Crisis Talk - The World Bank Group

Tax Cuts vs. Government Spending

Simeon Djankov argues for the merits of tax cuts over increased government spending as a form of fiscal stimulus, particularly in some eastern European countries. (The two policies are of course not mutually exclusive, but with limited fiscal space one may be preferred more than the other.) A new paper from NBER on What Are the Effects of Fiscal Policy Shocks? offers additional support for this line of thinking. According to the abstract:

We propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions. Specifically, we use sign restrictions to identify a government revenue shock as well as a government spending shock, while controlling for a generic business cycle shock and a monetary policy shock. We explicitly allow for the possibility of announcement effects, i.e., that a current fiscal policy shock changes fiscal policy variables in the future, but not at present. We construct the impulse responses to three linear combinations of these fiscal shocks, corresponding to the three scenarios of deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion. We apply the method to US quarterly data from 1955-2000. We find that deficit-financed tax cuts work best among these three scenarios to improve GDP, with a maximal present value multiplier of five dollars of total additional GDP per each dollar of the total cut in government revenue five years after the shock.

(Hat tip: Tyler Cowen)

Relaxing Holiday Reading: The IMF on Fiscal Policy

Hot off the press, the IMF yesterday released a staff position note on Fiscal Policy for the Crisis. Although Dominique Strauss-Kahn, the IMF's Managing Director, has been calling for fiscal stimulus for some time, this note attempts to lay out some principles on how best to go about it. In short, the note argues for the following:

[W]e argue that a fiscal stimulus should be timely (as there is an urgent need for action), large (because the drop in demand is large), lasting (as the recession will likely last for some time), diversified (as there is uncertainty regarding which measures will be most effective), contingent (to indicate that further action will be taken, if needed), collective (all countries that have the fiscal space should use it given the severity and global nature of the downturn), and sustainable (to avoid debt explosion in the long run and adverse effects in the short run). The challenge is to provide the right balance between these sometimes competing goals—particularly, large and lasting actions versus fiscal sustainability.

These recommendations fall largely within the mainstream, but a few new proposals will likely raise some eyebrows. The authors suggest that the public sector could play a bigger role in financial intermediation through various forms of quantitative easing. They add a proviso that "the public sector does not have a comparative advantage in evaluating credit risk." I'll nominate that one for understatement of the year - if the cartel of credit rating agencies managed to fail so miserably at rating securities, I can only imagine how well a monopoly will perform.

The second proposal concerns the provision of public insurance against large recessions. Banks or firms (or even individuals) could buy this insurance from the government and would receive a payout if GDP growth fell below some defined threshold. Such insurance would serve as an additional automatic stabilizer during a recession or depression. The theory sounds interesting. However, I think that economists tend to forget how often statistics are subject to political pressure. What would happen then if millions or even billions of dollars of publicly provided insurance were tied to output statistics?

Slow and Steady Wins the Race

That, at least, is the opinion of Yan Qifa and Tang Ping, two economists at the Export-Import Bank of China. They urge caution regarding financial opening in today's China Daily:

In recent years, Chinese banks' balance sheets have seen much improvement thanks to continual banking reforms. However, with the global financial crisis deepening and domestic economic growth slowing, policymakers must pay more attention to the potential risks the banks are facing.

In the mean time, policymakers must become more cautious in dealing with the country's financial opening up.

China's financial opening up drive has been quite bold in recent years. By the end of last year, 21 foreign banks have become locally incorporated banks in China while 193 banks from 47 countries and regions have established their representative offices in the country. A total of 82 foreign banks have been allowed to conduct renminbi business.

China's financial opening up is faster than many developed countries. However, the global financial crisis reminds us that a major element in deciding the pace of financial opening up is whether it is conducive to the stability of the national economy and the soundness of the financial system and whether it contributes to effective financial regulation.

Their take on financial opening is not too dissimilar from a recent paper from the Growth Commission on International Finance and Growth in Developing Countries. Given the current financial turmoil, I take it as a positive sign that there are calls for continued financial opening in China, albeit at a slow-and-steady pace.

Reforming the Credit Rating Agency Industry

A lot has been said and written about the role of credit agencies in the current crisis. Almost everyone agrees that their role has been negative, understating the risk of many financial products and papers and misleading many investors. But how can the incentive structure of this industry be reformed? Is tougher regulation the response? Or perhaps more competition in a three company industry?

