World Bank exec bares economic recovery prospects during SU talk

CEBU, Philippines - In his recent visit to Silliman University, World Bank Country Director Mr. Bert Hofman explained the global financial crisis, remaining optimistic about a positive growth for the world economy.

Mr. Hofman was the lecturer of the 2nd Annual Eminent Lecture Series held August 26 at the Luce Auditorium on the topic “Prospects of Recovery from the Global Financial Crisis in the Next 2 Years.”

With 18 years of experience in the WB, 15 of which spent in the Asian region, Mr. Hofman, however, admitted that even with post-crisis projections and forecasts, there is still uncertainty as to the shape of the world economy in the next years.

But he said the global financial crisis – the largest crisis since the Great Depression in the 1930s – has brought some significant outcomes that brought about policy reforms and a more practical mentality towards investments.

Mr. Hofman said there are “initial signs of recovery”, especially for developing countries like the Philippines . These signs are consistent with his description of developing countries as picking up in the world economy, catching up with member countries of the Organization for Economic Cooperation and Development.

“But the prelude to the crisis is as important as the crisis itself,” he said, although admitted that determining the real cause of the crisis is a subject of a long continuing debate.

Mr. Hofman said the crisis can be attributed to a combination of factors, and cited globalization as one of them.

Since the 1990s, a large number of developing countries, like China and India started to jump into globalization, and this, he said, made a relatively large number of inexpensive goods available in the world economy.

“As a consequence, this led to a dramatic drop of inflationary pressures on the world economy…and opened a large case for policy makers in the world to have much more lax monetary policies without consequences of inflation,” Mr. Hofman explained.

With the availability of cheap goods, monetary policies allowed for low interest rates, prompting banks to become “adventurous”. This gave rise to financial innovations which pushed for riskier investments. One of the beneficiaries of financial innovations was the housing sector.

But in 2006, when the US market turned sour and the default rates on subprime mortgages started to rise, the financial market started to wobble.

“Financial innovations meant that the risk that started in the housing market was spread out though the financial system in a way that only very few understood,” Mr. Hofman said.

This later led lending rates to rise unprecedentedly, from an inter-bank interest rate that used to be minimal and based on trust. In the early 2008, it became a liquidity crisis, which dramatically stopped lending to investment banks.

He cited Lehman Brothers, an investment bank, which default in September 2008 caught the international media’s attention.

“It was so connected to other parts of the financial market that it dragged the financial system down,” Mr. Hofman said.

Mr. Hofman explained that transparency became an issue. The investments and risks involved were so sliced up and redistributed that nobody knew who was bearing the risk.

But he said, while the global financial crisis was unprecedented, the response was unprecedented as well.

“The enormous volatility in the financial market and the enormous change in the policy rates of the federal reserves are truly unprecedented not just for its depth and its suddenness in the financial world, but for the enormous reaction that has happened. And this has saved us from a repeat of the Great Depression,” he said.

What made a difference, he added, was the swift policy reaction of individual countries and the coordinated response among the major players in the world economy.

It was in 2009 when, Mr. Hofman said, talks about recovery took place. “And there are initial signs of recovery,” He added.

On imposing tighter regulations to arrest the effects of the global financial crisis, Mr. Hofman said the same usually cause lesser availability of credit which translates to lower growth.

Optimistic, Mr. Hofman said the emerging world is outgrowing the OECDs. This is influenced by the experience of developing nations with regional crises, like the Asian crisis, which has led them to open up to more trade and foreign investments to spur up growth and development.