Banking crisis could cut output for 7 years

WASHINGTON, D.C.: The International Monetary Fund (IMF) said the global financial crisis could impair economic growth for at least seven years, and suggested structural reforms could help limit the damage.

“Typically, banking crises have a long-lasting impact on the level of output although growth eventually recovers. Lower employment, investment, and productivity all contribute to sustained output losses,” the IMF said Tuesday (late Wednesday in Manila).

IMF economists drew those conclusions in a chapter of the IMF’s World Economic Outlook report, released in advance of the institution’s annual meetings in Istanbul in early October.

The IMF economists looked at 88 banking crises over the past four decades in a wide range of countries.

“The medium-term output losses following banking crises are substantial. Seven years after the crisis, output has declined relative to trend by close to 10 percent on average,” they said, noting substantial variation across countries.

Long-term impact

The enduring effect of banking crises resulted from a decline in economic output at the beginning of the event, then a weakening in investment and in overall unemployment.

“Output per capita does not recover to its precrisis trend because capital per worker, the unemployment rate, and productivity do not typically return to their precrisis trends within seven years after the crisis,” the economists said.

“For the most part, the implications of our analysis are sobering for the medium-term output prospects in economies with recent banking crises.”

The associated losses in capital, employment and total factor productivity could be long-lasting, “leaving an enduring imprint on the productive capacity of these economies,” they wrote in the chapter.

The full World Economic Outlook report, including economic growth forecasts, will be published on October 1, ahead of the IMF annual meeting in Istanbul on October 6 to 7.

Policy prescription

The IMF economists said the results of their analysis suggest that proactive domestic macroeconomic policies in the short term may mitigate medium-term output losses.

“There is also some evidence of the beneficial role of structural policy reform and favorable global conditions. However, there is still much to learn about the processes and interactions that lead to strong growth performance,” they said.

The 186-nation institution called for stepped-up reforms to offset the gross domestic product (GDP) losses and capacity building.

GDP, a key economic indicator, is the total cost of all goods and services produced in the country in a year.

“The combined output of economies currently in the midst of a banking crisis comprises close to one-half of real GDP for the advanced economies and one-quarter of world GDP. This suggests that real output in advanced economies is unlikely to rebound to its precrisis trend, which was the experience of emerging economies following the 1980s debt crises,” it said.

The chapter was released ahead of a two-day summit of the Group of 20 key developed and developing countries that opens today.

Hosted by US President Barack Obama in Pittsburgh, Pennsylvania, the G-20 leaders are expected to discuss their response to the worst global recession in six decades and reform of the financial system. –AFP