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Options in Dealing with Economic Depression

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The current global economy still maintains positive growth, and neither main advanced economies nor emerging economies have experienced economic recession, let alone worsened into a major depression. However, the sustainability of global economic growth is facing challenges, and the deterioration of the global trade war has exacerbated the slowdown in global economic growth. The economy of the United States has begun to show signs of slowing down, and many investment banks expect that the possibility of a recession in the U.S. economy is increasing. The recovery of the European economy has been relatively fragile. The economic growth of Germany and France has slowed down, while the economic “internal friction” caused by Brexit has further weakened the European economy. Meanwhile, the deterioration of the trade war has increased the downward pressure on China’s economy. If the trade war extends to science and technology, as well as the finance, it may also trigger China’s domestic economic conflicts and deep-seated economic structural problems, which will cause more troubles to the Chinese economy.

In the past century, the United States has experienced two long-term debt cycles, leading to the prosperity of the 1920s and the Great Depression of the 1930s. History repeated itself where the United States enjoyed prosperity in the early 21st century and experienced the financial crisis began in 2008. 11 years after the 2008 financial crisis, will there be another Great Depression? This remains to be seen. However, in the context of the current deterioration of the global trade war, the global economy is still unable to rid itself of the laws of the “Crisis Triangle” (Chan Kung, 2015). With the structural problems of global overproduction and excess capital, we cannot help but consider the economic downturn and the possibility of an economic depression.

When the economic depression is approaching, how should policies respond? In other words, how to manage economic depression through policy adjustments? From the perspective of dealing with the debt crisis, Ray Dalio, the founder of Bridgewater Associates, provides some policy management options in the face of economic depression: one is fiscal austerity, the other is debt default/restructuring, the third is debt monetization or money printing, and finally there is the redistribution of wealth (from the rich to the poor). Each policy choice has a different impact on the economy, and the key is for policymakers to find the right policy combinations.

When the economic and capital market bubbles burst, it is almost an instinctive response for the government to tighten fiscal policy, hoping to reduce the degree of the bubble and promote deleveraging. But in many cases, wrong choices would be made. Dalio believes that in an economic depression, the better way of managing is that the central bank should promote ample liquidity, such as rapidly reducing short-term interest rates to 0%; while bad management is slowing down and providing limited liquidity and tightening up prematurely. If the government is unwilling to take action at the beginning, this will make the economic depression worse. During the Great Depression in the United States in the 1930s and the Lost Decade of Japan in the 1980s, the governments of these countries were slow to act, which resulted in a long depression. However, when the financial crisis broke out in 2008, the U.S. government learned the lessons well and quickly moved to inject liquidity into the market, leading to a shorter economic depression.

To deal with the economic recession, an important task that cannot be avoided is debt restructuring. There are usually several approaches: The first is to provide liquidity, including bank liquidity and emergency lending. The second is to solve the debt problem of lenders, including debt restructuring, recapitalization, and debt nationalization. The third is to divest debts, including setting up asset management companies to absorb these debts. For example, in the late 1990s, China established four major asset management companies to absorb bad debts from banks. The fourth is sovereign default and reorganization. After the 2008 financial crisis, the United States nationalized some banks, which is also a common practice. In the short term, debt restructuring is intended to diversify the impact of the debt crisis, so that short-term debt pain is not unbearable; in the long run, policymakers must realize that institutional reforms must be carried out to solve the root cause of the debt problem.

During economic depressions, loan institutions, especially those that are not protected by ordered guarantees, often encounter “runs.” The central bank and the central government ordered the need to determine as soon as possible which institutions are systemically important and need rescue. Most importantly, the central government needs to do its best to ensure the security of the financial/economic system and minimize government/taxpayer costs. Part of the funds needed for rescue comes from the government (through budget allocations) and part from the central bank (money printing). In the process of alleviating the credit crisis and stimulating the economy, if the government finds it difficult to raise funds through taxation and borrowing, the central bank will be forced to increase the amount of money printed and provide more funds to purchase national debt. The central bank and central government’s response actions should focus on several key points: 1) provide debt guarantees to reduce panic; 2) provide liquidity; 3) support the solvency of systemically important institutions; 4) recapitalize/nationalize/cover loss of systemically important financial institutions.