A recent theoretical paper by Patrick Bolton, Xavier Freixas and Joel Shapiro (The Credit Ratings Game) offers some suggestions towards reform of the industry, but also clearly shows that there are no silver bullets. As any theoretical model, it relies on simplifying assumptions, but it presents very clearly the incentives faced by different stakeholders, including credit rating agencies and issuers of securities, and how different policy measures will affect them. At the core of the incentive problem is the fact that it is the issuers who buy ratings rather than the "users", i.e. investors, and that issuers can shop around for good ratings.

Asian Crisis Redux?

Are we seeing the beginnings of an Asian crisis redux? James Seward, a senior financial sector specialist at the World Bank, reports that a recent bank nationalization in Indonesia was the first in the region since the 1997 financial crisis:

[A] small bank failed in Indonesia recently due to liquidity problems and was the first bank in the region to be taken over by a government since the 1997 Asian crisis. Three weeks later, another bank in the region failed – the fourth largest bank in Mongolia. Most recently in Hong Kong, the leading financial center in Asia, banks have been warning on profits for the year. In fact, the second largest bank in Hong Kong, Bank of China, just this week received a $2.5 billion loan from its parent bank in China. This is four times the size of its announced losses so far this year, which as a news report indicated could imply that the bank is preparing for much larger losses next year.

Financial authorities in the region are taking lots of measures to avert further crisis, though, including interest rates cuts, liquidity support, and less orthodox measures such as blanket deposit guarantees. But will it be enough? Seward offers some additional prescriptions:

A first step could be to conduct more widespread and systematic surveillance of financial conditions and long term viability of systemically important banks. This could be shared more widely so there is a common understanding of the risks and cross-border exposures. The supervisory authorities could also develop plans for crisis management, procedures, public relations, and liquidity support mechanisms for banks in the event of problems. Governments can also review and strengthen the legislative frameworks, processes, and institutional capacities for problem bank and asset resolution. Other creative steps can be taken, such as providing different forms of loan guarantee to targeted industries (as is being done in a few countries in the region already, such as Hong Kong). Finally, there is an urgent need to improve the coordination and communication processes among all financial regulators.

For more on how the financial crisis is playing out in East Asia and the Pacific, check out East Asia and Pacific on the Rise | Finance.

How to Turn a Profit During A Crisis

Reflecting on the recent dramatic downturns of the Ukrainian hryvnia, rising unemployment, inflation, and loan repayment problems, I suddenly thought that it can’t be quite as bad as it seems. It’s probably true that this financial crisis has made life harder for many people, but there will also be new opportunities for development - at least for those who are innovative enough in their approaches.

In Ukraine today there are businesses that are not only keeping up earlier levels of production but are increasing output because they have identified what is needed right at this moment. Take the example of Trio Ltd., a small business that designs and produces gas pressure regulators. The company meets local demand for regulators both from private companies and municipal boiler houses. However, the company has exported most of its products to neighboring countries. Recent events have allowed it to strengthen its position in the market. The export of gas pressure regulators brings US dollar income, and the company now purchases local currency at a very attractive rate - the Ukrainian hryvnia costs half what it did in the summer - while most of its current expenses are in hryvnia.      

Japan's Trade Falls 27%

In a previous post, I wrote about the rapid decline in international trade. Today, Japan followed this trend and posted a 27% decline in exports in November relative to November 2007.

"Demand is rapidly cooling not only in the United States and Europe but also in Russia and the Middle East, and we are expecting a further plunge in exports as the global economy is deteriorating," said Hideki Matsumura, a senior economist at the Japan Research Institute in Tokyo.

Indeed, exports suffered their biggest year-on-year drop since the current system of statistics went into effect in 1980. Exports totaled 5.3 trillion yen ($60 billion), while imports fell 14.4% from a year earlier to 5.55 trillion yen ($62 billion).

Among U.S.-bound shipments, vehicle exports plummeted by 44% in the month, while exports of auto parts fell 40% and those of audio equipment were down by 48.2%.

Japan's exports to the European Union tumbled by 30.8%, with vehicle shipments to the region falling by 37.2%, the ministry said.

Asia-bound exports fell 26.7% as semiconductor shipments dropped by 30.2%. Japan's exports to China alone plunged by 24.5%.

Smoot and Hawley Resurrected?

Shortly after my arrival at Tilburg University, I was asked by the campus newspaper to comment on the current crisis. Among other questions, I was asked what I could see as the worst-case-scenario. Back in September, I responded that this would be the raising of tariff and non-tariff barriers, leading to a break-down of international trade, such as in the 1930s. 

