ISMAIL LAGARDIEN: Interventions needed to help poor countries rebuild after pandemic
After every systemic crisis — where, for instance, more than one bank fails — there is a call for safety nets, or at least buffers to mitigate the effect on the poor and vulnerable. If we look back, starting with the 1929 stock market crash, bank runs swept across the US between 1931 and 1933 and thousands of banks shut down.
The newly elected US president, Franklin Roosevelt, hastily passed legislation to stabilise industrial and agricultural production, create jobs and generally stimulate recovery. He also created the Federal Deposit Insurance Corporation, to protect depositors’ accounts, and the US Securities and Exchange Commission to regulate the stock market and prevent abuses of the kind that led to the 1929 crash in the first place. In other words, he established great institutional (financial) stability, strengthened the necessary buffers and focused on creating greater social safety nets. Crucially, in 1935 the US Congress passed the Social Security Act, which for the first time provided Americans with unemployment, disability and old-age pensions.
Fast forward seven decades, and the 1997 East Asian crisis cut a swathe of social devastation from Bangkok across the region, its effect felt most severely in places such as Indonesia. The following passage, from a report by the Asian Development Bank on the social effect of the crisis, was especially poignant:
“It was 1998. One by one, most of Sukinah’s friends at a garment factory in Jakarta were taken aside and quietly fired. Too ashamed to tell her, they simply disappeared, returning to the villages they had left years ago in search of fortune in the big city. Sukinah’s turn came a few days after, and she too left without goodbyes, one of the latest victims of an economic disaster that saw millions of Indonesians losing jobs in the coming months.”
But the crisis was felt around the world, and there was growing concern about recurrent crises, their regularity and social impact. Of particular concern was whether the “architecture of global finance” remained fit for purpose. Nonetheless, renewed efforts were made to ensure the most vulnerable were adequately protected from recurrent crises.
A decade later Federal Reserve chair Ben Bernanke, Federal Reserve Bank of New York president Timothy Geithner, and US treasury secretary Henry Paulson explained the 2008 crisis as “a conflagration that choked off global credit, ravaged global finance and plunged the American economy into the most damaging recessions since the breadlines and shantytowns of the 1930s”.
Then came 2020 and the Covid-19 pandemic, the rush to stall its spread and develop vaccines, and the grinding halt of political economies, markets and financial services and structures around the world. The pandemic brought to the fore the way in which global communicable disease, and what has often been considered to be a technical and aloof “system” disembodied from society, are part of a totality, and may only be separated into constituent parts with some difficulty.
It is natural to believe that after the 2008 crisis most countries built substantial financial buffers in the form of foreign exchange reserves, reputable central banks and independent regulators. Even without the early development of vaccines and the prospect of a faster than expected economic recovery in 2021, the challenges facing the global financial system may well be manageable.
“The global financial system is resilient enough to withstand the impact of the coronavirus crisis but policymakers must act quickly to deliver a return to economic growth and avoid widespread financial distress,” IMF MD Kristalina Georgieva said last week.
She explained that policymakers have to take urgent, co-ordinated steps to deliver investment in digital technology, infrastructure and the environment, adding that “because productivity has to go up, investment has to go up. We have to be decisive and we have to act together.”
This is all well and good, and the banks’ expanded capital may help cushion economies and support the recovery, but there remains a whole lot more that can and ought to be done to help poorer countries. Important among these are interventions such as fiscal support, risk-sharing arrangements between governments and banks on lending, and measures to keep trade channels open. Without these, the recovery may take a long time, which would weaken bank balance sheets, dip into buffers and lead to likely second waves of retrenchments of employees and (another) halt in capital spending plans.
If we look at the responses to major systemic crises over the past 90 years or so, there have been serious attempts to secure financial stability and protect consumers from reckless institutions by strengthening social safety nets. It would require quite deliberative intervention — now, not after the pandemic — if there is to be a return to normal, whatever that may be.
• Lagardien, a visiting professor at the Wits University School of Governance, has worked in the office of the chief economist of the World Bank, as well as the secretariat of the National Planning Commission.
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