When the economy is in depression, the gap between rich and poor will become huge, and might even cause serious social problems. From historical experience, if the rich and the poor share social resources and the economy is in recession at this time, there may be economic and political conflicts. At this time, both left-wing and right-wing populism will rise. How the people and the country respond to populism will determine whether the economy and society can smoothly survive the depression. At this time, increasing taxes on the rich often becomes a politically attractive policy choice, because the rich use assets and wealth to make more money, and the central bank’s purchase of financial assets also allows the rich who hold more financial assets to earn more. This will also be the time for the “left-leaning” political trend to accelerate the redistribution of social wealth. If taxes are increased, they will usually be increased in the form of income tax, real estate tax and consumption tax. However, tax increases should not reach the stage that drives the rich to transfer their funds to safer places, leading to the “hollow” policy of tax increases for the rich.

The above-mentioned four types of policy ideas to deal with economic depression provide a brief policy framework for decision-makers to choose when an economic depression occurs. It should be pointed out that although this framework has a certain degree of versatility, it is mainly built on the basis of a market economy with a relatively complete system, and is mainly from the perspectives of investment and of dealing with debt crises. In the real world, the Great Depression is often a systemic collapse of the economy and finance of the world or a country. To cope with this extreme and complex systemic crisis often requires more complex policy responses and economic and financial resources. In any case, thinking about extreme risk scenarios in advance will enable us to find more rational and forward-looking policy responses, thereby reducing risks and losses.

Final analysis conclusion:

The downward pressure on both global economy and Chinese economy is increasing. Although there is still a gap between the economic recession and depression, policymakers need to plan ahead, think ahead and prepare for policy measures when an economic depression occurs in the face of an increasingly uncertain world.

Mr. He Jun takes the roles as Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy

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Economy

Mosul’s recovery moves towards a circular economy

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Five years since the end of the ISIL(so-called Islamic State in Iraq and the Levant) conflict in 2017, the International Organization for Migration (IOM) in Iraq and the UN Environment Programme (UNEP), with funding from the Government of Japan, has established a debris recycling centre in Mosul. After its initial use, the centre has now been handed over to Mosul Municipality for its continued, sustainable operation.

“On behalf of the Iraqi Government, the Ministry of Environment expresses its gratitude to the Government of Japan for generously supporting this important project and to UNEP and IOM for enabling the sustainable management of the huge quantities of conflict debris and restabilization of the liberated areas in an environmentally sustainable manner,” said Iraq’s Minister for Environment, Dr. Jasim Abdulazeez Humadi.

The handover of the Mosul debris recycling centre marks a significant step in the sustainable management of the huge volumes of debris — an estimated 55 million tonnes — created by the ISIL conflict. It also opens the way for the recycling of routine construction and demolition waste, contributing to ‘building back better’ and an increased circularity in Iraq’s development.

UNEP West Asia Regional Director, Sami Dimassi, emphasized that “by reducing waste, stimulating innovation and creating employment, debris recycling also creates an important business opportunity.” Indeed, construction companies in Mosul have expressed interest in purchasing the recycled aggregate, thereby underscoring the longer-term sustainability of debris recycling.

“This project supports recovery and livelihoods by drawing on principles of a circular economy, wherein waste and land pollution is limited through production processes that reuse and repurpose materials for as long as possible,” explained IOM Iraq Chief of Mission, Giorgi Gigauri. “Collaboration and sustainability are key priorities in IOM’s work toward durable solutions to displacement, and we are pleased to have partnered with UNEP and the Government of Japan so that this is represented not only in the function of the plant itself, but also in its functioning, by supporting local authorities to be prepared to effectively operate the plant moving forward.”

On 28 July 2022, Mosul Municipality hosted an event to officially hand over the debris recycling centre, attended by senior government officials and academia, as well as representatives from IOM, UNEP and the United Nations Assistance Mission for Iraq (UNAMI).

