A Five-Point Checklist To Prepare for Another Global Crisis

Imagine you are minister of finance in an average developing country. Suddenly you learn that a new global crisis may be looming in the horizon.
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Imagine you are minister of finance in an average developing country. You survived the 2008-2009 global crisis, presided over more than five years of respectable economic growth, a boom in commodity prices fills your treasury with cash, and your central bank does not quite know how to keep your currency from appreciating. Old problems persist -- too many young people are unemployed, your industrial sector is small and aging, and plenty of public money is wasted or simply missing. But, all in all, you feel pretty good about how things are going under your watch.

Suddenly you learn that a new global crisis may be looming in the horizon. Think of a rich country defaulting on its debt, pulling other rich countries' banks into trouble. East Asia can no longer find avid consumers in the West for its exports, so it cuts back on its own consumption of raw materials. Commodity prices begin to fall, and your politicians start to worry aloud. What do you do then? Or better, what can you do now to prepare for all that? Five key measures may help.

First, secure your financing -- for at least the next 24 months. The last thing you want in the middle of a storm in international finance is to default on your payments. If you do, already-nervous investors -- foreign and locals -- will rush for your economy's door. Not to speak of what soldiers, teachers and civil servants would do if they were to go unpaid. So, calculate your cash needs as if all your expenditures were untouchable, and sign today the loans you know you will need tomorrow. [NB: with interest rates currently at rock-bottom levels, this is smart debt management anyway.] While you are at it, assume that a good ten percent of those grants that developed nations regularly give you will no longer come in -- after all, those nations will be entangled in austerity, absorbed by their own problems. It would also be nice if the public companies that manage your oil, gas or minerals could buy insurance against their prices falling too much (this is called "hedging" in financial jargon); unfortunately, if they have not done it before, it is probably too late now -- the legal and administrative arrangements are not easy.

Second, prioritize your investments. Decide now which project you will slow down, postpone or drop, if you were to run out of money. In a way, you are looking for projects that are not "shovel ready", that is, those that cannot be quickly implemented. Rule of thumb: if it involves massive, never-done-before, pride-of-the-nation construction, it probably can be put on hold. Remember, cutting investment expenditures is always tricky -- the interest of the politically-connected are usually affected. You don't want to have that discussion during a crisis.

Third, audit your social safety nets. There will be plenty of people in need as jobs disappear and incomes fall. Poor families will respond in ways that may hurt them, and your country, in the long run -- pulling teenagers from high-school is the typical example. You will then be called upon to fund temporary employment programs, feed children in schools, and pay for direct cash transfers. If you don't have the necessary logistics in place -- including an updated register of who is poor and how to reach them -- you'd better start working on it. There will be no time for this when the turmoil begins.

Fourth, stress test your banks. Your financial system is probably small and isolated from the subprime sophistication of Wall Street. It is made up mostly of banks that hold the deposits of the urban middle class and handle the remittances of the diaspora. What would happen to your banks if, all of a sudden, foreign currency became expensive and scarce? Are their loans concentrated on a few construction or trading companies that would go belly up if the commodity boom came to an end? And are banks lending to each other? To each others' owners? Your central bank should be able to answer all these questions -- it is supposed to supervise banks in real time. So it can alert you early.

And, fifth, identify who will suffer when crisis strikes. Who are the winners and losers? (Yes, there are winners in this.) Will the impact be felt in a single, remote rural area where your commodities are produced or extracted, or will it be primarily an industrial affair, hurting middle classes across cities? Will the affected belong to a specific racial, religious or regional group? Whose consumption will get more expensive? And whose assets will lose most value? This kind of "political economy analysis" is invaluable because it will highlight the road-blocks in your decision-making.

One final point that may not depend entirely on you as finance minister. It would help to decide who, when the time comes, will speak for the government and what the message will be. Typically, in days of turbulence, cabinets tend to become dissonant and perceptions of policy paralysis -- if not incompetence -- make things worse. That would be a pity. All told, it is possible -- and not too difficult -- to get ready, at least for the first wave of impacts from a potential new global crisis. And if the crisis never comes, so much the better.

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