At the end of 2008, we are certainly not there yet, but we are moving towards it rapidly.  Countries around the globe are raising tariffs or are planning to do so, partly in response to government aid in specific industries in trade partners’ countries. Take, for example, the bail-out of the U.S. car industry, which is – correctly in my opinion - perceived as an unfair government subsidy by other countries, but is a move that is certainly to be followed by other countries, such as in Europe. Let’s just hope that policy makers around the world, but especially in the large countries, do not forget the lesson of the Smoot-Hawley Tariff Act that helped deepen the Great Depression and had long-term negative consequences for the whole world. Certainly one sign of hope are the demonstrations across Russia this past weekend against import tariffs on used cars – it's not often that one sees popular outcry against protectionism.

Update: Check out a chilling photo of a Russian protestor standing up for free trade being arrested by riot police.

Fiscal or Tax Stimulus, II

It turns out that Dani Rodrik is also thinking along the same lines as my latest post: a tax stimulus may be more efficient than a fiscal anti-crisis package. His rationale is here.

The proposal is different than mine, as it gives employers tax incentives to retain or add workers. This may not work well in countries with high perceptions of corruption. It is more of an OECD-country proposal.

Fiscal or Tax Stimulus?

Many countries are contemplating some sort of a stimulus package as an anti-crisis measure. In a previous post I wrote about the size of announced fiscal packages in OECD and large emerging markets.

Fiscal stimulus makes sense as a counter-cyclical device: it can be narrowly targeted, for example at low-skill jobs. The most obvious fiscal expansion is for infrastructure projects - these can create lots of jobs and are highly visible, thus generating a sense that the government is being responsive.

But what if the government doesn't have money - say it is running a budget deficit? Then the ability to spend yourself out of a crisis is limited. Still, some governments do it: the United States is an example, as are Egypt and India.

A more problematic case is when the existing government infrastructure projects are considered inefficient and corrupt. Then there is considerably less faith in the ability of government to handle an even bigger burden of projects. What is more, the fiscal stimulus may end up supporting certain bank accounts, not additional jobs. This is the predicament Bulgaria faces: an uneasy discussion on anti-crisis measures, after the European Union froze several payments to Bulgaria for alleged corrupt behavior (totalling several hundred million euros).

Moving Quickly on Corporate Governance

Editor's Note: Loty Salazar provides knowledge management and communications support to IFC's corporate governance program. She previously worked with the World Bank's East Asia and Pacific region as a Communications and Information Officer. Welcome!

As the economic crisis of the century takes hold across the globe, companies in emerging markets face tough circumstances. While it may not at first seem like a “front of mind” issue, improving corporate governance will be vital to making the most of the situation. Effective decision-making processes, transparency, robust risk management, optimum internal controls and reliable regular reporting – these are what a company needs to attract and sustain the confidence of shareholders, lenders, investors and stakeholders, attributes that help improve performance and access to cheaper capital.

Much Ado About Nothing

In the last three months, international organizations have raised alarms that the supply of trade credit has dried up and international trade is suffering as a result. Various initiatives have been launched to address this problem. As it turns out, the problem lies elsewhere.

I just came back from a conference in Lima, organized by UPC university. The main focus was supposed to be globalization, but the events of late shifted it to the economic crisis. A number of bankers were present from across Latin America and Spain. They all said: yes, credit is now extended with more caution than before.

Here is the rub: none of them (0) said there was a particular problem with trade credit. The general view was that until recently times were so good that everyone received credit without loan officers having to look carefully at the company's income flows. Now there is increased vigilance. But that vigilance extends to the overall health of the business, and is not specific to companies dependent on international trade. Of course, if global demand for particular goods has fallen, with an associated collapse in prices, bankers will get worried. And as export prices for many goods has fallen by 30-60%, there is enough reason to worry indeed. This said, the main issue is falling demand, not lack of credit.

It could be that international organizations understand this (they have enough good economists) but think donors are more likely to fork out extra cash if the "international trading system is at risk." And it could be that this is a good strategy as it gives some businesses in emerging markets extra room to maneuver during the economic downturn. So all is good. Except if the new credits are really focused on international trade, despite the obvious lack of demand. That could finance excess capacity in the coming months, and further depress prices.