Masamoto Kenichi, Charge d’Affaires, Embassy of Japan to Iraq stated: “We are glad to know that the project funded by the government and people of Japan has contributed to cleanup of debris and reconstruction of Mosul. We would like to commend UNEP, IOM and the city of Mosul for their tremendous efforts of turning the legacy of ISIL’s devastation into building blocks of reconstruction”.

Through the rubble recycling project, nearly 25,000 tonnes of debris have been recovered and sorted, of which around half was crushed into recycled aggregate. Material testing of the recycled aggregate endorsed by the National Center for Structural Tests of the Ministry of Planning confirms its compliance with the Iraqi State Commission for Roads and Bridges design standards for road foundational layers and its suitability for several low strength end-use applications such as concrete blocks and kerbstones.

The project created 240 much-needed jobs through cash-for-work schemes targeting vulnerable persons, including 40 women.

Building on this experience, IOM has set up two other debris recycling operations in Sinjar and Hamdaniya in Ninewa Governorate, and a third in Hawija in Kirkuk Governorate, where a pilot phase using a mobile crusher was implemented in al-Buwaiter Village in 2021. In addition, two other conflict-affected governorates — namely Salah al-Din and Anbar — have  also shown a high-level of interest in replicating and scaling up debris recycling in their own regions. 

UNEP has been supporting Iraq in cleaning up the huge volumes of debris created by the ISIL conflict since June 2017. Initially, this included carrying out technical assessments and planning workshops with UN-Habitat, and subsequently designing and implementing debris recycling pilot projects to support returns in Mosul, Kirkuk and other conflict-affected areas in cooperation with IOM.

UNEP

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Digital Futures: Driving Systemic Change for Women

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Authors: Erin Watson-Lynn and Tengfei Wang*

As digital technology continues to unlock new financial opportunities for people across Asia and the Pacific, it is critical that women are central to strategies aimed at harnessing the digital financial future. Women are generally poorer than men – their work is less formal, they receive lower pay, and their money is less likely to be banked. Even when controlling for class, rural residency, age, income, and education level, women are overrepresented among the world’s poorest people in developing countries. Successfully harnessing digital technology can play a key role in creating new opportunities for women to utilise formal financial products and services in ways that empower them. 

Accelerating women’s access to the formal economy through digital innovations in finance increases their opportunity to generate an income and builds resilience to economic shocks. The recently issued ESCAP guidebook titled, Harnessing Digital Technology for Financial Inclusion in the Asia Pacific, highlights the fact that mechanisms to bring women into the digital economy are different from those for other groups, and that tailored policy responses are important for women to fully realise their potential in the Asia-Pacific region.

Overwhelmingly, the evidence tells us that how women utilise their finances can have a beneficial impact on the broader community. When women have bank accounts, they are more likely to save money, buy healthier foods for their family, and invest in education. For women who receive Government-to-Person (G2P) payments, there is significant improvement in their lives across a range of social and economic outcomes. Access to safe, secure, and affordable digital financial services thus has the potential to significantly improve the lives of women.

Despite the enormous opportunity, there are numerous constraints which affect women’s access to financial services. This includes the gender gap in mobile phone ownership across Asia and the Pacific, lower levels of education (including lower levels of basic numeracy and literacy), and lower levels of financial literacy. This complex web of constraints means that country and provincial level diagnostics are required and demands agile and flexible policy responses that meet the unique needs of women across the region.

Already, across Asia and the Pacific, governments are implementing innovative policy solutions to capture the opportunities that come with digital finance, while trying to manage the constraints women often face. The policy guidebook provides a framework to examine the role of governments as market facilitators, market participants and market regulators. Through this framework, specific policy innovations drawn from examples across the region are identified which other governments can adapt and implement in their local markets.  

A good example of how strategies can be implemented at either the central government or local government levels can be found in Pakistan. While central government leadership is important, embedding tailored interventions into locally appropriate strategies plays a crucial role for implementation and effectiveness. The localisation of broader strategies needs to include women in their development and ongoing evaluation. In the Khyber Pakhtunkhwa province, 50,000 beneficiary committees comprising local women at the district level regularly provide feedback into the government’s G2P payment system. The feedback from these committees led to a biometric system linked to the national ID card that has enabled the government to identify women who weren’t receiving their payments, or if payments were fraudulently obtained by others.

