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Real culprits: policies, lack of reform - not hedge funds, equities
By Leszek Balcerowicz |
March 18, 2010, Thursday
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EPISODES like the current financial crisis seriously disrupt economic growth. But the question that we should be asking concerns such episodes' impact on longer-term development. And that question has attracted surprisingly little interest.
Traditional growth theories focus on systematic forces - for example, capital accumulation, employment, and technical change - that, by definition, operate all the time, although with varying degrees of intensity.
Some theories also consider underlying institutional factors like property rights, market competition, tax and regulatory burdens, and the level of the rule of law.
Another strand of research deals with crisis management, but without examining the impact on longer-term growth. In the case of a financial crisis, this usually includes fiscal and monetary easing, as well as rescue operations for larger financial institutions.
The prevailing approach to crisis management has been short-term, and, as was amply demonstrated during this latest crisis, is based on what I call the self-justifying doctrine of intervention.
Integrating these different streams of analysis into a coherent approach to economic growth is a huge challenge to policy makers and academics alike. But a number of points strike me as relevant to the current situation.
Excessive credit
First, because financial crises as deep as the latest one are socially so costly, it is only natural to try to prevent them. But, just as with medicine, this demands an accurate diagnosis of a problem's causes.
The proximate reason for financial crises is excessive credit growth - a credit boom that goes bust.
But the underlying reasons for the boom differ from crisis to crisis. In the present case, as a report last year prepared by a group led by Jacques de Larosiere, a former IMF managing director, emphasized, a major factor was a serious failure of public policies.
For example, many central banks followed the Federal Reserve's excessively loose monetary policy.
Other factors included defective financial regulations, expansionary fiscal policies in countries like the United States, Britain, and Ireland, a lack of appropriate macro-prudential regulations, and so on.
Preventive measures should therefore focus on these policy failures rather than degenerating into hostility towards hedge funds and other private-equity devices.
A second point, intended for all but those who still believe in a free lunch, is that the employment and growth implications of a country's commitments in the area of climate-change policy need to be carefully analyzed.
Multiplying the number of burdens on an economy is not the best policy to implement in the aftermath of a major crisis.
Fiscal discipline
Third, it is difficult to overestimate the importance of fiscal discipline to longer-term growth. It is all too easy to find examples of countries that subsequently suffered badly because of sustained fiscal expansion.
By the same token, I cannot think of a single economy whose long-term growth prospects were damaged by excessive fiscal stinginess.
Given the fiscal legacy of the current crisis, no efforts should be spared in anchoring fiscal discipline firmly in European Union countries. Institutional measures such as fiscal frameworks and public-debt thresholds can do much to help.
Ultimately, though, it is public opinion that will determine governments' fiscal stances, so fiscally conservative public opinion would be a great economic asset, as it would constrain policy makers' profligacy.
The key to overcoming the difficult legacy of the crisis will consist in how its origins are perceived. If public opinion attributes the crisis to policy errors or lack of reform, there is a chance that the right policy lessons will be learned, and that sound growth policies will result.
(The author is a former deputy prime minister and finance minister of Poland and a former president of the National Bank of Poland. The views are his own. Copyright: Project Syndicate, 2010. www.project-syndicate.org).
Traditional growth theories focus on systematic forces - for example, capital accumulation, employment, and technical change - that, by definition, operate all the time, although with varying degrees of intensity.
Some theories also consider underlying institutional factors like property rights, market competition, tax and regulatory burdens, and the level of the rule of law.
Another strand of research deals with crisis management, but without examining the impact on longer-term growth. In the case of a financial crisis, this usually includes fiscal and monetary easing, as well as rescue operations for larger financial institutions.
The prevailing approach to crisis management has been short-term, and, as was amply demonstrated during this latest crisis, is based on what I call the self-justifying doctrine of intervention.
Integrating these different streams of analysis into a coherent approach to economic growth is a huge challenge to policy makers and academics alike. But a number of points strike me as relevant to the current situation.
Excessive credit
First, because financial crises as deep as the latest one are socially so costly, it is only natural to try to prevent them. But, just as with medicine, this demands an accurate diagnosis of a problem's causes.
The proximate reason for financial crises is excessive credit growth - a credit boom that goes bust.
But the underlying reasons for the boom differ from crisis to crisis. In the present case, as a report last year prepared by a group led by Jacques de Larosiere, a former IMF managing director, emphasized, a major factor was a serious failure of public policies.
For example, many central banks followed the Federal Reserve's excessively loose monetary policy.
Other factors included defective financial regulations, expansionary fiscal policies in countries like the United States, Britain, and Ireland, a lack of appropriate macro-prudential regulations, and so on.
Preventive measures should therefore focus on these policy failures rather than degenerating into hostility towards hedge funds and other private-equity devices.
A second point, intended for all but those who still believe in a free lunch, is that the employment and growth implications of a country's commitments in the area of climate-change policy need to be carefully analyzed.
Multiplying the number of burdens on an economy is not the best policy to implement in the aftermath of a major crisis.
Fiscal discipline
Third, it is difficult to overestimate the importance of fiscal discipline to longer-term growth. It is all too easy to find examples of countries that subsequently suffered badly because of sustained fiscal expansion.
By the same token, I cannot think of a single economy whose long-term growth prospects were damaged by excessive fiscal stinginess.
Given the fiscal legacy of the current crisis, no efforts should be spared in anchoring fiscal discipline firmly in European Union countries. Institutional measures such as fiscal frameworks and public-debt thresholds can do much to help.
Ultimately, though, it is public opinion that will determine governments' fiscal stances, so fiscally conservative public opinion would be a great economic asset, as it would constrain policy makers' profligacy.
The key to overcoming the difficult legacy of the crisis will consist in how its origins are perceived. If public opinion attributes the crisis to policy errors or lack of reform, there is a chance that the right policy lessons will be learned, and that sound growth policies will result.
(The author is a former deputy prime minister and finance minister of Poland and a former president of the National Bank of Poland. The views are his own. Copyright: Project Syndicate, 2010. www.project-syndicate.org).
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