IMF chief economist lectures Cairo on financial crisis

In a lecture delivered Monday at the American University in Cairo, Olivier Blanchard, chief economist of the International Monetary Fund (IMF) tried to sell his audience on strong role for the IMF and a positive vision of their local economy. His lecture, which was titled “The Crisis, Past, Current and Future,” focused on how emerging market countries such as Egypt became entangled in the current financial crisis and what led some of these countries to weather the storm better than others.

"IMF has emerged from the current economic crisis more central than ever to the workings of the global financial system,” Blanchard told his audience in Moataz Al Alfi Hall at the university’s campus in New Cairo.

Pointing to vast arrays of graphs and models, Blanchard attempted to explain how what was “initially a crisis of the advanced countries came to eventually infect the emerging markets.” Blanchard identified three factors that led to a spillover of the crisis into emerging market countries.

First, as the developed countries fell into recession, they began to import less, which led to what he called a “collapse of exports in the developed world.” The second factor, according to Blanchard, was that “the terms of trade tilted in favor of the developed economies,” because the price of commodities typically exported by poor countries, such as oils and metals, declined relative to the prices of finished industrial goods. The third factor was that “emerging market countries suffered from high levels of capital flight,” as capital moved to the seemingly less risky markets of the developed world.

He noted great disparities in how developing economies performed during the crisis, asking “why some did so well while others so poorly?” Displaying a graph of developing economies GDP growth over the last quarter of 2008, he marveled at how “countries like India, Egypt and China achieved nearly five percent annualized growth rates while the economies of Turkey, Estonia and Thailand shrunk by over 20 percent annually.”

There are two principle variables that he felt best explained the differences in growth during the crisis. “Developing countries that had low short-term debt levels and minimal trade exposure to hard-hit countries performed better during the crisis,” he concluded

Admitting that he was not an expert on Egypt, Blanchard attributed the country’s relative success in weathering the crisis to its low levels of short-term debt and low trade exposure. He also praised the Egyptian government for “taking the right fiscal and monetary policy response to fairly moderate economic shocks.”

Much of his audience was critical of what they saw as his excessively abstract perspective on their daily problems. One man, who identified himself as a professor of economics, asked how Blanchard could celebrate Egypt’s economic performance when “its poverty rate had drastically increased over the last decade.”

Another questioner critiqued “Egypt’s artificially deflated unemployment numbers,” citing the exclusion of nonworking married females from employment statistics, “which makes the situation appear much better than it actually is.” Blanchard responded that he indeed was “struck by the high unemployment rate in Egypt,” that he chiefly blamed on “long term-structural factors rather than the current recession.”

At this point, seemingly tired of the unending tirades from the audience, he abruptly declined to answer any more questions on Egypt, claiming that it is outside his area of expertise.

Blanchard appeared confident of the role of the IMF as the guardian of the world financial system. “The institution has learned from its mishandling of the East Asian financial crisis in 1997,” and the current crisis has revealed the “IMF to be more needed by the world than ever,” he said.

His forecast for the world economy was equally buoyant. “I’m fairly sure that the worst is over after two horrible quarters for the world economy,” Blanchard said. The recent crisis in Dubai, he said, “should only moderately dampen an upcoming period of economic recovery of the Middle East region.”

Yet for all his confidence much of his audience appeared unconvinced by his optimism. As one audience member was heard to comment after the lecture, “I’m not sure if his numbers truly capture the sense of despair on the street in our country.”

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