Fortunately, businesses, not bureaucrats, will in the end decide how to use the money. And they probably realize by now that the domestic market may be where they can focus the attention, and wait for demand in OECD countries to pick up.

Big Brother

As the financial crisis has turned into an economic recession in nearly all OECD countries, governments are pumping money into the banking and real sectors in ways never seen before. The United States alone has committed to various stimulus packages amounting to about 9% of GDP in 2009 (figure 1). This is the largest amount in peacetime since the year 1900!

In addition, the US Fed has opened lending facilities worth $30 billion each to emerging markets such as Brazil, Mexico, Korea and Singapore. And, as a new Barclays Capital report ("Uncharted Territory") comments, the IMF has provided "fast credit without conditionality" to Iceland, Hungary, Ukraine and Pakistan. Several others countries are waiting in line.

The crisis response has evolved in four steps:

1. Aggressive expansion of monetary policy
2. Protecting "too big to fail" financial institutions
3. Fiscal packages for the real economy (with more likely to come)
4. Unconventional monetary policies (central banks purchasing risky assets such as asset-backed commercial paper from corporate issuers and mortgage-backed securities)

Looking for Solutions in the Ukrainian Banking Sector

You’d have to follow Ukrainian news very closely to keep up with all the proposals to deal with the financial crisis that have been floated in the last few months. Many are the result of well-intentioned efforts at the Ministry of Finance and the National Bank to help mitigate the impact of the crisis on ordinary citizens. The question, though, is whether any of the proposals will have the intended benefit, or will they simply limit the ability of the private sector to find its own ways to continue business?

The proposals being floated fall mainly into two categories. The first target those who took loans in US dollars and are now facing repayment problems. The second target those with fixed-term deposits who face problems with withdrawing funds. Here is what’s been floated so far for the first group:

The Kyrgyz Republic Gets $2 Billion from Russia

Prime minister Putin said yesterday that Russia would give $2 billion to the Kyrgyz Republic in the next two weeks. $1.7 billion will go towards infrastructure projects, and $300 million towards budget support for 2009-10.

The money is part of the anti-crisis strategy of the Kyrgyz government. The latest World Bank forecast is for the economy to slow down from growth of 8.2% in 2007, to 6.6% this year, and 4.2% in 2009.

Two months ago Iceland asked Russia for money. That deal eventually failed to materialize. 

Keynes Goes to Africa

The idea of Keynesian demand management has a strong appeal in the economics profession. During a severe downturn, the government becomes consumer of last resort. For emerging markets, though, the idea is problematic, in part because governments may not be able to raise the debt required to perform this kind of stimulus. As the Economist points out, a number of emerging markets are giving demand management a try: "Malaysia, South Korea and Russia have unveiled stimulus packages, all of them dwarfed by the splurge China announced last month."

Absent from the Economist article is the mention of any country in Africa. But it looks like Keynes is going to Africa too. Charlotte Lundgren, an economist working in the World Bank Uganda country office, recently discussed the Impact of the Global Economic Slowdown on Uganda:

In terms of policy implications, there is room for prudent widening of the fiscal deficit. It should therefore be possible to accommodate spending as planned, including much-needed infrastructure investments. This will also serve as a much needed fiscal stimulus to the economy. Given the increasing concerns about domestic factors keeping inflation above target, the room for monetary relief is very limited.

Since emerging markets now constitute a much larger share of global output than they did a few decades ago, the success or failure of their stimulus policies becomes central to the fate of the global economy. For much more on how all of this will play out in Africa, check out the World Bank's Africa Can End Poverty blog.

(Hat tip: Kristina Nwazota)

Heard on the Streets of Kyiv...

It's Autumn 2010, 6 a.m. Two street cleaners meet. One of them looks closely at the other and says:
- You have such a familiar face!
- I also think I’ve seen you somewhere...What bank did you work in?

(Осінній день 2010-го року, шоста ранку. Зустрічаються два двірники. Один пильно дивиться на іншого.
- У вас таке знайоме обличчя!
- І я вас десь бачив ... Ви в якому банку працювали?)

A man goes to the bank for a consultation:
- I’d like to start a small business. What should I do?
- Buy a large one and wait.

(Чоловік приходить у банк на консультацію:
- Я хочу розпочати малий бізнес. Що мені робити?
- Купіть великий бізнес і почекайте.)

Now Comes Real Trouble

Some leading exporters have just released their November data: start worrying. The data, analyzed by Caroline Freund and Matias David Horenstein of the World Bank, show that China's exports in November fell by 10.3 percent relative to October and 2.2 percent relative to November 2007. These data were widely reported in the international press: the first time China's exports have registered a monthly decline since 1999.

