1 MACRO-ECONOMIC DIMENSIONS OF THE GLOBAL FINANCIAL CRISIS Presentation to Economic Society of Singapore Pre-University Junior College Seminar Manu Bhaskaran August 2009

2 IN A NUTSHELL What will post-crisis world look like?  Exit from the crisis - unusual  Not U or V  The new “normal”: a tougher world  Big changes in global landscape  Big shift in economic power  Singapore and Asia must change too The benign era is over

3 EXIT FROM CRISIS

4 We are not out of the woods yet  Deleveraging process not over  Banks reducing leverage, cutting loans…  Households doing same  A few more shocks/stresses to come  Commercial property etc in US  Emerging Europe  to hurt Western banks  Currency turmoil?

5 EXIT FROM CRISIS (2) Huge policy response  huge costs  Monetary easing: huge increase in $$$

6 EXIT FROM CRISIS (3) Implications  Short term: party time!  Economic recovery firmed up  Asset bubbles: stocks, housing booming  Longer term: payback time!  Inflation fears  interest rates surge  Asset bubbles burst, more crises

7 EXIT FROM CRISIS (4) What is the shape of the exit?  Looks like V initially  But more shocks  W-shaped  A messy, troubled exit  Will we recover?  Yes, adjustments underway, will take time  Cut debt, raise savings, … all happening

8 POST-CRISIS WORLD

9 Global economy transformed  Slower growth for many years  Patterns of growth changed  Different structure of competitiveness  New balance of economic power  Distribution of income shifts

10 SLOWER GROWTH Coming decade  Lower growth in US, Japan, EU  Household savings must rise  Banks have to clean up  Shadow banking system dead  Energy prices likely to rise  Shift of power to OPEC from non-OPEC  Demand growing

11 SLOWER GROWTH (2)  No escaping climate change  By 2020, 2-3deg rise in temperatures  Businesses will face taxes, other costs  Increased regulation  Financial: much tighter, curtail innovation  Income distribution: political backlash  Protectionism

12 IMPLICATIONS A WORLD TRANSFORMED  Balance of global economic power  US declines but not as fast as some say  China stronger but gradually  US Dollar will gradually lose role  Will have to share role with EUR etc

13 IMPLICATIONS (2) Changed structure of competitiveness  Currency changes  Chinese RMB must rise  Other Asian currencies as well  Country changes  China: moving up value chain  India: a rising manufacturing power  Taiwan?Indonesia/Vietnam: a new surge

14 CONCLUSION: SINGAPORE AND ASIA MUST CHANGE

15 CONCLUSION Old economic models may not work well  Main source of growth changes  Not G3 but emerging markets  World trade and FDI growth may slow  Regulation, protectionism  More volatile  more shocks, stresses  Countries must raise resilience