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THE CENTENNIAL RESILIENCE INDEX: EXPANDING ITS COVERAGE AND TESTING ITS PREDICTIVE POWERhave been made to the measurement of private sectordebt and other variables.Second, the addition of the more advancedcountries allows a new base of comparison betweenthe resilience scores for those countries and thescores for EMCs. One fascinating result is the almostcontinuous - and significant - decline in the resiliencescore of the advanced countries since the start ofthe calculation period in 1997. This contrasts sharplywith the steadily increasing resilience of the EMCsuntil the crisis that began in 2007 / 2008 in the UnitedStates. 2 As the charts for the underlying factorsshow, the decline in the resilience of the advancedeconomies before the crisis was driven by the rapidaccumulation of both public and private debt in manycountries, and the decline in external robustness. 3The contrasting improvement in the resilience of theEMCs over that same period derived from a widevariety of factors: most importantly by stronger fiscaland monetary policies; increasing export diversity andinternational reserves; and — beginning around 2001— a strengthening of their banking systems.The resilience of both country groupings hasdeclined sharply in the wake of the global crisis. Inthe advanced countries, this has been driven primarilyby fiscal weaknesses and a severe initial declinein banking soundness. In the EMCs, the decline hasresulted from fiscal weakness - partly the result ofappropriately stimulative policies and the impact ofslower growth on revenue, and an increase in privatedebt. The decline in the resilience of the advancedeconomies has been greater than that in the EMCs.Moreover, there are many EMCs, including Israel,Korea, Singapore, Peru, and others for which the2 The latest WEO from the IMF confirms - with certain caveats - what it callsthe “rising resilience” of the emerging market and developing economies. SeeIMF Survey, September 27, 2012.3 See Box 1 for the definition of the elements included in each of thesefactors.Resilience Indices have actually strengthened in thewake of the crisis.Third, the results for the countries in Europethat have been worst affected by the crisis there aredramatic. For more than a decade before the globalcrisis in 2007 / 2008, with the exception of a brief periodaround 2001 and 2002, each of those countries(Greece, Spain, Portugal, Italy, and Ireland) have seenan almost continuous, and uniquely sharp, decline intheir resilience. The key elements responsible for thisdecline have been fiscal policy and banking sectorsoundness.The global crisis itself helped to further weakenthe resilience of these countries. The initial measurestaken to deal with their own crises since 2010, andthe resulting severe recessions in most of them, havealso contributed to that decline. This is, not least,partly a reflection of the way in which the crisis inEurope has been handled.Fourth, looking forward, the resilience of the largestcountries (the United States, the United Kingdom,the Euro-zone countries other than the crisiscountries, and Japan) has stabilized after the sharpdeclines associated with the global crisis. In Europeand Japan, resilience has begun to increase. Someregions and individual countries of the developingand emerging world, with the exception of emergingEurope and Sub Saharan Africa, have been able toretain or even strengthen somewhat their overall resilience.Latin America is pulled down by Venezuela, Argentina,and – to a lesser extent — Brazil, but overall,the region has retained most of its earlier resilience.Asia, as well as the Middle East and North Africa havemanaged to increase their resilience somewhat sincethe onset of the global crisis. In all regions, as would
e expected, there is a diversity of performanceacross countries.What conclusions can be drawn from this work?The first is that the index appears to have the powerboth to identify economies that are heading fortrouble, 4 and to isolate the specific policy areas ofweakness that lie behind their increasing vulnerability. 5The second conclusion is the more troubling.There was an obvious failure by the various surveillancemechanisms in the global system to fully andaccurately identify the major vulnerabilities that wereemerging in so many countries. It is not that none ofthese emerging problems was seen. Obviously theywere, including the housing bubbles in a number ofcountries - and the associated explosion in privatesector debt; the fiscal problems in the U.S. and insome other countries; and, at least at the BIS, someof the problems developing in the global financialsystem, including those in some of the major financialcenters. But in many instances, those analyses wereeither rejected or “the dots were not connected”, i.e.,the implications of some of the vulnerabilities werenot sufficiently explored. Many things were eithermissed, such as the depth of the perverse incentivesthat had developed in housing finance and inthe securitization process in the U.S. Beyond that,some widely held beliefs about how to deal with assetbubbles and the power of private sector markets toself-correct appears to have blinded many to the risksthat were being run.At the same time, even some of the emergingproblems that were identified were left uncorrected.Partly, this reflected the existing consensus aroundthe “Great Moderation”. In addition, the surveillancesystems that are relied upon to induce corrective policiesby countries at risk - the G7, the G20, WorkingParty 3 at the OECD, and, perhaps most importantly,the IMF - proved incapable of playing an effectiverole. These processes “lacked the teeth” necessaryto encourage - or to force - corrective policy actionswhere needed. As the saying goes, peer protection inthese forums took the place of effective peer pressure.6The Resilience index can add to the tools of thesurveillance process - at least as a device to helpinsure that vulnerabilities are surfaced, and deeperanalysis is conducted to asses those vulnerabilitiesand suggest corrective policies. But that alone wouldstill be insufficient. The recent report of the PalaisRoyal Initiative concludes, bluntly, that “Surveillanceover countries’ economic and financial policies isinadequate”. 7 The report makes a number of suggestionsto improve that process including the adoptionof “norms” and remedial measures on countries thatbreach such norms. 8The Resilience Index shows clearly that emergingweaknesses in many economies were evident wellbefore the global crisis and well before the crisis inEurope. What that implies, more than anything else,4 See the regressions results given in The New Resilience of EmergingMarket Countries: Weathering the Recent Crisis in the Global Economy, byJack Boorman, Jose Fajgenbaum, Manu Bhaskaran, Harpaul Alberto Kohliand Drew Arnold, ADB Regional Forum: Impact of the Global Crisis on Asia:Lessons Learned, Policy Insights, and Outlook, November 2010.5 The index relies on factor analysis to calculate the resilience scores foreach country. There are no a priori constraints put on the analysis other thanthe choice of specific variables to include. Factor analysis permits the datasets to speak for themselves.6 See the Report of the IMF Independent Evaluation Office: “IMF Performancein the Run-Up to the Financial and Economic Crisis: IMF Surveillancein 2004-07”, February 9, 2011.7 Palais Royal Initiative - Reform of the International Monetary System: ACooperative Approach for the 21st Century, in Reform of the InternationalMonetary System, Edited by Jack Boorman and Andre Icard, Sage Publicationsand Emerging Markets Forum, 2011, page 13.8 These could be similar to the measures that may be adopted under theproposed “Fiscal Pact among the euro-area countries.
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