Other countries have bigger troubles. Chile's exports fell by 21.2 percent relative to October, and by 19.1 percent relative to November 2007. A lot of this can be explained by the fall in copper prices. Korea's exports showed similar declines: 21.7 percent relative to October and 18.3 percent as compared to November 2007. Taiwan (China)'s exports fell by 17 percent to October and 21.6 percent to November 2007. Israel, one of the few countries outside East Asia to already report data, showed a 17 percent decline in exports from a year ago. (Data for European exporters has a 3-months lag and will be available only in January).

A European Contribution to Crisis (Management)

A lot has been written about the failures of bank regulation and supervision in the U.S., where the sub-prime crisis started, but what about Europe?  Problems abound here as well – bank runs in England, governance issues in state-owned banks, such as in Germany, where some of the first banks fell, and lots of interventions into failing banks. 

Unlike in the U.S., however, matters are complicated by the lack of a Europe-wide regulatory and supervisory framework despite the emergence of a pan-European banking system.  The consequence: national approaches, often resulting in nationalization, such as in Belgium and the Netherlands.  Private market solutions for large banks are not feasible as no bank strong and sound enough in the respective country exists to take on a large failing bank.  And private market solutions in Europe are impeded by the lack of a Europe-wide authority who could take the lead in organizing such a solution as the Federal Reserve or the FDIC do in the U.S. 

A Lapse of Reason

In last week's Wall Street Journal, two of the top financial economists wonder whether economists have lost their marbles. Oliver Hart (Harvard, and my co-author on a recent paper on bankruptcy regimes) and Luigi Zingales (Chicago) wrote an op-ed that starts with:

This year will be remembered not just for one of the worst financial crises in American history, but also as the moment when economists abandoned their principles. There used to be a consensus that selective intervention in the economy was bad. In the last 12 months this belief has been shattered.

Their main argument is that the US government should let financial and auto companies enter bankruptcy procedures, rather than rely on ad hoc bailouts. Bankruptcy, Hart and Zingales argue, provides an opportunity for claimants to figure out whether the company's financial trouble was the result of bad luck or bad management, and to decide what should be done. Short-cutting this process through a government bailout is dangerous. Does the government really know whether a company should be saved?

As an example of an effective bankruptcy mechanism, one need look no further than the FDIC procedure for banks. When a bank gets into trouble the FDIC puts it into receivership and tries to find a buyer. Every time this procedure has been invoked the depositors were paid in full and had access to their money at all times. The system works well.

Learning to Say Please

The Financial Times reported last week that China's sovereign wealth fund, China Investment Corporation, refused to risk any more money on western financial institutions. One Chinese official explained: "My confidence should come from government policies. But if they are changing every week, how can you expect that to make me confident?" Harsh.

But that might not be the end of the story. The December edition of the Atlantic magazine includes a fascinating interview with Gao Xiqing, the president of China Investment Corporation, which oversees some $200 billion. The title of the article? "Be Nice to the Countries that Lend You Money." Perhaps someone forgot to say 'please' when asking for a few more billion of China's capital?

Crisis Babies?

So, what will be the long-term effects of the crisis on people’s savings and investment patterns?  Will we just go back to business as usual once this is all over?  Not so, according to a paper by Ulrike Malmendier and Stefan Nagel, who studied individuals’ risk attitudes over the period 1964 to 2004.

The average stock market participation rate for the generation that experienced the Great Depression as teenagers or adults is less than half that of all other age cohorts.  In striking contrast, the 1931-40 age cohort that experienced the post-war boom years as young adults has a stock market participation rate almost twice the average.  Judging from that, we can expect a big crisis impact on the financial markets for a long time to come, as much from the demand as from the supply side. 

There is one piece of hope, however.  The data suggest that both recent and past experience counts.  Young households in the early 1980s, having experienced the dismal stock returns of the 1970s, had lower rates of stock market participation than older households for whom the negative experience of the 1970s was moderated by the high-return experience of the 1950s and 1960s.

A Virtual Iron Curtain

Editor's Note: Nadiya Pustovoytova is Acting HR administrator in the IFC Ukraine country office and a Program Assistant for the corporate governance business line in the Eastern Europe and Central Asia region. Nadiya will be adding a new angle to coverage of the financial crisis in the Crisis Talk blog with a "view from the field." Welcome!

