visions
Mystic crystal revalation
And the mind's true liberation
Aquarius!
Aquarius!"

Wow. This is awful. Pablum.

"Financial institutions should provide enhanced risk disclosures in their reporting and disclose all losses on an ongoing basis, consistent with international best practice, as appropriate. Regulators should work to ensure that a financial institution’ financial statements include a complete, accurate, and timely picture of the firm’s activities (including off-balance sheet activities) and are reported on a consistent and regular basis."

Pretty bold stuff.

"Prudential Oversight"

Prudential. This is like the good before Socrates gets to it.

"Advanced economies, the IMF, and other international organizations should provide capacity-building programs for emerging market economies and developing countries on the formulation and the implementation of new major regulations, consistent with international standards."

It's kind of like a statement of principles of peace and harmony among nations, ignoring everything to do with real world conflicts and contradictions. It can't hurt.

"sending former Secretary of State Madeleine Albright and former Republican Representative Jim Leach instead. "

Here's the list of guests to the party from Bloomberg:

"G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

The Netherlands and Spain are also be represented, as are the IMF, World Bank, and United Nations."

I'm not going to comment until I find out what happens. That seems a wiser course of action.

Bon appetit.

Here's nice agenda from The Times:

"Differing agendas

United States The US is scared of new, onerous regulation and is urging European countries to respect free-market principles on the basis that long-term state intervention will damage economic growth. But US policy on bailing out troubled industries is split: Barack Obama, the President-elect, wants to use federal funds to rescue American car companies; many Republicans do not.

Britain Gordon Brown has a long list. To start with, he wants “co-ordinated fiscal stimulus packages” — which means getting countries to increase public spending to create new jobs and offer tax rebates to families. He wants the IMF to create a council of experts to monitor the markets for danger signs — his much-vaunted early-warning system — and the IMF’s coffers to be boosted by cash-rich states such as Saudi Arabia and China. He is also calling for a clean-up of the banking system, including a network of regulators to scrutinise the world’s biggest banks.

France President Sarkozy is also pushing for cross-border regulation, meaning he wants to control French banks even when they are operating outside French borders. He sees the crisis as an opportunity to depose the US dollar as the king of currencies, and replace it with the euro. Mr Sarkozy would also like an overhaul of the world financial architecture, including making rating agencies more regulated and forcing accounting standards to be the same worldwide.

Germany The Germans are deeply suspicious of secretive hedge funds, which control about $2.5 trillion worth of assets and whose activities are not regulated. They blame the hedge funds for market volatility and driving down shares by short-selling. Angela Merkel, the Chancellor, also backs greater powers for the IMF to oversee international companies, revised rules for rating agencies and making it harder to hide risks off company balance sheets.

Russia President Medvedev wants more say in the IMF, so he is teaming up with Mr Sarkozy to back President Bush into a corner. He wants alternatives to the IMF as lenders of last resort and is willing to contribute to the cost of the new agencies. Russia has also pressed for international budgetary and economic rules to prevent any further crises

China China wants to press the West for a bigger role in global financial bodies such as the IMF but at the same time it has been trying to lower Western expectations that it will join in global actions. It cites as reasons its own economic problems and limited resources as a developing country.

Brazil and other developing nations These want changes to the voting structure at the IMF and the World Bank’s to give them more of a voice."

Krugman Agrees On Where We're Going

Paul Krugman offers the same proposals as I have been proposing:

"The question now is whether these moves are too little, too late. I don’t think so, but it will be very alarming if this weekend rolls by without a credible announcement of a new financial rescue plan, involving not just the United States but all the major players.

Why do we need international cooperation? Because we have a globalized financial system in which a crisis that began with a bubble in Florida condos and California McMansions has caused monetary catastrophe in Iceland. We’re all in this together, and need a shared solution.

Why this weekend? Because there happen to be two big meetings taking place in Washington: a meeting of top financial officials from the major advanced nations on Friday, then the annual International Monetary Fund/World Bank meeting Saturday and Sunday. If these meetings end without at least an agreement in principle on a global rescue plan — if everyone goes home with nothing more than vague assertions that they intend to stay on top of the situation — a golden opportunity will have been missed, and the downward spiral could easily get even worse.

What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort."

I actually think this will work. More later, but basically, this is what the markets have been waiting for.