In Cambodia and the Philippines, governments have implemented new and innovative solutions to support remittance payments through public-private-partnerships and policies that enable access to non-traditional banks. In Cambodia, Wing Money has specialised programs for women, who are overwhelmingly the beneficiaries of remittance payments. Creating an enabling environment for a business such as Wing Money to develop and thrive with these low-cost solutions is an example of a positive market intervention. In the Philippines, adjusting banking policies to enable access to non-traditional banking enables women, especially those with micro-enterprises in rural areas, to access digital products.

While facilitating participation in the market can yield benefits for women, so can regulating in a way that drives systemic change. For example, in Lao People’s Democratic Republic and India, different mechanisms for targets are used to improve access to digital financial products. In Lao People’s Democratic Republic, the central government through its national strategy, introduced a target of a 9 per cent increase in women’s access to financial services by 2025. In India, their targets are set within the bureaucracy to incentivise policy makers to implement the Digital India strategy and promotions and job security are rewarded based on performance.

These examples of innovative policy solutions are only foundational. The options for governments and policy makers at the nexus of market facilitation, participation and regulation demands creativity and agility. Underpinning this is the need for a baseline of country and regional level diagnostics to capture the diverse needs of women – those who are set to benefit the most of from harnessing the future of digital financial inclusion.

*Tengfei Wang, Economic Affairs Officer

This article is the second of a two-part series based on the findings of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) Policy Guidebook: Harnessing Digital Technology for Financial Inclusion in Asia and the Pacific, and is jointly prepared by ESCAP and the Griffith Asia Institute.source: UNESCAP

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Empowering women-led small businesses in Nepal to go digital

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People walk down a street of shops in Kathmandu, Nepal. (file) photo World Bank/Peter Kapuscinski

Authors: Louise Anne Sophie Lavaud and Mitch Hsieh*
Throughout the years, Laxmi Shrestha and her husband saw the opportunities that opening an online shop could bring to her family business.

“Looking at the trend of TikTok and other sites, we thought selling online could help us but we weren’t technically sound,” said Laxmi, the owner ofLaxmi Hastakala Store, in Banepa, Nepal, and part of a family of artisans.

As she learned about selling online, she picked up on how to market her shop digitally and, according to Laxmi: “It has surely given our business a push we always wanted. Recently we started selling our products online and we also receive payments online.”

Laxmi Hastakala Store is among the 1,800 women-led micro, small and medium enterprises (MSMEs) in Nepal being trained on digital and financial literacy by Sparrow Pay – one of the winners of the Women Fintech MSME Innovation Fund launched in 2019 by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and the United Nations Capital Development Fund (UNCDF).

Sparrow Pay has created a local digital marketplace where women-led MSMEs can offer products and services to its existing 800,000+ digital payment service users. Additionally, Sparrow Pay is supporting these women entrepreneurs in adopting digital payments and creating a payment history to support access to additional financial services.

MSMEs are a vital source of employment and a significant contributor to a country’s GDP. However, more than 45 per cent of MSMEs in Asia and the Pacific are constrained from accessing finance and other support for their businesses. Socio-cultural norms mean women-led enterprises have to overcome gender-specific barriers to access institutional credit and other financial services.

ESCAP and UNCDF aim to encourage easy access to digital finance for MSMEs in Asia and the Pacific, break the financial barriers surrounding women-led enterprises and support entrepreneur-centric growth and inclusiveness throughout the region. Initiatives by the 10 winning fintech companies are currently supporting more than 9,000 women-led MSMEs in Bangladesh, Cambodia, Fiji, Myanmar, Nepal, Samoa and Viet Nam.

Just like Laxmi, these women business owners plan on successfully growing their companies in the digital area.

The Women Fintech MSME Innovation Fund is part of a regional programme “Catalyzing Women’s Entrepreneurship: Creating a Gender-Responsive Entrepreneurial Ecosystem,” which seeks to support the growth of women entrepreneurs in Asia and the Pacific by enabling a policy environment for such business owners, providing them with access to finance and expanding the use of ICT for entrepreneurship.

*Mitch Hsieh Chief, Communications and Knowledge Management Section

UNESCAP

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