When I was working in the region (Bosnia in particular) there was a lot of discussion on the exchange rate regime and competitiveness. Like what is the “exit policy” for a currency board or fx risk in the region (in relation to foreign exchange lending at the time)?
It is a great honour for me to be invited to this seminar and even more to speak at it. I have to admit that I was in a way humbled by the title of this presentation, which sounds very ambitious. I decided to leave it as it was suggested by the organizers, but I immediately have to start with several disclaimers. You might call this “intellectual hedging” or maybe the truth is that I am simply trying to diminish your expectations. So, here are the reasons why it is extremely difficult to draw economic lessons from the crisis for the region:
First, I am not sure which crisis we have in mind and, consequently, I am not sure if it is over. If we refer to the global crisis, we may argue that the worst is over. Plus, one can only hope that Dr. Doom (for those who still do not know his real name: Nouriel Roubini) and his latest forecast of a double dip in 2013 is again wrong, but let us be patient. Second, if we refer to the European sovereign debt crisis, it is still unfolding as we speak. Finally, countries in the region are in a different status regarding their exit out of the crisis. Croatia does not expect any growth this year (probably at most 1%) while Albania might see a growth of more than 3%. For the Albanians the crisis was over last year, while we in Croatia still had a fall in GDP in Q1 2011. So, my first disclaimer is that it may be a little bit premature to draw definite lesson from this crisis or, in other words, we still lack the perspective for such an exercise.
Second, I have not seen an agreement within the economic profession that clearly identifies the causes of this crisis . If we are not absolutely certain about its causes, how can we draw lessons from it? It is my understanding that at this point there are a lot of different theories around. I will mention but a few: a) the neoliberal approach in general and, more specifically, the so-called light-touch financial regulation (which was highly praised only a couple of years ago); b) some are more specific and point out the “Greenspan put” in particular and too loose monetary policy with low interest rates, especially after the 2002 dot.com bubble burst, which according to this narrative created the new, real estate bubbles; c) some, more generally, attribute this to crony capitalism; d) others (like Ragu Rajan) put a lot of blame on growing income disparities (in the US) and politicians trying to rectify this by government subsidized mortgages; e) others blame financial innovation and, in particular, derivatives (“financial weapons of mass destruction”, as Warren Buffet called them already in 2003 in his now famous letter to shareholders); (one more financial icon, Paul Volcker, could be put into this category with his statement that the ATM has been the most useful financial innovation in the last 25 years; f) some say it was greedy bankers and their skewed incentive/ bonus structure (which can be described as “head I win, tail you lose”); g) some in general blame the originate-to-distribute banking model and securitization, as opposed to the originate-to-hold model; h) for others the main culprit is the “mispricing of risks”; i) academics, in more general terms, blame the unaddressed build-up of macroeconomic imbalances (bad fundamentals); j) and finally, the “leftists” see the market economy (capitalist system) itself as the root cause of crises. And of course, there is an almost infinite variety of any linear combination of the mentioned factors (plus other ones), differing only in relative weights attributed to them. Furthermore, I have deliberately mixed up the factors that should be labelled as the starting points with those that are the deep underlying causes. But, the “inconvenient truth” for the economic profession is that we do not know for sure what the causes of the crisis are and what the exact transmission mechanisms from advanced economies to the crisis in the region were. It may take decades of work to come to some sort of common understanding of those issues.