World Bank chief economist also calls for investments in ‘bottleneck’ areas
THE doomsayer’s new catchphrase is no longer “financial crisis”, it is “real crisis” – and only a concerted global effort in fiscal stimulus can turn the situation around, according to Justin Lin, the chief economist and senior vice-president of the World Bank.
“The nature of the crisis has changed from a financial crisis to a real crisis,” Prof Lin said in a talk yesterday.
According to the Chinese economist, the spillover from the financial crisis had resulted in an excess capacity of production in the real economy, which will greatly hamper the global economic recovery if left unremedied.
Prof Lin was making the points in a talk at the Eminent Speaker Series 2009, which was jointly organised by Lianhe Zaobao and Business China, and supported by the Singapore Press Holdings Foundation.
Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, chaired the talk.
Prof Lin in his talk cited historical lows in manufacturing capacity utilisation in countries like the US, Germany and Japan this year. In the US, for example, utilisation rates of manufacturing centres fell to 69.1 per cent in March, a 42-year low. The underutilisation of capacity could set off a dire chain of effects, he said.
“With excess capacity, it will be hard to find good investment opportunities. Corporate profits will be very poor and some of them might even go bankrupt. The unemployment rate will increase, and consumers’ confidence about the future cannot be restored,” he said.
With flagging consumer confidence, demand will drop significantly and the excess capacity might be exacerbated, leading to a vicious circle. The answer to the situation is a Keynesian fiscal intervention with a twist, according to Prof Lin.
“In order to boost aggregate demand, governments need to apply a Keynesian type of fiscal policy, but it has to be a globally coordinated effort,” he said.
In filling the investment void left by the private sector, governments need to identify “bottleneck” areas that have tremendous opportunity for growth and need investment, like China did with highway infrastructure in 1998.
Where developing nations lack the funds to carry out such “bottleneck” investments, Prof Lin proposed cross-border investments be made by developed nations in developing nations.
Hailing Temasek’s international investment strategy, Prof Lin said: “Cross-border investments generate a high rate of return for the developing country in the long run, and opens up markets for high-income nations. It’s a win-win situation.”
Courtesy of The Business Times, 26 June, 2009