November 10, 2008
In post I published last week [Trust and Credit in Emerging Markets], I commented on an op-ed piece by Kemal Dervis, executive head of the U.N. Development Program and a former minister of economic affairs and treasury in Turkey, who encouraged “making massive credit lines available” to most emerging-market economies. James Harmon, chairman of the Caravel Fund and former president and chief executive of the Export-Import Bank of the United States during the Clinton administration, has published a complementary op-ed piece to Dervis’ reminding us that not only do the national economies of emerging market countries need to be saved but global trade needs to be supported as well [“Trade’s Lending Lifeline,” Washington Post, 10 November 2008]. Like Dervis, Harmon’s target audience is world financial leaders (members of the G20) who are meeting to mitigate the effects of the current financial crisis. He writes:
“In his Nov. 3 op-ed, “Fairness for Emerging Markets,” Kemal Dervis made the case for ‘making massive credit lines available’ to most emerging-market economies. But if we are to limit the depth of the looming global recession, trade finance must also be on the agenda. Cross-border lending by banks based in developed countries fell at a record pace in the second quarter and continued its decline at an accelerated rate in the third quarter. One casualty is the drying up of trade finance, the lifeblood of $14 trillion annually in global commerce. Wachovia’s recent troubles, for example, have already led to a sharp reduction in short-term trade finance lines to Latin America. Other banks are reassessing credit lines for trading with Asia, Africa and Eastern Europe. The credit crisis has moved into trade finance as largely a funding problem. If bank lines are shut off, it would be devastating for the economies of the developing world. It would also have a boomerang effect on the United States and Europe, as key export markets — and the jobs that go with them — disappeared.”
Others have pointed out that one of the saving graces during the current financial crisis has been that emerging market consumers helped buoy the U.S. economy by buying our goods. That lifeline will break if either emerging markets or global trading collapse.
“Fortunately, there are institutions already built to promote trade finance: export credit agencies. The Export-Import Bank of the United States was established by President Franklin D. Roosevelt in 1934, in the midst of the Great Depression. It is a ‘lender of last resort’ that provides credit lines when private financial markets are not lending. Last year, the bank authorized more than $12 billion in guarantees and insurance to support U.S. exporters. Export credit agencies have helped mitigate a financial crisis before. In late 1997, banks were unwilling to provide credit to Asia after currency and equity markets there plunged. The U.S. Export-Import Bank confirmed letters of credit issued by 15 South Korean banks to support the purchase of raw materials and spare parts needed by Korean manufacturers. In February 1998, 20 official export credit agencies met in London to encourage each other to remain open and to offer new support to exports to Asia. The U.S. Export-Import Bank played its part by initiating a new program for South Korea that month. Within nine months, it supported 2,460 transactions worth more than $1 billion for U.S. exporters to sell to Korean firms (up from only $40 million the year before). Similar trade credit programs were launched for Indonesia and Thailand. These special short-term lending and trade credit insurance lines played a catalytic role in helping to build confidence in Asia at a critical time — and helped the region rebound quickly. None of the Korean banks defaulted, and the entire Export-Import Bank Korean program cost American taxpayers not one dime.”
We often forget those dark days a decade ago. Casandras predicted that it would take Asia decades to recover from the “Asian Flu.” It didn’t. Asia’s quick recovery demonstrated that when governments work together the international system can be resilient. We need to demonstrate that same kind of resilience now. Harmon continues:
“In the coming days, the U.S. Export-Import Bank and other export credit agencies should take the lead in getting trade finance flowing again. First, the export credit agencies should convene to share information and confirm credit availability for the pivotal months ahead. The World Trade Organization has called a special meeting of trade finance players, … and the subject will be a major topic of discussion at [the] next … meeting of the Organization for Economic Cooperation and Development. … Second, even though the Federal Reserve Bank’s discount window is now available to non-bank institutions, the volume of credit needed suggests it is crucial to find a way for the Export-Import Bank to fund asset-based lenders who support thousands of small suppliers in connection to exports. The bank should institute a new and unprecedented, but temporary, program that provides short-term funding to intermediary lenders. Third, with credit markets largely closed, traditional financing sources for medium- and long-term commercial export finance are not available. The Export-Import Bank must revitalize its direct-lending programs, but in ways that continue to engage the institutional skills and delivery capabilities of commercial lenders.”
If one pictures the global economy as a network (which is obviously is), nations represent major nodes in that network and businesses represent smaller nodes. Trade represents the connections between those nodes. Dervis supports strengthening the nodes and Harmon supports strengthening the connections between them. The wisdom of doing both seems apparent. Harmon concludes:
“It is critical for global prosperity that trade financing — be it keeping credit lines open, oiling the trade supply chain or direct funding — remain vibrant during the financial crisis. A concerted effort by the U.S. Export-Import Bank and other export credit agencies can make a meaningful difference in how the real economy responds and recovers.”
Resilience is often measured by how quickly a system bounces back once it has been adversely affected. There is no doubt that recovery from the current financial crisis will take some time. Exactly how long remains to be seen. The fact that countries large, medium, and small are working together to mitigate the crisis gives me hope that the global system will prove resilient. A lot of people wonder if we need so many international organizations; but as Harmon points out, each of those organizations looks at a different part of a very complex world. The rap against them has been that they are often just clubs for the wealthy. As emerging market countries become more influential, international organizations will also become more international. For the sake of the three billion people who have been lifted out of poverty by globalization, the world needs to work together to make the global economic network as resilient as possible.