On the Record

The Global Financial Crisis: Causes and Consequences

Warwick J. McKibbin

Editor’s Note: As the global economy begins to show some signs of recovery following the financial crisis, many are asking if the worst is over. In an interivew on Australian Broadcasting Cooperation’s “The 7.30 Report“, Warwick McKibbin discusses the causes and consequences of the crisis and his optimitism for economic growth in many countries.

Kerry O’Brien: Warwick McKibbin, in your speech [yesterday], you move between the optimistic and the pessimistic when you asked yourself the question about whether we can expect an early recovery from this global recession. Can you summarise your position?

Warwick McKibbin: Well, I was talking about the state of the global economy rather than the Australian economy. On the optimistic side, we are beginning to see what I regard as fish hooks in the data. There are things bouncing from the bottom – commodity prices, steel production in China. China is actually looking like it is recovering. It believes it’s recovering because it’s going around the globe buying up assets for the next stage of growth. On the pessimistic side, we do have concerns – or I have concerns about what’s happening in Eastern Europe. Eastern Europe looks something like Asia did in the ’97/’98 Asian crisis. The good news is that the concerns in Eastern Europe will be addressed by the International Monetary Fund, and the decisions at the G20 are critical in that regard.

O’Brien: But of course, right at the heart of everything is America, and there’s a very mixed picture there, but still a very grim picture.

McKibbin: There’s a lot of work to be done in the US. We have a fiscal package in place. We also have a financial package that the Treasury secretary Geithner has put together. I think has a good chance of working, although it is constrained by the politics. But even if the US is going to be a long slow recovery, and that’s my view, as will the UK, I think the developing world in particular is in pretty good position to re-emerge onto a growth path once the financing re-emerges. And that’s critical, is to get the global financial markets to function again properly.

O’Brien: And when you talk about the developing world in particular, I assume you would single out China, India and probably Brazil.

McKibbin: That’s right, I mean, China has put a massive fiscal stimulus into their economy. They’re fully aware of the domestic problems, they are aware of the insufficient domestic demand that they’ve faced for the last decade or more. So I think China’s looking good. Brazil has done particularly well during this crisis because they did learn from previous crises. India is, as India always is, is quite complex, but I think India will also emerge from this crisis looking very good.

O’Brien: Now that, in a sense, is very good news for Australia, isn’t it? Because doesn’t that position us very well into the future and give us cause to be extremely optimistic once we get past the crunch of the moment?

McKibbin: Well there are two aspects to answer that question, and I agree with you completely. The first aspect is that, during this whole process, Australia has demonstrated some very important reforms have payed off. The institutions we’ve built, the policy frameworks we’ve built, the regulatory frameworks we’ve built, have withstood a very major shock. And a lot of these developing countries who are going through the institutional development phase at the moment are looking somewhere for lessons and how to move forward. Secondly, we’ve got the comparative advantage in trading terms with these economies. And it’s not just the resources that they need which we have, but we also have human capital and education services which are very, very needed in these economies. So I think Australia, both geographically and philosophically, is very well placed for the growth which will come inevitably after this crisis is over.

Read the entire interview »