Nouriel Roubinni makes several interesting observations in today’s RGE newsletter. First off his research team made a survey of the countries that preformed the best during the Financial Crisis and then summarized what these different national cases shared in common. Almost all the shared characteristics indicate a macroeconomic profile (in terms of both policy and structural form) that is contrary to the received macroeconomic wisdom. Inter alia they summarize their findings as follows:
“What commonalities are visible among these countries? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in counter-cyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.”
Strong internally orientated markets with a well subordinated financial sector. Indeed hardly the neoliberal litany. The RGE monitor goes on to note that both
“Brazil and Peru stand out for their relatively healthy fundamentals and financial systems. Both countries have benefitted (sic) from being relatively closed economies and from having diversified export markets and products. They also took advantage of the boom years (2003-2008), reducing external vulnerabilities and increasing savings (fiscal and international reserves). By the time the crisis hit, both countries had well regulated financial systems that saved them from being contaminated by toxic assets. The fact that their domestic credit markets are at an early development stage, so consumption is not very dependent on credit, helped them shelter internal demand.”
But outside of these rather poignant observations about emerging markets the RGE monitor also made some interesting observations about Canada. In particular, they note the potential pitfalls of relying on resource exports to stimulate the national economy. Going forward in to 2010 they note:
“Yet the nascent revival in consumption may be weaker than the Bank of Canada expects. The rebound in commodity prices is mixed news. Higher commodity prices and greater demand for metals, if not yet for oil and cheap natural gas, should contribute to an expansion of mining and energy output–but too strong a surge could boost the Canadian dollar, exacerbating Canada’s manufacturing weakness as it boosts labor costs.”
In other words Canada could be in for a rough ride as the nascent recovery in the commodity sector could triggers futher declines in the manufacturing sector. What Roubini and Co. do not mention is the potential long term effects on the structure of the Canadian economy this could have. Each successive recession since the 1980s has been witness to relative permanent shaking out of Canada’s manufacturing sector. If commodity prices were to recover for an extended period of time before demand for our manufactured products picked up we could expect a relatively more severe and permanent shaking out of our manufacturing sector. When I get some more time I will drag out the manufacturing series and take a look at the relative magnitudes of the shake out during the last three recessions.