Friday, September 04, 2009

From recessions to recovery: Some notes (I)

A recent IMF paper (WP/09/183) , “International evidence on recovery from recessions”, (august 09)written by V. Cerra, U. Panizza and S. Saxena, analyzes the evidence concerning the main characteristics arising from past recoveries ,with data spanning 1960 to 2005 .
The first notion to take into account ,is that not all recoveries have the same profile although at fist glance, it might look so. It is important to make the distinction between recoveries arising from real shocks from that ones arising from financial shocks. In the former case the recovery looks stronger, while in the later case the recovery looks sluggish and weak which make more vulnerable . .
These differences , arises from the fact that the financial sector is at the core of the transmission mechanism of financial resources from savers to investors, such that when the banking system works well , they (investors) can undertake their investment project as planned ,otherwise when the banking system is in trouble ,they face unexpected delay to do so , therefore reducing output expansion because of lower investment level .
A real shock instead(For example, a decrease in exports due to a falling external demand ), deals with an adjustment process concerning expenditures ,which must go down according to the new lower income level, while the financial sector is healthy and ready to support the new expansion cycle, which will start up as soon as there are new sources of external demand .This was the case , after the Asian economies crisis (1997), for those economies which had the capabilities to shift exports from one falling market, to other with some potential making the case for stronger recoveries because of both: this managerial skills ,but also because its fundamental (financial sector) were also strong.
The other side of the analysis, deal with the effectiveness of the instrument applied since the economic activity start to go into negative territory, along with the level of openness to world market . Thus, Fiscal policy is less effective in open economies than it is for closed economies, therefore economic recovery is weaker in open economies than what it is closed economies. On this regard, and to be fair with fiscal policy countercyclical capabilities, it is important to take into account the Income elasticity of demand for export as well. If the income elasticity is high, a substantial drop in external demand will impact strongly on export ,affecting the path of tradable goods contribution to the recovery, making more difficult to compensate for the decrease in domestic demand .The opposite applies for closed economies .In this case by definition, the impact of countercyclical fiscal policy goes fully to the sector (domestic demand) which matter for economic activity.-
The available data suggest that the current recovery will have different characteristics, and it will hardly be a fast recovery. The economic recovery profile, looks to be at a slow pace in industrialized countries , while in emerging economies the recovery might be at a faster pace than their global counterparts.-