Public entities saved economy: Conference Board

The global economic crisis could have been much worse and much longer were it not for the support provided by public sector financial institutions, according to one of Canada’s leading think tanks.

The Conference Board of Canada has published the latest in a series of Lessons From the Recession and Financial Crisis, arguing that public financial institutions have proven their value in the crisis by providing credit when no private institution was willing to accept such risk.

In Lesson 2 — Public Sector Financial Institutions Prove Their Worth, the author argues that these organizations have helped speed the recovery of the Canadian financial system and will continue to play a significant role in the future.

“Just a couple of years ago, it was fashionable in some financial and economic circles to question why many of these institutions should continue to exist,” says Glen Hodgson, senior vice-president and chief economist of the Conference Board. “Once a financial crisis hits, however, it is too late for governments to create institutions to provide fallback credit support — they must already exist.”

At the core of the latest recession was the refusal of private financial institutions to extend credit, not only to businesses but also among themselves. With credit markets frozen, many businesses struggled to find short-term financing, forcing them to resort to cost-cutting.

In Canada, two federally mandated financial institutions — the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) — helped to fill the funding gap.

BDC alone received an additional $350 million in federal funding, strengthening the lender’s risk tolerance in a “challenging” period. The federal government also injected $350 million into EDC, supporting up to $1.5 billion in increased credit capacity.

Canada relies on exports more heavily than many other developed economies, due to the relatively small size of the domestic market. This support of credit for export-focused companies helped to sustain them at a time when global customers were tightening their purse strings.

On the global scale, institutions such as the World Bank and the International Monetary Fund — both widely criticized in periods of normal economic activity — supported the global credit system by providing massive lending and policy advice.

“During the crisis of the past 15 months, these institutions — internationally and in Canada — proved their collective value as policy tools for shoring up a severely weakened global financial system,” Hodgson says.

(01/28/10)