Friday, October 16, 2009

The Sweet Payoff of Prudent Policies

In surveying the economic landscape around the world, three countries stand out in terms of showing credible signs of having shaken off the recent misadventures of the global financial system with minimal damage and are already well on the way toward a solid comeback: China, Australia, and Brazil.

On the face of it, the structure of those countries' economies could not have been more different: China is -for all intents and purposes- a state-controlled economy, while Australia's falls squarely in to the group of developed, free market-oriented, industrialized ones. As for Brazil, its economy is powered by a hybrid of tightly government-regulated sectors and private sector mechanisms. However, despite their sharp differences, they all had one critical element in common that allowed them to weather the financial turmoil of the last 1 1/2 year quite well and escape relatively unscathed: overall sound banking systems.

In the case of China, the explanation for that is fairly transparent. Banks are government-controlled and essentially implement "guidelines" and policies regarding lending practices and types of assets on their balance sheets issued by the economic authorities and the State Council. This structure, although it did not insulate them completely from some exposure to bad real estate loans once China's construction boom ended, prevented the banking system from getting buried under a pile of toxic assets that caused the near meltdown of the financial system in the West. The result is that, after taking a big initial hit in the immediate post-Lehman stage of the global financial crisis last year, the Chinese economy is already coming back on line and is on track to grow in excess of 9% this year and return to double-digit growth in 2010.

Although the stability of the banking system in a country where the economy remains largely centralized may sound like an unimpressive achievement at first, there was an additional reason for the quick turnaround of the Chinese economy, which deserves considerable attention: the famously "front-loaded" fiscal stimulus package of approximately 4 trillion yuan announced last November. The package was geared toward stimulating domestic consumption, and its highly efficient implementation caused a turnaround in consumer spending by the second quarter of this year, helping the overall economy make a quick comeback. One cannot, at least for a fleeting moment, avoid the sad comparison here with the highly inefficient way the $787 billion fiscal stimulus package in the U.S. has been handled so far, with nearly 2/3 of the funds not having been disbursed yet, eight full months after it was signed into law earlier this year.

Although Australia is undeniably a free-market based economy, part of the tradition in that country has always viewed the government as having the responsibility to take measures to protect its citizens against the pitfalls of the impulsive greed its own corporate sector. Against that backdrop, the banking system in that country has typically been closely supervised and banks never strayed too far from their more conventional role and had very limited exposure to toxic assets. As a result, the Australian economy skirted the global recession and is already on the rebound- so much so that earlier in the month it became the first G-20 economy to raise short-term rates (by 25 basis points to 3.25%) with another hike expected before the end of the year.

Brazil's famously tight banking regulatory environment- that had often attracted criticism in the last decade as burdensome- became the country's savior in the midst of the recent financial crisis.
Although Brazil's economy experienced a major slowdown this year (unavoidable, given that it is a major commodities exporter feeling the brunt of the global downturn), the economy itself has impressed with its resilience and GDP growth is likely to be flat this year with a widely expected return to the 4% to 5% range next year.

President Lula's steadily rising stock as a successful leader on a continent where countries (including his own) had a long history of blowing up in some fashion, received another major boost by the way Brazil handled the global financial turmoil. His sensible, moderate policies, which have consistently resisted a free-for-all brand of capitalism in order to achieve the temporary illusion of faster growth, have been nicely rewarded in the current environment and helped solidify Brazil's standing as an emerging powerhouse on the global scene.

It is hardly surprising that the countries that had a consistently prudent approach to managing their financial system and broader domestic economic policies ( are now the ones that are emerging from the crisis in the best shape. Another such case is Norway, the solid economic prospects of which are now widely expected to lead the Norges Bank (central bank of Norway) to hike short-term rates later this month. Nor is it surprising that two of the G-20 countries that have suffered the most in the last 18 months are those that had banking systems that nearly collapsed under the weight of unfettered free-market, essentially unregulated, raw version of capitalism: the U.S. and the U.K.

One can only wonder whether there is some lesson to be learned here.

Anthony Karydakis

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