Financial issues that were quite abstract and distant at the beginning have now become quite concrete for an ordinary person in Ukraine.

The US dollar is over 1.6 times more expensive today than it was in the summer (UAH 7.38 compared to 4.54), and this last week the exchange rate has deteriorated 0.1-0.15 every day. Besides, it’s close to impossible to purchase dollars. There are many currency exchange booths in the streets, but since the beginning of November it’s hard to find dollars or Euros. If you’re lucky you can find dollars in the banks, but you’ll have to pay a commission of up to 7 percent of the amount exchanged.

Does Loose Monetary Policy Cause Crises?

Editor's Note: Thorsten Beck is a former contributor to the PSD blog. Now a professor at Tilburg University, he worked at the World Bank for eleven years and is still involved in activities in the research group and Africa and the Eastern Europe and Central Asia regions. Welcome!

The loose monetary policy in the first years of the 21st century has been one of the culprits for the boom and subsequent bust in the U.S., but rigorously testing this hypothesis is difficult since it is hard to identify cause and effect; the Fed typically lowers interest rates in times of financial fragility and uncertainty, such as after the collapse of Long-Term Capital Management in 1998.

But perhaps we can learn something from a small open economy for which monetary policy decisions can be considered exogenous.  A recent paper by Vasso Ioannidou, Steven Ongena and Jose Luis Peydro does exactly this, using a unique dataset on Bolivian borrowers.  During the period 1999 to 2003, the local currency was pegged to the U.S. dollar and the relevant short-term benchmark rate was the U.S. federal funds rate.  The paper shows that reductions in short-term interest rates do indeed lead to excessive risk taking by banks, which can eventually lead to banking fragility when interest rates rise back to “normal” levels.  So, cheap money is no free lunch and an excessively high variation in interest rates will eventually catch up with you!  These findings emphasize that bank regulation and supervision cannot act independently of monetary policy.

The Temptation of Capital Controls

As often happens during financial crises, governments become tempted to put in place capital controls. Is your currency losing value? No problem, just restrict capital outflows! In reality, of course, there are longer-term costs to such policies that have to be balanced against any potential short-term gain.

This crisis is no different, and some speculation has cropped up about countries potentially imposing such controls. However, major emerging markets have denied the rumors; for example, Russian Premier Vladimir Putin recently said "[t]here is no question of any state bans." Similarly, the Governor of Indonesia's Central Bank has issued "a renewed pledge that Jakarta [is] committed to free capital movement."

While most emerging markets have steered clear of imposing new capital controls, the temptation will undoubtedly remain for some time. Debate on the topic is lively - here are a few notable voices:

• A recent paper from the World Bank on The Unfolding Crisis argues that
  "[t]here is a continuum of policy measures to enhance confidence and stem the risk of bank runs and capital outflows, of which the introduction of capital controls should be considered as instruments of last resort."
• Guillermo Calvo gives tentative support to controls on capital outflows, although he remains skeptical of controls on capital inflows (Hat tip: Dani Rodrik).
• Bob Geldof comes out in support of the Tobin tax just before the recent G20 summit.
• A Harvard Business School case study discusses the pros and cons of Malaysia's imposition of capital controls during the Asian financial crisis.
• A new World Bank working paper on Crises, Capital Controls, and Financial Integration finds that capital controls are effective in segmenting markets, although it takes no stance on whether or not this is beneficial.
• A new working paper from the Commission on Growth and Development on International Finance and Growth in Developing Countries takes an ambivalent view of financial openness but points out that "domestic financial deepening...makes capital controls ever costlier to enforce."   

Views from the Field on Microfinance and the Financial Crisis

CGAP held a virtual conference on the impact of the financial crisis on microfinance on November 18-20. Participation was exceptional - over 600 managers of MFIs and other experts contributed to the discussion. You can now read a summary of the results (Hat tip: Paulina Ibarra). And make sure to check out much more on CGAP's recently revamped Microfinance Blog! Here's a short excerpt from the summary:

The most immediate concern is how the global liquidity contraction will affect the cost and availability of funding to non-deposit taking MFIs. Money from both domestic and international banks is tighter, slower, more conservative and more expensive. Anecodotal evidence cites rate increases from 1% to 4% in Latin America and South and Central Asia, with some banks pulling out altogether. MFIs are anxious about meeting refinancing needs when loans from foreign banks and MIVs come due in 2009.