Daisuke Kotegawa served as Executive Director of IMF from 2007 to 2010 and as Representative Director, IMF Japanese Government since July 2007. He was in charge of the restoration of the Japanese economy in the late 1990s and early 2000s. Among others, he was in charge of the liquidation of Sanyo Securities and Yamaichi Securities in 1997, partial nationalisation of Long Term Credit Bank and Nippon Credit Bank in 1998, and the establishment of the Industrial Revitalization Corporation of Japan in 2003. In the 91st Synergia Virtual Forum, Mr Kotegawa drew on his personal experience as the Japanese representative in the IMF during the GFC. This article is based on his views expressed during the discussion.
The first item on the agenda should be to decide on the size of the physical stimulus. After the GFC, the IMF advocated that all countries launch a fiscal stimulus that amounts to 2 per cent of each country’s GNP. This stopped the world economy from falling into the depths of the Great Depression of 1929 and the New York Stock Exchange crash.
In comparison, in 2020, almost all countries announced a large-scale fiscal stimulus of around 20 per cent of the GNP.
Advanced economies such as Australia, Europe, and Japan have historically announced the largest scale of QE (quantitative easing), to supply easy liquidities to the financial sector. However, China has neither announced any significant stimulus nor a QE, since they are afraid of a repetition of the heavy criticism they faced after the Lehman Shock in the form of nonperforming loans. Although the Chinese economy is bouncing back well, its growth rate, while remaining positive, can be viewed as low by Chinese citizens, accustomed as they are to a growth rate of 6 per cent to 10 per cent.
As per Mr. Sumi, China did indeed draw lessons from the GFC where they had embarked on a massive fiscal stimulus. While this may have been good for the global economy, China had to pick the tab in the form of large nonperforming assets.
The state of the health sector, especially those in low-income countries, has been a factor in the overall situation. The main reason why European countries are suffering the most from COVID-19 is that after the GFC, European countries implemented very tight fiscal policies. There were two major areas where they cut their budgets substantially — the number of policemen and the number of hospital beds. In the United States, the health care policy has seen the privatisation of public hospitals since the 1970s. The purpose of privatising public hospitals was to economise on the expenses incurred by government sourced hospitals in unoccupied hospital beds. This policy of 'no empty hospital bed' has come back to haunt most governments!
CAPITAL INFLOWS AND CONTROL
From 1997 to 1998, South Korea first welcomed a huge amount of capital inflow, which abruptly ended after a year, and it led to an economic collapse. Former Prime Minister Mahathir Mohamad of Malaysia proposed to put up controls over capital flows in the 90s, for which the IMF heavily criticised him. Yet in 2009, after the Lehman Shock, the IMF advised the same. Specific countries are now better at dealing with these issues, having been on a learning curve after their earlier mistakes.
As regards prescriptive suggestions on the fiscal and monetary policy measures to be followed by different governments, every nation is differently placed. Overall, one has to be brave enough to take some risks if one is in charge of making a policy for the future. The time now is to be a risk-taker.
In the late 1990s, in the middle of the financial crisis in Japan, the banking sector and financial sector was the safety net for the entire domestic economy. Special measures have to be supported by a robust financial sector. Bankers shouldn't be able to exert any political power to avoid any moral hazard. Were they to engage in moral hazards, it would deteriorate the domestic economy further. There is, therefore, a very sensitive balance to be maintained between these two different dimensions.