Softening the Impact of the Global Crisis

When a crisis is seen coming, the knee-jerk reaction of governments is to busy themselves with a variety of ill-thought interventions. Doing something, however inadequate, is considered a show of care. Most often, it is best if the government calmly assesses the developments and intervenes as little as possible. Two cases in point. First, the Great Depression was vastly exacerbated by the actions of the then-young Fed, which reduced money supply and thus prolonged the crisis unnecessarily. (Current Fed chairman Ben Bernanke has built his academic reputation writing on this issue.) Second, the IMF followed a similar increase-the-interest-rate-and-shrink-money-supply stance ten years ago in East Asia. The result was a deepened crisis and a stigma associated with any future IMF actions. Malaysia, the only country that openly avoided the IMF's advice, had a better time than its neighbors.

So what can be done to soften the impact of the unfolding global crisis? I suggest four things:

1. Inform the public about what segments of the economy are likely to be hit. Some governments prefer to bury their heads in the sand and pretend the crisis will pass over. It won't. The stock markets have already taken a beating, but fortunately few people have their life savings there. The more important hit comes from the coming drop in exports, especially to Western Europe. Country after country are changing their forecasts to recessionary ones. Exports are bound to fall: global trade shippers say their cargo has fallen by a quarter in the last two months. So important export sectors like the chemicals and metals industries will suffer. There is little the government can do to encourage demand abroad.

2. There is, however, an obvious tool in the government's hands: the use of the EU structural funds. These can be used as a counter-cyclical device. This is especially true for the infrastructure and agricultural funds, which also create significant employment. The brightest people in the government can be re-deployed to ensure expedient usage of these funds.

3. Next, the government can use the time to push some regulatory reforms. If credit for businesses is drying up, at least they should have less bureaucracy to deal with. This is what the Nordic countries did after the 1991-93 banking crises there, and this is why they are so far less affected by the current crisis. This "Doing Business response" is already seen in several crisis-bound economies. Specifically, business licensing is a big drag on economic activity: lots of inane rules, breeding lots of petty corruption. This is a good time to simplify. The same applies for bankruptcy regulation: cumbersome and with lots of delays. Many more companies will now need efficient insolvency proceedings: better start reform early. Business entry can be further simplified as can trading across borders.

4. Finally, the government can be more frugal with its budget. Setting some aside for contingencies from next year's budget shows good care. One could limit, for example, official trips abroad. A small measure, for sure, but one that signals resolve.

Whatever the government considers doing, it should take the Hippocratic oath: do no (future) harm. Many interventions can sew the seed of the next crisis. Governments are generally bad at running banks, doing large-scale investment projects, and running schemes for helping business (of the directed credit variety or otherwise). Let's stay out of (future) trouble.