Wednesday, September 9, 2009

Fiscal stimulus: larger, more balanced, co-ordinated

A United Nations source (World Economic and Social Prospects-Update as of Mid-2009) estimates that, since September 2008, Governments worldwide have made available massive public funding (amounting to $18 trillion, or almost 30 per cent of WGP [World Gross Product]) to recapitalize banks, to acquire ownership stakes in ailing financial institutions, and to provide ample guarantees on bank deposits and other financial assets. Further, recognizing the inadequacy of these monetary and financial measures to stave off a recession, many countries have also adopted fiscal stimulus plans, totalling about $2.6 trillion (about 4 per cent of WGP), to be spent over 2009-2011. ”While significant, this may still fall somewhat short of the stimulus of 2 to 3 per cent of WGP per year that would be required to make up for the estimated decline in global aggregate demand. “ (Ibidem).

In the same document the UN makes a number of recommendations of preconditions affecting fiscal stimulus effectiveness: the adequate recapitalisation of banks; the “fundamental reforms of the international financial system… to overcome the systemic flaws which caused this crisis” (a “macro-prudential regulatory system”, “counter-cyclical capital provisioning”, supervision of all financial market segments in which systemic risk is concentrated, including hedge funds and cross-border flows); “a new framework for global economic governance”, attributing to the IMF the role taken until now by the “Group of 7, the Group of 8, the Group of 20 or other ad hoc forums, lacking the participation or representation of important parts of the international community, especially from developing countries.”

These preconditions would produce spillovers such as the reduction of tax evasion (enhancing development resources), of corruption, of drug trafficking and the financing of terrorism. The UN document stresses the need for mechanisms of debt restructuring, and for “a new global reserve system which no longer relies on national or regional currencies, as the major reserve currency must be created.”

But the most important policy recommendation of this UN document is that of a co-ordinated stimulus, “with global sustainable development objectives”. In truth this is understood to involve more than just co-ordination, and to include an increase and redistribution of the stimulus, 80% of which is coming at present from developed, deficit countries. Greater efforts are expected of surplus countries in order to reduce global imbalances and to contribute “about $500 billion extra over 2009-2012, compared with the uncoordinated scenario” to middle and low-income developing countries, strengthening their social protection systems and making long-term investments in sustainable development. “The additional resource transfers needed would include about $50 billion for the least developed countries.”

Global coordination should also eliminate unfair trading practices associated with many stimulus packages that provide subsidies to domestic firms, in order to benefit through trade those countries that cannot afford domestic subsidies and fiscal stimulus. There would be “concerted efforts to provide countries with greater access to developed country markets as envisaged in a truly developmental Doha round of multilateral trade negotiations.”

The WESP-Update reports that the UN Department of Economic and Social Affairs has made simulations with their global policy model, which suggests that the proposed larger, more balanced and coordinated global macroeconomic stimulus would yield significant gains in terms of global growth, compared with the existing scenario of uncoordinated fiscal stimulus being individually undertaken by national Governments. The simulations are summarised in the figures below. (Click to enlarge).

The figures illustrate economic recovery under coordinated and uncoordinated global stimulus, 2009-2015. Source: United Nations/Department of Economic and Social Affairs, based on policy simulation within the UN Global Policy Model. From: UN WESP-World Economic Situation and Prospects, Update as of Mid-2009, New York.

In such a coordinated, development-oriented policy scenario, the world economy would recover at an annual growth rate of around 4 to 5 per cent in 2010-2015, led by robust growth of about 7 per cent per year in developing countries. In the uncoordinated scenario, developing countries - including transition economies - would recover at only 3 to 4 per cent per year.

Developed countries would also gain from the proposed policy broadening and coordination, with their GDP growth accelerating to about 4 per cent per year, up from 2 to 3 per cent in the uncoordinated scenario. “Furthermore, the simulation results for the coordinated policy scenario predict a benign unwinding of global imbalances, keeping external asset and liability positions of major economies in check, which would, in turn, support greater exchange-rate stability.” Coordination would require monitoring mechanisms. There would be net gains all round.

All this might be considered as “pie in the sky”, but - especially at a time of generalised discussions of premature “exit strategies” it is a timely reminder of the generalised, large-scale additional gains, and the possible improvement in global imbalances, that are within the grasp of a slightly larger, more balanced, co-ordinated stimulus package.


Anonymous said...

Even the IMF guidance on Fiscal Stimulus now recommends that it should be:
- timely,
- large,
- lasting,
- diversified
- contingent,
- collective,
- sustainable.
So what is missing?

D. Mario Nuti said...

What is missing is:
- Larger, by at least half a billion $ by UN standards, instead of Large;
- More balanced, so as to involve greater contributions by surplus countries and greater benefits for developing countries; and with a fairer "burden sharing";
- not just "collective", but co-ordinated, synchronised at the beginning and staggered on exit in order to avoid a stampede.
- and not just "lasting" but "lasting for as long as necessary" and preferably for a longer rather than a shorter period than necessary, for the risks of under and over-shooting are not symmetrical.
- and never mind sustainability, we are not choosing between alternative steady states, but between alternative unsteady time paths of policy variables to match unsteady time paths of macroeconomic adverse trends: you can do for quite some time something that is not sustainable for ever.
Alles klaar?